THE CPAP STUDY GUIDE TO VCE ACCOUNTING

Transcription

1 THE CPAP STUDY GUIDE TO VCE ACCOUNTING 4th edition Vicki Baron & Simon Phelan ISBN:

2 ABOUT THE AUTHORS Vicki Baron (B.Bus, Dip Ed) has been the Assistant Chief Assessor in Accounting for 16 years and is currently Head of Commerce at Haileybury College. She has taught senior Accounting for 25 years, has been a panel writer of Accounting Study Designs between 2000 and 2011 and has provided professional development to teachers for 15 years via the VCTA. Vicki is also the author of a number of publications and podcasts. She is a reviewer of Insight VCE Accounting Guides, has written numerous trial examinations and has over 15 years experience providing student lectures on exam preparation. Simon Phelan (B.Ed., B.Bus., Post Grad.Dip.Int.Ed) was Chief Assessor in Accounting between 2003 and 2008 and is currently Head of Senior School and a senior Commerce teacher at Rosehill Secondary College. He has been actively involved in both the setting and assessment of Accounting examinations for the VCAA, being a member of the Accounting Examination Setting Panel for 6 years, periodically serving as Panel Chairperson. Simon has previously held the positions of Head of Senior School at Elisabeth Murdoch College for 4 years and Year 11 Coordinator/Head of Accounting at Taylors College for 8 years. COPYRIGHT AND DISCLAIMER Please note that this publication is protected by copyright laws and no part of the publication can be reproduced without the express permission of CPAP. Last updated in The publication is in no way connected to the VCAA. Readers should be aware that the advice provided throughout the publication is the advice of the authors alone, and not the VCAA. CPAP Publishing GPO Box 3550 Melbourne Vic 3000 publications@commpap.com TEL: (03) Fax (03)

3 TABLE OF CONTENTS The Unit 3 Study Design... 4 WHAT IS ACCOUNTING?... 7 THE ACCOUNTING STANDARDS... 8 REVIEW QUESTIONS/APPLICATION EXERCISE 1 Introduction... 9 The Accounting Elements Business (Source) documents REVIEW QUESTIONS/APPLICATION EXERCISE 2 Accounting Elements Accounting for stock REVIEW QUESTIONS/APPLICATION EXERCISE 3 Accounting for Stock RECORDING TRANSACTIONS SPECIAL JOURNALS RECORDING TRANSACTIONS THE GENERAL JOURNAL REVIEW QUESTIONS/APPLICATION EXERCISE 4 Journals RECORDING TRANSACTIONS THE GENERAL LEDGER ACCOUNTING FOR THE GST RECORDING TRANSACTIONS CONTROL ACCOUNTS REVIEW QUESTIONS/APPLICATION EXERCISE 5 Ledgers THE TRIAL BALANCE UNIT 3: MINI EXAM NO BALANCE DAY ADJUSTMENTS REVIEW QUESTIONS/APPLICATION EXERCISE 6 Balance Day Adjustments CLOSING THE LEDGER REVIEW QUESTIONS/APPLICATION EXERCISE 7 Closing the Ledger ACCOUNTING REPORTS Cash Flow Statement The Income Statement The Balance Sheet REVIEW QUESTIONS/APPLICATION EXERCISE 8 Accounting Reports CASH VERSUS PROFIT UNIT 3: MINI EXAM NO BONUS PRACTICE EXAMINATION THE UNIT 4 STUDY DESIGN: WHAT IS AN ACCOUNTING SYSTEM - REVISITED? QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION ACCOUNTING PRINCIPLES EXTENSIONS TO RECORDING - FURTHER STOCK TRANSACTIONS SALES AND PURCHASE RETURNS STOCK VALUATION PRODUCT AND PERIOD COSTS REVIEW QUESTIONS/APPLICATION EXERCISE 1 Further stock transactions FURTHER BALANCE DAY ADJUSTMENTS PREPAID REVENUE ACCRUED REVENUE DEPRECIATION REVIEW QUESTIONS/APPLICATION EXERCISE 2 Further balance day adjustments DISPOSAL OF NON-CURRENT ASSETS REVIEW QUESTIONS/APPLICATION EXERCISE 3 Disposal of Non current Assets UNIT 4: MINI EXAM NO BUDGETED FINANCIAL REPORTS BUDGETED CASH FLOW STATEMENT BUDGETED INCOME STATEMENT VARIANCE REPORTS REVIEW QUESTIONS/APPLICATION EXERCISE 4 Budgeted Financial Reports ANALYSING BUSINESS PERFORMANCE PROFITABILITY EFFICIENCY LIQUIDITY STABILITY UNDERSTANDING RATIOS CONFLICTING RATIOS

4 ASSESSING PERFORMANCE GRAPHICAL REPRESENTATION OTHER PERFORMANCE MEASURES STRATEGIES TO IMPROVE PROFITABILITY AND LIQUIDITY REVIEW/APPLICATION QUESTIONS 5 Analysing performance UNIT 4: MINI EXAM NO THE NOVEMBER EXAMINATION EXAMINATION PREPARATION STRATEGY BONUS PRACTICE EXAMINATION

5 The Unit 3 Study Design Recording and reporting for a trading business This unit focuses on financial accounting for a single activity trading business as operated by a sole trader and emphasises the role of accounting as an information system. Students use the double entry system of recording financial data and prepare reports using the accrual basis of accounting. The perpetual method of stock recording with the First In, First Out (FIFO) method is also used. Where appropriate, the accounting procedures developed in each area of study should incorporate the application of accounting principles and the qualitative characteristics of accounting information. AREA OF STUDY 1 Recording financial data This area of study focuses on identifying and recording financial data for a single activity sole trader. Students record data using double entry accounting to provide the owner with accounting information, enabling the owner to make informed decisions about the operation of the business. Outcome 1 On completion of this unit the student should be able to record financial data for a single activity sole trader using a double entry system, and discuss the function of various aspects of this accounting system. To achieve this outcome the student will draw on key knowledge and key skills outlined in Area of Study 1. Key knowledge applicable accounting principles and qualitative characteristics of accounting information the elements of financial reports: assets, liabilities, owner s equity, revenue and expenses the two-fold effect of transactions on the accounting equation source and business documents for a trading business, including cash receipts, cheque butts, sales and purchases invoices, statements of account, memos, bank statements stock cards using the First In, First Out (FIFO) method for cash and credit purchases and sales of stock, advertising use and drawings the GST Clearing account special journals: sales journal, all credit sales of stock purchases journal, all credit purchases of stock cash receipts journal, all receipts of cash with GST not applicable on discount expense cash payments journal, all payments of cash with GST not applicable on discount revenue the use of the general journal to record infrequent non-cash transactions: establishing a double entry system correction of errors contribution of non-current assets by the owner at agreed value use of stock for advertising purposes withdrawals of stock by the owner with GST not applicable bad debts with GST not applicable the distinction between historical cost and agreed value in relation to non-current assets the general ledger using T-form accounts the process of posting to the general ledger from the general journal and special journals on a monthly basis the process of balancing the general ledger and subsidiary ledger accounts in preparation for the next reporting period reasons for using control accounts control accounts for debtors, creditors and stock subsidiary ledgers and schedules for debtors and creditors, with individual transactions posted to the subsidiary ledger accounts on the date the transaction occurs internal control procedures and practices of this accounting system pre-adjustment trial balance. Key skills use correct accounting terminology identify, classify and record financial data 5

6 explain and apply the qualitative characteristics and accounting principles underlying the recording of financial data and presentation of accounting information apply theoretical knowledge to simulated situations explain the effect of financial transactions on the accounting equation discuss the function of the various aspects of the accounting system for a single activity trading business. AREA OF STUDY 2 Balance day adjustments and reporting and interpreting accounting information The preparation of financial reports at the end of the reporting period provides information for planning and decision making by the owner of a small business. Students complete the accounting processes required at balance day and apply the accrual method of accounting in the preparation of accounting reports. They identify the differences between cash and profit and explain the implications of these differences when using reports to make decisions. Outcome 2 On completion of this unit the student should be able to record balance day adjustments and prepare and interpret accounting reports. To achieve this outcome the student will draw on key knowledge and key skills outlined in Area of Study 2. Key knowledge applicable accounting principles and qualitative characteristics of accounting information the recording and reporting of balance day adjustments: straight-line method of depreciation stock loss or gain as revealed by a physical stocktake the asset approach to recording prepaid expenses with GST being recorded at the time of payment accrued expenses with GST being recorded at the time of payment the payment of accrued expenses in the subsequent reporting period closing entries for revenue and expenses in the general journal and in the general ledger the preparation of the Profit and Loss Summary account with transfer of profit or loss to Capital account transfer of Drawings to Capital account post-adjustment trial balance classified accounting reports: Cash Flow Statement using the transaction approach Income Statement Balance Sheet the effect of transactions on the accounting equation and the accounting reports the distinction between cash and profit. Key skills use correct accounting terminology identify, classify and record financial data and report accounting information explain and apply the qualitative characteristics and accounting principles underlying the recording of financial data and the reporting and presentation of accounting information apply theoretical knowledge to simulated situations discuss the effect of financial transactions on the accounting equation and accounting reports distinguish between cash and profit and explain the effect on accounting reports prepare, explain and interpret accounting reports discuss the function of the various aspects of the accounting system for a single activity trading business. 6

7 WHAT IS ACCOUNTING? Accounting is a process. It involves the recording and reporting of financial information to allow users of financial information to make decisions. This process consists of three stages Inputs, Processing and Output. Inputs This is the raw data drawn from the day to day activities of the business [The data is found in documents which provide evidence that a transaction has occurred.] Processing At this stage, the data is sorted, classified and recorded. The data found in documents is eventually recorded in Journals, the General Ledger, Subsidiary Ledgers and records and a Trial balance is prepared Output Information in the records are summarised in the financial reports Financial reports that summarise the affairs of the business are prepared: the Statement of Cash Flows, Profit and Loss Statement and Balance Sheet. The accounting system used in VCE Accounting has five key features that form the basis of this system. Students are expected to know these features: 1. Single activity trading business - Single activity performs only one activity, sells one area of stock while a trading business purchases stock from a supplier and resells it at a higher price (mark-up) 2. Double entry system - each transaction requires a double entry a debit entry and a credit entry. These entries must balance to ensure the system works and the accounting equation balances. 3. Accrual basis for reporting - each transaction is recorded when it occurs hence the business recognises revenue when earned (not necessarily when cash is received) and expenses are recognised when incurred which is not always when they are paid. 4. Perpetual method of stock recording - a method of recording stock movements so a continuous record is kept. The cost price of stock is known and recorded for each sale. Individual stock records are kept using stock cards. 5. First In, First Out cost assignment method - a cost assignment method where it is assumed that the price stock purchased by the business (IN) is the first stock that is sold, withdrawn, donated or lost (OUT). It is an assumption and it is a simpler and cheaper method of assigning costs to stock under the perpetual inventory system. Exam Tip: Students are expected to be able to define these terms. For example, in 2011 students were asked what is meant by 'accrual accounting' and in 2010 students were asked why businesses adopt the FIFO cost assignment method. 7

8 THE ACCOUNTING STANDARDS The Accounting Standards are a set of rules that govern the way in which financial reports are prepared so that different financial reports are comparable. These standards have left us with 4 Qualitative Characteristics and 7 Accounting Principles that guide our recording and reporting. Qualitative Characteristics of accounting information Understandability Information provided in financial reports must be understandable by users. Users of financial reports are assumed to have a reasonable knowledge of accounting, and a willingness to study the information with reasonable diligence. Relevance Information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluation. (AASB Framework, para. 26) Reliability Information must have the qualitative characteristics of reliability. This means it must involve: Faithful representation; Substance over form; Neutrality; Prudence; and Completeness. Comparability Users must be able to compare the financial reports of a business from one period to the next in order to identify trends and areas of concern, as well as assess performance. Exam Tip: Relevance and Reliability are more easily understood and students tend to use these as answers to examination questions relating to the qualitative characteristics. However, this is not always the best approach and students must be prepared to use the other characteristics in their responses as examiners have asked for this in the past. ACCOUNTING PRINCIPLES Entity The business must be a separate accounting entity from its owner and all transactions between the owner and the business must be clearly identified. Going concern It is assumed that the life of the business will be indefinite. This is so that a distinction can be made between assets, which will provide benefit to future reporting periods, and expenses that are totally consumed within one reporting period. Reporting period The ongoing life of a business is broken into regular intervals of time for the preparation of financial reports. Exam Tip: The change to the examination format may mean that each question involves different lengths of time for the reporting period. It will be more important than before to read the question carefully to ensure the correct time period is used. Monetary unit All transactions should be recorded and reported in the currency of the country in which the business operates. This allows for comparability and understandability. 8

9 Conservatism It is acknowledged that gains will not be recognised until earned and losses will be recognised as soon as they are likely to occur. Exam Tip: The 2012 November examination asked how Conservatism applied to the use of the 'Lower of cost and net realisable value principle'. Students should avoid providing a rote learned definition of Conservatism including reference to not recognising gains until certain. This is not appropriate as the question related to an expense and an asset. Students must only provide the relevant part of a definition rather than the rote learned full definition to demonstrate their ability to apply knowledge. Historical cost All transactions are recorded at their original purchase price. Therefore, items are shown in the accounting records at their historical (original) price. Consistency The accounting methods used by the business should be applied in the same manner from one reporting period to another. Exam Tip: When asked to explain with reference to an Accounting Principle or a Qualitative Characteristic, students must ensure they don't just provide a rote learned definition and not link their response to the scenario/item provided. In the 2012 examination, a question asked students to refer to one Accounting Principle and two Qualitative Characteristics in relation to a particular asset. Responses did not require strict definitions, but instead a qualified definition with a link to the asset. REVIEW QUESTIONS/APPLICATION EXERCISE 1 Introduction Sportz Plus Balance Sheet as at 30 June 2016 Assets Equities Current Assets Current Liabilities Cash at Bank Accrued Wages Debtors Creditors Stock GST Clearing Prepaid Rent Expense Loan ABC Non Current Assets Non Current Liabilities Motor Vehicle (at cost) Loan ABC Accumulated Depreciation (9 000) Mortgage Land & Buildings Accumulated Depreciation (40 000) Owners Equity Capital L Dean Total Assets Total Equities Using the Balance Sheet above, explain how the four Qualitative Characteristics and seven Accounting Principles are utilised. 2. Explain what is meant by the FIFO cost assignment method. 3. Explain why it is necessary for a business to adopt a cost assignment method. 9

10 The Accounting Elements All financial transactions will impact upon the accounting elements. These elements form the basis of an accounting system and can be defined as: Assets An asset is a resource controlled by the entity as a result of a past transaction and from which future economic benefits are expected to flow to the entity. Liabilities A liability is a present obligation of the entity arising from a past transaction, the settlement of which is expected to result in an outflow of economic benefits from the entity. Owners Equity Owners Equity is the residual interest in the assets of the entity after deducting all its liabilities. i.e. OE = A L. This is the accounting equation from which we develop our accounting system. Because equity is seen as what is left of the assets after deducting what is owed to outsiders (liabilities), the equation must always balance. Revenue For the purposes of this study, revenue is inflows of economic benefits or savings in outflows in the form of increases in assets or decreases in liabilities that lead to an increase in owner s equity, except capital contribution. Exam Tip: In the 2012 examination two revenue items were provided and students were asked to describe how those items met the definition of a revenue. This required students to not use a rotelearned response but instead apply the relevant components of the definition. Expenses Expenses are outflows of economic benefits or reductions in inflows in the form of decreases in assets or increases in liabilities that lead to a decrease in owner s equity, except drawings. Exam Tip: These are textbook definitions for the Accounting elements and they must be known. However, most examination questions do not require a full textbook definition. They require the definition to be modified so it relates to the specific Asset, Liability, Revenue, Expense or Owners Equity item being discussed. An example follows. Below is an extract from an Income Statement: Less Expenses Wages Discount Expense Advertising Interest Expense When asked to explain why Discount Expense is reported as an expense for a business it might appear that the textbook definition of Expenses may suffice. This definition is: Expenses are outflows of economic benefits or reductions in inflows in the form of decreases in assets or increases in liabilities that lead to a decrease in owner s equity, except drawings. However, in analysing exactly what a discount is, we can see that the highlighted terms in the definition are not appropriate in this instance. A discount given to a Debtor reduces the amount of cash we will receive from that Debtor. Therefore, the discount results in a reduction in inflows less cash is received from the Debtor and it results in a decrease in Assets the amount owed by the Debtor is decreased. 10

11 Exam Tip: In an examination situation, this question is likely to be worth two marks. A straightforward rote learned definition would see students only receive one mark because their definition would not be appropriate. By removing the highlighted terms in the definition, the full two marks would be awarded. Business (Source) documents To commence recording financial information we need to understand the structure of our accounting system. The diagram below details our accounting system. At each stage through this Study Guide the diagram will appear to remind students where we are in the accounting system and the purpose of the particular section being discussed. To commence recording, a business requires reliable evidence of financial information. This reliable information is found in the Documents prepared. Financial information Documents Journals * General Journal * Special Journals Ledger Accounts * General Ledger * Subsidiary records Trial Balance Balance Day Adjustments Postadjustment Trial Balance Closing the Ledger Financial Reports Documents are the base for our accounting system. The Qualitative Characteristic of Reliability states that information must have the qualitative characteristics of reliability. This means it must involve: Faithful representation; Substance over form; Neutrality; Prudence; and Completeness. By using documents, a business has evidence of all transactions that occur. These documents provide material evidence and should be free from bias. In Unit 3 there are seven documents that may be used: 1. Cash Receipt; 2. Cheque Butt; 3. Sales Invoice; 4. Purchase Invoice; 5. Statement of Account; 6. Memorandum (Memo); and 7. Bank Statements. 11

12 Each of these documents can be linked to certain transactions and students must be aware of the type of transaction that may be associated with a particular document. A summary of business documents and their transactions is contained in the following table: Document Transaction Example Cash Receipt All times a business receives cash Cash sale of stock Receipt from Debtor Receipt of Loan Capital contribution Proceeds from sale of NCA Cheque Butt All times a business pays out cash Cash purchase of stock Payment to Creditor Repayment of Loan Drawings Cash Purchase of a NCA Cash Expenses Sales Invoice Credit sale of stock Credit Sale of Stock Purchase Invoice Credit purchase Credit Purchase of Stock Credit Purchase of NCA Credit Payment of an Expense Memorandum Non-cash internal transaction by the Bad Debts business Drawings of Stock or NCA Stock Loss/Gain Other Balance Day Adjustments Contribution of NCA by the owner Statement of Summary of Transactions with a Debtors Statement of Account Account Debtor/Creditor Creditors Statement of Account Bank Statement Summary of cash flows in and out of the business bank account. Used as a crosschecking mechanism with business records Allows preparation of a Bank Reconciliation Statement (Unit 1) Allows for detection of errors and correcting journal entries In identifying the type of document being used students should: Identify the name of the business in the question Identify the name of the business issuing the document (usually at the top of the document) Identify the title of the document 12

13 REVIEW QUESTIONS/APPLICATION EXERCISE 2 Accounting Elements 1. Discuss how the use of documents improves the reliability of financial information. 2. Explain the circumstances that would see GST Clearing reported as a Current Asset. 3. Explain the difference between a Current and a Non-Current Asset. 4. Discuss why assets and liabilities are classified in the Balance Sheet. 5. Explain what is meant by.. as at.. in the title of the Balance Sheet. 6. Explain why the Loan may be reported as both a Current and Non-Current Liability. 7. Examine the document below and answer the questions that follow: Xenon Limited 43 Smith Road Piermont ABN: Invoice: XL 28 : 8/08/16 Credit to: Allen s Appliances 17 Winter Road Samville Item Qty Unit Price GST Total Copper Kettles 20 $50 $5 $1100 SD Electric Frypans 20 $40 $4 $880 4-Slice Toasters 10 $40 $4 $440 Freight 50 $2 $0.20 $110 Monthly Insurance charge 1 $400 $40 $440 Invoice Total $2970 a. What type of document is shown? b. Who issued the document? c. What type of transaction has occurred? d. Who are Allen s Appliances? e. In which journal would the document be recorded? Task 1 Nick Anderson operates a watch and jewellery repair shop in Avondale Heights called Nick of Time. Extracts from the cash journals of the business for September 2016 showed the following. Cash Receipts Journal Details Rec. Bank Disc. Exp. Debtors Cost of sales Sales Sundries GST Totals

14 Cash Payments Journal Details Ch. Bank Disc. Rev. Creditors Stock Wages Sundries GST Totals only $ Bank Cross-reference Amount $ Cross-reference Amount $ Sept 1 Balance 200 Nick s most recent bank statement was issued on 30 September 2016 and it revealed that his bank balance was $50 CR. After comparing the Cash Receipts Journal and the Cash Payments Journal with the bank statement, it was found that the following items appeared in only one set of records: The bank has charged $20 for transaction fees. A deposit of $110 in the cash receipts journal placed into the deposit drop box of the bank late in the day on 30 September 2016 does not appear on the bank statement. The bank has directly credited the bank account of Nick of Time with $120, representing interest received on a term deposit. Cheques written in September 2016 that did not appear on the bank statement: Cheque 146 $ $ $600 C. Campbell paid $220 (including $20 GST) to Nick for Repair Fees but the cheque has been dishonoured. Interest on overdraft charged by the bank for the month totals $25. Required a. Complete the cash journals for September b. Calculate the bank balance in the books of Nick of Time as at 30 September Task 2 On 1 November 2016, the records of Pulsating Pecs Gym showed a positive bank balance of $ The firm s cash journals for November 2016 (prior to receiving the bank statement) were totalled as follows: Cash Receipts Journal $ Cash Payments Journal The bank statement for November 2016 showed that at 30 November 2016, the gym had a balance of $4 435 DR, and revealed the following: Cheque #8751 for $2 300, and cheque #8763 for $615, had not been presented. A cheque from A. Weid for $484 (including $44 GST) had been debited on the bank statement, because it had been dishonoured. Interest of $245 had been credited in the bank statement. 14

15 $6 970 banked on 29 November 2016 did not appear on the bank statement. Cheque #8778 for $78 had been wrongly entered in the Cash Payments Journal as $87. Bank fees and charges amounting to $50 were debited in the bank statement. Required Calculate the bank balance according to the cash records of Pulsating Pecs Gym as at 30 November Cross-reference Amount Bank Cross-reference Amount $ $ Nov 1 Balance 2010 Accounting for stock The Unit 3 course requires students to record and report financial information for a trading firm. A trading firm is a business that buys goods from a supplier and resells that stock to a customer at a higher price. The difference between the price that stock was purchased for (cost price) and the price stock is sold for (selling price) is referred to as the mark-up. Mark-up may be expressed as a percentage of cost or a fixed dollar value. These goods that are bought and sold are referred to as Stock and will form the basis of much of the recording and reporting during your studies. Mark-up may be calculated in one of two ways when expressed as a percentage: Cost Price = Selling Price /1.markup Selling Price = Cost Price x 1.markup Thus if the mark-up on goods is 60% Cost Price = Selling Price /1.6 Selling Price = Cost Price x 1.6 Exam Tip: In an examination situation mark up may only be provided in the introductory information to a question. Students are advised to take note of this information as it may not be repeated further in the question yet may be needed to assist in responding to a question. A trading firm will be required to record many different transactions relating to stock. These include the following: Cash purchase of stock from supplier; Credit purchase of stock from supplier; Cash sale of stock to customer; Credit sale of stock to customer; Withdrawal of stock from the business by the owner; Use of stock for advertising purposes through use as display items or as a donation of stock to charities/sporting clubs/raffles; Loss of stock due to a range of factors; Gain of stock from a range of sources; and 15

16 To assist a business in monitoring stock, its movement and cost, a business will adopt a stock recording system and a cost assignment method. In Unit 3, all businesses will adopt the: Perpetual Inventory system where a continuous record of all stock movements is kept. The cost price of all stock is known and can be applied to all transactions. First In, First Out (FIFO) cost assignment method where all stock moves on the concept of First In, First Out. The first stock purchased by the business (in) is the first stock to be sold (out). Exam Tip: In the June 2010 examination students were asked 'Why busineeses adopt the FIFO cost assignment method'.students must remember that FIFO is an assumption and it is used because it is often cheaper and easier to use and best resembles the desired flow of stock. It is not 100% accurate. Recording stock transactions Recording stock transactions involves the use of a number of different Journals, General Ledger accounts and the Subsidiary record known as a Stock Card. A summary of stock transactions, their documents and the records used is contained in the following table: Transaction Document Record(s) Cash Purchase of Stock Cheque Butt Cash Payments Journal Stock account Bank account Stock Card Credit Purchase of Stock Purchase Invoice Purchases Journal Stock account Creditors account Stock Card Cash Sale of Stock Cash Receipt Cash Receipts Journal Stock /Cost of Sales account Bank/Sales account Stock Card Credit Sale of Stock Sales Invoice Sales Journal Stock /Cost of Sales account Debtors /Sales account Stock Card Withdrawal of Stock by Memorandum General Journal Owner Stock account Drawings account Stock Card Use of Stock for Advertising Memorandum General Journal Stock account Advertising account Stock Card Stock Loss Memorandum General Journal Stock account Stock Loss account Stock Card Stock Gain Memorandum General Journal Stock account Stock Gain account Stock Card Exam Tip: Recording transactions into financial records is the basic skill involved in accounting. Practice in making such recordings is essential, as every examination will require students to undertake this basic recording to ensure students understand the fundamentals of the recording and reporting process. Examples of these recordings is set out below: 16

17 Allen Appliances: example of recording Transactions for the month of January 2016 for Allen s Appliances: Jan 1 Purchased 20 units of the SD Electric $50 each (plus $5 GST each) on credit from Xenon Ltd [Inv XL23]. Jan 4 Cash Sale of 5 SD Electric Frypans for $100 each (+ $10 GST each) [Rec. 1]. Jan 7 Cash Purchase of 10 SD Electric $50 each plus GST [Chq 101]. Jan 8 Took home 1 SD Electric Frypan [Memo 1]. Jan 12 Sold 3 SD Electric Frypans on credit to Rye Hospital for $100 each plus GST [Inv. AA1]. Jan 15 Donated 1 SD Electric Frypan to Seaford Cricket Club for their annual raffle [Memo 2]. Jan 31 Conducted a physical stocktake and found 19 SD Electric Frypans on hand. The journal entries for these transactions are: Purchases Journal 2016 Creditor Inv. Stock GST Creditors Jan-01 Xenon Ltd XL Cash Receipts Journal 2016 Details Rec. Bank Disc. Exp Debtors Cost of Sales Sales Sundries GST 04-Jan Sales Cash Payments Journal Chq. Disc. Creditors Stock 2016 Details Bank Rev Wages Sundries GST 07-Jan Stock Sales Journal 2016 Debtor Inv. Cost of Sales Sales GST Debtors 12-Jan Rye Hospital AA General Journal Details General Ledger Subsidiary Ledger 2016 Debit Credit Debit Credit 08-Jan Drawings 50 Stock 50 Withdrew 1 SD Electric Frypan for own use [ Memo 1] 15-Jan Advertising 50 Stock 50 Donated 1 SD Electric Frypan to Seaford Cricket Club [ Memo 2] 17

18 Exam Tip: When recording stock transactions in the General Journal (as above), students are often asked to complete a narration. To gain the mark allocated for the narration students must include (1) the quantity of stock involved, (2) the type of stock involved, and (3) the document number. If any of these three pieces of information are missing, students are unlikely to be awarded the mark. Exam Tip: In the 2012 examination students were required to calculate two 'missing' amounts from two special journals. Students were provided with a box to complete their 'workings'. Students are advised to use this workings box as assessors will check workings if they believe a transcription or arithmetical error has occurred. Hence students can still be awarded full marks even if the amount in the journal appears incorrect. The ledger entries for these transactions are: Stock Cross-reference Amount Cross-reference Amount 1/1/16 Creditors /1/16 Cost of Sales /1/16 Bank 500 Drawings 50 Cost of Sales 150 Advertising 50 Debtors Cross-reference Amount Cross-reference Amount 31/1/16 Sales/GST Clearing 330 Drawings Cross-reference Amount Cross-reference Amount 31/1/16 Stock 50 Advertising Cross-reference Amount Cross-reference Amount 31/1/16 Stock 50 Cost of Sales Cross-reference Amount Cross-reference Amount 31/1/16 Stock 250 Stock 150 Sales Cross-reference Amount Cross-reference Amount 31/1/16 Bank 500 Debtors

19 Bank Cross-reference Amount Cross-reference Amount 31/1/16 Sales/GST Clearing /1/16 Stock / GST Clearing 550 Creditors Cross-reference Amount Cross-reference Amount 31/1/16 Stock / GST Clearing GST Clearing Cross-reference Amount Cross-reference Amount 31/1/16 Creditors /1/16 Bank 50 Bank 50 Debtors 30 The Ledger entries above conform to the double-entry method of recording that is the basis of Unit 3 recording. Each transaction will have a two-fold effect on the Accounting Equation. Stock cards and stock losses/gains The Ledger accounts record the transactions according to how they have affected the accounting elements. We are also required to record the movements of the individual line of stock. This is done via a subsidiary record the Stock Card. A Stock Card will record all the movements of a particular line of stock. Example of a Stock Card: Allan s Appliances Stock Item: SD Electric Frypan Details IN OUT BALANCE Qty Unit Cost Total Cost Qty Unit Cost Total Cost Qty Unit Cost Total Cost 1/01/2016 Inv XL /01/2016 Rec /01/2016 Chq /01/2016 Memo /01/2016 Inv AA /01/2016 Memo The Stock Card shows all movements of this line of Stock. It is recorded in date order. Exam Tip: Entries in the Stock Card must be at the cost price. If the selling price is used for the sales entries, the figure in the Balance section would make no sense. Exam Tip: Information in the details column must show the document number. This provides a link back to the original source of the information. To use the title of the transaction such as Credit Purchase for the entry on 1 January 2010 is likely to see a 1 mark penalty applied. Exam Tip: Recent examinations have seen students forget the basic rules for recording in Stock Cards. As well as using document numbers and the cost price, students must ensure they exclude GST from the entries recorded in the Stock Card. 19

20 At the conclusion of an exercise, or at the end of a reporting period, the information that is shown in the Stock Card is checked for accuracy of recording. This is done using a physical stocktake, whereby the actual amount of stock on hand is physically counted. The result is then compared with the figure shown in the Stock Card. From here there are two possible outcomes: 1. The Physical count reveals an amount less than what is shown in the Stock Card. This is known as a Stock Loss. It can occur due to: Theft of stock; An undersupply of stock from the supplier; An oversupply of stock to a customer; A recording error in the Stock Card; and/or An error on the original Invoice. 2. Physical count reveals an amount more than what is shown in the Stock Card. This is known as a Stock Gain. It can occur due to: An oversupply of stock from the supplier; An undersupply of stock to a customer; A recording error in the Stock Card; and/or An error on the original Invoice. Stock gain is recorded at the lowest value from the Stock Card if two cost prices of stock are provided. A Stock Loss is an Expense and a Stock Gain is Revenue and each will be reported as such in the Income Statement. Exam Tip: In a situation where a business sells multiple lines of Stock, it is possible for there to be a Stock Loss in one line and a Stock Gain in another. In this situation, the Loss and the Gain are netted off against each other and only the net result is reported. Students need to be aware that this is a possible occurrence and may surface in the examination. In the example above, the stocktake revealed 19 units on hand and 20 units in the Stock Card. This business has a Stock Loss and it must be recorded: General Journal Details General Ledger Subsidiary Ledger 2016 Debit Credit Debit Credit 31-Jan Stock Loss 50 Stock 50 Loss of 1 SD Electric Frypan [Memo 3] Stock Cross-reference Amount Cross-reference Amount 31/1/16 Creditors /1/16 Cost of Sales 250 Bank 500 Drawings 50 Cost of Sales 150 Advertising 50 Stock Loss 50 20

21 Stock Loss Cross-reference Amount Cross-reference Amount 31/1/16 Stock 50 Stock item: SD Electric Frypan Details IN OUT BALANCE Qty Unit Cost Total Cost Qty Unit Cost Total Cost Qty Unit Cost Total Cost 1/01/2016 Inv XL /01/2016 Rec /01/2016 Chq /01/2016 Memo /01/2016 Inv AA /01/2016 Memo /01/2016 Memo Recording with more than one cost price The previous example involved a straightforward series of entries using FIFO. The recording becomes more difficult when the business is dealing with a line of stock with 2 different cost prices. Transactions for the month of March 2016 for Allan s Appliances: Mar 1 10 units of the SD Electric $50 each on hand. Mar 6 Cash Sale of 7 SD Electric Frypans for $100 each plus GST [Rec. 12]. Mar 11 Purchase of 15 SD Electric $60 each (plus GST) on credit from Xenon Ltd [Inv XL46]. Mar 22 Sold 7 SD Electric Frypans on credit to Mead Restaurant for $110 each (plus $11 GST each) [Inv. AA11]. Mar 31 Conducted a physical stocktake and found 11 SD Electric Frypans on hand. Cash Receipts Journal Details Rec. Bank Disc. Exp Debtors Cost of Sales Sales Sundries GST 06-Mar-16 Sales Purchases Journal Creditor Inv. Stock GST Creditors 11-Mar-16 Xenon Ltd XL Sales Journal Debtor Inv. Cost of Sales Sales GST Debtors 22-Mar-16 Mead Restaurant AA After these transactions, the Stock Card would appear as: Stock item: SD Electric Frypan Details IN OUT BALANCE Qty Unit Total Qty Unit Total Qty Unit Cost Total 21

22 Cost Cost Cost Cost Cost 1/03/2016 Balance /03/2016 Rec /03/2016 Inv XL /03/2016 Inv AA The Stock Card demonstrates the use of FIFO. The older stock (with a cost price of $50) is sold before the newer, more expensive stock. REVIEW QUESTIONS/APPLICATION EXERCISE 3 Accounting for Stock 1. The following information relates to Erin s Exercise Bikes a small business selling exercise bikes and gym equipment: Stock on Hand 1 April 2016: Quantity Cost Price Excel Exercise Bike 12 $200 Elite Exercise Bike 15 $250 Equal Exercise Bike 10 $150 Transactions for April 2016 were: Apr 2 Sold 4 Excel Exercise Bikes for $400 cash plus GST (Rec 45). Apr 5 Credit purchase of 10 Equal Exercise Bikes for $160 each plus GST from Get Fit Ltd (Inv 98). Apr 6 Cash sale of 2 Equal Exercise Bikes for $320 each (plus $32 GST each) (Rec 46). Apr 11 Credit sale of 5 Elite Exercise Bikes to Core Gymnasium for $550 each including GST (Inv EE32). Apr 14 Took 1 Equal Exercise Bike home for own use (Memo 3). Apr 17 Used 1 Elite Exercise Bike as part of a store display (Memo 4). Apr 19 Sold 2 Excel Exercise Bikes for cash for $440 each including GST (Rec 47) Apr 23 Credit sale to Victory Gym of 5 Excel, 5 Elite and 5 Equal Exercise Bikes. All items sold at 100% mark up (Inv EE33). Apr 27 Cash sale of 3 Equal Exercise Bikes for $320 each plus GST (Rec 48) Apr 29 Credit purchase of 10 Excel and 10 Elite Exercise Bikes from Get Fit. Cost prices were $220 (Excel) and $280 (Elite) each plus GST (Inv 105). Apr 30 A Physical Stocktake revealed the following quantities of stock on hand: Excel 11 units Elite 14 units Equal 8 units Complete the following tasks: a. Calculate the value of Stock on hand at 1 April 2016 b. Record the transactions into the Journals of Erin s Exercise Bikes c. Record the transactions into the Stock Cards for Erin s Exercise Bikes d. Calculate the value of Stock on hand at 30 April 2016 e. What is meant by the term mark up? f. Explain how the concept of FIFO is demonstrated in the above transactions. g. Calculate the total cost price of all stock sold during April. h. Calculate the total value of all sales for the month of April. i. Explain why the transaction on 17 April is treated as an expense. j. Explain how a Stock Loss may have occurred for this business. k. Discuss how Stock Cards can assist a business in managing stock. 22

23 RECORDING TRANSACTIONS SPECIAL JOURNALS Financial information Documents Journals * General Journal * Special Journals Ledger Accounts * General Ledger * Subsidiary records Postadjustment Trial Balance Trial Balance Closing the Ledger Balance Day Adjustments Financial Reports In the previous section we looked at recording transactions involving stock. Those transactions were recorded into Journals. There are two broad groups of Journals used in Unit 3 Accounting the General Journal and Special Journals. Special Journals are used to group similar transactions together so the information about particular transactions is stored in the same location. Special Journals also allow specialisation amongst staff as different staff can be delegated to look after different journals. The journals also allow for the data to be summarised and provide a daily detailed record of all transactions. The table below outlines the four Special Journals and the transactions that are recorded in them: Journal Document Transactions Cash Receipts Journal - Receipt Cash sale of stock records all transactions where Receipt from Debtor the business receives cash Receipt of Loan Capital contribution Proceeds from sale of NCA Interest received GST Collected GST Refund Cash Payments Journal - Cheque Butt Cash purchase of stock records all transactions where Payment to a Trade Creditor the business pays out cash Repayment of Loan Drawings Cash Purchase of a NCA Cash Expenses Cash Purchase of a CA GST Paid GST Settlement Sales Journal - records all Sales Invoice Credit Sale of Stock transactions where the GST Earned business sells Stock on credit Purchases Journal - records all Purchase Invoice Credit Purchase of Stock transactions where the business buys Stock on credit GST Incurred 23

24 Exam Tip: The VCE Accounting Study Design provides templates for the Special Journals these templates outline the column headings to be used in all examination questions and students should be familiar with them. They are provided below. Cash Receipts Journal Details Rec. Bank Disc. Exp Debtors Cost of Sales Sales * Sundries GST Cash Payments Journal Details Chq. Bank Disc. Rev Creditors Stock * * Sundries GST Sales Journal Debtor Inv. Cost of Sales Sales GST Debtors Purchases Journal Creditor Inv. Stock GST Creditors The templates for the Cash Receipts Journal and the Cash Payments Journal provide blank columns. These columns will be labelled according to the particular question being asked and will reflect payments or receipts that occur frequently and therefore justify their own column. In some cases a blank column may not appear as it is not being used. Items of an irregular nature will be recorded in the Sundries column. Exam Tip: The June 2010 Examination asked why the total of the 'Sundries' column is not posted to the General Ledger.' Students must understand the nature of the Sundries column and the role it plays in reporting. Examples of completed journals are shown below: Cash Receipts Journal 2016 Details Rec. Bank Disc. Exp Debtors Cost of Sales Sales Sundries GST 1-May Sales May Debtor - S. Smith May Sales May Sales May Debtor - P. Horton May Sales May Capital May Sales Interest Revenue May Sales

25 Cash Payments Journal 2016 Details Chq. Bank Disc. Rev Creditors Stock Drawings Wages Sundries GST 1-May Stock May Advertising May Wages May Creditor - Get Fit May Drawings May Loan - ABC May Office Supplies May Office Equipment May Rent Expense May Stock May Creditor - Hisense Another benefit of Special Journals is the ability to cross-check information. The total of all columns (excluding the Cost of Sales column in the Cash Receipts Journal) will equal the figure in the Bank column once the respective discounts have been deducted. Exam Tip: Note that in the cash Journals, the titles in the Details column reflect the titles of the Ledger account to be used. In both cash journals there are transactions involving discounts. In recording discounts, students must note how they are recorded: In the Debtors/Creditors column, the total amount owing/owed is recorded. The amount of the discount is recorded in the discount column. The amount recorded in the Bank column is the net amount the amount owing/owed less the discount. Exam Tip: Receipts from debtors in the CRJ will generally involve a discount and the correct recording is likely to attract one mark. Students who neglect to record the discount accurately are unlikely to be awarded the mark. Sales Journal 2016 Debtor Inv. Cost of Sales Sales GST Debtors 2-May L. Walker EE May P. Horton EE May R. James EE May Galon College EE May Core Gymnasium EE Purchases Journal Inv. Stock Creditors 2016 Creditor GST 4-May Hisense H May Get Fit GF May Ace Equipment AE