Chapter 5
Chapter 5 Transaction analysis for double-entry accounting (with GST) Transaction analysis for
double-entry accounting
(with GST)
Information Procedures
IP 4.3 and 5.3
Working through this chapter will assist you to:
• classify accounts to prepare financial records
• apply accounting principles to record transactions.
INFORMATION PROCEDURES
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Nature of
information
Managing
information
Source
documents
Accounting
fundamentals
Chapter 5
Transaction analysis
Key topics:
Double-entry
accounting
Goods and
Services Tax
Transaction analysis
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
The doubleentry
process
Specialised
journals
Other
accounting
systems
End-ofperiod
reports
Control
procedures
Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Double-entry accounting
In the previous chapters we’ve discussed accounting systems in a general way
and the rules that these systems follow. In this chapter we will begin to look at an
actual accounting system that businesses use. We’ll see how the rules for accounts
and the accounting equation are applied to transactions in this system.
The system we are examining is known as double entry.
Goods and Services Tax (GST)
Every time you buy a magazine or book or go to the movies, for example, you pay
Goods and Services Tax (GST). Although businesses are also charged GST on goods
and services they purchase, they are able to claim this back from the government.
It is eventually only the final consumer who pays the GST.
The Commonwealth government introduced this tax on 1 July 2000. It applies
to most goods and services and is calculated at the rate of 10% of the total price of
the product or service. Only businesses that register with the Australian Taxation
Office (ATO) are required to charge GST. They receive an Australian Business
Number (ABN), which they must display on all their business documents.
Where a price includes the amount of GST to be paid, it is said to be GSTinclusive. When the GST component has not yet been added to the price for a
product or service, the price is said to be GST-exclusive. Figure [5.2] shows prices
in both formats.
✦The double-entry system of accounting states that for every transaction there is
a debit (DR) entry and a corresponding credit (CR) entry of equal value.
The double-entry system allows businesses to build safeguards into their
accounting system and to prepare detailed and varied financial reports. It also
ensures that the accounting equation remains equal.
Assets= Liabilities + Owner’s equity
DR
= CR
Figure [5.1] illustrates the flow of information in a double-entry system of
accounting. In this chapter we are focusing on the thinking process involved in
recording information into the accounting system of a business. In later chapters
we’ll look at the other steps in the double-entry system.
[5.1] Double-entry accounting process
✦GST-inclusive indicates that the price given for a product includes the GST
component.
✦GST-exclusive indicates that the price given for a product has not had the GST
component added.
[5.2] A document that shows both
GST-inclusive and GST-exclusive prices
Thinking process:
transaction analysis
Source
documents
Journal
Ledger
Trial balance
Financial
reports
Evaluation of
reports
The GST-exclusive price
The GST-inclusive price
Example
GST-inclusive
calculations
The GST-inclusive price of a product is given as $165. In order to determine the
value of GST, it is necessary to divide the price by 11 or multiply by   .
Therefore, the GST component of the above product
=   × $165
= $15
Focus on Business 1
Example
GST-exclusive
calculations
Chapter 5 Transaction analysis for double-entry accounting (with GST) The GST-exclusive price of a product is given as $150. In order to determine the
value of GST, the product selling price is simply multiplied by 10%:
GST = 10% × $150
= $15
Therefore, the full selling price of the product would be
$150 + $15 = $165.
Example
Purchase of an
asset for cash
It is important to distinguish between the terms GST inclusive and GST
exclusive, because the calculation of the GST component will vary accordingly. In
this chapter, GST will be recorded in a GST account, and this account is a liability
as it represents the amount of GST owed to the government. When a business
pays for goods and services it purchases, it has to pay out the total cost including
GST. However, as long as a business has kept correct records, it can reclaim from
the government the amount of GST it has had to pay to run its business. This then
reduces the GST liability. When the business makes sales of its goods or services, it
must collect GST. This is a liability as this amount is paid to the government.
GST is only involved in transactions that are based on the buying and selling
of goods and services. If the transaction does not involve buying or selling, GST is
not included. GST is also not included in financial transactions (e.g. transactions
with a bank) and some food items (generally fresh food). The following is a list of
transactions that will be included in this chapter that do not include GST:
• capital contributions by the owner (cash and other assets)
• drawings by the owner (cash only)
• interest paid on a loan
• interest received from a bank
• a loan from a bank
• a loan to another party
• payment of wages to employees.
Something to remember is that GST only involves sales and purchases of goods
and services and that when a sale is concerned, GST is always credited because the
liability is increasing. When purchases are made, GST is always debited because
the liability is decreasing.
✦Transaction analysis is a process used to break down a transaction into its debit
and credit parts. It is the ‘thinking process’ involved in taking information from the
source document/transaction and applying the rules of debit and credit so that
you can enter the details into the accounting records.
Consider the following transaction:
On 1 June 2007 Petra Pollack bought computer equipment for business purposes for
$22 000 cash (including GST). The GST included in the price paid is 1/11th of the total.
So that is 22 000 divided by 11 = $2 000. That means that the value of the equipment
is $20 000, but the business has to pay $22 000 to purchase the equipment. GST that
is paid by businesses on its purchases is able to be reclaimed (paid back) from the
government.
Equipment is an asset account, which has a debit nature. Because the computer
equipment account is increasing (that is, the business has more invested in computer
equipment than before this transaction), the computer equipment account would be
debited. The GST included in the price is also debited as it is decreasing the amount
the business has to pay to the government because this amount of GST can be
reclaimed by Petra’s business. Remember that you have learnt that assets are debit
in nature and that to increase an account you do the same as its nature. On the other
hand, the bank account (an asset ) would decrease because Petra’s Peraphernalia
has paid money out of this account. Because the bank account is an asset account
decreasing, it is credited.
Analysing transactions involves the following questioning process:
2 What category does each
of these accounts belong
to? (Revenue, expense,
asset, liability or owner’s
equity?)
1 Which accounts does
the transaction affect?
(names of individual
accounts)
3 Is the value of the
individual account going
to increase or decrease
as a result of the
transaction?
4 Will this increase or
decrease lead to this
account being debited or
credited?
If you apply this process in the table format called a transactional analysis table
(see [5.3]), you will have an invaluable tool for learning the rules of double-entry
accounting.
Transaction analysis
We discussed the first step in the accounting process, the preparation of source
documents, in chapter 3. These source documents contain the details of
transactions. The next step is to record the information about the transactions
into the journals of a business.
First, however, you need to practise the thinking process that will help you
apply the rules for accounts to transactions and ensure you enter the information
correctly into the business’s financial records. This process is called transaction
analysis.
[5.3] Transaction analysis table
Transaction
Account
involved
Account type
Increase or
decrease
A business
activity with a
financial value
Be concise and
select the most
obvious name
or the common
name used for
that type of
activity
Revenue,
Expense,
Asset,
Liability or
Owner’s equity
↑ or ↓
Debit or credit
Amount
Apply the rules:
debit or credit so that
Debits = Credits
Record the
amount to be
entered into
each account
Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) We will use this table format to show how the following transactions are
analysed:
• contributions of cash or other
assets by the owner (no GST)
• purchases of assets for cash (GST)
• sales of assets (other than
inventories) for cash (GST)
• sales of inventories for cash (GST)
• sales of services for cash (GST)
• return of inventories purchased
for cash (GST)
• return of inventories sold for cash
(GST)
• cash paid to accounts payable
(not a sale or a purchase—no GST)
• withdrawals of cash by the owner
(no GST)
• purchases of assets on credit (GST)
• sales of assets (other than
inventories) on credit (GST)
• sales of inventories on credit (GST)
• sales of services on credit (GST)
• return of inventories purchased on
credit (GST)
• return of inventories sold on credit
(GST)
• purchase of supplies and services for
cash (GST)
• purchase of supplies and services
on credit (GST)
• cash received from accounts
receivable (not a sale or a
purchase—no GST)
• other cash received (may involve
GST e.g. commission or may not
involve GST, e.g. interest).
Contributions of cash or other assets
by the owner
Business owners usually make an investment of cash and/or other assets to start
a business. They do this so that the business can begin purchasing the items and
services needed to begin the business. When the owner makes an investment, the
name of the account used to record these contributions is called ‘capital’ and is
grouped with the owner’s equity accounts.
✦Capital is the name of the account used to record the owner’s contributions to a
business.
When an owner contributes cash or other assets to the business, we always
represent (and record) the transaction from the business’s point of view. As the
transaction analysis table [5.4] shows, the assets (for example, Bank or Computer
equipment) are said to be increasing and therefore they are debited. At the same
time, the amount invested by the owner is increasing and the Capital account is
therefore credited.
[5.4] Transaction analysis of contributions by the owner
Type of transaction
Example
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Investment of cash
by owner
Petra Pollack
invested
$20 000 cash
Bank
Capital
Asset
Owner’s equity
Increase
Increase
DR
CR
$20 000
$20 000
Investment of
assets other than
cash by owner
Petra
contributed
computer
equipment for
business use
Computer equipment
Capital
Asset
Owner’s equity
Increase
Increase
DR
CR
$25 000
$25 000
RULE Asset (e.g. Bank, Vehicle, Equipment)
activity
Analysing and evaluating
Applying
Communicating
Knowing and understanding
Owner’s equity (Capital)
Amount
Increase
DR
Increase
CR
KNOWING AND DOING 5.1
1
What is transaction analysis?
2
Explain the double-entry system of accounting. Illustrate your answer.
3
What are the steps involved in analysing transactions?
4
Draw a flow diagram to illustrate the steps involved in analysing transactions.
5
What are the benefits of preparing a transaction analysis table?
6
Distinguish between GST exclusive and GST inclusive.
7
List some items on which you pay GST.
8
Find out which everyday items GST is not charged on.
9
Calculate the GST amount for each of the following.
a $700 (GST exclusive)
b $440 (GST exclusive)
c $165 (GST inclusive)
d $720 (GST exclusive)
e $1 210 (GST inclusive)
f $66 (GST exclusive)
10 What is the purpose of the capital account?
11 Why do we always represent transactions from the point of view of the business?
12 Identify the accounts involved in each of the following transactions.
a J Smith invested $40 000 cash into a business.
b B Clancy contributed $20 000 cash and a vehicle worth $40 000 into his
new business.
13 What type of account is each of the following?
a Capital
b Bank
c Motor vehicle
d Equipment
e Furniture
f Buildings
14 Complete a transaction analysis table for the following transactions.
• Jenny Wong invested $100 000 cash into her new business.
• Nicky’s Nautical Wear received a $60 000 contribution in cash from the owner.
• Jan Lowe commenced business with a vehicle valued at $25 000, equipment
worth $10 000 and $40 000 cash.
Focus on Business 1
Note to teachers:
This section of
Chapter 5 Transaction
analysis for doubleentry accounting (with
GST) differs slightly
from Chapter 5 in the
textbook. Drawings
of cash only will be
considered in this
chapter as it does
not involve GST. This
chapter only considers
drawings of cash,
not other assets.
GST as it applies
to the withdrawal of
inventories and other
assets (other than cash)
is outside the scope of
this junior course.
Chapter 5 Transaction analysis for double-entry accounting (with GST) Withdrawal of cash by the owner
A business owner may want to take out cash to use for their personal needs outside
the business. When a business owner withdraws cash, a negative owner’s equity
account called ‘drawings’ is used to record this transaction. GST is not involved in
this type of transaction.
‘Goods’ are also called
‘inventories, stock or
merchandise’.
✦The drawings account is the name of the account where businesses record that
the owner has withdrawn cash from the business, for personal use.
As the transaction analysis table [5.5] shows, the drawings account is a
‘negative’ owner’s equity account and has a debit nature because it decreases the
value of the owner’s investment. At the same time, the asset account from which
the withdrawal is made is also decreasing and is therefore credited.
Purchase of assets—cash
Just as we buy furniture or equipment (for example, washing machines or
toasters) to use in our homes to make our lives comfortable, businesses buy assets
such as vehicles, furniture or equipment (for example, computers or fax machines). A
trading business purchases goods and these goods are called inventories. Inventories
are owned by the business (until they are sold) so they are also assets. GST is paid
on all purchases of assets but the business can reclaim this amount of GST from the
government at a later date.
When a business buys an asset, the value of the assets (what the business owns)
increases. You therefore debit the asset account (for example, the Motor vehicle,
Inventories, Furniture or Equipment account), as [5.6] illustrates. GST is debited
because it represents a decrease in the liability of GST owed to the government
because GST paid on purchases can be reclaimed by a business. If the business
uses cash to buy the asset, then the Bank account will decrease because there will
be less money in the account. Decreases in assets are credited.
[5.6] Transaction analysis of the purchase of an asset for cash
[5.5] Transaction analysis of cash withdrawn by the owner
Type of transaction
Example
Accounts
involved
Type of account
Increase or
decrease
Debit
or
credit
Drawings of cash
by owner
Petra withdrew $200
cash for personal use
Drawings
Negative owner’s
equity
Asset
Increase
DR
$200
Decrease
CR
$200
Bank
activity
Amount
Example
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Purchase of
asset for cash
Bought equipment for
$4 400 cash
Equipment
GST clearing
Bank
Asset
Liability
Asset
Increase
Decrease
Decrease
DR
DR
CR
Amount
$4 000
$400
$4 400
RULE Asset (e.g. Furniture, Inventories, Motor vehicle)
Increase
DR
RULE Negative owner’s equity (Drawings)
Increase
DR
Liability (GST)
Decrease
DR
Decrease
CR
Asset (Bank)
Decrease
CR
Asset (Bank)
KNOWING AND DOING 5.2
1 What is the purpose of the Drawings account?
2 Why do we debit the Drawings account when the owner takes out cash for
personal use?
Analysing and evaluating
Applying
Knowing and understanding
Type of
transaction
3 Why is the Drawings account called a ‘negative’ owner’s equity?
4 Analyse the following transactions:
a Benny Koutsis withdrew $200 to pay for personal expenses.
b The owner paid for her $365 home electricity bill from her business’s bank account.
c Johnny Liu (owner) took cash of $150 for his own use.
5 Analyse the following transactions for Linda Young:
a Linda contributed a motor vehicle valued at $40 000.
b Linda withdrew $50 for personal use.
c Linda invested an additional $10 000 into the business.
d Linda paid a $400 account for her daughter’s school fees from the business’s
bank account.
10 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Purchase of assets—credit
Sale of assets (other than inventories)—cash
If the business buys an asset on credit (that is, the business will pay for the asset
at a later date), then a record of the business or person to whom the business
owes money is necessary. The individual account used to record the amount owed
to an individual or other business is called an ‘Accounts Payable’. This account is
classified as a liability. Therefore, because the amount that the business owes has
increased, it is necessary to credit the Accounts Payable account (see [5.7]). The
GST involved in this transaction is recorded when the purchase is made. The cash
owing is recorded at a different time.
Sometimes a business may find it has no further use for a particular asset, or the
item now uses technology that has become out of date (for example, a computer).
When a business sells its assets, the value of the business’s assets decreases.
Therefore, we credit the individual asset account (for example, computer
equipment or furniture) as [5.8] shows. If the business sells the asset for cash, then
the bank account will increase because there will be more money in this account.
Increases in assets are debited. When a business sells any of its assets it must
charge GST on the sale. GST is a liability and it is remitted to the government at a
later date; and as the amount owing is increasing it is credit.
[5.7] Transaction analysis of the purchase of assets on credit
Type of
transaction
Example
Purchase of
asset on credit
Bought $2 200 worth of
inventories from Mandy
Taylor
activity
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Inventories
GST clearing
Accounts payable—
Mandy Taylor
Asset
Liability
Liability
Increase
Decrease
Increase
DR
DR
CR
Amount
$2 000
$200
$2 200
RULE Asset (e.g. Furniture, Inventories, Motor vehicle)
Increase
DR
Liability (GST clearing)
Decrease
DR
Liability (Accounts payable—name)
Increase
CR
[5.8] Transaction analysis of the sale of an asset (other than inventories) for cash
Type of transaction
Example
Accounts
involved
Type of
account
Increase or
decrease
Debit or
credit
Sale of asset for cash
(not inventories)
Sold equipment for
$770 cash
Bank
Equipment
GST clearing
Asset
Asset
Liability
Increase
Decrease
Increase
DR
CR
CR
KNOWING AND DOING 5.3
3 What is the rule for the purchase of inventories on credit?
4 What are three other names used to identify the inventories of a business?
5 Why are inventories an asset to a business?
6 What is the rule to record the purchase of goods on credit?
8 Analyse the following transactions:
a Bought goods for $1 100 cash.
b Purchased stock valued at $5 500 for cash.
c Inventories worth $2 200 were bought on credit from Wholly Suppliers.
d Bought stock from Tickle Co. for $11 000 on credit.
e Georgia Parks purchased a new delivery van for $66 000 cash.
$770
$700
$70
RULE Asset (Bank)
Increase
DR
Asset (e.g. Furniture, Equipment)
Decrease
CR
Liability (GST clearing)
Increase
CR
If the business sells an asset on credit (that is, it will receive the money for the
asset at a later date), then it needs to keep a record of the person or business owing
the money. The account used to record the amount that another business or an
individual owes is called an ‘accounts receivable’. We classify this account as an
asset. Therefore, because the value of the business’s assets is increasing, we debit
the accounts receivable account (see [5.9]).
2 What is the rule for the purchase of an asset on credit?
7 What is the rule to record the purchase of inventories for cash?
Amount
Sale of assets (other than inventories)—
credit
1 Explain the difference between a cash purchase and a credit purchase.
Analysing and evaluating
Applying
Knowing and understanding
11
[5.9] Transaction analysis of the sale of an asset (other than inventories) on credit
Type of
transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Sale of asset on
credit
Sold motor vehicle to
H Nolls for $16 500 on
credit
Accounts receivable—
H Nolls
Motor vehicle
GST clearing
Asset
Asset
Liability
Increase
Decrease
Increase
DR
CR
CR
f Hao Van Nguyen bought furniture for the business for $2 200. He paid by cheque.
Amount
$16 500
$15 000
$1 500
g Chris Chester bought a new computer from Computer World for $3 300 on credit.
h Tommy Chan bought a new vehicle from Westside Motors for $33 000 on credit. He
paid a $5 000 deposit.
RULE Asset (Accounts receivable—name)
Increase
DR
Asset (e.g. Furniture, Equipment)
Decrease
CR
Liability (GST clearing)
Increase
CR
12 Focus on Business 1
activity
Chapter 5 Transaction analysis for double-entry accounting (with GST) Sales of inventories—cash
KNOWING AND DOING 5.4
Petra’s Paraphernalia, the business we’ve been using as an example in this book, is a
trading enterprise, that is, Petra buys goods and resells them at a higher price. The
price Petra buys goods for is called the cost price. When she sells the goods, they are
sold at a different price, the selling price, which is the cost price plus a mark-up
and with GST added on as well.
1 What is the rule to record the sale of assets (other than inventories) for cash?
2 What is the rule to record the sale of assets (other than inventories) on credit?
3 Explain the term ‘accounts receivable’.
Analysing and evaluating
Applying
Knowing and understanding
13
4 Why is an accounts receivable an asset?
5 Complete the following transaction analysis table:
✦Cost price includes the cost of the goods bought and any costs of getting the
goods ready for sale.
Transaction
Sold vehicle for
$22 000 cash
Accounts involved
Type of
account
Increase
or
decrease
Debit
or
credit
Amount
✦Selling price is the price for which the business sells the product(s) and GST is
added to this price.
✦Mark-up is an amount added to the cost price to work out the selling price before
Bank
Vehicle
GST
GST is added.
Bank
Furniture
GST
Asset
Asset
Liability
Increase
Decrease
Increase
$550
$500
$50
Accounts receivable—
T Antonio
Machinery
GST clearing
Asset
Increase
$1 100
Asset
Liability
Decrease
Increase
$1 000
$100
Businesses use both sets of prices when recording a sale of inventories. The
cost price is the value of the goods recorded in the inventories account.
The selling price is the value used when the business records the revenue
earned from the sale.
Therefore, when a sale of inventories occurs, a business makes two distinct
entries in the records of the business—a selling price entry (with GST) and a cost
price entry (no GST).
Sold equipment to
V Collins for $990
Recording the selling price
C Papadopoulos sold
furniture worth $1 100
to B Henry on credit.
Received a $200
deposit
If a business sells goods for cash, the bank account will increase by the full
amount received from the customer, that is, the selling price and GST (as shown in
[5.10]). Increases in assets are debited. The income earned by the business (that is,
revenue) also increases and the GST liability also increases. We call the individual
account used to record this type of income a ‘sales revenue’ account or just ‘sales’.
Increases in revenue are credited.
D Coulter sold P
Fleming a computer for
$2 200
Accounts receivable—
O Redding
Bank
Equipment
GST clearing
$4 500
$1 000
$5 000
$500
Recording the cost price
The business also needs to record the cost price effect of the entry. The value of
inventories is decreasing; therefore, the asset account, inventories, is credited (see
[5.10]). An expense account called ‘cost of goods sold’ is debited as this reflects the
costs directly associated with selling the products.
14 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) [5.10] Transaction analysis of sale of inventories for cash
Type of transaction
Sale of inventories
for cash
Example
Accounts
involved
Sold goods for $660
cash (cost price $300)
Type of
account
Increase or
decrease
Debit
or
credit
Amount
activity
15
KNOWING AND DOING 5.5
1 Why do businesses need two prices to record the sale of inventories?
Bank
Sales
GST clearing
Asset
Revenue
Liability
Increase
Increase
Increase
DR
CR
CR
$660
$600
$60
Cost of goods sold
Inventories
Expense
Asset
Increase
Decrease
DR
CR
$300
$300
2 What is the rule to record the cost price of goods sold for cash?
3 What is the rule to record the selling price of goods sold for cash?
Analysing and evaluating
Applying
Knowing and understanding
4 What is the rule to record the cost price of goods sold on credit?
5 What is the rule to record the selling price of goods sold on credit?
6 Analyse the following transactions:
a Sold inventories for $1 100 cash (cost price $600).
RULE
Asset (Bank)
Increase
DR
b Sold stock for $1 650 cash (cost price $700).
Revenue (Sales)
Increase
CR
c Inventories worth $2 200 were sold on credit to P Chester (cost price $1 400).
Liability (GST clearing)
Increase
CR
e N Wiseman was sold goods on credit for $880 (cost price 50% of selling price).
Cost price
Expense (Cost of goods sold)
Increase
DR
f Inventories worth $990 were sold to B Vandermeer for cash (cost price 40%
of selling price).
Asset (Inventories)
Decrease
CR
g Cash sales $3 300 (cost price $1 600).
Selling price
Sales of inventories—credit
Sale of services—cash
Similarly, when a business sells inventories on credit, it must record both the
selling price (plus GST) and cost price part of the transaction. In a credit sale,
however, the business has not yet received the cash, so it needs to record the name
of the person or business who now owes it money. The account name given is
‘Accounts receivable—name of business or person’. As shown in [5.11], we debit
Accounts receivable (name) because this represents an increase in the business’s
assets. All the other accounts involved remain the same as the ones used for cash
sales of inventories.
When service enterprises (that is, businesses such as an auto-repair centre or
an accountancy firm), sell their services, they increase their revenue. Service
enterprises record this type of revenue in a ‘Service Fees Revenue’ account.
GST is charged on the sale of services and remitted to the government. If the
business provides a service for cash then the asset account, Bank, will increase
and, therefore, will be debited (see [5.12]). The service fees revenue earned
by the business will increase and therefore be credited. As this type of transaction
represents a sale, the GST owing (liability) is increasing and is credited.
[5.11] Transaction analysis of sale of inventories on credit
Type of
transaction
Sale of
inventories on
credit
d Y Polti was sold goods on credit for $3 300 (cost price $2 000).
Example
Sold stock to
Party Planners Ltd
on credit for $880
(cost price $400)
[5.12] Transaction analysis of the sale of services for cash
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Amount
Accounts receivable—
Party Planners Ltd
Sales
GST clearing
Asset
Revenue
Liability
Increase
Increase
Increase
DR
CR
CR
$880
$800
$80
Cost of goods sold
Inventories
Expense
Asset
Increase
Decrease
DR
CR
$400
$400
RULE
Asset (Accounts receivable—name) Increase
DR
Revenue (Sales)
Increase
CR
Liability (GST clearing)
Increase
CR
Cost price
Expense (Cost of goods sold)
Increase
DR
Asset (Inventories)
Decrease
CR
Selling price
Type of transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Sale of service for
cash
Serviced vehicle for a
cash customer $330
Bank
Service fees revenue
GST clearing
Asset
Revenue
Liability
Increase
Increase
Increase
DR
CR
CR
RULE Asset (Bank)
Increase
Amount
$330
$300
$30
DR
Revenue (Service fees revenue)
Increase
CR
Liability (GST clearing)
Increase
CR
16 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Sale of services—credit
If a business sells its services on credit to a customer, then (as shown in [5.13]) it
debits the Accounts receivable account for the customer because the customer
now owes the business money and this results in an increase in assets. The Service
fees revenue account will still be credited because the revenues for the business
have increased, and as GST is charged it is therefore credited.
[5.13] Transaction analysis of the sale of services on credit
Type of
transaction
Example
Sale of
service on
credit
Serviced E Winters’s
vehicle for $220 on
credit
activity
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Accounts receivable—E Winters
Service fees revenue
GST clearing
Asset
Revenue
Liability
Increase
Increase
Increase
DR
CR
CR
of the returned goods. This means (as shown in [5.14]) that the bank account
will increase and, therefore, be debited. On the other hand, the inventories will
decrease because the value of business’s assets is less—decreases in assets are
credited. The GST clearing account is also affected and will be credited (opposite
to when goods were purchased).
[5.14] Transaction analysis of the return of inventories that a business had purchased for cash
Type of transaction
Example
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Return of goods
purchased for cash
Returned damaged
inventories for $55 refund
Bank
Inventories
GST clearing
Asset
Asset
Liability
Increase
Decrease
Increase
DR
CR
CR
Amount
$220
$200
$20
RULE Asset (Accounts receivable—name)
Increase
DR
Revenue (Service fees revenue)
Increase
CR
Liability (GST clearing)
Increase
CR
Amount
$55
$50
$5
RULE Asset (Bank)
Increase
DR
Asset (Inventories)
Decrease
CR
Liability (GST clearing)
Increase
CR
Return of inventories purchased on credit
If the business originally purchased the goods on credit, the amount that the
business now owes to the supplier is reduced. This will result in a decrease in
a liability account—Accounts payable—and this account will be debited (see
[5.15]). Again, the value of inventories owned by the business has decreased and
will be credited because the asset has decreased and GST clearing, a liability, will
be increased—credited.
KNOWING AND DOING 5.6
1 What is ‘service fees revenue’?
2 List five types of businesses in your local area that would use a Service fees revenue
account.
Analysing and evaluating
Applying
Knowing and understanding
17
3 What is the rule to record the sale of services for cash?
4 What is the rule to record the sale of services on credit?
5 Analyse the following transactions.
a Received $660 cash for services provided.
b $440 cash was received for accounting services provided.
c Bookkeeping fees of $220 were provided to DH Chu on account.
d Security services were provided on credit to Nick’s Nightclub for $165.
e Design consultancy fees of $330 each were charged to G Kingley and W Quentin.
Return of inventories purchased for cash
Sometimes when a business purchases inventories, it may find that the goods are
faulty, the wrong size or unsuitable in some other way. The business may decide
to return the goods or keep them if the supplier provides an adjustment to the
price of the goods. This is called an ‘allowance’. Whether the goods are returned
or an allowance is given, the effects on the accounts are the same. If the business
originally bought the goods for cash, then it will receive a refund for the full value
[5.15] Transaction analysis of the return of inventories that a business had purchased on credit
Type of
transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Return of goods
purchased on
credit
Returned goods
worth $77
originally bought
on credit from
Parties Galore
Accounts payable—
Parties Galore
Inventories
GST clearing
Liability
Asset
Liability
Decrease
Decrease
Increase
DR
CR
CR
Amount
$77
$70
$7
RULE Liability (Accounts payable—name)
Decrease
DR
Asset (Inventories)
Decrease
CR
Liability (GST clearing)
Increase
CR
18 Focus on Business 1
activity
Chapter 5 Transaction analysis for double-entry accounting (with GST) [5.16] Transaction analysis of the return of inventories originally sold for cash
KNOWING AND DOING 5.7
Type of
transaction
Example
Accounts
Involved
Type of account
Increase
or
decrease
Debit
or
credit
Return of goods
sold for cash
$110 worth of goods
were returned for a
cash refund. Cost
price $55
Sales returns
Bank
GST clearing
Inventories
Cost of goods sold
Negative revenue
Asset
Liability
Asset
Expense
Increase
Decrease
Decrease
Increase
Decrease
DR
CR
DR
DR
CR
1 What is the rule to record the return of inventories purchased for cash?
2 What is the rule to record the return of inventories purchased on credit?
Analysing and evaluating
Applying
Knowing and understanding
19
3 Why is a cash refund not received when inventories originally bought on credit are
returned?
4 Why might a business return inventories?
5 Analyse the following transactions:
a Inventories worth $330 were returned to the supplier for a cash refund.
b $110 worth of goods was sent back to the supplier because they were the wrong
colour.
c The business received an adjustment note for $55 from T Hallam on goods purchased
on credit.
d The business returned $88 worth of goods to S Dimitriou.
Returns of inventories sold for cash
When a business provides a refund, the Bank account will decrease and the revenue
from the original sale will also decrease. The business records this decrease in sales
in a ‘Sales returns’ account. This is a negative revenue account because there has
been a decrease in the revenues earned by the business. The GST clearing account
is also decreasing and will be debited.
Recording the cost price of goods returned
Because the returned goods are now back in stock, the business’s Inventories
account will now increase. The cost of goods sold (or the expense associated with
the original sale) is also decreasing and therefore this account will be credited.
$100
$110
$10
$55
$55
RULE
Negative revenue (Sales return)
Increase
DR
Asset (Bank)
Decrease
CR
Liability (GST clearing)
Decrease
DR
Cost price
Asset (Inventories)
Increase
DR
Expense (Cost of goods sold)
Decrease
CR
Selling price
Returns of inventories sold on credit
When a customer returns goods sold for cash because they prove to be incorrect for
some reason, or are more than what the customer needs, the customer is entitled
to receive a cash refund from the business for the full price paid. Remember that
the sale of the goods involved a selling price and a cost price component. Similarly,
when the goods are returned for a cash refund, the adjustments in the books of the
business need to reflect the selling price and the cost price parts of the transaction
and the reversal of the GST originally charged (as shown in [5.16]).
Recording the selling price of goods returned
Amount
If the goods were originally sold on credit, then the records need to show a
reduction in the amount owed to the business by the customer (that is, the amount
of the original credit sale). A cash refund is not appropriate as the customer has
not yet paid for the goods. Therefore, (as shown in [5.17]) a decrease in the asset
account—Accounts receivable—is necessary to record the reduced amount that
the customer now owes. Decreases in assets are credited. The other accounts
involved are the same as in the cash example above.
[5.17] Transaction analysis of the return of inventories originally sold on credit
Type of
transaction
Example
Accounts
involved
Type of account
Increase
or
decrease
Debit
or
credit
Amount
Return of
goods sold on
credit
Party Planners
Ltd returned $220
worth of excess
goods. Cost price
$100
Sales returns
Accounts receivable—
Party Planners Ltd
GST clearing
Inventories
Cost of goods sold
Negative revenue
Increase
DR
$200
Asset
Liability
Asset
Expense
Decrease
Decrease
Increase
Decrease
CR
DR
DR
CR
$220
$20
$100
$100
RULE
Negative revenue (Sales returns)
Asset (Accounts receivable—name) Decrease
CR
Liability (GST clearing)
Decrease
DR
Cost price
Asset (Inventories)
Increase
DR
Expense (Cost of goods sold)
Decrease
CR
Selling price
Increase
DR
20 Focus on Business 1
activity
Chapter 5 Transaction analysis for double-entry accounting (with GST) [5.19] Transaction analysis of the payment to an accounts payable with a discount received
KNOWING AND DOING 5.8
Type of transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Accounts payable—
Parties Galore
Bank
Liability
Asset
Decrease
Decrease
DR
CR
$1 045
$1 045
Accounts payable—
Parties Galore
Discount revenue
GST clearing
Liability
Revenue
Liability
Decrease
Increase
Increase
DR
CR
CR
$55
$50
$5
1 What is the rule to record the cost price of the return of inventories sold for cash?
2 What is the rule to record the cost price of the return of inventories sold on credit?
3 What is the rule to record the selling price of the return of inventories sold for cash?
Analysing and evaluating
Applying
Knowing and understanding
4 What is the rule to record the selling price of the return of inventories sold on credit?
5 What is the nature of the Sales returns account? Why?
6 Analyse the following transactions:
Cash paid to
accounts payable
(with discount)
a A customer has returned inventories worth $440 (cost price $150) for a cash
refund.
Paid Parties Galore
$1 045 and
received a $55
discount for prompt
payment
b Customers returned stock to the value of $99 (cost price $30).
RULE Liability (Accounts payable)
Decrease
DR
d G Fernando returned inventories to the value of $132 (cost price 40% of selling
price).
Revenue (Discount revenue)
Increase
CR
Liability (GST clearing)
Increase
CR
e A Huang returned goods worth $990 (cost price 60% of selling price).
Asset (Bank)
Decrease
CR
activity
You will recall from our earlier examples that, when a business purchases an asset
or goods on credit, it records this credit purchase in a liability account—accounts
payable. This records the fact that the business owes someone money and that
the amount owed includes the GST that was recorded when the purchase was
recorded. The amount of GST owed is included in the amount paid but is not
recorded again as this transaction is not a sale or purchase – just a subsequent
payment of cash owing.
Example
Accounts
involved
Paid Parties
Galore $1 100
Accounts payable—
Parties Galore
Bank
Type of
account
Liability
Asset
Increase
or
decrease
Debit
or
credit
Decrease
Decrease
DR
CR
Amount
1 What is the rule to record cash paid to an accounts payable?
2 What is the rule to record the discount received from an accounts payable?
3 Why is a discount given by an accounts payable?
Analysing and evaluating
Applying
Knowing and understanding
4 Why is the Accounts payable account debited when recording a discount received?
5 Analyse the following transactions:
a Sent a cheque to C Knight for $500 in full settlement of amount owing.
b Paid P Xavier $900 in settlement of account.
d P Calder was paid $900 in full settlement of a $999 account.
e We owed W Wilson $880. He gave us a discount of 5% for prompt payment.
$1 100
$1 100
RULE Liability (Accounts payable—name)
Decrease
DR
Decrease
CR
Asset (Bank)
KNOWING AND DOING 5.9
c Paid B Engles $400 and received a $44 discount for prompt payment (including
GST).
[5.18] Transaction analysis of a payment to accounts payable
Cash paid to
accounts payable
(no discount)
Amount
c H Major returned $220 worth of goods (cost price $110). The business issued an
adjustment note.
Cash paid to accounts payable
Type of transaction
21
Discount received
A discount has the effect of reducing the original transaction amount and as this
included GST, an adjustment must also be made for GST in this transaction. Due
to the GST, it may be easier to understand this transaction if done as two entries.
The first entry is the amount actually paid. The second entry is the amount not
paid which includes a component of GST in the discount.
f The amount owing to C H Lai was $2 200. The account was settled in full after
deducting a 2% discount for prompt payment.
22 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Purchases of supplies and services—cash
[5.21] Transaction analysis of the purchase of a supply or service on credit
In the previous sections we have been discussing the purchase of assets such as
equipment and inventories. Businesses also need to pay for other supplies, such
as stationery, and for services such as electricity, advertising and rent to keep
operating and to carry out their main activities. These costs are called expenses
because they must be incurred in order to earn the revenue. Expenses will reduce
the overall profit made by the business at the end of the accounting period. If the
business pays for the expense by cash (that is, with a cheque), then the expense
account will increase and therefore be debited (see [5.20]). The amount paid
for these expenses will generally include GST but because the amount can be
reclaimed by the business from the government at a later date, the GST liability is
decreasing. The bank account will decrease as there will be less cash available in
this account—so the asset, Bank, is credited because it is decreasing. Wages and
interest paid to a bank do not attract GST.
[5.20] Transaction analysis of the purchase of a supply or service for cash
Type of transaction
Purchase of supply
or service for cash
Example
Paid $220 telephone bill
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Telephone
Bank
GST clearing
Expense
Asset
Liability
Increase
Decrease
Decrease
DR
CR
DR
23
Type of transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Purchase of supply
or service on credit
Bought $770 worth of
advertising from SunQuest
News on account
Advertising
Accounts payable—
SunQuest News
GST clearing
Expense
Increase
DR
$700
Liability
Liability
Increase
Decrease
CR
DR
$770
$70
activity
Amount
RULE Expense (e.g. Electricity, stationery)
Increase
DR
Liability (Accounts payable)
Increase
CR
Liability (GST clearing)
Decrease
DR
KNOWING AND DOING 5.10
1 What is the rule to record the purchase of a supply for cash?
Amount
2 What is the rule to record the purchase of a supply on credit?
$200
$220
$20
RULE Expense (e.g. Electricity, stationery)
Increase
DR
Asset (Bank)
Decrease
CR
Liability (GST clearing)
Decrease
DR
Purchases of supplies and services—credit
When the business buys the supply or service on credit, the expense account will
increase and, therefore, be debited (see [5.21]). The amount that the business
owes will also increase; therefore, the business’s liabilities will increase—and so
liabilities will be credited. GST will be included in the amount paid and represents
an amount that can be reclaimed from the government at a later date and is
therefore decreasing the overall GST liability account.
3 Explain why an expense account is debited when a supply or service is purchased.
Analysing and evaluating
Applying
Knowing and understanding
4 Analyse the following transactions:
a Paid $440 for a telephone account.
b Sent a cheque for $220 to Energex for electricity supplied.
c Purchased advertising on account from Questfair Newspapers $990.
d Received a tax invoice from Busy Bookkeepers for $880 accounting fees.
e Paid $1 200 wages. (There is no GST in wages.)
f Auto Repairs Ltd charged our account $550 for repairs to the delivery van.
Cash received from accounts receivable
You will remember from our earlier examples that the sale of an asset or goods on
credit meant that the customer now owes the business money. The business records
the amount of money owing in an Accounts receivable account. This account is
an asset. When the customer settles the account, that is, pays the business the
full amount owing or part of the amount owing, the Accounts receivable (asset)
decreases and therefore is credited (see [5.22]). GST is not included in this
transaction as it has already been recorded at the time of the sale. At the same
time the Bank account will increase and therefore be debited.
24 Focus on Business 1
[5.22] Transaction analysis of cash received from an accounts receivable customer
Type of transaction
Cash received from
accounts receivable
(no discount)
25
Chapter 5 Transaction analysis for double-entry accounting (with GST) Example
Party Planners Ltd
paid us $300 for
amount owing
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Bank
Accounts receivable—
Party Planners Ltd
Asset
Increase
DR
$300
Asset
Decrease
CR
$300
RULE Asset (Bank)
Increase
DR
Decrease
CR
Asset (Accounts receivable—name)
Other cash received
Amount
Sometimes a business earns income from sources other than its main service
or trading activity. For example, it may rent a building to other businesses, or
it may earn interest from money invested. When the business receives cash for
these other revenues, the Bank account will be debited as it is increasing, and an
individual revenue account will be credited for the type of revenue received and
GST clearing will be credited also (see [5.24]). Interest from a bank or some other
type of investment does not attract GST.
[5.24] Transaction analysis of cash received from other revenue
Discount given
Because the original sale to the accounts receivable included GST, if discount is
now given it really means that the amount charged for the goods has decreased.
This also means that the GST we originally recorded must also decrease. It is
generally easier to do this transaction in two parts to make it more simple. The
first part of the entry deals with the cash actually paid. The second part deals with
the amount of cash not paid—the discount that has a GST component.
Type of transaction
Example
Accounts
involved
Type of
account
Increase or
decrease
Debit
or
credit
Receipt of revenue
Received $88
commission
Bank
Commission
GST clearing
Asset
Revenue
Liability
Increase
Increase
Increase
DR
CR
CR
[5.23] Transaction analysis of the payment from an accounts receivable customer with a discount
Type of transaction
Example
Accounts
involved
Type of
account
Increase
or
decrease
Debit
or
credit
Amount
Cash received
from accounts
receivable (with
discount)
Received $500 cheque
from G Zammit. $55
discount was given for
prompt payment
Bank
Accounts receivable—
G Zammit
Asset
Asset
Increase
Decrease
DR
CR
$500
$500
Discount expense
GST clearing
Accounts receivable—
G Zammit
Expense
Liability
Asset
Increase
Decrease
Decrease
DR
DR
CR
$50
$5
$55
activity
Amount
$88
$80
$8
RULE Asset (Bank)
Increase
DR
Revenue (e.g. Rent, commission)
Increase
CR
Liability (GST clearing)
Increase
CR
KNOWING AND DOING 5.11
1 What is the rule to record cash received from an accounts receivable?
2 What is the rule to record the discount given to an accounts receivable?
Analysing and evaluating
Applying
Knowing and understanding
3 Why is a discount sometimes given to an accounts receivable?
4 Make a list of sources of revenue a business might earn other than sales or service
fees revenue.
5 What is the rule to record cash received for other revenues?
6 Analyse the following transactions:
a Received $900 from T Lee in full settlement of account.
RULE Asset (Bank)
Increase
DR
b P Reed sent a cheque for $245 to pay the amount owing on his account.
Expense (Discount expense)
Increase
DR
c Received $1 400 from K Makris in full settlement of a $1 499 debt.
Asset (Accounts receivable—name)
Decrease
CR
Liability (GST clearing)
Decrease
DR
d L Jimmieson was given an $88 discount for prompt payment of a $988 account.
e M Briggs owed $1 650. She received a discount of 7  % for prompt payment.
f Received $200 interest on an investment. (There is no GST in this transaction.)
g Commission of $440 was received by cheque.
h J Nagy (a tenant) paid his monthly rent of $800.
26 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Summary of business transactions
Sale of inventories—cash
The following table [5.25] provides an overview of the types of transactions we
have analysed in this chapter.
[5.25] Summary of types of business transactions
Transaction
Accounts involved
(DR entry first
CR entry indented)
Bank
Capital
Transaction
Capital contributed
—assets
Asset account
Capital
Sale of services—credit
Drawings of cash
Drawings
Bank
Goods returned—originally
purchased for cash (cash
refund received)
Purchase of asset—cash
Asset account
GST clearing
Bank
Asset account
GST clearing
Accounts payable—
name
Goods returned—originally
purchased on credit
Capital contributed­—cash
Purchase of asset—credit
Sale of asset—cash
Bank
Asset account
GST clearing
Sale of services—cash
Goods returned—originally
sold for cash (cash refund
paid)
Goods returned—originally
sold on credit
Sale of asset—credit
Accounts receivable—
name
Asset account
GST clearing
Payment to accounts
payable
Purchase of inventories—
cash
Inventories
GST clearing
Bank
Inventories
GST clearing
Accounts payable—
name
Purchase of supplies and
services—cash
Purchase of inventories—
credit
Purchase of supplies and
services—credit
Accounts involved
(DR entry first
CR entry indented)
Bank
Service fees revenue
GST clearing
Accounts receivable—
name
Service fees revenue
GST clearing
Bank
Inventories
GST clearing
Accounts payable—name
Inventories
GST clearing
Sales returns
GST clearing Selling price
Bank
Inventories
Cost of
goods sold
Sales returns
GST clearing
Accounts
receivable
—name
Cost price
Selling price
Cost of goods
sold
Cost price
Inventories
Accounts payable—name
Bank
Accounts payable—name
Discount revenue
GST clearing
Expense account
GST clearing
Bank
Expense account
GST clearing
Accounts payable—
name
Sale of inventories—credit
Bank
Sales
Selling price
GST clearing
Cost of goods
sold
Cost price
Inventories
Accounts
receivable
—name
Selling price
Sales
GST clearing
Cost of goods
sold
Inventories
Cost price
Payment from accounts
receivable
Bank
Accounts receivable—
name
Discount expense
GST clearing
Accounts receivable—
name
Revenue received
Bank
Revenue account
GST clearing
27
28 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Goods and Services Tax and Business Activity
Statements (BAS)
The business collects the GST on behalf of the ATO and pays GST when it purchases
goods, supplies and assets for the operation of its own business. The GST collected
is owed to the government. The GST paid by the business can be reclaimed from
the government. Businesses must complete a Business Activity Statement (BAS)
to determine the net GST payable to the ATO.
activity
KNOWING AND DOING 5.12
1 What is transaction analysis?
2 Distinguish between GST exclusive and GST inclusive.
3 List some items on which a business does not pay GST.
Analysing and evaluating
Applying
Knowing and understanding
4 Find out which everyday items GST is not charged on.
5 Using the form provided and the financial information listed below, prepare the quarterly
Business Activity Statement (BAS) for Parties Galore at 119 Waterworks Road, Ashgrove,
Qld 4060 and change dates to Quarter 1 April 2008 to 30 June 2008. Amounts are
inclusive of GST.
a Calculate the total sales for the period and insert this figure at G1 in the BAS and
tick the appropriate included/excluded box.
b Calculate the total purchases for the period and insert this figure at G11 in the BAS
and tick the appropriate included/excluded box.
<www.ato.gov.au>
c Calculate total capital purchases for the period. Add 10% GST and insert this figure
at G10 in the BAS and tick the appropriate included/excluded box.
d Then turn the page of the BAS and calculate either the GST owing to the ATO, or the
amount owed back to the business by the ATO.
6 Identify the accounts involved in each of the following transactions.
Transaction
Borrowed $40 000 from bank
Bought land for $100 000
Sold equipment for $4 400 cash
Paid electricity $440
Received rent of $1 100
Paid $500 wages
Received commission $330
Purchased building worth $90 000
Owner contributed delivery van worth $40 000 for
business use
Paid telephone $330
A direct payment of $220 was made from our bank
for rent
Sold motor vehicle to G Brandt for $16 500 on credit
7 Categorise each of the following accounts into its correct group.
Account title
Capital
Bank
Accounts payable
Parties Galore financial information for quarter 1 April to 30 June 2008:
Sales for each month in the quarter including GST are as follows.
Accounts receivable
• Sales for April
$33 000
Rent (received)
• Sales for May
$22 000
• Sales for June
$44 000
Parties Galore purchased inventories during the period as follows.
Wages
Interest (paid)
• Purchases for April
$16 500
Advertising
• Purchases for May
$11 000
Commission (received)
• Purchases for June
$13 200
Parties Galore also purchased the following assets. The prices given here are exclusive of
GST.
• Computer in April
$12 000
• Tailormade filing system
$15 000
Accounts involved
GST clearing
Commission (paid)
Building
Mortgage on land
Equipment
Loan from AGC Finance Co.
Loan to R Thore
Type of account
29
30 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) 8 State whether each account in the following transactions is increasing or decreasing.
Transaction
Accounts involved
Bought motor
vehicle for $44 000
cash
Motor vehicle
Bank
GST clearing
Bought equipment
on credit from W
Houston for $5 500
Equipment
W Houston (accounts payable)
GST clearing
Paid wages $900
Wages
Bank
Paid cleaning $440
Cleaning
GST clearing
Bank
Sold equipment on
credit to Eric Wise
for $1 100
Eric Wise (accounts receivable)
Equipment
GST clearing
Owner invested
$10 000 cash
Bank
Capital
Owner contributed
equipment worth
$1 000
Equipment
Capital
Received interest
of $40 on
investment
Bank
Interest on investment
Received rent $440
Bank
Rent
GST clearing
Received
commission $220
Bank
Commission
GST clearing
Increase or decrease
31
9 Draw a transaction analysis table and analyse the following transactions (GST is
included when applicable).
– Borrowed $40 000 from bank.
– Bought land for $100 000.
– Bought inventories $1 100 cash.
– Bought inventories from W Rent on credit $330.
– Sold equipment for $4 400 cash.
– Paid electricity $440.
– Received rent of $1 100.
– Paid $550 wages.
– Received commission $220
– Purchased building $90 000.
– Owner contributed delivery van worth $40 000 for business use.
– Paid telephone $330.
– A direct payment of $220 was made from our bank account for rent.
– Sold motor vehicle to G Brandt for $16 500 on credit.
– Sold inventories for cash $880 (cost price $400).
– Sold inventories to G Brennan on credit for $550 (cost price $250).
32 Focus on Business 1
Chapter 5 Transaction analysis for double-entry accounting (with GST) Culminating
activity
GLOSSARY
Capital
name of the account used to record the owner’s contributions to a business
TRANSACTION ANALYSIS
Draw a transaction analysis table and analyse the following source documents on behalf
of Dom’s Doughnuts owned by Dominic Haddad. The cost price of goods sold is 40% of
the selling price in each case. Be sure to analyse the transactions in date order.
Analysing and evaluating
Applying
Receipt no 78
12/03/07
Credit:
PA Chester
Details:
Payment of account
Cash received: $24.00
Discount given:
Cash register summary 03/03/07
Tax invoice no 698
Supplier:
Sold to:
Tax invoice no 258
09/03/07
Supplier:
Mandy’s Supplies
Sold to:
Dom’s Doughnuts
The following goods:
4 cartons cocoa powder $9.00/carton
Cheque no 2358
02/03/07
Fran Flour Suppliers
Dom’s Doughnuts
The following goods:
5 bags self-raising flour $5/bag
Dominic Haddad
Cash drawings
$300
4/3/07
Supplier: Dom’s Doughnuts
Sold to: Tommy Tucker
The following goods:
20 boxes mixed doughnuts $4.00/box
Terms of trade:
5/10; n/30
The following goods:
Ford utility van $25 000
Paid to:
For:
This cheque:
2/3/07
Energex
Electricity supply
$200
Receipt no 77
Fran Flour Supplies
Settlement of account
$71
Credit:
Details:
Cash received:
Discount given:
12/3/07
Tommy Tucker
Payment of account
$76.00
$ 4.00
03/03/07
Supplier: Fran Flour Suppliers
Details:
Damaged goods
Re: Invoice 698
Return/allowance:
2 bags self raising flour $5/bag
7 boxes yeast $8/box
Terms of trade:
Motorworld
Dom’s Doughnuts
07/03/07
Adjustment note no 698
Tax invoice no 447
Supplier:
Sold to:
06/03/07
11/03/07
Cheque no 2357
Paid to:
For:
This cheque:
Tax invoice no 944
Cheque no 2356
Paid to:
For:
This cheque:
$600
33
Tax invoice no 446
1/3/07
Supplier: Dom’s Doughnuts
Sold to: PA Chester
The following goods:
6 boxes mixed doughnuts $4.00/box
5/10; n/30
If Dom’s Doughnuts had registered to collect GST, which of the following statements
would be considered true for the month of March?
• All the transactions involving cheques would have had GST calculated. True/False
• The cash register summary figure would not include GST. True/False
• Mandy’s Supplies, Fran Flour Suppliers and Motorworld would have a GST figure
on each source document. True/False
• Each of the transactions in the above source documents would include GST. True/False
Cost price
the cost of the goods bought and any costs of getting the goods ready for sale
Double-entry system
states that for every transaction there is a debit (DR) entry and a corresponding credit
(CR) entry of equal value
Drawings account
name of the account used to record the amount of assets that the owner withdraws
from the business for personal use
GST-inclusive
the price given for a product includes the GST component
GST-exclusive
the price given for a product has not had the GST component added
Inventories
goods a business buys for resale to customers
Mark-up
an amount added to the cost price to work out the selling price
Selling price
the price for which the business sells the product(s)
Transaction analysis
the process used to break down a transaction into its debit and credit parts