Accounting Unit 3 Notes - ATARNotes

VCE Unit 3 Accounting
Summary Notes
May 2012
CHAPTER 1 – THE NATURE OF ACCOUNTING
Accounting Principles
Entity
The business has a separate identity to the owner of the business. As such, the business’
transactions and books are kept separate from those of the owner.
Going Concern
It is never assumed the business will close – it is instead assumed the business will have
infinity life.
Reporting Period
The life of the business is divided into equal periods of time to allow for reports to be
prepared as it is useless to only look at the businesses performance once the business
closes.
Historical Cost
Transactions are recorded at their original cost as recorded on a receipt or other source
document.
Conservatism
It is aimed to report the lowest amount of profit possible, by only showing gains that are
certain to happen, and losses that are probable to occur.
Consistency
Accounting methods are applied in the same manner each accounting period.
Monetary Unit
Accounting reports are prepared in the currency of where the report is being prepared.
QUALITIVE CHARASITICS OF ACCOUNTING

Relevance
Only relevant information to decision making is shown in accounting reports.
Reliability
Infomation that is free from bias and supported by source documents only is recorded, all
other information is excluded.
Comparability
All accounting reports are prepared in a manner that allows them to be compared to each
other.
VCE Unit 3 Accounting - 2012 Revision Notes (page 2)

Understandability
All accounting reports are prepared in a manner that allows them to be understood by the
user.

CHAPTER 4 – DOUBLE ENTRY ACCOUNTING
NAME OF LEDGER ACCOUNT

Date Particulars Amount Date Particular Amount
Apr 1 Opening Balance $ 5000 Apr 1
Apr 1 Cash at bank $ 4000
The left side of a ledger account is known as the debit side, and the right side is known as
the credit side.
Entries are made into ledger accounts in accordance with this table:
Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Owners Equity Credit Debit
Revenues Credit Debit
Expenses Debit Credit
The main set of ledger accounts known is known as the general ledger – this is where all
transactions are made. A second set of ledgers are used, known as the subsidiary ledgers –
these are used for recording individual debtors and creditors and are summarised into the
Debtors Control and Creditors Control accounts.
IN ALL CASES DEBITS MUST EQUAL CREDITS. NO EXCEPTIONS.
At the end of the accounting period, a ledger may either be footed or balanced (except
Revenue and Expense accounts).
To foot a ledger, the totals of the debit and credit side are added and written in pencil at the
bottom of the ledgers. The smaller figure is taken away from the larger number and written
and circled on the larger side.
At the end of the Accounting period, accounts are balanced in the following manner: A
entry is made on the smaller side to make both sides equal, equal to the difference between
the two accounts with the cross reference Balance, like this:
Cash at Bank
Apr 1 Balance 5000 Apr 1 Cash payments 2500
Apr 30 Cash receipts 10000 Apr 30 Balance 12 500
The ledgers are now totalled:

Cash at Bank
15 000 15 000
The balancing entry is then made on the opposite side to open the new Accounting period:
Cash at Bank
15 000 15 000
May 1 Balance 12 500
A trial balance can be completed once all accounts are balanced:

Trial Balance for Some Buisness – month ending 30 June 2012
Dr Cr
Cash at Bank 5 000
Bank loan 20 000
GST Clearing 200
Stock Control 4 000
Computer 2 000
Fittings 500
Capital 8 700
28 900 28 900
If Debits do NOT equal

Credits, a error has
been made.

CHAPTER 5 – CASH JOURNALS
Special Journals are used to group transactions of a similar nature together to aid in posting
to ledger accounts. There are:
 Cash Receipts Journal

 Cash Payments Journal
 Credit Sales Journal
 Credit Purchases Journal
In the Cash Receipts Journal, the name of the account to be credited for the transaction is
recorded in the Details column. The customers name is usually not recorded as the details
unless it is a credit sale or a payment from a debtor. The Cost of Sales column displays the
cost price of the goods sold, while the sales column displays the selling price, ex. GST. The
notation “CRS” may be used when transactions are posted from an electronic cash register
at the end of the day to indicate “Cash Register Summary”.
The Bank column should ALWAYS equal the total of all other columns.
The same process applies in the Cash Payments Journal.
At the end of the accounting period, the journals are totalled and posted to the relevant
general ledger accounts. The entries in Cash at Bank use the cross reference “Cash receipts”
/ “Cash Payments” and all other entries except Cost of Sales and Stock Control (in the CRJ)
use the cross reference Cash at Bank.
Where discounts are granted: The Bank column must equal Debtors less Discount Expense.
Where discounts are received: The bank column must equal Creditors less Discount
Revenue.

CHAPTER 6 – CREDIT JOURNALS
Operate under a simular nature to the cash journals.
When posting:
 For the Credit Sales journal, the cross reference to Debtors Control is Sales/GST and
a second double entry is made to Cost of Sales and Stock Control.
 For the Credit Purchases journal, the cross reference to Creditors Control is Stock
Control/GST Clearing.
These ledgers are posted on balance day to the general ledger. A record of each individual
transaction is also recorded, with the date as recorded in the journals to an account in the
subsidiary ledger for each individual debtor/creditor.
A creditors and debtors schedule can also be prepared using the information from these
journals and the subsidiary ledgers:
Creditors Schedule at 30 June 2012

$
Apple 500 000
Microsoft 250 000
Dell 20 000
780 000
Format identical for debtors schedule

CHAPTER 7 – GENERAL JOURNAL
Used to record all NON CASH transactions within the business, for example balance day
adjustments, drawings of stock, correction of errors, writing off bad debts and the like.
Examples:
Bad debt of J. Smith written off $500 on December 31, 2015.
Date Details General Ledger Subsidiary Ledger

Debit Credit Debit Credit
Dec 31 Debtors Control 500
Debtor – J. Smith 500
Bad Debts 500
Drawings of stock worth $50 on January 1, 2016

Jan 1 Stock Control 500
Drawings 500
Correction of error – Registration paid $250 however recorded as a payment of Wages

Dec 31 Wages 250
Registration 250
J. Smith deemed bankrupt – payment received of $0.05 in the dollar, remainder to be

written off

Dec 31 Debtors Control 500
Debtor – J. Smith 500
Cash at Bank 25
Bad Debts 475

CHAPTER 9 – STOCK
FIFO: First In First Out system
The first item of stock received is deemed to be the first item sold for accounting purposes.
Stock Card
Date Details IN OUT BALANCE

Qty Cost Value Qty Cost Value Qty Cost Value
When stock is purchased at different prices, the stock must be recorded in the same order it
is received in:

June 1 Inv. 201 1 500 500 1 500 500
June 2 Inv. 203 3 600 1800 1 500 500
3 600 1800
This way, when stock is sold, the correct value of the Cost of Sale can be recorded:

June 1 Inv. 201 1 500 500 1 500 500
June 2 Inv. 203 3 600 1800 1 500 500
3 600 1800
June 3 Rec. 42 1 500 500
3 600 1800
To calculate Cost of Sale, add the value of the Out column, not including stock involved in
Memos or otherwise not sold.
A memo can be recorded in the same manner as a sale.
A stock loss can be caused by undersupply to the business, oversupply to customers, theft,
recording errors in the stock card, double invoicing or when goods are omitted from the
stocktake. These are recorded at the cost price of the eariest stock received This is
recorded in the General Journal as having occurred:

Jun 30 Stock Control 600
Stock Loss 600
Stock loss – Memo 1
And is then recorded in the stock card:

June 1 Inv. 201 1 500 500 1 500 500
June 2 Inv. 203 3 600 1800 1 500 500
3 600 1800
June 3 Rec. 42 1 500 500
3 600 1800
June 30 Memo. 1 1 600 600 2 600 1200
A stock gain can be caused by oversupply by suppliers, undersupply to customers, recording

errors in stock cards or where double counting occurs in a stocktake. All stock gains are
recorded at the lowest cost price in the stock card since the last stocktake to comply with
the accounting principal of concertisim.
Again, this is recorded in the general journal:

Aug 30 Stock Control 600
Stock Gain 600
Stock loss – Memo 2
And then the stock card:

June 1 Inv. 201 1 500 500 1 500 500
June 2 Inv. 203 3 600 1800 1 500 500
3 600 1800
June 3 Rec. 42 1 500 500
3 600 1800
June 30 Memo. 1 1 600 600 2 600 1200
Aug 30 Memo. 2 1 600 600 3 600 1800

CLOSING THE GENERAL LEDGER – CHAPTER 10
At the end of the Accounting period, all accounts need to be closed in order to determine a
profit or loss for the period, and to prepare the ledgers for the new accounting period.
On Balance Day, all Revenue and Expense accounts need to be reset to zero so one
periods revenue and expenses are not mixed up with the next periods.
To do this, first all Revenue and Expense accounts (ie Cash Sales, Wages, Depreatiation)
have an equalling entry made, in a similar manner to balancing, with the cross reference
“P+L Summary”.
These entries need to also be made in the General Journal.
Example balances: Cash Sales $30,000, Credit Sales $2,000, Cost of Sales $14,000, Wages
$5,250, Advertising $3,000, Electricity $200, Insurance $500, Drawings $200
Date Details General Ledger Subsidiary

Ledger
Jun 30 Cash Sales 30 000
Credit Sales 2 000
Profit and Loss Summary 32 000
Closing entries
Jun 30 Cost of Sales 14 000

Wages 5 250
Advertising 3 000
Electricity 200
Insurance 500
Closing entries
Profit and Loss Summary

Jun 30 Expense accounts 22 950 Jun 30 Revenue accounts 32 000

A balancing entry then is made to Profit and Loss Summary to transfer the profit from Profit
and Loss Summary to Capital:

Aug 30 Profit and Loss Summary 9 050
Capital 9 050
Transfer of net profit
Profit and Loss Summary

Jun 30 Expense accounts 22 950 Jun 30 Revenue accounts 32 000
Jun 30 Capital 9 050
Drawings need to be transferred separately from Drawings to Capital:

Aug 30 Drawings 200
Capital 200
Transfer of drawings

CHAPTER 11 – INCOME STATEMENTS
An income statement is a Accounting report used to show the profit or loss for the
accounting period in question. Consider the following General Journal entries:
Date Details General Ledger Subsidiary

Ledger
Jun 30 Cash Sales 30 000
Credit Sales 2 000
Closing entries
Jun 30 Cost of Sales 14 000

Wages 5 250
Advertising 3 000
Electricity 200
Insurance 500
Closing entries
These entries can then be used to provide a report on how the business has made its profit
for the month of $9,050.
When evaluationg a net profit figure, a number of measures need to be considered, such as
the trend in regards to profit made, the profit budgeted for, the average for the industry
under consideration, and some anayltcal ratios exist.
When considering Cost of Goods Sold (COGS), this needs to include the costs included in
obtaining stock and preparing it for sale. For example, cartage inwards, buying expenses,
customs duties, and packaging expenses.
When discounts are given by a business:
 Discount Revenue should be reported under “Other Reveune” as it is not the main
way a business earns its revenue.
 Discount Expense should be reported under “Other expenses”.

Thus, a Income Statement based on the Closing Entries on the previous page would be:
Revenue
Cash Sales 30000
Credit Sales 2000 32000
Less Cost of Goods Sold

Cost of Sales 14000 14000
Gross Profit 18000
Less Other Expenses

Wages 5250
Advertising 3000
Electicity 200
Insurance 500 8950
Net Profit 9050

CHAPTER 12 – CASH FLOW STATEMENTS
A cash flow statement shows movements of CASH in and out of the business during an
accounting period, simular to a statement of receipts and payments. Under no
circumstances are credit transactions included on a CASH flow statement.
A cash flow statement is broken up into three sections:
Cash Flows from Operating Cash Flows from Investing Cash Flows from Financing
Activities Activities Activities
Cash flows from the Day to Cash flows from the Cash flows from changes to
Day activities of the firm – purchase and sale of non- the financing structure of the
for example sale of stock, current assets. business.
payment of wages
Inflows from cash sales (not Inflows from the sale of non- Inflows from capital
credit sales), commissions current assets contributions and bank loans
paid, GST received, debtor being taken out
payments
Outflows from wages and Outflows from the sale of Outflows from drawings and
other expenses, payments to non-current assets repayments
creditors and other day-to-
day payments.
A cash flow statement is always set out in the order “Cash Flows from Operating Activities”,
“Cash Flows from Investing Activities” and “Cash Flows from Financing Activities”.
(example next page)

Cash Flow Statement for year ending 30 June 2012
Cash flows from Operating Activities $ $
Collections from Customers:
Cash Sales 50,000
Collections from Debtors 25,000
GST Collected 5,000 80,000
Payments to suppliers and employees:
Cash purchases of Stock (15,000)
Wages (5,000)
Advertising (1,000)
Insurance (4,000)
GST Paid (2,000) (27,000)
Net cash provided by Operating Activities: 53,000
Cash flows from Investing Activities

Proceeds from sale of Shop Fittings 2,000
Payments for new Cash Register (5,000)
Net cash used in Investing Activities (3,000)
Cash flows from Financing Activities

Loan from NAB 20,000
Capital Contribution 3,000
Net cash provided by Financing Activities 23,000
Net increase in Cash Held 76,000
Cash held at the beginning of year 500
Cash held at end of year 76,500

CHAPTER 13 – STRAIGHT LINE DEPREATATION
Deprecation is the process used to match the expenses incurred by the use of non-current
assets to revenues earnt in an accounting period, to calculate a profit or loss.
The formula for straight line depredation is:
When the cost of an asset is calculated, the original cost (historical cost principal) and any
other cost incurred in preparing the asset for use in the business are considered. For
example, when purchasing a secondhand car without registration, the cost incurred in
obtaining a roadworthy certificate is considered to be part of the cost of the car. However,
the cost of petrol is not considered to be part of the cost.
When depretiation is recorded on balance day, an entry needs to be made into the
Depretiation of [asset] account (expense) and Accumulated Depreation of [asset] account
(negative asset). The following general journal entry is used:
Depreation of Computer, cost price $1500 with scrap value $200 and useful life 3 years:
(1500) – 200 / 3
1200 / 3
$400 per annuum or 26.33%
Date Particulars General Ledger Subsidiary Ledger

30 June Deprecation of Computer $400
Accumulated Depreciation $400
of Computer
When expense accounts are closed off to Profit and Loss Summary, the Depreciation
account (not accumulated depreciation) is closed off as this is an expense account:
Date Particulars General Ledger Subsidiary Ledger

30 June Deprecation of Computer $400
Profit and Loss Summary $400
The Accumulated Depretiation account, however, is merely balanced and carried over to the
next accounting period.

When the balance sheet is prepared, depreciated assets are displayed as follows:
Non-current assets
Computer $1 500
less Accumlated Depreciation 400
1 100
The original/historical cost of the asset is shown on all balance sheets for as long as the
asset is under the businesses control.
The Accumulated Depretiation figure, also known as the expired cost of the asset, shows all
depreation that has been accumulated since the asset was purchased by the firm.
The remainder is known as the book or carrying value (carrying value preferred) of the
asset.
Note that displaying deprecation on the Income Statement is acceptable, despite the lack of
reliable evidence as the demands of relevance outweigh the demands of reliability.
VCAA have also stated on a previous exam Assessors report that it is acceptable to
determine depreatiation for half a month if an asset was purchased in the vicinity of the 15 th
of the month.

CHAPTER 14 – BALANCE DAY ADJUSTMENTS
The life of the business is divided up into a series of reporting periods.
The problem is that not all financial transactions begin and end within the same period,
there are overlaps into other reporting periods. To account for these transactions in an
accrual accounting system, Balance Day Adjustments are made. This will also the Revenue
and Expense for the period to be calculated more accurately in the determination of Net
Profit.
For example:
Paid $5000 cash for insurance (one year) on January 1. This business uses June 30 as Balance
day.
Under accrual accounting: $2500 would be recorded as the insurance expense for this
accounting period as only half the insurance premium has been used up.
To record this, a balance day adjustment is required.
When the insurance bill is paid, the double entry on the debit side is made to an account for
the prepaid expense (ie prepaid insurance expense, prepaid advertising expense):
Prepaid Insurance expense

Jan 1 Cash at bank $5000
When on June 30, once a trial balance has been prepared, the amount of insurance that has
been used up needs to be calculated and the balance day adjustment made:

Jan 1 Cash at bank $5000 Jun 30 Insurance expense $2500
Insurance expense
Jun 30 Prepaid insurance $2500
expense
These are then treated like any other asset and expense account:

Jan 1 Cash at bank $5000 Jun 30 Insurance expense $2500
Jun 30 Balance $2500
$5000 $5000
Jul 1 Balance $2500
Insurance expense
Jun 30 Prepaid insurance $2500 Jun 30 Profit and Loss $2500
expense Summary
$2500 $2500

Jun 30 Insurance expense 2500
Profit and Loss Summary 2500
Where a expense is owing at the end of the accounting period on balance day, this is
handled as follows:
$200 advertising owing on June 30:
This is recorded into the expense account that it would usually be recorded into (Debit)
and a liability account, known as “Accured [...] expense”.
So:
Advertising expense
Jun 10 Cash at Bank $3000 Jun 30 P+L Summary $3200
Jun 30 Accured advertising $200
expense
$3200 $3200
Accured advertising expense

Jun 30 Balance $200 Jun 30 Advertising expense $200
$200 $200
Jul 1 Balance $200

Jun 30 Advertising expense 200
Accrued advertising expense 200
Adjusting entry for advertising owing
NB: In the previous example, assume a $20 GST Clearing debit entry is also made.
When the amount is paid off, a sundry transaction is recorded in the Cash Payments Journal
for the amount and the following double entry made:
Accured advertising expense

Jun 30 Balance $200 Jun 30 Advertising expense $200
$200 $200
Jun 29 Cash at bank $200 Jul 1 Balance $200
$200 $200
Adjusted trial balances
A Trial Balance is prepared after entering all financial transactions in the 5 jounrals then
posting to the general ledger. When you have checked that this has been done correctly the
BDAs are recorded. When the BDAs are posted to the ledgers an Adjusted Trial Balance is
prepared before preparing Financial Reports (Income Statement and Balance Sheet).

Accounting Unit 3 Notes - ATARNotes

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Accounting Unit 3 Notes - ATARNotes

Încărcat de

Drepturi de autor:

Formate disponibile

VCE Unit 3 Accounting

QUALITIVE CHARASITICS OF ACCOUNTING

VCE Unit 3 Accounting - 2012 Revision Notes (page 2)

VCE Unit 3 Accounting - 2012 Revision Notes (page 3)

NAME OF LEDGER ACCOUNT

IN ALL CASES DEBITS MUST EQUAL CREDITS. NO EXCEPTIONS.

The ledgers are now totalled:

VCE Unit 3 Accounting - 2012 Revision Notes (page 4)

A trial balance can be completed once all accounts are balanced:

VCE Unit 3 Accounting - 2012 Revision Notes (page 5)

If Debits do NOT equal

VCE Unit 3 Accounting - 2012 Revision Notes (page 6)

 Cash Receipts Journal

The same process applies in the Cash Payments Journal.

VCE Unit 3 Accounting - 2012 Revision Notes (page 7)

Operate under a simular nature to the cash journals.

Creditors Schedule at 30 June 2012

VCE Unit 3 Accounting - 2012 Revision Notes (page 8)

Bad debt of J. Smith written off $500 on December 31, 2015.

Date Details General Ledger Subsidiary Ledger

Drawings of stock worth $50 on January 1, 2016

Date Details General Ledger Subsidiary Ledger

Correction of error – Registration paid $250 however recorded as a payment of Wages

Date Details General Ledger Subsidiary Ledger

J. Smith deemed bankrupt – payment received of $0.05 in the dollar, remainder to be

Date Details General Ledger Subsidiary Ledger

VCE Unit 3 Accounting - 2012 Revision Notes (page 9)

FIFO: First In First Out system

Date Details IN OUT BALANCE

Date Details IN OUT BALANCE

Date Details IN OUT BALANCE

A memo can be recorded in the same manner as a sale.

VCE Unit 3 Accounting - 2012 Revision Notes (page 10)

And is then recorded in the stock card:

Date Details IN OUT BALANCE

A stock gain can be caused by oversupply by suppliers, undersupply to customers, recording

Again, this is recorded in the general journal:

Date Details General Ledger Subsidiary Ledger

And then the stock card:

Date Details IN OUT BALANCE

VCE Unit 3 Accounting - 2012 Revision Notes (page 11)

These entries need to also be made in the General Journal.

Date Details General Ledger Subsidiary

Jun 30 Cost of Sales 14 000

Profit and Loss Summary

VCE Unit 3 Accounting - 2012 Revision Notes (page 12)

Date Details General Ledger Subsidiary Ledger

Profit and Loss Summary

Drawings need to be transferred separately from Drawings to Capital:

Date Details General Ledger Subsidiary Ledger

VCE Unit 3 Accounting - 2012 Revision Notes (page 13)

Date Details General Ledger Subsidiary

Jun 30 Cost of Sales 14 000

When discounts are given by a business:

VCE Unit 3 Accounting - 2012 Revision Notes (page 14)

Less Cost of Goods Sold

Gross Profit 18000

Less Other Expenses

VCE Unit 3 Accounting - 2012 Revision Notes (page 15)

A cash flow statement is broken up into three sections:

(example next page)

VCE Unit 3 Accounting - 2012 Revision Notes (page 16)

Cash flows from Investing Activities