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Unit 4 Summary
Accounting Principles
Historical Cost Cost of stock; Cost of NCA
EntityReporting Period Prepaid and Accrued Revenue; BDA
Monetary Unit Purchase of stock from overseas suppliers always record in AUD
Conservatism LC/NRV the selling price should not be used as gains should be recognised
until certain and there is no guarantee that the stock can be sold at the selling
price; prevent overstating Assets (stock control) and Owners Equity
Consistency Treatment of product and period costs from one period to the next
Going Concern Prepaid and Accrued Revenue
Qualitative Characteristics
Comparability Treatment of product and period costs from one
period to the next
Understandability Headings/titles and formatting used in reports
Relevance Product costing it is important to calculate an
accurate value for stock as the mark-up is often
applied to the cost price to calculate the selling
price, too prevent selling prices to be too
high/low
Reliability Historical cost is used because it can be verified
by a source document
Effect of transactions on the Accounting Equation
Transaction Assets Liabilities Owners Equity
Sales Return
SP 2000+200 GST
CP 1200+120 GST
Purchase Return
1200+120 GST
Disposal of NCA
HC 4000, CV 1200,Bank 1000
Stock Write Down
400
Loss on Disposal of
Asset
600
Profit on Disposal of
Asset
200
Product Costing on
Units of Stock
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Purchase NCA on
Credit
50000+5000 GST
Trade-in NCA
4000
Adjusting entry forPrepaid Revenue
2000 has now been
earned
Adjusting entry for
Accrued Revenue
Interest of 50 is owed
on the Term Deposit
Extension to recording
Credit Notes
A source document that verifies the return of stock by either a trade creditor or by a tradedebtor (Reliability)
It provides evidence that a debt owed to a creditor (Purchase Return) or by a debtor (SalesReturn) has been reduced by the amount of the return
How to Distinguish :
The suppliers name is always at the TOP Apurchase returns credit note has our name in the body (middle) of the credit note, we are
returning stock to the supplier. A sales return has our business name at the top of the credit note- we are receiving the
being stock in return.
Reporting Sales Returns separately
Relevance Provides information useful for decision making Provides additional information for management in relation to customer satisfaction Indicator of the quality and suitability of the stock that is being traded
Recording Sales Returns
Reverse FIFO or LOFI (last transaction regardless if it was drawings, advertising, etc.)Purchases Returns
Identified cost method
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Recording Product costs from same supplier
Recording Product costs from different suppliers
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Recording a Period Cost
Stock cardunit cost of stock without period cost
Hence, product costing includes ALL stock-related expenses (such as cartage in) recorded as Stock
Control in the CPJ, while period costing recognises individual expense accounts
Returns of stock
Reasons for returns Addressing Sales Returns
Poor quality or faulty Changing products or supplier
Damaged Improve product packaging or change to a more
reliable delivery company
Wrong colour, size or model Improve sales staff training to be more
responsive to customers needs and improve
checking mechanisms when orders are being
completed
Goods were delivered late and no longer
required
Changing to a more reliable delivery company
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Product and Period Costing
Product costs Period costs
Costs associated with getting the goods into alocation and condition ready for sale
Costs associated with getting the goods into alocation and condition ready for sale
Costs can be allocated to individual items of
stock on a logical basis
Costs cannot be allocated to individual items of
stock on a logical basis (as they relate to more
than one item of stock) e.g. shipment for ALL
stock
Included in the calculation of cost of sales
allocated per item of stock sold
Period costs written off as buying expense for
the reporting period under Cost of Goods Sold
If not all goods are sold in this Reporting Period
Costs of Goods Sold will be lower and Gross
Profit and Net profit will be higher as the
additional costs are allocated only to the units ofstock sold
If not all goods are sold this reporting period
Cost of Goods Sold will be higher and Gross
Profit and Net Profit will be lower as the
additional costs are treated as expenses in theperiod in which they were incurred regardless of
the number of units sold
Effect on Stock Control in the Balance sheet
Higher (accurate)
Effect on Stock Control in the Balance sheet
Lower (understated)
IF ALL STOCK IS SOLD IN THE ONE REPORTING PERIODN THE EFFECT ON NET PROFIT WILL BE
EXACTLY THE SAME
Relevance when a cost is significant that it affects financial decision-making then it should be
considered material and should be reported
Issues : Product costs
There is no 10% rule to materiality and therefore relevance
Items to be allocated as product costs must be incurred in the purchase of stock items That is they must be logically traceable to stock items and be able to be allocated on a
logical basis
They must also be materially significant in terms of their dollar value The question of materiality is whether the omission of an item would affect management
decision making Potential Discuss Question
Insurance of Stock
Would usually be classified as a period cost as it does not usually relate to a specific numberof goods
However, if it isrelated to a particular delivery in transit it may well be treated as a productcost
Classification on the income statemento If incurred in purchasing the stock or in the delivery of stock to the shop it should be
treated as a cost of goods sold item (product/period cost)
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o If the insurance relates to the goods on the shelves in the shop then it could beargued that this is incurred in selling the stock and should be reported as other
expenses
Stock valuation
Cost Net Realisable Value (NRV)
The original purchase price of the stock PLUS all
costs associated with getting the stock into a
position and condition ready for sale
Expected selling price of the stock less any
expected costs of marketing, selling and
distribution of goods
PLUS includes all product costs LESS includes all costs associated with selling the
stock
Reasons for NRV to be below cost price:
A decrease in demand Physical deterioration of stock Product has become obsolete Purposeful decrease in selling price below cost price as a deliberate marketing ploy
LC/NRV rule is applied to individual items or batches of stock
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Balance Day Adjustments
U3 U4
Prepaid Expenses Prepaid Revenues
Accrued Expenses Accrued Revenues
Stock loss/gains Stock Write DownDepreciation straight line method Depreciation Reducing Balance Method
Prepaid Revenue
This is revenue received in advance or revenue received but not yet earned. Thebusiness must determine what part of the revenue received has been earned and
therefore must be reported in the current reporting period.
Two possible scenarios:
1) Customer orders stock to be delivered at some time in the future. Customer maypay a deposit at the time of ordering or pay in full. Some or all stock is delivered
before the end of the reporting period
2) The business earns revenue from a secondary source, such as Rent, and thisrevenue is paid in advance
DR Prepaid sales revenue CR Sales Revenue
Accrued Revenue
Revenue that the business has earned but not yet received. As a result, there is an Assetcreated because there is an expected inflow of economic benefit at some point in the future.
It excludes credit sales and involves a secondary revenue source, usually interest.
DR Accrued Interest Revenue CR Interest Revenue
Disposal of non-current assets
Recording this type of transaction can be quite complex. You may be asked to:
1) Record the depreciation allocated to this asset for the period prior to the saleDR Depreciation of Shop Equipment
CR Accumulated Depreciation of Shop Equipment
2) The next step is to remove the asset from the businessDR Disposal of Shop Equipment
CR Shop Equipment
3) The accumulated depreciation associated with the asset must now be removed (mustremember step no.1)
DR Accumulated Depreciation of Shop Equipment
CR Disposal of Shop Equipment
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4) Record the purchase of the new assetDR Shop Equipment
DR GST Clearing
CR Sundry Creditor Ace Supplies
5) Record the trade-in of the old asset. This entry will reduce the amount owed to the SundryCreditor
DR Sundry Creditor Ace Supplies
CR Disposal of Shop Equipment
6) Calculate and record the Profit or Loss on Disposal of the AssetDR Loss on Disposal of Equipment
CR Disposal of Equipment
7) Pay Sundry Creditoris there discount?CPJ
Sundry Creditor Ace Supplies; chq 34; bank 11270; sundries 11500; GST 0
8) Calculate and record Deprecation at the end of the Reporting PeriodProfit or loss on sale of asset
Will occur because the amount received from the sale is different from the carryingvalue
Means the asset has been over or under-depreciatedOver-depreciation occurs when:
A profit on disposal occurs Useful life was underestimated Residual value was underestimated
Under-depreciation occurs when:
A loss on disposal occurs Useful life was overestimated Residual value was overestimated
Depreciation is based on estimates and so is generally inaccurate and a profit or loss will eventuate
Depreciation
Historical cost the cost of the asset to get into a revenue earning position/location condition ready
for use
Useful life the length of time the business will keep the asset
Residual Value The estimated value of the asset at the end of its useful life
Depreciable value HC-RV
Carrying Value HC AD
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Depreciation Expense The amount of the cost allocated this period
Accumulated Depreciation The total amount of depreciation charged to date
Reducing Balance Method
Calculation : Carrying value x Depreciation Rate Recording and Reporting: No change Reducing balance method is used for assets that:
Contribute more the revenue earning in their early years than in their later years Less likely to break down in the early years than the later years The key is the type of asset
Issues:
Changing Depreciation methods- Consistency- Comparability
Profit lower in early years as depreciation expense is higher No overall effect on Net Profit over the life of the asset
Documents
Records
Reports
How did our business perform this reporting Period?
Analysis
How will our business perform in future periods?
Budgets
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Budgeting
Budgeting is the process of predicting the financial consequences of future events, a budgetis the REPORT that predicts such things
Budgeted Reports
Budgeted Cash Flow statement shows all expected future cash inflows and outflows, andthe expected bank balance at the end of the period
Budgeted Income Statement shows all expected future revenues and expenses, and theexpected Gross Profit, Adjusted Gross Profit and Net profit
Budged Balance Sheet 0 shows all expected assets, liabilities and owners equity at somepoint in the future
Budgets vs actual reports
Budgets report future events rather than historical events. Budgets use estimates; no verifiable data
Importance of Budgeted Sales
Main revenue item in Budgeted Income Statement and significant cash Inflow (either as cashsales or receipts from debtors)
Level of sales crucial in estimating expenses that vary with number of units sold such as costof sales, wages
Affect how much stock is purchases, payments to creditors Balance sheet- Bank balance and Net Profit figure
Purpose of budgeting
Aid planningo Budgeting assists planning by predicting what is likely to occur in the future. This
allows the owner to prepare so that possible problems may be managed and
possible opportunities may be taken
Aids decision makingo Budgeting can aid decision-making by providing a standard against which actual
performance can be measured against. This allows the owner to identify problemareas and remedial action can be taken. Includes budgeted ratios.
Budgeted Cash Flow Statement
Planning for CFS
If predicted surplus:
Purchase of NCA Expand operations by employing more staff; increasing advertising Increase loan repayments Increase level of drawings
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If predicted deficit:
Organise/extend overdraft facility Reduce drawings Defer loan repayment Defer purchases of NCA Capital contribution
Decision-making for CFS
Effectiveness of Advertising in generating cash sales Debtor collection procedures Creditor payment policies Level of cash payments for expenses Level of cash drawings Adequacy of finance for purchase of NCA
Budgeted Income Statement
Planning
Indicates future requirements of firm in staffing Stock levels Advertising campaigns
Decision-making
Level of sales and effectiveness of advertising Mark-up achieved Level of stock loss to assess stock management procedures Expense control Staff performance
Budgeted Balance Sheet
Planning
Helps prepare for replacement of NCA as it details carrying value of NCA in future periodsDecision-making
Setting a benchmark for indicators that assess liquidity and stability (e.g. WCR, Debt Ratio)Consecutive budgets (frequent budgeting)
Enables:
Identify monthly/seasonal trends
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Identify when to undertake a particular cash activity e.g purchase of NCA More accurate, therefore more useful benchmark for comparison Allow earlier detection of problem areas so corrective action can be taken in a timely
manner
Variance Reports
Accounting report that compares budgeted figures against actual figures, highlightingvariances so problem areas can be identified and corrective action can be taken
F Favourable variance(i.e. better cash position, higher net profit than budgeted) U Unfavourable variance(worse off than budgeted)
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Analysis
Analysing the performance of a business is more than looking at the final bank figure or the
$ amount of Profit or Loss made by the business.
A raw number does not mean a lot unless we can use that number for analysis or comparison.
In Unit 4, financial reports are analysed using a number of performance indicators or financial ratios.
These ratios assess the business performance in terms of:
1) Profitability the ability of the business to earn profit, measured by comparing its profitagainst a base such as sales, assets or owners equity
2) Efficiency the ability of the business to manage its assets and liabilities3) Stability the ability of the business to meet its debts and continue its operations in the long
term
4)
Liquidity the ability of the business to meet its short-term debts as they fall due
Profitability
Profitability is a measure of how the business has performed in terms of returning a profit compared
to a base such as assets, sales and owners equity. There are four financial ratios associated with
Profitability.
Return on Owners investment (ROI)
%
Return on Owners investment measures the return or money back the owner has received on
his/her investment in the business. In the real world a person has many alternative investments
available to them invest in shares, deposit their money in a high interest account, purchase
property. All of these investments provide a return dividend, interest or rent. Each investment has
its rewards and risks.
An owner of a business hopes to be rewarded for their investment of time (working hours), money
(capital), expertise and what they have given up to operate the business (previous job, savings).
A profitability indicator that measures how effectively a business has used the ownerscapital to earn profit
Profit earned per dollar of capital invested Used to decide between alternative investments Benchmarks: past performance, budgeted goals, industry average Assesses profitability from an investors point of view Linked to Debt Ratio
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Return on Assets (ROA)
%
Return on Assets is designed to measure how well the assets of the business are generating revenue
and hence, profit. The Equipment, Stock, Office Furniture, Vehicle, etc. all contribute to the business
earning revenue.
As the assets age they become more inefficient, breaking down more and hence earn less revenue
for the business. This ratio helps an owner determine if the assets of the business are getting to the
point where they may need replacing.
A profitability indicator that measures how effectively a business has used its assets to earnprofit
Net Profit per dollar of assets controlled by the business Assesses profitability from a managers point of view Will always be lower than ROI because Total assets are greater than Owners equity, unless
it has 0 liabilities
Depends heavily on firms ability to earn revenue and control its expenses (Net Profit)
Net Profit Margin (NPR)
%
When an owner determines selling price for their product they must consider:
What did the product cost the business? What price are my competitors charging? Will my selling price allow me to make a profit?
This ratio determines how much (in % or $ terms) profit is made for each $ of sales
Good indicator of expense controlGross Profit Margin (GPR)
%
In the same manner, Gross Profit examines the profit made on just the buying and selling of stockthe mark-up.
A business can use this ratio to determine if stock expenses Freight, Insurance, Cartage, etc are
costing the business too much and affecting the ability of the business to make an overall Net Profit
Assess mark-up Increasing selling price may decrease sales, therefore GPM may increase but $GP decrease due
to less sales
Cheaper supplier may decrease sales due to poor quality or increase in sales returns
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Efficiency
Efficiency measures examine how well a business is managing key items such as Debtors, Creditors,
Stock and Assets. Key questions about each of these items need to be answered:
1) How quickly do our Debtors pay?2) Is our stock staying on the shelves too long?3) Are we paying our Creditors too quickly?
There are 4 primary measures of efficiency:
Debtors Turnover (DTO)
number of days
It is important for a business to know how long it takes for Debtors to pay. Debtors are a major
source of cash and the cash received is used to pay Creditors and purchase stock. All Debtors areoffered terms so it is important to know if our Debtors are meeting those terms and if not, what
corrective action needs to be taken by the business.
Average number of days it takes a business to collect cash from its Debtors If cash is collected quickly, it can be used to meet other debts as they fall due Look at credit terms
Asset Turnover (ATO)
times per period
Asset Turnover is more complex it examines whether the business is using its assets efficiently togenerate sales. It also allows the owner to evaluate whether the purchase of a new asset has
improved performance.
An efficiency indicator that measures how productively a business has used its assets to earnrevenue
Measures number of times in a period the value of assets is earned as Sales Revenue; thehigher the Asset Turnover, the more capable the firm is of using its assets to earn revenue
ATO vs ROA; higher ATO does not equal higher ROA, think expensesStock Turnover (STO)
number of days
The selling of stock is the major source of revenue for a business. It is also a cost to the business.
Therefore careful management of stock is important. A business cant hold too little or too much
stock. Each situation can cause problems for the business:
*Too much stock can mean stock becomes out-dated, obsolete, and increases storage and insurance
costs
*Too little stock may see the business run out and miss sales; the business is continually ordering
stock leading to an increase in expenses such as Delivery and Customs Duty; missing out on discount
revenue from bulk purchases
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Optimal Stock Turnover rates will differ according to the type of stock sold cars should be sold
within a year (before new models are introduced) whereas milk should be turned over every 3-5
days.
The average number of days it takes for a business to convert its stock to sales To fix high STO (too slow):
o Increase sales (i.e. advertising, better stock mix)o Decrease level of stock held (order less, just in time ordering, replace slow moving
lines)
Low STO (too fast):o Selling price too low leading to loss of potential revenueo Holding too little stock: Increase in delivery costs; missing out on discount revenue
for bulk purchases
Creditors Turnover (CTO)
number of days
As with Debtors Turnover, it is important to know how regularly a business is paying its Creditors.
The money to pay Creditors generally comes from Debtors and Sales of stock. It is important for a
business to manage its cash flow efficiently so Creditors are:
*Paid early enough to earn discounts
*Not threatening to cut off supply
*Not requiring the business to regularly go into overdraft to make payments
The average number of days it takes for a business to pay its creditors Effectiveness of managing creditors If discounts are offered, and cash is available, then it is beneficial If no discount, pay close to credit terms (pay as late as possible) retaining cash in the
business for longer so it can be used for other purposes
Should not exceed Credit Terms because:o Interest charges on late accountso Removal of Credit Facilitieso Reduction in Credit Rating
Liquidity
Liquidity ratios examine the ability of the business to generate cash flow and pay debts. The ability
of the business to meet its short term financial commitments as they fall due. This measure relies on
the ability of the business to generate sufficient cash flow to meet all urgent, current and long term
debts.
There are 4 main liquidity ratios in Unit 4:
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Working Capital Ratio (WCR)
Ratio
Are we able to repay our short term debts? Our short term debts are our Current Liabilities they
must be repaid within the current reporting period (12 months). To pay these debts we need to use
our Current Assets. Consequently, our Current Assets must cover our Current Liabilities.
However, as with many ratios it is a balancing act. Too many CA may mean we have too much tied
up in Stock, Bank or Debtors.
A liquidity indicator that measures the ratio of current assets to current liabilities, to assessthe firms ability to meet its short term debts
More than 1:1 satisfactory 1:1 no margin for error if any current assets are not converted to cash, the business will
face liquidity problems
Less than 1:1 the owner needs to seek additional finance through:o Cash contributiono Extending Overdraft facilityo Loan
Much greater than 1:1 suggests there are idle current assets:o Bank expand operations, term deposit/other investmentso Stock control additional storage costs , obsolescence, out of fashiono Debtors Control too many ageing debtors, bad debts
Corrective action:o Taking extra drawings, purchase NCAo
Lower stock levels and reorder later
o Contact debtors and collect fundsQuick Asset Ratio
Some of our debts are more immediate. Creditors and Accrued Expenses must be paid quickly
(usually within 30 days). We measure our ability to pay these immediate debts by examining our
Quick Assets those assets that can be turned into cash quickly without a great loss in value.
Some CA cannot be turned into cash quickly. Stock and Prepaid Expenses are difficult to turn into
cash quickly (and for their Historical Cost) so we exclude them from the calculation.
As with WC, we dont want too many Quick Assets as it may mean we have idle cash or too many
Debtors.
Liquidity indicator that measures the ratio of quick assets to quick liabilities to assess thefirms ability to meet its immediate debts
Assesses firms ability to meet its immediate debts with its immediate assets High WCR, Low QAR will it survive?
o Depends on whether the business can sell its stock on time (speed of its tradingcycle)
To fix low QAR:
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o Positive bank balanceo Improving debtorso Reduce level of creditors and accrued expenses
Cash Flow Cover (CFC)
times per period
As mentioned in June, cash is one of the most important assets for a business. The ability to
generate cash to pay Creditors is important because, as mentioned above, we need a constant
supply of stock from Creditors in order to serve our customers.
A liquidity indicator that measures the number of times Net Cash Flows from OperatingActivities is able to cover average Current Liabilities
No set benchmark; the longer the period examined, the more times CL will be coveredStability
Debt Ratio
%
What % of the business assets are financed by external sources (liabilities)?
The higher the Debt Ratio the greater the risk for the business, the more interest will be incurred in
the future and future cash flows are tied up in cash repayments.
Measures % of assets financed by liabilities therefore indicates reliance on borrowed funds Measures Long term stability of the firm Assessed with ROI Balance is required high enough to maximise ROI, but low enough to maintain stability Higher Debt Ratio susceptible to interest rate hikes, decreasing cash flow and Net Profit
Limitations of financial information
Use of historical data cannot guarantee what will happen in the future Many indicators rely on averages, concealing details about individual items Firms use different accounting methods, undermine comparability
Relationship between ratios
ROI and Debt ratio ROI and ROA ROA and ATO NPM, ATO and ROA
Other measures
Trends variances in ratios/indicators over a number of reporting periods
Benchmarks standards within an industry that every business in that industry measure themselves
against. E.g. Industry Average; Budgeted goals; Past performance
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Non financial indicatorsdata gathered from sources that arent strictly $ related.
Aspects:
Firms relationship with customers
Repeat sales Sales Returns Customer complaints Customer satisfaction surveys
Suitability of stock
Number of sales returns, why did they return it? Number of purchase returns Number of customer complaints
Firms relationship with employees
Performance appraisal of employees Average length of staff employment, staff turnover Industrial action; sick leaves
State of the economy
Interest Rates Unemployment Rate Competition
Strategies to improve performance:
Earning Revenue:
Selling price Advertising Stock mix More efficient NCA Customer Service
Controlling Expenses:
Management of stock (cheaper/reduce storage costs/better quality products) Management of staff (training/incentives) to improve productivity Management of NCA inefficient assets should be removed
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Possible Narrations
The 3 key areas: Units, stock item, Document number
Purchases Return: 20 Tyres returned to suppler wrong type (Cr. Note 11)
Sales Return: 3 books returned by customer too many supplied (Cr. Note 21)
Stock Write down: Write down of 6 dishwashers to NRV release of new model (Memo 31)
Depreciation: Depreciation of Asset straight-line/reducing balance Method (Memo 1)
Loss(profit) on disposal of asset Disposal of equipment at a loss/profit (Rec. 17)
Credit Purchase of NCA Credit purchase of Van (Inv. 12)
Prepaid RevenueAdjusting entry to record one months rent revenue earned (Memo 12); Prepaid
sales earned (Inv.12)
Accrued RevenueAdjusting entry to record one months interest earned but not yet received
(Memo 12)
Stock loss/gain Physical Stocktake has detected a stock loss/gain of 3 units of Dishwashers (Memo
12)
Bad Debts Ace Supplies deemed irrecoverable, written off as Bad Debt (Memo 40)
Correcting entry Correcting entry drawings recorded as advertising (Memo 50)
Donation 3 wheelbarrows donated to school (Memo 10)
Closing expense and revenue a/c to Profit and Loss summary a/c - Closing expense/revenue
accounts to Profit and Loss Summary account
Transfer of Profit/Loss to Profit and Loss Summary a/c - Transfer of Net Profit from Profit and Loss
summary account to Capital Account
Accrued Expense Adjusting entry to record electricity consumed but not yet paid (Memo 15)
Prepaid ExpenseAdjusting entry to record one month insurance incurred (Memo 9)
Drawings of stockDrawings of 2 cabinets by owner (Memo 12)
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Templates
Purchase Returns General JournalGeneral Ledger Subsidiary Ledger
Date Details Debit Credit Debit Credit
March 31 Creditors Control 1760
Creditor-X 1760
Stock Control 1600
GST Clearing 160
Return of 20 tyres to
supplier due to wrong size
(Cr. Note 11)
Sales Returns
General JournalGeneral Ledger Subsidiary Ledger
Date Details Debit Credit Debit Credit
May 23 Sales Return 90
GST Clearing 9
Debtors Control 99
Debtor-X 99
Stock Control 40
Cost of Sales 40
3 books returned by customer
too many supplied (Cr. Note 21)
Stock Writedown
General JournalDate
2012
Particulars General Ledger Subsidiary Ledger
Debit Credit Debit Credit
Dec 31 Stock Writedown 300
Stock Control 300
Adjusting entry for Write down of 6
dishwashers to NRV release of new
model (Memo 31)
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Depreciation
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
June 30 Depreciation of Van 6 400Accumulated Depreciation of Van 6 400
Depreciation of van 20% reducing balance method or
Straight line method 20% (Memo 12)
Disposal of NCA
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit$
Credit$
Debit$
Credit$
May 1 Disposal of Van 30 000
Van 30 000
Accumulated Depreciation of Van 20 000
Disposal of Van 20 000
Sundry Creditor Dodge Motors 7 000
Disposal of Van 7 000
Loss on Disposal of Van 3 000
Disposal of Van 3 000
Van 40 000
GST Clearing 4 000
Sundry creditor Dodge Motors 44 000
Trade-in of old van on new van from Dodge Motors (Inv. 19)
Credit Purchase of NCA
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
April 1 Delivery Van 22 500
Prepaid Service Contract 1 200
GST Clearing 2 370
Sundry Creditor Jane Motors 26 070
Credit purchase of Delivery Van (Inv. 36)
Prepaid Revenue
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
June 30 Prepaid Rent Revenue 6 000
Rent Revenue 6 000
4 months rent earned (Memo 44)
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23 | P a g e - A c c o u n t i n g U n i t 4 - W i l b u r
Receipt of Prepaid Sales received in full, but stock yet to be supplied
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit$
Credit$
Debit$
Credit$
Prepaid Sales Revenue
Sales Revenue
Cost of Sales
Stock Control
Prepaid sales revenue earned stock delivered to customer
(Inv. 44)
Accrued Revenue
General JournalGeneral
Ledger
Subsidiary
LedgerDate Details Debit
$
Credit
$
Debit
$
Credit
$
Aug. 31 Accrued Interest Revenue 700
Interest Revenue 700
Interest revenue earned but not yet received (Memo 95)
Bad Debts
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
Mar. 25 Bad Debts 1 600
Debtors Control 1 600
Debtor I. Solvent 1 600
Debt written off as irrecoverable
(Memo 52)
Correcting Entry
General
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
June 30 Telephone Expense 50
Insurance 50
Correcting entry telephone charges were incorrectlydebited to insurance (Memo 16)
Advertising (Donation) of stock
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
Jan. 16 Advertising 500
Stock Control 500
10 frames taken for advertising use (Memo 14)/ 3 wheel
barrows donated to school (Memo 14)
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24 | P a g e - A c c o u n t i n g U n i t 4 - W i l b u r
Closing Revenue/Expense accounts and transferring Profit(Loss) to Capital
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
Aug. 31 Sales 62 000Interest Revenue 1500
Profit and Loss Summary 63 500
Closing revenue accounts to P&L Summary (Memo 41)
Aug. 31 Profit and Loss Summary 61 900
Cost of Sales 32 000
Wages 12 000
Rent Expense 9 000
Advertising 8 400
Stock Loss 500
Closing expense accounts to P&L Summary (Memo 41)
Aug.31 Profit and Loss Summary 1 600
Capital 1 600
Transfer of Net Profit to Capital account (Memo 41)
Drawings of stock
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
May 7 Drawings 480
Stock Control 480
Drawings of 2 cabinets by owner
(Memo 34)
Prepaid Expense
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
Feb. 28 Rent Expense 240
Prepaid Rent Expense 240
Balance day adjustment to record one months Rent incurred
(Memo 84)
Accrued Expense
General JournalGeneral
Ledger
Subsidiary
Ledger
Date Details Debit
$
Credit
$
Debit
$
Credit
$
Dec. 31 Advertising Expense 3 000
Accrued Advertising 3 000