Accg100
Accounting 1A
Lecture Notes
Semester 2, 2012
1
Table of Contents
Lecture Notes
Week 1:
Introduction to Accounting, Ethics,
Business Entities, Financial Statements
Week 2:
Accounting for Transactions –Part 1
Week 3:
Accounting for Transactions –Part 2
Week 4:
Accounting for Adjustments- Part 1
Week 5:
Accounting for Adjustments- Part 2
Week 6:
Completion of Accounting Cycle
Accounting Systems
Revision Chapters 1 – 4
Week 8:
Accounting for Retailers
Week 9:
Accounting for Inventories
Week 10: Non-Current Assets
Week 11: Cash Management and Control
Week 12: Accounting for Receivables
Week 13: Revision
Tutorial Exercises
Terminology
Page
3
14
27
42
53
64
70
80
86
97
111
123
134
149
150
168
2
Lecture Notes Week 1
Introduction to Accounting, Ethics,
Business Entities, Financial Statements
Required Readings: HEM : Chapters 1 and 2
All required readings m ust be com pleted before
attending class
3
What is Accounting?
The process of ________________________________and
___________ economic information to assist users to make
_____________.
Users of Accounting Information
The users are internal and external decision makers.
Internal:
External:
Management Accounting
Providing information to management to help them ____,
______ and ____________. Users are ________.
Financial Accounting
Reporting information to ________users to help them make
decisions about the entity’s __________ and ____________.
The reports produced for the external users are known as General
Purpose Financial Reports (GPFR) and include:
 Balance Sheet
 Income Statement
 Statement of Changes in Equity
 Statement of Cash Flows (not covered in Accounting 1A)
The information in the GPFR must abide by accounting standards and
are produced for a
to ensure that accounting information is RELIABLE.
Ethics
Ethics is a system of
Examples of unethical behaviour:
- entities polluting the environment because it is too costly to
- deceptive
- bribery – payment for a
- fraud – dishonest acts with a
4
ETHICAL PHILOSOPHIES
Ethical decision making in business is complex. It is important to
identify all the ethical issues involved in order to make an
A joint code of ethics has been established by the professional
accounting bodies – CPA Australia and the Institute of Chartered
Accountants in Australia (ICAA). Members must comply
Many companies have developed their own code of ethics as
guidelines for employees to make ethical decisions.
The code of ethics concentrates on what ought to be done
Two theories typify this approach:
• Teleological theories are concerned with consequences of
decisions. If actions result in good consequences, behaviour
The most notable theory is ethical utilitarianism - behaviour
should be based on what provides the greatest good to the
• Deontological theories are concerned with duties. An action is
morally right if it is motivated by a good will that stems from a
Steps to assist in decision making when there is an ethical issue at
stake:
1. Identify the stakeholders. Stakeholders are individuals or groups
who have an interest in the entity’s activities and performance and
may be affected by the entity’s actions. Stakeholders include
2. Identify the ethical issues involved eg fraud, bribery, dishonesty,
covering up information, environmental issues like pollution and
sustainability
3. Identify the consequences of the decision
Eg will employees lose their jobs if the business is forced to close?
4. Make an ethical decision
5
BUSINESS ENTITIES
Different types of entities can be formed to run a business:
Sole trader
Partnership
Company
They differ in terms of owner liability, equity structure, funding
opportunities, decision making responsibilities and taxation
1. Sole Trader (single proprietorship) – a business owned by a single
person
The owner
Advantages:
• Easy and
• no government
• Owner has total autonomy
• Owner claims
Disadvantages:
• Limited by skill,
• Limited life of the business• the owner has
UN LI M I TED LI ABI LI TY means that the owner is personally
responsible for all debts of the business. ___________________
___________________________________________________
2. Partnership: a business owned by 2 or more people
Owners
Partners own and
Partners share everything –
Advantages:
• Enables sharing
• Easy and
• no
Disadvantages:
• partners
• Limited life – if one partner dies or withdraws from the business
then the
• Mutual agency – each partner acts as an agent for the business and
all partners are
6
3.Company: a business owned by shareholders.
The company is an independent legal entity which means that the
business is separate
Advantages:
• A company has continuity of existence – the business does not
have to be dissolved
• Shareholders have LIMITED LIABILITY which means that if the
business fails,
Disadvantages:
• More time consuming
• Must comply with complex government regulations
• Separation of
Financial Statements
1. The Balance Sheet
______________________________________________________
The balance sheet includes Assets, Liabilities and Equity
ASSETS: resources controlled by the entity that provide future
benefits, what the business owns
Examples_______________________________________________
_______________________________________________________
_____________________________________________________
LIABILITIES: amounts owed by the entity to others, which will result
in a future sacrifice
Examples: ____________________________________________
_____________________________________________________
_____________________________________________________
EQUITY: represents the owner’s wealth or the owner’s interest in the
business. Equity also reflects the claim of owners on the firm’s
assets. Example: Capital –
The Balance Sheet shows:
• the assets in which the
• how the entity has
There are 2 formats of the Balance Sheet:
7
Account form at:
ASSETS
Cash at Bank
Accounts receivable
Repair supplies
Repair equipment
Land
Building
DON’S AUTO REPAIRS
Balance Sheet
As at 30 June 2012
LIABILITIES
$ 50 340 Accounts payable
17 790 Mortgage payable
14 610
110 700 EQUITY
60 000 Don Brady, Capital
255 000
$508 440
$ 20 760
201 000
221 760
286 680
$508 440
Assets are on the left hand side and liabilities and equity are on
the right hand side. ASSETS =
N arrative form at:
DON’S AUTO REPAIRS
Balance Sheet
As at 30 June 2012
ASSETS
Cash at Bank
$ 50 340
Accounts receivable
17 790
Repair supplies
14 610
Repair equipment
110 700
Land
60 000
Building
255 000
$508 440
LIABILITIES
Accounts payable
Mortgage payable
$ 20 760
201 000
221 760
NET ASSETS
286 680
EQUITY
Don Brady, Capital
286 680
Assets, liabilities and equity are presented down the page
Assets – Liabilities =
Net Assets are disclosed and calculated as
NET ASSETS =
N ote: The N arrative form at is preferred and w ill be used in ACCG 10 0
8
2. The Income Statement ________________________________
_____________________________________________________
DON’S AUTO REPAIRS
Income Statement
For the year ended 30 June 2012
INCOME
Repair revenue
EXPENSES
Advertising expense
$ 20 250
Repair supplies expense
91 710
Salaries and wages expense 127 800
Rent expense
40 260
Telephone expense
20 190
Light and Power expense
47 940
PROFIT
$442 500
348 150
$ 94 350
The Income Statement includes Income and Expenses
INCOME / REVENUE: what the business earns, represents an increase
in the wealth of the owners.
Examples: sales revenue ____________________________
service revenue ___________________________________
EXPENSES: costs incurred by the entity to earn income, represents a
decrease in the wealth of the owners
Examples:
Income – Expenses =
If expenses > income, the business has made a _____
3. Statement of Changes in Equity explains the change in the balance
of equity during the period ie it shows how the owner’s wealth has
changed
DON’S AUTO REPAIRS
Statement of Changes in Equity
For the year ended 30 June 2012
Don Brady, Capital - 1 July 2011
$ 237 330
Net profit for the year
94 350
331 680
Less: Drawings
45 000
Don Brady, Capital - 30 June 2012
$ 286 680
9
There are 4 factors which can affect Equity:
i. Capital Contributions –
ii. Drawings –
iii. Profit –
iv. Loss –
FINANCIAL STATEMENT HEADINGS
All financial statements must have a heading or title which contains
the following information:
• Name of the business
• Name of the financial statement eg Balance Sheet, Income
Statement or Statement of Changes in Equity
• Date or time period covered by the report
Balance Sheet
Income Statement
Statement of Changes in Equity
ACCOUNTING ASSUMPTIONS
(________________________________)
*Accounting entity assumption: for accounting purposes the business
is considered to be a
This means that the financial activities of the entity need to be
separated
Without this separation, it is not possible to assess the performance
or financial position
*Accrual basis accounting: transactions are recorded when they
happen
*Accounting period assumption: the life of the business is broken into
equal time periods. Profit for the period is determined by recognising
*Going concern assumption – the entity will continue
10
Lecture Problem:
The following is a list of financial statement balances for Hip Hop
Dance Studios at 30 June 2012.
Account Name
Accounts payable
$
Asset, Liability,
Equity, Revenue,
Expense
1 200
Accounts receivable
12 800
Advertising Expense
10 400
Cash at bank
22 000
Electricity expense
Equipment
Hip Hop, Capital
Hip Hop, Drawings
1 500
28 800
?
9 000
Loan Payable
18 000
Rent expense
36 000
Services revenue
Unearned revenue
Wages expense
Financial
Statement
120 440
800
28 400
Required:
A.
For each of the items listed above, 1. classify the item as an asset,
liability, equity, revenue or expense and 2. indicate whether the item
should appear on the balance sheet, income statement or statement of
change in equity
B.
Prepare an Income Statement, Balance Sheet and a Statement of
Changes in Equity for Hip Hop Dance Studios for the year ended 30 June
2012
11
HIP HOP DANCE STUDIOS
Income Statement
for the year ended 30 June 2012
HIP HOP DANCE STUDIOS
Balance Sheet
as at 30 June 2012
HIP HOP DANCE STUDIOS
Statement of Changes in Equity
for the year ended 30 June 2012
12
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13
Lecture Notes Week 2
Accounting for Transactions –
Fundamentals Part 1
Required Readings: HEM : Chapter 3 Pages 68-81
All required readings m ust be com pleted before
attending class
14
THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY
This equation must ALWAYS balance.
Effects of transactions on the Accounting Equation
Transactions are business events which are given accounting
recognition, and are inputs to the accounting system. Transactions
usually involve a flow of resources.
Examples:
Every transaction will result in changes to an entity’s assets,
liabilities or equity, and
After each transaction is recorded,
Transaction Analysis
• First step in the recording process
• Involves analysing the effects of transactions on the accounting
equation:
*Identify the items affected:
*Determine effect:
Note that Revenues and Expenses are treated as a subset of
Equity:
• Revenues
• Expenses
15
Lecture Problem 1:
The following transactions occurred in the business of Bambi’s Interior Designs
during the month of February.
Feb 1. Obtained a loan from the bank for $120,000
Feb 2. Purchased a computer for $2,200 cash.
Feb 6. Paid wages of $15,000
Feb 10. Purchased equipment for $3,000 on credit.
Feb 12. Invoiced customer for services performed, $8,000
Feb 14. Purchased furniture costing $25,000 from Fab Furniture. $5,000 was
paid as a deposit, and the remaining amount of $20,000 is due to be paid
within 14 days.
Feb 15. Rent was paid for office space for the month of February, $6,000.
Feb 20. Received cash of $750 for services performed.
Feb 21. Paid interest expense on bank loan $1,500
Feb 22. Received a cheque for $8,000 from customers on account (customers
were invoiced on Feb 12.)
Feb 26. Sent a cheque for $20,000 to Fab Furniture in payment for the amount
owing on the office furniture purchased on Feb 14
Feb 28. Received $3,200 in advance from customers for services to be
provided in March.
(Hint: revenue has not been earned yet, because the service has not yet been
performed)
Required:
Perform a transaction analysis and prepare journal entries for the above
transactions.
16
LECTURE PROBLEM 1: TRANSACTION ANALYSIS
ASSETS
=
LIABILITIES
+
EQUITY
17
Recording Transactions:
Step 1: Perform Transaction Analysis
• Identify the
• Determine whether the account needs to be
•
•
•
•
•
Commonly used accounts:
Assets:
Liabilities:
Owners’ Equity:
Income:
Expenses:
Step 2 : Journal Entries
Transactions are recorded as Journal Entries in the General Journal.
Journal Entry:
Date Dr Account Name
$
Cr Account Name $
(Narration - brief explanation)
The terms debit (dr) and credit (cr) are used as a code for recording
transactions.
DEBIT CREDIT RULES:
DR ⇑
CR ⇓
A
CR ⇑
=
DR ⇓
L
CR ⇑
+
DR ⇓
E
Note: when recording transactions:
* at least 2 accounts
* the sum of the debits must always equal the sum of the credits for
every journal entry. This ensures that the equality
* Always put debit first
18
Lecture Problem 1: General Journal
Date
Details
Debit
Credit
19
Lecture Problem 2:
Abbey’s Advertising Agency began operations on 1 January. The following
transactions occurred during the month:
Jan 1. The owner contributed cash of $65,000 to start the business
Jan 3. Rent was paid for office space for January, $1,500.
Jan 5. Office furniture was purchased on credit for $4,000
Jan 6. Office equipment was purchased for $1,200 cash
Jan 10. Cash of $500 was received for services performed
Jan 14. Office supplies were purchased on credit for $350
Jan 18. Billed customers for services provided, $2,500
Jan 20. Paid wages of $2,000
Jan 25. Received cash of $2,500 from customers on account for the services
billed on Jan 18.
Jan 27. Paid for internet and phone expenses $360
Jan 28. Services performed for a customer amounted to $1,950. Received cash
of $450 and invoiced customer for the balance owing of $1,500.
Jan 31. Office supplies used $200
Required:
Perform a transaction analysis and prepare journal entries for the above
transactions.
20
LECTURE PROBLEM 2: TRANSACTION ANALYSIS
ASSETS
=
LIABILITIES
+
EQUITY
21
Lecture Problem 2: General Journal
Date
Details
Debit
Credit
22
Lecture Problem 3:
The following transactions occurred in the business of Rosie’s Couriers during
August 2012.
Aug 1.Paid advertising expense for the month of August by cheque, $6,000
Aug 2. Paid 6 months rent in advance, $7,200
Aug 4. Purchased a motor vehicle costing $50,000. $10,000 was paid in cash
and a loan was obtained from the bank for the remaining $40,000.
Aug 6. Received $9,000 from clients for services provided in July.
(Hint: revenue would have been recorded in July when the service was
performed and the amount owing from the customers would have been
recorded as Accounts Receivable)
Aug 12. Received cash of $640 for services performed
Aug 15. A motor bike was purchased on credit, $16,000
Aug 17. Invoiced clients for services performed on account, $3,200
Aug 20. The owner withdrew $1,000 in cash from the business to pay personal
expenses
Aug 21. Paid interest expense of $400 on the bank loan
Aug 24. Paid wages of $2,000
Aug 27. Received $3,200 from clients for services provided on August 17
Aug 31. Paid supplier for the motor bike purchased on August 15
Required:
Perform a transaction analysis and prepare journal entries for the above
transactions.
23
LECTURE PROBLEM 3: TRANSACTION ANALYSIS
ASSETS
=
LIABILITIES
+
EQUITY
24
Lecture Problem 3: General Journal
Date
Details
Debit
Credit
25
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26
Lecture Notes Week 3
Accounting for Transactions –
Fundamentals Part 2
Required Readings: HEM : Chapter 3 Pages 81-104
All required readings m ust be com pleted before
attending class
27
Goods and Services Tax: GST
This is a 10% tax on the supply of most goods and services.
GST exempt items:
Businesses that are registered for GST will collect GST from
customers for a sale and pay GST on their purchases from suppliers.
There are 2 accounts used for GST:
1. GST Collections: GST that the business collects from its customers
on sales / services. The business has collected it on behalf of the Tax
Office, so the amount is OWED to the Tax Office, therefore,
Example: Received cash of $200 plus GST for services performed
A
=
L
+
E
Date Dr
Cr
Cr
(received cash for services performed)
2. GST Outlays / GST Outlaid: GST paid to other businesses on the
purchase of assets and expenses. The business will receive a REFUND
from the Tax Office for the GST paid, therefore,
Example: Purchased supplies costing $400 plus GST on credit.
A
=
L
+
E
Date Dr
Dr
Cr
(purchased supplies on credit)
28
Lecture Problem 1:
The following transactions occurred in the business of FYI News for March
2012.
May 1. Paid rent for the month, $6,000 plus GST
May 4. Purchased office furniture on credit for $7,000 plus GST
May 6. Received cash from customers of $500 plus GST for services performed
May 7. Purchased printing equipment costing $60,000 plus GST. $5,000 was
paid in cash and the balance is to be paid within 30 days.
May 9. Paid wages expense of $5,000
May 16. Paid for the office furniture purchased on May 4.
May 21. Invoiced customers $3,000 plus GST for services performed
May 23. Paid $900 plus GST for a 1 year insurance policy
May 24. Paid internet expense of $330 including GST
May 28. Received cash of $3,300 from customers on account. (The customers
had been invoiced on May 21.)
May 31. The owner withdrew cash of $1,500 for personal expenses
Required:
Perform a transaction analysis and prepare journal entries for the above
transactions.
29
LECTURE PROBLEM 1: TRANSACTION ANALYSIS
ASSETS
= LIABILITIES
+
EQUITY
30
Lecture Problem 1: General Journal
Date
Details
Debit
Credit
31
The Accounting Cycle
1. Recognise & record
transactions
Source documents
2. Journalise transaction
General journal
3. Post to ledger accounts
General ledger
4. Prepare trial balance
5. Prepare financial
statements
Trial balance
Financial statements
After journal entries have been prepared in the General Journal, the
information is transferred to the
The General Ledger is a collection of ________organised in the order
that they appear in the balance sheet and income statement.
Account (also called General Ledger Account)
The place to record increases and decreases for each item in the
financial statements
The General ledger ____________________________________
___________________________________________________
The general ledger can be maintained using either of 2 formats:
•
•
W e w ill be using T-accounts in ACCG 100
32
Account title
Date
Explanation
Amount
Date
Debit (Dr)
Explanation
Amount
Credit (Cr)
A general ledger T- account has 3 parts:
• Title • A place to record
• A place to record
•
Debit = Dr
Credit = Cr
Chart of Accounts
A listing of all accounts and the number assigned to each account
See ex am ple page 75
Posting from the General Journal to the Ledger
Transferring amounts from the general journal to the general
ledger is called
The steps in the posting process:
1. locate the account to be
2. enter the date as per
3. enter in the explanation / details column the name of the OTHER
ACCOUNT
4. enter the debit amount in the
Repeat steps 1 – 4 for credit entries.
33
Example: Post the following Journal Entries to the General Ledger
1 July
Dr Cash at Bank
Cr Capital
(To record investm ent by ow ner)
5,000
5,000
3 July
Dr Cash at Bank
770
Cr Service revenue
700
Cr GST collections
70
(To record services provided for cash )
GENERAL LEDGER
Date Explanation
Cash at Bank
$
Date Explanation
$
Date Explanation
GST Collections
$
Date Explanation
$
Date Explanation
Capital
$
Date Explanation
$
Date Explanation
Service Revenue
$
Date Explanation
$
34
Balancing a T-account
1. Identify the larger side.
2. Record the same total
3. Determine the difference between the total of the larger side
and total of smaller side. This difference is the BALANCE of the
account.
4. Put balance on larger side below total.
Example: Balance the following T-accounts
1 Aug
10 Aug
Capital
Cash at Bank
Cash at Bank
20,000 6 Aug Wages expense
9 Aug Rent expense
Accounts Payable
5,000 7 Aug Office Supplies
8 Aug Equipment
3,000
5,000
2,000
7,000
35
Trial Balance
A trial balance _________________________________________
____________________________________________________
See ex am ple page 100.
Checks whether total debits equal total credits (remember debits
should always equal credits when recording general journals).
If debits do NOT equal credits in the trial balance:
1. Add the debit and credit columns again.
2. Calculate the difference between the totals.
*Divide the difference by 2 – is this the balance of any ledger
account? This could indicate that you have put a debit balance in the
credit column, or a credit balance in the debit column by mistake.
(refer to Normal balances below)
3. Compare the account balances with each ledger account again
Trial Balance does not guarantee
Errors could have occurred, for example, posting to the wrong ledger
account, and the
Normal Balances
Account
Assets
Liabilities
Equity
Capital
Drawings
Income/ Revenues
Expenses
Normal balance
36
Lecture Problem 2:
Titanic Travel opened for business on 1 July 2012.
The following transactions occurred during the first month of operations:
2 July. The owner contributed $22,000 cash to the business.
4 July. Paid cash for Office Furniture purchased at a cost of $8,000 plus GST
15 July. Rent for July was paid by cheque, $4,000 plus GST
16 July. Billed customers $2,000 plus GST for services performed.
24 July. Cash of $500 plus GST was received for services performed.
Required:
1. Perform a transaction analysis
2. Record the transactions in the General Journal
3. Post the journal entries to the General Ledger
4. Prepare a Trial Balance
LECTURE PROBLEM 2: TRANSACTION ANALYSIS
ASSETS
= LIABILITIES
+
EQUITY
37
Lecture Problem 2: General Journal
Date
Details
Debit
Credit
38
Lecture Problem 2: General ledger
Date
Date
Date
Date
Date
Date
Explanation
Cash at bank
Amount Date Explanation
Explanation
Accounts Receivable
Amount Date Explanation
Explanation
Office Furniture
Amount Date Explanation
Amount
Explanation
GST Outlays
Amount Date Explanation
Amount
Explanation
GST Collections
Amount Date Explanation
Amount
Explanation
Capital
Amount Date
Explanation
Amount
Amount
Amount
39
Date
Date
Explanation
Service Revenue
Amount Date Explanation
Amount
Explanation
Rent expense
Amount Date Explanation
Amount
Titanic Travel
Trial Balance
as at 31 July 2012
Debits
Credits
40
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41
Lecture Notes Week 4
Accounting for Adjustments –Part 1
Required Readings: HEM : Chapter 4 Pages 122-140
All required readings m ust be com pleted before
attending class
42
The Accounting Cycle
1. Recognise and record
transactions
Source documents
2. Journalise transactions
General journal
3. Post to ledger accounts
General ledger
4. Prepare unadjusted
trial balance of GL
Trial balance
(unadjusted)
5. Determine adjusting
entries and/or
6. Post adjusting entries to
general ledger
General ledger
(accounts adjusted)
7. Prepare adjusted trial
balance of GL (adjusted)
Trial balance
(adjusted)
8. Prepare financial statements
work
sheet
t
Financial statements
Measurement of Profit
Profit/(loss) =
Income and expenses may be recorded on a cash basis or accrual
basis.
Cash Basis
Incomes are recorded when
Expenses are recorded when
Accrual Basis
Timing of cash receipts and cash payments ignored.
Income recorded
43
CASH vs ACCRUAL BASIS
Accrual basis is preferred because _______________________
___________________________________________________
At the end of the accounting period, ADJUSTING ENTRIES (also
known as balance day adjustments) are required under the Accrual
Basis
This is known as the MATCHING CONCEPT / MATCHING PRINCIPLE
and it is derived from the Accounting Period Assumption which
states:
Some transactions may affect the entity’s profit or financial position
for more than 1 accounting period.
Example:
As a result, some accounts need to be ADJUSTED on the last day of
the accounting period
Adjusting entries are recorded in the general journal, then posted to
ledger accounts.
2 IMPORTANT RULES:
1.
2.
Types of Adjusting Entries:
Prepayments, Supplies, Accrued Expenses, Accrued Income,
Depreciation, Unearned Revenue
1. PREPAYMENTS
Item paid for in advance. Recorded as an ASSET at time of payment
(future benefit). Examples:
Over time, the future benefits are lost / used up / consumed. The
asset needs to be
44
Eg 1 June, paid 1 year’s insurance $1200 plus GST.
This was recorded by debiting Prepaid Insurance:
1 June Dr Prepaid Insurance 1200
Dr GST Outlays
120
Cr Cash
1320
(to record prepaid insurance)
At the end of the month, an adjusting entry is required to record the
benefits __________________________________:
30 June Dr
Cr
(adjusting entry to record expired insurance)
Balance of Prepaid Insurance at June 30 (after adjusting entry) is
$
This represents
Adjusting entry required at end of every month
N o GST adjustm ent is required in the adjusting entry as there is no
tax effect.
Supplies /Office supplies are recorded as an ASSET when purchased
(future benefit).
Adjusting entry required to
N o GST adjustm ent required in the adjusting entry as there is no tax
effect.
Eg supplies purchased during period $200. At end of period $80
supplies remain in stock / on hand
30 June Dr
Cr
(adjusting entry to record supplies used)
45
2. Accrued Expenses
Accrued Expenses (or unrecorded expenses) are expenses that have
been INCURRED in period,
Adjusting entry is required to record
GST adjustment is necessary.
Eg accrued rent at year end $2000 plus GST:
30 June Dr
Dr
Cr
(adjusting entry to record accrued rent)
eg wages owing at year end $600:
30 June Dr
Cr
(adjusting entry to record wages owing)
GST has not been recorded here
eg interest accrued on bank loan, $1,000
30 June Dr
Cr
(adjusting entry to record interest owing on bank loan)
GST has not been recorded here
eg tax invoice received for telephone $120 plus GST:
30 June Dr
Dr
Cr
(adjusting entry to record accrued telephone expense)
N ote that w hen the LI ABI LI TY account is created, w e do N OT credit
Accounts Payable. Accounts Payable is used for the purchase of goods
on credit.
46
3. Accrued Income
Accrued income (or unrecorded income) is income that has been
EARNED in period,
Adjusting entry is required to record
GST adjustment is necessary.
eg services performed $900 plus GST but cash not yet received and
not yet recorded:
30 June Dr
Cr
Cr
(adjusting entry to record accrued services income)
eg interest earned on investment but not yet received or recorded
$150:
30 June Dr
Cr
(adjusting entry to record accrued interest income)
GST has not been recorded here because
47
4. Depreciation
Certain assets (eg motor vehicles, equipment, buildings) have future
benefits which will be used up over many accounting periods.
An adjusting entry is required to allocate part of the cost of the asset
to expense each period over the life of the asset.
This allocates
Depreciation is a Cost Allocation process NOT a Valuation process.
No GST adjustment is required.
Eg Helicopter cost $5m. Expected useful life 3 years, estimated scrap
value $2m.
Useful Life –
Scrap Value –
Depreciation expense=Cost - Scrap value
Useful life
30 June Dr
Cr
(adjusting entry to record depreciation on helicopter)
ACCUMULATED DEPRECIATION is a CONTRA ASSET
CONTRA ASSETS
Eg Balance Sheet:
ASSETS
Helicopter
$5m
Less: Accum Dep Helicopter ( $1m)
$4m
48
5. Unearned Income
Unearned Income arises when the business receives cash in advance
from a customer before the service is performed.
Examples:
These amounts CANNOT be recorded as income until earned (when
the service has been performed).
When cash is received, record as a LIABILITY,
When the service is subsequently performed, an adjusting entry is
required
Eg 1 April received $600 plus GST for 6 months gym membership
recorded by crediting Unearned Income:
1 April Dr Cash
660
Cr Unearned Income 600
Cr GST Collections
60
(to record cash received in advance)
At the end of the month, an adjusting entry is required to record
income earned in the accounting period:
30 April Dr
Cr
(adjusting entry to record income earned)
Balance of Unearned Income at April 30 (after adjusting entry ) is
$
This represents the
Adjusting entry required at end of every month
N o GST adjustm ent required in the adjusting entry as there is no tax
effect.
49
Summary:
2 major categories of adjusting entries:
1. Deferrals –
Examples:
2. Accruals –
Examples:
Adjusting entries requiring GST:
•
•
Effect on Financial Statement items if adjusting entries are not
performed:
Financial Statement items will not be correctly stated if adjusting
entries are not performed.
• Some items will be OVERSTATED, which means the account
balance being reported is
• Some items will be UNDERSTATED, which means the account
balance being reported is
Adjusting Entry
Effect on account if no adjustment
Prepayments
Accrued Expenses
Accrued Income
Depreciation
Unearned Revenue
50
Lecture Problem:
The following information relates to Fareeza’s Basketball Camps for the year
ended 30 June 2012. Prepare the necessary adjusting entries in the general
journal.
1. Prepaid rent expired during the year, $6,000.
2. Depreciation on Sports Equipment was $3,000 for the year.
3. Electricity expenses of $550 including GST were unpaid and unrecorded
at year end
4. Supplies purchased during the year totaled $800. At year end, only $150
of supplies remained on hand.
5. Interest of $320 had been earned on an investment, but cash has not yet
been received.
6. Unpaid Wages at year end amounted to $5,000.
7. Cash of $8,000 had been received in advance for Basketball Camps to be
held in the future. This was recorded as Unearned Revenue. By year end
all the revenue had been earned.
Date
Details
Debit
Credit
51
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52
Lecture Notes Week 5
Accounting for Adjustments –Part 2
Required Readings: HEM : Chapter 4 Pages 140-155
All required readings m ust be com pleted before
attending class
53
The Accounting Cycle
1. Recognise and record
transactions
Source documents
2. Journalise transactions
General journal
3. Post to ledger accounts
General ledger
4. Prepare unadjusted
trial balance of GL
Trial balance
(unadjusted)
5. Determine adjusting
entries and/or
6. Post adjusting entries to
general ledger
General ledger
(accounts adjusted)
7. Prepare adjusted trial
balance of GL (adjusted)
Trial balance
(adjusted)
8. Prepare financial statements
work
sheet
t
Financial statements
54
Adjusted Trial Balance
After adjusting entries are recorded in the general journal, they need
to be posted to the ledger accounts so that an
Financial statements are prepared from the adjusted trial balance .
In practice we only record and post adjusting entries at the end of
the year, we would not enter journals and post them every single
month.
The Worksheet
If financial statements are required during the year (eg. monthly) a
worksheet is used.The worksheet
The worksheet is NOT a financial statement.
See example of worksheet: page 151.
Worksheet - Steps
1. Enter the ledger account titles and balances in the account title
and unadjusted trial balance columns
2. Enter the adjusting entries in the
3. Prepare an Adjusted Trial Balance
4. Extend every account balance listed in the Adjusted Trial
Balance to its financial statement column (Income Statement or
Balance Sheet)
5. Determine
55
Classified Financial Statements
When preparing a Balance Sheet, assets and liabilities can be
classified as either ____________________
These classifications provide more useful information to users for
decision making.
Current Assets
Current Assets: assets that are cash, or are expected to be sold,
converted to cash or consumed within the operating cycle or 12
months from balance sheet date.
Operating cycle: the time it takes to acquire inventory, sell inventory
to customers and then collect the cash from customers
Examples:
Current assets should be listed in order of their liquidity –
Non-Current Assets
Non-Current Assets: assets that are not current assets, assets that
are expected to last longer than 12 months
Examples:
Current Liabilities
Current Liabilities: obligations that are expected to be settled in the
entity’s operating cycle or within 12 months of balance sheet date.
Examples:
Non-Current Liabilities
Non-Current Liabilities: all liabilities that are not current.
Examples:
N OTE: Balance Sheet – only acceptable form at for Final Ex am is
CLASSI FI ED N ARRATI VE FORM AT see page 154
56
Lecture Problem:
Required:
a. Enter the adjustments below into the worksheet, and complete the
worksheet for Asha’s Orchid Shows. (Ignore GST)
b. Prepare a fully classified Balance Sheet in the narrative format for Asha’s
Orchid Shows as at 30 June 2012 and a Statement of Changes in Equity
for the year ending 30 June 2012
1. Accrued service revenue $3,600
2. Depreciation on Motor Vehicle $5,000
3. Wages owing to staff but unpaid as at 30 June $2,000
4. Prepaid advertising expired $1,000
5. Supplies on hand at 30 June $2,780. The beginning balance of supplies was
$6,780.
6. Cash of $12,000 had been received in advance and was recorded correctly
as Unearned Revenue. By 30 June, 50% has been earned.
57
ACCOUNT TITLE
Cash at bank
Accounts Receivable
GST Outlays
Prepaid Advertising
Supplies
Land
Motor Vehicle
Accum deprec. – MV
Accounts payable
Wages payable
GST Collections
Unearned service revenue
Mortgage Payable
Asha, Capital
Asha, Drawings
Service revenue
Depreciation exp – MV
Wages expense
Telephone expense
Advertising expense
Supplies expense
UNADJUSTED
TRIAL BALANCE
DEBIT CREDIT
57420
6880
200
2400
6780
50000
65200
5680
6200
1000
500
12000
50000
110060
6000
14600
3200
400
600
960
200,040
Asha’s Orchid Shows
Work Sheet
For the year ended 30 June 2012
ADJUSTMENTS
ADJUSTED TRIAL
BALANCE
DEBIT CREDIT
DEBIT
CREDIT
INCOME
STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
200,040
Net profit/(loss)
58
Asha’s Orchid Shows
Balance Sheet
As at 30 June 2012
59
Asha’s Orchid Shows
Statement of Changes in Equity
For the year ended 30 June 2012
60
ADJUSTING (CORRECTING) ENTRIES
Prepayments:
If, at the time of payment, a prepayment is INCORRECTLY recorded
as an expense instead of an asset, then the adjusting entry has to
correct the situation by:
*creating a prepayment (asset) _______________________
(unexpired portion)
*reducing the expense recorded ___________________________
_____________________________________________________
Example: 1 June paid 1 year’s insurance $1200 plus GST. This was
recorded by debiting insurance expense
1 June Dr Insurance Expense 1200
Dr GST Outlays
120
Cr Cash
1320
(to record payment of insurance)
At the end of the month, an adjusting entry is required to correct the
situation:
30 June Dr
Cr
(Adjusting entry to correct prepayment)
The effect of the correcting entry is to
61
ADJUSTING (CORRECTING) ENTRIES (continued)
Unearned Income /Unearned Revenue:
If, at the time cash received in advance is INCORRECTLY recorded as
revenue instead of a liability, then the adjusting entry has to correct
the situation by
*reducing the revenue recorded
* creating a liability unearned revenue
Example : 1 April received $600 plus GST for 6 months gym
membership. This was recorded by crediting income.
1 April Dr Cash
660
Cr Gym Income 600
Cr GST Collections
60
(to record cash received )
At the end of the month, an adjusting entry is required to correct the
situation:
30 April Dr
Cr
(Adjusting entry to correct Unearned Revenue)
The effect of the correcting entry is to
62
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63
Lecture Notes Week 6
Completion of Accounting Cycle
Required Reading: HEM : Chapter 5 pages 176 -200
Accounting Systems
Required Reading: HEM : Chapter 7 Pages 274-307
64
COM PLETI ON of ACCOUN TI N G CYCLE (Chapter 5)
The Closing Process
The closing process occurs after adjusting entries have been prepared
and posted to the ledger.
This involves closing temporary accounts at the end of the accounting
period to
Temporary accounts include __________________________and a
special temporary account called
Close means
These accounts then begin the next accounting period with a
Steps in the Closing Process
1. Close Income accounts to P&L Summary:
- the normal balance of income accounts is
to close (make zero) an income account we need to_________
_________________________________________________
_________________________________________________
30 June DR
DR
CR
(to close revenue accounts)
2. Close Expense accounts to P&L Summary:
- the normal balance of expense accounts is
- to close (make zero) an expense account we need to _______
______________________________________________________
______________________________________________________
30 June DR
CR
CR
(to close expense accounts)
65
3. Close the P&L Summary account to Capital:
Firstly, calculate the Balance in the P & L Summary account.
- if the business made a Profit, the balance of the P&L Summary
account is
- to close (make zero) if profit:
30 June DR
CR
(to close P & L summary to capital)
This will INCREASE the owner’s capital balance
What if the business made a loss?
- if the business made a Loss, the balance of the P&L Summary
account is
- to close (make zero) if there is a loss:
30 June DR
CR
(to close P & L summary (loss) to capital)
This will DECREASE the owner’s capital balance
4. Close the Drawings account to Capital:
- the normal balance of Drawings is
to close (make zero) the Drawings account we need to
30 June DR
CR
(to close drawings to capital)
This will DECREASE the owner’s capital balance
After the Closing Process
All income, expense and drawings accounts
The capital account has been increased/decreased
66
Post Closing Trial Balance
After the closing entries have been recorded in the general journal
and posted to the ledger accounts, a post-closing trial balance can be
prepared.
The post-closing trial balance will include only permanent accounts:
*
*
*
Note that the capital balance
Summary of the Closing Process:
The steps in the closing process:
1. Close income accounts to P&L Summary account
2. Close expense accounts to P&L Summary account
3. Close P&L Summary account to Capital account
4. Close Drawings account to Capital account
Lecture Problem:
Nandini’s Jazz Club
Adjusted Trial Balance
As at 30 June 2012
Debits
Cash at bank
16,000
Accounts Receivable
15,400
Prepaid Rent
3,600
Furniture
82,400
Accum Depreciation Furniture
Accounts payable
Wages Payable
Capital
Drawings
12,000
Service revenue
Advertising expense
22,280
Rent expense
17,400
Wages expense
12,800
Depreciation expense Furniture
18,000
199,880
Credits
18,000
26,000
2,280
86,600
67,000
199,880
67
Required: Using the adjusted trial balance above, prepare the closing
entries for Nandini’s Jazz Club , a post-closing trial balance
at 30 June 2012 and a Statement of Changes in Equity.
Closing Entries:
Date
Details
Debit
Credit
68
Nandini’s Jazz Club
Post-Closing Trial Balance
As at 30 June 2012
Nandini’s Jazz Club
Statement of Changes in Equity
For the year ended 30 June 2012
69
ACCOUN TI N G SYSTEM S (Chapter 7)
Special Journals
The general journal is
Posting to the ledger line by line from the general journal
Solution –
Sales Journal
Purchases Journal
Cash Receipts Journal
Cash Payments Journal
Special Journals are used for
The General Journal is used to record all transactions that are not
recorded in the special journals
Sales Journal
Records only credit sales of inventory
Note: cash sales
See example page 287.
Purchases Journal
Records only credit purchases
If purchase was paid for by cash or cheque,
See example page 289.
Cash Receipts Journal
Records all receipts of cash, regardless of source
Examples:
See example page 292.
70
Cash Payments Journal
Records all payments of cash.
Examples:
See example page 295.
Use of Special Journals:
Frequent transactions are recorded in the appropriate special journal
as they
If the transaction affects a related subsidiary ledger, eg Accounts
Receivable or Accounts payable, update the relevant subsidiary
ledger
At month end, total the special journals and post the
Note: when using Special Journals, individual transactions do not
have to be posted to the General Ledger
Special Journals – Advantages
•
•
•
Use of the General Journal
The General Journal is inefficient and is used for:
• Infrequent transactions like
•
•
•
Control Accounts and Subsidiary Ledgers
The General ledger is a collection of accounts. Some accounts in the
General Ledger require detailed information which the General
Ledger cannot provide.
For example: Accounts Receivable
The balance in the General Ledger represents the TOTAL amount
owing from ALL customers,
71
This enables management to
Bad debts arise when an accounts receivable customer
The business needs to establish a separate Receivable account for
every customer . This cannot be done in the general ledger as the
general ledger would be
Instead, these individual accounts will be established in a separate
ledger known as a
Note: the Subsidiary Ledger is NOT part of the
When a subsidiary ledger is used, the corresponding General Ledger
account is known as a CONTROL account, because it summarises the
information
The total of the balances of the individual accounts in the subsidiary
ledger MUST EQUAL the balance in the corresponding General Ledger
control account.
See example page 298.
Accounts that Subsidiary Ledgers are commonly used for include:
The Accounts Receivable Subsidiary Ledger (ARSL) contains the
accounts of individual credit customers and is updated when a
transaction occurs with an accounts receivable customer, so that an
up-to-date balance is available for each customer.
Examples:
The Accounts Payable Subsidiary Ledger (APSL) contains the
accounts of individual credit suppliers and is updated when a
transaction occurs with an accounts payable supplier.
Examples:
Subsidiary ledgers for I nventory and Fix ed Assets w ill N OT be
covered in ACCG 10 0
72
Transaction Type
Journal
Subsidiary Ledger
Credit sale
Cash Sale
Credit purchase
Cash purchase
Receipt of cash from Accounts
Receivable Customer
Payment of cash to Accounts
Payable Supplier
Cash payment of expense
Steps for using Special Journals and Subsidiary Ledgers:
1. Record the transaction in the appropriate special journal – SJ,
PJ, CRJ or CPJ
2. Update the related subsidiary ledger: Accounts Receivable (from
SJ or CRJ) or Accounts Payable (from PJ or CPJ)
3. Add up special journals and post TOTALS to the General Ledger
at the end of the accounting period.
4. Prepare listing of the individual accounts from the subsidiary
ledgers and ensure that the total equals the balance in the
relevant General Ledger account.
73
Lecture Problem :
Aquatastic buys and sells aquariums and aquarium supplies. The business uses a
Sales Journal, Purchases Journal, Cash Receipts Journal and Cash Payments
Journal. Accounts Receivable and Accounts Payable Subsidiary Ledgers are also
maintained.
Transactions for the month of March are as follows: (Ignore GST)
1 March. The owner contributed cash of $30,000
2 March. Purchased inventory on credit from Aqua Nova, $6,000
3 March. Sold inventory on account to Nemo’s Aquariums, $8,000
10 March. Cash sales to customers $1,200
12 March. Paid Aqua Nova for the purchase on 2 March, $6,000
15 March. Purchased inventory on credit from Coral Cove, $3,200
16 March. Paid rent for the month, $5,500
18 March. Sold inventory on account to Neptuneworld, $4,800
20 March. Received cash on account of $8,000 from Nemo’s Aquariums for the
sale on 3 March
22 March. Cash purchases of $2,000 were made
24 March. Sold inventory on account to Triton’s Treasures, $6,000
25 March. Purchased inventory on credit from Marinescape, $1,800
27 March. Received cash on account from Neptuneworld of $4,800
30 March. Sold inventory on account to Triton’s Treasures, $1,200
Required:
A. Record the above transactions in the Special Journals and update the
relevant subsidiary ledgers where appropriate.
B. Post the totals from the Special Journals to the General ledger
C. Prepare listings of the individual accounts from the subsidiary ledgers and
ensure that the total equals the balance in the relevant General Ledger
account.
74
Purchases Journal
Date
Account
Post Ref.
Purchases
Sales Journal
Date
Account
Post Ref.
Sales
Cash Receipts Journal
Date
Account
Post.
Ref.
Cash at
Bank
Cash
Sales
Accts.
Receivable
Other
Cash Payments Journal
Date
Account
Post.
Ref.
Cash
Purchases
Accts.
Payable
Other
Cash at
Bank
75
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER
Nemo’s Aquariums
Date
Post
Ref
Debit
Credit
Balance
Neptuneworld
Date
Post
Ref
Debit
Credit
Balance
Triton’s Treasures
Date
Post
Ref
Debit
Credit
Balance
ACCOUNTS PAYABLE SUBSIDIARY LEDGER
Aqua Nova
Date
Post
Ref
Debit
Credit
Balance
Credit
Balance
Coral Cove
Date
Post
Ref
Debit
Marinescape
Date
Post
Ref
Debit
Credit
Balance
76
GENERAL LEDGER
Cash at bank
Date
31/3
31/3
31/3
Explanation
Capital - CRJ
Sales - CRJ
Ac Rec - CRJ
Amount Date
31/3
31/3
31/3
Explanation
Purchases - CPJ
Ac Pay - CPJ
Rent expense
Bal c/d
Amount
Bal b/d
Accounts Receivable Control
Date
31/3
Explanation
Sales - SJ
Amount Date
31/3
31/3
Explanation
Cash - CRJ
Bal c/d
Amount
Bal b/d
Accounts Payable Control
Date
31/3
31/3
Explanation
Cash - CPJ
Bal c/d
Amount Date
31/3
Explanation
Purchases - PJ
Amount
Bal b/d
Sales Revenue
Date
Explanation
Amount Date
31/3
31/3
Explanation
Ac Rec - SJ
Cash - CRJ
Amount
Explanation
Amount
Purchases
Date
31/3
31/3
Explanation
Ac Pay - PJ
Cash - CPJ
Amount Date
77
Capital
Date
Explanation
Amount Date
31/3
Explanation
Cash - CRJ
Amount
Explanation
Amount
Rent Expense
Date
31/3
Explanation
Cash - CPJ
Amount Date
C. Listing of balances in subsidiary ledgers:
Accounts Receivable:
Nemo’s Aquariums
Neptuneworld
Triton’s Treasures
Accounts Payable:
Aqua Nova
Coral Cove
Marinescape
78
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79
REVISION: Chapters 1 – 4
The mid-semester test will be held during lectures in week 7.
Complete the following as part of your exam preparation.
Time Allowed 30 MINUTES
1. A stakeholder is a (an):
a. investor.
b. employee.
c. customer.
d. special interest group.
e. all of the above
2. Theories concerned with the consequences of decisions are known as:
a. relativity theories
b. deontological theories
c. teleological theories
d. all of the above
e. none of the above
3. An advantage of a company is:
a. mutual agency
b. unlimited liability
c. limited liability
d. all of the above
e. none of the above
4. A business started the year with total assets of $60000 and total liabilities of $40000.
During the year the business earned $100000 in income and incurred $55000 in expenses.
Drawings were $10000.
Equity at the end of the period was:
a. $55000.
b. $35000.
c. $65000.
d. $45000.
e. None of the above
80
5. If total liabilities decreased by $14000 and equity increased by $6000 over a period, then
total assets must have changed by?
a. $14 000 increase
b. $20 000 increase
c. $8000 decrease
d. $8000 increase
e. None of the above
6.
Double-entry accounting requires that when recording a transaction:
a. The accounting equation should stay in balance
b. Total debits should equal total credits
c. At least one account should be debited and one account credited
d. All of the above
e. None of the above
7.
A business has the following assets and liabilities:
$
Cash at bank
2 000
Bank overdraft
5 500
Trade creditors
1 500
Inventory
1 350
Trade debtors
4 050
Office furniture
2 250
Loan Payable
7 500
Motor vehicles
12 000
Equity is:
a. $1150
b. $15 000
c. $-200
d. $7150
e. $13 300
8. If a transaction causes an asset account to increase, which of the following effects of
equal amount may also occur?
a. A decrease in a liability account
b. An increase in another asset account
c. A decrease in an equity account
d. An increase in a liability account
e. None of the above
81
9. Some of ABC's transactions for the month of October are as follows. Which transaction, if
any, is an expense for the month of October?
a. Purchased $50 worth of petrol on credit, to be paid for in November
b. Paid $1000 off a loan obtained during July
c. Paid a mechanic $250 for repair work carried out in September
d. Purchased a photocopier for $15 000
e. None of the above
10. The account Unearned Revenue is a(n):
a. income account.
b. expense account.
c. asset account.
d. liability account.
e. equity account.
11. A machine is purchased for $130000. It is estimated that it has a useful life of 8 years
and will then be sold for $10000. Using the straight-line method calculate the amount of
depreciation to be charged for each year of useful life.
a. $1625
b. $10000
c. $16250
d. $15000
e. $0
12. An adjusting entry needs to be recorded for $35 of interest on a bank loan that has
accrued at 30 June. The adjusting entry would be:
a. Debit Interest Expense $35, Credit Cash at bank $35
b. Debit Interest Payable $35, Credit Interest Expense $35
c. Debit Interest Payable $35, Credit Cash at bank $35
d. Debit Interest Expense $35, Credit Interest Payable $35
e. Debit Interest Expense $35, Credit Unearned Interest $35
82
13.
Adjusting entries are needed:
a. To ensure all assets and liabilities are correct
b. To ensure all income and expenses are correctly recognised
c. With cash basis accounting
d. All of the above are correct
e. Both A and B
14.
In preparing its adjusting entries, a business neglected to adjust the Prepaid Insurance
(asset) account for the amount of insurance used up during the year. As a result of this
mistake:
a. Net profit is overstated, the balance in equity is overstated, and assets are overstated
b. Net profit is understated, the balance in equity is understated, and assets are
understated
c. Net profit is overstated, the balance in equity is overstated, and assets are correctly
stated
d. Liabilities are understated
e. None of the above
15.
16.
The correct classification for these ledger accounts is:
1.
2.
3.
4.
GST Outlays
GST Collections
Mortgage Payable
Unearned Service Fees
a.
b.
c.
d.
e.
1 Liability
1 Asset
1 Asset
1 Asset
1 Asset
2 Asset
2 Liability
2 Liability
2 Liability
2 Asset
3 Liability
3 Equity
3 Liability
3 Liability
3 Income
4 Income
4 Liability
4 Liability
4 Asset
4 Liability
Which of the following assumptions is the basis upon which the personal assets of the
owner are excluded from the businesses balance sheet?
a. Going concern
b. Accounting entity
c. Limited liability
d. Accounting period
e. Accrual basis
83
17.
A business reports the following balance sheet information for 2010:
1 January 2010
31 December 2010
Assets
$120 000
$140 000
Liabilities
$24 000
$28 000
Assuming the capital contribution made by the owners during 2010 was $6000 and
withdrawals were $24 000, net profit for 2010 was:
a. $24 000
b. $28 000
c. $32 000
d. $36 000
e. $34 000
18.
During the month of June, a business received $220 including GST from a customer for
services to be performed during July. The transaction is recorded as:
a.
b.
c.
d.
e.
19.
Debit Accounts Receivable $220; credit Services Revenue $220
Debit Cash at bank $220; credit Unearned Services Revenue $220
Debit Cash at bank $200 and debit GST Outlays $20; credit Unearned Services
Revenue $220
Debit Cash at bank $220; credit GST Collections $20 and credit Unearned
Services Revenue $200
Debit Cash at Bank $242; credit GST Collections $22 and credit Unearned
Services Revenue $220
For a business that is registered for GST, how is the payment of $440 to an account
payable recorded in the general journal?
$
$
DR
CR
a.
Accounts Payable
400
GST Outlays
40
Cash at bank
440
b.
Accounts Payable
Cash at bank
440
c.
Cash at bank
Accounts receivable
440
d.
Cash at bank
GST Collections
Cash at bank
440
e.
None of the above
440
440
40
400
84
20.
A business collects rents from several properties. Prior to recording adjusting entries,
assume the Rent Revenue account has a credit balance of $16000. Two adjustments are
to be made at the end of the financial year (1) an accrual for accrued rent revenue of
$1200 is to be recorded (2) the Unearned Rent Revenue account is to be decreased by
$400. After processing these adjusting entries the Rent Revenue account has a balance
of:
a.
b.
c.
d.
e.
$17600
$16800
$15200
$14400
None of the above
85
Lecture Notes Week 8
Accounting for Retailing
Required Readings: HEM : Chapter 6 Pages 228-254
All required readings m ust be com pleted before
attending class
86
Retailer versus Service Provider
A service provider earns revenue by
A retailer earns revenue by
Inventory
-Goods or property held for sale by the business
-Also referred to as
-Classified as a Current Asset because
Retailer Income Statement - Format:
Business Name
Income Statement
For the year ended 30 June 201_
Sales
Less: sales returns
Net sales revenue
Less: COGS + Freight inwards
Gross profit
Add: other income
E.g. discount received, interest revenue
Less expenses:
Selling and distribution
$
Administrative
$
Financial
$
Net profit
$
($)
$
($)
$
$
($)
$
Income referred to as
Sales Revenue is calculated as:
Sales Returns – occur when goods previously sold are returned by a
customer. A credit note is issued which acts like a negative invoice
and will
Cost of sales (Cost of Goods Sold or COGS) shows the total cost of
inventory sold during the period, calculated as:
Freight Inwards - the cost of having inventory delivered to the
business.
Sales – COGS = Gross Profit. Gross profit is the profit derived from
87
Expenses - classified according to type:
SELLING EXPENSES
Result from efforts to sell inventory – examples include:
___________________________________________________
___________________________________________________
ADMINISTRATIVE EXPENSES
Associated with operating the business – examples include:
___________________________________________________
FINANCIAL EXPENSES
Result from financing the business – examples include:
___________________________________________________
Cash Discounts
Cash (settlement) discounts are used to ___________________
_______________________ for sales or purchases on credit.
There are 2 types of cash discount:
• Discount Allowed: allowing the accounts receivable customers to
pay less than the amount on the invoice for early settlement.
This is a
• Discount Received: the business is entitled to pay less than the
invoice amount to their supplier for early payment of accounts
payable. This is a
Ex am ple 1 : the business sells goods to a customer on 1 March on
credit for $5000, terms 2/10, n/30. The customer pays on 10 March.
1 March: DR Accounts Receivable 5,000
CR Sales
5,000
(to record credit sales)
10 March: DR
DR
CR
(to record cash receipt within discount period)
88
Ex am ple 2 : the business purchases inventory on 12 March on credit
for $2000, terms 3/12, n/30. The business pays its supplier on 24
March.
12 March: DR Inventory 2,000
CR Accounts Payable 2,000
(to record credit purchase of inventory)
24 March: DR
CR
CR
(to record payment within discount period)
N OTE: You are N OT required to do GST adjustm ents for discounts in
ACCG 100
Accounting for Inventory
There are 2 methods of accounting for inventory:
1. Perpetual inventory
2. Periodic inventory
Perpetual Inventory
This method is suitable for
Example:
• Maintains a running (continuous)
• The Inventory balance is constantly updated and shows the
amount of
• keeps a record of
• helps to determine if any inventory is
by comparing the physical inventory with inventory records.
Buying inventory, selling inventory and inventory returns to suppliers
(purchase returns) or from customers (sales returns) are recorded in
the Inventory account:
Increases (debits)
INVENTORY
Decreases (credits)
89
Periodic Inventory
This method is suitable for
Examples:
• does not keep a
• inventory purchases are debited to the ‘Purchases’ account
• it is necessary to do a physical stock take at the end of the
period to determine
• cannot identify
because inventory records
have not been maintained
• does not keep a Cost of Goods Sold expense account. COGS must
be calculated
Periodic Inventory – determining COGS expense:
Beginning inventory balance
+net Purchases (purchases – purchase returns +freight inwards)
=cost of goods available for sale
-ending inventory balance (from stocktake)
=COGS
STOCKTAKES
A stocktake is when the inventory is physically
Stocktakes are required in both perpetual and periodic systems.
Perpetual System – purpose of stocktake is to
Periodic System – purpose of stocktake is to
90
Recording Transactions:
PERIODIC:
Purchases of I nventory
Dr Purchases
Dr GST outlays
Cr Ac payable
Purchase returns
Dr Ac payable
Cr Purchase returns
Cr GST outlays
Sale of I nventory
PERPETUAL:
Dr Inventory
Dr GST outlays
Cr Ac payable
Dr Ac payable
Cr Inventory
Cr GST outlays
Dr Ac receivable
Cr Sales Revenue
Cr GST collections
Dr Ac receivable
Cr Sales Revenue
Cr GST collections
no entry required
Dr COGS
Cr Inventory
Sales Returns
Dr Sales returns
Dr GST collections
Cr Ac receivable
Dr Sales returns
Dr GST collections
Cr Ac receivable
no entry required
Dr Inventory
Cr COGS
91
Lecture Problem: Journal Entries
Ollie’s Olympic Mascots buys Souvenirs for $10 each plus GST, and sells them for $33 each
including GST.
Record the following transactions under both perpetual and periodic inventory systems:
1 July Buys 100 Souvenirs on credit, terms 3/10, n/30
2 July 2 Souvenirs are returned to the supplier for a credit note
5 July Sold 12 Souvenirs on credit, terms 1/7
6 July Customer returns 1 Souvenir
9 July Paid balance owing on 1 July purchase
12 July Received cash from customer for balance of 5 July sale
15 July A stocktake was performed, and it was discovered that 5 Souvenirs were missing
Periodic
Perpetual
92
Periodic
Perpetual
93
Lecture Problem: Perpetual Income Statement
The following information relates to Mandeville’s Mascots:
Sales
Sales returns
Financial expenses
Discount received
Cost of goods sold
Freight inwards
Selling and distribution expenses
Administrative expenses
500,000
15,000
21,980
1,510
233,460
3,820
75,075
61,470
Using the information above, prepare the income statement for the year ending 30 June
2012 for Mandeville’s Mascots.
94
Lecture Problem: Periodic Income Statement
The following information relates to Mandeville’s Medals
Inventory 1 July 2011
Sales
Sales returns
Financial expenses
Purchases
Purchase returns
Discount received
Freight inwards
Selling and distribution expenses
Administrative expenses
Inventory 30 June 2012
26,400
500,000
15,000
21,980
236,280
1,720
1,510
3,820
75,075
61,470
27,500
Using the information above, prepare the income statement for the year ending 30 June
2012 for Mandeville’s Medals
95
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96
Lecture Notes Week 9
Accounting for Inventories
Required Reading: HEM : Chapter 19 Pages 784-801
All required readings m ust be com pleted before
attending class
97
PERPETUAL and PERIODIC INVENTORY SYSTEMS – REVISION
The following are comments regarding inventory systems. You are required to
identify the relevant system (perpetual or periodic) referred to in each
statement.
 Inventory records constantly updated
 COGS must be calculated in income statement
 A purchase is recorded as Dr Inventory
 A purchase is recorded as Dr Purchases
 Inventory balance not updated
 A stocktake is required to determine ending inventory balance
 COGS recorded at time of sale
 Stolen / missing/ lost inventory can be identified by comparing inventory
records with stocktake
 Suitable for high value inventory
 Only 1 entry required to record sale or sales return at selling price
 Additional entry required at time of sale to record COGS and update
inventory balance at cost price
 Inventory balance can be determined at any time
98
The Need For Cost Flow Assumptions
Inventory is purchased at different times during the period and often
at different prices. This makes it difficult to determine ___________
______________________________________________________
Both perpetual and periodic inventory systems require the allocation
of the total inventory cost ________________________________
______________________________________________________
Ending Inventory =
Note : The Ending Inventory is the
It is an
Cost of Sales =
Cost of Sales or COGS or Cost of Goods Sold is an
For most inventory items it is difficult to determine which inventory
units
Specific Identification is a costing method which can only be used
when an inventory item can be specifically identified eg _________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
Example: Flashy Cars sells motor vehicles and uses the Specific
Identification costing method. Details of purchases for the month of
June are as follows:
Numberplate
ABC-001
BTW-990
EZY-123
FYI-234
LOL-456
OMG-789
Cost
$48,000
$52,000
$55,000
$60,000
$49,500
$62,000
99
During the month, the following cars were sold:
ABC-001, EZY-123, FYI-234 and OMG-789.
Required: Calculate COGS for June and determine the ending
inventory balance at 30 June for Flashy Cars.
COGS :
Ending Inventory :
Other inventory items which cannot be specifically identified need to
base their cost allocations on some assumptions as to ___________
______________________________________________________
Example: Cuckoo’s Clocks sells alarm clocks. Details of inventory
transactions for the month of July are as follows:
Beginning Inventory 1 July
Purchase 10 July
Purchase 20 July
Quantity
20
20
20
Cost
$10
$11
$12
During July, 20 alarm clocks were sold.
Problem: The alarm clocks are identical which means it is not possible
to determine which clocks have been sold _____ and which clocks
have not been sold. ___________________
Solution: The total inventory cost ____________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
100
Cost Flow Assumptions:
1. FIFO :
2. LIFO :
3. Average Cost
1.FIFO : First In First Out
The FIFO method assumes that the __________________________
_______________________________________________________
Therefore, the ending inventory is assumed to be ________________
_______________________________________________________
In periods of rising prices, FIFO yields a
balance and therefore a
Example: Cuckoo’s Clocks:
Beginning Inventory 1 July
Purchase 10 July
Purchase 20 July
Quantity
20
20
20
Cost
$10
$11
$12
During July, 20 alarm clocks were sold.
Required: Calculate COGS and Ending Inventory using FIFO.
COGS:
Ending Inventory:
2.LIFO : Last In First Out
The LIFO method assumes that the
Therefore, the ending inventory is assumed to be
In periods of rising prices, LIFO yields a
balance and therefore a
101
Example: Cuckoo’s Clocks
Beginning Inventory 1 July
Purchase 10 July
Purchase 20 July
Quantity
20
20
20
Cost
$10
$11
$12
During July, 20 alarm clocks were sold.
Required: Calculate COGS and Ending Inventory using LIFO.
COGS:
Ending Inventory:
NOTE: LIFO cannot be used in Australia for taxation purposes.
3. Average Cost
Average cost is called
This method assumes that all units of inventory have the same unit
cost and an
In periods of rising prices, using average cost
Example: Cuckoo’s Clocks:
Beginning Inventory 1 July
Purchase 10 July
Purchase 20 July
Quantity
20
20
20
Cost
$10
$11
$12
During July, 20 alarm clocks were sold.
Required: Calculate COGS and Ending Inventory using Average Cost.
102
Beginning Inventory 1 July
Purchase 10 July
Purchase 20 July
Total Available for Sale
Quantity
20
20
20
60
Cost
$10
$11
$12
Total
$200
$220
$240
$660
Average Cost =
COGS:
Ending Inventory:
N ote: These three m ethods are cost flow assum ptions not physical
flow assum ptions.
Application of Cost Flow assumptions to Perpetual and Periodic
Inventory Systems
Perpetual:
In a Perpetual Inventory system, an inventory card or inventory
record is maintained for each item of inventory. This inventory record
will be updated for all inventory transactions ie purchases, purchase
returns, sales and sales returns. ____________________________
______________________________________________________
______________________________________________________
Periodic:
In a Periodic Inventory system, inventory records are not maintained
and the inventory balance is not updated. The ending inventory
balance is determined by stocktake The total inventory cost can be allocated between COGS and ending
inventory as follows:
Calculate the cost of goods available for sale
Calculate the Ending Inventory balance
Calculate COGS by
103
Lecture Problem: Inventory cost flow methods – perpetual system
Greg’s Games buys and sells electronic games. The inventory on 1
August consisted of 15 units that cost $120 each. Greg sells these
games for $250 each. Transactions during August include:
August 5 Purchased 10 units for $125 each
August 16 Sold 18 units @ $250 each
August 25 Purchased 9 units for $127 each
Required: A. Complete the following perpetual inventory records.
(Ignore GST)
FIFO
Date
Quantity
Purchases
Unit
cost
Cost of Goods Sold
Quantity
Unit
Total
cost
cost
Total
cost
Inventory on Hand
Quantity
Unit
Total
cost
cost
Aug 1
LIFO
Date
Aug 1
Purchases
Quantity
Unit
cost
Total
cost
MOVING AVERAGE COST
Purchases
Date Quantity Unit
Total
cost
cost
Aug 1
Cost of Goods Sold
Quantity
Unit
Total
cost
cost
Cost of Goods Sold
Quantity
Unit
Total
cost
cost
Inventory on Hand
Quantity
Unit
Total
cost
cost
Inventory on Hand
Quantity
Unit
Total
cost
cost
104
Required: B. Prepare journal entries to record the inventory
transactions for August for Greg’s Games using FIFO.
Date
Details
Debit
Credit
105
Lecture Problem : Inventory cost flow methods – periodic system
Ken’s Sports Store sells cricket bats for $75 each. Total sales for the
year were 2,500 units. The inventory balance determined by
stocktake at year end was 1,200 units.
The inventory was purchased as follows: (Ignore GST).
Inventory, 1 July
600 units
$32 each
15 Oct.
5 Dec.
1 Apr.
950
1500
650
$32.50
$32.75
$33.00
Purchases:
Ken uses a periodic inventory system.
Required:
A
Prepare a schedule to calculate the number of units and cost of
goods available for sale during the year.
B.
Determine the cost of the ending inventory and COGS using each
of the following costing methods:
1. FIFO
2. LIFO
3. weighted average.
C.
Prepare a partial income statement showing sales, COGS and
Gross Profit for the year for each of the costing methods.
Solution:
A.
1 July
15 Oct.
5 Dec.
1 Apr.
TOTAL
# of units Cost per unit
$
106
B.
FIFO:
LIFO:
WEIGHTED AVERAGE:
107
C. Income Statement:
Sales
Less COGS:
Beginning Inventory
Plus Purchases
Cost of Goods available
for sale
Less Ending Inventory
Cost of Goods Sold
Gross Profit
FIFO
LIFO
Weighted
Average
108
Lower of Cost and Net Realisable Value (NRV)
Inventory is usually shown at cost on the balance sheet.
However, in some circumstances the price of inventory may fall as a
result of
The accounting standard requires that inventory cost should be
compared with NRV - net realisable value.
NRV is defined as the
If the NRV falls below Cost, an adjusting entry is required to write
inventory down to NRV and
If Inventory is NOT written down to NRV, the inventory balance on
the Balance sheet will be
Example: Nokoff sells mobile phones. The inventory contains the
following items at 30 June:
Model
1234
2235
3238
4237
Quantity
100
50
75
200
$ Cost
120
110
150
100
$ NRV
90
160
250
75
Required: Determine the Ending Inventory value at 30 June
Model
1234
2235
3238
4237
TOTAL
Quantity
100
50
75
200
$ Cost
120
110
150
100
$ NRV
90
160
250
75
Ending Inventory
Required: Calculate the inventory LOSS to be recorded
109
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110
Lecture Notes Week 10
Accounting for Non-Current Assets
Required Readings: HEM : Chapter 20 pages 828-840
All required readings m ust be com pleted before
attending class
111
Property, Plant and Equipment P,P&E
P,P&E are
also known as
These assets are used by the entity to provide economic benefits over
Examples include:
Cost of Acquisition- P,P&E
Non-current assets should initially be recorded at the ‘cost of
acquisition’.
Cost of acquisition =
Purchase consideration =
Fair Value is the amount for which the asset can be exchanged
between knowledgeable willing parties in an arm’s length
transaction
Directly Attributable Costs = any costs necessarily incurred in getting
the asset to a location and condition ready for its intended use.
Examples include:
NOTE: GST is NOT included in the cost, it is recorded separately in
GST Outlays as it is a recoverable amount - this means the business
will
Eg : Date Dr Non-current Asset $
Dr GST Outlays
Cr Cash at bank / Loan payable
(to record purchase of non-current asset)
112
Example:
A new machine is purchased on 1 Jan for $60,000 cash. $2,000 is
paid for delivery, $1,000 for installation and $500 for stamp duty.
GST paid $6,350
Cost of
= purchase
directly
acquisition consideration + attributable costs
Date
Details
Debits
Credits
Costs that are not necessary or do not increase the future economic
benefits of the asset should be excluded from the acquisition cost.
For example,
These costs should be expensed not included in the cost of acquisition
of the asset.
Eg: Date Dr Repairs expense
Dr GST Outlays
Cr Cash at bank
(to record cost of repairs to non-current asset)
Example:
New equipment is purchased on 1 July 2010 with cash, and all the
associated costs are paid with cash. Determine which of the following
items should be included in the cost of acquisition of the equipment:
Item
Purchase price paid for equipment
Installation of equipment
GST paid
Insurance on equipment while in transit
Repairs for damage caused due to
carelessness while installing equipment
Testing equipment to make sure it
works properly
Amount
120,000
6,000
12,950
2,000
650
Include in
Cost? Yes/No
1,500
113
Cost of acquisition =
=
Date
Details
Debits
Credits
Cost of Acquisition – Land
The cost of land is the purchase price plus other fees including
real estate agent’s commission and stamp duty related to the
purchase plus any expenditure for
Land Improvements
Land is a non-current asset which has an unlimited life. As such, land
is NOT depreciated. Any improvements made to land have limited
useful lives and need to be depreciated. These improvements need to
be accounted for separately. Do NOT include in cost of land.
Examples:
Lump Sum Acquisitions:
• occurs when several items of property, plant and equipment are
acquired by a
• the total cost must be apportioned to the
• costs are allocated based on their fair values using the following
formula:
Fair value of specific asset x total cost = cost allocated to specific asset
Total fair value
Example: On 1 April, Al Greasy purchased a freezer, oven and
dishwasher for his restaurant for a lump sum payment of $12,000
plus GST. The fair values of these items were determined to be
$7000, $5000 and $3000 respectively.
114
Required: Calculate the cost of the individual assets acquired and
record the purchase in the General Journal.
ASSET
FAIR
VALUE
PROPORTION
COST
ALLOCATED
1 April Dr
Dr
Dr
Dr
Cr
(to record purchase of assets)
Depreciation
A non-current asset is said to be a store of future economic benefits
that an entity intends to
With the exception of land, non-current assets have limited lives.
The future economic benefits are lost or used up over time due to:
• Wear and tear –
eg.
• Obsolescence *
*
• Age –
This decrease in economic benefits is recorded periodically as
depreciation expense by the following adjusting entry:
DR
CR
115
The purpose of recording depreciation is to allocate part of the cost of
the asset where
Thus, depreciation is a
Accumulated depreciation is a CONTRA ASSET.
• it has a
• it is shown on the balance sheet with the non-current asset
being depreciated.
• the accumulated depreciation
Example:
Business Name
Balance Sheet (extract)
as at 30 June 2012
NON-CURRENT ASSETS
Land
100,000
Machinery
Less: Accumulated depreciation
85,000
(20,000)
Equipment
Less: Accumulated depreciation
30,000
(5,000)
65,000
25,000
190,000
Note that on the balance sheet, non-current assets are shown at
COST less accumulated depreciation ie
To measure depreciation we need to know:
1. The ________________________of the asset
2. Estimate the useful life of the asset 3. Estimate the scrap value / residual value - the amount that is
expected to
4. the intended pattern of use over the life of the asset– to determine
the most appropriate
116
Depreciation Methods
There are 4 frequently used methods to calculate depreciation.
Straight Line:
Depreciation expense
= cost – scrap value
Useful life in years
Note: this formula gives the ANNUAL expense. If the asset has
not been owned for an entire year, the expense will need to be
pro-rated.
•
•
•
•
Diminishing Balance: also known as Reducing Balance Method
Depreciation expense = depreciation rate % x carrying amount from
end of previous year
Carrying amount
= cost
Depreciation rate =
–
accumulated depreciation
n
1-
√scrap / cost
•
•
•
•
N ote: I n the Final Ex am the Depreciation Rate for Dim inishing
Balance m ethod w ill be given
117
Units of Production
Depreciation
Cost per unit
= (cost – residual)
useful life in units
Depreciation expense = depreciation cost per unit x units produced
•
•
•
•
Sum-of-years-digits
- This m ethod is no longer accepted under the accounting
standard, hence, it w ill N OT be covered in ACCG 100
Comparison of depreciation methods
• Different depreciation methods will result in different
• Regardless of the method chosen, the total depreciation
expense over the life of the asset
118
Lecture Problem 1
Shanta’s Book Club purchased new printing equipment on 1 July
2011 at a cost of $180,000. Shanta estimates the residual value to be
$40,000. The equipment is expected to be used for 400,000 hours
during its 4 year life.
Calculate depreciation expense and carrying amount for the years
ended 30 June 2012, 2013, 2014 and 2015 using:
1. The straight-line method
2. The diminishing balance method. Depreciation rate : 40%
3. The units of production method assuming machine usage was
as follows:
year ended 30 June 2012 89,000 hours
year ended 30 June 2013 115,000 hours
year ended 30 June 2014 102,000 hours
year ended 30 June 2015 94,000 hours
1. Straight line:
Year end
30 June
2012
Depreciation expense
Accumulated
depreciation
Carrying amount
at end of year
2013
2014
2015
119
2.
Diminishing Balance:
Year end Carrying amount Depreciation
30 June
at beg of year
expense
2012
Accumulated
depreciation
Carrying amount
at end of year
2013
2014
2015
3. Units of Production:
Year end Hours Depn
Depreciation
30 June used Cost per expense
hour
2012
Accumulated Carrying amount
depreciation at end of year
2013
2014
2015
120
Lecture Problem 2:
Rosie’s Roses purchases new equipment on 1 July 2011 and incurs
the following expenditure to acquire the equipment:
Purchase price of equipment
Stamp duty on purchase of
equipment
Delivery of equipment
Cost to repair equipment that was
damaged during installation
Installation of new equipment
GST paid
85,000
5,500
3,000
3,200
2,500
9,600
The equipment will have a useful life of 4 years and a scrap value of
$20,000.
Required:
1. Calculate the cost of acquisition
2. Calculate the annual depreciation expense and carrying amount for
the years ended 30 June 2012, 2013, 2014 and 2015 using the
Reducing Balance method.
Note: the depreciation rate is 30%.
1. Cost of acquisition =
2. Diminishing Balance:
Year end
30 June
2012
Carrying amount
at beg of year
Depreciation
expense
Accumulated
depreciation
Carrying amount
at end of year
2013
2014
2015
121
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122
Lecture Notes Week 11
Cash Management and Control
Required Readings: HEM : Chapter 10 pages 416-430
All required readings m ust be com pleted before
attending class
123
What is Cash?
Cash is a Current Asset on the balance sheet, but what should we
include in this item?
Cash includes:
•
•
•
•
Internal Controls
Internal controls are policies and procedures that are used to
•
•
Internal controls can take many different forms including:
• physical controls to protect assets
Examples:
• electronic controls to ensure accuracy of information
Examples:
Control of Cash
Cash is the asset that is most often
It is important to set up good internal controls for handling cash and
recording cash transactions.
3 very important principles of internal control for CASH are:
1. separation of responsibility for handling cash and record keeping
for cash –
2. banking each day’s receipts intact –
3. make all payments by cheque or electronic transfer –
The types of internal controls adopted will vary depending on the size
and type of business.
124
Bank Accounts and Reconciliation
The business keeps a record of all cash received and paid in its cash
receipts and cash payments journals (internal record).
The bank keeps a record of all cash received and paid by the business
in the form of a bank statement (external record).
The bank statement is prepared
If the entity has money in the bank, a credit balance is shown on the
bank statement, this is because
(the m oney belongs to the business N OT to the bank ).
A debit balance on the bank statement
See ex am ple of bank statem ent p4 25.
Entries in the credit column are commonly
Entries in the debit column are normally
The bank statement and Cash at Bank ledger account usually have
different balances on the same date.
A Bank Reconciliation Statement is prepared to explain the
differences between the
Reconciling items (differences)
Differences between the bank statement balance and Cash at Bank
account (business) balance are usually a result of timing differences
and include:
1. Items recorded by the business but not yet recorded by the bank.
*unpresented cheques –
* outstanding deposits -
125
2. Items recorded by the bank but not yet recorded by the business.
Examples:
A cheque will be dishonoured if the person writing the cheque does
not have
3. Errors – made by the bank, or by the business.
How are these reconciling items treated?
1. Items recorded by business but not by bank:
2. Items recorded by bank but not yet by business:
3. Errors:
The Reconciliation Process
1. Go through last month’s bank reconciliation statement, ticking
off any amounts that were outstanding last month but appear on
this month’s bank statement.
Any unticked items
2. Go through the bank statement again and tick off items that
appear both in the bank statement and the cash journals (tick
items off in both places). Unticked items
3. If errors are discovered
126
4.
Record in the cash journals items that are not ticked on the bank
statement eg
Everything on the bank statement should now be ticked off.
5.
Post the totals from the cash journals to the Cash at Bank ledger
account
6.
Prepare a bank reconciliation statement
Business Name
Bank Reconciliation Statement
as at 30 June 201_
Balance as per bank statement Cr (or Dr)
Add (or deduct) outstanding deposits
$ XXX
XXX
XXX
Deduct (or add) unpresented cheques
XX
XX
XX XXX
Balance as per Cash at Bank account (Dr or Cr) $ XXX
See ex am ple page 429
Cr balance per bank statement means business has money in the
bank
ADD outstanding deposits
because when processed by bank,
DEDUCT unpresented cheques
because when processed by bank,
Dr balance per bank statement means business has negative cash at
bank – there is a liability TO the bank, also known as
DEDUCT outstanding deposits
because when bank processes,
ADD unpresented cheques
because when bank processes,
127
Lecture Problem 1:
The following information relates to Murphy’s Law Firm:
Murphy’s Law Firm
Bank Reconciliation Statement
As at 31 March 2012
Balance per bank statement
Less: Unpresented cheques
# 552
435.00
# 560
97.00
# 562
159.00
# 568
372.00
$3657.00 cr
Balance per Cash at Bank
$2,594.00 dr
Cash Receipts Journal
Date
Amount
April
April
April
April
April
April
1
8
15
22
29
30
687
805
412
482
246
960
3,592
1,063.00
Cash Payments Journal
Chq
Amount
Date
#
April 2
570
415
April 3
571
82
April 5
572
137
April 8
573
1315
April 11
574
642
April 15
575
701
April 17
576
240
April 20
577
194
April 23
578
311
April 27
579
293
April 28
580
114
4,444
128
The bank statement for Murphy’s Law Firm is as follows:
Which Bank Limited
Murphy’s Law Firm
Account 123-456-78
Date 30th April 2012
Date
Particulars
Dr
Mar 31 Balance
April 1 Deposit
April 3 Chq568
372
April 4 Chq570
415
April 8 Deposit
Chq572
137
April 9 Direct Deposit
April 10 Chq573
1513
April 11 Chq574
642
April 14 Chq552
435
April 15 Deposit
April 16 Chq571
82
April 20 Chq575
701
April 22 Deposit
Chq577
194
April 25 Chq560
97
April 27 Chq576
240
April 29 Deposit
April 30 Chq580
114
Interest
Bank charges
36
Dishonoured chq
805
Cr
687
805
696
412
482
246
75
Balance
3657Cr
4344Cr
3972Cr
3557Cr
4362Cr
4225Cr
4921Cr
3408Cr
2766Cr
2331Cr
2743Cr
2661Cr
1960Cr
2442Cr
2248Cr
2151Cr
1911Cr
2157Cr
2043Cr
2118Cr
2082Cr
1277Cr
Other information:
Cheque number 573 was recorded correctly by the bank as $1513.00.
The General ledger balance for Cash at Bank at 31 March is $2,594dr.
Required:
Prepare a Bank Reconciliation Statement as at 30 April 2012 for Murphy’s Law
Firm.
129
Cash at Bank
Date
Details
Amount
Date
Details
Amount
130
Lecture Problem 2:
Using the information below, prepare a bank reconciliation statement
for Sandy’s Ski Hire as at 30 November 2011.
• There was a deposit of $1,660 that had been recorded in the
cash receipts journal but did not appear on the bank statement
• The following cheque payments had been recorded in the cash
payments journal but did not appear on the bank statement:
o #612
$32.00
o #620
$440.00
o #624
$880.00
o #626
$66.00
• The balance on the bank statement at the 30th November was
$8,880cr.
• The balance in the cash at bank ledger account at the 30th
November was ?
131
Lecture Problem 3:
Using the information below, prepare a bank reconciliation statement
for Sandy’s Ski Hire as at 30 November 2011.
• There was a deposit of $1,660 that had been recorded in the
cash receipts journal but did not appear on the bank statement
• The following cheque payments had been recorded in the cash
payments journal but did not appear on the bank statement:
o #612
$32.00
o #620
$440.00
o #624
$880.00
o #626
$66.00
• The balance on the bank statement at the 30th November was
$8,880dr.
(Hint : Dr balance per bank means OVERDRAWN)
• The balance in the cash at bank ledger account at the 30th
November was ?
132
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133
Lecture Notes Week 12
Accounting for Receivables
Required Readings: HEM : Chapter 18 pages 748 -765
All required readings m ust be com pleted before
attending class
134
Definition
Receivables are
Receivables are highly liquid, which means it is expected that they will be
converted into cash quickly, and are classified as
Types of Receivables
Accounts Receivable:
Also called Trade Debtors.
Bills Receivable: are legal instruments and include
Interest is charged on the bill receivable and it usually gives the customer more
time to pay than accounts receivable.
Other Receivables: for example
Accounts Receivable
Recognition of accounts receivable
• Usually recorded when
• The
provides evidence of the sale
Valuation of accounts receivable
• This is an important issue as usually not all accounts receivable are
collected
• The accounts that cannot be collected are called
• The amount shown on the Balance Sheet as receivables should be the
amount that is
• This requires the business to estimate the
amount of receivables that will become
135
Bad and Doubtful Debts
When a business sells on credit there are usually some customers who do not
pay their account. The customer may not pay their account due to:
These uncollectable accounts are called bad debts and are an unavoidable risk
when selling on credit. Bad Debts are classified as a
There are 2 methods that can be used to account for bad debts:
1. The Direct Write-off Method
2. The Allowance Method
1.
The Direct Write-off Method
Under this method the bad debt is recorded as an expense at the time that it is
determined to be uncollectable. This can happen at any time during the
accounting period.
The entry to record the bad debts expense is:
Date
Details
Debit
XXX
XX
Credit
XXX
Under this method bad debts are
This method is not recommended as it does not show the receivables on the
Balance Sheet at the amount that is estimated to be collected. This method is
only suitable
136
2.
The Allowance Method
Under this method bad debts are
at the end of the period.
The receivables amount on the Balance Sheet is the amount that is estimated
to be collected. This method is recommended as it
________________________________on the Balance Sheet.
Example:
Business Name
Balance Sheet (extract)
As at 30 June 201X
Current Assets
Cash at bank
Accounts receivable
Less: allowance for doubtful debts
Inventory
200,000
(8,000)
Total current assets
$
50,000
192,000
85,000
327,000
NOTE: $192,000 is the Net Realisable Value of Accounts Receivable (amount
estimated to be collected)
The Allowance for Doubtful debts is a
from Accounts Receivable on the Balance Sheet.
It is subtracted
The Allowance Method : Estimating Bad Debts
At the end of the period the business must make an estimate of bad debts (the
uncollectable accounts receivable). This estimate is usually based on past
experience.
The adjusting entry to record the estimate of bad debts at the end of the
period is:
Date
Details
30 June
Debit
XX
Credit
XX
There are 2 methods that can be used to estimate bad debts under the
allowance method.
137
1. Percentage of net credit sales: using this approach the business
estimates a percentage of their
(excluding GST) that will become uncollectable. This amount is recorded in the
journal entry
Example: ABC Ltd estimates at 30 June that 3% of the net credit sales in
2011 will be uncollectable. From the Income Statement, net credit sales in
2011 totalled $450,000.
The estimate
The journal entry to record the estimate of bad debts is:
Date
Details
Debit
Credit
2. Ageing of accounts receivable: using this approach the business
estimates a percentage of their
(excluding GST) that will become uncollectable.
The estimate is based on the length of time the account is overdue, eg older
accounts are more likely to be bad.
This amount is the closing balance (Balance c/d and b/d) required
From the t-account the estimate of bad debts is determined.
138
Example: XYZ Ltd – Ageing Analysis (ignore GST).
Ageing of
Accounts
Receivable
Accounts
Receivable
Balance
% Estimated
Uncollectable
Not yet due
61 600
1%
1-30 days
11 660
5%
31-60 days
7 260
10%
61-90 days
4 620
20%
91-180 days
4 180
30%
Over 180 days
2 640
60%
Estimated
Bad Debts
$
$91 960
The balance in the Allowance for Doubtful Debts account was $300 credit on
30 June before the estimate of bad debts was recorded.
Allowance for Doubtful Debts
1/7
Balance b/d
30/6
300
This is the estimate of bad debts at 30 June 2010 that needs to be recorded in
the journal.
Date
Details
Debit
Credit
139
Writing off bad debts
At any time during the period the business may determine that an account is
bad (it is uncollectable). This could be due to the customer
The balance owing from the customer must be removed from accounts
receivable. This is known as
The entry to write-off a bad debt at any time is:
Date
Details
Debit
XXX
XX
Credit
XXX
Recovery of an account written-off
In some cases, after an account has been written-off as a bad debt, it is
collected (in part or in full) at a later date.
The entry to reinstate the account receivable that was previously written-off is:
Date
Details
Debit
XXX
Credit
XXX
XXX
Bad Debts Recovered is an
The entry to record the receipt of the cash is:
Date
Details
Debit
XXX
Credit
XXX
140
Disposal of Accounts Receivable
As many businesses sell on credit, accounts receivable can often be a large
asset.
The problems with having a large accounts receivable balance are:
• The business may need cash
• The cost of managing accounts receivable
• There is the risk
Many businesses sell their accounts receivable, which is called
The advantages of factoring include:
Example: Desperado factors $300,000 of receivables to a finance company on
1 May 2011. There is a service charge of 2% of the receivables being sold.
The journal entry for Desperado to record the sale of the receivables is:
Date
Details
Debit
Credit
141
Accounting for Credit Cards
When a customer uses a credit card to purchases goods or services the
business does not have to collect the cash from the customer, this
responsibility is transferred to the issuer of the credit card.
The accounting for the use of credit cards depends on the issuer of the credit
card.
Credit Cards Issued by a Bank
When the credit card is issued by a bank, the sale to a customer is treated
_________________The business will receive the cash from the bank the same
day. The bank will charge the business a fee which is called a
Example: sold goods to a customer on 10 June for $1,000 plus $100 GST. The
customer paid with a credit card issued by ANZ bank. The merchant fee is 2%.
The business would record this transaction as follows:
Date
Details
Debit
Credit
142
Credit Cards Issued by Non-Bank Financial Institutions
When the credit card is issued by another financial institution for example
American Express, the sale to a customer is treated
The business will not receive the cash on the same day; it will receive the cash
days or weeks later. The financial institution will charge the business a
merchant fee.
Example: sold goods to a customer on 25 June for $2,000 plus $200 GST. The
customer paid with a credit card issued by American Express (Amex). The
merchant fee is 4%. The business received the cash from Amex on 2 July.
The business would record this transaction as follows:
Date
Details
Debit
Credit
143
Lecture Problem 1
Dodgem Driving School uses the allowance method to account for bad debts.
The business is registered for GST. The following transactions took place
during the month of June 2012:
6 June:
14 June:
20 June:
30 June:
wrote off Shonky’s account for $990 including GST
received $660 including GST from Speedy, which had been
previously written off as a bad debt
wrote off Miserly’s account for $330 including GST
estimated bad debts to be 3% of net credit sales of $300,000
(excluding GST)
The balance in the Allowance for Doubtful Debts account at 1 June was $1,000
credit. The balance in Accounts Receivable at 30 June 2012 was $125,000.
Required:
1. Record the transactions for the month of June in the general journal.
2. Prepare the T-account for the Allowance for Doubtful Debts at 30 June
2012.
3. Determine the net realisable value that would be shown on the Balance
Sheet for Accounts Receivable at 30 June 2012.
144
Date
Details
Debit
Credit
Allowance for Doubtful Debts
3.
145
Lecture Problem 2
Nokoff uses the allowance method to account for bad debts. An aged analysis
of accounts receivable at 31 December 2011 has been provided below:
Accounts not yet due
Accounts overdue:
10-30 days
31-60 days
61-120 days
121 days and over
Accounts
receivable
balance
$65,000
$35,000
$29,500
$22,000
$8,600
$160,100
% Estimated
uncollectable
0.5%
2%
10%
25%
55%
Required:
1. Prepare the general journal entry to record the estimate of bad debts at
31 December 2011. The balance in the Allowance for Doubtful Debts
account is $500 credit.
2. Determine the net realisable value that would be shown on the Balance
Sheet for Accounts Receivable at 31 December 2011.
3. Prepare the general journal entry to record the estimate of bad debts at
31 December 2011 if the balance in the Allowance for Doubtful Debts
account is $200 debit.
146
1.
Accounts not yet due
Accounts overdue:
10-30 days
31-60 days
61-120 days
121 days and over
Accounts
receivable
balance
$65,000
$35,000
$29,500
$22,000
$8,600
$160,100
% Estimated
uncollectable
Estimated bad
debts amount
0.5%
2%
10%
25%
55%
Allowance for Doubtful Debts
Date
Details
Debit
Credit
2.
147
3.
Allowance for Doubtful Debts
Date
Details
Debit
Credit
148
Week 13
REVISION
Week 13 lectures will provide an opportunity for
students to do practical revision problems in class.
The revision problems will be released on the portal at
the end of week 12. Please print the problems and
bring to lectures and tutorials in week 13.
149
TUTORIAL EXERCISES
These exercises are to be completed DURING tutorials.
Your tutor may randomly mark your answers to these
tutorial exercises. Satisfactory completion of these
tutorial exercises will contribute to your tutorial mark.
150
Week 1 Tutorial Exercise:
Ethical Case 1
Greg Goody is the accountant at Dodgy Investments. Greg discovered a misstatement that
significantly overstated profit in this year’s financial statements. The misleading financial
statements are included in the company’s annual report, which is going to be issued to
shareholders, banks and other creditors.
After much thought about the consequences of informing his superiors about the
misstatement, Greg gathered the courage to tell them in a meeting. Present at the meeting
were his boss, the chief financial officer, David Deville, and the managing director, Sam
Shonky. When informed of the overstated profit in the financial statements, both David and
Sam said they were aware of the misstatement and intended to adjust next year’s financial
statements for this year’s misstatement.
Required:
a. Who are the stakeholders in this situation?
(Hint: Stakeholders are individuals or groups who have an interest in the entity’s activities
and performance and may be affected by the entity’s actions. Stakeholders include
shareholders, employees, creditors, suppliers, governments, unions, environmental groups
etc
b. What are the ethical issues?
c. What would you do if you were Greg?
151
Week 1 Tutorial Exercise (continued)
Ethical Case 2
Kevin Shady owns and manages a busy café. Kevin employs 6 full-time employees and 12
part-time employees. The full-time employee wages are calculated by Angela, the
accountant, and are paid via electronic transfer into their bank accounts. Kevin pays all the
part-time employees in cash from the cash register.
Angela has repeatedly urged Kevin to pay the part-time employees by electronic transfer
rather than cash. However, Kevin has refused to comply with Angela’s requests. When asked
for his reasons, Kevin stated that by paying the employees cash, he does not have to
withhold or pay any taxes or superannuation on those wages.
a. Who are the stakeholders in this situation?
b. What are the ethical issues?
c. What would you do if you were Angela?
152
Week 2 Tutorial Exercise
Part A: Short Answer Theory Questions
1. Compare and contrast the characteristics, advantages and disadvantages of a sole
trader, partnership and company.
2. Who are stakeholders? Provide examples of stakeholders and give reasons as to why
they would have an interest in a business.
Part B
Classify each of the accounts below as Asset (A), Liability (L), Owner’s Equity (OE), Income
(I) or Expense (E).
Capital
Land
Wages Expense
Inventory
Equipment
Accounts Payable
Mortgage
Interest Income
Accounts Receivable
Bank Loan
Supplies
Drawings
Bank Overdraft
Rent Expense
Service revenue
Motor Vehicle
Prepaid rent
Unearned Revenue
Interest expense
Cash at Bank
153
Week 3 Tutorial Exercise
Part A: Short Answer Theory Questions
1. Explain why it is important to do a transaction analysis before performing journal entries.
2. Explain why the total assets do not change when a business receives cash from an
accounts receivable customer.
Part B:
For the following transactions, perform a Transaction Analysis and record transactions in the
general journal.(Ignore GST).
April 1 Purchased a computer on credit for $2000.
April 4 Invoiced a customer for services provided $3400.
April 11 Received $1600 from clients’ for services provided and invoiced last month
April 20 Paid for the computer purchased on April 1.
Transaction Analysis:
ASSETS
=
LIABILITIES
+
EQUITY
154
General Journal:
Date
Details
Debit
Credit
R em inder: Diagnostic Tests w ill be held during
TUTOR IALS in w eek 4.
155
Week 5 Tutorial Exercise
Part A: Short Answer Theory Questions
1. Explain why Unearned Revenue is classified as a liability.
2. Compare the differences between the cash basis of accounting and the accrual basis of
accounting.
Part B
1. The following journal entries relate to transactions for the month of April 2012 for LOL
Amusements. Required: Post the journal entries to the General Ledger.
Date
1 April
Details
Equipment
Accounts payable
Debit
5,000
Cash
Services revenue
12,000
Rent Expense
Cash
4,000
Accounts payable
Cash
5,000
Accounts Receivable
Services revenue
6,000
Purchased equipment on credit
4 April
Received cash for services
11 April
Paid April Rent
20 April
Billed customer for services
5,000
12,000
4,000
5,000
Paid accounts payable
28 April
Credit
6,000
2. Prepare a Trial Balance
156
Cash at bank
Date
Explanation
Amount Date
Explanation
Amount
Accounts Receivable
Date
Explanation
Amount Date
Explanation
Amount
Equipment
Date
Explanation
Amount Date
Explanation
Amount
Accounts Payable
Date
Explanation
Amount Date
Explanation
Amount
Service Revenue
Date
Explanation
Amount Date
Explanation
Amount
Explanation
Amount
Rent expense
Date
Explanation
Amount Date
LOL Amusements
Trial Balance
as at 30 April 2012
157
Week 6 Tutorial Exercise
Part A
Using the information below, prepare any necessary adjusting entries in the general journal.
The accounting period ends on 30 June.
 The telephone tax invoice was received for $330 including GST, it is unrecorded and
unpaid.
 The balance in the Unearned Service Revenue account was $10,000 at the beginning
of the year. By the end of the year 30% of the services have been provided to the
customer.
 Prepaid Advertising expired to the value of $6,000
Date
Details
Debit
Credit
158
Week 6 Tutorial Exercise (continued)
Part B: Short Answer Theory Questions
1. Why are adjusting entries necessary?
2. Explain the effect on the financial statements if the adjusting entry for the accrued
telephone expense in part A had not been recorded.
3. Explain the effect on the financial statements if the adjusting entry in relation to the
unearned revenue account in part A had not been performed.
4. Explain the effect on the financial statements if the adjusting entry for the expired
prepaid advertising in part A had not been recorded.
159
Week 7 Tutorial Exercise
Part A
Using the information below, prepare any necessary adjusting entries in the general journal.
The accounting period ends on 30 June.
 When insurance of $6000 for 12 months was prepaid on 1 April it was recorded by
debiting Insurance Expense.
 Rent has been earned but not yet received or recorded of $990 including GST.
 Office supplies purchased during the year totalled $800. At 30 June only $60 of
office supplies remained.
Date
Details
Debit
Credit
160
Week 7 Tutorial Exercise (continued)
Part B: Short Answer Theory Questions
1. Explain the effect on the financial statements if the adjusting entry for the expired
insurance in part A had not been recorded.
2. Explain the effect on the financial statements if the adjusting entry for the accrued
rent revenue in part A had not been recorded.
3. Explain the effect on the financial statements if the adjusting entry for the consumed
supplies in part A had not been recorded.
4. Define Current Assets and give examples. What basis is used for arranging the order
of the individual items in the Current Assets section on the balance sheet?
161
Week 8 Tutorial Exercise
Part A: Short Answer Theory Questions
1. What is the purpose of closing entries?
2. Identify the four special journals. Provide examples of the transactions that would be
recorded in each special journal.
Part B: Multiple Choice Questions
1.
In which order do these steps in the accounting cycle occur?
1. Prepare closing entries
2. Post to the ledger
3. Enter business transactions in the journal
4. Prepare adjusting entries
5. Prepare financial statements
a.
b.
c.
d.
1, 2, 3, 4, 5
5, 4, 3, 1, 2
4, 2, 1, 5, 3
3, 2, 4, 1, 5
2.
Closing the accounts refers to:
a.
b.
c.
d.
Establishing zero balances in the balance sheet accounts
Establishing a zero balance in the cash at bank account
Establishing zero balances in all ledger accounts
Transferring income and expense account balances to the profit and loss summary
account, which is then closed to the equity account
162
3.
The balance in the Profit and Loss Summary account before it is closed represents:
a.
b.
c.
d.
Total income
Total expense
Profit (or loss)
Profit (or loss) less cash drawings
4.
A business uses a subsidiary ledger for its accounts receivable. At the end of the
accounting period a listing of customers' accounts is prepared from the subsidiary
ledger. The purpose of this listing is to:
a.
b.
c.
d.
Provide the amount that should be posted to the accounts receivable control account
Determine whether the debits equal the credits in the subsidiary ledger
Prove that the subsidiary ledger agrees with the control account
Provide information necessary for trial balance preparation
5.
Details of amounts owed to individual suppliers are found in the:
a.
b.
c.
d.
Accounts payable subsidiary ledger
Accounts payable control account
Accounts receivable subsidiary ledger account
General ledger
6.
Which of the following accounts should be included in the post-closing trial balance?
a.
Interest payable, Interest expense, Buildings, Accumulated Depreciation Buildings,
b.
Interest payable, Buildings, Accumulated Depreciation Buildings, depreciation Expense,
Service Revenue, Drawings
c.
Interest payable, Buildings, Accumulated Depreciation Buildings, depreciation Expense,
Drawings
d.
Interest payable, Buildings, Accumulated Depreciation Buildings, Accounts payable
Rem inder: Group P resentations w ill be held during
tutorials in w eeks 9, 10 and 11
163
Week 12 Tutorial Exercise
Revision Chapters 6, 19, 20
Part A: Short Answer Theory Questions
1. Compare the characteristics of the Perpetual Inventory system with the Periodic
Inventory System.
2. Explain the purpose of a stocktake.
3. Discuss the reasons why businesses need to use inventory cost flow assumptions.
Part B: Multiple Choice Questions
1.
Sales Returns and Allowances is what type of account?
a.
b.
c.
d.
Contra to sales revenue
Liability
Contra to an asset
Expense
2.
The primary purpose of (cash) settlement discounts is to:
a.
b.
c.
d.
Convince the customer to buy the goods on credit
Facilitate the quoting of prices to different customer groups
Reduce the invoice price of the goods
Encourage the customer to settle their account early
164
3.
The entry to record the return of goods to a supplier under the perpetual inventory
system, including GST, is:
a.
b.
c.
d.
Debit Inventory, credit Purchases Returns, credit GST outlays
Debit Accounts Payable, credit Purchases, credit GST outlays
Debit Inventory, debit GST outlays, credit Accounts Payable
Debit Accounts Payable, credit Inventory, credit GST outlays
4.
In the financial statements prepared at the end of the accounting period the item
Accumulated Depreciation appears:
a.
b.
c.
d.
On the income statement as an expense
On the balance sheet as a liability
On the balance sheet as a deduction from the related asset
On both the balance sheet and the income statement
5.
On 31 December 2009 a new motor vehicle with a life of five years and an estimated
residual value of $3000 was purchased by a business at a cost of $23 000, net of
GST. The straight-line depreciation method is employed. What is the carrying amount
of the motor vehicle at 31 December 2012 (after charging depreciation for that year)?
a.
b.
c.
d.
$23 000
$11 000
$12 000
$15 000
6.
A business uses the specific identification method of cost assignment.
Date
Units Unit Cost
$
Beginning Inventory July 1
1000
10
Purchase
10
2000
11
Purchase
20
1000
13
a.
b.
c.
d.
On 25 July 500 units from beginning inventory and 1500 units from the 10 July
purchase were sold. What was the value of ending inventory at 31 July?
$10 500
$23 500
$26 000
$34 500
7.
a.
b.
c.
d.
The lower of cost or net realisable value procedure is used with:
Weighted average
FIFO
The perpetual method
All methods of inventory valuation or recording
165
Week 13 Tutorial Exercise
Revision Chapters 10, 18
Part A: Short Answer Theory Questions
1. What are the objectives of internal controls?
2. Provide examples of physical and electronic controls.
3. Explain why current assets on the balance sheet would be overstated if a business did not
have an allowance for doubtful debts.
4. Explain why the Allowance Method of accounting for doubtful debts is preferred to the Direct
Write-off method.
Part B: Multiple Choice
1.
Dishonoured cheques:
a.
b.
Must be listed in the bank reconciliation
Are cheques from debtors that were deposited into the firm's bank account but were not
paid due to lack of funds
Appear as credits on the bank statement
Can be adjusted by making a negative entry in the cash payments journal
c.
d.
2.
Assuming the account is not in overdraft, when reconciling the ledger with the bank
statement an outstanding deposit should be:
a.
b.
c.
d.
Subtracted from the general ledger bank balance
Added to the general ledger bank balance
Subtracted form the bank statement balance in the reconciliation
Added to the bank statement balance in the reconciliation
166
3.
The bank statement of a business shows an overdraft of $10 000 at 31 March. In
reconciling the account at that date indicate the treatment you would give to Cheque
No. 461 for $30 that was drawn on 25 March but had not yet been presented for
payment.
a.
b.
c.
d.
Record in the cash receipts journal
Record in the cash payments journal
Add to the bank statement balance in the bank reconciliation
Subtract from the bank statement balance in the bank reconciliation
4.
a.
b.
c.
d.
A business received its monthly bank statement showing a balance of $27 629 Cr at 31
January. On this date cash received from customers and not yet processed by bank
totalled $857 and outstanding cheques were $4321. The amount to appear as cash at
bank on the 31 January balance sheet is:
$22 451
$28 486
$31 093
$24 165
5.
The account called Bad Debts Recovered is shown as:
a.
b.
c.
d.
an income account on the income statement
an expense account on the income statement
a contra asset on the balance sheet
a liability on the balance sheet
6.
The Allowance for Doubtful Debts account:
a.
b.
c.
d.
is a contra asset
should be deducted from Accounts Receivable on the Balance Sheet
A and B
none of the above
7.
The entry to write- off an Account Receivable as bad is:
a.
b.
c.
d.
Dr Accounts Receivable, Cr Allowance for Doubtful Debts
Dr Bad Debts Expense, Cr Allowance for Doubtful Debts
Dr Allowance for Doubtful Debts, Cr Accounts Receivable
Dr Allowance for Doubtful Debts, Cr Bad Debts Expense
167
TERMINOLOGY
Terminology
Invoice
Sent Invoice
Forwarded invoice
Invoiced, billed,
charged
Sold on account, sold on
credit
Recorded revenue on
account
services performed
services rendered
Performed service on
account
Cheque
Collected Cash
Received cheque
Received payment on
account,
Received on account
Purchased on account,
purchased on credit
Received Invoice
Sent payment
Forwarded cheque
Forwarded payment
Issued cheque
Due date
Overdue, Past due
Borrowed,
Obtained a loan,
Signed a loan agreement
Repaid
Leased,
lease on premises
Insurance,
Insurance policy
Insurance premium
Definition
This is an itemised statement listing amounts of money owed for
goods shipped or services performed / rendered
This happens when a business sells goods or provides a service to
customers and the business is asking the customer for payment.
Invoice is sent to the customer asking for payment
This is where the business prepares and sends out a request for
payment from the customer for the provision of goods or services
When the business sells goods on credit - they have sold the goods
but have not yet received any money
This is when income is recorded but the business has not received
cash from the customer yet.
Providing services to clients
When the business performs services on credit - they have
provided the service but have not yet received any money
A written authority to the bank directing the bank to pay a
nominated person money out of the bank account.
TREAT AS CASH
A business has received money from their customers
The business has received money from the customer.
Remember : treat cheques as cash
The business has received cash from the customer for goods or
services previously provided on credit.
Note revenue has been recorded at the time of service
When the business buys goods or services on credit - they have
received the goods or service but have not paid yet
This happens when the business buys goods or services and is
being asked for payment from the supplier.
Payment has been sent to the supplier of the goods
When the business sends a cheque as payment to another party
who has provided goods or services
Remember : treat cheques as cash
Payment has been sent to the supplier of the goods and services
When the business sends a cheque as payment to another party
who has provided goods or services
Date that payment is required
Means that payment has NOT been made by the due date
To take money from a bank or financial organisation and pay it back
over a period of time.
To pay back money borrowed
This is when a business rents instead of buying assets.
An agreement in which an insurance company agrees to cover you
for specified events eg fire and will pay your costs if the specified
event eg fire occurs and your property is damaged
An amount of money paid to obtain insurance
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