Study Guide 13-B3 Accounting Page 1
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Acknowledgement:
Mark Wilson has kindly given us permission to use some of the materials from his text
Accounting Alive for Study Guide purposes only.
NAME: ……………………………. STUDENT ID: …………………………….
ACCOUNTING
Study Guide 13-B3
Double Entry Accounting
(2014 VERSION 1)
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CONTENTS:
Double Entry Accounting
Chapter Title Page
1 Accounting the Language of Business 3
2 The General Ledger 11
3 Income and Expenses 23
4 Journals 49
5 Closing the General ledger 55
6 Depreciation and Disposal of Assets 62
7 Balance Day Adjustments 70
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Chapter 1
Accounting … ‘The Language of Business’
Contents 1.1 Introduction - What is Accounting?
1.2 Users of Accounting Information
1.3 Fundamental Qualitative Characteristics
1.4 The Accounting Process
1.5 Accounting Reports - Balance Sheet
1.6 Exercises for you to try.
1.1 Introduction: What is Accounting?
Definition:
Accounting is the process of identifying, measuring recording and communicating financial information
in order to permit informed decisions to be made by the users of the information.
Key Words:
Process: Organised, purposeful way of doing things
Identifying: Knowing, being aware
Measuring: Able to quantify, ‘how much’
Recording: Keeping information which can be referred to again
Communicating: To tell someone, impart news
Financial information: Related to money and the use of money
Accounting is about communicating financial information so that better decisions can be made.
Accounting involves not only the recording and reporting of financial transactions, but also the interpretation,
analysis, preparation and distribution of this information to the various users.
1.2 Users of Accounting Information:
Employees, unions: are interested in the operating results of the business in order to negotiate wages,
conditions.
Shareholders, owners: are interested in the past performance and current position of the business so
that they can determine how well the business has performed.
Taxation authorities and other government authorities require businesses to provide reports for each
financial year and to ensure the business pays the correct tax and economic growth can be measured
accurately.
Investors: are interest in predicting future benefits and financial risk of their investment.
Managers: are interested in how well the business is performing and its financial position. They make
daily decisions regarding the operation of the business.
Auditors: are interested in checking the accounts for accuracy in order to determine whether the
reports show a true and fair view of profits and financial position.
Creditors, Accounts Payable, lenders: want to know if they can extend credit to the business or
provide finance in the form of loans.
1.3 Fundamental qualitative characteristics of financial statements: Financial information must meet the qualitative characteristics of relevance and faithful representation.
Financial statements provide information that is useful for decision making.
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1.4 The Accounting process
1. Transaction
as evidenced by
2. Document
recorded in
3. Journals General Journal
Cash Receipts Petty Cash Book
Cash Payments
post totals to Credit Fees/Sales
Credit Purchases
Sales Returns & Allowances
Purchase Returns &
Allowances
4. Ledgers General
Subsidiary A/c Receivable
A/c Payable
foot ledgers and summarise in Inventory
Property, Plant
and Equipment
Register
5. Trial Balance
1. Balance Day Entries
&
Adjustments
General Journal
General Ledger
7. Adjusted Trial Balance
8. Closing the Ledger General Journal
General Ledger
9. Post-closing Trial Balance
10. Final Report Income Statement
Statement of Cash Flows
10A. Analysing 10B. Budgeting
& Interpretation & Planning for
of Reports the Future
Bank Reconciliation Statement
Balance Sheet
11. Opening Books for new
Accounting Period
- Opening entries
- Reversing entries
General Journal
General Ledger
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1.5 Accounting Reports – Balance Sheet
The owner of a business has invested time, effort and capital into his/her business. He/she will be particularly
interested in assessing the performance of the business, how the business is going, how profitable the
business is over a given accounting period or period of time.
The owner is also interested in the financial position of the business, does it have the ability to repay debts and
to survive over the long term, that is, for many years.
In order to assess the above, the owner/accountant prepares the following accounting reports:
Balance Sheet
Definition:
The Balance Sheet is a formal accounting document, showing the assets, liabilities and equity of a business at a
given date. It shows the financial structure of the business.
Definition:
An Asset is a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
Assets for a business include cash, bank, accounts receivable, inventory, vehicles, machines, buildings, land.
An asset is an item of value owned by the business.
Definiton:
A Liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
A liability for a business would be: bank overdraft, accounts payable, short term loan, mortgage. A liability is
what the business owes (must pay back) to other parties or businesses.
Definition:
Equity, is the residual interest in the entity’s assets after deducting its liabilities.
The capital account records increases in equity for a sole trader. The drawings account is debited when
the owner takes money or goods for personal use.
Classification of assets and liabilities: Assets and liabilities can be classified into current and non-current.
Definition:
Current assets are those assets which we expect to obtain a future economic benefit from in the next
accounting period only, usually one year.
The business expects to realise the asset, or intends to sell or consume it, in its normal operating cycle. NZ IAS 1 para 66
Note: inventory can be sold on credit, it does not have to turn into cash within the next reporting period to make it a
current asset.
Example: bank account, accounts receivable, inventory.
Definition:
Non-current assets are those assets which we expect to obtain a future economic benefit from for many
accounting periods, usually many years.
We do not expect to use up these assets or turn them into cash. We hold onto these assets and use them to earn
income for the business.
Example: vehicles, equipment, buildings, land.
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Definition:
Current liabilities are obligations must be met no more than twelve months after the reporting period.
They are amounts we owe and must repay in one year.
Example: bank overdraft, accounts payable, short term loans.
Definition:
Non-current liabilities – obligations that must be met more than twelve months after the reporting period.
They are amounts we owe and must repay but we have longer than one year to repay them.
Example: loan, mortgage.
What does the Balance Sheet show us?
The Balance Sheet shows us the basic Accounting Equation:
ASSETS = LIABILITIES + EQUITY
A = L + EQ
OR
EQUITY = ASSETS - LIABILITIES
EQ = A - L
Example: Balance Sheet
Information required to produce a Balance Sheet:
Dales Automotive Electrical
Account Balances as at 30 June 20X1
Assets Liabilities
Bank 6 800 Mortgage 25 000
Accounts Receivable*
Byrne
120
Accounts Payable*
Tway
790
Apex 540
Inventory 1 260 Equity
Motor Vehicles 4 680 Capital D. Dale ???
Land and Buildings 40 000
Note: The Mortgage is repayable at the rate of $3 000 a year.
* Accounts receivable is money owed to a business by its customers for goods and services sold on credit. Accounts
receivable is an asset because it represents future economic benefit for the business.
Accounts payable is the amount a business owes to its suppliers for the purchase of goods or services on credit. Accounts
Payable is a liability because the business has an obligation to pay the amount owing in the future.
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Dales Automotive Electrical
Balance Sheet
as at 30 June 20X1
Current Assets Current Liabilities
Bank 6 800 Accounts Payable: Tway 790
Accounts Receivable: Mortgage 3 000 3 790
Bryne 120
Apex 540 Non Current Liabilities
Inventory 1 260 8 720 Mortgage 22 000
Non Current Assets Property, Plant and Equipment
Equity
Capital D. Dale
27 610
Motor Vehicle 4 680
Land & Buildings 40 000 44 680 _____
$53 400 $53 400
1.6 Exercises for you to try: 1.6.1 Complete the following two tables by filling in the missing amounts:
ASSETS LIABILITIES EQUITY
$ $ $
i. 2,400 200
ii 3,000 1,560
iii 2,500 1,300
iv 10,000 5,250
v 2,000 3,000
vi 2,580 2,620
vii 25,500 12,750
viii 32,300 16,450
ix 28,500 16,321
x 30,596 15,678
1.6.2 Prepare the Balance Sheet of Burwood Real Estate on 30 September 20X1 from the following list of
assets and liabilities. Calculate equity by using the accounting equation.
Cash at Bank $11 600
Cash on hand 240
Commission receivable 25 000
Accounts Payable 2 600
Motor Vehicles 32 000
Office Furniture 2 400
Office Equipment 1 600
Inventory of Stationery 260
Loan from Finance Bank Ltd (due 10 August 20X5) 20 000
1.6.3 Prepare the classified Balance Sheet of F Devon, a doctor, who has the following assets and liabilities
on 30 June 20X1.
Cash on Hand $ 100
Cash at Bank 4 000
Subscription due to Medical Association 240
Owing to D Furness (Chemist) 90
Owing to Drug Supplies Ltd 1 800
Amounts owing by patients 3 600
Surgery Furniture and Fittings 2 200
Inventory of Drugs 400
Motor Car 8 200
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1.6.4 From the following information, prepare a Balance Sheet for UniversityTraining School as at
4 February 20X1.
Cash at Bank 2 000
Accounts Receivable 4 000
Accounts Payable 3 000
Office Equipment 10 000
Loan (due 20X8) 4 000
1.6.5 From the following information, prepare a Balance Sheet for Accountants Training School
as at 4 February 20X1.
Cash at Bank 4 500
Accounts Receivable 5 600
Accounts Payable 1 675
Office Equipment 11 250
Loan (due 20X9) 6 000
1.6.6 A Sweet operates the Warewood Entertainment Centre and at 31 December 20X1 had the
following assets and liabilities. Calculate equity and present his classified Balance Sheet
as at 31 December 20X1. $
Bank (overdraft) 2 700
Cash on hand 150
Cleaning materials on hand 100
Entertainment equipment 100 000
Ten Pin Supplies – loan ($5 000 repayable each year) 40 000
Land and buildings 240 000
Mortgage (due 20X3) 100 000
Restaurant equipment 20 000
Inventory of refreshments 8 900
Accounts Receivable Hawthorn Social Club 600
Burwood Social Club 200
Malvern Social Club 1 200
1.6.7 Alan Rankin, a carpenter, asks you to prepare a classified Balance Sheet for his business, Burwood
Extension Services, at 30 June 20X1. He supplies you with the following information:
$
Utility truck (used in business) 6 400
Trailer (used in business) 200
Motor car (used by family) 8 000
Building materials 1 200
Cash on Hand 80
Land and business premises 88 000
Land and private home 240 000
Shares in Hiway Ltd (private investment) 6 000
Mortgage on business premises (repayable at $3 000 a year) 30 000
Mortgage on private home (repayable at $1 200 a year) 15 000
Work-in-progress (partly completed extension for client) 6 000
Business equipment and tools 2 500
Amounts owing for work done 4 500
Business accounts payable 2 300
Business bank account (overdraft) 1 600
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1.6.8 State the effect of each of the following transactions on the accounting equation (Assets
Liabilities + Equity) of Zippie Taxi Trucks (Owner, T Samuel).
Set out your answer in a table as shown below. Do not complete the last column at present. It will be
completed later. The first transaction is done for you.
ZIPPIE TAXI TRUCKS
ACCOUNT CLASSIFICATION TABLE
FOR THE WEEK ENDED 5 APRIL 20X1
20X1
Apr 1 T. Samuel starts his business with $10,000 cash and Accounts Receivable $420.
The business buys a delivery van for $12 000 on credit from Trusty Cars Ltd.
2 The business pays $500 owing to accounts payable, A & J Traders.
3 T Samuel withdraws $2 000 to reduce his basic investment in the firm.
4 The business receives $420 from A Landy, an accounts receivable.
5 The business buys furniture for cash, $180, from Trendy Furnishings.
1.6.9
Prepare an Account Classification Table to show the effect of each of the following transactions on the
accounting equation (A = L + EQ), of T Viner, dentist for the week ended 6 April 20X1.
20X1
Apr 3 Deposited $5 000 in the business bank account to help finance the expansion of his
surgery.
4 Extended the premises at a cost of $12 000 to be paid to Peninsula Building Co within
6 months.
5 Bought additional surgery equipment for $2 000 cash.
6 Borrowed $4 000 from Medical Financiers Ltd.
1.6.10 State the effect of each of the following transactions on the accounting equation (A = L + EQ), of Express
Messenger Service (N Andrews, owner). Prepare an Account Classification Table for the week ended
5 May 20X1.
20X1
May 1 Andrews commenced business by depositing $2 000 in the
business bank account and bringing in his car valued at $4 500
2 Bought a van for $15 000 on credit from Fineway Motors
3 Paid Fineway Motors $1 000, the balance to be paid by 31 May
4 Sold old car for $4,500
5 Bought office equipment for cash $700
REVIEW
Accounting Elements are used to group the economic activities of an accounting entity. The first three
elements are:
Monetary Measurement concept: All transactions, assets, liabilities, incomes, expenses and equity are
recorded in a common dollar unit such as the $NZ.
DATE ACCOUNT TYPE +/-
20X1
Apr 1 Bank Asset +
Capital Equity +
Assets Liabilities Equity
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1.6.11 MODEL BALANCE SHEET
Hedley Caravan Park
Balance Sheet as at 31 March 20X1
Notes $NZ $NZ $NZ
Assets
Current Assets
Petty Cash Imprest 100
Bank 5,000
Accounts Receivable 10,767
Inventory 14,560
Accrued Income 613
Prepayments 100
Total Current Assets 31,140
Non Current Assets
Investments
Term Deposit 6,000
Property, Plant and Equipment 1
Total Carrying Amount 57,910
Intangible Assets
Goodwill 4,000
Total Non Current Assets 67,910
Total Assets 99,050
Less Liabilities
Current Liabilities
Accounts Payable 7,440
Accrued Expenses 140
Total Current Liabilities 7,580
Non Current Liabilities
Loan (9% due 20X5) 8,613
Total Non Current Liabilities 8,613
Total Liabilities 16,193
Net Assets $82,857
Equity
Opening Capital 96,200
Plus Profit 10,657
106,857
Less Drawings 24,000
Closing Capital $82,857
Notes to the Balance Sheet
1 Property, Plant and Equipment
Equipment Machinery Total
$NZ $NZ $NZ
Cost 8,600 70,000 78,600
Less Accumulated Depreciation 1,720 18,970 20,690
Carrying Amount $6,880 $51,030 $57,910
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Chapter 2
Recording transactions in the General Ledger
Contents
2.1 Double Entry Accounting
2.2 The General Ledger
2.3 Features of the General Ledger
2.4 The Chart of Accounts
2.5 Rules for Double Entry Accounting
2.6 Example
2.7 The Trial Balance
2.8 Exercises for you to try
2.1 Double Entry Accounting
A double entry system recognises the fact that each and every financial transaction will always affect at least
two items in the final reports.
Transaction:
A transaction is a business event that is expressed in money terms.
Cash Transaction:
Money is paid when the transaction occurs.
e.g. Sell equipment for $600 cash.
Credit Transaction:
Money is paid at a later date than the transaction.
eg Sell equipment for $600 to Traders Ltd on credit.
Measurement:
Transactions are usually measured using the Historical Cost Concept. Assets are recorded at their
price at the time of acquisition, that is at their original purchase price.
2.2 The General Ledger
The systematic recording of transactions in a ledger of accounts is called the General Ledger. Accounts can be
likened to separate note books in which we record changes that have affected assets, liabilities, equity, revenues
or expenses.
The entire group of accounts kept by a business is referred to as the 'ledger'.
The purpose of keeping a ledger is to enable us to calculate, at any given point of time, the balance in each
account which can be used to prepare the Income Statement and Balance Sheet.
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2.3 Features of the General ledger
Ledger accounts group together and summarise business transactions that affect a particular Income Statement
or Balance Sheet item.
The use of ledger accounts allows us to record (or process) many transactions quickly and efficiently before the
preparation of accounting reports.
For example, all transactions affecting the business bank account; cash coming in and going out of the business
will be put into a ledger account called “Bank”.
2.4 The Chart of Accounts
A ledger, as we have noted, is made up of accounts. The number of accounts found in the ledger will depend on
the size of the firm and the frequency and type of transactions. The larger the firm and the more frequent and
varied the transactions the greater the number of accounts needed. The problem is that the larger the ledger, the
harder it becomes to find accounts quickly. This can be solved by the use of some sort of index to accompany
the ledger.
Features of the chart of accounts
Each account has been classified into one of five main groups:
Assets, Liabilities, Equity, Income and Expenses. These groups have each been assigned a particular number
range, for example:
Current Assets (100-199)
Non Current Assets (200-299)
Current Liabilities (300-399)
Non Current Liabilities (400-499)
Equity (500-599)
Income (600-699)
Expenses (700-799)
Due to the small number of income and expense accounts no attempt has been made to classify them
further. They could, however, be grouped according to function, that is, distribution costs (700-719),
vehicle expenses (720-739), administrative expenses (740-759), occupancy expenses (760-779), and
finance costs (780-799).
The Chart of Accounts is an index of all accounts found in the ledger.
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The end result is that each specific account has been given an account number, for example accounts
receivable is account number 120. This tells us two things:
the accounts receivable account is a current asset because all current assets are numbered
between 100 and 199
where the accounts receivable account is located in the ledger. The number itself is listed on the
right side of the account.
Turner's Plumbing Services
Chart of accounts Current Assets 100 110 Cash at Bank
120 Accounts Receivable
130 Inventory
140 Accrued Income
150 Prepayments
Non-current assets 200 Investment Assets
210 Term Deposit
220 Shares in XYZ Ltd
Property Plant and Equipment
230 Motor vehicles
240 Equipment
250 Premises
Intangible Assets
280 Goodwill
290 Patents
Current Liabilities 300 310 Accounts Payable
320 Accrued Expenses
Non-current Liabilities 400 410 Loan, ANZ Bank
420 Mortgage
Equity 500 510 Capital, F Turner
520 Drawings
Income 600 610 Sales Revenue
611 Sales Returns and Allowances
620 Fees Revenue
630 Interest Income
640 Discount Received
650 Commission Income
Expenses 700 710 Purchases
711 Purchases Returns and Allowances
720 Advertising Expense
730 Commission Expense
740 Office Salaries Expense
750 Stationery Expense
760 Telephone Expense
770 Rates Expense
780 Interest expense
790 Discount Allowed
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2.5 Rules for Double Entry Accounting
Ledger recording is based on a widely accepted set of rules.
The left hand column of all ledger accounts is known as the DEBIT column and is abbreviated as “DR”.
The right hand column of all ledger accounts is known as the CREDIT column and is abbreviated as “CR”.
The ledger recording rules are derived (obtained) from the basic accounting equation:
A = L + EQ
It is commonly accepted that Assets increase on the debit side; that is, left hand side and decrease on the right
hand side.
Changes in Liabilities must be recorded on the opposite side to assets, in order to keep the accounting equation
in balance.
Liabilities increase on the credit side and decrease on the debit side.
Changes in Equity are recorded on the same side as Liabilities, again so the basic accounting equation remains
in balance.
A table can be set up to summarise our ledger recording rules:-
ASSETS
LIABILITIES + EQUITY
INCREASE
Debit
Credit
DECREASE
Credit
Debit
NOTE:
- Each ledger entry and transaction must follow the above rules
- For each transaction, the total value of debit side entries must equal the total value of credit side entries
Following the above rules will ensure that for each transaction, our accounting equation remains in balance.
This is essential for our “double entry” recording process to work properly and for the Balance Sheet to remain
“in balance”.
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2.6 Example:
20X1
July 1 Lee Lee Chan contributed cash of $27 000 to start her hairdressing salon called Trim
and Shape Beauty Salon.
Required: Enter the above transaction into an account classification table and record in the
General Ledger
TRIM AND SHAPE BEAUTY SALON
ACCOUNT CLASSIFICATION TABLE
FOR 1 JULY 20X1
DATE ACCOUNT TYPE +/- DEBIT/CREDIT
20X1
Jul 1 Bank Asset + Debit
Capital Equity + Credit
TRIM AND SHAPE BEAUTY SALON
GENERAL LEDGER
BANK 110
20X1 DEBIT CREDIT BALANCE
Jul 1 Capital 27 000 27 000 Dr
CAPITAL 510
Jul 1 Bank 27 000 27 000 Cr
2.7 The Trial Balance A Trial Balance lists all the ledger account balances. The total of the debit balances must equal the total of the
credit balances if the processing is correct.
The purpose of a Trial balance is to check that each transaction has been accurately recorded ie. the
two fold effect of each transaction. However, it is still possible that errors may have been made in
the recording of the transactions.
The following errors may have taken place despite the trial balance showing that total debit
balances equal total credit balances:
1. Complete omission of transactions.
2. Reversal of the recording of the transactions ie: the debit and credit entries reversed.
3. Transactions recorded twice.
4. Entering (called posting) of the transaction in the wrong account eg. Machinery account
debited instead of Office Equipment.
5. Wrong amounts entered, eg. Rent expense recorded in both bank account and rent account as
$400 instead of $600.
6. Compensating errors, eg. Wages overstated by $200 and rent understated by $200.
NB: The extraction of the trial balance is a necessary preliminary step prior to the preparation of
the Income Statement and Balance Sheet..
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2.8 Exercises for you to try:
2.8.1 L. Bow is a physiotherapist. He commenced business on 6 June 20X1 and the following trans-
actions occurred in the first half of the month. 20X1
June 6 L Bow deposited $30 000 in a bank account to start the practice.
7 Bought equipment worth $18 000 on credit from Medical Supplies.
8 Paid $2 400 cash for office furniture.
11 Paid Medical Supplies $8 000 on account.
12 L Bow decided to use his own car valued at $6 000 for business purposes.
14 Bought more equipment for cash $2 000.
15 Paid Medical Supplies a further $5 000 on account.
REQUIRED:
a. Complete the Transaction Analysis table below:
Assets = Liabilities+ Equity
20X1 Bank Equipment Office
Furniture
Motor
Vehicle
Accounts
Payable Capital
$NZ $NZ $NZ $NZ $NZ $NZ
Jun 6
7
8
11
12
14
15
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b. an Account Classification Table
c. Record the transactions in a three column ledger. Prepare your three column paper using the
Chart of Account numbers provided below.
L. BOW
General Ledger Accounts
Account Number Lines
Bank 110 6
Equipment 210 3
Office Furniture 220 2
Motor Car 230 2
Accounts Payable 310 4
Capital 510 3
d. Prepare a Trial Balance as at 15 June 20X1.
e. Prepare a Balance Sheet as at 15 June 20X1.
2.8.2 The Rock Shop is a business which sells guitars. The business Trial Balance as at
1 January 20X1 was as follows:
TRIAL BALANCE
As at 1 January 20X1
Bank 10 250 Accounts Payable – goods 1 150
Accounts Receivable 3 300 Accounts Payable – other 2 270
Equipment 35 000 Loan 4 800
Office Furniture 4 550 Capital ???
YOU ARE REQUIRED TO:
a. Enter these balances into 3-column ledger accounts – use the table below as a guide.
THE ROCK SHOP
Ledger Accounts
Account Number Lines
Bank 110 9
Accounts Receivable 120 3
Office Furniture 210 3
Equipment 220 4
Accounts Payable - Goods 310 3
Accounts Payable – Other 311 3
Loan 410 3
Capital 510 3
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b. Record the following transactions in the ledger for the month of January
c. Prepare a 2 column Trial Balance and a Balance Sheet as at 31 January 20X1.
Jan 2 Received $1 300 from accounts receivable
8 Paid Accounts Payable $750 for goods
9 Bought office furniture for cash $2 250
14 Sold equipment for cash $4 000
15 The owner invested $6 000 cash into the business
25 Repaid $1 000 off loan
28 Bought equipment on credit for $8 880
2.8.3 Taylors College is a business which provides education for international students. The business
Trial Balance as at 1 February 20X1 was as follows:
TRIAL BALANCE
As at 1 February 20X1
Bank 12 600 Accounts Payable – goods 2 000
Accounts Receivable 2 400 Accounts Payable – other 3 000
Equipment 20 000 Loan 3 000
Office Furniture 6 000 Capital ???
YOU ARE REQUIRED TO:
a. Enter these balances into 3-column ledger accounts – use the table below as a guide.
TAYLORS COLLEGE
Ledger Accounts
Account Number Lines
Bank 110 9
Accounts Receivable 120 3
Office Furniture 210 4
Equipment 220 3
Accounts Payable - Goods 310 3
Accounts Payable – Other 311 3
Loan 410 3
Capital 510 3
b. Record the following transactions in the ledger for the month of February 20X1.
c. Prepare a 2 column Trial Balance and a Balance Sheet as at 28 February 20X1.
Feb 3 Received $400 from accounts receivable
8 Paid Accounts Payable $1 000 for goods
9 Bought office furniture on credit $900
14 Bought equipment for cash $1 500
15 The owner invested $2 000 cash into the business
25 Repaid $1 000 off loan
28 Sold old office furniture for $300 cash
The Accounting Entity Concept states that the financial affairs of the business are kept separate and
distinct from the financial affairs of the owner.
Drawings are money or goods taken by the owner for personal use. Drawings decrease equity.
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2.8.4 The following balances are from the books of A Peacock who runs a business trading as
Fancyfree Decorators as at 30 September 20X1.
Bank 200 Accounts Payable 2,500
Inventory 4,000 Loan (due 31.1.20X5) 2,000
Accounts Receivable 750 Mortgage (due 20X2) 118,000
Premises 226,000 Capital ???
Fittings 1,500
Furniture 500
a. Calculate the capital of Fancyfree Decorators
b. Design a Chart of Accounts for Fancyfree Decorators
c. Enter the above balances in the general ledger. Make sure you label each account with its
correct number from your chart of accounts.
d. Prepare a Trial Balance as at 30 September 20X1.
e. Prepare a Balance Sheet as at 30 September 20X1.
2.8.5 M Campbell started a plumbing business. Record the following transactions in an Account
Classification Table and the ledger. Complete a Trial Balance as at 31 July 20X1.
20X1
July 29 M Campbell deposited $12 000 into a bank account to start the business of
Suburban Plumbing Services.
30 Purchased a panel van for $6 000 cash
Purchased plumbing equipment worth $800 on credit form McEwan Ltd
31 Bought tools for $100 cash
2.8.6 Record the following transactions in an Account Classification Table and the ledger
of R Fletcher, real estate agent. Prepare a Trial Balance as at 3 March 20X1.
20X1
March 1 R Fletcher commenced business by depositing $6 000 in the
business bank account and bringing in a car valued at $5 000
2 Office furniture was purchased for $350 cash
Office stationery was bought on credit from Northern Printers $200
3 Purchased a computer on credit from Oliver Ltd $4 000
2.8.7 The following is an analysis of the transactions to start the Peninsula Coaching
College of S Taylor. You are required to:
a. Explain the actual transactions
b. Record the analysed transactions in the ledger of Peninsula Coaching College
c. Prepare a trial balance at 5 August 20X1
Account Classification Table
Date Ledger Account Type +/- Debit/Credit Amount
20X1
Aug l Bank Asset Increase Debit 40 000
S. Taylor, Capital Equity Increase Credit 40 000
Study Guide 13-B3 Accounting Page 20
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2 Premises Asset Increase Debit 50 000
Bank Asset Decrease Credit 20 000
Mortgage Liability Increase Credit 30 000
3 Motor Vehicle Asset Increase Debit 7 000
Accounts Payable Liability Increase Credit 5 000
Bank Asset Decrease Credit 2 000
4 Classroom Furniture Asset Increase Debit
Accounts Payable Liability Increase Credit 10 000
5 Office Furniture Asset Increase Debit
Bank Asset Decrease Credit 1 000
2.8.8 Enter the following transactions in the ledger of R Martin (who is starting a gymnasium, Stretch Fitness
Centre), and prepare a trial balance at 4 June 20X1.
20X1
June 1 R Martin deposited $20 000 in the business bank account
Purchased a building for $135 000, paying $5 000 cash and the balance
on mortgage (repayable $6 000 per annum)
2 Bought equipment for $5 000 cash
3 Purchased office furniture for $500 cash
4 Borrowed $10 000 from National Finance Ltd
2.8.9 Explain the transactions that have been recorded below in the ledger of I. Green,
painter.
I. GREEN - PAINTER
GENERAL LEDGER
Bank 110
20X1
Jan 6 Capital I Green 10 000 10 000 Dr
7 Equipment 800 9 200 Dr
8 Motor Vehicle 5 000 4 200 Dr
Equipment 210
Jan 7 Bank 800 800 Dr
10 Accounts Payable 12 000 12 800 Dr
Motor Vehicles 220
Jan 8 Bank 5 000 5 000 Dr
Accounts Payable 310
Jan 10 Equipment 12,000 12 000 Cr
Capital I Green 510
Jan 6 Bank 10 000 10 000 Cr
Study Guide 13-B3 Accounting Page 21
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2.8.10
Enter the following transactions in the ledger of R Pollock, dentist.
Prepare a Trial Balance as at 9 May 20X1
Prepare a Balance Sheet as at 9 May 20X1
20X1
May 5 R Pollock deposited $120 000 in the business bank account to commence
practice
6 Bought premises worth $136 000 by paying a deposit of $10 000 and the
balance on mortgage from the Fidelity Loan Co.
7 Purchased surgery equipment on credit from Dental Supplies Ltd $2 500
8 Bought office equipment and furniture for $1 000 cash
9 Paid Dental Supplies Ltd $500 on account
2.8.11
Record the following transactions in the ledger of M McKenzie, owner of a child
minding centre (Kiddytime Centre)
Prepare a Trial Balance at 8 August 20X1
Prepare a Balance Sheet at 8 August 20X1
20X1
Aug 4 M McKenzie deposited $50 000 in the business bank account
Bought premises worth $138 000 on a deposit of $20 000 and
the balance payable to Ace Realty Co in 3 years
5 Purchased playground equipment on credit from Playcraft Ltd $3 000
6 Bought furniture and fittings for $3 000 cash
7 Bought a mini-bus costing $8 000 from Eastside Motors on terms
of $4 000 cash deposit and the balance payable over 2 years
8 Paid Playcraft Ltd $1 000 on account
2.8.12
Enter the following in the General ledger of A Norris who is starting a business called
Guardian Security Services.
Prepare a Trial Balance at 10 April 20X1.
Prepare a classified Balance Sheet at 10 April 20X1.
20X1
Apr 2 A Norris deposited $100 000 in a bank account to start the business
3 Purchases premises worth $120 000 from National Investments on
$60 000 deposit and the balance payable over 5 years
3 Borrowed $40 000 repayable in 2 years, from the Australian Finance Co
6 Bought cars for $55 000 cash
7 Purchased uniforms on credit from Custom Tailors $2 800
8 Purchased office furniture for $2 000 cash
10 Paid Custom Tailors $1 000 on account
Study Guide 13-B3 Accounting Page 22
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2.8.13 The following trial balance was extracted from the ledger of R Lehman, caravan-park operator,
at 30 June 20X1.
Holiday Park (R Lehman, proprietor)
Trial Balance as at 30 June 20X1
Brighton Travel Club 500 Capital, R Lehman 228 000
Land 30 000 Mortgage (due 20X5) 136 000
Buildings 295 000 Accounts Payable 2 300
On-site caravans 24 000 Bank 1 200
Motor vehicle 15 000
Laundry equipment 3 000
$ 367 500 $ 367 500
Enter the account balances, listed in the trial balance above, in the ledger of Holiday Park
Enter the transactions below in the ledger and extract a trial balance for Holiday Park at 5 July
20X1
20X1
July 1 Received $500 from Brighton Travel Club in full settlement of
their account
2 Paid Accounts Payable $200 on account
3 R Lehman invested another $4 000 cash in the business
4 Bought $300 refreshments on credit
Prepare a classified Balance Sheet at 5 July 20X1.
2.8.14 A Searle operates a tennis ranch and the following is the Trial Balance as at 31 December 2011.
Southport Tennis Ranch (A.Searle, proprietor)
Trial Balance as at 31 December 20X1
Bank 2 500 Accounts Payable 2 100
Accounts Receivable 100 Loan (due 20X5) 3 000
Equipment 2 500 Mortgage due (20X9) 60 000
Land 55 000 Loan (due 20X6) 15 000
Tennis courts 20 000
Buildings 120 000 Capital - A. Searle 120 000
$ 200 100 $ 200 100
Enter the account balances, listed in the Trial Balance above, in the ledger of Southport Tennis
Ranch.
Record the following transactions in the ledger and prepare a Trial Balance and a Balance Sheet as
at 5 January 20X1.
20X1
Jan 2 Paid accounts payable $1 800 on account
3 Received $100 owing by customer in full settlement
4 Bought more equipment for $1 500 cash after arranging for
overdraft facilities at the bank
5 A Searle decided to use his car, worth $4 000, for business
purposes
Study Guide 13-B3 Accounting Page 23
You are learning from a Taylors Study Guide.
Chapter 3
Income and Expenses
Contents 3.1 Income Recognition
3.2 Expense Recognition
3.3 Accrual Basis Accounting
3.4 Expanded Rules for Double Entry Accounting
3.5 Illustrative Exercise
3.6 Exercises for you to try
3.7 Trading Statement
3.8 Accounting for Sales Revenue and Purchases Returns
3.9 Classification of Expenses
3.10 Model Income Statement
3.11 Exercises for you to try
3.1 Income Recognition
Income is the money earned by a business for selling goods or providing services, eg Sales, Fees.
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements
of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions
from equity participants. Eg Sales Revenue, Fees Revenue
Criteria for Income Recognition
Income shall be recognised in the determination of the results for the reporting period, when and only
when:
It is probable that the inflow or other enhancement of assets or decreases in liabilities has
occurred and
An increases in future economic benefits related to an increase in an asset or decrease of a
liability has arisen that can be can be measured with reliability.
3.2 Expense Recognition
Expenses are the costs a business must pay in the process of earning income, eg wages.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants. e.g. wages expense.
Criteria for expense recognition
Expenses shall be recognised in the determination of the result for the reporting period, when and only
when:
The decrease in equity must be probable.
The consumption or loss of service potential or future economic benefits can be measured with
reliability
3.3 Accrual Basis Accounting
The Accrual Basis concept states that the effects of transactions and other events are recognized when
they occur and are reported in the financial statements of the periods to which they relate. Income is
recognized when it is earned and expenses are recognized when they are incurred whether
or not cash has been received or paid.
Profit = Income earned - Expenses incurred
An Income Statement is a financial statement that measures an accounting entity’s financial
performance over a specific accounting period. It informs the owner if the business has made a profit
or loss.
Study Guide 13-B3 Accounting Page 24
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Example:
The Shiny Window Service is a business run by Chris Kleer. Chris advertises in the local press and most
of the work is done for local firms. He receives enquiries via his car phone or his wife who works from
home and maintains the accounts. Chris visits the proposed jobs and prepares quotes. If accepted, he
then compiles an order for work to be done which is then authorised by his clients. He invoices* his
clients when a job takes place. About 60% of his clients accept the 14 day credit terms he offers. Those
who pay by cash immediately obtain a 5% discount and he issues receipts at this time.
We can show the above in a flow diagram.
Advertise
Enquiry made
Quotes given
Job accepted
Job completed
Invoice prepared
Money received
Receipt sent
There are a number of possible revenue recognition points in this flow diagram.
If we delay recording the job until cash is received then the cash method of recognition of a transaction
is being used.
However, if we are reasonably certain that payment will be received, then we would record the job at
time of invoice preparation. If this was done then we would be using the accrual method of
recognising a transaction.
* An invoice is the source document that provides the original record of a credit transaction.
a. Invoices sent or issued record the amounts the customers owe to the business. According to the
Accrual Basis concept, the income can now be recorded as it has been earned.
Accounts Receivable account is debited to recognise an asset.
b. Invoices received record amounts the business owes to others. For example, received an invoice
for van repairs. According to the Accrual Basis concept, the expense can be recorded as it has
been incurred.
Accounts Payable account is credited to recognize a liability.
Study Guide 13-B3 Accounting Page 25
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3.4 Expanded Rules for Double Entry Accounting
ASSETS + EXPENSES
LIABILITIES + EQUITY + INCOME
INCREASE
Debit
Credit
DECREASE
Credit
Debit
3.5 Illustrative Exercise:
L Mann started the Hitone Cleaning Service by depositing $5 000 in a business bank account on
10 August 20X1. Your teacher will help you to complete this illustrative exercise as a model
for your future exercises.
a. Prepare an Account Classification Table
b. Record the following transactions in the ledger of Hitone Cleaning Service.
c. Prepare a trial balance at 24 August 20X1.
d. Prepare an Income Statement for the 2 weeks ended 24 August 20X1.
e. Present a Balance Sheet as at 24 August 20X1.
20X1
Aug 10 Deposited $5 000 in the business bank account.
Paid for advertising $50 cash.
11 Bought a panel van from Richmond Motors for $6 500 paying
$2 000 cash deposit.
Purchased cleaning equipment on credit for $1 000 from Delta
Equipment Ltd.
12 Banked cleaning fees $200
13 Bought cleaning material $30 cash
14 Banked cleaning fees $350
Paid advertising $50 cash
17 Withdrew $50 cash for private use
18 Banked cleaning fees $250
19 Paid petrol $10 cash
Charged Hillview Hospital for cleaning $250
20 Banked cleaning fees $300
21 Paid wages $80 cash
24 Withdrew $50 cash for private use.
HITONE CLEANING SERVICE
ACCOUNT CLASSIFICATION TABLE
FROM 10-24 AUGUST 20X1
Date Account Type +/- Debit/Credit
20X1
Aug 10 Bank A + Debit
Capital EQ + Credit
Advertising Expense
Bank
11 Van
Bank
Accounts Payable
Study Guide 13-B3 Accounting Page 26
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Equipment
Accounts Payable
12 Bank
Cleaning Fees
13 Cleaning Materials Expense
Bank
14 Bank
Cleaning Fees Revenue
Advertising Expense
Bank
17 Drawings
Bank
18 Bank
Cleaning Fees Revenue
19 Petrol Expense
Bank
Accounts Receivable
Cleaning Fees Revenue
20 Bank
Cleaning Fees Revenue
21 Wages Expense
Bank
24 Drawings
Bank
HITONE CLEANING SERVICE
GENERAL LEDGER
Bank 110
Accounts Receivable 120
Study Guide 13-B3 Accounting Page 27
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Van 210
Equipment 220
Accounts Payable 310
Capital 510
Drawings 520
Cleaning Fees Revenue 610
Advertising Expense 710
Cleaning Materials Expense 720
Wages Expense 730
Petrol Expense 740
Study Guide 13-B3 Accounting Page 28
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HITONE CLEANING SERVICE
TRIAL BALANCE AS AT 24 AUGUST 20X1
$NZ $NZ
Bank
Accounts Receivable
Van
Equipment
Advertising Expense
Cleaning Materials Expense
Wages Expense
Petrol Expense
Drawings
Accounts Payable
Capital
Cleaning Fees Revenue
Hitone Cleaning Service
Income Statement
For the period ended 24 August 20X1
$NZ $NZ
Cleaning Fees Revenue
Less Expenses
Advertising Expense
Cleaning Materials Expense
Wages Expense
Petrol Expense
TOTAL EXPENSES
PROFIT
Hitone Cleaning Service
Balance Sheet as at 24 August 20X1
$NZ $NZ $NZ
Study Guide 13-B3 Accounting Page 29
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3.6 Exercises for you to try
3.6.1 Analyse the following transactions of H King, pleasure-boat operator, in an account
classification table before recording in the ledger accounts.
20X1
March 15 H King banked $1 000 takings after a holiday weekend
3.6.2 M Yates operates a merry-go-round. Analyse the following transactions in an account
classification table before entering them in the ledger accounts.
20X1
May 1 Bought merry-go-round for $5 000 cash
2 Banked takings $100 Paid wages $25
3.6.3 A Bright started a lawn-mowing service. Analyse the following transactions in an account
classification table before entering them in the ledger accounts.
20X1
July 29 A Bright deposited $300 into the business bank account and decided to
use his own utility (value $4 500) in the business
Bought a motor mower for $180 cash
30 Banked $40 lawn-cutting fees
Bought petrol $15 cash
31 Banked $50 cutting fees
3.6.4 Collins operates the Ace Driving School transactions for the week ending 8 November 20X1
were:
20X1
Nov 3 Bought petrol $20
Banked $50 received from students
4 Banked $45 received from students
5 Bought petrol $22, tyres $45
6 Banked $68 received from students
7 Paid wages $80
8 Banked $110 received from students
Enter the above transactions in the ledger of Ace Driving School.
Matching Costs with Income Concept:
The Matching Costs with Income Concept states that profit is determined by matching the expenses incurred
against the income earned in an accounting period.
Study Guide 13-B3 Accounting Page 30
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3.6.5 The following is an analysis of the transactions to start the swimming coaching business,
Poolside Coaching, of R Wood.
Analysing Chart
Date Ledger Account Type Increase or Debit or Amount
Decrease Credit
20X1 $ $
June 10 Bank Asset Increase Debit 5 000
Capital Equity Increase Credit 5 000
11 Pool & Premises Asset Increase Debit 25 000
Bank Asset Decrease Credit 4 000
Mortgage Liability Increase Credit 21 000
12 Bank Asset Increase Debit 500
Fees Revenue Income Increase Credit 500
Norwood High School Asset Increase Debit 110
Fees Revenue Income Increase Credit 110
13 Bank Asset Increase Debit 300
Fees Revenue Income Increase Credit 300
14 Wages Expense Expense Increase Debit 100
Electricity Expense Expense Increase Debit 50
Bank Asset Decrease Credit 150
You are required to:
a. write down the actual transactions
b. record the analysed transactions in the ledger of Poolside Coaching
c. prepare a trial balance at 14 June 20X1
3.6.6 R.Baron established an aircraft charter service.
a. Record the following transactions in the ledger of Stratos Air Services.
b. Prepare a trial balance at 14 July 20X1.
c. Prepare an Income Statement for the 2 weeks ended 14 July 20X1.
d. Comment on the profitability of R. Baron's investment. What other information would
assist you in your assessment of the profitability of the business?
20X1
July 3 R Baron deposited $20 000 in the business's bank account to start business
Bought a Piper Commanche for $38 000 from Laverton
Aircraft Co, paying $16 000 cash deposit and the balance payable in 2 years
Paid hangar rent $150
4 Paid advertising $200
5 Banked charter fees $250
Banked charter fees $400
7 Paid fuel account $ 100
10 Banked charter fees $850
Paid hangar rent $150
Invoiced Castle Hill Mining Co $350 for charter fee
11 Banked charter fees $ 100
Paid aircraft maintenance $350
12 Paid aircraft landing fees $200 and R Baron's personal insurance $50
Study Guide 13-B3 Accounting Page 31
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13 Banked charter fees $1 000
Purchased office furniture $750 on credit from Atlas Furniture Co
14 Banked charter fees $100
Paid fuel account $230
Paid aircraft maintenance $450
3.6.7 B Child commenced the Stork Nappie Service on 11 October 20X1.
a. Record the following transactions in the ledger of Stork Nappie Service.
b. Prepare a trial balance at 24 October 20X1.
c. Prepare an Income Statement for the 2 weeks ending 24 October 20X1.
d. Prepare a Balance Sheet as at 24 October 20X1.
d. Comment on the profitability of B Child's investment.
e. Comment on the short-term financial position of Stork Nappie Service
20X1
Oct 11 Started the Stork Nappie Service by bringing in cash $150 000, delivery van
$6 000
Paid rent $200 cash
Bought $6 000 worth of nappies on credit from Cottonweave Ltd
12 Paid advertising $200 cash
Bought laundry supplies $100 cash
Bought laundry equipment worth $12 000 from Thor Industries, paying $7 000
cash and the balance payable in 12 months
13 Banked receipts $200
Paid office expenses $30
14 Banked receipts $120
15 Banked receipts $150
Received an invoice from Clark Motors for delivery van repairs $210
Withdrew $100 for personal use
18 Banked receipts $170
Paid rent $200 and paid advertising $250
19 Paid Cottonweave Ltd $3 000 on account
20 Banked receipts $250
Paid vehicle expenses (2 tyres) $100
21 Banked receipts $300
Paid wages $180
22 Banked receipts $320
24 Sent invoice to St Mary's Babies Home for $350
Account Lines Account Number
Bank 21 110
Accounts Receivable 2 120
Delivery Van 2 210
Laundry Equipment 2 220
Accounts Payable 6 310
Capital 3 510
Drawings 2 520
Fees 9 610
Nappies Expense 2 710
Rent Expense 3 720
Advertising Expense 3 730
Vehicle Expenses 3 740
Wages Expense 2 750
Office Expenses 2 760
Laundry Supplies Expense 2 770
Study Guide 13-B3 Accounting Page 32
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3.6.8 M.Franklin operates an advertising agency and his Balance Sheet as at 30 June 20X1 was:
Slick Advertising Agency (M.Franklin, proprietor)
Balance Sheet as at 30 June 20X1
Current Assets $ $ Current Liabilities $ $
Bank 5 000 Accounts payable
Accounts Receivable Hanson & Duke 1 000
Peerage Ltd 15 000 Non Current Liabilities
Baton Traders 5 000 25 000 Loan (due 20X5) 10 000 11 000
Non Current Assets
Property, Plant and Equipment Equity
Motor vehicle 12 000 Capital – M Franklin 30 000
Equipment 20 000 32 000 plus Profit 16 000 46 000
$ 57 000 $ 57 000
a. Enter the account balances (above) in the ledger of the Slick Advertising Agency.
b. Record the following transactions in the ledger.
c. Prepare a trial balance at 14 July 20X1.
d. Prepare an Income Statement for the 2 weeks ended 14 July 20X1.
e. Present a Balance Sheet as at 14 July 20X1.
20X1
July 1 Received $4 000 from Peerage Ltd on account
2 Paid rent $500, cleaning $100
3 Invoiced APC Industries $6 000 for a TV commercial
4 Paid Hanson & Duke $1 000
5 Paid models' fees $600
Bought equipment $1 000 on credit from Phillips & Co.
8 Invoiced Glamour Cosmetics $750 for magazine advertisements
9 Paid rent $500, cleaning $100
10 Invoiced Macrob Confectionery $5 000 for a TV commercial
11 Received $3 000 from Baton Traders on account
12 Paid wages $4 000
14 Withdrew $200 computer for personal use
Contract for a $4 000 TV commercial signed with Seagull Outboards
Account Lines Account Number
Bank 12 110
Accounts Receivable 7 120
Motor Vehicles 2 210
Equipment 4 220
Accounts Payable 4 310
Loan 2 410
Capital 2 510
Drawings 2 520
Fees 4 610
Rent 2 710
Cleaning Expenses 3 720
Models’ Expense 2 730
Wages 2 740
Study Guide 13-B3 Accounting Page 33
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3.6.9 M Jenkins operates the Timber Ridge Bus Service and her assets and liabilities
at 1 April 20X1 are as follows:
Timber Ridge Bus Service (proprietor, M.Jenkins)
Balance Sheet as at 31 March 20X1
Current Assets $ $ Current Liabilities $ $
Bank 6 000 Accounts Payable
Accounts Receivable Drayton & Sons 500
Education Dept 5 500 Baynes Ltd 2 000 2 500
11 500
Non Current Assets Non Current Liabilities
Property, Plant and Equipment Loan (Ford Credit) 24 000
Motor Vehicles 58 000 Mortgage (due 20X5) 15 000 39 000
Office Equipment 1 500 Equity
Land & Buildings 43 000 102 500 Capital – M Jenkins 50 000
plus Profit 27 500
77 500
less Drawings 5 000 72 500
$ 114 000 $ 114 000
a. Enter the account balances (above) in the ledger of Timber Ridge Bus Service.
b. Record the following transactions in the ledger and extract a trial balance at
30 April 20X1.
20X1
Apr 2 Banked fares $150
5 Banked fares $720
6 Invoiced the Education Department for school-bus services $250
M Jenkins withdrew $100 for personal use
9 Banked fares $180
11 Received $3 000 from Education Department on account
12 Banked fares $230
Paid Drayton & Sons $500
13 Paid wages $800, tyres $220
Invoiced the Education Department for school-bus services $280
Banked fares $210
15 Invoice received from Ampol Petroleum on delivery of $200 worth of petrol
18 Banked fares $480
Paid Baynes Ltd $250
19 Paid Ford Credit $500 (including $100 interest)
Banked fares $200
20 M Jenkins withdrew $150 for her own use
Invoiced Education Department for school-bus services $350
23 Banked fares $240
24 Paid Ampol Petroleum $200
26 Received $1 000 on account from the Education Department
27 Paid wages $800
Invoiced the Education Department for school-bus services $300
Banked fares $320
30 Banked fares $110
c. Prepare an Income Statement for the month ended 30 April 20X1.
d. Present a Balance Sheet as at April 20X1.
e. Comment on the change in the short term financial position of Timber Ridge Bus
Service over the month.
Study Guide 13-B3 Accounting Page 34
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3.6.10 J Gale operates the Hellenic Travel Agency and the assets and liabilities at 1 July 20X1 were as
follows:
Hellenic Travel Agency
Balance Sheet as at 1 July 20X1
Current Assets $ $ Current Liabilities $ $
Bank 1 500 Accounts Payable
Accounts Receivable American Airlines 1 500
C Makris 1 200 Panjan Airlines 3 400
T Dayton 6 000 Olympic Airways 1 600 6 500
Mason Ltd 4 800 13 500
Non Current Assets Non Current Liabilities
Property. Plant and Equipment Loan from Victoria
Office furniture 1 200 Finance (due 20X5) 2 000
Motor vehicle 5 000 6 200 Equity
Capital - Gale 11 200
$ 19 700 $ 19 700
a. Enter the account balances (above) in the ledger of Hellenic Travel Agency.
b. Record the following transactions in the ledger.
c. Extract a trial balance at 31 July 20X1.
d. Prepare an Income Statement for the month ended 31 July 20X1 and a Balance Sheet as
at 31 July 20X1.
20X1
July 2 Received $1 200 from C Makris, a customer who owes money on his account.
5 Paid office expenses $65
7 Sent invoice to Brighton College $6 000 for school tour
8 Received cash from Mason Ltd for holiday bookings $4 800
12 Paid $1 500 to American Airlines, an accounts payable
14 Paid office girl's wages $120
18 Sent a cheque to Olympic Airways for $1 600 owing
22 Paid Panjan Airlines $2 000 on account
24 Received $4 000 cash for holiday bookings from T Dayton
25 Invoiced the Bellevue Social Club for $7 000 for travel arrangements
26 Received payment in full from Brighton College
27 Invoice received for travel expenses $8 000 from Olympic Airways
28 Paid office girl's wages $120
31 Purchased air ticket on credit $200 from Olympic Airways for personal holiday
Paid rent $400 cash
REVIEW:
Accounting Elements are used to group the economic activities of a business entity. The five elements are:
Assets Liabilities Equity
Expenses Income
Study Guide 13-B3 Accounting Page 35
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e. Enter the second month's transactions in the ledger accounts then:
i) extract a trial balance at 31 August 20X1
ii) prepare an Income Statement for the 2 months ended 31 August 20X1 and a
Balance Sheet as at 31 August 20X1
20X1
Aug 2 Paid signwriter $100 cash
5 Received $5 000 from Bellevue Social Club
8 Bought new office desk for cash $150
13 Paid Olympic Airways $6 000 on account
15 Paid office girl's wages $120
18 Hi-way Motels sent an invoice for $4 000 for travel expenses
20 Paid Panjan Airlines $1 400
22 Paid telephone account $240
23 Invoiced St James College $10 000 for travel arrangements
24 Paid $ 100 cash for office cleaning
26 Paid $1 080 to Victoria Finance (including $80 interest)
28 Received invoice from Olympic Airways $800 travel expenses
29 Received $6 000 cash from St James College
30 Paid office girl's wages $120
31 J Gale withdrew $500 cash
Paid rent $400 cash
3.7 Trading Statements
A business which earns its revenue from selling goods must complete a Trading Statement to calculate
Gross Profit.
Role Play illustration – Props: Sunglasses
Characters: Teacher (student volunteer), Student (another student volunteer)
Teacher: How much do you think I paid for these sunglasses?
Student: About $50
Teacher: Do you think that the shopkeeper bought the sunglasses at this price?
Student: No
Teacher: How much do you think the shopkeeper may have paid for these sunglasses?
Student: $20
Teacher: Gross Profit equal the selling price of an item less the price the shopkeeper bought it for.
How much is the Gross Profit for the sunglasses?
Student: $30
3.7.1 Complete the following table. An example has been given for you to follow: SALES
REVENUE
COST OF
GOODS
SOLD
GROSS
PROFIT
EXPENSES PROFIT
(LOSS)
Example $50 000 $20 000 $30 000 $10 000 $20 000
A $75 000 $25 000 $12 000
B $420 000 $288 000 $118 000
C $55 000 $40 000 $18 000
D $161 000 $78 000 $29 250
E $359 280 $248 000 $(500)
F $72 000 $12 000 $4 280
GROSS PROFIT = SELLING PRICE – COST PRICE = SALES REVENUE – COST OF GOODS SOLD
Study Guide 13-B3 Accounting Page 36
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3.7.2 Complete Trading Statements from the following information for the month ended 28 February
20X1. Business A is done for you as an example. (Wilson p232)
Business A B C
Sales Revenue 360 000 224 000 300 000
Opening Inventory 20 000 65 000 85 000
Purchases Expense 340 000 150 000 80 000
Closing Inventory 35 000 55 000 55 000
EXAMPLE:
Business A
Trading Statement for the month ended 28 February 20X1
$NZ $NZ
Sales Revenue 360 000
Less Cost of Goods Sold
Opening Inventory 20 000
Plus Purchases Expense 340 000
GOODS AVAILABLE FOR SALE 360 000
Less Closing Inventory 35 000
COST OF GOODS SOLD 325 000
GROSS PROFIT $35 000
3.8 Analysing the Trading Statement
There are three ways to analyse the Trading Statement:
a. Gross Profit%
Formula
Gross Profit % =
Gross Profit x 100
Net Sales Revenue 1
Example
Business A: 35,000 x 100
360,000 1
= 9.72%
This means that for every dollar of goods sold by the business, the business earns almost 10 cents Gross Profit.
It is not possible to state whether 9.72% is satisfactory or not. It must be compared with the gross profit
percentage of other firms in the same industry or other accounting periods. If the percentage remains constant
between periods, there should be no cause for concern. If the percentage increases or decreases, the reason
should be investigated.
Possible causes for a change in Gross Profit % are:
M Mark-up – the business may have chosen to change the mark-up %
I Inaccurate recording of closing inventory
S Stealing of stock (Gross Profit% decreases)
F Failure to take discounts (Gross Profit% decreases)
I Inaccurate recording of credit sales
T Theft of cash (Gross Profit% decreases)
Possible suggestions for improvement are:
1 Improve inventory control
2 Investigate purchasing policy
3 Improve control of cash
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b.Mark-Up %
Formula
Mark-Up % =
Gross Profit x 100
Cost of Goods Sold 1
Example
Business A: 35,000 x 100
325,000 1
= 10.77%
The mark-up percentage represents the proportion of the cost price that is added to achieve the selling price.
The type of business will determine the appropriateness of this percentage. Supermarkets can afford to have a
low mark-up as their sales volume is sufficient to allow enough gross profit to be made to cover other expenses.
A jeweller will have a high mark-up as it has a low inventory turnover.
Expectation:
The Mark- up % should remain unchanged from year to year.
Causes for change:
o The firm may have purchased goods that are difficult to sell because they are out-of-date.
o Mark-downs required to solve overstocking.
Suggestions for improvement:
o Investigate purchasing policy.
o Up skill purchasing personnel.
c.Inventory Turnover
Formula:
Rate of Inventory Turnover
Cost of Goods Sold
Average Inventory
Example
Business A: 325,000
(20,000+ 35,000)/2
= 11.82 times p.a.
The inventory turnover shows how many times the inventory in the shop is sold (turned into cash) during the
reporting period. The inventory turnover will differ according to the type of business activity the enterprise is
engaged in. A bread shop will have a rate of inventory turnover of approximately 365 times a year whereas an
antique shop may have an inventory turnover of only twice a year.
When writing a report on the importance of trends in the rate of inventory turnover, it is helpful to determine the
Inventory Turnover period. For example, to find out how many days on average it takes to sell the inventory for
Business A, you would complete the following calculation:
Formula:
Days in the Inventory turnover
period:
365
Rate of Inventory Turnover
Example
Business A: 365
11.82
= 31 days
Note:
The days in the inventory turnover period must always be rounded up to the next day.
e.g. 20.01 days = 21 days.
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Expectation:
The rate of inventory turnover should remain constant or increase between accounting periods. The days in the
inventory turnover period should decrease.
Evidence for concern:
A decreasing rate of inventory turnover or below normal for the type of business.
Causes for concern:
o Poor merchandising.
o Insufficient advertising.
o Too much competition.
o Products do not meet customer requirements.
o Overstocking.
Suggestions for improvement:
o Eliminate slow moving lines by having a sale with mark downs.
o Improve staff efficiency.
o Advertise.
o Conduct market research.
Costs of incorrect inventory turnover include:
Too high (Inventory Turnover) Too Low (Inventory Turnover)
Lack of choice for customers
Loss of sales
Higher delivery costs
Extra storage costs
Obsolete stock
Items stolen
Damaged stock
Liquidity problems
Illustration: e.g. Krazy Clothes Limited.
20X2
Income Statement
for the year ended 31 March 20X3 $NZ $NZ
1,200,000 Sales Revenue 1,400,000
700,000 less Cost of Goods Sold 750,000
500,000 Gross Profit 650,000
Inventory balances for the last three years ending 31 March 20X3include:
20X1 20X2 20X3
Inventory $42,000 $65,000 $137,000
20X2 20X3
Inventory Turnover
= 700,000 (42,000+65,000)/2
13.08 times p.a.
= 750,000 (65,000+137,000)/2
7.43 times p.a.
Inventory Period
= 365 13.08
28 days
= 365 7.43
50 days
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3.9 Accounting for Sales Revenue and Purchases Returns
When goods that are purchased are faulty, the consumer is able to return them. If the goods have been
purchased or sold on credit, cash will not be refunded but a credit note will be issued. The credit note is a
source document that authorizes a reduction in the amount owing by the customer. The following
illustrations show the accounting treatment.
Illustration 1 Sales Returns: March 1 Sell 3 pairs of shoes on credit at $150 each. March 2 Customer returns 1 pair of shoes
DATE ACCOUNT TYPE +/- Debit/Credit
Mar 1 Accounts Receivable A + Debit
Sales Revenue I + Credit
Mar 2 Sales Returns I - Debit
Accounts Receivable A - Credit
Shoe Shop
General Ledger
ACCOUNTS RECEIVABLE 120
Mar 1 Sales Revenue 450 450 Dr
2 Sales Returns 150 300 Dr
SALES REVENUE 610
Mar 1 Accounts Receivable 450 450 Cr
SALES RETURNS 611
Mar 2 Accounts Receivable 150 150 Dr
TRIAL BALANCE (EXTRACT)
Accounts Receivable 300
Sales Revenue 450
Sales Returns 150
Illustration 2 Purchases Returns: March 1 Order 500 cartons of yoghurt at 40 cents each March 2 Return 100 cartons of yoghurt that were past their expiry date.
DATE ACCOUNT TYPE +/- Debit/Credit
Mar 1 Accounts Payable L + Credit
Purchases Expense E + Debit
Mar 2 Purchases Returns E - Credit
Accounts Payable L - Debit
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SUPERMARKET
General Ledger
ACCOUNTS PAYABLE 310
Mar 1 Purchases Expense 200 200 Cr
2 Purchases Returns 40 160 Cr
PURCHASES EXPENSE 710
Mar 1 Accounts Payable 200 200 Dr
PURCHASES RETURNS 711
Mar 2 Accounts Payable 40 40 Cr
TRIAL BALANCE (EXTRACT)
Accounts Payable 160
Purchases Expense 200
Purchases Returns 40
3.10 Practice Exercises:
3.10.1 (Wilson 6.29)
Calculate and comment on the inventory turnover for the following businesses.
Trading Accounts for the year ended 31 March 20X3
Papas Bakery Dinah’s Desks
Sales Revenue (credit)
Less Cost of Goods Sold Opening Inventory Purchases Expense Less Closing Inventory Cost of Goods Sold Gross Profit
490,000
650 260,000
(450) 260,200
$229,800
490,000
34,000 310,000 (21,000) 323,000
$167,000
3.10.2 (Wilson 6.30) Pedro Hats Limited has the following information from their financial statements. (use 365 days per year.)
Income Statement extract 20X1 20X2 20X3
Sales Revenue – cash Sales Revenue – credit Cost of Goods Sold Gross Profit
380,000 1,150,000
(1,120,000) 410,000
290,000 1,200,000 (995,000)
495,000
243,000 990,000
(830,000) 403,000
Balance Sheet extract
Current Asset (extract) 20X0 20X1 20X2 20X3
Inventory 54,000 68,000 75,000 81,000
Required: Calculate the rate of inventory turnover and the Inventory Turnover Period for Pedro Hats Limited for the years ending 20X2 to 20X3.
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3.10.3 Practice: Mid-Course Examination January/April 2009
QUESTION 4: Financial Reporting for Trading Enterprises (19 marks) Marc Booth is a sole proprietor who owns Crazy Hats. Crazy Hats is a retail store that sells a variety of goods suitable for theme parties.
CRAZY HATS
Trial Balance (Extract)
As at 31 March 20X9 $NZ $NZ
Inventory (1 April 20X8) 14,690
Freight In 1,450
Purchases Expense 62,950
Sales Returns 1,250
Sales Revenue 119,200
Additional Information: Inventory on 31 March 20X9 was $17,756.
REQUIRED: (a) Prepare an Income Statement Extract to determine Gross Profit for Crazy Hats for the year ended 31 March 20X9. Use the information from the Trial Balance extract
together with the additional information provided above. 9 marks
CRAZY HATS
Income Statement (extract)
for the year ended 31 March 20X9
$NZ $NZ $NZ
% Change in Net Sales Formula:
New result – original result x 100
Original result 1 Expectation: it is good if the % remains constant between accounting periods. If it increases, it is very good. If it decreases, there are causes for concern and it should be investigated.
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(b) Analysis and Interpretation:
(i) Use the Income Statement (extract) on page 41 to complete the following worksheet showing full working and entering your answers in the schedule below correct to two decimal places for 20X9. 4 marks
CRAZY HATS WORKSHEET FOR ANALYSIS FOR THE YEAR ENDED 31 MARCH 20X9
WORKING SCHEDULE
20X8 20X9
Gross Profit %
Gross Profit x 100
Turnover 1
40%
Mark Up%
Gross Profit x 100
Cost of Goods Sold 1
66.67%
Inventory Turnover
Cost of Goods Sold
Average Inventory
5 times pa
(ii) Explain the meaning of the calculations you have completed for 20X9. 2 marks Gross Profit %
Mark-up %
Inventory Turnover
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3.10.4 Practice: Mid-Course Examination January/April 2010
QUESTION 4: Financial Reporting for Trading Enterprises (19 marks) Charles Chung is the owner of Bathroom Ware Enterprises which is a retail store that sells a variety of materials used in the construction and renovation of bathrooms. The following table summarises financial data for Bathroom Ware Enterprises for the years ended 31 March 20X8 and 31 March 20X9.
BATHROOM WARE ENTERPRISES
Year ended 31 March 20X7
$NZ
Year ended 31 March 20X8
$NZ
Year ended 31 March 20X9
$NZ
Inventory 15,000 22,500 25,000
Net Sales Revenue 263,208 290,882
Net Purchases Expense 127,000 133,000
REQUIRED: (a) Prepare an Income Statement Extract to determine Gross Profit for Bathroom Ware Enterprises for the year
ended 31 March 20X9. Include comparative figures for the year ended 31 March 20X8. 7 marks
BATHROOM WARE ENTERPRISES
Income Statement (extract)
for the year ended 31 March 20X9
20X8 20X9
(b) Analysis and Interpretation
(i) Use the Income Statement (extract) above to complete the following
worksheet showing full working and entering your answers in the schedule
on page 43 correct to two decimal places for 20X8 and 20X9. 5 marks
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BATHROOM WARE ENTERPRISES WORKSHEET FOR ANALYSIS FOR THE YEAR ENDED 31 MARCH 20X8 and 20X9
WORKING SCHEDULE
Gross Profit %
Gross Profit x 100
Net Sales 1
20X8
20X9
Inventory Turnover
Cost of Goods sold
Average Inventory
20X8
20X9
% Change in Net Sales
20X9
Mark-Up %
Gross Profit x 100
Cost of Goods Sold 1
20X8
20X9
(ii) Explain fully what the percentage change in net sales for 20X9 tells Charles about
his business. 2 marks
(iii) Carefully examine the worksheet analysing the trading results of Bathroom
Ware Enterprises above.. Identify ONE unsatisfactory trend in the
results from 20X8 to 20X9. 1 mark
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(iv) Suggest TWO possible causes for the unsatisfactory trend you have identified
above. 2 marks
(v) Recommend TWO strategies that Charles can use to correct the unsatisfactory
trend in the next reporting period. 2 marks
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3.11 Classification of Expenses and Income
The following table provides a guide to the classification of expenses in the Income Statement. As you
learn more examples, add them to the table.
COST OF GOODS SOLD
Purchases Expense
(Purchases Returns and Allowances)
Customs Duty
Cartage Inwards Expense
Freight Inwards Expense
ADMINISTRATIVE EXPENSES
Accountancy Fees Expense
Depreciation on Buildings*
Depreciation on Office Equipment
Electricity Expense
General Expenses
Insurance Expense
Rates Expense
Repairs and Maintenance on Buildings
Office Salaries Expense
Stationery Expense
Telephone Expense
Rent Expense
Discount Allowed
Bad Debts
Doubtful Debts
DISTRIBUTION COSTS
Advertising Expense
Delivery Expenses
Freight Outwards Expense
Cartage Outwards Expense
Depreciation on Vehicles
Depreciation on Shop Fittings
Repairs and Maintenance on Delivery
Vehicles Expense
Sales Commissions Expense
Sales Wages Expense
Shop Electricity Expense
FINANCE COSTS
Interest on Loan
Interest on Mortgage
Interest on Overdraft
OTHER EXPENSES
Loss on Sale
REVENUE
Sales Revenue
(Sales Returns and Allowances)
Fees Revenue
OTHER INCOME
Gain on Sale
Commission Received
Discount Received
*NZ tax law currently does not allow depreciation on buildings to be treated as an expense.
However in order to comply with IAS 16 Accounting for Property, Plant and Equipment,
depreciation is still recorded on buildings for financial reporting purposes.
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3.10 MODEL INCOME STATEMENT
Kasey’s Kayeks
Income Statement
for the year ended 31 March 20X1
$NZ $NZ $NZ
Sales Revenue 877 800
Less Sales Returns and Allowances 18 500 859 300
Less Cost of Goods Sold
Opening Inventory 150 000
Plus Purchases Expense 455 000
Less Purchases Returns and Allowances 15 500
439 500
Plus Customs Duty 10 500 450 000
GOODS AVAILABLE FOR SALE 600 000
Less Closing Inventory 145 000
COST OF GOODS SOLD 455 000
GROSS PROFIT 404 300
Plus Other Income
Discount Received 10 000
414 300
Less Expenses
Distribution Costs
Advertising Expense 15 300
Wages (shop) Expense 118 000
Depreciation – delivery van 8 800 142 100
Administrative Expenses:
Electricity Expense 9 000
Insurance Expense 3 000
Stationery Expense 10 000
Salaries (office) Expense 90 000
Bad Debts 900
Discount Allowed 600
Telephone expense 9 000
Depreciation - equipment 6 000 128 500
Finance Costs
Interest on Loan 4 900
Interest on Mortgage 5 600 10 500
Other Expenses
Loss on Sale of Vehicles 500
TOTAL EXPENSES 281 600
PROFIT $132 700
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3.11 Exercises for you to try
3.11.1 From the following balances for G. Joyco, prepare:
a. A Trial Balance as at 31 March 20X1
b. An Income Statement for the year ended 31 March 20X1
c. A Balance Sheet as at 31 March 20X1
Inventory 1.4.X0 $993.25, Purchases Expense $7 728.95, Wages Expense $854.35,
Advertising Expense 169.62, Rent Expense 720.55, Repairs Expense $58.28, Bad Debts $69.00,
Bank $779.28, Accounts Receivable $325.60, Furniture $496.75, Equipment $1 250.00, Drawings $1 500.00
Sales Revenue $11 257.00, Discount Received $64.91, Accounts Payable $175.35, Capital $3 448.37.
Inventory 31.3.X1 $1 085.53
3.11.2 From the following balances for Ed Ward prepare:
a. A Trial Balance as at 31 March 20X1
b. An Income Statement for the year ended 31 March 20X1
c. A Balance Sheet as at 31 March 20X1
Inventory 1.4.X0 $895.35, Sales Returns $56.72, Salaries Expense $1 055.35,
Purchases Expense $4 696.68, Advertising Expense 325.20, Discount Allowed $94.22,
General Expenses 282.57, Bank $1 000.58, Accounts Receivable $497.26, Furniture $849.00,
Equipment $3 000, Drawings $1 680.00, Sales Revenue $8 575.82, Purchases Returns $64.49,
Accounts Payable $495.62, Capital $5 297.00. Inventory 31.3.X1 $715.22.
3.11.3 From the following balances for Easter Shop prepare:
a. A Trial Balance as at 31 March 20X1
b. An Income Statement for the year ended 31 March 20X1
c. A Balance Sheet as at 31 March 20X1
Inventory 1 April 20X0 $23 000, Purchases Expense $77 000, Cartage Inwards Expense $3 000,
Wages Expense $30 000, Advertising Expense $4 000, Salaries Expense $50 000, Rent Expense $28 000,
Office Expenses 10 000, Delivery Expenses $5 000, Interest Expense $2 000, Bank $5 000,
Accounts Receivable $15 000, Motor Vehicles $27 000, Equipment $10 000, Drawings $25 000, Sales Revenue
$240 000, Purchases Returns $2 000, Sales Returns $1 000, Commission Received $3 000,
Accounts Payable $10 000, Loan $20 000, Capital $40 000. Inventory 31 March 20X1 $30 000.
NOTE:
The Income Statement shows the profitability of the business. The Income
Statement shows the operating results of the business for the period.
The Balance Sheet shows the financial structure of the business.
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Chapter 4
Journals
Contents 4.1 Introduction
4.2 Source Documents
4.3 Journals
4.4 The General Journal
4.5 Exercises for you to try
4.1 Introduction
The accounting process can be shown diagrammatically as follows:
Transaction Document Journal Ledger Trial Balance
Income Statement Balance Sheet
Whenever a transaction takes place in business, a source document (or business document) is prepared
to record the details of the transaction to ensure an accurate record is provided. Source documents are
part of the accounting process because they are used to record information in the journals. Different
journals are used for each category of transactions. All entries made in the journals are then transferred
to or 'posted' using the rules of double entry accounting.
From the ledger balances we can then construct a trial balance to prove the accuracy of our double entry
in the ledger. Finally, from the trial balance we can prepare our financial reports, that is, an Income
Statement and a Balance Sheet.
4.2 Source Documents
The most common source documents used for accounting recording purposes are:
1. Receipt
2. Invoice
3. Credit Note
4. Cheque/cheque butt
5. Bank Statement
Source Documents should have at least two copies - the original sent to the supplier or customer and the
copy retained by the business for future reference.
The input of the accounting system should be in the form of consecutively pre-numbered multi-copied
documents. Reasons for pre-numbered documents include:
The documents provide an audit trail to trace a transaction through the accounting system.
It is easy to file and retrieve source documents.
Any false documents can be identified.
The customer has a number to quote when making enquiries.
All documents can be accounted for.
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4.3 Journals
A journal is a book that collates and summarises information from similar source documents in date
order. For example, The Cash Payments Journal summarises all cheques, the Sales Journal summarises
all invoices issued to customers. There are two types of journals - specialised journals and general
journals.
A specialised journal groups large number of transactions into frequently used similar business events.
All in all, there are six specialist journals.
1. Cash Receipts Journal, to record all cash received. Source document: Cash invoice, receipt,
bank deposit form or bank statement.
2. Cash Payment Journal, to record all cash paid. Source document: Cheque/butt, or bank
statement. Note: Cash includes cheques.
3. Sales Journal, to record sales of merchandise on credit. Source document: Invoice issued.
4. Purchases Journal, to record purchases of merchandise on credit. document:
Source document: Invoice received.
Those transactions which do not 'fit' into the special journals are entered into the General Journal.
4.4 General Journal
Transactions that do not occur frequently enough to warrant a special journal are recorded in the general
journal from various source documents depending on the transaction. (eg. memos).
Format of the General Journal:
Date Particulars Folio Debit Credit
An important aspect of formatting in the journal is to ensure that the credit entry is indented in the
particulars column.
The major types of general journals entries are:
1. Commencement of business
2. Contribution or withdrawal of assets other than cash by proprietor
3. Purchase of non-current assets on credit
4. Bad Debts written off
5. Interest Expense owing to a creditor
6. Interest Receivable from a debtor
7. Contra, or offsetting, entries
8. Adjusting and reversing entries
9. Doubtful debts
10. Depreciation of non-current assets
11. Inventory of an item (apart from merchandise) that requires adjustment
12. Disposal of a non-current asset
13. Closing entries
1-7 will be examined in this chapter.
8-13 will be examined in later chapters.
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4.4.1 Commencement of Business
Example:
On 1 October 20X1 Pink's Boutique, proprietor Paula Brown had the following assets and liability:
Cash at Bank $3 500, Equipment $6 900, Vehicle $10 000 and liability a loan of $6 000 from AGP
Finance. To establish a double entry set of records, a general journal entry would show:
Pink’s Boutique
General Journal
GJ1
Date Particulars Ref Debit Credit
20X1
Oct 1
Bank
Equipment
Vehicle
Loan – AGP
Capital – P Brown
(Assets and liabilities contributed by the owner).
3 500
6 900
10 000
6 000
14 400
Note: The amount of $14 400 was calculated by subtracting the liability from the assets. The total
debits now equal the total credits.
4.4.2 Purchases of non-current assets on credit
Example:
On October 3, Pink’s Boutique purchases equipment from Guy's Computer Supplies on credit for
$3000.
General Journal
GJ2
20X1
Oct 3
Computer Equipment
Guy’s Computer Supplies
Purchased computer equipment on credit
3 000
3 000
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4.4.3 Contribution or withdrawal of assets other than cash by the owner
Example: Nov 11 The owner contributed an office desk to the business valued at $200.
The owner withdrew tools with a value of $ 100 for personal use.
The owner took goods home for private use. The business (a service firm)
purchased the materials at a cost of $50.
General Journal
GJ 3
20X1
Nov 11
Office Furniture
Capital
(Contribution of desk by owner)
200
200
Drawings
Tools
(Owner withdrew tools for personal use)
100
100
Drawings
Purchases Expense
(Owner withdrew goods for personal use)
50
50
4.4.4 Interest Expense
Example:
On 11 December Paula overlooked payment of an account to S Brown. The amount is $600 and the
account is one month overdue. Interest of 10% p.a. is charged.
General Journal
GJ 4
20X1
Dec 11
Interest Expense
Accounts Payable – S. Brown
(Charged interest on overdue account by S. Brown
at 10% p.a.)
5
5
4.4.5 Interest Income
Example:
On 12 December R. Taylor's account is overdue - he owes $750 and is charged interest of $25.
General Journal
GJ 5
20X1
Dec 12
Accounts Receivable – R. Taylor
Interest Income
(Charged interest on overdue account)
25
25
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4.4.6 Bad Debts Written Off
Bad Debts are debts (accounts receivable) that will not be collected by the business.
Example:
On 6 January 20X1 Paula receives notification that one of her customers, B James has been declared
bankrupt. The balance of B James’ account of $200 is to be written off.
General Journal
GJ6
20X1
Jan 6
Bad Debts
Accounts Receivable – B. James
(For bad debts written off).
200
200
4.4.7 Contra, or Offsetting, Entries
It may happen that a business may owe money to an accounts payable who at the same time is an
accounts receivable of the business. If both parties agree it is possible to off set the lower balance
against the larger balance. This is known as a contra, or offsetting entry.
Example:
Peters Traders is owed $70 by John Smith, for goods supplied. At the same time John Smith who is an
electrician has provided services for $160. Both parties agree that the balances owing should be off set
on 7 February 20X1.
Peters Traders
General Journal
GJ81
20X1
Feb 7
Accounts Payable – John Smith
Accounts Receivable – John Smith
(Contra Entry)
70
70
4.5 Exercises for you to try
4.5.1 T Phillips decided to commence business as Topflight Mowers and on 1 August 20X1 deposited
$5 000 into a business bank account. His motor vehicle, a utility valued at $3 500, is to be used
as a business vehicle for pickups and deliveries.
a. Show the general journal entry required to commence a double-entry set of accounting
records.
b. Record the following transactions in his general journal:
c. Post all journal entries to the general ledger of Topflight Mowers and extract a trial
balance as at 4 August 20X1.
20X1
Aug 2 A Cash register was purchased on credit from I.B.R Ltd for $580
(invoice B748)
3 Shelving and counters (shop fittings) were purchased on credit from
Mildara Pty Ltd for $400 (invoice 79)
4 An account was received from Hiway Garage for modifications to the
utility for delivery purposes, $90 (invoice 3291)
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4.5.2 S James has been trading as Supreme Gifts for 12 months and has the following assets and
liabilities on 1 July 20X1: furniture and fittings $1 200; equipment $320; Inventory $8 900;
cash on hand $60; bank overdraft $1 300; Accounts Payable, Healy Ltd $700.
a. Show the general journal entry required to commence a set of double-entry records for
Supreme Gifts.
b. Record the following transactions in the general journal of Supreme Gifts
20X1
July 1 Bought glasses from Healy Ltd on credit for $165, Invoice A770
2 Additional shelving was purchased and fitted at a total cost of $120, payment to
be made within 60 days to Bullet Shop Supplies (invoice 8491)
3 James took a set of glasses, cost $65, from inventory and gave them to his wife
for her birthday
4 A supply of special wrapping paper was purchased on credit from Healy Ltd,
$180 (invoice A779)
c. Post the journal entries from a. and b. to the general ledger of Supreme Gifts and extract
a trial balance.
4.5.3 Brian Megan, an electrician, has decided to set up his own business called Megan Electrics, and
on I June 20X1 he deposited $2 000 in a special cheque account at the ANZ Newton Branch. He
intends using his own utility valued at $4 000 as the business vehicle, and he has tools valued at
$1 200. During the first week while he was getting his business organised, he had the following
transactions:
20X1
June 2 Electrical supplies were bought from Electron Ltd on credit for $300
3 His utility was fitted out to facilitate its use as a service van.
The work was carried out by Hisco Motors on 30 days credit terms for $140
4 Alterations were made to Megan's garage to fit it out as a workshop at a cost of
$380. The business has 60 days credit on this work done by Bayside
Constructions Ltd
a. Show the general journal entries required to record the above items from 1 to 4 June 20X1.
b. Post the journal entries to the general ledger.
c. Extract a trial balance at 4 June 20X1.
4.5.4 a. Enter the following items in the general journal of Topical Toys (owner, D Menzies)
On 1 September 20X1 a double-entry set of records was commenced with the following
assets and liabilities: Cash $200, Accounts Receivable A. Lane $600, D. Denver $140,
T. Blight $1 200; Furniture and Fittings $700; Inventory $10 000; Motor Vehicle
$3 900; Bank Overdraft $140, Accounts Payable D. Lane, $200; Toy Traders Ltd
$12 000; Toy Imports Ltd $800.
Sep 2 A cheque for $200 received from A Lane on 24 August, had been
incorrectly credited to D Lane. This error must now be corrected.
3 T Blight was charged $6 interest on his overdue account
4 Stationery supplies were bought on credit from Atlas Office Supplies $140
(invoice 8491)
5 Notification was received that D Denver was bankrupt and his debt was written
off as irrecoverable
6 The business purchases toys for $300 paying from the bank account.
7 D Menzies took toys to the value of $80 home for his children
b. Post the entries to the General Ledger of Topical Toys.
c. Prepare a trial balance at 6 September 20X1.
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Chapter 5
Closing the Ledger
5.1 Introduction
5.2 Example of Closing Journal entries for a service business
5.3 Exercises for you to try
5.4 Example of Closing Journal entries for a business which trades in goods
5.1 Introduction
The business records the assets and liabilities at commencement in the General Journal. Capital is
calculated using the accounting equation:
Temporary equity accounts – income, expense and drawings are opened to record the transactions that
occur during the accounting period. At the end of each period income and expense accounts must be
closed.
5.2 Example for Closing a Service Business:
A Business commenced on 1 January 20X1 and prepared the following journal entry.
a. Calculate the capital.
A BUSINESS
General Journal
GJ1
Date Particulars Ref Debit Credit
20X1
Jan 1
Bank
Equipment
Loan
Capital – A Business
(Assets and liabilities contributed)
2 000
20 000
5 000
?
b. Post the journal into the ledger accounts given on the next page. The teacher will help you to work through
this model which you can use to revise from later.
Income and expense accounts are closed to the Income Summary
account.
Income Summary account is closed by transferring the final balance
to the Capital account. A credit balance represents Profit while a
debit balance represents a Loss.
Finally when the Drawings account is closed to the Capital account,
the ledger is ready to commence a new accounting period with only
Asset, Liability and Equity accounts remaining open.
Equity = Assets – Liabilities
(Capital)
Study Guide 13-B3 Accounting Page 56
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A BUSINESS
General Ledger
Bank 110
Equipment 210
Loan 410
Capital 510
Drawings 520
Income Summary 530
Fees Revenue 610
Expenses 710
c. The following transactions occurred during the month of January:
Received fees of $16 000
Paid expenses $10 000
The owner took $4 000 for personal use
Enter the double entry record for these transactions directly into the correct ledger accounts.
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d. The following journal entries are prepared to close the journal at balance day. Your teacher will show you
how to post them to the ledger so that the income, expense and drawings accounts are closed.
A BUSINESS
General Journal GJ10
Date Particulars Ref Debit Credit
20X1
Jan 31
Fees Revenue
Income Summary
(Closing Entry)
16 000
16 000
Income Summary
Expenses
(Closing Entry)
10 000
10 000
Income Summary
Capital
(Transfer of Profit)
6 000
6 000
Capital
Drawings
(Closing Entry)
4 000
4 000
e. The following Trial Balance is prepared after the closing journal entries have been posted. You will
notice that only Asset, Liability and Capital accounts remain open ready to start the next accounting
period.
A BUSINESS
POST CLOSING TRIAL BALANCE
AS AT 31 JANUARY 20X1
$NZ $NZ
Bank 4 000
Equipment 20 000
Loan 5 000
Capital 19 000
$24 000 $24 000
5.3 Exercises for Closing Journal entries for a Service Business
5.3.1
a. Open ledger accounts using the information given in the Trial Balance for Manton Photographic
Services as at 30 June 20X1 on the next page. Account number 530 should be Income
Summary.
Your teacher will work through this problem with you.
Study Guide 13-B3 Accounting Page 58
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The following trial balance was extracted from the ledger of Manton Photographic Services:
Manton Photographic Services
Trial Balance at 30 June 20X1
A/c No $NZ $NZ
Bank 110 5 820
Accounts Receivable – Syndal High School 120 680
Accounts Receivable – Mason High School 130 410
Accounts Payable – T Milne Ltd 310 720
Capital – I Manton 510 5 500
Drawings – I Manton 520 1 500
Income Summary 530
Fees Revenue 610 15 800
Materials Expense 710 2 810
Office Salaries Expense 720 3 000
Photographer Salary Expense 730 7 000
Advertising Expense 740 200
Rent Expense 750 520
Bad Debts 760 80
$22 020 $22 020
MANTON PHOTOGRAPHIC SERVICE
GENERAL LEDGER
20X1
Study Guide 13-B3 Accounting Page 59
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b Prepare closing journal entries and post to the ledger
c Prepare a post closing trial balance
d Prepare an Income Statement for the year ended 30 June 20X1
e Prepare a Balance Sheet as at 30 June 20X1
Study Guide 13-B3 Accounting Page 60
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5.3.2 The following trial balance was extracted from the ledger of Henley Dry Cleaning Service (owner,
B Henley)
Henley Dry Cleaning Service
Trial Balance at 30 June 20X1
$NZ $NZ
Accounts receivable, Denning Ltd 820
Accounts payable, Banco Sons 1 640
Close Bros 950
Bank 5 690
Capital, B Henley 10 000
Drawings, B Henley 10 000
Cleaning revenue 65 400
Advertising Expense 1 820
Rates Expense 640
Agent's commission Expense 6 540
Electricity and power Expense 1 400
Salaries Expense 18 780
Loan from ANZ Finance (due 20X5) 10 000
Cleaning Materials Expense 7 400
Interest Expense 1 000
Equipment 18 000
Motor vehicles 14 000
Motor vehicle expenses 1 900
$ 87 990 $ 87 990
a. Open ledger accounts using the information given in the Trial Balance for Henley Drycleaning Service as
at 30 June 20X1. Include account number 530 as the Income Summary.
b. Prepare closing journal entries and post to the ledger
c. Prepare a post closing trial balance
d. Prepare an Income Summary for the year ended 30 June 20X1
e. Prepare a Balance Sheet as at 30 June 20X1
5.4 Example of Closing Journal entries for a business which trades in goods using periodic inventory
B BUSINESS
Trial Balance
As at 31 March 20X1
Account
Account
Number
Lines
Debit
Credit
Bank 110 2 2 000
Inventory 120 4 2 000
Equipment 210 2 32 000
Accounts Payable 310 2 1 000
Capital 510 4 28 000
Drawings 520 2 5 000
Income Summary 530 6
Sales Revenue 610 2 25 000
Purchases Expense 710 2 10 000
Expenses 720 2 3 000
$54 000 $54 000
Inventory 31 March 20X1 $4 000
Study Guide 13-B3 Accounting Page 61
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REQUIRED:
a. Open ledger accounts using the information given in the Trial Balance for B Business as
at 31 March 20X1. Your teacher will explain how to do Step b. as illustrated below.
b. Prepare closing journal entries and post to the ledger.
c. Prepare a post closing trial balance.
d. Prepare an Income Summary for the year ended 31 March 20X1
e. Prepare a Balance Sheet as at 31 March 20X1
B BUSINESS
General Journal GJ10
Date Particulars Ref Debit Credit
20X1
Mar 31
Sales Revenue
Income Summary
(Closing Entry)
25 000
25 000
Income Summary
Purchases Expense
Expenses
(Closing Entry)
13 000
10 000
3 000
Income Summary
Inventory
(To close inventory 1.04.10)
2 000
2 000
Inventory
Income Summary
(For inventory as per stock sheets A55-B68)
4 000
4 000
Income Summary
Capital
(Transfer of Profit)
14 000
14 000
Capital
Drawings
(Closing Entry)
5 000
5 000
Study Guide 13-B3 Accounting Page 62
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Chapter 6
Depreciation and Disposal of Assets
6.1 Concept of Depreciation and Historical Cost
6.2 Methods of Calculating Depreciation
6.3 The Depreciation Schedule
6.4 The General Journal Entries
6.5 Posting to the Ledger
6.6 Depreciation and the Financial Statements
6.7 Exercises for you to try
6.8 Procedure on Disposal of an Asset
6.9 Exercises for you to try
6.1 Concepts of Depreciation and Historical Cost
What is Depreciation?
Depreciation is the systematic allocation of the cost of an asset less its residual value over its useful life.
Formula:
Depreciation = Historical Cost – Estimated Residual Value
Estimated Useful Life
Depreciation is an expense for a particular accounting period. Depreciation must be shown in an Income
Statement for an accounting period.
Depreciation is not a cash payment and is not seen in the cash flow statement or cash budget. Depreciation does
not provide funds (cash) to purchase a new asset.
Important concepts, terms:
What is allocation? (allocate)
- To divide up and distribute, to apportion, to assign.
What is residual value?
The funds that the business will receive when the asset has finished its useful life in the business. It is also
known as scrap value, salvage value, disposal value, or trade in value.
What is Historical Cost of an Asset?
Original purchase price of an asset plus any costs associated with getting the asset into a position and ready for
use.
Example of historical cost:
Machine cost $1000
Improvement to use machine $100
Installation (put in) cost $200
Insurance for the year $250
How much is the historical cost of machine? Answer: $ 1 300
Why? $1000 has added to it $100 and $200 which are part of the historical cost and are capital expenditure.
Insurance for the year $250 is recurring expenditure and NOT part of the historical cost.
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Capital Expenditure
Spending that benefits the business for many accounting periods.
Revenue Expenditure
- Expenditure, the benefit of which are used up on the current accounting period. Revenue expenditure is
expenditure that must be made again in every accounting period.
6.2 Methods of Depreciation
The first step in the calculation of depreciation is to change all GST inclusive amounts to
GST exclusive.
If the GST rate is 15%
GST inclusive = GST exclusive x 1.15
GST exclusive = GST inclusive/1.15
Eg If equipment cost $17 250 GST inclusive, the Historical Cost to be allocated equals
$15 000
i.e. $17 250/1.15 = $15 000
There are 3 major methods of calculating depreciation. The key for management is to select a method
of depreciation that accurately reflects the pattern of service provided by the asset.
a. Straight line method:
Depreciation is calculated as a fixed percentage of cost each year.
Eg.Equipment cost $12,000 and is to be depreciated at 10% per annum.
The depreciation expense each year will be $1,200
The straight line method is used when the business expects to receive future economic benefits
from the asset evenly over its useful life
b. Reducing Balance Method:
Depreciation is charged at a fixed percentage of the carrying amount each year.
This method is most appropriate in situations where depreciation is greatest in the early years of
an asset's life. Some property, plant and equipment are most efficient when new, and therefore
contribute more and better services in the early years of useful life. In such case by using the
reducing balance method costs will be better matched with income.
Eg Motor Vehicles (cost) $200 000
Depreciate Motor Vehicles at 20% p.a. reducing balance
Depreciation Expense: Year 1 $200 000 x 0.2 = $40 000
Year 2 ($200 000 - $40 000) x 0.2 = $32 000
Carrying amount = Historical Cost – Accumulated Depreciation
GST is the abbreviation for Goods and Services Tax in New Zealand.
Study Guide 13-B3 Accounting Page 64
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c. Units of use method:
The units of use method of depreciation is used when the economic life of the asset is dependent
on the amount of use made of it.
IGNORE GST in this example
For example, if a truck cost $55 000 with an estimated resale value of $5 000 at the end of
200 000 kilometres, when it will be dispose of, the depreciation charge per kilometre is 25 cents
(i.e. $50 000 / 200 000). At the end of each year the depreciation charge would be determined
by multiplying the kilometres travelled during the year by 25 cents. Formula
$50 000
200 000 kilometres
= 25 cents per kilometre
If the truck travels 20 000 kilometres in the first year:
20 000 x 0.25 =$5 000
This method perhaps is the most accurate in applying the matching concept because if an asset
lies idle for most of the accounting period then depreciation charge will be negligible.
6.3 The Depreciation Schedule The allocation of the cost of an asset during its useful life can be summarized in a depreciation
Schedule:
Eg.Equipment cost $12,000 and is to be depreciated at 10% per annum.
Year Carrying Amount
$
Depreciation
$
Accumulated
Depreciation
$
1 12 000 1 200 1 200
2 10 800 1 200 2 400
3 9 600 1 200 3 600
Carrying amount = Historical Cost – Accumulated Depreciation.
If the asset is sold for less than its carrying amount, a loss on sale will occur.
If the asset is sold for more than its carrying amount, a gain on sale will occur.
For example:
If the equipment is sold for $8,000 at the end of the third year, what is the loss on sale?
If the equipment is sold for $8,500 at the end of the third year, what is the gain on sale?
6.4 The General Journal entries At balance date the annual depreciation expense is recorded as a balance day adjustment.
Eg Depreciation is to be provided on equipment $12 000 at 10% p.a. on cost and Motor
Vehicles at 20% p.a. on reducing balance. (Motor vehicles cost $200 000 and Accumulated
Depreciation on Motor Vehicles is currently $40 000).
Date Particulars
20X1
Mar 31 Depreciation on Equipment 740 1 200
Depreciation on Motor Vehicles 750 32 000
Accumulated Depreciation on Equipment 211 1 200
Accumulated Depreciation on Motor Vehicles 221 32 000
Depreciation provided on Equipment $12 000 at 10% p.a.
on cost and Motor Vehicles ($200 000-$40 000) at 20% p.a.
on reducing balance.
Study Guide 13-B3 Accounting Page 65
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6.5 Posting to the Ledger
Equipment 210
20X1
Mar 31 Balance b/f 12 000 Dr
Accumulated Depreciation on Equipment 211
Mar 31 Balance b/f 1 200 Cr
Depreciation on Equipment GJ79 1 200 2 400 Cr
Motor Vehicles 220
Mar 31 Balance b/f 200 000 Dr
Accumulated Depreciation on Motor Vehicles 221
Mar 31 Balance b/f 40 000 Cr
Depreciation on Motor Vehicles GJ79 32 000 72 000 Cr
Depreciation on Equipment 740
Mar 31 Accumulated Depreciation on Equipment GJ79 1 200 1 200 Dr
Depreciation on Motor Vehicles 750
Mar 31 Accumulated Depreciation on Motor
Vehicles
GJ79 32 000 32 000 Dr
6.6 Depreciation and the Financial Statements
Income Statement (extract)
Distribution Costs
Depreciation on Motor Vehicles 32 000
Administrative Expenses
Depreciation on Equipment 1 200
Balance Sheet (extract)
Non Current Assets Notes
Property Plant and Equipment
1
Total carrying amount 137 600
Notes to the Balance Sheet (simple format)
1 Property Plant and Equipment
Motor
Vehicles
$NZ
Equipment
$NZ
Total
$NZ
Cost 200 000 12 000 212 000
Less Accumulated Depreciation 72 000 2 400 74 400
Carrying Amount $128 000 $9 600 $137 600
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6.7 Exercises for you to try (Ignore GST in these exercises)
6.7.1 A business purchased a delivery van for $7 000 and conversion to the business's requirements
cost a further $500. The estimated life of the van is 5 years and it is estimated that its disposal
value at that time will be $2 250. The business intends to allocate the cost of the van over its
useful life by the straight-line depreciation method. Calculate:
a the amount (in dollars) to be allocated as depreciation expense each year;
b the annual depreciation charge expressed as a percentage
6.7.2 A business purchases a front-end loader for $20 000. It is estimated that the loader will be used
for 4 years and that it will have a trade-in value at the end of that time of $4 000.
a Show the formula to calculate depreciation, then use it to calculate the annual depreciation
charge (in dollars).
b Convert the annual depreciation charge (in dollars) to an annual rate per cent of asset cost.
c What will be the effect on profit of charging depreciation at the end of the accounting
period?
6.7.3 Toorak Quarry purchased a truck for $24 000 and the necessary bodywork cost another $3 000.
The accountant estimated that the truck would travel 100 000 kilometres and then be traded-in
for $7 000.
a Show the formula to calculate the depreciation and then use it to calculate the depreciation
charge per kilometre (in cents).
b Calculate the amount of depreciation that should be charged at the end of an accounting
period during which the truck travelled 40 000 kilometres.
c What factor determined the depreciation method you used to calculate the truck's
depreciation?
6.7.4 On 1 July 20X1 B.Morton bought machinery worth $10 000. The machinery cost $800 to install
and it is estimated that it will have to be replaced in 5 years and its trade-in value will be $2 000.
Depreciation is to be charged by the straight line method.
a Show the ledger entries to record:
i the purchase and installation of the machinery;
ii the balance day adjustments for depreciation of machinery on 30 June 20X2
and 30 June 20X3;
iii the closing of the depreciation expense to profit or loss each year.
b Show how the asset, machinery, would appear in the Balance Sheet as at
30 June 20X2 and 30 June 20X3.
6.7.5 Axtec Recording Studios bought recording equipment worth $45 000 on 1 April 20X1. It was
decided that the equipment would be replaced after 4 years when its estimated trade-in value
would be $9 000. On 1 October 20X1 another $5 000 worth of equipment was purchased for
cash, and it was depreciated at the same rate per annum as the original equipment.
a Calculate the depreciation of recording equipment by the straight-line method for the
years ending 30 June 20X1 and 30 June 20X2.
b Show the following ledger accounts, complete with balance day adjustments, on
30 June 20X1.
i recording equipment;
ii depreciation of recording equipment;
iii accumulated depreciation of recording equipment.
c Show the asset, recording equipment, as it would appear in the Balance Sheet as at
30 June 20X1.
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6.8 Procedure on Disposal of an Asset (Ignore GST in this section) DISPOSAL:
Sell
Trade in
Throw away
EXAMPLE:
A business purchased a motor vehicle for $40 000 cash on 1 April 20X0. The vehicle was depreciated using the
straight line method at 20% p.a.
The Vehicle was sold for $20 000 cash on 1 April 20X2.
PROCEDURE:
STEP 1
Calculate any depreciation on the asset from the last balance date up to the date of disposal.
STEP 2
Transfer the asset to a Disposal account
JOURNAL ENTRY:
20X2
Apr 1 Disposal of Motor Vehicle 40 000
Motor Vehicle 40 000
To transfer the motor vehicle to
the disposal account.
STEP 3
Transfer the accumulated depreciation to the Disposal account
JOURNAL ENTRY
20X2
Apr 1 Accumulated Depreciation on Motor Vehicle 16 000
Disposal of Motor Vehicle 16 000
To transfer the accumulated depreciation
to the disposal account
STEP 4
Record the selling price of the asset (or trade in allowance) in the disposal account
JOURNAL ENTRY
20X2
Apr 1 Bank 20 000
Disposal of Motor Vehicle 20 000
Cash received on sale of motor
vehicle
STEP 5
Close the disposal account.
Debit balance represents loss on sale
Credit balance represents gain on sale
JOURNAL ENTRY
20X2
Apr 1 Loss on Sale of Motor Vehicle 4 000
Disposal of Motor Vehicle 4 000
For loss on sale of motor
vehicle.
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GENERAL LEDGER
Motor Vehicle 210
20X2
Mar 31 Balance b/f 40 000 Dr
Apr 1 Disposal of Motor Vehicle 40 000 0
Accumulated Depreciation on Motor Vehicle 211
20X1
Mar 31 Depreciation on Motor Vehicle 8 000 8 000 Cr
20X2
Mar 31 Depreciation on Motor Vehicle 8 000 16 000 Cr
Apr 1 Disposal of Motor Vehicle 16 000 0
Disposal of Motor Vehicle 212
20X2
Apr 1 Motor Vehicle 40 000 40 000 Dr
Accumulated Depreciation 16 000 24 000 Dr
Bank 20 000 4 000 Dr
Loss on sale of Motor Vehicle 4 000 0
6.9 Exercise for you to try
6.9.1 On 1 July 20X0, Accounting Services had the following account balances in its ledger: Computer
$5 000, Accumulated Depreciation on Computer $2 400. Accounting Services decided to trade-in their
computer on 31 March 20X1 for $2 800 to Business Machines Ltd. The new computer was valued at
$6 500 and Accounting Services charge depreciation on accounting machines at 20% per annum on cost.
a. Show the journal entries to record the depreciation on the computer to
31 March 20X1 and post to the ledger.
b. Show the journal entries to record the trade in of the computer and post to the
ledger.
6.9.2 L.Howe purchased a new motor vehicle for $27 000 cash on 1 July 20X0. Howe intends running the car
for 120 000 kilometres when he hopes to trade-in the car to Meteor Motors for $12 000. During the year
ended 30 June 20X1 the car travelled 40 000 kilometres. Howe decided to sell the car for $15 000 cash
on 23 February 20X2 after it had travelled another 50 000 kilometres.
a. Show the journal entries to record the depreciation on 30 June 20X1.
b. Show the journal entries to record the disposal of the vehicle on 23 February 20X2.
c. Show the general ledger accounts for Motor Vehicle, Accumulated Depreciation on
Motor Vehicle and Disposal of Motor Vehicle as they would appear after posting the
journal entries on 23 February 20X2.
6.9.3 On 1 July 20X0, a business bought office equipment for $7 500 cash. Its estimated life as 5 years and its
residual value was expected to be $2 500. Depreciation was calculated by the straight line method. On
30 June 20X2 the office equipment was traded in to EP Engineering for $3 600 on new office equipment
worth $10 000. It was decided to depreciate the new office equipment at a rate of 25% per annum on the
reducing balance method.
a. Show the journal entries to record all the above information up to and including 30 June
20X2.
b. Show the general ledger accounts for Office Equipment, Accumulated Depreciation on
Office Equipment and Disposal of Office Equipment as they would appear after posting
Journal entries on 30 June 20X2.
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6.9.4 Mid-Course Accounting Examination July/September Intake 2010
On 31 March 20X9 the business sells its old delivery vehicle for $4,500 cash. The delivery vehicle was
purchased for $27,000 on 1 April 20X4 and has been depreciated using the straight line method at 15 per cent per
annum.
(i) Show the General Journal entry to record the depreciation expense on the delivery vehicle for the year ended
31 March 20X9.
(ii) Transfer the asset account (Delivery Vehicle) to the Disposal of Vehicle account.
(iii) Close the Accumulated Depreciation on Delivery Vehicle account tothe Disposal of Vehicle account.
(iv) Prepare the General Journal entry to record the cash received from the sale of the vehicle in the Disposal of
Vehicle account on 31 March 20X9.
(v) Show the General Journal entries to close the Disposal Account and record the gain or loss on sale of the
delivery vehicle.
Study Guide 13-B3 Accounting Page 70
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Chapter 7
Balance Day Adjustments
7.1 Accounting Objective
7.2 Accounting Assumptions
7.3 Accrual Basis Concept
7.4 Balance Day Adjustments (excluding GST)
7.5 Reversing Entries
7.6 Exercises for you to try
7.7 Balance Day Adjustments with GST
7.8 Exercise for you to try
7.1 The Objective of Accounting
The objective of Accounting is to provide information about the reporting entity that is decision useful
to present and potential capital providers.
7.2 Accounting Assumptions
Accounting assumptions provide a foundation for recording the transactions and preparing the financial
statements.
7.2.1 Explicit Assumption:
Going Concern Assumption: The business prepares its financial reports based on the assumption that as far as it is aware it will
continue in its present operations into the foreseeable future.
Assets are therefore valued at their worth to the business as a going concern, not at their liquidation
value. They are recorded at their historical cost less accumulated depreciation, not at their market price.
If the entity is intending to close or change shape, the going concern assumption is no longer valid.
Non-current assets would then be valued at market value or the agreed value of the purchaser.
7.2.2 Implicit Assumption:
Periodicity Assumption:
In order to provide timely information, it is assumed that the entity’s economic activity can be divided
into nominated time periods. This is evidenced in the accounts through the title, eg Income Statement
for the year ended 31 March 20X1. This requires the preparer to determine which time period each
transaction or event relates in order to resolve any difficult allocation problems.
The periodicity assumption combined with the accrual basis concept gives rise to balance day
adjustments.
7.3 Accrual Basis Concept:
The effects of transactions and other events are recognised when they occur and are reported in the
financial statements of the periods to which they relate.
Accrued Expenses and Accrued Income accounts are created at balance day to comply with the Accrual
Basis concept.
Income and expenses often do not fit neatly into an accounting period but may cover parts of two
accounting periods, therefore at the end of the accounting period it is necessary to adjust the income and
expense accounts in the general ledger to include items which belong to the accounting period and to
exclude items which belong to another accounting period. Balance day adjusting general journal entries
will be written to take account of these items.
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7.4 Balance Day Adjustments (excluding GST) 7.4.1 Accrued Expenses (Current Liability)
Expenses due but unpaid at balance day. Eg. Wages due $500, Interest due on loan $300 Journal entry
20X1
Mar 31 Wages Expense 500
Interest on Loan 300
Accrued Expenses 800
For wages due but unpaid at balance day.
7.4.2 Accrued Income (Current Asset) Income earned in the current accounting period but not received before balance day. e.g. Commission due but not received $600. Journal entry
20X1
Mar 31 Accrued Income 600
Commission Income 600
For commission due but not received at balance day.
7.4.3 Bad Debts written off When accounts receivable fail to pay because they have been declared bankrupt. e.g. Further bad debts are to be written off $560. Journal entry
20X1
Mar 31 Bad Debts 560
Accounts Receivable 560
For bad debts written off at balance day.
7.4.4 Prepayments (Current Assets) Prepayments are expenses which have been paid in advance at balance day. e.g. Insurance paid in advance $250 Journal entry
20X1
Mar 31 Prepayments 250
Insurance Expense 250
For insurance paid in advance at balance day.
7.4.5 Income in Advance (Current Liability)
This is a liability because we have an obligation to provide a service for which we have already received cash in the current accounting period. E.g. Rent $2,500 received in advance Journal entry
20X1
Mar 31 Rent Income 2 500
Income in Advance 2 500
For rent received in advance at balance day.
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7.4.6 Accumulated Depreciation (Negative Non Current Asset) Depreciation is the systematic allocation of the cost of an asset less its residual value over its useful life. e.g. Depreciation is to provided on Motor Vehicles $20,000 at 20% p.a. straight line method Journal entry
20X1
Mar 31 Depreciation on Motor Vehicles 4 000
Accumulated Depreciation on Motor Vehicles
4 000
For depreciation provided on Motor Vehicles $20,000 at 20% p.a. on cost.
7.4.7 Allowance for Doubtful Debts (Negative Current Asset) As the accounts receivable may include some bad debts which have not yet been identified, an allowance can be made at balance date. e.g. A business has accounts receivable $20,000. From past experience, the accountant estimates that 3% will not be paid. Journal entry
20X1
Mar 31 Doubtful Debts 600
Allowance for Doubtful Debts 600
To create an allowance for doubtful debts equal to 3% of accounts receivable $20,000.
7.4.8 Inventory of Stationery (Current Asset)
e.g. $700 of stationery has not been used on balance day.
20X1
Mar 31 Inventory of Stationery 700
Stationery Expense 700
For stationery remaining on hand at balance day.
7.5 Reversing Entries Balance day adjustments create the following temporary asset and liability accounts in the ledger.
Accrued Expenses
Accrued Income
Prepayments
Income in Advance
Inventory of Stationery (or other consummable items)
On the day following balance day these accounts must be closed and the relevant income and expense accounts reopened.
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The following journal entries show how the adjustments illustrated in 7.4 would be reversed on 1 April 20X1.
General Journal GJ89
20X1
Apr 1 Accrued Expenses 800
Wages Expense 500
Interest on Loan 300
For reversing entry
Commission Income 600
Accrued Income 600
For reversing entry
Insurance Expense 250
Prepayments 250
For reversing entry
Income in Advance 2 500
Rent Income 2 500
For reversing entry
Stationery Expense 700
Inventory of Stationery 700
For reversing entry
7.6 Exercises for you to try:
7.6.1 The following information relates to Zhang’s Medical Centre
Trial Balance at 30 June 20X1
$NZ $NZ
Bank 10 160
Accounts Receivable 26 000
Medical supplies on hand 30 100
Vehicles 70 900
Lease of surgery 60 000
Accounts Payable 17 460
Capital - Zhang 95 630
Medical supplies expense 46 050
General expense 63 500
Surgery expense 77 000
Fees Income 285 340
Accumulated depreciation of vehicles 24 000
Wages Expense 27 320
Insurance Expense 12 000
Allowance for Doubtful Debts 600
Adjustments to be considered:
1. Wages $220 owing
2. Bad debts to be written off $300.
3. Allowance for doubtful debts to be 3% of accounts receivable
4. Depreciate vehicles at 10 per cent of cost.
5. Insurance prepaid $400
6. $1 000 stationery charged to surgery expense was on hand.
Study Guide 13-B3 Accounting Page 74
You are learning from a Taylors Study Guide.
Required.
a. Prepare the balance day adjustments on 30 June 20X1 in the General
Journal.
b. Adjust the Trial Balance as at 30 June 20X1.
c. Prepare an Income Statement for the year ended 30 June 20X1.
d. Prepare a Balance Sheet as at 30 June 20X1.
Advanced Notes to the Balance Sheet The following presentation is required in most Mid-Course Accounting Examinations:
Note 1 – Accounts Receivable
$NZ $NZ
Note 2 – Property Plant and Equipment
Delivery
Van
$NZ
Machinery
$NZ
For the year ended 30 June 20X1 Opening Carrying Amount
Plus Additions 0 0
Less Disposals 0 0
Less Depreciation
Closing Carrying Amount
As at 30 June 20X1
Historical Cost
Less Accumulated Depreciation
Closing Carrying Amount
Depreciation is calculated on the following rates:
Study Guide 13-B3 Accounting Page 75
You are learning from a Taylors Study Guide.
7.6.2 The following information relates to a flower shop that April Showers set up in Karangahape Road on
1 April 20X1. She has come to you, her accountant to find out if her business has made a profit at the
end of the first month.
APRIL SHOWERS
TRIAL BALANCE
AS AT 30 APRIL 20X1
$NZ $NZ
Inventory 2 795.85
Purchases Expense 7 716.30
Goodwill 5 735.25
Rent Expense 462.00
Electricity Expense 105.00
Cartage Inwards 95.35
General Expenses 295.85
Cartage Outwards Expense 195.65
Discount Allowed 92.50
Advertising Expense 456.78
Stationery Expense 565.00
Accounts Receivable 2 040.00
Vehicle Expenses 355.00
Insurance Expense 75.00
Interest Expense 115.00
Bank 1 365.00
Equipment 4 800.00
Motor Vehicle 7 500.00
Drawings 6 550.00
Commission Received 2 500.00
Sales Revenue 16 075.00
Discount Received 98.00
Loan 3 000.00
Accounts Payable 1 513.24
Capital 18 129.29
Study Guide 13-B3 Accounting Page 76
You are learning from a Taylors Study Guide.
Required: 1. Prepare General Journal entries to record the following balance day adjustments as at
30 April 20X1.
Inventory 30 April 20X1 $3 795.75
The amount of advertising due but unpaid is $21
Rent paid in advance: $92.40
Create an allowance for doubtful debts equal to 2% of accounts receivable
Depreciate property, plant and equipment at 20% p.a. on cost
Commission due but not received $118.00
Inventory of Stationery 30 April 20X1 $120.00
2. Adjust the Trial Balance as at 30 April 20X1
3. Prepare a classified Income Statement for the month ended 30 April 20X1
4. Prepare a classified Balance Sheet as at 30 April 20X1.
5. Prepare the closing journal entries.
6. Prepare the reversing journal entries
7. Prepare the following ledger accounts as they should appear from 30 April to 1 May 20X1.
Drawings
Capital
Advertising Expense
Accrued Expenses
Inventory
8. Explain to April Showers the importance of recording Depreciation in the accounts at the end of
each reporting period.
Study Guide 13-B3 Accounting Page 77
You are learning from a Taylors Study Guide.
7.6.3 Mid-Course Accounting Examination 2012 This question deals with the Financial Reporting requirements of Mere, a sole proprietor who operates a pet supplies retail store trading as Mokaikai Supplies. You are provided with the following Trial Balance for the fiscal year ended on 31 March 20X2.
Mokaikai Supplies
Trial Balance as at 31 March 20X2
Accounts Receivable 4,368
Advertising 354
Discount Allowed 2,350
Interest on loan 1,124
Inventory 39,312
Office Expenses 572
Purchases 130,000
Drawings 2,600
Insurance Expense 1,300
Shop Electricity Expense 5,408
Sales Returns 926
Shop Rent Expense 14,560
Shop Wages Expense 24,960
Office Wages Expense 14,560
Shop Fittings 56,160
Petty Cash 160
Bank 4,030
Term Deposit (4% p.a. due 31.08.20X3) 15,600
Bad Debts 112
Accumulated Depreciation on Shop Fittings 5,610
Allowance for Doubtful Debts 90
Capital – Mere 56,290
Interest Received 292
Sales Revenue 197,324
Accounts Payable 8,950
Loan (6% p.a.due 20X5) 49,900
Ignore GST for this question. Additional information:
Inventory is $78,000 at 31 March 20X2.
The annual insurance premium is $1,200 and one month has been paid in advance.
The term deposit has been invested for 6 months. Record the interest due but not received on reporting date.
Write off further bad debts of $168.
Adjust the Allowance for Doubtful Debts to equal 2.5% of Accounts Receivable.
Depreciate the Shop Fittings by 12% pa using the reducing balance method.
Record any interest owing on the loan.
Study Guide 13-B3 Accounting Page 78
You are learning from a Taylors Study Guide.
Required: (a) Adjust the Trial Balance on page 77 by crossing out the original number and writing the adjusted figure to the
left or right as appropriate, to record the adjustments required at reporting date. (b) Prepare an Income Statement for the year ended 31 March 20X2. (c) Prepare a Balance Sheet with Notes to the Balance Sheet for Accounts Receivable and Property, Plant and
Equipment as at 31 March 20X2.
7.5 Balance Day Adjustments with GST: GST is charged at the rate of 15 % on sales of goods and services in New Zealand.
1. Sales on credit
When a sale on credit for $2,300 including GST occurs the transaction is recorded as shown below:
Accounts Receivable 2,300
Sales Revenue 2,000
GST Payable 300
GST is a liability which the business must pay to the government.
2. Purchases on credit
When a purchase of $1,150 including GST occurs, the transaction is recorded as shown below:
Purchases Expense 1,000
GST Payable 150
Accounts Payable 1,150
As a result of these two transactions, the business owes the government $150.
Items exempt of GST include:
Financial services: eg Loan, bank charges, interest
Capital and Drawings
Internal payments eg wages
Domestic rent
All amounts stated are GST inclusive where applicable.
3. Accrued Expenses
eg Accounts owing for Wages $4,000, Advertising $276 and Interest $2 250.
Wages Expense 4 000
Advertising Expense 240
Interest Expense 2 250
Accrued Expenses 6 490
For expenses due but unpaid at balance
day.
Study Guide 13-B3 Accounting Page 79
You are learning from a Taylors Study Guide.
4. Accrued Income
eg A term deposit of $30,000 was invested on 1 January 20X1 at an interest rate of 8% per annum
payable every six months. Balance day is 31 March each year. Commission of $552 is owing to the
firm at balance day. The invoice was sent on 2 April 20X1.
Accrued Income 1 080
Interest Income 600
Commission Income 480
For income earned but not received at
balance day.
5. Bad Debts
eg A customer who owes $322 is to be written off as a bad debt on balance date.
Bad Debts 280
GST Payable 42
Accounts Receivable 322
For bad debts written off at balance day.
5. Prepayments
eg Insurance of $2 576 including GST has been paid 6 months in advance.
Prepayments 1 120
Insurance Expense 1 120
For insurance paid in advance at balance
day.
6 Income in Advance
eg Rent of $1 725 including GST has been received in advance.
Rent Income 1 500
Income in Advance 1 500
For rent received in advance at balance
day.
Balance day adjustments for Inventory, Depreciation and Allowance for Doubtful Debts do not contain
GST entries.
Study Guide 13-B3 Accounting Page 80
You are learning from a Taylors Study Guide.
ACCOUNTING GLOSSARY:
Term Unit Meaning
Accounting
1
Accounting Entity
Concept
Accounting Equation
Accounts Receivable
Accounts Payable
Accrual Basis
Concept
Assets
Auditor
Balance Sheet
Carrying Amount
Cash Transaction
Study Guide 13-B3 Accounting Page 81
You are learning from a Taylors Study Guide.
Chart of Accounts
Comparability
Credit Transaction
Current Assets
Current Liabilities
Depreciation
Drawings
Elements
Entity
Equity
Expenses
Faithful
Representation
Study Guide 13-B3 Accounting Page 82
You are learning from a Taylors Study Guide.
Going Concern
Assumption
Goodwill
Historical Cost
Income
Income Statement
Inventory
Invoice
Journal
Ledger
Liability
Matching Costs with
Income
Study Guide 13-B3 Accounting Page 83
You are learning from a Taylors Study Guide.
Monetary
Measurement
Non Current Assets
Non Current
Liabilities
Periodicity
Assumption
Property Plant and
Equipment
Reducing Balance
Relevance
Residual Value
Source Document
Straight Line
Transaction
Study Guide 13-B3 Accounting Page 84
You are learning from a Taylors Study Guide.
Trial Balance
Understandability
Units of Use