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THE CPAP STUDY
GUIDE TO VCE
ACCOUNTING
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3rd edition (2012)
Vicki Baron & Simon Phelan
ISBN: 978-1-921813-06-1
ABOUT THE AUTHORS
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Vicki Baron (B.Bus, Dip Ed) has been the Assistant Chief Assessor
in Accounting for 12 years and is currently Head of Commerce at
Haileybury College. She has taught senior Accounting for 20
years, has been a panel writer of Accounting Study Designs
between 2000 and 2011 and has provided professional
development to teachers for 15 years via the VCTA. Vicki is also
the author of a number of publications and podcasts. She is a
reviewer of Insight VCE Accounting Guides, has written
numerous trial examinations and has over 13 years experience
providing student lectures on exam preparation.
COPYRIGHT AND DISCLAIMER
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Simon Phelan (B.Ed., B.Bus., Post Grad.Dip.Int.Ed) was Chief
Assessor in Accounting between 2003 and 2008 and is currently
Head of Senior School and a senior Commerce teacher at
Rosehill Secondary College. He has been actively involved in
both the setting and assessment of Accounting examinations for
the VCAA, being a member of the Accounting Examination
Setting Panel for 6 years, periodically serving as Panel
Chairperson. Simon has previously held the positions of Head of
Senior School at Elisabeth Murdoch College for 4 years and Year
11 Coordinator/Head of Accounting at Taylors College for 8
years.
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Please note that this publication is protected by copyright laws and no part of the publication can be
reproduced without the express permission of CPAP.
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The publication is in no way connected to the VCAA. Readers should be aware that the advice provided
throughout the publication is the advice of the authors alone, and not the VCAA.
CPAP Publishing
GPO Box 3550
Melbourne Vic 3000
publications@commpap.com
TEL: (03) 9014 9857
Fax (03) 9005 2717
2 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan TABLE OF CONTENTS
THE UNIT 3 STUDY DESIGN ..................................................................................................................................................... 5 WHAT IS ACCOUNTING? .......................................................................................................................................................... 7 THE ACCOUNTING STANDARDS ................................................................................................................................................ 7 U
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REVIEW QUESTIONS/APPLICATION EXERCISE 1 – INTRODUCTION ............................................................................... 9 THE ACCOUNTING ELEMENTS .................................................................................................................................................. 9 BUSINESS (SOURCE) DOCUMENTS .......................................................................................................................................... 10 REVIEW QUESTIONS/APPLICATION EXERCISE 2 – ACCOUNTING ELEMENTS .............................................................. 12 ACCOUNTING FOR STOCK ....................................................................................................................................................... 12 REVIEW QUESTIONS/APPLICATION EXERCISE 3 – ACCOUNTING FOR STOCK ............................................................. 19 RECORDING TRANSACTIONS – SPECIAL JOURNALS.................................................................................................................. 20 RECORDING TRANSACTIONS – THE GENERAL JOURNAL ........................................................................................................... 23 REVIEW QUESTIONS/APPLICATION EXERCISE 4 – JOURNALS ..................................................................................... 25 RECORDING TRANSACTIONS – THE GENERAL LEDGER ............................................................................................................. 26 ACCOUNTING FOR THE GST .................................................................................................................................................... 29 RECORDING TRANSACTIONS – CONTROL ACCOUNTS...............................................................................................................33 REVIEW QUESTIONS/APPLICATION EXERCISE 5 – LEDGERS ........................................................................................ 39 THE TRIAL BALANCE ...............................................................................................................................................................41 UNIT 3: MINI EXAM NO. 1 .................................................................................................................................................. 44 BALANCE DAY ADJUSTMENTS .................................................................................................................................................. 48 REVIEW QUESTIONS/APPLICATION EXERCISE 6 – BALANCE DAY ADJUSTMENTS ....................................................... 53 CLOSING THE LEDGER ............................................................................................................................................................55 REVIEW QUESTIONS/APPLICATION EXERCISE 7 – CLOSING THE LEDGER ................................................................... 60 ACCOUNTING REPORTS .......................................................................................................................................................... 62 CASH FLOW STATEMENT ......................................................................................................................................... 62 THE INCOME STATEMENT ....................................................................................................................................... 64 THE BALANCE SHEET ................................................................................................................................................ 66 REVIEW QUESTIONS/APPLICATION EXERCISE 8 – Accounting Reports ....................................................................... 68 CASH VERSUS PROFIT............................................................................................................................................................. 70 UNIT 3: MINI EXAM NO. 2 .................................................................................................................................................. 72 THE JUNE EXAMINATION ........................................................................................................................................................ 74 EXAMINATION PREPARATION STRATEGY ................................................................................................................................. 74 SOLUTIONS UNIT 3: MINI EXAM NO. 1 .................................................................................................................................... 80 SOLUTIONS UNIT 3: MINI EXAM NO. 2 .................................................................................................................................... 86 BONUS PRACTICE EXAMINATION 1 ................................................................................................................................... 92 THE UNIT 4 STUDY DESIGN: ................................................................................................................................................... 96 WHAT IS AN ACCOUNTING SYSTEM - REVISITED? ................................................................................................................... 99 QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION .......................................................................................... 99 ACCOUNTING PRINCIPLES .................................................................................................................................................... 100 EXTENSIONS TO RECORDING - FURTHER STOCK TRANSACTIONS .......................................................................................... 101 SALES AND PURCHASE RETURNS ........................................................................................................................... 101 STOCK VALUATION ................................................................................................................................................ 105 PRODUCT AND PERIOD COSTS............................................................................................................................... 107 REVIEW QUESTIONS/APPLICATION EXERCISE 1 – Further stock transactions .......................................................... 112 FURTHER BALANCE DAY ADJUSTMENTS ................................................................................................................................ 114 PREPAID REVENUE ................................................................................................................................................. 114 ACCRUED REVENUE ............................................................................................................................................... 118 DEPRECIATION ....................................................................................................................................................... 120 REVIEW QUESTIONS/APPLICATION EXERCISE 2 – Further balance day adjustments ............................................... 121 DISPOSAL OF NON-CURRENT ASSETS .................................................................................................................................... 122 REVIEW QUESTIONS/APPLICATION EXERCISE 3 – Disposal of Non‐current Assets ................................................... 130 UNIT 4: MINI EXAM NO. 1 ................................................................................................................................................ 132 BUDGETED FINANCIAL REPORTS ........................................................................................................................................... 134 BUDGETED CASH FLOW STATEMENT .................................................................................................................... 136 3 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan O
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BUDGETED INCOME STATEMENT .......................................................................................................................... 137 VARIANCE REPORTS ............................................................................................................................................... 141 REVIEW QUESTIONS/APPLICATION EXERCISE 4 – Budgeted Financial Reports ........................................................ 142 ANALYSING BUSINESS PERFORMANCE ................................................................................................................................... 143 PROFITABILITY ....................................................................................................................................................... 143 EFFICIENCY ............................................................................................................................................................. 143 LIQUIDITY ............................................................................................................................................................... 143 STABILITY ............................................................................................................................................................... 143 UNDERSTANDING RATIOS ..................................................................................................................................... 146 CONFLICTING RATIOS ............................................................................................................................................ 148 ASSESSING PERFORMANCE ................................................................................................................................... 149 GRAPHICAL REPRESENTATION ............................................................................................................................... 149 OTHER PERFORMANCE MEASURES ....................................................................................................................... 151 STRATEGIES TO IMPROVE PROFITABILITY AND LIQUIDITY .................................................................................... 151 REVIEW/APPLICATION QUESTIONS 5 – Analysing performance ............................................................................... 152 UNIT 4: MINI EXAM NO. 2 ................................................................................................................................................ 154 THE NOVEMBER EXAMINATION ............................................................................................................................................. 157 EXAMINATION PREPARATION STRATEGY ............................................................................................................................... 158 SOLUTIONS UNIT 4: MINI EXAM NO. 1 .................................................................................................................................. 163 SOLUTIONS UNIT 4: MINI EXAM NO. 2 .................................................................................................................................. 168 BONUS PRACTICE EXAMINATION 2 ................................................................................................................................. 176 INDEX OF KEY TERMS ........................................................................................................................................................... 180
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4 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan The Unit 3 Study Design
Recording and reporting for a trading business
This unit focuses on financial accounting for a single activity trading business as operated by a sole
trader and emphasises the role of accounting as an information system. Students use the double entry
system of recording financial data and prepare reports using the accrual basis of accounting. The
perpetual method of stock recording with the First In, First Out (FIFO) method is also used.
Where appropriate, the accounting procedures developed in each area of study should incorporate
the application of accounting principles and the qualitative characteristics of accounting information.
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AREA OF STUDY 1
Recording financial data
This area of study focuses on identifying and recording financial data for a single activity sole trader. Students record
data using double entry accounting to provide the owner with accounting information, enabling the owner to make
informed decisions about the operation of the business.
Outcome 1
On completion of this unit the student should be able to record financial data for a single activity sole
trader using a double entry system, and discuss the function of various aspects of this accounting system.
To achieve this outcome the student will draw on key knowledge and key skills outlined in Area of Study 1.
Key knowledge
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applicable accounting principles and qualitative characteristics of accounting information
the elements of financial reports: assets, liabilities, owner’s equity, revenue and expenses
the two-fold effect of transactions on the accounting equation
source and business documents for a trading business, including cash receipts, cheque butts, sales and purchases
invoices, statements of account, memos
stock cards using the First In, First Out (FIFO) method for cash and credit purchases and sales of stock,
advertising use and drawings
the GST Clearing account
special journals:
– sales journal, all credit sales of stock
– purchases journal, all credit purchases of stock
– cash receipts journal, all receipts of cash with GST not applicable on discount expense
– cash payments journal, all payments of cash with GST not applicable on discount revenue
the use of the general journal to record infrequent non-cash transactions:
– establishing a double entry system
– correction of errors
– contribution of non-current assets by the owner at agreed value
– use of stock for advertising purposes
– withdrawals of stock by the owner with GST not applicable
– bad debts with GST not applicable
the distinction between historical cost and agreed value in relation to non-current assets
the general ledger using T-form accounts
the process of posting to the general ledger from the general journal and special journals on a monthly basis
the process of balancing the general ledger and subsidiary ledger accounts in preparation for the next reporting
period
reasons for using control accounts
control accounts for debtors, creditors and stock
subsidiary ledgers and schedules for debtors and creditors, with individual transactions posted to the subsidiary
ledger accounts on the date the transaction occurs
internal control procedures and practices of this accounting system
pre-adjustment trial balance.
Key skills
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use correct accounting terminology
identify, classify and record financial data
5 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan •
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explain and apply the qualitative characteristics and accounting principles underlying the recording of financial
data and presentation of accounting information
apply theoretical knowledge to simulated situations
explain the effect of financial transactions on the accounting equation
discuss the function of the various aspects of the accounting system for a single activity trading business.
AREA OF STUDY 2
Balance day adjustments and reporting and interpreting accounting information
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The preparation of financial reports at the end of the reporting period provides information for planning and decision
making by the owner of a small business. Students complete the accounting processes required at balance day and
apply the accrual method of accounting in the preparation of accounting reports. They identify the differences
between cash and profit and explain the implications of these differences when using reports to make decisions.
Outcome 2
On completion of this unit the student should be able to record balance day adjustments and prepare and interpret
accounting reports.
To achieve this outcome the student will draw on key knowledge and key skills outlined in Area of Study 2.
Key knowledge
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applicable accounting principles and qualitative characteristics of accounting information
the recording and reporting of balance day adjustments:
– straight-line method of depreciation
– stock loss or gain as revealed by a physical stocktake
– the asset approach to recording prepaid expenses with GST being recorded at the time of payment
– accrued expenses with GST being recorded at the time of payment
the payment of accrued expenses in the subsequent reporting period
closing entries for revenue and expenses in the general journal and in the general ledger
the preparation of the Profit and Loss Summary account with transfer of profit or loss to Capital account
transfer of Drawings to Capital account
post-adjustment trial balance
classified accounting reports:
– Cash Flow Statement using the transaction approach
– Income Statement
– Balance Sheet
the effect of transactions on the accounting equation and the accounting reports
the distinction between cash and profit.
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use correct accounting terminology
identify, classify and record financial data and report accounting information
explain and apply the qualitative characteristics and accounting principles underlying the recording of financial
data and the reporting and presentation of accounting information
apply theoretical knowledge to simulated situations
discuss the effect of financial transactions on the accounting equation and accounting reports
distinguish between cash and profit and explain the effect on accounting reports
prepare, explain and interpret accounting reports
discuss the function of the various aspects of the accounting system for a single activity trading business.
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6 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan WHAT IS ACCOUNTING?
Accounting is a process. It involves the recording and reporting of financial information to allow users of financial
information to make decisions.
This process consists of three stages – Inputs, Processing and Output.
Inputs
This is the raw data drawn from the day to day activities of the business
[The data is found in documents which provide evidence that a transaction has occurred.]
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Processing
At this stage, the data is sorted, classified and recorded.
The data found in documents is eventually recorded in Journals, the General Ledger, Subsidiary Ledgers and records and a Trial balance is prepared
Output
Information in the records are summarised in the financial reports
Financial reports that summarise the affairs of the business are prepared: the Statement of Cash Flows, Profit and Loss Statement and Balance Sheet.
THE ACCOUNTING STANDARDS
The Accounting Standards are a set of rules that govern the way in which financial reports are prepared so that
different financial reports are comparable. These standards have left us with 4 Qualitative Characteristics and 7
Accounting Principles that guide our recording and reporting.
Qualitative Characteristics of accounting information
Understandability
Information provided in financial reports must be understandable by users. Users of financial reports are assumed to
have a reasonable knowledge of accounting, and a willingness to study the information with reasonable diligence.
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Relevance
Reliability
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Information must be relevant to the decision-making needs of users. Information has the quality of relevance when it
influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or
correcting, their past evaluation. (AASB Framework, para. 26)
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Information must have the qualitative characteristics of reliability. This means it must involve:
• Faithful representation;
• Substance over form;
• Neutrality;
• Prudence; and
• Completeness.
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Comparability
Users must be able to compare the financial reports of a business from one period to the next in order to identify
trends and areas of concern, as well as assess performance.
7 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Exam Tip: Relevance and Reliability are more easily understood and students tend to use these as answers to examination questions relating to the qualitative characteristics. However, this is not always the best approach and students must be prepared to use the other characteristics in their responses as examiners have asked for this in the past. ACCOUNTING PRINCIPLES
Entity
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The business must be a separate accounting entity from its owner and all transactions between the owner and the
business must be clearly identified.
Going concern
It is assumed that the life of the business will be indefinite. This is so that a distinction can be made between assets,
which will provide benefit to future reporting periods, and expenses that are totally consumed within one reporting
period.
Reporting period
The ongoing life of a business is broken into regular intervals of time for the preparation of financial reports.
Exam Tip: The change to the examination format may mean that each question involves different lengths of time for the reporting period. It will be more important than before to read the question carefully to ensure the correct time period is used.
Monetary unit
All transactions should be recorded and reported in the currency of the country in which the business operates. This
allows for comparability and understandability.
Conservatism
It is acknowledged that gains will not be recognised until earned and losses will be recognised as soon as they are
likely to occur.
Historical cost
All transactions are recorded at their original purchase price. Therefore, items are shown in the accounting records at
their historical (original) price.
Consistency
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The accounting methods used by the business should be applied in the same manner from one reporting period to
another.
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8 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan REVIEW QUESTIONS/APPLICATION EXERCISE 1 – Introduction
Sportz Plus
Balance Sheet as at 30 June 2016
Equities Current Liabilities Accrued Wages Creditors Control GST Clearing Loan – ABC 3 400 22 300 31 900 2 400 60 000 1 000 16 100 4 700 5 000 26 800 D
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Assets Current Assets Cash at Bank Debtors Control Stock Control Prepaid Rent Expense Non‐Current Assets Motor Vehicle (at cost) Accumulated Depreciation Land & Buildings Accumulated Depreciation Total Assets Non‐Current Liabilities Loan – ABC Mortgage 45 000 (9 000) 310 000 (40 000) 306 000 366 000 25 000 170 000 195 000 Owners Equity Capital ‐ L Dean 144 200 Total Equities 366 000 Using the Balance Sheet above, explain how the four Qualitative Characteristics and seven Accounting
Principles are utilised.
The Accounting Elements
All financial transactions will impact upon the accounting elements. These elements form the basis of an accounting
system and can be defined as:
Assets
An asset is a resource controlled by the entity as a result of a past transaction and from which future economic
benefits are expected to flow to the entity.
Liabilities
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A liability is a present obligation of the entity arising from a past transaction, the settlement of which is expected to
result in an outflow of economic benefits from the entity.
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Owners Equity
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Owners Equity is the residual interest in the assets of the entity after deducting all its liabilities. i.e. OE = A – L. This
is the accounting equation from which we develop our accounting system. Because equity is seen as what is left of
the assets after deducting what is owed to outsiders (liabilities), the equation must always balance.
Revenue
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For the purposes of this study, revenue is inflows of economic benefits or savings in outflows in the form of increases
in assets or decreases in liabilities that lead to an increase in owner’s equity, except capital contribution.
Expenses
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Expenses are outflows of economic benefits or reductions in inflows in the form of decreases in assets or increases in
liabilities that lead to a decrease in owner’s equity, except drawings.
Exam Tip: These are textbook definitions for the Accounting elements and they must be known. However, most examination questions do not require a ‘full’ textbook definition. They require the definition to be modified so it relates to the specific Asset, Liability, Revenue, Expense or Owners Equity item being discussed. An example follows.
Below is an extract from an Income Statement:
9 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Less Expenses
Wages
Discount Expense
Advertising
Interest Expense
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700
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60 800
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When asked to explain why Discount Expense is reported as an expense for a business it might appear that
the textbook definition of Expenses may suffice. This definition is:
Expenses are outflows of economic benefits or reductions in inflows in the form of decreases in assets or
increases in liabilities that lead to a decrease in owner’s equity, except drawings.
However, in analysing exactly what a discount is, we can see that the highlighted terms in the definition are not
appropriate in this instance. A discount given to a Debtor reduces the amount of cash we will receive from that
Debtor. Therefore, the discount results in a reduction in inflows – less cash is received from the Debtor – and it results
in a decrease in Assets – the amount owed by the Debtor is decreased.
Exam Tip: In an examination situation, this question is likely to be worth two marks. A straightforward rote learned definition would see students only receive one mark because their definition would not be appropriate. By removing the highlighted terms in the definition, the full two marks would be awarded.
Business (Source) documents
To commence recording financial information we need to understand the structure of our accounting system. The
diagram below details our accounting system. At each stage through this Study Guide the diagram will appear to
remind students where we are in the accounting system and the purpose of the particular section being discussed.
To commence recording, a business requires reliable evidence of financial information. This reliable information is
found in the Documents prepared.
Financial information
Journals
Documents
* General Journal
* Special Journals
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Ledger Accounts
* Subsidiary records
Balance Day Adjustments
Closing the Ledger
Financial Reports
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Post‐
adjustment Trial Balance
Trial Balance
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* General Ledger
10 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Documents are the base for our accounting system. The Qualitative Characteristic of Reliability states that information
must have the qualitative characteristics of reliability. This means it must involve:
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Faithful representation;
Substance over form;
Neutrality;
Prudence; and
Completeness.
By using documents, a business has evidence of all transactions that occur. These documents provide material
evidence and should be free from bias.
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In Unit 3 there are six documents that may be used:
1.
2.
3.
4.
5.
6.
Cash Receipt;
Cheque Butt;
Sales Invoice;
Purchase Invoice;
Statement of Account; and
Memorandum (Memo).
Each of these documents can be linked to certain transactions and students must be aware of the type of transaction
that may be associated with a particular document. A summary of business documents and their transactions is
contained in the following table:
Document
Transaction
Example
Cash sale of stock
Receipt from Debtor
Receipt of Loan
Capital contribution
Proceeds from sale of NCA
Cash purchase of stock
Payment to Creditor
Repayment of Loan
Drawings
Cash Purchase of a NCA
Cash Expenses
Credit Sale of Stock
Credit purchase
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Credit Purchase of Stock
Credit Purchase of NCA
Credit Payment of an Expense
Memorandum
Non-cash internal
transaction by the
business
Statement of Account
Summary of
Transactions with a
Debtor/Creditor
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Bad Debts
Drawings of Stock or NCA
Stock Loss/Gain
Other Balance Day Adjustments
Contribution of NCA by the owner
Debtors Statement of Account
Creditors Statement of Account
Cheque Butt
All times a business
pays out cash
Sales Invoice
Credit sale of stock
Purchase Invoice
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All times a business
receives cash
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Cash Receipt
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In identifying the type of document being used students should:
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Identify the name of the business in the question
Identify the name of the business issuing the document (usually at the top of the document)
Identify the title of the document
11 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan REVIEW QUESTIONS/APPLICATION EXERCISE 2 – Accounting Elements
1. Explain how the use of documents improves the reliability of financial information.
2. Explain the circumstances that would see GST Clearing reported as a Current Asset.
3. Explain the difference between a Current and a Non-Current Asset.
4. Explain why assets and liabilities are classified in the Balance Sheet.
5. Explain what is meant by ‘.. as at ..’ in the title of the Balance Sheet.
6. Explain why the Loan may be reported as both a Current and Non-Current Liability.
7. Examine the document below and answer the questions that follow:
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Xenon Limited
43 Smith Road
Piermont
ABN: 45 175 527 078
Invoice: XL 28
Date: 8/08/16
Credit to: Allen’s Appliances
17 Winter Road
Samville
Item
Qty
Unit Price
GST
Total
Copper Kettles
SD Electric Frypans
4-Slice Toasters
20
20
10
$50
$40
$40
$5
$4
$4
$1100
$880
$440
Freight
Monthly Insurance charge
50
1
$2
$400
$0.20
$40
$110
$440
Invoice Total
What type of document is shown?
Who issued the document?
What type of transaction has occurred?
Who are ‘Allen’s Appliances’?
In which journal would the document be recorded?
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b.
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d.
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$2970
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The Unit 3 course requires students to record and report financial information for a ‘trading firm’. A trading firm is a
business that buys goods from a supplier and resells that stock to a customer at a higher price. The difference
between the price that stock was purchased for (cost price) and the price stock is sold for (selling price) is referred to
as the ‘mark-up’. Mark-up may be expressed as a percentage of cost or a fixed dollar value. These goods that are
bought and sold are referred to as Stock and will form the basis of much of the recording and reporting during your
studies.
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Mark-up may be calculated in one of two ways when expressed as a percentage:
Cost Price = Selling Price /1.markup
Selling Price = Cost Price x 1.markup
Thus if the mark-up on goods is 60%
Cost Price = Selling Price /1.6
Selling Price = Cost Price x 1.6
12 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Exam Tip: In an examination situation mark‐up may only be provided in the introductory information to a question. Students are advised to take note of this information as it may not be repeated further in the question yet may be needed to assist in responding to a question.
A trading firm will be required to record many different transactions relating to stock. These include the following:
Cash purchase of stock from supplier;
Credit purchase of stock from supplier;
Cash sale of stock to customer;
Credit sale of stock to customer;
Withdrawal of stock from the business by the owner;
Use of stock for advertising purposes through use as display items or as a donation of stock to
charities/sporting clubs/raffles;
Loss of stock due to a range of factors;
Gain of stock from a range of sources; and
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To assist a business in monitoring stock, its movement and cost, a business will adopt a stock recording system and a
cost assignment method. In Unit 3, all businesses will adopt the:
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Perpetual Inventory system – where a continuous record of all stock movements is kept. The cost price of all
stock is known and can be applied to all transactions.
First In, First Out (FIFO) cost assignment method – where all stock moves on the concept of ‘First In, First
Out’. The first stock purchased by the business (in) is the first stock to be sold (out).
Exam Tip: In the June 2010 examination students were asked 'Why busineeses adopt the FIFO cost assignment method'.Students must remember that FIFO is an assumption and it is used because it is often cheaper and easier to use and best resembles the desired flow of stock. It is not 100% accurate.
Recording stock transactions
Recording stock transactions involves the use of a number of different Journals, General Ledger accounts and the
Subsidiary record known as a Stock Card. A summary of stock transactions, their documents and the records used is
contained in the following table:
Transaction
Document
Cash Receipt
Credit Sale of Stock
Sales Invoice
Withdrawal of Stock by
Owner
Memorandum
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Sales Journal
Stock Control/Cost of Sales account
Debtors Control/Sales account
Stock Card
General Journal
Stock Control account
Drawings account
Stock Card
N
Cash Sale of Stock
O
TI
Purchase Invoice
Cash Payments Journal
Stock Control account
Bank account
Stock Card
Purchases Journal
Stock Control account
Creditors Control account
Stock Card
Cash Receipts Journal
Stock Control/Cost of Sales account
Bank/Sales account
Stock Card
U
IB
Credit Purchase of Stock
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









TR
Cheque Butt
IS
Cash Purchase of Stock
Record(s)
13 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Use of Stock for Advertising
Memorandum
Stock Loss
Memorandum
Stock Gain
Memorandum
General Journal
Stock Control account
Advertising account
Stock Card
General Journal
Stock Control account
Stock Loss account
Stock Card
General Journal
Stock Control account
Stock Gain account
Stock Card
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
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Exam Tip: Recording transactions into financial records is the basic skill involved in accounting. Practice in making such recordings is essential, as every examination will require students to undertake this basic recording to ensure students understand the fundamentals of the recording and reporting process. Examples of these recordings is set out below:
Allen Appliances: example of recording
Transactions for the month of January 2016 for Allen’s Appliances:
Jan 1
Purchased 20 units of the SD Electric Frypans @ $50 each (plus $5 GST each) on credit from Xenon Ltd [Inv
XL23].
Jan 4 Cash Sale of 5 SD Electric Frypans for $100 each (+ $10 GST each) [Rec. 1].
Jan 7 Cash Purchase of 10 SD Electric Frypans @ $50 each plus GST [Chq 101].
Jan 8 Took home 1 SD Electric Frypan [Memo 1].
Jan 12 Sold 3 SD Electric Frypans on credit to Rye Hospital for $100 each plus GST [Inv. AA1].
Jan 15 Donated 1 SD Electric Frypan to Seaford Cricket Club for their annual raffle [Memo 2].
Jan 31 Conducted a physical stocktake and found 19 SD Electric Frypans on hand.
The journal entries for these transactions are:
Purchases Journal
Date
2016
Creditor
Jan-01 Xenon Ltd
Stock
Control
1 000
Bank
550
Disc.
Rev
Creditors
Control
Cost of
Sales
250
Stock
Control
500
Sales
500
Sundries
GST
50
Wages
Sundries
GST
50
N
Sales Journal
Date
2016
Debtor
12-Jan Rye Hospital
Debtors
Control
O
TI
Cash Payments Journal
Date
Chq.
2016
Details
No.
07-Jan Stock
101
Disc.
Exp
U
IB
Bank
550
Total
Creditors
1 100
TR
Rec.
No.
1
GST
100
IS
Cash Receipts Journal
Date
2016
Details
04-Jan Sales
Inv.
No.
XL23
Inv.
No.
AA1
Cost of
Sales
150
Sales
300
GST
30
Debtors
Control
330
14 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan General Journal
Date
Details
General Ledger
2016
Debit
08-Jan
Drawings
Credit
Debit
Credit
50
Stock Control
50
Withdrew 1 SD Electric Frypan for own use
[ Memo 1]
15-Jan
Subsidiary Ledger
Advertising
50
Stock Control
50
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
Donated 1 SD Electric Frypan to Seaford Cricket
Club [ Memo 2]
Exam Tip: When recording stock transactions in the General Journal (as above), students are often asked to complete a narration. To gain the mark allocated for the narration students must include (1) the quantity of stock involved, (2) the type of stock involved, and (3) the document number. If any of these three pieces of information are missing, students are unlikely to be awarded the mark.
The ledger entries for these transactions are:
Stock Control
Date
1/1/16
7/1/16
Date
12/1/16
Cross-reference
Sales/GST Clearing
Cross-reference
Stock Control
Date
1 000
500
Cross-reference
4/1/16
8/1/16
12/1/16
15/1/16
Debtors Control
Amount Date
Cross-reference
Amount Drawings
Amount Date
50
Amount
Date
Cross-reference
Amount Cross-reference
50
Amount
O
TI
Stock Control
250
50
150
50
U
IB
15/1/16
Cross-reference
Cost of Sales
Drawings
Cost of Sales
Advertising
330
Advertising
Date
Amount TR
8/1/16
Creditors Control
Bank
Amount
IS
Date
Cross-reference
N
Cost of Sales
Date
Cross-reference
Amount
4/1/16
Stock Control
250
12/1/16
Stock Control
150
Date
Cross-reference
Amount
15 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Sales
Date
Cross-reference
Amount
Date
4/1/16
12/1/16
Cross-reference
Amount
Bank
Debtors Control
500
300
Cross-reference
Stock Control/
GST Clearing
Amount
Cross-reference
Stock Control/
GST Clearing
Amount
Bank
Date
Cross-reference
Sales/GST Clearing
Date
550
7/1/16
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
4/1/16
Amount
550
Creditors Control
Date
Cross-reference
Amount
Date
1/1/16
1 100
GST Clearing
Date
Cross-reference
4/1/16
Amount
Creditors Control
Bank
100
50
Date
Cross-reference
7/1/16
Amount
Bank
Debtors Control
50
30
The Ledger entries above conform to the double-entry method of recording that is the basis of Unit 3 recording. Each
transaction will have a two-fold effect on the Accounting Equation.
Stock cards and stock losses/gains
The Ledger accounts record the transactions according to how they have affected the accounting elements. We are
also required to record the movements of the individual line of stock. This is done via a subsidiary record – the Stock
Card. A Stock Card will record all the movements of a particular line of stock.
Example of a Stock Card: Allan’s Appliances
Stock Item: SD Electric Frypan
Details
20
50
Total
Cost
Qty
OUT
Unit
Cost
1 000
Total
Cost
BALANCE
Total
Cost
TR
Qty
IN
Unit
Cost
IS
Date
Qty
Unit Cost
20
50
1 000
15
50
750
25
50
1 250
Inv XL23
4/01/2016
Rec. 1
7/01/2016
Chq 101
8/01/2016
Memo 1
1
50
50
24
50
1 200
12/01/2016
Inv AA1
3
50
150
21
50
1 050
15/01/2016
Memo 2
1
50
50
20
50
1 000
5
10
50
50
250
500
U
IB
1/01/2016
O
TI
N
The Stock Card shows all movements of this line of Stock. It is recorded in date order.
Exam Tip: Entries in the Stock Card must be at the cost price. If the selling price is used for the sales entries, the figure in the Balance section would make no sense.
16 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Exam Tip: Information in the details column must show the document number. This provides a link back to the original source of the information. To use the title of the transaction – such as Credit Purchase for the entry on 1 January 2010 – is likely to see a 1 mark penalty applied.
At the conclusion of an exercise, or at the end of a reporting period, the information that is shown in the Stock Card is
checked for accuracy of recording. This is done using a physical stocktake, whereby the actual amount of stock on
hand is physically counted. The result is then compared with the figure shown in the Stock Card. From here there are
two possible outcomes:
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
1. The Physical count reveals an amount less than what is shown in the Stock Card. This is known as a Stock
Loss. It can occur due to:
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Theft of stock;
An undersupply of stock from the supplier;
An oversupply of stock to a customer;
A recording error in the Stock Card; and/or
An error on the original Invoice.
2. Physical count reveals an amount more than what is shown in the Stock Card. This is known as a Stock
Gain. It can occur due to:




An oversupply of stock from the supplier;
An undersupply of stock to a customer;
A recording error in the Stock Card; and/or
An error on the original Invoice.
Stock gain is recorded at the lowest value from the Stock Card if two cost prices of stock are provided. A Stock Loss is an Expense and a Stock Gain is Revenue and each will be reported as such in the Income Statement.
Exam Tip: In a situation where a business sells multiple lines of Stock, it is possible for there to be a Stock Loss in one line and a Stock Gain in another. In this situation, the Loss and the Gain are ‘netted’ off against each other and only the net result is reported. Students need to be aware that this is a possible occurrence and may surface in the examination.
In the example above, the stocktake revealed 19 units on hand and 20 units in the Stock Card. This business has a
Stock Loss and it must be recorded:
IS
General Journal
Details
General Ledger
2016
Stock Loss
Credit
50
Stock Control
50
Loss of 1 SD Electric Frypan
[Memo 3]
1/1/16
7/1/16
Creditors Control
Bank
1 000
500
Cross-reference
Amount 4/1/16
8/1/16
12/1/16
15/1/16
Cost of Sales
Drawings
Cost of Sales
Advertising
250
50
150
50
31/1/16
Stock Loss
50
N
Cross-reference
Stock Control
Amount Date
Credit
O
TI
Date
Debit
U
IB
31-Jan
Debit
Subsidiary Ledger
TR
Date
17 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Date
Cross-reference
31/1/16
Stock Loss
Amount Date
Stock Control
Cross-reference
Amount 50
Stock item: SD Electric
Frypan
Date
Details
20
50
Total
Cost
Qty
OUT
Unit
Cost
BALANCE
Total
Cost
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
Qty
IN
Unit
Cost
1 000
Total
Cost
Qty
Unit Cost
20
50
1 000
15
50
750
25
50
1 250
1/01/2016
Inv XL23
4/01/2016
Rec. 1
7/01/2016
Chq 101
8/01/2016
Memo 1
1
50
50
24
50
1 200
12/01/2016
Inv AA1
3
50
150
21
50
1 050
15/01/2016
Memo 2
1
50
50
20
50
1 000
31/01/2016
Memo 3
1
50
50
19
50
950
5
10
50
50
250
500
Recording with more than one cost price
The previous example involved a straightforward series of entries using FIFO. The recording becomes more difficult
when the business is dealing with a line of stock with 2 different cost prices.
Transactions for the month of March 2016 for Allan’s Appliances:
Mar
Mar
Mar
Mar
Mar
1
6
11
22
31
10 units of the SD Electric Frypans @ $50 each on hand.
Cash Sale of 7 SD Electric Frypans for $100 each plus GST [Rec. 12].
Purchase of 15 SD Electric Frypans @ $60 each (plus GST) on credit from Xenon Ltd [Inv XL46].
Sold 7 SD Electric Frypans on credit to Mead Restaurant for $110 each (plus $11 GST each) [Inv. AA11].
Conducted a physical stocktake and found 11 SD Electric Frypans on hand.
Cash Receipts Journal
Details
Sales
Disc.
Exp
Bank
770
Inv.
No.
XL46
Stock
Control
900
Debtors
Control
Cost of
Sales
350
Purchases Journal
Creditor
Xenon Ltd
GST
90
Creditors
Control
990
Inv.
No.
AA11
Cost of
Sales
370
Sales
770
GST
70
Debtors
Control
840
N
Debtor
Mead Restaurant
GST
70
O
TI
Sales Journal
Date
22-Mar-16
Sundries
U
IB
Date
11-Mar-16
Sales
700
TR
IS
Date
06-Mar-16
Rec.
No.
12
After these transactions, the Stock Card would appear as:
18 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan Stock item: SD Electric Frypan
Date
Details
Qty
1/03/2016
Balance
6/03/2016
Rec. 12
11/03/2016
Inv XL46
IN
Unit
Cost
Total
Cost
Qty
7
15
60
OUT
Unit
Cost
50
BALANCE
Total
Cost
350
900
3
4
50
60
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
22/03/2016
Inv AA11
390
Total
Cost
Qty
Unit Cost
10
50
500
3
50
150
3
15
50
60
1050
11
60
660
The Stock Card demonstrates the use of FIFO. The older stock (with a cost price of $50) is sold before the newer,
more expensive stock.
REVIEW QUESTIONS/APPLICATION EXERCISE 3 – Accounting for Stock
1. The following information relates to ‘Erin’s Exercise Bikes’ – a small business selling exercise
bikes and gym equipment:
Stock on Hand 1 April 2016:
Quantity
Cost Price
Excel Exercise Bike
12
$200
Elite Exercise Bike
15
$250
Equal Exercise Bike
10
$150
U
IB
TR
IS
Transactions for April 2016 were:
Apr 2
Sold 4 Excel Exercise Bikes for $400 cash plus GST (Rec 45).
Apr 5
Credit purchase of 10 Equal Exercise Bikes for $160 each plus GST from Get Fit Ltd
(Inv 98).
Apr 6
Cash sale of 2 Equal Exercise Bikes for $320 each (plus $32 GST each) (Rec 46).
Apr 11
Credit sale of 5 Elite Exercise Bikes to Core Gymnasium for $550 each including
GST (Inv EE32).
Apr 14
Took 1 Equal Exercise Bike home for own use (Memo 3).
Apr 17
Used 1 Elite Exercise Bike as part of a store display (Memo 4).
Apr 19
Sold 2 Excel Exercise Bikes for cash for $440 each including GST (Rec 47)
Apr 23
Credit sale to Victory Gym of 5 Excel, 5 Elite and 5 Equal Exercise Bikes. All items
sold at 100% mark up (Inv EE33).
Apr 27
Cash sale of 3 Equal Exercise Bikes for $320 each plus GST (Rec 48)
Apr 29
Credit purchase of 10 Excel and 10 Elite Exercise Bikes from Get Fit. Cost prices
were $220 (Excel) and $280 (Elite) each plus GST (Inv 105).
Apr 30
A Physical Stocktake revealed the following quantities of stock on hand:
Excel
11 units
Elite
14 units
Equal
8 units
Calculate the value of Stock on hand at 1 April 2016
Record the transactions into the Journals of Erin’s Exercise Bikes
Record the transactions into the Stock Cards for Erin’s Exercise Bikes
Calculate the value of Stock on hand at 30 April 2016
What is meant by the term ‘mark up’?
Explain how the concept of FIFO is demonstrated in the above transactions.
Calculate the total cost price of all stock sold during April.
Calculate the total value of all sales for the month of April.
Explain why the transaction on 17 April is treated as an expense.
Explain how a Stock Loss may have occurred for this business.
N
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
O
TI
Complete the following tasks:
19 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan RECORDING TRANSACTIONS – SPECIAL JOURNALS
Financial information
Journals
Documents
* General Journal
* Special Journals
D
LY R
N
O GO
PY IN
O T
C IN
W PR
IE R
EV FO
PR OT
N
Ledger Accounts
* General Ledger
* Subsidiary records
Trial Balance
Balance Day Adjustments
Closing the Ledger
Financial Reports
Post‐
adjustment Trial Balance
In the previous section we looked at recording transactions involving stock. Those transactions were recorded into
Journals. There are two broad groups of Journals used in Unit 3 Accounting – the General Journal and Special
Journals. Special Journals are used to group similar transactions together so the information about particular
transactions is stored in the same location. Special Journals also allow specialisation amongst staff as different staff
can be delegated to look after different journals. The journals also allow for the data to be summarised and provide a
daily detailed record of all transactions. The table below outlines the four Special Journals and the transactions that
are recorded in them:
Sales Invoice
Purchase Invoice


N
Sales Journal - records all
transactions where the
business sells Stock on credit
Purchases Journal - records all
transactions where the
business buys Stock on credit
O
TI
Cheque Butt
Transactions
Cash sale of stock
Receipt from Debtor
Receipt of Loan
Capital contribution
Proceeds from sale of NCA
Interest received
GST Collected
GST Refund
Cash purchase of stock
Payment to a Trade Creditor
Repayment of Loan
Drawings
Cash Purchase of a NCA
Cash Expenses
Cash Purchase of a CA
GST Paid
GST Settlement
Credit Sale of Stock
GST Earned
U
IB
Cash Payments Journal records all transactions where
the business pays out cash
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
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

TR
Document
Receipt
IS
Journal
Cash Receipts Journal records all transactions where
the business receives cash
Credit Purchase of Stock
GST Incurred
20 The CPAP Study Guide to VCE Accounting, 3rd Edition (2012) by Vicki Baron and Simon Phelan