1 General journal entries for purchases returns and sales returns

Transcription

1 Introduction The re-accredited VCE Accounting course ( ) has certainly evolved over the last couple of years. Having witnessed two sets of examinations (2003 and 2004), teachers have now been given a clear indication of what to expect on future exams. Some have commented that some of the exam questions have stretched the boundaries in relation to the material expected to be known by VCE students. Please note that this update is not designed to question what should or should not be on VCE exams. It has been written to provide guidance for teachers in relation to recommended methods to be used in the classroom when preparing students for such exams. It therefore covers some of the more contentious areas of the VCE course, most of which have been identified by queries received via over the last two years. 1 General journal entries for purchases returns and sales returns Some general journal entries have not been handled well by students in relation to inventory recording. Students may be required to record both purchases returns and sales returns in either a stock card or in a general journal. The incorrect recording and the correct treatment of such items has been outlined below: a To record a purchases return of stock for a business using FIFO inventory assumption Note: The FIFO assumption is NOT applied to purchases returns. The actual cost of such returns must be identified. For example: June 2 Bought 10 units on credit from Ace Supplies for $5 (invoice 123) June 3 Returned 2 units to Ace Supplies due to goods being damaged (credit note 32) Incorrect treatment: Applying FIFO Jun 1 Bal Inv CN Correct treatment: Identify the original cost of the items Jun 1 Bal Inv CN Page 1

2 General journal entries required Date Details Dr Cr Dr Cr Jun 3 Creditors control 10 Ace Supplies 10 Stock control 10 Actual value of credit approved by the supplier b To record a sales return of stock for a business using FIFO inventory assumption Note: Students must reverse the latest sales made and recorded under the FIFO assumption For example: August 2 Sold 5 units on credit to A. Smith for $10 each (invoice 987) August 5 A. Smith returned 2 units due to damage and was granted full credit (credit note 65) Incorrect treatment: Applying identified cost of goods returned Aug 1 Bal Inv Inv Rec CN Page 2

3 Correct treatment: Reverse the FIFO assumption Aug 1 Bal Inv Inv Rec CN General journal entries required Date Details Dr Cr Dr Cr Aug 5 Sales returns 20 Debtors control 20 Debtor - A. Smith 20 Stock control 12 Cost of sales 12 Actual value of the credit approved to debtor (selling price) Assumed cost price of goods returned (assumed cost price) Summary: FIFO is an assumption used for sales and sales returns. Purchases returns are based on the actual price charged, and therefore approved for credit when returned, by a supplier. Page 3

4 2 Revaluation/devaluation of non-current assets This area has resulted in many queries over the last two years. The material presented below attempts to demonstrate the various situations that may be presented to students on their exams. a An upwards revaluation of a non-current asset Land that cost $ three years ago has now been given a sworn valuation of $ General journal entry required Date Accounts Post ref Dr Cr Land Asset revaluation reserve b A devaluation (or downward revaluation) of a non-current asset previously revalued upwards (Based on the example of the land as shown above in example a) Two years later a new freeway has been built next to the land owned by the business. This has adversely affected the value of the land. A sworn valuation now puts the value of the land at $ General journal entry required Date Accounts Post ref Dr Cr Asset revaluation reserve Asset devaluation expense Land The asset revaluation reserve should be written off completely before the asset devaluation expense account is used. This entry decreases OE, but also has an affect on profit for the period as the devaluation account must be closed off to P&L Summary. c Devaluation of depreciable non-current assets Using the example from the June 2004 examination (balances provided in exam): BUILDINGS ACC. DEPN BUILDINGS ASSET REVALUATION RESERVE The buildings were independently valued at $ during June The accountant recommends a revaluation to be done on 30 June Page 4

5 General journal entry required Date Accounts Post ref Dr Cr Acc. Depn buildings Buildings Asset revaluation reserve Asset devaluation expense Buildings It is strongly recommended that students should close off the balance of the related accumulated depreciation account. This will help them identify the carrying value of the asset prior to any revaluation required. In the example above, the carrying value would therefore be $ ($ $60 000). Having completed this step, the carrying value can then be compared to the new value required. In this case, the carrying value of $ is compared to $ , giving a difference of $ This difference is the amount required to be recorded in the general journal as the total amount of buildings to be written down. As there is a revaluation reserve of $50 000, this must be written off first, followed by the creation of the devaluation expense of $ The total of these two amounts represent the $ downward revaluation that was required by the question. 3 Recording accrued expenses and revenues Most students can record balance day adjustments accurately, but many struggle when asked to record the payment of accrued expenses or the receipt of an accrued revenue item. Two examples have been prepared below. The first one (for an accrued expense) concentrates on using the ledger accounts to demonstrate the process required. The second example (for an accrued revenue) uses the general journal to show how the accrued item should be recorded. Example 1 wages owing 30 June $600 wages paid 12 July $1500 Wages expense a/c 30 June Balance June P&L Summary June Accrued wages July Cash at bank 900 Only the expense incurred for the new period is recorded in the expense account, after deducting the $600 owing Page 5

6 Accrued wages expense a/c 12 July Cash at bank June Accrued wages 600 The $600 that is owed is paid in the new period, thus eliminating the current liability account Example 2 commission owing 30 June $400 commission received 6 July $700 Cash receipts journal Date Accounts Bank xx xx Comm rev xx Sundries 6 Jul Commission revenue Accrued commission revenue 400 The amount of revenue earned in the new period may have a special column watch out for this! The amount of accrued commission from the previous period must be shown in the Sundries column Page 6