Accounting: an introduction to principles and practices [9 ed.] 9780170403832, 0170403831

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ACCOUNTING 9E An Introduction to Principles & Practice

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Edward A. Clarke Yvonne Wilson Michael Wilson

Workbook

ACCOUNTING9E An Introduction to Principles & Practice

Edward A. Clarke Yvonne Wilson Michael Wilson

Copyright © 2018. Cengage. All rights reserved.

INSTRUCTORS: Resources to help you teach are available for this textbook. Visit cengage.com.au/instructors or cengage.co.nz/instructors

ISBN 978-0170403832

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Copyright © 2018. Cengage. All rights reserved.

Copyright © 2018. Cengage. All rights reserved.

Edward A. Clarke Yvonne Wilson Michael Wilson

Copyright © 2018. Cengage. All rights reserved.

ACCOUNTING9E

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·-

,-'., CENGAGE Accounting: An Introduction to Principles and Practice

© 2019 Cengage Learning Australia Pty Limited

9th Edition

Edward A. Clarke

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Yvonne Wilson

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CO NTE NT S Guide to the text  Guide to the online resources  Preface  Acknowledgements

1

2

Copyright © 2018. Cengage. All rights reserved.

4

Accounting: its foundations

1

Introduction

1

Introduction to business operations

2

Basic accounting terms

5

Types of business ownership, their advantages and disadvantages

10

Accounting assumptions: conventions and doctrines

13

The Conceptual Framework and accounting standards

17

Ethics as it applies to accounting

21

Financial transactions and their documentation

3

ix xi xiii xiv

26

Introduction

26

Personal transactions

27

Business transactions

28

Documentation

30

Filing of documentation

50

The accounting equation

55

Introduction

55

The accounting equation

56

Balance sheet (or statement of financial position)

62

The expanded accounting equation

65

Chart of accounts

70

Transactions, general journals and double-entry processing

79

Introduction

79

An overview of the accounting process

80

Introduction to the general journal

80

Introduction to the goods and services tax (GST)

82

Transactions entered in the general journal

84

General journals posted to the general ledger

92

Trial balance: summary of general ledger balances

98

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v

CONTENTS

5

Copyright © 2018. Cengage. All rights reserved.

6

7

Transactions, specialised journals and double-entry processing

111

Introduction

111

The process so far

112

Specialised journals

113

Source documents entered in journals

114

Preparation of specialised journals

121

Sales journal: sell now, be paid later

122

Purchases journal: buy now, pay later

130

Cash receipts journal

138

Cash payments journal

147

Cash receipts journal with accounts receivable

155

Cash payments journal with accounts payable

155

Transactions review

163

Discounts: result of credit transactions

170

Cash accounting 

173

Organisational standards and procedures

177

Separate ledgers for accounts receivable and accounts payable

184

Introduction

184

What can we now do?

185

Subsidiary ledgers and control accounts

185

Relevance of the inventory system to receivables and payables

187

Accounts receivable control and subsidiary ledger

188

Accounts payable control and subsidiary ledger

196

Administration of accounts receivable and accounts payable

210

Reconciliations

220

Reconciliations: accounts receivable

220

Reconciliations: accounts payable

233

Other subsidiary ledgers and control accounts 

241

Journals and ledgers for special transactions

258

Introduction

258

Commencement of a business 

259

Buying another business

260

Introduction of additional capital

261

Drawings of funds and goods

261

Purchase of non-current assets

263

Sale of a non-current asset at book value

264

Interest receivable and payable on overdue accounts

265

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CONTENTS

8

Copyright © 2018. Cengage. All rights reserved.

267

Bad debt write-offs

272

Bad debts recovered

275

Bills receivable accepted and met

276

Bills payable accepted and met

278

Computerised accounting and special transactions 

279

Management controls over cash

9

10

Dishonour of a cheque

Introduction 

290

Principles for internal control of cash

291

Bank reconciliation

293

Petty cash imprest system

322

The general ledger and financial reports



290

333

Introduction

333

Linking the general ledger to financial reports 

334

Close general ledger accounts

338

Closing general journal entries

350

Income statement: trading basic format

351

Balance sheet: basic format

357

Account allocation to financial statements

361

Preparing financial reports for a servicing business 

374

Matching expense and revenue to the accounting period

386

Introduction

386

Balance day adjustments

387

1. Expense accrued: expense incurred not yet processed

391

2. Expense prepaid: expense processed but not yet incurred

398

3. Revenue accrued: revenue not yet received

402

4. Revenue received in advance: revenue received not earned

407

5. Accounts receivable: uncollectable 

411

6. Depreciation

418

7. Variance between perpetual inventory records and physical inventory

422

8. Leave provisions: annual leave, sick and carer’s leave and long service leave

432

Prepare adjusted trial balance

438

Summary of balance day adjustments

440

Reversals

441

Standing journals

446

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vii

CONTENTS

11



12

13

Copyright © 2018. Cengage. All rights reserved.

14



Preparing final reports from a worksheet

458

Introduction 

458

Steps in preparing the 2-column worksheet: trial balance

459

8-column worksheet: format and columns

474

8-column worksheet incorporating balance day adjustments

476

From the 8-column worksheets to financial statements

483

Worksheets for simple service industry

492

Advanced management reports and correction of errors

499

Introduction499





Review of end-of-period processes

500

1. Periodic and perpetual inventory: trial balance, balance day adjustments and closing journals

501

Both periodic and perpetual inventory 

508

Financial statements from an 8-column worksheet or the adjusted trial balance

511

Preparation of financial statements

515

Correction of errors

527

Accounting for non-current assets

552

Introduction552 Key terms

553

Asset register

555

Depreciation expense: its nature and determination

558

Procedures for calculation of depreciation methods and recording in the accounts

560

Derecognition or disposal of depreciable assets

577

Payroll preparation and accounting entries

591

Introduction591 Main payroll functions and processes

592

Employment conditions

592

Employee benefits and payroll

594

Payroll preparation

598

Accounting for payroll

605

Provisions for leave

612

Pay-as-you-go – PAYG withholding

613

Other employer obligations

621

Glossary629 Index634

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Guide to the text As you read this text you will find a number of features in every chapter to enhance your study of accounting, helping you to understand how the theory is applied in the real world. CHAPTER-OPENING FEATURES

1

THE ACCOUNTING EQUATION

The accounting equation

The foundation or rules for the processing of all accounting entries in the accounting information system can be traced back to the accounting equation. Simply expressed, it is the relationship of resources controlled by the business to the present obligations the business has to third parties and also to the owner. Resources controlled by the business = Present obligations that the business has to third parties + The owner’s investment in the business

The introduction to each chapter provides a simple the concepts the content covers and the specific accounting skills and knowledge you are required to achieve.

Accounting: its foundations

overview KEEP of IN MIND

An asset is a resource owned or controlled by a business; it is of economic value and is expected to be Introduction used in operating the business. This book is intended to introduce you to the principles In running a business there willand bepractice transactions that result in the business owing to another business; of accounting. It will concentrate on the this is a liability. operations of a business that is owned by one person – a sole proprietor or sole trader. We will use examples of The accounting entity convention means that, for accounting purposes, the owners of a business businesses that: must be treated as distinct from the• business. business separately from the owner. sell a serviceThe (a service business)exists or • buy classify and sell goods trading business) Therefore, the books of the business the(aowner’s share of its worth as owner’s equity. with the intention of making a profit. However, the basics of accounting are relevant to all business ownership structures and types of business activities (such as primary producers and manufacturing industries). You will learn that the accounting equation is the basis for recording business transactions. Initially, Assets = Liabilities + Owner’s Equity transactions are entered into the general journal and sometimes into specialised journals. These journals are then summarised in the general ledger, and at the end of the period a trial balance is prepared from the ending A = Gardening L + OE and Landscaping General Journal of Max’s account balances. Finally, financial reports are prepared. An income statement shows the revenues and expenses, Date Particulars Ref and provides a picture of the financial performance of the 1 Mar 22 Bank business over a particular period of time. The balance sheet a Motor Vehicle what the business owes. It Write business commenced with $5000represents in assets and $5000owns/controls in owner’sand equity. Capital states the financial position at a particular point in time.

The accounting equation may therefore be written as:

CHAPTER 4

These transactions are recorded in the general journal for Max in figure 4.5. or

QUESTION 3.1

The equation format provided in the Workbook.

GJ 1 Debit 2 000 6 000

Credit

this in the accounting 8 000

Assets on commencement of business

1 091 2 Mar 22 Equipment QUESTION 109 b 3.2 GST Receivable 200 BankBK-CLA-CLARKE_9E-170438-Chp01.indd [payment] You are required to complete the accounting equation formats shown in the Workbook where a1business 1

CHAPTER 3

commenced with: Purchased equipment with cash a assets2$15 909 Mar000 22 Computer 91 cowner’s Receivable liabilities and Later in this chapter, we will expand the accounting equation to also include b assets $25 000 GSTequity. 1 000 Accounts Payable – Computers Ltd c assets $20 000, liabilities $5000 and owner’s equity $15 000 revenues and expenses. Purchased computer from Computers Ltd – given 30 days to pay d Inassets $30 000 and liabilities $7000 the same chapter we identified some examples of assets, including cash at bank, accounts receivable, 30 Mar000 22 Fuel for Equipment e assets7$10 and owner’s equity $7000 machinery and office equipment. Rather than report on every asset individually, we can group similar 3 GST Receivable f liabilities d$15 000 and owner’s equity $70 000.

FEATURES WITHIN CHAPTERS

assets together under appropriate headings. For example, all motor vehicles controlled by a business can 33 Bank [payment] Cashaccount purchasecalled of fuel for mower and otherCash relatedatequipment be reported under one ‘motor vehicles’. bank, accounts receivable, machinery and KEEP IN MIND [receipt] 165 Bank office equipment may also be headings for grouped accounts. 150 d a business’s Sales of Service The users of financial reports need information that is relevant and a faithful representation of Liabilities may includeGST accounts such as accounts payable and loans. Similarly, owner’s equity, revenues Payable the business’s activities. The reports should have further qualitative characteristics: comparable,15timely, andverifiable expensesand willunderstandable. include number of different accounts.for cash Mowing aand landscaping services performed Later, we will analyse transactions and identify all the affected accounts. It is these accounts that are FIGURE 4.5 General journal for Max’s service business then classified as assets, liabilities, owner’s equity, revenues and expenses. To record information simply under the headings of assets, liabilities and owner’s equity does not provide sufficient meaningful information to assist users in making decisions. It is useful to know, for QUESTION 3.3 QUESTION 4.1of assets that the business controls. Similarly, it is useful to know more details about example, the types You are required to complete the accounting equation formats shown in the Workbook where a business Show the following transactions liabilities and owner’s equity. for Cheryl’s Cyclist Courier Service, referenced by date as well as ‘a’ and ‘b’, in commenced with: the general journal format theintroduced Workbook. to the terms ‘revenues’ and ‘expenses’, and were shown how chapter 1 you werein also a In assets of cash at bank $12 000, motor vehicle $25 000 and owner’s equity $37 000 a On 1 September 2022 Cheryl starts her Cyclist Courier Service in the Sydney central business district, with impact owner’s this stage, will only look at transactions btheyassets of on cash at bankequity. $8000, At machinery $20we 000 and office equipment $10 000that directly affect assets,

Important concepts that apply throughout a section are highlighted in the Keep in mind boxes.

Copyright © 2018. Cengage. All rights reserved.

1

10/05/18 4:41 PM

Questions appear throughout the chapter to help you apply and test your understanding of the key topics as you go.

$600 in the bank account. Her bicycle, communication equipment and protective clothing valued at $3000 c cash at bank $5000, office equipment $30 000, motor vehicle $20 000 and inventory $5000, and a liability are grouped in her accounts as ‘equipment’. of a loan $10 000 b For the week ended 8 September courier fees received totalled $517 ($470 + $47 GST) with repairs d cash at bank, a liability of a loan from D Shark $25 000 and owner’s equity $50 000. expense $88 ($80 + $8 GST) to cycling equipment and protective clothing; both revenue and expense transactions BK-CLA-CLARKE_9E-170438-Chp03.indd 56 were processed electronically through the bank account. 56

The accounting equation for a trading business

Worked examples demonstrate how to apply accounting principles in practice.

a AOn 1 August 2022 Stephanie formally commenced business with $5000 in the bank and an inventory trading business generally buys goods and sells the products to individuals or other businesses. of materials valued at $1500. newsagents, supermarkets, petrol stations and car sales yards. Examples include greengrocers, b On 3 August 2022 Stephanie used her new debit card from the bank to purchase various bolts of material1:(various lengths of material rolled around a cardboard cylinder or rectangle)equity for Example Ann’s trading business – assets, liabilities, owner’s ($800 + $80atGST). purchased other material on credit from Gillian’s We$880 will look further a seriesShe of business transactions for a trading business affectingFabrics assets, liabilities ($450 + $45 and$495 owner’s equity andGST). consider how these are reflected in the accounting equation.

Note that in the general journal, and later in the general ledger, the name used for accounts payable i. Commencement of business is the accounts payable control account. This control account is used to summarise, rather than record a On 1 July 2022 Ann commenced business with $40 000 in the bank and $4000 in inventory. Assets a. Bank a. Inventory

$ + 40 000 + 4 000 44 000

=

Liabilities

$

+

Owner’s Equity a. Capital

=

+

$ + 44 000 44 000

FIGURE 3.1 Commencement of business

ii. Acquisition of assets and Ann brought more cash into business

BK-CLA-CLARKE_9E-170438-Chp04.indd 85

b Ann’s business paid $33 000 with a bank cheque for motor vehicles on 2 July 2022.

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10/05/18 5:21 PM

Example 2: Stephanie’s Fabrics and Materials – trading business and the general KEEP IN MINDjournal

c On 3 July Ann’s business purchased a computer system on credit (received the computer but would pay later) for $11 990 from Kurrawood, an account payable. d Ann realised that the business required more cash. She deposited a further $7000 into the business’s

85

10/05/18 5:25 PM

ix

GUIDE TO THE TEXT

END-OF-CHAPTER FEATURES CHAPTER 3

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 3.21 You are required to complete the figure in the Workbook for this question. Allocate the accounts into their account group including their sub-classification where necessary. Identify whether the account is normally debit [dr] or credit [cr] and allocate an account number as appropriate.

At the end of each chapter you will find several tools to help you to review, practise and extend your knowledge of the key learning outcomes.

Accounts Payable

Electricity

Petty Cash

Accounts Receivable

Interest

Premises

Advertising

Interest Received

Rent Received

Bad Debt Expense

Inventory

Salaries

Bank Overdraft

Investment in Shares

Sales

Capital

Long-term Loan

Stationery

Cartage Inwards

Motor Vehicles

Telephone

Dividends Received

Office Equipment

Vehicle Expense

QUESTION 3.22

ACCOUNTING FOR NON-CURRENT ASSETS

You are required to prepare a balance sheet for S T David as at 30 April 2022 using the data provided. You will need to calculate the profit – that is the revenue less expense – the owner’s equity and the capital value.

REVISION QUESTIONS

Revision questions reinforce and test your knowledge of the material covered in the chapter.

Confirm your understanding of this chapter by completing the following questions. Account $ Account

$

Accounts Payable

330 Accounts Receivable 3 300 1 500 Capital ?? Computers 8 800 Cost of Sales 3 300 You are reminded that the time line is a tool to assist you in obtaining the correct answer to depreciation questions. It is 4 000 Inventory 880 Bank Loan [repayable at year end] not meant to be a work of art; it is your rough working, A time line solution will be given as part of the total solution for the Motor Vehicles 22 000 Office Furniture 6 600 following questions, but there will be no requirement given in the question. The depreciation worksheet is also a tool to Rent 1 100 Salaries 2 000 help in depreciation calculations and the values are recorded in the relevant columns of the asset Sales 11actually 000 Vehicle Expense 550register.

TIMEBank LINE REMINDER

QUESTION 13.42 QUESTION 3.23

On 15 September 2021, Bendigo Fabricating purchased for cash from Battenfeld Importers a BF767 Multi-Ripple metal For each of machine the business transactions listed+ below, areDelivery to enterand in the Workbook: folding for $30 800 ($28 000 $2800 you GST). installation costs were included in the price. a the account withwas thecommissioned debit account on first The newname, machine 1 October 2021. It is depreciated at 15% straight line, as past experience b whether account entry is a debit orfor credit indicatedthe that it should be operational seven and a half years. The residual value was nil, as the amount was immaterial.

c d

the chart of account group name;and that is, CA, NCA, CL, NCL, OE, R, E was obtained from Battenfeld Importers for $8800 An upgraded larger feeding extraction mechanism, BFM3.5, whether entry is an toof the account ($8000 +the $800 GST) to increase enhance or thedecrease capability the BF767.balance. It was delivered and installed as part of BF767. Depreciation is Where appropriate, assume the perpetual inventory system is used. date of 1 February 2023. to remain at the same rate. Payment was made on the commissioning The On business are listed below.was traded in for $16 500 ($15 000 + $1500 GST) on a new digitised hydraulic 31 Maytransactions 2025 the entire equipment – Remitted wages multitasked folding machine from Battenfeld Importers. – Prepare Commenced business with cashfor the life of the machine (assume appropriate account and serial numbers). an asset register record – Purchased inventory with the business debit card

QUESTION 13.43

– Sold inventory for cash – Purchased postage stamps with business debit card On 30 April 2022, E Shelley purchased a new Ford Falcon sedan registration KKW 443 from Steven Motors for $49 500 – Sold inventory on credit ($45 000 + $4500 GST). Funds were transferred electronically. The estimated life is four years with an estimated residual The first entry for this question is completed as an example. value of $8800 ($8000 + $800 GST). Depreciation is 22% p.a. diminishing balance method.

WORKBOOK

On 1 August 2026 Account the car was traded in for $19 800or ($18 000 +$1800Chart GST) on new motor vehicle purchased on or credit. Business Names Debit Credit ofaAccount Account Increase Transaction Group Decrease Prepare: Remitted wages a a depreciation worksheet for the period that the car is owned Wages debit E increase b extract general journals for the calendar year 2026 Bank credit CA decrease c an asset register record for the motor vehicle from its purchase to disposal (assume appropriate account and serial numbers).

Workbook 75

BK-CLA-CLARKE_9E-170438-Chp03.indd 75

The workbook for this new edition is structured to be used in combination with the student book, providing consistent and professionally presented solution templates for each question in the chapter.

10/05/18 5:21 PM

ACCOUNTING9E An introduction to Principles & Practice

Microsoft Excel™ versions of the answer templates are available online for selected questions via CourseMate Express (see the Guide to the online resources — For students). 588

Copyright © 2018. Cengage. All rights reserved.

BK-CLA-CLARKE_9E-170438-Chp13.indd 588

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29/05/18 5:12 PM

Edward A. Clarke Yvonne Wilson Michael Wilson

xi

Guide to the online resources FOR THE INSTRUCTOR Cengage is pleased to provide you with a selection of resources that will help you prepare your sessions and assessment plans. These teaching tools are accessible via cengage.com.au/instructors for Australia or cengage.co.nz/instructors for New Zealand.

SOLUTIONS MANUAL The solutions manual provides detailed solutions to every question in the text.

POWERPOINTTM PRESENTATIONS Use the chapter-by-chapter PowerPoint slides to enhance your lecture presentations and handouts by reinforcing the key principles of your subject.

MAPPING GRID The intermediate mapping grid is a simple tool that shows how the content of this book relates to the units of competency needed to complete FNS30317 – Certificate III in Accounts Administration and FNS40217 – Certificate IV in Accounting and Bookkeeping.

ARTWORK FROM THE TEXT

Copyright © 2018. Cengage. All rights reserved.

Add the digital files of graphs, tables, pictures and flow charts into your learning management system, use them in student handouts, or copy them into your lecture presentations.

ADDITIONAL QUESTIONS Use additional questions in your assessment materials or assign them as homework or as an extension activity. Full answers are provided.

WEBLINKS Use weblinks to research additional learning resources online and extend your students’ understanding of complex topics

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xi

GUIDE TO THE ONLINE RESOURCES

FOR THE STUDENT New copies of the accompanying workbook come with an access code that gives you a 12-month subscription to the CourseMate Express website. Visit http://login.cengagebrain.com and log in using the access code card. OR Visit the Accounting: An Introduction to Principles and Practice student companion website. You will find: • quizzes • weblinks • flashcards • and more tools to help you excel in your studies.

Copyright © 2018. Cengage. All rights reserved.

COURSEMATE EXPRESS FOR ACCOUNTING Digital workbook templates Fast-track expertise in accounting by practising the student book theory with the companion workbook. The timesaving templates remove the need to recreate standard forms, so students can focus on solving the accounting problems presented in Accounting: An Introduction to Principles and Practice 9e, by Edward A. Clarke, Yvonne Wilson and Michael Wilson.

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PRE FACE

When preparing for the first edition of this book from December 1989, technology and electronics were very different from today. At the time, many businesses used manual accounting systems. Computerised accounting systems were very basic and expensive. In the intervening years, the business and accounting world has been ‘turned up-side down’ with computers and electronic processes that include cloud-based accounting software and storage facilities. Communication choices are considerable and have become inexpensive. Electronic devices including cards and phones may be used as means of payment. Cash money and cheques are being used less, as new technologies are developed and accepted. Technological developments continue to change payment systems at a rapid pace. The ninth edition of this book includes some of these ongoing major developments in the way business is transacted. This new edition includes the following features: • The first chapter has been reduced in size and complexity to concentrate on the broad concepts of recording and reporting business transactions. • A new second chapter incorporates the second half of chapter one in the 8th edition. It includes diagrams to demonstrate electronic forms of documentation and transfer of funds. The importance of thorough authorisation and checking procedures to verify the accuracy and authenticity of a transaction is also incorporated in diagrams and throughout the chapter. • Further links are developed between manual accounting and computer accounting systems. • The number of closing journals entries for end of year accounts has been reduced. Students should understand the principles behind the process but not be expected to complete excessive numbers of closing journal entries and general ledger postings. • The emphasis on service industries has been enhanced throughout book. Service industry questions have been expanded, but financial reporting has been limited to basic income statements reporting to avoid undue complexity.

Copyright © 2018. Cengage. All rights reserved.

• Worksheets have been significantly upgraded as the need for having a ‘trading’ account has been incorporated into the profit and loss. This has reduced the worksheet process to an 8-column worksheet. The 6-column worksheet has been removed to place more emphasis on learning to prepare financial reports. • The payroll chapter has been updated in line with current minimum wage rates. The 2017–18 income tax rates are used, being the most current at the time of updating the book. • The exposition of the principles and methods is supplemented with clear, worked examples. This textbook is accompanied by CourseMate Express, a Cengage online platform that includes fully worked solutions to all even-numbered questions, and a soft copy of the workbook and additional templates in Excel format. The ninth edition of Accounting: An Introduction to Principles and Practice supports compliance with the VET Quality Framework and the Financial Services Training Package (Release 3.0). It covers several core and elective units in the Accounting and Bookkeeping qualifications and skills sets. It is designed for use by students studying at TAFE and other tertiary education providers. It also continues to be very useful reading for university students studying introductory accounting.

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xiii

ACK NOW LE DG E M E NT S

We – Yvonne, Michael and Ted – have appreciated the opportunity to combine our efforts in writing this ninth edition of your accounting book. It is our hope and trust that it will help you to understand and be able to apply the processes of accounting in your studies and career, in whichever direction it takes you. Our thanks are due also to colleagues across Australia, and particularly in TAFE NSW, for feedback on the previous editions. We have noted your comments and hopefully have included some of the recommendations that you have made. We acknowledge and are grateful for the contribution you have made to this book. The invaluable contribution of Diane Fowler, the editor of the book, is also acknowledged by Ted, Yvonne and Michael. Diane’s guidance and dedication throughout the process has been greatly appreciated. Edward A. Clarke Yvonne Wilson Michael Wilson

To special friends:

Very special thanks continue to Peggy, Ted’s friend, wife and confidante, who continues showing kindness, love and understanding as we journey together. Thanks also go to all those friends who have contributed to our many wonderful life experiences down on the farm at Glenreagh.

Copyright © 2018. Cengage. All rights reserved.

Edward A. Clarke Glenreagh NSW

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1 Accounting: its foundations

Copyright © 2018. Cengage. All rights reserved.

Introduction This book is intended to introduce you to the principles and practice of accounting. It will concentrate on the operations of a business that is owned by one person – a sole proprietor or sole trader. We will use examples of businesses that: • sell a service (a service business) or • buy and sell goods (a trading business) with the intention of making a profit. However, the basics of accounting are relevant to all business ownership structures and types of business activities (such as primary producers and manufacturing industries). You will learn that the accounting equation is the basis for recording business transactions. Initially, transactions are entered into the general journal and sometimes into specialised journals. These journals are then summarised in the general ledger, and at the end of the period a trial balance is prepared from the ending account balances. Finally, financial reports are prepared. An income statement shows the revenues and expenses, and provides a picture of the financial performance of the business over a particular period of time. The balance sheet represents what the business owns/controls and owes. It states the financial position at a particular point in time.

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ACCOUNTING: ITS FOUNDATIONS

Introduction to business operations It is usual for introductory accounting texts to demonstrate the principles of accounting through a sole trader ownership structure: that is, a business owned by one person who may employ other people. The examples we will examine include trading and service businesses that buy and sell goods and/or services.

SERVICING BUSINESS A servicing business mainly sells its knowledge or skills at a profit. Examples of service businesses operated by sole proprietors may include vehicle maintenance and repair, building construction and renovations, repair, installation and restoration of electrical or electronic products. Businesses that provide professional services such as accounting, legal, veterinary, medical and dental practices as well as travel and accommodation may also be operated as sole proprietors.

TRADING BUSINESS A trading business generally buys goods in large quantities (in bulk) and sells the products in smaller quantities, at a profit. Buyers purchase these goods for their individual or business use or consumption. A petrol station buys many thousands of litres of petrol and diesel at a bulk price and sells them to individual motorists, who drive in to fill up the tank of their car or truck. The petrol station does nothing to the petrol or diesel. A stationery shop buys paper, pens, pencils and many types of folders and sells the products or goods in smaller quantities. Other examples may include greengrocers and clothing retailers. ‘Retailer’ is another term used for businesses that buy and sell goods directly to the public.

COMBINED SERVICE AND TRADING BUSINESS Some businesses may provide a combination of services and trade, such as a car dealership that sells cars, provides maintenance services on the cars it has sold, and also sells spare parts. As well as its core business of plumbing services, a plumber may also sell kitchen, laundry and bathroom fittings and provide installation services for these items. Can you identify businesses in your area that operate as sole traders and are service providers, traders or both?

Departments or functions within a business More complex businesses might have a number of departments or sections that are responsible for different functions, including the following: • purchases: buying goods and/or services for the business Copyright © 2018. Cengage. All rights reserved.

• receiving: accepting deliveries of goods that have been purchased by the business • warehouse: holding or storing goods before sale or use by the business • sales: selling goods to various customers • despatch: sending or delivering out goods that have been sold to customers • accounting: recording and reporting financial transactions related to the business • human resources (personnel) and payroll: employing and paying employees for their services. Some departments, such as receiving and warehouse, will often interact with each other. All departments, however, will interact with accounting as well as indirectly through accounting to each other (see figure 1.1).

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CHAPTER 1

DESPATCH

SALES

HUMAN RESOURCES (PERSONNEL) AND PAYROLL

PURCHASES

ACCOUNTING

WAREHOUSE

RECEIVING

FIGURE 1.1  Interactions between departments or sections within a business

These interactions will occur no matter which industry group the business belongs to: primary, secondary, transport or service. More complex businesses generally operate through different ownership structures. Later in this chapter we will briefly look at different structures of business ownership, including sole traders, partnerships and companies.

Management The objective of the owner or manager of a business (entity) is to plan, lead, organise and control the business to enable a reasonable return of profit on the investment put into the business by the owner. Managers need to develop systems to provide them with the information they require to make decisions about a business. These systems are often referred to as the management information system, or MIS. If the owner or manager plans to expand into a new area, they have to consider whether there is a market for the goods or services, whether the goods or services can be supplied and if there are trained human resources or personnel available in the business. Financial information can assist in the decision-making process. A money or dollar value needs to be placed on the cost or benefit of each option. It will help the owner to decide whether it is worth expanding in an area or whether to look for different alternatives.

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Accounting Accounting is the process of collecting, classifying, recording, reporting, analysing and interpreting financial data to meet the financial information requirements of the various interests, or users, concerned with the operation of a business both internally (within the business) and externally (outside of the business). Accounting has evolved from a single-entry record keeping system, dating from around 4000 BCE and covering ownership of property and transactions between parties, to the double-entry accrual accounting system used by many businesses today. Basically, accrual accounting is the matching of revenue and expenses to the accounting period, usually one year. Although this book adopts the accrual accounting method, chapter 5 includes a brief introduction to the cash accounting method of recording.

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ACCOUNTING: ITS FOUNDATIONS

A system for recording accounting information, commonly called an accounting information system, should be developed to provide relevant reports that faithfully represent the information to users. The reports should also be comparable, verifiable, timely and understandable. An accounting system is a collection of processes, procedures and controls designed to collect, record, classify and summarise financial data for interpretation and management decision making. Before the introduction of computers and appropriate software, businesses used a manual accounting system, keeping their financial records by hand. Some businesses may still use a manual accounting system. Today many businesses use some form of computerised accounting system to maintain their financial records. Computers and off-the-shelf or customised accounting software packages are used to record, store and analyse financial data. In Australia, some commonly used off-the-shelf packages include MYOB, Reckon, QuickBooks and Xero. Although this book focuses on setting up and maintaining a manual accounting system, the same principles are used in many computer accounting software packages. As data is input into the accounting package, most of the steps you would complete in a manual system are automatically processed. You would not be aware how the package is processing the data, but most accounting packages include reports that are similar to those manually produced. They can manipulate data and present information far quicker than manual systems. Over time the accounting processes or systems of a business may need to change. As its operations and structure become more complex, different or more frequent information may need to be produced. Changes to legislation or accounting rules may also require changes in the way a business must report information to its users.

USERS OF ACCOUNTING INFORMATION There are two user groups interested in the financial details of a business: internal users and external users. • Internal users: – owners and managers of the business, who need to know the revenue, expenses and the resulting profit of the business so that decisions on the future for the business can be made. These users should have access to all available financial information or can require it to be prepared for them at any time.

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• External users: – other businesses, such as suppliers, who are owed monies by the business (also known as creditors, or accounts payable); these may be concerned if the business is making insufficient profit (or even a loss), in which case they may not be paid the amount that is owed to them – government departments, including the Australian Taxation Office, which must ensure that the correct taxes are paid by the business – lenders, who are concerned that the funds lent to the business together with interest will be repaid in full and on time – employees, who are interested in the long-term financial viability of the business and its ability to pay leave entitlements when they fall due. External users generally only have access to financial reports or financial statements that are prepared periodically and contain limited financial details about the business. Some external users, such as government departments, may require more detailed information that is not available to other external users.

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CHAPTER 1

Basic accounting terms Assets An asset is a resource controlled by the entity (business) from which future economic benefits are expected.1 Therefore, an asset is an item of value to the business, which can be used in its operations and can be expressed as a dollar value. There are two classifications of assets: current assets and non-current assets.

CURRENT ASSETS Current assets are cash or other assets of the business that are expected to be used, consumed or converted into cash within the next 12 months. Examples of current assets are: • cash at bank; that is, funds that are held by a bank but owned and used by the business to buy and sell goods and services. The words ‘cash’ and ‘bank’ also mean the same as ‘cash at bank’ • inventory; that is, all of the goods that a business has for sale. The words ‘stock’ and ‘stock on hand’ also mean the same as ‘inventory’. Service businesses that hold large amounts of materials for use in providing their services may use the term ‘supplies’ for these current assets • accounts receivable; that is, all the amounts owed by customers who have bought goods or services from the business with the agreement that they will remit or pay the funds owing for that sale within the next month or two. The word ‘debtors’ means the same as ‘accounts receivable’.

NON-CURRENT ASSETS Non-current assets are assets the business expects to hold for more than 12 months; that is, they will not be consumed or converted into cash within the next 12 months. Examples of non-current assets include: • land – the area of earth, ground, soil or terrain that a business controls and uses in the business • buildings – structures usually built on land controlled by the business and used in its operations • machinery or machines – equipment used by a business to make goods or products for sale as inventory, stock or goods • motor vehicles – cars, utilities, trucks, forklift trucks and motorbikes. Trucks bring inventory and goods from suppliers into the business, or deliver inventory to customers. Cars are used by salespeople to visit customers or by other employees while carrying out their work responsibilities

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• office equipment – equipment used in the office or administration area. It includes such assets as tables, desks, chairs, cupboards, shelving, filing cabinets, photocopiers, fax machines and telephone systems • computers – these may form an integrated information and communication system between all areas of the business • investments – other long-term assets that the business has acquired. These may include shares and debentures in a company, government bonds and other financial instruments.

Liabilities A liability is a present obligation of the entity (business) that is expected to result in an outflow of resources. Therefore, a liability is an obligation of the business that it must eventually discharge or repay. Liabilities are what the business owes outside or external to the business. There are two classifications of liabilities: current liabilities and non-current liabilities.

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ACCOUNTING: ITS FOUNDATIONS

CURRENT LIABILITIES A current liability is an obligation that the business is required to satisfy or pay within the next 12 months. An example of a current liability is: • accounts payable; that is, all the amounts owed by the business to suppliers from whom it has purchased goods or services, with the expectation that it will remit the funds owing for that purchase within the next month or two. Accounts payable include amounts owing to suppliers for inventory or stock purchased for resale, as well as amounts owing for expenses incurred or acquired by the business, such as electricity, telephone, postage and stationery. The word ‘creditors’ means the same as ‘accounts payable’.

NON-CURRENT LIABILITIES Non-current liabilities are obligations that the business is required to satisfy or pay after or beyond 12 months. Examples of non-current liabilities include: • loan from a lending institution or other source; there is a requirement to repay the amount that has been received from the loan, but this is expected to occur beyond or after 12 months • mortgage: this is a special type of security for a loan, usually for a bank or other lending institution. The funds are only given if the business and/or persons guaranteeing the loan assigns the title or right to specific land (real estate) as security that the loan will be repaid. A mortgage allows the lender (mortgagee) to sell the borrower’s land (real estate) if they default on the loan. This puts the lender, often a bank, in a better position than most other creditors.

Owner’s equity Owner’s equity is what the owner has put into or invested in the business. It shows what the business owes to the owner. The total can be calculated by deducting liabilities from assets. The words ‘proprietorship’ or ‘equity’ mean the same as ‘owner’s equity’. Examples of owner’s equity are: • capital, which shows the amount and details of what has been invested by the owner in the business. Any profit made by the business is added to this capital amount. Any loss incurred by the business is deducted from the capital amount • drawings, which includes amounts of cash taken out of the business by the owner as well as the value of any inventory taken by the owner that the business had originally purchased to sell to its customers.

Revenue Copyright © 2018. Cengage. All rights reserved.

Revenue arises in the course of the ordinary activities of an entity. Therefore, revenue is the earnings, proceeds or takings from the operations of a business. Examples of revenue are: • sales, which includes the total amount or price obtained by the business when it sells its inventory or goods. This is the main revenue source for a business selling inventory or goods • fees, which includes the total amount or price obtained by the business when it sells its services. This is the main revenue source for a business selling services • commission received, which is revenue received from selling someone else’s inventory, goods or property. It is not usually the main revenue source • interest received, which is revenue received from investments that the business has made with available funds. This may include interest-bearing deposits with a bank or other borrowing institution. It is not usually the main revenue source • rent received, which is revenue received from renting to a third party a part or all of a building that the business controls but does not use. It is not usually the main revenue source. Created from tafenswlib on 2020-05-30 00:31:30.

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CHAPTER 1

Expense We shall examine expenses that arise in the course of the ordinary activities of the entity (business). Expenses usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. For our purposes, ‘cost’ means the same as ‘expense’. Examples of expense are: • cost of sales (services or goods), which is the cost of the service that has been provided or goods that have been sold by the business • wages or salaries, which are paid to the people who work for the business; they are employees of the business • rent expense, which is the amount paid to another business for the right to use an area of land and/or building to store inventory and carry out the activities of the business • postage expense, which includes the cost of sending and receiving items through the mail – that is, Australia Post • stationery expense, which includes the cost of pens, pencils, markers, paper and pre-printed forms used by the business • depreciation, which is an allocated expense spread over the estimated useful life of a non-current asset. If the total revenue is greater than the total expenses then the business has made a profit that is added to owner’s equity. Revenue $10 000 – Expense $8000 = Profit $2000 Owner’s Equity $50 000  +  Profit $2000  =  new Owner’s Equity $52 000

If the total revenue is less than the total expenses then the business has made a loss; this reduces the owner’s equity. Revenue $10 000 – Expense $11 000 = Loss $1000 Owner’s Equity $50 000  –  Loss $1000  =  new Owner’s Equity $49 000

Financial statements

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Financial statements are particular reports that are prepared for users and provide information about the business’s assets, liabilities, owner’s equity, revenues and expenses. We will develop two financial statements in this book: • statement of financial position or balance sheet, which shows the account balances of all assets, liabilities and owner’s equity at the end of the accounting period • statement of profit or loss and other comprehensive income or income statement, which shows the account balances of all revenues and expenses that determine the profit or loss made for the period.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.1 From the following clues relating to the topic matters covered above, complete the crossword in figure 1.2.

Across   2   5   8 10 11 12 15 16 17 18

It can be an asset or a liability that still exists after 12 months. An obligation that the business is required to satisfy or pay within the next 12 months (2 words). The type of accounting system used today by businesses. If total sales revenue is greater than total expense then a . . . . . . . . . . occurs. Part of the accounting process is the i . . . . . . . . . . of financial data. Accounting information is prepared for them. Part of the accounting process is the a . . . . . . . . . . of financial data. The . . . . . . . . . . users of accounting information have very limited access to accounting information. The earnings made from the operation of the business. Accounting is not a science or an art but an ongoing . . . . . . . . . .

Down   1   3   4   6   7   9 13 14

Cash is this (2 words). It is what the owner has put into or invested in the business (2 words). Other businesses that are owed debts are called it (2 words). This group of users of accounting information usually has full access to accounting data. Accounting exists to provide this to the business. Part of the accounting process is the c . . . . . . . . . . of financial data. It is incurred or spent in making sales or running the business. Items of value used by the business in its operations.

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2

3

4 5

6 8

7

9

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11

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12 14

13 15

16

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FIGURE 1.2  Crossword for question 1.1

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CHAPTER 1

QUESTION 1.2 From the following clues relating to examples used above for assets, liabilities, owner’s equity, revenue and expenses, complete the crossword in figure 1.3.

Across   2   5   6 10 11 14 15 16 17 19 20 21

The business owes them for purchases of goods and services not yet paid. A current asset summarising details of what amount is owed to the business and by whom. The printed word you are reading this from is on it and it is included in this expense. This non-current asset is used in the administration area (2 words). A current asset that shows details of who and how much is owed by customers to the business (2 words). An expense for using the mail system. The business has this current asset to sell (3 words). Amounts of cash and inventory taken by the owner. This non-current liability provides funds to the business that must be repaid. The business uses this non-current asset to make goods or products for sale. These non-current assets are sometimes referred to as work stations. A business selling goods calls the goods this, and it’s a current asset.

Down   1   3   4   7   8   9 12 13 18

This type of loan requires collateral or security and is a non-current liability. The bank has this current asset but the business owns it. If you don’t like flying, this non-current asset is very good to keep your feet on. A current liability that shows details of who and how much is owed to suppliers by the business (2 words). This current asset is used to pay for goods and services (3 words). Cars, utilities, trucks and forklifts are this non-current asset. This owner’s equity shows what the business is worth and any profit adds to it. A structure that the business may construct and use for its operations; a non-current asset. The same meaning as inventory.

1 2 3

4 5

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7

8 9

10

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11 12

13

14 15 16 18

17 19 20

21

FIGURE 1.3  Crossword for question 1.2

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ACCOUNTING: ITS FOUNDATIONS

Types of business ownership, their advantages and disadvantages Sole trader A business that is carried on by a sole trader is owned by one person, who also usually runs and manages the business. There may or may not be people working in the business; these are referred to as employees of the business and the owner is the employer. This is the simplest form of ownership and numerically the most common. The sole trader receives all profits and is legally required to bear and satisfy all losses personally. In other words, the sole trader has unlimited liability to repay amounts owing, or debts, of the business. The total amount of cash and other assets brought into the business by the sole trader is the capital that the business owes to the owner; it is called the owner’s equity. Over time, the owner’s equity will be increased by profits made by the business, and reduced by losses made by the business and drawings (cash or goods) from the business. The sole trader is free to run the business as they think best and is not answerable to a boss. Although such a business is inexpensive and easy to set up and run, additional finance may be difficult to obtain. The business name, if different from the owner’s own name, must be registered with the Australian Securities and Investments Commission (ASIC). A business bank account would normally be set up.

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Partnership A business that is carried on by a partnership can generally be owned by between two and 20 people. A partnership is a relationship between two or more persons with a view to profit. The partners usually run and manage the business. However, there may be a silent partner who does not take any part in the running of the business even though they have contributed capital to the partnership. The amount of the capital that each partner brings to the partnership and the proportion in which the profits and losses are to be split among the partners is agreed between them and usually written in the partnership agreement. If a matter is not covered by the partnership agreement, then the position as set out in the Partnership Act of the state or territory in which the business is registered applies. Partnerships do not have any special legal, accounting or recording requirements. A partnership is not a taxable entity. Profits and losses are allocated to each partner according to their entitlements in the partnership. It is important the accounts correctly record income and losses for the partners’ individual tax returns. The partners share in the profits of the partnership. However, they also must share in the losses and can each be held personally liable for the debts of the partnership. There is unlimited liability on the partners to repay the debts of the partnership. Partners are jointly and severally liable for debts. This means that, if necessary, creditors can enforce their full debt against the personal assets of any partner who can afford to pay. The partners are able to use their individual skills and specialise in areas for the overall benefit of the partnership and therefore should be able to earn more collectively than would be possible if they operated individually as sole traders. It is easy and inexpensive to set up a partnership. The business name should be registered and a separate bank account must be used for the partnership.

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CHAPTER 1

Corporation The most common type of corporation or company is one that is limited by shares. The shareholders hold shares in the company and therefore own it. Shareholders have limited liability; that is, their obligation is limited to the amount, if any, unpaid on their shares. Beyond this, the shareholder is not required to contribute to satisfying the debts of the company. The company has a separate legal identity. It can sue and be sued, but the shareholders (the owners) cannot be sued by creditors. The name of a company limited by shares must end with ‘Limited’ or its abbreviation ‘Ltd’. There are approximately 2.5 million companies that are registered in Australia. The Corporations Act 2001 (Cwlth) indicates that companies are either proprietary or public companies.

PROPRIETARY COMPANY A proprietary company is a company limited by shares and is sometimes referred to as a private company. The Corporate Law Economic Reform Program Act 1999 (Cwlth), which became effective early in 2000, changed a number of the areas covering these types of companies. Since the Act came into force, a proprietary company need only have one member and one director, but must have no more than 50 non-employee shareholders and the transferability of shares is restricted. The word ‘Proprietary’ or its abbreviation ‘Pty’ must appear in the company name; for example, ABC Pty Ltd. A proprietary company can be either a small or a large proprietary company. To be defined as a small proprietary company, the rules of ASIC require that the company must satisfy at least two of the following conditions for a financial year: • the consolidated revenue of the company and any entities it controls is less than $25 million • the value of the consolidated gross assets of the company and any entities it controls is less than $12.5 million at the end of the financial year • the company and any entities it controls have fewer than 50 employees at the end of the financial year. To be defined as a large proprietary company, a company must satisfy at least two of the following conditions for a financial year: • the consolidated revenue of the company and any entities it controls is $25 million or more • the value of the consolidated gross assets of the company and any entities it controls is $12.5 million or more at the end of the financial year • the company and any entities it controls have 50 or more employees at the end of the financial year.

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Large proprietary companies must prepare and lodge a financial report and a directors’ report for each financial year. The accounts must be audited unless ASIC grants relief.

PUBLIC COMPANY The Corporations Act 2001, Part 1.2 – Interpretation Div. 1 s. 9. defines a public company as any company other than a proprietary company; it is a company limited by shares. Many – although not all – public companies are listed on the Australian Securities Exchange (ASX). A public company is able to ask the public for funds and its shares are readily transferable. It must have at least one member and at least three directors, of which two must ordinarily reside in Australia. A board of directors, which is elected by and acts on behalf of the shareholders, manages the company. However, the board of directors recommends to the shareholders how much of the profit the company should retain and how much should be paid to shareholders as a dividend (a return on their investment in the company). Public companies are regulated by the Corporations Act, and they can be expensive to establish. There are around 2400 that are listed and traded on the ASX. Created from tafenswlib on 2020-05-30 00:31:30.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.3 From the following clues relating to topic matters covered for the different types of businesses, complete the crossword in figure 1.4.

Across   5   6   8   9 12 13 14 15

The liability of a sole trader and the partners in a partnership is . . . . . . . . . . They usually run and manage the partnership. How much capital is contributed and how profits are shared among partners is usually written in the partnership . . . . . . . . . . A . . . . . . . . . . partner does not take part in the running of the partnership. The company is owned by them. A . . . . . . . . . is owned by between two and 20 people. A business owned by one person is a . . . . . . . . . . . . . . . . . . . . (2 words). The last word in a company’s name is . . . . . . . . . .

Down   1   2   3   4   7 10 11 13

This Act regulates companies. The abbreviation for limited. They manage the company on behalf of the shareholders. The abbreviation for proprietary. The liability of a shareholder is limited to the amount, if any, unpaid on their . . . . . . . . . . A company owned by between one and 50 people is a . . . . . . . . . . limited company. If a sole trader operates a business using other than their own name as the business name, then the name of that business must be . . . . . . . . . . This type of company is listed on the Australian Securities Exchange.

1

2 4

3 5

7

6

8

9 10 11

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12

13

14

15

FIGURE 1.4  Crossword for question 1.3

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CHAPTER 1

Accounting assumptions: conventions and doctrines The accounting process creates a common language that enables communication within and between different businesses, no matter which language is spoken or what the ethnic background. Accounting is used by all businesses. The accounting language is guided by basic accounting concepts, ideas or thoughts. There are 10 concepts listed on pages 13–15 that are often referred to as conventions or doctrines. • Conventions are general agreements in accounting, which especially relate to standards or procedures. • Doctrines or principles are fundamental or general truths upon which other truths depend.

Conventions ACCOUNTING ENTITY CONVENTION The accounting or financial information of the business is always treated as a separate unit or body from the owner’s personal financial information. The business exists separately from the owner; this is known as the accounting entity convention. For example, the owner has a business, which includes a warehouse and trucks used in the business, and these are both recorded (or shown) in the books of the business. However, the house where the owner lives and the boat that is used on the weekend are personal property and are not shown (or recorded) in the books of the business. Also, the bank account of the business must be kept separate from any personal or private bank accounts. In accounting, the owner is treated as separate from the business. In a court of law, however, the nonbusiness assets of a sole trader are not likely to be treated as separate from the business, if creditors have not been paid. Legal separation occurs when a business is incorporated into a company that is owned by shareholders. Running a business within a company structure offers a level of protection for personal assets such as the family home.

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ACCOUNTING PERIOD CONVENTION The life of a business is divided into periods of equal lengths for reporting purposes. This is known as the accounting period convention. Accounting or financial reports are prepared for a specific time period to enable two things: to assess the results of buying and selling goods or services, and to meaningfully compare the results for the period with expected or past period results. In Australia many businesses use a financial year (or fiscal year) from 1 July to 30 June of the next year. Shorter accounting periods may be used depending upon the needs of the user. The goods and services tax (GST) started in Australia on 1 July 2000. A business that has an annual turnover (revenue or sales) of less than $75 000 is not required to register for GST but may choose to do so. The GST is introduced in chapter 4 and is relevant throughout the book. Most small and medium businesses registered for the GST are required to complete and submit a Business Activity Statement (BAS) every three months. This is known as submitting on a quarterly basis. A business with an annual GST turnover of $20 million or more must submit its electronic BAS on a monthly basis. Businesses must also prepare financial reports showing their profit or loss on an annual (yearly) basis to the Australian Taxation Office for final assessment of taxation. The specific time period is usually the financial year from 1 July to 30 June. Regardless of the size of a business or its GST registration obligations, it is wise for all businesses to prepare regular reports. Certain monthly, quarterly or six-monthly reports are useful as they provide Created from tafenswlib on 2020-05-30 00:31:30.

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ACCOUNTING: ITS FOUNDATIONS

management with information on the finances of the business. They allow comparisons to be made and corrective action taken where necessary. A loss of $10 000 revealed in an annual financial report might have been avoided if monthly reports had been prepared. Early corrective action could have been taken to change the loss for the year into a profit.

GOING CONCERN (OR CONTINUITY OF ACTIVITY) CONVENTION Financial reports or statements are prepared on the assumption that the life of the business will continue indefinitely. A business is regarded as a going concern as long as it can pay its liabilities when they have to be paid and the intention of the owner is not to cease business but to carry on with that business. A business is started because the owner expects it to be successful and to earn adequate profits. Even when the owner wants to retire, there may be an expectation that the business will be sold and will carry on indefinitely into the future.

MONETARY CONVENTION All financial business transactions or events are recorded in Australian dollars and cents. If a monetary value cannot be given to a transaction, then it cannot be recorded in the books of the business and cannot be included in an accounting financial statement or report. This is known as the monetary convention. The sale of 1000 goods or items for $5.00 each is recorded as sales of $5000. The 1000 units are not shown, only the monetary value of those units.

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HISTORICAL COST (OR HISTORICAL RECORD) CONVENTION The actual amount that a business receives or pays is the amount that is recorded or written in the accounting books or records of that business. Non-current assets are recorded at their cost. This is known as the historical cost convention. This convention assumes that the buying capacity of a dollar is the same in the past as it is at present. However, this is not the case, as the purchasing power of a dollar is reduced over time by inflation. For instance, land that was purchased by a business 15 years ago for $8000 was recorded at its original cost and would still be in the accounting records today at $8000. This is the case even though the land might be worth $80 000 if it was sold now. This can lead to apparent distortions of the worth of a business when only historical cost accounting records are used to record items purchased in the past. Certain non-current assets may be revalued to ‘fair value’. This is a topic studied in more advanced financial accounting and will not be covered in this book. In another example, a delivery truck that was advertised for $35 000 is purchased at a special sale price of $31 500. The delivery truck is recorded in the books of the business at its cost of $31 500 and not at the advertised price. Despite the valuation problem caused by inflation and the recording of items at their original cost to the business, the historical cost convention remains the most commonly used method of reporting the financial statements of businesses. There are alternatives to historical cost accounting but these generate considerable debate and go beyond our scope of study.

RECOGNITION OF LAW CONVENTION The preparation of statements and reports must follow relevant laws. Taxation law includes specific recording and reporting requirements to comply with GST and income tax purposes. The Corporations Act 2001 requires companies that are reporting entities to comply with Australian Accounting Standards.

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Doctrines DOCTRINE OF CONSISTENCY The accounting principles used to prepare financial statements should be applied in the same way for each accounting period, irrespective of whether the period is a month or a year. If a business is not consistent in its reporting methods from one period to another, then differences may appear to have occurred that in fact did not happen. More seriously, a change in valuation or reporting may cover up a problem that the business is having. The valuation of inventory or stock needs to be consistent, as it has a direct result on the profit of the business. If there is any change in consistency, then the change should be disclosed.

DOCTRINE OF DISCLOSURE The accounting reports should contain information that ensures that the users understand the financial position of the business. A loss should not be included with other figures if it has the effect of hiding or misleading an event of significance. A profit on the sale of a truck should not be included with the diesel and other running costs of the truck, as they are two different events. The cost or expense of running a truck and the profit on the sale of a truck should be shown as separate figures. The owner and other users who rely on the financial reports expect that full disclosure has taken place.

DOCTRINE OF MATERIALITY The significance, importance or materiality of an amount depends on both the size of a business and the importance of the item being considered. A shortage of $100 from inventory or stock held in a warehouse where the total cost was $250 000 may not be considered material or significant and very little effort may be made to try to find it. However, $1000 missing from $2500 that was to be deposited in the bank is material. It would result in a significantly detailed investigation as to how and why the funds went missing and what was required to prevent such an event happening again. The accounting reports often reflect the doctrine of materiality, where a large business may report in hundreds, thousands or millions of dollars, whereas a small business may report in dollars.

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DOCTRINE OF CONSERVATISM When there is a choice or uncertainty in the results to be reported, the preference is to understate the profit results rather than to overstate them; the more conservative approach should be taken. Generally, an expense in running the business should be included as an expense of the business when it is first anticipated. However, revenue would normally be included when it has been received, or when there is strong probability that it will be received when it is due. However, this should not lead to a distortion (or misunderstanding) of the financial reports, as there should be a full disclosure of why the conservative alternative has been taken.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.4 From the following clues relating to topic matters covered in ‘Accounting assumptions: conventions and doctrines’, complete the crossword in figure 1.5.

Across   1   3   4   6   9 11 12 15 16

This doctrine depends on the size and importance of the item being considered. There should be full . . . . . . . . . . so the owner understands the financial position. The assumption that a business will continue to operate in the future is the . . . . . . . . . . of activity convention. To record a non-current asset such as land at its cost rather than what it is now worth is applying the . . . . . . . . . . . . . . . . . . . . convention (2 words). Accounting principles should be applied to the accounts . . . . . . . . . . To understate profit, rather than overstate it, is the doctrine of . . . . . . . . . . Entries recorded in the accounts are expressed in . . . . . . . . . . dollars. The business life should be broken into periods of no more than . . . . . . . . . . . . . . . . . . . . (2 words). Non-current assets are recorded in the accounts at their historical . . . . . . . . . .

Down   2   5   7   8 10

13 14

The life of the business is usually expected to go on . . . . . . . . . . An assumption that the life of a business continues well into the future is the . . . . . . . . . . . . . . . . . . . . convention (2 words). This accounting convention separates the business from the owner. Unless a dollar value can be given to a transaction then it cannot be entered into the accounts. This is an expression of the . . . . . . . . . . convention. To enable an assessment of the results of buying and selling to be compared with the past and with present expectations, the accounting . . . . . . . . . . convention breaks the life of the business into equal time lengths. If they affect the business or its reports then they are to be followed. Accounting is used by . . . . . . . . . . businesses.

1

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4 5

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6

7 8

9

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15 16

FIGURE 1.5  Crossword for question 1.4 16 tafenswlib on 2020-05-30 00:31:30. Created from

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The Conceptual Framework and accounting standards Accounting standards are intended for more complex business structures that are classified as reporting entities. This includes companies that are listed on the ASX, where generally management is separate from ownership. These entities must prepare general purpose financial statements (GPFSs) that are designed for external users. While the recording and reporting of the financial activities of sole traders and partnerships do not have to comply with the standards, the terminology we use is consistent with them. The standards are also useful in understanding how to report specific transactions or activities.

Australian Accounting Standards Board Section 224 of the Australian Securities Commission Act 1989 (Cwlth) established the Australian Accounting Standards Board (AASB). The AASB continues in existence under s. 261 of the Australian Securities and Investments Commission Act 2001 (Cwlth) (the ASIC Act). Its functions, as set out in s. 227(1) of the ASIC Act, include the development the Conceptual Framework (CF). Section 224 and ss 228 to 233 establish the framework within which the AASB is to formulate and make accounting standards.

The Conceptual Framework The Framework for the Preparation and Presentation of Financial Statements is usually abbreviated to the term ‘Framework’ or ‘Conceptual Framework’. This Framework is issued by the AASB and is equivalent to the International Accounting Standards Board (IASB) Framework, with changes that make it more relevant and appropriate to Australia. It aims to: • develop logical consistent accounting standards • provide guidance where no accounting standard exists

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• enhance understanding by report users. The Framework sets out the objectives, assumptions, quality, elements and criteria for the recognition of GPFSs. Financial reports should be relevant and faithfully represent the business’s financial information. They should also be comparable, verifiable, timely and understandable. GPFS apply to reporting entities and are prepared for external users (CF para 1).2 The Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and the AASB developed a number of Statements of Accounting Concepts (SACs). Only SAC1 Definition of the Reporting Entity remains as a separate document from the Conceptual Framework. The Statement of Accounting Concepts SAC1 establishes a minimum quality of financial reports for a business or entity to provide to external users. These users include individuals, other businesses and governments. This information can help these users in their decision making.

Accounting standards The AASB’s primary responsibility was to develop accounting standards (the AASB Standards) in respect of general purpose financial reporting by reporting entities that are companies. The Corporations Law Economic Reform Program Act 1999 (Cwlth) further empowered the AASB to develop accounting standards for the private and public sectors (effective from 1 January 2000) with oversight responsibility being undertaken by the Financial Reporting Council. The AASB has adapted the accounting standards of the IASB applicable to annual reporting periods commencing on or after 1 January 2005. Australian standards that were applicable before 1 January 2005 have been replaced with Australian standards equivalent to those of the IASB. Created from tafenswlib on 2020-05-30 00:31:30.

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ACCOUNTING: ITS FOUNDATIONS

Although you are not required to learn the names of each standard you should be aware of some. The following list outlines standards that are relevant to an introductory accounting course. These and other standards will be important in more advanced studies in accounting. A complete list of standards is available on the AASB’s website.3 AASB 101 Presentation of Financial Statements AASB 102

Inventories

AASB 107

Statement of Cash Flows

AASB 112

Income Taxes

AASB 116

Property, Plant and Equipment

AASB 118

Revenue

AASB 119

Employee Benefits

AASB 137

Provisions, Contingent Liabilities and Contingent Assets

AASB 138

Intangible Assets

AASB 1031

Materiality

LEGAL RECOGNITION OF STANDARDS The AASB is an Australian Government agency, reporting to the Minister for Revenue and Financial Services. The AASB’s principal funding is via parliamentary appropriation under the Australian Treasury portfolio. When making standards, the AASB exercises its statutory powers under s. 334(1) of the Corporations Act over companies. Standards have legal enforceability and are to be complied with by a business that is subject to the laws.

PURPOSE OR OBJECTIVE OF STANDARDS Financial statements [AASB 101 (9)] are a structured representation of the financial position and financial performance of an entity. Their objective is to provide information about the financial position, financial performance and cash flows of an entity, which can be used by a wide range of users to make economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: a assets b liabilities c equity d revenues and expenses, including gains and losses Copyright © 2018. Cengage. All rights reserved.

e contributions by and distributions to owners in their capacity as owners, and f cash flows. This information helps users of financial statements to predict the entity’s future cash flows and, in particular, their timing and certainty. These reports must be prepared and presented to show a true and fair view of the entity (Corporations Act 2001, s. 297). The main requirements of AASB 101 (10) Presentation of Financial Statements are that the financial statements of a reporting entity must include four statements plus notes. A complete set of financial statements comprises: • a statement of financial position as at the end of the period (a balance sheet, which shows assets, liabilities and equity) • a statement of profit or loss and other comprehensive income for the period (an income statement, which shows revenues and expenses) 18 tafenswlib on 2020-05-30 00:31:30. Created from

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• a statement of changes in equity for the period • a statement of cash flows for the period, and • notes, which include a summary of significant accounting policies and other explanatory information. A sole proprietorship business would not be required to prepare the full range of statements and notes prescribed in the standards because it is not classified as a reporting entity. However, the standards assist in clarifying how to record and report transactions. Each standard includes detailed objectives of its purpose. Some of the principal considerations required by the standards are listed below. • Fair presentation and compliance with International Financial Reporting Standards (IFRSs) • Selection and application of appropriate accounting policies • The entity’s ability to continue as a going concern • Accrual basis of accounting • Materiality and aggregation • Comparative information • Consistency of presentation • The classification of items in the financial statements • A range of disclosures about financial position and financial performance For the purposes of this book, the statement of financial position will be titled the balance sheet, and the statement of profit or loss and other comprehensive income will be titled the income statement. The statement of changes in equity and the statement of cash flows are not covered in this book, as they relate to more advanced studies in accounting.

QUESTION 1.5 From the following clues involving topic matters covered that relate to accounting standards, concepts and the Framework, complete the crossword in figure 1.6.

Across   2   5   7   8

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10 11 14 15 16 17 19 20

Since January 2000 the AASB has been empowered to develop accounting standards in the private and . . . . . . . . . . sectors. AASB 101 is titled Presentation of . . . . . . . . . . . . . . . . . . . . (2 words). General purpose financial statements are provided to external . . . . . . . . . . An overall consideration by an entity in presenting financial reports is that the . . . . . . . . . . basis of accounting is used. The AASB exercises its statutory powers under the . . . . . . . . . . Act. Standards have legal . . . . . . . . . . and are to be complied with by reporting entities. The Framework for the Preparation and Presentation of Financial Statements may be abbreviated to the . . . . . . . . . . This type of user includes individuals and other businesses. The Statement of Financial Position is referred to in this book as a . . . . . . . . . . . . . . . . . . . . (2 words). Initially the AASB’s primary responsibility for general purpose financial statements was for reporting entities that were . . . . . . . . . . According to the AASB 101 standard, one of the considerations that an entity must take into account when presenting financial reports is the . . . . . . . . . . basis of accounting. The Framework sets out the objectives, . . . . . . . . . . , quality, elements and criteria for the recognition of general purpose financial statements. CONTINUED

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ACCOUNTING: ITS FOUNDATIONS

Down   1   3   4   6   9 12 13 14 18

Australian Accounting Standards Board, its abbreviation. An overall consideration by an entity in presenting financial reports is that each year there should be . . . . . . . . . of presentation. An overall consideration by an entity in presenting financial reports is that the presentation and compliance with Australian accounting standards should be . . . . . . . . . . The Statement of profit or loss and other comprehensive income is referred to in this book as an . . . . . . . . . . . . . . . . . . . . (2 words). An overall consideration by an entity in presenting financial reports is that the business is continuing into the future or that it is a . . . . . . . . . . . . . . . . . . . . (2 words). From 1 January 2005, the AASB has adapted the accounting standards of the . . . . . . . . . . Accounting Standards Board. SAC1 is titled ‘Definition of the Reporting . . . . . . . . . .’. The Conceptual Framework refers to the Preparation and Presentation of . . . . . . . . . . . . . . . . Statements. Standards applicable before 1 January 2005 have been replaced with Australian Standards equivalent to those of the . . . . . . . . . . , its abbreviation.

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19

FIGURE 1.6  Crossword for question 1.5

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Ethics as it applies to accounting The word ‘ethics’ can mean many things to many people, but in accounting it has a meaning similar to principles, morals and beliefs, as they relate to professional conduct. The Accounting Professional and Ethical Standards Board (APESB) has issued APES 110 Code of Ethics for Professional Accountants,4 effective 1 July 2011. The Fundamental Principles introduced in s 100.5 and elaborated in ss 110–150 of this code require that accountants conduct themselves ethically and act in a professional manner in relation to behaviour in the areas of: • integrity: the need to maintain a straightforward, honest, truthful and fair approach to professional work • objectivity: the need to be fair and not allow conflicts of interest, undue influence of others or bias to override objectivity • professional competence and due care: the need to perform professional services diligently in accordance with applicable technical and professional standards as well as to maintain a high level of professional knowledge and skill • confidentiality: the need to respect the confidentiality of information acquired in the course of work and not to disclose information to a third party without specific authority or unless there is a legal or professional duty to disclose it; not using confidential information for personal advantage or the advantage of third parties • professional behaviour: the need for conduct consistent with the good reputation of the profession and to refrain from any conduct that might bring discredit to the profession.

QUESTION 1.6

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Using the jumbled words below, unscramble the six areas that relate to the requirements of accountants to be ethical and act in a professional manner. The jumbled word may or may not relate to two words; however, the Workbook indicates if there are one or two words. d AFILOPRSENOS COEPECEMTN a CDEURAE e FDITLAIITNEOYNC b IYTETNRGI f REPNIFOSSAOL AOUVBIHER c JTYIIBCOETV

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21

ACCOUNTING: ITS FOUNDATIONS

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 1.7 Write down how you would explain to a relative or friend what accounting is and what it is about.

QUESTION 1.8 Define the following accounting terms and provide examples of each. a assets b liabilities c owner’s equity d revenue e expense

QUESTION 1.9 Can you find the following 17 basic accounting terms in the find-a-word puzzle? Each word is in a straight line but the line can be in any direction, including diagonal and reverse. Where the word consists of more than one word it is shown as a joined word; for example ‘current asset’ will be shown as ‘currentasset’. The words are: current liability

profit

accruals

expense

revenue

analysing

interpreting

service

asset

non-current

tax

collecting

owner’s equity

users

current asset

process

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accounts payable

22 tafenswlib on 2020-05-30 00:31:30. Created from

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QUESTION 1.10 From the 22 scrambled examples of current assets, non-current assets, current liabilities, non-current liabilities, owner’s equity, revenue and expenses you are required to unscramble the letters to create account names. a togesap

i ihevtslcmeoro

q iqeftefncuopemi

b olan

j igubdnil

r yntvinroe

c grwiadns

k eyhamncri

s rumetoscp

d troegagm

l taailpc

t assel

e eivtebcnascolrauec

m hcas

u cdantnshoko

f ahbakncats

n anbk

v okcst

g botserd

o daln

h etcirsrod

p buepnltcacaoasy

QUESTION 1.11 For each of the following business transactions or events, indicate the name of the convention or doctrine that applies.

Business transaction or event

Name of convention or doctrine

 1 Annual accounts were prepared.  2 The business pays amounts owed, through the business bank account.  3 The business expects to remain in existence into the foreseeable future.  4 The business will be a law-abiding entity.  5 The payment of hockey fees for the owner’s child is not a business expense.  6 The price of cars has increased from what the business paid last year.  7 The business was unsure how to record in its books the sale of goods to overseas, as the invoice was required to be in US$.  8 The business commenced in January and wanted to prepare its accounts in line with the fiscal year.

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 9 Almost identical land and buildings next to the one owned by the business were sold for $30 000 more than the business had paid for its own premises three years earlier. 10 The business valued its inventory this year in the same way it had valued it last year. 11

The business explained in its report the effects of changing the way it valued its inventory this year from the one used in previous years.

12 The loss on the sale of machinery was shown separately from the cost of maintaining and running all machinery during the year. 13 The $75.00 inventory loss was not treated as a separate expense.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.12 There are six accounting conventions and four accounting doctrines but three of the conventions have acceptable alternative names. Unscramble the 13 words to name the conventions and doctrines. a tiooiicyntutycnvitfa

f eialrtymait

k asoociitlcrtsh

b oreiognngncc

g dgoiocnrptiacnue

l ntaoeyrm

c drlactocrieriohs

h ncosetincys

m ytssuninetbies

d tmeocvnraiss

i teayctntiingnuco

e eoitwlgnnacofori

j dcsrieusol

QUESTION 1.13 What is the purpose or objective of accounting standards? How does AASB 101 contribute to that purpose?

QUESTION 1.14 What is the Framework and how is it involved with the financial reports?

QUESTION 1.15 What are the names of the following AASB standards? a AASB 101

d AASB 112

g AASB 119

b AASB 102

e AASB 116

h AASB 137

c AASB 107

f

i

AASB 118

AASB 138

QUESTION 1.16 Complete the following statements and locate the missing word(s) in the find-a-word puzzle. The answers are in straight lines but can be in any direction, including diagonal and reverse. a This Act regulates companies. b Limited, its abbreviation. c This type of company is listed on the Australian Securities Exchange. d They manage the company on behalf of the shareholders. e Proprietary, abbreviated. f

The liability of a sole trader and the partners in a partnership is . . . . . . . . . .

g They usually run and manage the partnership. h The liability of a shareholder is limited to the amount, if any, unpaid on their . . . . . . . . . . i

How much capital is contributed and how profits are shared among partners is usually written in the partnership . . . . . . . . . .

j

A . . . . . . . . . . partner does not take part in the running of the partnership.

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k A company owned by between one and 50 people is a . . . . . . . . . . limited company. l

If a sole trader operates a business that doesn’t use their own name as the business name then the name of that business must be . . . . . . . . . .

m The company is owned by them. n A . . . . . . . . . . is owned by between two and 20 people. o A business owned by one person is a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2 words). p The last word in a company’s name is . . . . . . . . . .

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T

L

G

G N

E

F W G

L

J

A

A

L M O

S

O H K H

D

QUESTION 1.17 The Accounting Professional and Ethical Standards Board states that there are five areas in which accountants must display a certain standard of professional conduct or ethics. What are they? Explain the ethics and give a meaningful example of each area.

QUESTION 1.18 Define and give examples to explain the significance of the following conventions and doctrines used in accounting: a accounting entity convention b accounting period convention c going concern convention d historical cost convention e doctrine of consistency f

doctrine of materiality

Copyright © 2018. Cengage. All rights reserved.

g doctrine of conservatism.

Endnotes 1 In this text when specific accounting terms are used we shall draw the explanations from published accounting guidelines/authorities like the Conceptual Framework and Accounting Standards. Further details of this authority are discussed later in this chapter. 2 The Conceptual Framework: http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx 3 http://www.aasb.gov.au/Pronouncements/Current-standards.aspx 4 http://www.apesb.org.au/page.php?id=12

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25

2 Financial transactions and their documentation Introduction

Copyright © 2018. Cengage. All rights reserved.

In Chapter 1 you learnt that accounting involves the recording and reporting of transactions for a business. In this chapter we will examine the main types of business transaction and the documents that are used to record the transactions in the business’s books.

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Personal transactions Before we look at common business financial transactions, let’s look at some financial transactions that you may undertake. As an individual, you would regularly make decisions to buy or purchase goods, such as food, clothing and electronic equipment, or services, such as travelling by bus or train, repairs to equipment or visiting the doctor or dentist. What do these decisions involve?

Hungry – buy food What do I feel like? Made a choice

Found the place to buy the food of my choice

Ordered food and paid cash

Received the food that was ordered

Ate the food. It tasted as good as expected; I’m satisfied and not hungry any more

OR

Mobile phone is faulty and needs repair

Take the phone to a repairer. Check that it will be done properly, quickly and for a reasonable price

Is it ready? No, sorry; waiting for a part from supplier

Finally ready; repaired and working correctly; paid by electronic method*

*Electronic methods may include a debit or credit card, a smart phone or other electronic technology

FIGURE 2.1  An individual buys goods or services and pays with cash or by an electronic method

Both of the transactions in figure 2.1 are financial transactions, as you are required to pay for the good or service. There are several ways you can pay: pay with cash; insert or swipe a debit or credit card linked to your bank account into a terminal; use a contactless method such as payWave or PayPass, where your chip-embedded card is placed near a point-of-sale terminal reader; or use another electronic device such as a mobile phone. The supplying business should give you some documentation (hard copy or electronic) as proof of the purchase. Similarly, a business undertakes financial transactions. A business event or transaction occurs when the business agrees to either: • buy goods or services, or other items of benefit to it, or • sell goods or services, or other items that it owns. Business event  =  Business transaction

Copyright © 2018. Cengage. All rights reserved.

Written records arising from business transactions  =  Documents

Every transaction can be expressed in monetary terms and requires some form of documentation. The document may be a hard copy or an electronic copy. There are two types of documents: • source document: the originating (or starting) document, used to record required information in the accounting books of the business. The document records specific details about the transaction and must include a monetary amount • control document: a document used in the business to control the use, or prevent the misuse, of the source documents. Control documents support a transaction; in other words, they provide information that can be used to verify or check the accuracy and validity of the relevant source document. Most control documents are for use within the business and have no direct use outside of that business. Control documents are an integral component of a system of internal control, as they assist in the prevention of misappropriation and detection of errors in the processing of business transactions. This chapter includes a description of the more commonly occurring transactions of a business, related documentation and an outline of how the documents are prepared. Each business uses documents that are designed to suit its specific needs, and hence their format will be unique to that particular business. Created from tafenswlib on 2020-05-30 00:33:55.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

An organisation’s accounting policies and procedures will generally stipulate procedures relating to the conduct of business transactions and the preparation and/or use of the relevant documents. It is essential for employees to be aware of and follow these policies and procedures, which should be included in the business’s operations manuals. On many documents, some information is mandated by Australian taxation laws and regulations.

Business transactions Purchase for cash and sale for cash When a business buys assets, goods or services for use in the business it may have to pay cash at the time of purchase or delivery; that is, the goods, services or items are paid for at the time of purchase. These are called cash transactions. When a business sells goods that it has previously purchased for resale or provides services, it may require the receipt of cash at the time of sale or delivery to the customer; that is, cash is received at the time the goods/services are sold/provided or at the time of delivery.

TRANSACTION – CASH PURCHASE Remit funds for services, goods or other items at the time of their purchase Business A remits funds to business B for services, goods or other items at the time they are purchased; this is a cash purchase for business A.

$ Business

A

Business

B

FIGURE 2.2  Business A makes a cash purchase from business B

TRANSACTION – CASH SALE

Copyright © 2018. Cengage. All rights reserved.

Receive funds for services, goods or other items at the time of their sale Business A receives funds from business C for services, goods or other items at the time they are sold; this is a cash sale for business A.

$ Business

A

Business

C

FIGURE 2.3  Business A makes a cash sale to business C

Purchase on credit and sale on credit When a business buys or sells a good or service, the business transaction may not immediately be accompanied by the remittance (payment or receipt) of funds (money). These are called credit transactions. The remittance of funds will occur at a later date, usually within a month or two. This is

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referred to as buying or selling on credit as funds, cash or money are remitted (paid or received) after the goods or other items of benefit have been exchanged.

TRANSACTION – PURCHASE ON CREDIT Invoice from supplier for services provided, goods or other items purchased on credit Business A buys services or goods from business E by receiving services or goods and a tax invoice requested from business E.

Business

A

Tax invoice

Business

E

FIGURE 2.4  Business A purchases on credit from business E

Remit (pay) funds to supplier Business A remits funds to business E for goods, services or other items purchased from business E at an earlier date.

Business

A

$

Business

E

FIGURE 2.5  Business A remits funds to business E

Credit note from supplier for services provided, goods or other items previously purchased on credit Business A returns goods, previously purchased on credit from business E, as some were no longer required by business A. If the return is agreed to by both parties, business A should then receive a credit note from business E. This reduces the amount owed by business A to business E. A credit note may also be used if there was a problem with the pricing or quality of the goods or services. In this case, all the goods are still required by business A, and none would be returned to business E. A credit note would be issued by business E and forwarded to business A to correct the pricing or quality problem agreed to with business E.

Business

A

Business

E

Copyright © 2018. Cengage. All rights reserved.

Credit note

FIGURE 2.6  Business A receives credit note from business E

TRANSACTIONS – SALES ON CREDIT Invoice to customer for services provided, goods or other items sold on credit Business A sells goods to business D by sending goods and a tax invoice required by business D.

Business

A

Tax invoice

Business

D

FIGURE 2.7  Business A sells on credit to business D

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Receive funds from customer Business A receives funds from business D for services provided, goods or other items sold to business D at an earlier date.

Business

A

$

Business

D

FIGURE 2.8  Business A receives funds from business D

Credit note to customer for goods previously sold on credit By agreement, business D returns goods previously purchased from business A as some were no longer required by business D. Business A then sends a credit note to business D. This reduces the amount owed to business A by business D. A credit note may also be used to adjust amounts owed if there was a problem with the pricing or quality of the goods. In this case, all the goods are still required by business D, and no goods would be returned to business A. A credit note would be issued by business A and forwarded to business D to correct the pricing or quality problem.

Business

A

Business

D

Credit note

FIGURE 2.9  Business A sends credit note to business D

Other adjustments Internal memorandum Business A authorises in writing the internal adjustment to a customer’s account.

Business

Memo

A

Copyright © 2018. Cengage. All rights reserved.

FIGURE 2.10  Business A authorises adjustment by internal memo

QUESTION 2.1 What is a business transaction?

QUESTION 2.2 Explain the difference between: • a cash sale and a credit sale

•   a cash purchase and a credit purchase.

Documentation Buy goods, services and other items on credit A business needs to buy goods and services from other businesses. A retailer will buy goods for resale (inventory) from suppliers and also additional assets such as vehicles, plant and equipment. The business

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will also need services like electricity, insurance, telecommunications and perhaps a website. It is usual for businesses to buy and sell to each other on credit rather than cash on delivery. A small business may do most of its purchasing from other businesses by initially preparing a paper purchase order. Using computers may be more efficient when a business has many transactions to record. Computers can assist document tracking and reconciling money amounts to ensure greater accuracy and reduce the cost of accounting services.

Purchase Requisition Prepared An internal control document may be needed seeking approval for a purchase order to be prepared for goods or services required by the person or department preparing the document.

Purchase Order Prepared An official request by the buyer to the supplier for specific goods or services for a specified price by a specified time; to be paid for after they are received. The purchase order is signed by an authorised person from the buyer. The original is emailed to the supplier. Internally, copies are emailed to the Receiving/Warehouse, Administration Office and, if appropriate, to a quality assurance section.

Purchase Requisition

Purchase Order

email

email to supplier

email

Receiving & Warehouse

Administration Office

Copyright © 2018. Cengage. All rights reserved.

Delivery Docket

Delivery Docket &/or Tax Invoice from Supplier

Goods

Signed delivery docket/tax invoice from Receiving/Warehouse to Administration Office for attention of the Accounts Payable Officer Tax invoice from supplier comes with goods OR to office by email or mail

Accounts Payable Officer Matches purchase order, delivery docket, tax invoice to each other. Checks that the price, quality, quantity received all agree to purchase order; account number allocated; initials the tax invoice

Purchase Order

Purchase Order

Tax Invoice

Service

If the Purchase Order was for services (and not goods) then the work relating to the service would be approved by the person responsible for the area where the service was performed and appropriate signed paperwork would be forwarded to the Accounts Payable Officer

Authorised Officer Approves The Tax Invoice is approved, with any other relevant documentation attached, so that it can be processed through the Purchases Journal and later paid through the Cash Payments Journal. All attached documents must clearly show that they have been processed through the Purchase and Payment Journals to prevent them being processed and paid a second time

FIGURE 2.11  Process flow for purchasing goods or services on credit Created from tafenswlib on 2020-05-30 00:33:55.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

A business may use a simple stand-alone computer system that produces all its transaction documents using an accounting software package. Typically, such a simple system would not be integrated into its suppliers’ computer systems, even though they may use email to send purchase orders. A bigger business such as a supermarket may require all its suppliers to have compatible and interlinked computer systems that contribute to improving its supply chain management. Such a business may use electronic data interchange (EDI), where its computers monitor inventory levels and automatically generate a purchase requisition to a supplier at a predetermined reorder point. The suppliers’ computers receive and act upon the electronic purchase order without human involvement. Figure 2.11, and the following pages, show the process flow for purchasing on credit.

TRANSACTION Tax invoice from supplier for goods and other items purchased on credit

Tax invoice $1210 and/or delivery docket from Bourke Produce

Louth Pastoral

Goods

Bourke Produce

FIGURE 2.12  Louth Pastoral purchased on credit from Bourke Produce

Louth Pastoral has bought (or purchased) inventory or goods from its supplier, Bourke Produce. The goods have not yet been paid for, but are to be paid for within 30 days; that is, 30 days from the end of the month, or 30 November 2022. The tax invoice for $1210.00 is the original and bears the number 29778. This numbered invoice is the source document for Louth Pastoral to record the purchase of inventory or goods on credit (or paying cash later).

BOURKE PRODUCE

Supply Street, Bourke NSW 2840 (02) 6872 2287 SOLD TO Louth Pastoral Wilcannia Road Louth NSW 2840

Copyright © 2018. Cengage. All rights reserved.

Date 27.10.2022

Customer Number LOU05 Description

* 20 L Drums of Degreaser * Nudge Bump Gate Assembly * Add 10% GST TOTAL AMOUNT PAYABLE

Terms: Net 30 days E&OE

Tax Invoice 29778 ABN: 98 765 432 187 DELIVER TO Shed behind Shindy’s Inn generator

Customer Order Number LPC 8597 Qty Unit Amount Price Payable 2 200.00 400.00 1 700.00 700.00 1 100.00 110.00 $1 210.00

FIGURE 2.13  Louth Pastoral tax invoice for purchases from supplier, Bourke Produce

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SOURCE DOCUMENT Tax invoice from supplier An invoice is a document issued by a seller to a buyer, relating to a sale transaction, and includes details of the goods and services sold. A tax invoice is an invoice that meets the requirements of the goods and services tax (GST) legislation in Australia. Figure 2.13 is an example of a tax invoice that meets the requirements, which include the following: • document title is ‘Tax Invoice’ • seller’s business name and address • seller’s Australian Business Number (ABN) • the date the invoice was issued • invoice number (pre-numbered) • buyer’s identity and/or ABN (if the sale is more than $1000) • brief description of the items sold, including the quantity (if applicable) and the price • the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly oneeleventh of the total price, as a statement such as ‘Total price includes GST’ • the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST). All businesses in Australia, regardless of their ownership structure, must have an ABN. GST is explained in more detail in chapter 4. Throughout this book we use the term ‘tax invoice’. A tax invoice can be viewed in two ways: 1 a credit purchase; from Louth Pastoral’s position. Louth Pastoral has purchased from Bourke Produce and it processes the original tax invoice it has received with the goods. The processing indicates that goods have been purchased and that it needs to pay Bourke Produce 2 a credit sale; from Bourke Produce’s position. Bourke Produce has sold to Louth Pastoral and it processes a duplicate of the tax invoice it has retained in its records. The processing indicates that inventory has been sold and that it is awaiting payment from Louth Pastoral. The purchase by one business (Louth Pastoral) is a sale by the other business (Bourke Produce).

Copyright © 2018. Cengage. All rights reserved.

CONTROL DOCUMENTS When a business receives a tax invoice for the purchase of goods or other items on credit, the invoice should be checked against supporting documents that provide key information relating to the purchase transaction. The thorough checking of these supporting documents is an important internal control mechanism that will ensure that the purchase invoice is valid and contains accurate information. Before the goods or other items included on the invoice are paid for, it is necessary for the purchasing business to confirm that it has ordered and received the goods, that the goods were received on time and in a saleable or useable condition, and that the price and other details on the invoice are correct. Errors detected during this checking process should be corrected and the supplier contacted if required. The supporting documents are described on page 34.

Purchase order requisition The purchase order requisition form may be known by various names, including the purchase order request and purchase approval form. These forms are intended to make sure that a business only purchases what it wants, at a price that it is prepared to pay, by a specific date; and finally, that the purchase is authorised. Created from tafenswlib on 2020-05-30 00:33:55.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Louth Pastoral Purchase Order Requisition Requisition Number: 1234

Date: 20 October 2022

Supplier Name: Bourke Produce

Supplier Code: BoP01

Supplier’s email: [email protected]

Date required: 31 October 22

Reason why goods or service required: Degreaser needed for work being done next month on the large harvester; only have about 3 litres in storeroom Gate opener needs replacing as cattle road train knocked it when leaving in the wet conditions last month

Norma

[email protected]

Signature Qty 40 1

Per Part Unit No. L ea Nb17

email Description Degreaser Nudge bump gate assembly

Total Cost $

Cost $ 440 770

Job No. Mntc Repr

Remarks Very low stock Refer above

1 210

FIGURE 2.14  Louth Pastoral purchase order requisition to property manager

Purchase order The purchase order, signed by an authorised business employee, is the official business document prepared by the customer/purchaser and given to the supplier, which advises the supplier that the specified goods are required by a particular date at a specified price. The order will show: • a number, which is to be quoted on the supplier’s tax invoice when the goods are invoiced (or charged) to the customer/purchaser • the delivery address • an indication whether the goods are GST-free or include GST Copyright © 2018. Cengage. All rights reserved.

• any other details believed necessary by the business.

Delivery docket The delivery docket is usually prepared as part of the supplier’s tax invoice set of documents, but does not include the price or value of the tax invoice. It is included, as its name suggests, with the goods when they are delivered. The delivery docket is signed by the customer when the goods are received. It is usually held by the receiving business as well as the supplier, who keeps a signed copy to confirm that its customer received the goods. Both businesses can use the signed delivery docket to confirm that the buying business has received the goods shown on the tax invoice.

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Louth Pastoral Purchase Order

Number: LP 8597

Wilcannia Road Louth NSW 2840 Phone: 02 6872 3456 email: [email protected]

Date: 21 October 2022

Supplier:

Deliver to:

Bourke Produce Supply Street Bourke NSW 2840 e: [email protected]

Shed behind Shindy’s Inn generator at Louth. Louth Pastoral will collect it from there, thanks.

Qty 40 1

Delivery required by: 31 October 2022

Unit Description L Degreaser ea Nb17 Nudge bump gate assembly

Price/unit 220.00/20L 770.00 ea

Total 440.00 770.00

GST and Freight included in price

Authorised by:

L Gray

Freight GST Total

0.00 incl. 1 210.00

Property Manager Louth Pastoral

FIGURE 2.15  Louth Pastoral purchase order to Bourke Produce

Receiving report A receiving report (or ‘goods received advice’) is a document generated by the Receiving (or Goods inwards) section of a business. It is prepared as goods and other items are received from suppliers and its purpose is to notify various sections of the business (Purchasing, Storeroom, Accounting etc.) that inventory has arrived. As it is prepared independently of the delivery docket, it provides additional evidence of the receipt of goods from suppliers and therefore has an important place in a system of internal control over purchases. The use of receiving reports is normally restricted to larger business entities.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 2.3 List the supporting documents that should be used by a business to check the validity and accuracy of a tax invoice received from a supplier for purchases on credit of goods, services or other items.

Sell goods and services on credit TRANSACTION A trading or service business sells goods and/or services to customers. A retailer will sell goods (inventory) that it purchases from suppliers and also additional assets such as vehicles, plant and equipment. Other businesses sell services such as plumbing repairs, legal advice, accounting or medical services. It is common for businesses to sell goods and services on credit. Figure 2.16 and the following pages show the process flow for selling on credit.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

If the business has a large range of complex products in various sizes, then an internal sales docket would normally be prepared. If the business has a small variety of products then the original purchase order received from the customer may be used as an internal sales docket.

Purchase Order Received An official request is received by the supplier from a customer for specific goods or services, for a specified price, by a specified time; and the purchase order is signed. The purchase order may be received in the mail, as an email, from the supplier’s website, or over the phone. Where an official order has not actually been received, an order number or other acceptable reference needs to be provided that is acceptable to the supplier, so that the order can start its process through the supplier’s business. If the order is received over the phone then an internal sales docket is normally created where an order number or an acceptable reference must be noted in the required place on the document.

email

Purchase Order

Credit Officer

Sales/Service Department

refer note 1

refer note 2

refer note 3

Internal Sales Docket (ISD) Referencing the customer’s purchase order number and details, the ISD uses internal code numbers, prices and descriptions to ensure that the correct products are selected from the Warehouse.

Warehouse & Despatch

Service

Goods Only Sale Warehouse advises Sales Dept that the ISD products have been ‘picked’ from the Warehouse and the order is ready to be despatched to the customer when the Tax Invoice and Delivery Docket are prepared.

Installation Service Sale including Goods Warehouse advises Sales Dept that the ISD products have been ‘picked’ from the Warehouse and the order is ready for the service installation to be made by their installation team, as per the Purchase Order.

Copyright © 2018. Cengage. All rights reserved.

Sales/Service Department

Sales/Service Department

Sales/Service Department organise for the Tax Invoice/ Delivery Docket to be prepared and the Warehouse attaches them to the goods and they are despatched to the customer as per the Purchase Order.

The installation work including goods is completed and the customer signs the ISD or other appropriate electronic ‘document’ agreeing that the installation has been completed to their satisfaction and agrees with their original purchase order.

Warehouse & Despatch

Goods

Sales/Service Department

Sales/Service Department organises preparation of the Tax Invoice referencing the customer’s Purchase Order.

Tax Invoice emailed to customer

FIGURE 2.16  Process flow for selling on credit The following notes provide further details for figure 2.16.

Note 1  Sales Department: The PO is priced to provide a total value, including freight/postage if appropriate, and GST. Availability of goods to fill the order is also checked. If the order is for the supply of services, then the order should reference a quotation number for the work or the job. Note 2  Credit Officer: As the order received is a credit sale, not a cash sale, the order must be approved by the credit officer before it can proceed through the business. If not approved, as there is no current account, then the order is returned to the sales department and they contact the ordering business to advise that the order is deemed to be ‘cash with order’ and the funds must be received before the order can proceed. At that point the supply of credit or debit card details by the customer could be accepted CONTINUED and the order would be processed as a cash sale.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

SOURCE DOCUMENT Tax invoice to customer The sale by one business (Jane Sparrow Crochet Design) is a purchase by the other business (Warrumbungle Craft Group). When looking at the source document for buying goods, an invoice (or a tax invoice using GST terms) can be viewed in two ways: 1 a credit sale; that is, from Jane Sparrow’s position. Jane Sparrow Crochet Design has sold to Warrumbungle Craft Group and uses or processes a duplicate of the tax invoice it has retained in its records. The processing indicates that inventory has been sold and that it is awaiting receipt of a cheque from Warrumbungle Craft Group 2 a credit purchase; that is, from Warrumbungle’s position. Warrumbungle Craft Group has purchased from Jane Sparrow Crochet Design and processes the original of the tax invoice it received with the goods. The processing indicates that goods have been purchased and that it must pay Jane Sparrow Crochet Design.

CONTROL DOCUMENTS Part of the process of preparing a tax invoice for the sale of goods or other items on credit is the gathering and checking of supporting documents that provide key information relating to the sale transaction. The thorough checking of these supporting documents is an important internal control mechanism that will ensure that the selling business supplies the required inventory to the right customer at the correct price, and that all information on the tax invoice is accurate. Errors detected during this checking process should be corrected. The supporting documents are described below.

Customer purchase order The purchase order from the customer will provide information relating to the nature and quantity of goods required, the address for delivery and billing, and the required delivery date, if any.

Inventory price list The selling business should maintain a detailed current price list covering all items of inventory that it has available for sale.

Picking slip

Copyright © 2018. Cengage. All rights reserved.

A picking slip is intended for use in a business that sells a large number of different goods, such as a bookshop or food distributor. It is used to help a store person select (or pick) the goods from the store or warehouse.

Despatch docket A despatch docket is similar to a delivery docket, and is usually prepared as part of the invoice set of documents. It is signed by the business receiving the goods (Warrumbungle Craft Group) and returned to the business selling the goods (Jane Sparrow Crochet Design) as evidence that the goods have been received.

QUESTION 2.4 List the supporting documents that must be checked by a business during the process of preparing a tax invoice for the sale on credit of goods, services or other items.

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Remit or pay funds (money) TRANSACTION Remit funds at time of purchase Butler Engineering makes a remittance to Nola Moxey for goods, paying by either cash/cheque or an electronic method such as a debit or credit card, a smart phone or other electronic technology. The goods are made available by Nola Moxey to Butler Engineering in exchange for immediate payment.

Cash/cheque $104.50

either

either Butler Engineering

or

Card/phone $104.50

or

Nola Moxey

Goods

FIGURE 2.19  Butler Engineering pays $104.50 to supplier Nola Moxey in exchange for goods

Remit funds to a credit supplier (account payable) Butler Engineering had previously received goods on credit from Nola Moxey. Butler Engineering now makes a remittance to Nola Moxey for goods, paying by either cash/cheque or an electronic method such as an internet bank transfer, a debit or credit card, a smart phone or other electronic technology.

Butler Engineering

either or

Cash/cheque $104.50

either Internet/card/ phone $104.50

or

Nola Moxey

Copyright © 2018. Cengage. All rights reserved.

FIGURE 2.20  Butler Engineering remits $104.50 to supplier Nola Moxey for goods received earlier

SOURCE DOCUMENTS Unless the amount involved is small and the business maintains a petty cash system (see chapter 8), cash should not be used to pay for goods or services. For control purposes it is general practice to use funds directly from the business’s bank account. There are now several equally acceptable methods, including electronic funds transfers (EFT) direct from the business’s bank account and the use of debit cards. With the increased use of electronic forms of payment or remittance through a business’s internet banking system, the traditional means of payment – by cheque – has become less common. The source documents used for recording payment transactions have also changed and will depend on the method of remittance. In some cases, the traditional source documents are not available. Regardless of the method used for making payments, it is very important that before any remittance is made, it is authorised by the Created from tafenswlib on 2020-05-30 00:33:55.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

correct people within the business. Authorisation must be in accordance with the business’s policies and procedures for making payments. It is important to understand and follow the processes within a business.

Copyright © 2018. Cengage. All rights reserved.

Electronic funds transfers In a computer-based business environment, the internet has resulted in the ability to transfer funds electronically between the bank accounts of individual parties. Banks and other financial institutions provide customers with access to electronic banking facilities, allowing them to conduct a range of transactions via EFT and over the internet. For example, most businesses pay employees’ salaries and wages by electronic transfer to their personal bank accounts, and many suppliers of goods and services offer facilities for electronic transfer of amounts owing directly into their bank account. Generally an authorised person logs on to the business bank account and inputs the details for the transfer of funds to the supplier, including any reference code that the supplier has included on the invoice. This allows the supplier to match the receipt of funds to the relevant invoice. Before the payment is finalised it is safe practice for at least one other person to authorise the transaction. This means that at least one other authorised person logs on to the bank’s website using their own access codes and authorises the transaction before the remittance is transmitted. The authorisation rules of such transfers vary from business to business but should always be done in accordance with the organisational policies and procedures of the business. When the authorisation process is complete, the payment will be transmitted by the bank from the business account to the bank account of the supplier. A remittance advice may also be generated by the payer’s bank or prepared by the payer and sent to the supplier to advise the payment has been made. As the transaction is finalised, the supplier’s bank may electronically generate a confirmation of the receipt of funds transferred. Electronic funds transfers can also be made using debit or credit cards. These are increasingly used by businesses to make payments for purchases. A card is presented at the time of purchase and scanned through an electronic funds transfer at point of sale (EFTPOS) machine or terminal. The holder of the card either signs the original receipt automatically generated by the terminal or inputs an authorisation code or personal identification number (PIN) into the terminal machine. Cards with inbuilt chips may also be passed near a payWave or PayPass logo on the business’s input device. For low-value transactions (under $100) no pin or signature is required. Receipts are automatically printed by the terminal, and a copy is provided to the cardholder as proof of payment. Each receipt should include a transaction number and other details including the name of the supplier, identification of the terminal, customer card details, itemised details of the purchases and the amount of funds paid. It must also clearly show any taxes paid. Signed receipts or electronic copies are retained by the supplier. It is increasingly common for receipts for cash purchases to include sufficient information to also be accepted as a tax invoice. Figure 2.24 is an example of a document that is both a receipt and a tax invoice. Every business should have clear policies and procedures on the use of debit and credit cards, including who is authorised to use them and when they may be used. Giving employees a debit or credit card introduces a higher risk of unapproved spending, unless controls on use are closely monitored. It is also becoming increasingly common for payments to be made by mobile telephone or other electronic devices. The software used automatically generates receipts and remittance documents. A business should also carefully reconcile transactions listed on its bank statements, including credit card statements, with other documentation such as receipts and cheque butts. This will be discussed in chapter 8.

Cheque butt and cheque Cheques were the main method that businesses used to remit funds before the introduction of electronic banking methods, including debit and credit cards. Although less common today, cheques are still used as a form of payment by businesses. Figure 2.21 is an example of a manually prepared cheque and cheque butt.

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The right-hand section is the cheque, which is given to the business or person being paid (the payee). The left-hand section is the cheque butt, which is retained by the business making the payment (referred to as the drawer of the cheque). The cheque butt is the main source document, with the cheque number used as the reference number for the recording of the transaction. The business completes the following details on the cheque butt: the date, the name of the business or person being paid, the purpose and amount of the payment. The cheque is signed by an authorised cheque signatory on behalf of the business paying. For example, Bruce Butler, of Butler Engineering (drawer), has prepared or drawn a cheque in favour of Nola Moxey for $104.50 of supplies purchased for a board meeting.

Supplies for board meeting

NITROGEN BRANCH

PAY

19 July

Nola Moxey

THE SUM OF

One hundred and four dollars 50

2022

OR BEARER

$

104.50

No t

FOR

Natural Australia Bank

2022

Ne go tia ble

19 July TO Nola Moxey

$

104.50

BUTLER ENGINEERING

543211

Bruce Butler

".543211 ".078"474":156".8087".

FIGURE 2.21  Butler Engineering crossed cheque payable to Nola Moxey

Some computerised accounting packages have the facility to generate and authorise cheques electronically. The manual cheque butt is replaced by an electronic version or the remittance advice. Further discussion on the remittance advice can be found in chapter 6, in the section dealing with accounts payable reconciliations.

Tax invoice/invoice With the declining use of cheques and increasing use of alternative methods of payment by businesses, the tax invoice supplied with the goods/service is commonly used in combination with the above documents as a source document. Tax invoices were discussed earlier in the chapter. It is important to retain the tax invoice provided by the supplier. It is prudent to record the details of payment on the tax invoice.

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MORE INFORMATION ON CHEQUES In accounting it is important that you record (or write) the payment details from a cheque or a cheque butt into the general journal or cash payments journal. The Cheques and Payment Orders Amendment Act 1998 (Cwlth) amended the definition of a cheque in the Cheques Act 1986 (Cwlth) to be: an unconditional order in writing that: (a) is addressed by a person to another person, being a financial institution; and (b) is signed by the person giving it; and

(c) requires the financial institution to pay on demand a monetary sum.

Crossed cheque A cheque is crossed when two parallel lines are drawn across the face of the cheque; it may also have the words ‘Not negotiable’ written between the lines. The crossing is usually vertical or diagonal across the face of the cheque, as shown in figure 2.21.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

A crossed cheque means that upon presentation at the bank the funds must be deposited into a bank account. This means that it cannot be cashed. Deleting the words ‘or bearer’ will ensure that the person or business named on the cheque (the payee) is the receiver of the value for the cheque. In preparing (or drawing) a cheque there are a few ‘dos and don’ts’ to be followed. • Do write clearly and legibly. • Don’t use pencil; use a ball-point pen or ink. • Do start to write close to the words, ‘Pay’, ‘The sum of’ and ‘$’. • Do write in today’s date. • Do sign the cheque. • Don’t leave spaces that allow extra words or figures to be added. • Do complete the details on the source document; that is, the cheque butt.

Cheque banking process A crossed cheque usually goes by mail to the payee (the business being paid or the supplier). The business that is owed the debt (the payee) deposits the cheque into its bank account. The cheque is processed through the banking system and eventually ends back at the bank of the drawer (the person who signed the cheque). It is then shown as a reduction from the amount of funds that the drawer holds at the bank.

CONTROL DOCUMENT Payment request The payment request form is known by a number of names such as a requisition form or voucher. These forms are internally generated and used, and should include the following details: the payee’s name, address, amount, specific reason or justification for payment, the name and signature of the person making the request for payment and, most importantly, an authorising signature giving approval for a payment to be prepared for the amount shown on the payment request form. Part of the process of preparing a payment request is the gathering and checking of supporting documents that provide evidence confirming the validity of the transaction for which the payment is being made. Such supporting documents could include, for example, a supplier’s invoice, a purchase order, a supplier’s delivery note and a receiving report (if any). These supporting documents are generally attached to the payment request, which is then submitted for authorisation by a designated person. When ready, the electronic payment or the cheque is prepared and forwarded to designated persons for authorisation or signing (manually or digitally).

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QUESTION 2.5 Write the missing word in the space provided, using the following words: deposited, drawer, payee. a A crossed cheque has to be . . . . . . . . . in a bank account. b The business to whom a cheque is made payable is the . . . . . . . . . and the person signing the cheque is the . . . . . . . . .

Receive funds (money) TRANSACTION Receive funds at time of sale Nola Moxey makes a cash sale of $104.50 to Butler Engineering. Nola Moxey receives a remittance from Butler Engineering for goods; receiving funds by either cash/cheque or an electronic method which may have been a debit or credit card, a smart phone or other electronic technology. Nola provides a receipt and the goods to Butler Engineering in exchange for the funds.

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• Receipt of cash/cheque. If the receipt of $104.50 was by either cash or cheque then Nola Moxey prepares a receipt and deposits the funds into her bank account. She may need to prepare a bank deposit form to present with the cash or value of the cheque when physically depositing these funds into the business’s bank account. Alternatively, the bank may accept the cash and cheques without a form, and provide a receipt acknowledging the deposit. The funds from cheque deposits are not immediately available to Nola Moxey, as there is usually a delay of three to seven days for clearance. However, this time delay is changing as real-time processing of electronic bank transactions through the New Payments Platform (NPP) becomes more common. • Electronic receipt of funds. Currently, availability of funds from these transactions occurs immediately or within 24 hours. Refer to the section below for further details on how Nola Moxey identifies these funds.

Cash/cheque $104.50

either

either Nola Moxey

or

Card/phone $104.50

Butler Engineering

or

Goods

FIGURE 2.22 Nola Moxey receives $104.50 remittance from her customer Butler Engineering in exchange for goods as a cash sale

Receive funds for credit sales (account receivable) Nola Moxey had previously sold goods on credit to her customer, Butler Engineering (see figure 2.23). Nola Moxey now receives a remittance from Butler Engineering either as cash/cheque or by an electronic method such as an internet bank transfer, a debit or credit card, a smart phone or other electronic technology.

either

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Nola Moxey

or

Internet transfer /card/other $104.50

Cash/cheque $104.50 or

either

Butler Engineering

FIGURE 2.23 Nola Moxey receives remittance from her customer Butler Engineering following an earlier credit sale from Nola Moxey for $104.50

• Electronic receipt of funds. Electronic receipt of funds occurs without any action required by Nola Moxey. Nola knows that Butler Engineering has paid $104.50 for the credit sale when she sees the entry in her bank account – either by logging in to her account on the bank’s website or in the bank statement. The funds deposited in the bank account should be identified by a reference number, which may be the tax invoice or customer number, and may include Butler Engineering’s name. Nola Moxey then processes the receipt through her accounts.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

SOURCE DOCUMENTS As with cash payments, there is now a range of equally acceptable methods for receiving funds. With the electronic transfer of funds, point-of-sale terminals, debit and credit cards and other electronic technologies, receipt of funds is commonly supported by electronically generated documents. In the past, the most common method of receiving funds was by accepting cheques or cash (notes and coins). Cash sales dockets, cash register printed tapes and handwritten receipts were used. As some smaller operations still use these documents, they are further discussed below. Although receipts were the generally accepted source document for recording funds received, the development of alternative payment methods has changed the type of source document used to record the transaction; this now depends on how the funds are received. Hard copies of documents may no longer be produced and alternative controls may be necessary. It is important to be aware of and follow a business’s policies and procedures for receipt of funds.

Electronic funds transfers For many businesses, the stand-alone cash register has been replaced by a point-of-sale (POS) input terminal that is able to process receipts from customers who use debit and credit cards to pay for goods and services supplied by the business. Funds received in this way are transferred directly into the business’s bank account, normally within 24 hours. These terminals automatically generate receipts that also serve as tax invoices and can be used by the customer as a source document for recording purchases. Therefore, such documents must include all of the information needed to comply with the requirements of a tax invoice. (Tax invoices were covered earlier in this chapter as the source documents for buying and selling on credit.) Figure 2.24 is an example of an electronically generated receipt and tax invoice. As POS debit and credit card transactions are immediately apparent, in this book we treat these as if the funds are immediately received. Therefore we recognise them immediately and they are recorded in a similar manner to cheque deposits into the bank account.

Butler Engineering Grassy Head Road Grassy Head ABN: 12 345 678 901 Date: 9 October 2022 Invoice number: 89456 Your friendly local steel suppliers and fabricators

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50 mm × 25 mm steel channel 4.5 kg/m cut into 2 × 3 m lengths Total including GST

55.00 11.00 $66.00

GST included in total

$6.00

Paid by debit card number: xxxx xxxx x569 Balance owing

$66.00 $0.00

Tax Invoice

FIGURE 2.24  Butler Engineering electronically prepared and processed tax invoice and receipt 44 tafenswlib on 2020-05-30 00:33:55. Created from

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In addition, banks and other financial institutions provide access to electronic banking facilities. Individuals and businesses can conduct a range of EFTs over the phone or on the internet. For example, it is common for a business to receive an amount owing from a credit customer via an EFT from the customer’s bank account to the business’s bank account. In such cases, the supplier business may not know that it has received the funds until it accesses its own bank account, or receives a remittance advice from the customer or a statement from the bank. It is therefore prudent that businesses regularly check their bank accounts to ensure funds have been received when due.

Remittance advice Suppliers of goods or services on credit include a remittance advice as a tear-off slip at the bottom of an invoice and/or statement of account. The remittance advice can then be returned to the supplier with payment details. If already remitted electronically, the customer reference number on the remittance advice will enable the supplier to identify the customer and the transaction/s to which the payment relates. In other cases the remittance advice could accompany a cheque or provide bank account details and authorisation to the supplier to directly remit funds to their account. Further discussion on the remittance advice can be found in chapter 6, in the section dealing with accounts payable reconciliations.

Receipt and duplicate receipt There are many shapes and sizes of receipts. However, whether they are handwritten or electronically produced, they all acknowledge the receipt of funds. Two copies – the original and a duplicate – are generally produced when preparing handwritten receipts (see figure 2.25). The original receipt is given to the business or person from whom the funds were received (the payer). The duplicate receipt is retained by the business and the receipt number is the reference for this source document. Manually prepared receipts should include: • the customer’s and supplier’s name • what the funds were received for • the amount, both in words and in figures • the signature of the person representing the business, who has received the funds. If a cheque has been received, then the person making out the receipt must first confirm that the cheque is payable to the business receiving the cheque and that it is signed and dated.

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Electronically generated sales docket, tax invoice and receipt Most businesses use an electronic terminal or device to record receipt of funds. The funds may be received as cash or a cheque, or be transferred directly to their bank account using an electronic method such as debit or credit card, a smart phone or other electronic technology. An electronically generated document that serves as an acceptable tax invoice and receipt, as in figure 2.24, is produced and given to the customer. The terminal would also produce records that serve as source documents for entering into the business’s accounting records. These may be transferred manually, or be automatically transmitted to the business’s accounting records. Butler Engineering has sold some of its product and applied a service to the product by cutting it into lengths. It has accepted payment using the customer’s debit card, and provides the customer with a record of the sale and how it was paid, by generating an electronically prepared tax invoice and an acceptable form of a receipt.

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Receipt No. 022 15 July 2022 Butler Engineering One hundred and four dollars 50 ¢ goods sold to Butler Eng. N Moxey 104.50

Date 15 July 2022 Receipt No. 022 Received from Butler Engineering The sum of One hundred and four

Duplicate receipt

dollars 50 ¢ goods sold to Butler Eng. N Moxey Signature

Being for $ 104.50

on behalf of Nola Moxey

Original receipt

FIGURE 2.25  Nola Moxey’s handwritten receipt following remittance from Butler Engineering

QUESTION 2.6 Prepare handwritten receipts for J Lawson, whose business has received the following amounts: a 2 June 2022: $100.10 cheque from J Adam for a cash sale. b 6 June 2022: $83.60 cash from a sale of inventory for cash.

QUESTION 2.7 Peak’s Office Furniture (ABN 12 345 678 910) is located at 45 Main Road, Brighton NSW 2999. On 4 May 2022, the business sold office equipment to Tan’s Accounting Services for its premises at 72 South Road, Brighton West. The sale included 4 x office chairs $150 plus $15 GST each, 1 x desk @ $500 plus $50 GST and 2 x bookcases @ $330 plus $33 GST each. Phan Tan paid Peak’s Office Furniture by debit card at the time of picking up the goods. Prepare a combined tax invoice and receipt prenumbered 98765 (use figure 2.24 as a guide) for the sale.

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CONTROL DOCUMENTS Bank deposit preparation An important control measure that all businesses should follow is to bank in total all cash in the form of notes and coins, and all cheques. No funds received should be used to pay for any purchases. Payments should always be made through the bank account using the methods outlined on pages 39–41. The only exception to this rule is if the business uses a petty cash system. Even then, funds received by the business should never be used directly for payment. Cash is withdrawn from the bank account specifically for this purpose. The total of all monies received, in the form of cash and cheques, should be banked on a regular basis, usually once a day. A bank deposit slip should be prepared with a duplicate or on a butt attached to the deposit slip. If deposits are made over the counter at the bank, the teller should stamp the duplicate or butt, which is then held by the business to indicate that the bank has received the funds from the business for that day. It is now common for banks to accept deposits without the requirement for deposit slips to be completed. Instead the bank should provide a receipt as proof of the deposit of funds into the

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business’s bank account. As a control, this bank-stamped document must be sighted and signed by a senior authorised employee to confirm that there have been no alterations to the banking records. Any alteration could indicate that there may have been a substitution of cheques deposited and thus identify an attempt to falsify business records for illegal reasons. Pre-printed bank deposit forms are provided to account holders. An example of a deposit form for the Natural Australia Bank is shown in figure 2.26. The form may include a duplicate or a butt for the business to retain. Details of notes, coins and cheques are recorded on the form by the business and given to the bank with the funds to be deposited into its account. Natural Australia bank Phosphorous Branch

DEPOSIT 20

DATE

CREDIT (Deposit to the account of)

NOTES COIN

DRAWER

BANK

BRANCH

CHEQUES

TOTAL

FIGURE 2.26  Bank deposit, blank

Where a business is equipped to process electronic transactions through a POS input device or other electronic techology, these transactions will result in a direct transfer of funds to the business’s bank account. These items will not be included in a bank deposit slip but will appear in the next statement of account that the business receives from its bank. To document these transactions for internal control purposes, the business may generate a variety of reports, such as direct debit transactions listings and electronic transfer reports.

Deposit and banking process In chapter 8 you will be comparing your records with those of the bank; this is a bank reconciliation (or agreement) and is an important internal control measure.

QUESTION 2.8

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In a modern business environment: a list and briefly describe the additional forms of payment that can be used (other than cheques or cash), and b list and briefly describe how funds can be received by a business (other than in the form of cheques or cash).

QUESTION 2.9 Using the information below relating to Billie Taylor for 15 April 2022, prepare a bank deposit slip. Details of amounts received for the day are:

Name Receipts issued No 375 (cash)   376 (cheque) Cash register tape Cash Cheques

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Bank

Branch

$

c

M Eckett

NSW

Newcastle

45 147

00 65

N Leighton J Walsh M Ivetic

Victoria Regal NSW

Broken Hill Sydney Hay

675 225 42 98

50 00 70 00 47

FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Return or allowance for inventory or goods, expense items or non-current assets previously purchased on credit TRANSACTION Credit note received from supplier upon return of goods purchased The ‘return’ of inventory or goods, expense item or non-current assets previously purchased on credit arises when there is a physical return of the good or item to the supplier.

Business

A

Business

E

Credit note

FIGURE 2.27  Business A returned goods to business E and then received a credit note from business E

An ‘allowance’ is where there is an overcharge arising from an error in pricing, quality or condition on receipt, or when the supplier indicates that the faulty good or item can be either kept, recycled or dumped as it is uneconomic to have it returned to the supplier. A ‘return’ is appropriate where the good or item is physically returned and ‘allowance’ where there is no physical return. A credit note is received by the business from its supplier and this is often the signal for the tax invoice, which originally charged the inventory or goods, expense item or non-current asset, to be processed and paid together with the credit note. If a tax invoice from a supplier is paid and then a credit note is requested, it is sometimes difficult to encourage the supplier to process a credit note.

Return or allowance for inventory or goods, other expense items or non-current expense items previously sold on credit TRANSACTION Credit note issued to customer upon return of goods purchased

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The ‘return’ of inventory previously sold on credit arises when there is a physical return of the good or item by the customer to the warehouse or store.

Business

A

Business

D

Credit note

FIGURE 2.28  Business A received inventory back from business D and then sent a credit note to business D

An ‘allowance’ arises where there is an overcharge arising from an error in pricing, quality or condition on receipt, or when it is uneconomic to have faulty goods returned and they are either kept, recycled or dumped by the customer. An approved credit note is issued by the supplying business to the customer when it is satisfied that the inventory has been received back into store in good order or condition, or that the allowance

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is appropriate. The issuing of a credit note is not an action that the business takes lightly; credit notes normally require the approval of a supervisor or other appropriate person. A credit note is often in a similar format to the business tax invoice except that it shows ‘tax credit note’ or ‘adjustment note’ and not ‘tax invoice’; it has its own numerical sequence and is sometimes printed in red ink.

Internal memorandum TRANSACTION An internal memorandum is an adjustment to the records or books of the business, which has no effect outside the business. It is essential that it is appropriately authorised, and that this authorisation is kept with any other relevant documentation to provide a reason for the action taken as a result.

SOURCE DOCUMENT Internal memo (or note) This final heading or category covers internal adjustments required by the business, which should be communicated in writing.

CONTROL DOCUMENT Internal memo, authorised It is important, from a control point of view, that the internal communication be signed by a person who is authorised (or allowed) to request that an internal adjustment be made. These internal adjustments will be discussed at length later in the book.

Statement of account As a service to its credit customers, a business will normally provide each customer with a monthly statement of account, which is a summary of all invoices, credit notes and remittances received during the period, together with the total amount owing. This document is a valuable tool that enables each customer to reconcile the final balance owing with details contained in its own accounts payable records. Further discussion on the statement of account can be found in chapter 6, in the section dealing with accounts receivable reconciliations.

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QUESTION 2.10 Write the missing word(s) in the spaces provided, using the following words: duplicate copy, cheque, control, duplicate receipt, memo, original, receipt, receives, sends, source. a An originating or starting document is called a . . . . . . . . . document. b With some exceptions, the . . . . . . . . . document is used within a business and does not go outside of the business. c To pay funds the business could prepare a . . . . . . . . . and the source document would be the cheque butt. d When the business receives funds it could prepare a . . . . . . . . . and the source document would be the . . . . . . . . . e When the business buys on credit it . . . . . . . . . the . . . . . . . . . tax invoice from the supplier and processes it as the source document. f When the business sells goods on credit it . . . . . . . . . the original invoice and the source document is the invoice . . . . . . . . . g The source document for an internal adjustment to the books of the business is usually an authorised internal . . . . . . . . .

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Filing of documentation No matter how good internal controls are, or how well the procedures and authorisations exist and operate, if you cannot find the documentation when it is needed then the controls and procedures have been seriously impaired. Accounting records and documents may be needed months or even several years later. The Australian Taxation Office (ATO), for example, may audit the accounts and records of the business to ensure that the businesses returns accurately reflect their taxable situation. Documentation related to taxation must be kept for a minimum of 5 years after a tax return is lodged. Under the Corporations Act 2001, companies must retain certain financial records for 7 years. An inability to locate documentation when required can result in significant costs to the business, as expenses may not be allowed as deductions. This increases the profit, which increases the tax owed to the government and can result in the imposition of fines. Most documentation should be securely held by the business for a minimum of five (preferably seven) years, with each business having a clear policy on what is kept for what length of time. Documents can be retained in either hard copy or in electronic form. Hard copy files should be securely stored in a logical and systematic manner to facilitate retrieval. Access should be restricted to authorised personnel. Similarly, electronic files should be stored in a logical and systematic manner, with access restricted through the use of computer user identification and passwords. In addition, a system of regular back-ups of electronic files should be in place to avoid the loss of vital information.

FILING OF PAYMENTS Purchases on credit will eventually need to be paid, either by cheque or electronically. The payments can be filed by date order, sequential cheque and/or electronic reference number. The purchase tax invoice, checked, authorised and approved, should have attached to it: • the business copy of the authorised purchase order, which should show: – the account to which the purchase is to be allocated in the financial accounts, plus – the price and quantity required, and – the date the purchase is required to be delivered to the business • a signed delivery docket indicating the receipt of the quantity on the purchase order

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• where applicable, a receiving report, confirming that the items purchased have been accepted and checked by staff in the receiving department of the business. The number of the purchase tax invoice is listed on the cheque requisition or electronic payment request, together with any other purchase tax invoices being paid to the same supplier, and any related documents, such as supplier credit notes. All are filed together under the sequential cheque number or electronic reference number unique to that payment. Other payments should also be filed with the authorised and approved payment documentation so that cheque signatories or persons approving electronic payments can also check that all tax invoices are approved for payment before the cheque is signed or the electronic payment is processed.

FILING OF RECEIPTS Business copies of the sales tax invoices are usually filed sequentially by their tax invoice number. A credit sale should eventually result in a payment being received from the customer to whom the credit sale was made. If the payment is by cheque, it will be accompanied by a remittance advice indicating the tax invoice(s) being paid. If there is no remittance advice, one must be prepared internally, showing the total of the cheque and the details of what is being paid (it may be necessary to contact the customer to confirm which tax invoices are being paid by that cheque). The duplicate of the bank deposit must be stamped by the bank and signed by a senior accounting officer when it comes back from the bank. It is

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filed with the remittance advices and any duplicate receipts where they are prepared by the business. Remittance advice details, duplicate receipts, duplicate cash sales dockets and cash register tape details need to be agreed in total to the total of the day’s banking. Documentation retained by a business for a cash sale is minimal, as there are usually no details of the person to whom the sale was made. The most important aspect is that all the funds received by the business are banked to the business bank account. The total of the daily cash sales will need to be determined and filed chronologically on the day it is banked. All receipts, remittance details, cash sale dockets, cash register tapes and duplicate deposits are filed together in chronological order. If a customer pays for a credit sale using electronic means, there is generally a unique customer reference code, which allows the business to identify the customer and the details of the payment. Further details for internal controls for cash receipts are included in chapter 8.

FILING OF CUSTOMER QUOTES AND SALES ORDERS Sales quotes and sales orders are filed by customer’s name or in chronological order, depending upon the particular circumstances of the business. They are ideally referenced to the date when the inventory was shipped, preferably with a copy of the customer tax invoice.

FILING OF DATA TO SUPPORT THE PREPARATION OF JOURNALS AND MONTHLY ACCOUNTS

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Information used as input for journals is filed chronologically. Working papers relating to monthly accounts are filed together for that particular month. Access to these working papers – especially the working papers of annual accounts – and the accuracy, cross-referencing and completeness of monthly accounts cannot be stressed enough. Working papers protect the employee who prepares the journal, as they provide readily accessible reasons for the preparation of each journal. It is assumed that every journal prepared in this book satisfies the accuracy requirements of data and authorisation, and that the filing of reports and working papers occurs accurately and in a timely manner. This applies to the general journal (first used in chapter 4) and to the specialised journals: sales journal, purchases journal, cash receipts journal, cash payments journal and cash book (first used in chapter 5 and throughout the book).

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 2.11 Why do business transactions need to be documented?

QUESTION 2.12 Identify, from the supplier’s point of view, a source document and the information that should be used included on the document for each of the following transactions: • the supplier receives cash from the customer at the time of selling goods • the supplier sells goods on credit • the supplier receives funds directly into the bank account from a customer for a purchase previously made on credit • the supplier accepts a return of goods that were damaged at the time of purchase on credit and needs to adjust the customer’s account. Identify, from the customer’s point of view, a source document and the information that should be used included on the document for each of the following transactions: • the customer pays the supplier cash at the time of purchase • the customer buys goods on credit • the customer transfers funds directly to the supplier’s bank account for a purchase previously made on credit • the customer returns faulty goods to the supplier and receives a credit for the amount.

QUESTION 2.13 Which of the following transactions should be included on a bank deposit slip by a supplier? • Debit card sale of $125 • Daily cash sales of $2400 • Customer paid invoice of $450 by direct transfer to supplier’s bank account • Credit card sale of $30 • Received cheque for $823 at time of sale from a customer • Goods sold on credit for $380

QUESTION 2.14 Identify a source and a control document that Chris Condie Computer Supplies could use for each of the following transactions:

Copyright © 2018. Cengage. All rights reserved.

Transaction Repairs a customer’s computer on credit Transfers monthly rent on shop by electronic funds transfer to landlord’s bank account Buys spare parts from XYZ Ltd on credit Returns some faulty spare parts to XYZ Ltd Accepts debit card payment from customer for cash purchase of a computer Buys petrol for business motor vehicle using a business credit card Invoiced a customer for 20 items but only delivered 15 as per customer’s order

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Source document

Control document

CHAPTER 2

QUESTION 2.15 List the main details that should be included in each of documents in the table below.

Document

Details on document

Sales tax invoice Cheque butt Receipt that is also a tax invoice Credit note

QUESTION 2.16 The buyer, Sam’s Cycles, has received goods from the supplier, Spare Parts. When the delivery is checked, Sam suspects that the supplier has sent the wrong goods. How can Sam confirm that the order and invoice are incorrect? Include in your answer any documents that can be used to cross-check.

QUESTION 2.17 Broadbent Tailors sends a purchase order to Melville Supplies for rolls of cloth and threads to be purchased on credit. What steps should Melville Supplies follow from receipt of the Broadbent Tailors’ order through to delivery and invoicing of the goods? Include in your answer the key documents and control measures that should be used to ensure the order and invoicing are correct.

QUESTION 2.18 On 10 January 2022 Meredith Jane’s Restaurant placed a purchase order for cleaning supplies for the business from Glenn Peters Cleaning Supplies. The goods and the original tax invoice, number 75963, for $398.97 arrived on 13 January. However, on checking the prices on the invoice against the purchase order, Meredith Jane found there was an overcharge on one of the main items and she requested a credit note for $74.80. The credit note, number 290145, for $74.80 arrived on 25 January. The payment terms were net 30 days; payment was made towards the end of February so that it would arrive at the supplier’s address by 25 February. Calculate the net amount owed by Meredith Jane’s Restaurant to her supplier, Glenn Peters Cleaning Supplies.

QUESTION 2.19 Nicola Paige prepares a receipt for each of the amounts received during March 2022. She prepares a deposit on the same day funds are received and goes to the bank to deposit the total receipts for the day. What are the values of each of the deposits made for Nicola during the month of March, and what was the total deposited at the bank for the month of March?   3 Cheque received for goods sold on credit $2131.80.   3 Cheque from a cash sale $282.04.

Copyright © 2018. Cengage. All rights reserved.

  6 $2505.03 received from an account receivable for monies owed.   9 Cash sale $532.07.   9 Rent received of $693.00 for rent owing by tenant. 12 $803.00 cash received for cash sale. 12 Cheque received from customer $2147.20. 23 Cash sale, received $402.05. 28 $1045.00 from cheque received for a cash sale. 28 Cash sale $1196.80. 28 Received from an account receivable $804.10.

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53

FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

QUESTION 2.20 On 27 July 2022 purchase order 59 was received for two (2) copies of the book How Can I Use Herbs in my Daily Life by Isabell Shipard at a unit price of $44 ($40.00 + $4.00 GST) from Dunedoo Soil Co-op at Mendooran Road Dunedoo 2844, customer number 1612. The books were sent and invoiced on the day the order was received. The purchasing officer from Dunedoo Soil Co-op was advised that from 1 July 2022 the trading terms were net 30 days and that was accepted. Complete the blank tax invoice shown in the Workbook.

QUESTION 2.21 Louth Purchasing Co in Wilcannia Road Louth 2840 purchased on credit 3 Nudger NG14 gates from its supplier, Bourke Suppliers Co on net 30 days terms. The purchase order number is LPC 8995. Tax invoice number 41987 is dated 6 April 2022 and the customer number is LOU05. The goods were correctly delivered. The selling price of $418 ($380 + $38 GST) each agrees with the purchase order. The purchase order indicated delivery as ‘the shed behind Shindy’s Inn generator’ in Louth. Complete the blank tax invoice shown in the Workbook.

QUESTION 2.22 Briefly outline the filing requirements for: a sales invoices b purchase invoices. In your answer you are to indicate the types of documents that should be filed and the sequence in which they should be filed.

Endnote

Copyright © 2018. Cengage. All rights reserved.

1 The term ‘tax invoice’ rather than simply ‘invoice’ is used to comply with the requirements of the GST. To satisfy these requirements, the tax invoice must also show various details, including the Australian Business Number of the supplier.

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3 The accounting equation Introduction

Copyright © 2018. Cengage. All rights reserved.

The accounting equation is the foundation of the fundamental rules of double-entry accounting. In chapter 1 you were introduced to some basic accounting terms: assets, liabilities, owner’s equity, revenues and expenses. In this chapter you will learn how these form the basis of the accounting equation. You will also see how business transactions lead to changes in the components of the accounting equation.

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55

THE ACCOUNTING EQUATION

The accounting equation The foundation or rules for the processing of all accounting entries in the accounting information system can be traced back to the accounting equation. Simply expressed, it is the relationship of resources controlled by the business to the present obligations the business has to third parties and also to the owner. Resources controlled by the business  =  Present obligations that the business has to third parties  +  The owner’s investment in the business

KEEP IN MIND An asset is a resource owned or controlled by a business; it is of economic value and is expected to be used in operating the business. In running a business there will be transactions that result in the business owing to another business; this is a liability. The accounting entity convention means that, for accounting purposes, the owners of a business must be treated as distinct from the business. The business exists separately from the owner. Therefore, the books of the business classify the owner’s share of its worth as owner’s equity.

The accounting equation may therefore be written as: Assets = Liabilities + Owner’s Equity

or A = L + OE

QUESTION 3.1 The business commenced with $5000 in assets and $5000 in owner’s equity. Write this in the accounting equation format provided in the Workbook.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 3.2 You are required to complete the accounting equation formats shown in the Workbook where a business commenced with: a assets $15 000 b assets $25 000 c assets $20 000, liabilities $5000 and owner’s equity $15 000 d assets $30 000 and liabilities $7000 e assets $10 000 and owner’s equity $7000 f liabilities $15 000 and owner’s equity $70 000.

KEEP IN MIND The users of a business’s financial reports need information that is relevant and a faithful representation of the business’s activities. The reports should have further qualitative characteristics: comparable, timely, verifiable and understandable.

To record information simply under the headings of assets, liabilities and owner’s equity does not provide sufficient meaningful information to assist users in making decisions. It is useful to know, for example, the types of assets that the business controls. Similarly, it is useful to know more details about liabilities and owner’s equity. In chapter 1 you were also introduced to the terms ‘revenues’ and ‘expenses’, and were shown how they impact on owner’s equity. At this stage, we will only look at transactions that directly affect assets,

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CHAPTER 3

liabilities and owner’s equity. Later in this chapter, we will expand the accounting equation to also include revenues and expenses. In the same chapter we identified some examples of assets, including cash at bank, accounts receivable, machinery and office equipment. Rather than report on every asset individually, we can group similar assets together under appropriate headings. For example, all motor vehicles controlled by a business can be reported under one account called ‘motor vehicles’. Cash at bank, accounts receivable, machinery and office equipment may also be headings for grouped accounts. Liabilities may include accounts such as accounts payable and loans. Similarly, owner’s equity, revenues and expenses will include a number of different accounts. Later, we will analyse transactions and identify all the affected accounts. It is these accounts that are then classified as assets, liabilities, owner’s equity, revenues and expenses.

QUESTION 3.3 You are required to complete the accounting equation formats shown in the Workbook where a business commenced with: a assets of cash at bank $12 000, motor vehicle $25 000 and owner’s equity $37 000 b assets of cash at bank $8000, machinery $20 000 and office equipment $10 000 c cash at bank $5000, office equipment $30 000, motor vehicle $20 000 and inventory $5000, and a liability of a loan $10 000 d cash at bank, a liability of a loan from D Shark $25 000 and owner’s equity $50 000.

The accounting equation for a trading business KEEP IN MIND A trading business generally buys goods and sells the products to individuals or other businesses. Examples include greengrocers, newsagents, supermarkets, petrol stations and car sales yards.

Example 1: Ann’s trading business – assets, liabilities, owner’s equity We will look further at a series of business transactions for a trading business affecting assets, liabilities and owner’s equity and consider how these are reflected in the accounting equation. i. Commencement of business

a On 1 July 2022 Ann commenced business with $40 000 in the bank and $4000 in inventory.

Copyright © 2018. Cengage. All rights reserved.

Assets a. Bank a. Inventory

$ + 40 000 +   4 000 44 000

=

Liabilities

$

+

Owner’s Equity a. Capital

=

+

$ + 44 000 44 000

FIGURE 3.1  Commencement of business

ii. Acquisition of assets and Ann brought more cash into business

b Ann’s business paid $33 000 with a bank cheque for motor vehicles on 2 July 2022. c On 3 July Ann’s business purchased a computer system on credit (received the computer but would pay later) for $11 990 from Kurrawood, an account payable. d Ann realised that the business required more cash. She deposited a further $7000 into the business’s bank account from her personal savings on 6 July.

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57

THE ACCOUNTING EQUATION

Assets a. Bank b. d. a. Inventory b. Motor Vehicles c. Computers

$ 40 000 – 33 000 +    7 000 =  14 000 4 000 + 33 000 +  11 990 62 990

=

Liabilities c. Accounts Payable

=

$

+

+ 11 990

Owner’s Equity a. Capital d.

$ 44 000 + 7 000

51 000

 11 990 +

FIGURE 3.2  Acquisition of assets and Ann put more cash into business

QUESTION 3.4 From the following business transactions you are required to show, in the Workbook, the effects on the accounting equation, using the above format. (This solution is used in questions 3.12 and 3.16.) a 1 July 2022: A Argenton commenced business with $6000 cash in the bank and a motor vehicle valued at   $25 000. b 4 July: A Argenton purchased inventory of $3300 on credit from A Point, an account payable. c 5 July: A Argenton paid by debit card for $2200 of inventory. d 6 July: A Argenton introduced $3000 more cash as capital into the business. e 6 July: A Argenton introduced more capital into the business, being office equipment valued at $4500.

Example 1 continued: Ann’s trading business – assets, liabilities, owner’s equity Before we continue, review the closing balance values for the various accounts for Ann’s business in figure 3.2. These closing balances have been summarised in figure 3.3. Assets Bank Inventory Motor Vehicles Computers

$ 14 000 4 000 33 000 11 990 62 990

=

Liabilities Accounts Payable

=

$

+

11 990

11 990

Owner’s Equity Capital

+

$ 51 000

51 000

FIGURE 3.3  Ann’s accounting equation as at 6 July 2022

Copyright © 2018. Cengage. All rights reserved.

iii. Obtained a loan from a bank, account payable paid and purchased more goods/inventory to sell

The following transactions occur for Ann’s business between 10 July and 15 July: e On 10 July 2022 the business obtained a five-year loan of $16 000 from the Natural Bank. f Remitted funds on 11 July for $11 990 owing to the account payable, Kurrawood. g On 15 July purchased inventory, paid by debit card $5500. h On 15 July purchased inventory on credit $6600 from Mareeka & Co, an account payable. Using figure 3.3 as the starting point, figure 3.4 shows the impact of these transactions on the accounting equation for Ann’s business.

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CHAPTER 3

Assets

$

Bank e. f. g.

=

14 000 +  16 000 –  11 990 –    5 500 =  12 510 4 000 +    5 500 +    6 600 =   16 100 33 000 11 990 73 600 =

Inventory g. h. Motor Vehicles Computers

Liabilities Accounts Payable f. h. e. Bank Loan

$

+

11 990 – 11 990 +  6 600 = 6 600 + 16 000

Owner’s Equity Capital

22 600 +

$ 51 000

51 000

FIGURE 3.4  Obtained a loan, paid account payable, purchased inventory for cash and credit

If we summarise the transactions as at 15 July, the accounting equation for Ann is still correct, as shown in figure 3.5. Assets

$

Bank Inventory Motor Vehicles Computers

=

12 510 16 100 33 000 11 990 73 600 =

Liabilities Accounts Payable Bank Loan

$

+

6 600 16 000

Owner’s Equity Capital

22 600 +

$ 51 000

51 000

FIGURE 3.5  Summarised accounting equation for Ann as at 15 July 2022

Assets $73 600  =  Liabilities $22 600  +  Owner’s Equity $51 000

QUESTION 3.5 On 21 August 2022, the business of P Dumont had the balances of assets, liabilities and owner’s equity as shown in figure 3.6. Assets Bank Inventory Premises

$

=

3 000 2 200 45 000 50 200 =

Liabilities Accounts Payable

$

+

1 500

1 500

Owner’s Equity Capital

+

$ 48 700

48 700

Copyright © 2018. Cengage. All rights reserved.

FIGURE 3.6  The accounting equation for question 3.5 You are required to process the following transactions in the format of the accounting equation. a 22 August: P Dumont obtained a loan of $10 000 for seven years from the Natural Australia Bank. b 25 August: P Dumont paid $1500 owing to D Paul, the account payable. c 26 August: P Dumont purchased inventory on credit from D Paul $3080. d 26 August: P Dumont purchased other inventory for $1210, paying by debit card.

QUESTION 3.6 P Barrack commenced business on 1 September 2022 with bank $2000, inventory $1000, motor vehicle $8000 and premises $35 000. You are required to process this transaction and the ones on page 60 in the accounting equation format. (This solution is used in question 3.7.) a 3 September: Inventory was purchased and paid electronically by P Barrack for $1012. b 4 September: P Barrack’s bank granted a mortgage of $15 000 over the premises. CONTINUED Created from tafenswlib on 2020-05-30 00:30:31.

59

THE ACCOUNTING EQUATION

c d e f

  6 September: Machinery $8250 was purchased on credit by P Barrack from A Vince, an account payable.   7 September: P Barrack purchased inventory on credit from V Alan (an account payable) for $1320. 10 September: Machinery was purchased by P Barrack for $2530 with debit card. 13 September: Payment was made by P Barrack to the account payable, A Vince $8250.

The accounting equation, debits and credits The accounting equation is the basis for entering transactions into the books of account for a business. In the previous examples, you saw that every business transaction impacts on the accounting equation and on at least two accounts. Assets = Liabilities + Owner’s Equity

or A = L + OE

The concept of double-entry accounting is based on the accounting equation and ensures that at all times the equation is in balance. Increases or decreases to an account resulting from a transaction are shown as ‘debits’ and ‘credits’. For the accounting equation to balance, at least one account will receive a ‘debit’ entry, and at least one will receive a ‘credit’ entry. Using this format, the left-hand side (A) is called the debit side or debit. The right-hand side of the accounting equation (L + OE) is called the credit side or credit. The following table (figure 3.7) will assist in understanding when accounts have a debit or a credit entry. Example 2 shows how this works. Assets

=

Liabilities

+

Owner’s Equity

[debit]

=

[credit]

+

[credit]

an increase ↑ is a

[debit] ↑

[credit] ↑

[credit] ↑

a decrease ↓ is a

[credit] ↓

[debit] ↓

[debit] ↓

FIGURE 3.7  The accounting equation: debits and credits

Example 2: Assets [debit], liabilities [credit], owner’s equity [credit] The entries in the accounting equation can be shown as either debit or credit entries. Figure 3.4 (example 1 – Ann’s business transactions ‘e’ to ‘h’) is now repeated in figure 3.8, showing the entries as debit or credit entries. Debit has been abbreviated to ‘dr’ while credit has been abbreviated to ‘cr’. You may wish to refer to figure 3.7 to understand why each of the entries in figure 3.8 is a debit or credit. Assets

$

=

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[debit]

Bank e. f. g. Inventory g. h. Motor Vehicles Computers

Liabilities

$

+

[credit]

14 000 + 16 000 – 11 990 –     5 500 =   12 510 4 000 +     5 500 +     6 600 =   16 100 33 000 11 990 73 600

dr dr cr cr dr dr dr dr dr dr dr =

Accounts Payable f. h. e. Bank Loan

Owner’s Equity

$

[credit]

11 990 – 11 990 +     6 600 =     6 600 +  16 000

22 600

cr Capital dr cr cr cr

51 000 cr

+

51 000

FIGURE 3.8 Debits and credits included when Ann’s business obtained a loan, paid an account payable, purchased inventory for cash and credit

Assets $73 600 dr  =  Liabilities $22 600 cr  +  Owner’s Equity $51 000 cr 60 tafenswlib on 2020-05-30 00:30:31. Created from

CHAPTER 3

QUESTION 3.7 Return to the solution for P Barrack in question 3.6. Write next to each entry whether it is a debit [dr] or credit [cr] in the accounting equation.

The accounting equation showing current and non-current assets, liabilities and owner’s equity KEEP IN MIND Assets – the resources that the business controls and are of economic value to it – can be allocated to either current assets or non-current assets. Current assets are cash and assets that the business expects to be converted or changed into cash within the next 12 months. Non-current assets are assets that the business does not expect to consume or change into cash in the next 12 months and will continue to contribute economic value to the business.

In the accounting equation, we can separate assets into ‘current assets’ and ‘non-current assets’ and liabilities into ‘current liabilities’ and ‘non-current liabilities’. Ann’s business as at 15 July 2022 now incorporates the headings shown in figure 3.9. Assets

$

=

Current Assets

Liabilities

$

+

Owner’s Equity

$

Current Liaiblities

Bank Inventory

12 510 16 100 28 610

Accounts Payable Non-current Liaiblities Bank Loan

6 600

Capital

51 000

16 000

Non-current Assets Motor Vehicles Computers

33 000 11 990 44 990 73 600

=

22 600

+

51 000

FIGURE 3.9  Ann’s accounting equation as at 15 July with current and non-current classifications

Copyright © 2018. Cengage. All rights reserved.

Assets $73 600 = Liabilities $22 600 + Owner’s Equity $51 000

As at 15 July, Ann’s business has current assets of bank $12 510, and inventory $16 100 that she expects to sell at a profit and convert to cash within the next 12 months. The business also has non-current assets of motor vehicles $33 000 and computers $11 990, both of which are expected to be in use for more than 12 months.

KEEP IN MIND Liabilities can be allocated to either current liabilities or non-current liabilities. Current liabilities are liabilities that need to be paid or repaid within the next 12 months. Non-current liabilities are liabilities that the business does not have to pay for more than 12 months.

Ann’s business has a current liability of accounts payable, Mareeka & Co, $6600 that needs to be paid within 12 months. She also has a non-current liability of a loan from the Natural Australia Bank of $16 000, which must be repaid in five years.

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61

THE ACCOUNTING EQUATION

KEEP IN MIND The owner’s equity is what the business owes to the owners.

Ann’s share of the business is $51 000. This is shown as owner’s equity, in the capital account.

QUESTION 3.8 From the accounts and values of Fred McKay as at 31 March 2022, prepare an accounting equation summary for assets, liabilities and owner’s equity. List the assets under the headings of current and non-current assets, and the liabilities under the headings of current and non-current liabilities and owner’s equity. Use figure 3.9 as a guide. Bank $15 000, motor vehicles $30 000, accounts payable $8000, inventory $10 000, premises $65 000, loan from J Flynn $35 000, capital $32 000, computers $5000, mortgage $50 000. (This solution is used in question 3.10.)

QUESTION 3.9 From the details of Margaret Robertson as at 31 March 2022, prepare an accounting equation summary for assets, liabilities and owner’s equity, including the current and non-current classifications as appropriate. Use figure 3.9 as a guide. Accounts payable $35 000, capital $105 000, cash at bank $25 000, inventory $40 000, land and buildings $120 000, loan from A Pendix $100 000, machinery $80 000, mortgage from credit union $45 000, office equipment $20 000. (This solution is used in question 3.11.)

Balance sheet (or statement of financial position) The accounting equation can be presented in a balance sheet report format showing the financial position of the business as at a particular date. A balance sheet, prepared as at a specific date, is a list of accounts that are classified as assets, liabilities or owner’s equity and their dollar balances on that date. The accounting equation is: Assets = Liabilities + Owner’s Equity A = L + OE

Ann’s accounting equation as at 15 July shows: Assets $73 600  =  Liabilities $22 600  +  Owner’s Equity $51 000

The balance sheet format is: Assets – Liabilities = Owner’s Equity Copyright © 2018. Cengage. All rights reserved.

A – L = OE

Therefore, Ann’s balance sheet as at 15 July shows: Assets $73 600  –  Liabilities $22 600  =  Owner’s Equity $51 000

Where appropriate, the asset and liability accounts are shown as either current or non-current.

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CHAPTER 3

Example 3: Balance sheet format of assets, liabilities, owner’s equity Using the accounting equation for Ann on 15 July 2022, we can prepare the balance sheet in figure 3.10. Balance Sheet of Ann as at 15 July 2022 Current Assets Bank Inventory Non-current Assets Motor Vehicles Computers Total Assets Current Liabilities Accounts Payable Non-current Liabilities Bank Loan less Total Liabilities Net Assets [73 600 – 22 600] Owner’s Equity Capital Total Owner’s Equity

12 510 16 100 33 000 11 990

28 610

44 990 73 600 6 600 16 000 22 600 51 000

51 000 51 000

FIGURE 3.10  Ann’s balance sheet as at 15 July 2022

QUESTION 3.10 Using the solution from question 3.8, prepare a balance sheet for Fred McKay as at 31 March 2022.

QUESTION 3.11 Using the solution from question 3.9, prepare a balance sheet for Margaret Robertson as at 31 March 2022.

QUESTION 3.12 You are required to prepare a balance sheet for A Argenton as at 6 July 2022, using the accounting equation in figure 3.11. (This is actually the accounting equation solution for question 3.4.) Assets

Copyright © 2018. Cengage. All rights reserved.

Bank Inventory Motor Vehicle Office Equipment

$ 6 800 5 500 25 000 4 500 41 800

=

Liabilities Accounts Payable

=

$

+

3 300

3 300

Owner’s Equity Capital

+

$ 38 500

38 500

FIGURE 3.11  Accounting equation for question 3.12

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63

THE ACCOUNTING EQUATION

QUESTION 3.13 You are required to prepare a balance sheet for P Dumont as at 31 August 2022, using the accounting equation in figure 3.12. (This is actually the accounting equation solution for question 3.5.) Assets

$

Bank

10 290

Inventory Premises

6 490 45 000 61 780

=

Liabilities Accounts Payable Bank Loan

$

     13 080

=

+

3 080 10 000

Owner’s Equity Capital

+

$ 48 700

48 700

FIGURE 3.12  Accounting equation for question 3.13

QUESTION 3.14 You are required to prepare a balance sheet for P Barrack as at 30 September 2022 from the accounting equation in figure 3.13. (This is actually the accounting equation solution for question 3.6.) Assets Bank Inventory Motor Vehicle Premises Machinery

$ 5 208 3 332 8 000 35 000 10 780 62 320

=

Liabilities Accounts Payable Bank Mortgage

=

$

+

1 320 15 000

   16 320

Owner’s Equity Capital

+

$ 46 000

46 000

FIGURE 3.13  Accounting equation for question 3.14

Copyright © 2018. Cengage. All rights reserved.

QUESTION 3.15 From the following September 2022 transactions for K Pullen, you are required to: • process the transactions in the accounting equation format • enter next to each amount whether it is a debit or a credit transaction • prepare a balance sheet as at 30 September 2022. a 1 September 2022: Commenced business with bank $12 000, inventory $3000, building $37 000,   machinery $7500 and mortgage $7500. b 4 September: K Pullen purchased inventory for $2310 cash. c 7 September: Additional capital was brought into the business by K Pullen in the form of cash $7500   and motor vehicle $15 000. d 10 September: Inventory $2915 was purchased on credit from C Blaxland. e 13 September: Machinery costing $4620 was bought by K Pullen using a debit card. f 17 September: K Pullen received $10 000 as a three-year loan from V Alan. g 22 September: Machinery costing $8800 was purchased from C Eastment on credit. h 23 September: Inventory was purchased by K Pullen for $3960 by electronic remittance. i 26 September: Paid C Blaxland $2915 owing from the purchase earlier in September. j 27 September: K Pullen purchased inventory on credit from C Blaxland $4070. k 28 September: Remitted $8800 to C Eastment, an account payable.

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CHAPTER 3

The expanded accounting equation Businesses usually earn revenue by making sales of goods and/or services. In order to earn revenue, businesses incur expenses. When expenses are deducted from the revenue earned, we are left with the profit or loss. If the revenue for a period is greater than the expenses, the business makes a profit. This will increase owner’s equity. On the other hand, when revenue for a period is less than expenses, the business makes a loss. This will decrease owner’s equity. This can be shown as: Profit = Revenue – Expense

or P = R – E

Revenue is earned from the sale of goods and services and also includes revenue such as interest received and rent received. Expense is the amount incurred or paid in earning the revenue and running the business, and includes the cost of sales (that is, the cost of the goods or inventory and services which have been sold), wages, electricity and motor vehicle expenses, to mention but a few. The profit that a business earns goes to the owner and is added to the owner’s equity. You will remember that we have been showing the accounting equation as: Assets = Liabilities + Owner’s Equity

or A = L + OE

Profit, which is added to the owner’s equity, can now be included in an expanded accounting equation as follows: Assets = Liabilities + Owner’s Equity + Profit (where Profit = Revenue – Expense)

or A = L + OE + P (where P = R – E)

or A = L + OE + (R – E)

or A + E = L + OE + R

The expanded accounting equation, debits and credits Copyright © 2018. Cengage. All rights reserved.

KEEP IN MIND Assets [debit] = Liabilities [credit] + Owner’s Equity [credit]

When revenue and expense are included, then: Assets [debit] = Liabilities [credit] + Owner’s Equity [credit] + (Revenue [credit] – Expense [debit])

or Assets [debit] + Expense [debit] = Liabilities [credit] + Owner’s Equity [credit] + Revenue [credit]

Revenue leads to an increase in the owner’s share of the business. So revenue is of a credit nature, the same as owner’s equity. Expense has the opposite effect to revenue. Expense leads to a decrease to the owner’s share of the business equity. So expense is of a debit nature, the opposite of owner’s equity. Created from tafenswlib on 2020-05-30 00:30:31.

65

THE ACCOUNTING EQUATION

This can be summarised as shown in figure 3.14. Assets

=

Liabilities

+

Owner’s Equity

+

Revenues

–

Expenses

[debit]

=

[credit]

+

[credit]

+

[credit]

–

[debit]

an increase ↑ is a

[debit] ↑

[credit] ↑

[credit] ↑

[credit] ↑

[debit] ↑

a decrease ↓ is a

[credit] ↓

[debit] ↓

[debit] ↓

[debit]   ↓

[credit] ↓

FIGURE 3.14  Increases/decreases, debits/credits of account groups

Example 4: Assets, liabilities, owner’s equity, revenue, expense Let us continue with Ann’s business, which was previously used in examples 1, 2 and 3. As at 15 July 2022 her business had acquired current assets (CA) and non-current assets (NCA) and incurred current liabilities (CL) and non-current liabilities (NCL). As a result, the business has owner’s equity (OE) of $51 000 (see figure 3.15). Assets

$

[debit]

Bank Inventory Motor Vehicles Computers

=

Liabilities

$

+

Owner’s Equity

[credit]

12 510 16 100 33 000  11 990 73 600

dr Accounts Payable dr Bank Loan dr dr =

$

[credit]

6 600 cr Capital 16 000 cr

51 000 cr

22 600

51 000

+

FIGURE 3.15  Ann’s accounting equation as at 15 July

Ann keeps a perpetual (or continuous) record of her inventory and can tell how much the inventory has cost when it is sold as well as the value still held in inventory. This knowledge of the inventory occurs on a continuous basis and not just at the end of the accounting period. iv. Sale and purchase of inventory, payment of accounts payable and expenses, remittance received

Using figure 3.15 as a starting point for Ann’s business, the accounting transactions are entered using the alphabetical prefix as a reference in the accounting equation in figure 3.16 from 17 July to 31 July: i On 17 July Ann sold inventory for $7700 cash, which had cost $4400. j On 20 July, Ann sold inventory on credit to Matthew & Assoc. for $9900, which had cost Ann $5500.

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k On 25 July, Ann remitted funds to account payable Mareeka & Co $6600 for inventory purchased 15 July. l On 26 July, Ann purchased inventory $7150 with her debit card. m Ann purchased inventory $4950 on credit from Cathy & Co on 26 July. n On 29 July, Ann remitted funds to pay the rent $1100. o On 29 July, wages $2200 were remitted. p On 29 July, Ann purchased more computers for $2970 with debit card. q Ann received remittance on 30 July for $9900, the amount owing from sale on 20 July to Matthew & Assoc. r Ann remitted funds on 30 July to Cathy & Co $4950 for inventory purchased on 26 July.

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CHAPTER 3

Assets

$

=

Liabilities

[debit]

$

+

[credit]

Owner’s Equity

$

$

[credit] + (Revenue [cr] – Expense [dr])

Bank i. k. l. n. o. p. q. r. Inventory i. j. l. m. j. Accounts Receivable q. Motor Vehicles Computers p.

12 510 +     7 700 –     6 600 –      7 150 –      1 100 –     2 200 –      2 970 +     9 900 –     4 950 =     5 140 16 100 –     4 400 –     5 500 +     7 150 +     4 950 = 18 300 +      9 900 –     9 900 =      0       33 000 11 990 +     2 970 =  14 960     71 400

dr dr cr cr cr cr cr dr cr dr dr cr cr dr dr dr dr cr

Accounts Payable 6 600 k. – 6 600 m. + 4 950 r. – 4 950 =          0 Bank Loan 16 000

cr Capital dr i. Sales cr j. dr i. Cost of Sales cr j.

51 000 +     7 700 +     9 900 = 17 600 –    4 400 –     5 500 –     9 900 –     1 100 –     2 200 – 13 200

n. Rent o. Wages Profit [17 600 – 13 200]

dr dr dr dr =

= 4 400

cr cr cr dr dr dr dr dr dr cr

           55 400

  16 000 +

FIGURE 3.16  Business transactions for Ann recorded in accounting equation format as at 31 July 2022

From the totals of the accounting equation for Ann as at 31 July 2022 the balance sheet is shown in figure 3.17. Balance Sheet of Ann

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as at 31 July 2022 Current Assets Bank Inventory Non-current Assets Motor Vehicles Computers Total Assets Non-current Liabilities Bank Loan less Total Liabilities Net Assets [71 400 – 16 000] Owner’s Equity Capital add Profit Total Owner’s Equity

5 140 18 300 33 000 14 960

23 440

47 960 71 400 16 000 16 000 55 400

51 000 4 400 55 400

FIGURE 3.17  Balance sheet of Ann as at 31 July 2022

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67

THE ACCOUNTING EQUATION

QUESTION 3.16 The previous accounting equation for A Argenton was at 6 July 2022 (from question 3.12) and is repeated below. Further transactions are to be processed in similar format using the alphabetical prefix as a reference to each transaction. You are also to indicate if the transaction is a debit [dr] or a credit [cr] and then, from the accounting equation, prepare a balance sheet as at 31 July 2022. Assets

$

=

[debit]

Liabilities

$

+

Owner’s Equity

[credit]

$

$

[credit] + (Revenue [cr] – Expense [dr])

Bank Inventory Motor Vehicles Office Equipment

6 800 5 500 25 000 4 500 41 800

dr Accounts Payable dr dr dr =

3 300

cr Capital

38 500

3 300

+

   38 500

cr

FIGURE 3.18  Accounting equation of A Argenton for question 3.16 a b c d e f g h i j

10 July: A Argenton sold inventory for $2475 cash, which had cost $1210. 15 July: A Argenton sold inventory on credit to T Ranch $3740 costing $1540. 18 July: A Argenton remitted $3300 to A Point (an account payable) for inventory purchased on 4 July. 21 July: Inventory was purchased by A Argenton from E Kevin on credit for $2860. 21 July: Purchased inventory for $1595 with a debit card. 25 July: Remitted wages $900. 25 July: Remitted $110 to electricity supplier. 25 July: Used debit card to purchase machinery costing $1540. 29 July: Received remittance from the account receivable T Ranch for $3740. 29 July: Remitted payment to account payable E Kevin of $2860.

QUESTION 3.17 From the accounting equation of G Cooranbong in figure 3.19, you are required to prepare the balance sheet as at 31 March 2022. Assets

$

=

[debit]

Liabilities

$

+

Owner’s Equity

[credit]

$

$

[credit] + (Revenue [cr] – Expense [dr])

Bank Accounts Receivable Inventory Office Equipment Computers

2 500 1 800 1 000 3 500 6 000

dr Accounts Payable dr Bank Loan dr dr dr

900 cr Capital 5 000 cr Sales Cost of Sales Expenses

=

5 900

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Profit [10 000 – 8 100] 14 800

+

7 000 +10 000 – 5 500 – 2 600 – 8 100 1 900 8 900

FIGURE 3.19  Accounting equation of G Cooranbong for question 3.17

QUESTION 3.18 You are required to process the following transactions for January made by D Brad in the accounting equation format. Note next to each transaction the alphabetical prefix and next to each amount whether it is a debit [dr] or a credit [cr]. Using this data you are to prepare a balance sheet as at 31 January 2022. a 2 January: D Brad commenced business with $7000 deposited into the bank and equipment $12 100. b 4 January: D Brad purchased machinery for $2090 using the business debit card. c 4 January: Remitted funds for purchase of inventory for $2255. d 7 January: Inventory costing $1980 was sold by D Brad on credit for $4070 to K Camping. e 9 January: D Brad brought $2000 cash into the business and a motor vehicle valued at $13 860.

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cr cr dr dr dr

CHAPTER 3

f g h i j k l m n

12 January: A loan was obtained by D Brad for $7500 from A Relo. 15 January: Equipment costing $6050 was purchased by D Brad from T Kevin on credit. 15 January: Inventory $2365 was purchased on credit from C Curnuck. 17 January: Cash sale was made by D Brad for $3575 and the cost of the goods sold was $1925. 20 January: Sold inventory on credit to K Camping for $968 that had a cost of sales of $385. 23 January: Machinery $3850 was purchased with the debit card. 25 January: D Brad remitted funds to T Kevin, an account payable, $6050 being the amount owed. 28 January: D Brad paid C Curnuck, an account payable, $2365 in full payment of account. 28 January: D Brad was remitted funds totalling $4070 from K Camping, an account receivable.

Revenue and expenses Similar to assets and liabilities, revenues and expenses are classified using the simple structure based on principles suitable for the financial statements of a business that is a sole trader and not a reporting entity. This classification structure is described below.

Revenue OPERATING REVENUE This is the main area of revenue or income for the business and would include the earnings from the sale of goods and services.

OTHER OPERATING REVENUE Other operating revenue or income is usually of a minor nature and includes such revenues as dividends received, interest received and rent received.

Expenses OPERATING EXPENSES Most expenses are operating expenses, as this includes all expenses incurred or committed in the normal operations of the business, such as wages, electricity and rent. Operating expenses are often classified into four groups, which are described below to assist in understanding their cost structures and in decision making.

Copyright © 2018. Cengage. All rights reserved.

1. Cost of sales For a trading business, this is the purchase cost of goods that have been sold plus the cost of getting them into a saleable condition and location. For a service business, this would include costs that are directly linked to the service provided to the customer, such as the wages of those who directly deliver the service and supplies used in delivering the service.

2. Selling and distribution (or marketing) expenses These relate to the expenses incurred in selling the goods and distributing (or delivering) them to customers’ premises.

3. General and administrative expenses These relate to the expenses incurred in running and organising the administrative area of the business as well as expenses incurred for the general good of the business as a whole.

4. Financial and borrowing expenses These relate to the costs of collection of debts and having funds available to the business. Borrowing expense specifically relates to interest and other costs incurred in connection with the borrowing of money. Created from tafenswlib on 2020-05-30 00:30:31.

69

THE ACCOUNTING EQUATION

Chart of accounts In accounting, it is important to keep accounts in a logically accepted order. This order is based on a business’s chart of accounts, which is a listing of account names, based on their grouping or classification. Each account is allocated a reference number, which reflects its classification and kept in the order ALOERE (asset, liability, owner’s equity, revenue and expense).

KEEP IN MIND An asset is an item of value to the business, which can use it in its operations. Assets are what the business owns; they are of economic value to the business and can be expressed as a dollar value. Current assets are cash or other assets of the business that will be used, consumed or converted into cash within the next 12 months. Non-current assets are assets the business expects to be still using and not to have consumed or converted into cash beyond, or after, 12 months. A liability is an obligation that the business must eventually discharge or repay. Liabilities are what the business owes outside or external to the business. Current liabilities are obligations that the business is required to satisfy or pay within the next 12 months. Non-current liabilities are obligations that the business is required to satisfy or pay after or beyond 12 months. The owner’s equity is what the owners have put into or invested in the business; it is what the business is worth. It is an internal liability, as it shows what the business owes to the owners. If the business makes a profit then this is added to the owner’s equity. If the owners withdraw cash or goods from the business then this reduces the owner’s equity; this withdrawal is called drawings. Revenue is the earnings made from the operations of the business; it primarily arises from sales made or services provided by the business. Expense or cost is what is incurred or spent in making sales, providing services and in running the business. If the total sales/service revenue is greater than the total expenses then the business has made a profit; this is added to the owner’s equity. If the total sales/service revenue is less than the total expenses then the business has made a loss; this reduces the owner’s equity.

It is standard practice to use the ALOERE order for developing a chart of accounts, with the first digit of the account number identifying the classification of the account. However, each business may have its own way of numbering ledger accounts. When answering questions in this book, it is suggested that you use the number groupings in figure 3.20 as a guide. The principle to follow in account numbering is to keep it simple, but meaningful. Account Nature Assets – 1xx

Account Numbers 100

Current Assets Non-current Assets Copyright © 2018. Cengage. All rights reserved.

Liabilities – 2xx

100 – 149 150 – 199 200

Current Liabilities Non-current Liabilities

200 – 249 250 – 299

Owner’s Equity – 3xx

300

Revenue – 4xx

400

300 – 399 Operating Other Operating Expenses – 5xx

500 Operating Cost of Sales Selling and Distribution (or Marketing) General and Administrative Financial and Borrowing

 

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400 – 409 410 – 499

500 – 510 520 – 539 540 – 559 560 – 599

CHAPTER 3

When entering data into computerised accounting packages, the account number, rather than the account ledger name, is often used to identify the relevant accounts affected by a business transaction. The account numbers are important because they are used to ensure the correct data is transferred to financial reports that are produced through the accounting package.

Chart of accounts – servicing business At this early stage it is sufficient to mention that a service business has similar asset, liability and owner’s equity accounts to a trading business. However, with revenue the sales account can be replaced by an account such as dental fees account for a dentist or revenue from renovations account for a builder. Costs that can relate directly to the revenue earned should be treated differently from those costs incurred that are indirect to the revenue earned. Salaries are usually identified by the service the employee carries out and can then be classified as direct or indirect expenses. For example, in a medical practice the revenue earned by the doctor and the nurse can be directly related to their salary costs and so need to be allocated as a direct cost of the revenue earned. However, the receptionist’s salary bears no direct relationship to the revenue earned by the doctor or nurse and needs to be allocated as an indirect cost. Indirect cost for Salaries – Receptionist is incurred because all people who enter the medical practice will need to see the receptionist in the first place. The cost of the receptionist is incurred irrespective of what revenue the doctor or the nurse earns from providing a medical service.

Chart of accounts in detailed example Although the groups in the chart of accounts have either a debit or credit nature, you should note that not all the general ledger accounts within that group may have the same nature. Some assets have a contra assets account, which will reduce the balance of the main account. For example, ‘Motor Vehicles’ is of a debit nature but ‘Accumulated Depreciation – Motor Vehicles’ is an account that is used to reduce the value of the motor vehicle over time. You will learn more about the purpose of such accounts in chapter 13. For your convenience, the debit/credit nature of each account is indicated for the asset, liability and owner’s equity groups. The chart of accounts would not normally show this information. Note that alternative account names are shown after the first name, separated by a solidus (/).

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ASSET (DEBIT NATURE) Current assets 100  Bank/Cash at Bank (debit) 101  Petty Cash/Cash on Hand (debit) 102  Accounts Receivable Control/Debtors Control (debit) 103  Allowance for Doubtful Debts (credit) 104  GST Receivable (debit) 105  Inventory/Stock/Stock on Hand/Supplies (debit) 106  Expense Prepaid (debit) 107  Revenue Accrued/Revenue Receivable (debit)

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71

THE ACCOUNTING EQUATION

Non-current assets 150  Land (debit) 151  Building/Premises (debit) 152  Accumulated Depreciation of Building (credit) 153  Plant and Equipment/Plant/Equipment/Machinery (debit) 154  Accumulated Depreciation of Plant and Equipment (credit) 155  Motor Vehicles (debit) 156  Accumulated Depreciation of Motor Vehicles (credit) 157  Office Furniture and Equipment/Fittings/Equipment (debit) 158  Accumulated Depreciation of Office Furniture and Equipment (credit) 159  Computers (debit) 160  Accumulated Depreciation of Computers (credit) 161  Patents (debit) 162  Trademarks (debit) 163  Shares in Company/Share Investments (debit) 164  Debenture Investment (debit) 165  Government Bonds (debit)

LIABILITY (CREDIT NATURE) Current liabilities 200  Bank Overdraft (credit) 201  Accounts Payable Control (was also called Creditors Control) (credit) 202  GST Payable (credit) 203  Pay As You Go Tax (credit) 204  Expense Accrued/Expense Payable (credit) 205  Revenue Received in Advance/Prepaid Revenue (credit) Non-current liabilities 250  Mortgage/x% Mortgage on …… (credit) 251  Loan from …… (credit)

OWNER’S EQUITY (CREDIT NATURE)

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300  Capital (credit) 301  Drawings (debit) 302 Trading 303  Profit and Loss

REVENUE (CREDIT NATURE) Operating revenue 400 Sales 401  Fees/Fees Received/Fee Revenue Other operating revenue 410  Discount Received 411  Rent Received (assume it is commercial rent received) 412  Interest Received 413  Commission Received 414  Dividends Received

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CHAPTER 3

415  Bad Debts Recovered 416  Gain on Disposal of Non-current Assets 417  Damages Received from Lawsuit

EXPENSE (DEBIT NATURE) Operating expenses Cost of sales 500 Purchases/Supplies 501  Freight Inwards/Cartage Inwards 502  Import Costs 503  Wharfage/Landing Costs 504  Cost of Sales

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Selling and distribution (or marketing) expenses 520  Sales Salaries/Wages 521 Advertising 522  Freight Outwards/Cartage Outwards/Freight and Cartage 523 Commission 524  Depreciation (of non-current assets for selling and distribution)

General and administrative expenses 540  Office Salaries/Wages 541  Electricity/Light and Power 542 Insurance 543  Motor Vehicle Expenses/Vehicle Expenses 544 Photocopying 545 Postage 546  Rates/Rates and Taxes 547  Rent/Office Rent (assume it is commercial rent expense) 548  Repairs and Maintenance 549  Stationery/Printing and Stationery 550 Telephone 551 Donations 552  Sundry Expenses/Other/Other Office/Miscellaneous/General 553  Depreciation (of non-current assets for administrative area) 554  Loss on Disposal of Non-current Assets 555  Loss Due to Floods/Fire/Burglary Financial and borrowing expenses 560  Discount Allowed 561  Bank Fees/Bank Charges 562  Interest/Interest on Overdraft/Interest on Loan/Interest on Mortgage 563  Borrowing Expenses 564  Bad Debts 565  Doubtful Debts 566  Collection Expenses

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73

THE ACCOUNTING EQUATION

QUESTION 3.19 Using the account names listed and format provided for this question in the Workbook, allocate the accounts into their account group. Identify whether the account is normally debit (dr) or credit (cr) and allocate an appropriate account number. Accounts Payable Commission Received Interest Machinery Rent Received

Accounts Receivable Cost of Sales Inventory Mortgage – Land & Buildings Sales

Bank Discount Allowed Land and Buildings Motor Vehicles Telephone

Capital Discount Received Loan (repay in 10 months) Office Equipment Wages and Salaries

QUESTION 3.20 Using the account names listed and format provided for this question in the Workbook, allocate the accounts into their account group. Identify whether the account is normally debit (dr) or credit (cr) and allocate an appropriate account number:

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Capital Accounts Receivable Commission Drawings Accounts Payable Advertising Loan (repay in 18 months) Gain on disposal of a ­   non-current asset

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Sales Inventory Purchases Government Bonds Bank GST Payable Cartage Outwards Loss on disposal of a   non-current asset

GST Receivable Interest Received Commission Received Mortgage Machinery Stationery Cartage In Postage

Wages Plant & Equipment Rent Received Land & Buildings Discount Allowed Interest Loan (repay in 6 months) Computer

CHAPTER 3

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 3.21 You are required to complete the figure in the Workbook for this question. Allocate the accounts into their account group including their sub-classification where necessary. Identify whether the account is normally debit [dr] or credit [cr] and allocate an account number as appropriate. Accounts Payable

Electricity

Petty Cash

Accounts Receivable

Interest

Premises

Advertising

Interest Received

Rent Received

Bad Debt Expense

Inventory

Salaries

Bank Overdraft

Investment in Shares

Sales

Capital

Long-term Loan

Stationery

Cartage Inwards

Motor Vehicles

Telephone

Dividends Received

Office Equipment

Vehicle Expense

QUESTION 3.22 You are required to prepare a balance sheet for S T David as at 30 April 2022 using the data provided. You will need to calculate the profit – that is the revenue less expense – the owner’s equity and the capital value.

Account

$

Accounts Payable Bank Computers Inventory Motor Vehicles Rent Sales

330 1 500 8 800 880 22 000 1 100 11 000

Account Accounts Receivable Capital Cost of Sales Bank Loan [repayable at year end] Office Furniture Salaries Vehicle Expense

$ 3 300 ?? 3 300 4 000 6 600 2 000 550

QUESTION 3.23 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance.

Copyright © 2018. Cengage. All rights reserved.

Where appropriate, assume the perpetual inventory system is used. The business transactions are listed below. –

Remitted wages

–

Commenced business with cash

–

Purchased inventory with the business debit card

–

Sold inventory for cash

–

Purchased postage stamps with business debit card

–

Sold inventory on credit

The first entry for this question is completed as an example.

Business Transaction

Account Names

Debit or Credit

Chart of Account Group

Account Increase or Decrease

E CA

increase decrease

Remitted wages Wages Bank

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debit credit

75

THE ACCOUNTING EQUATION

QUESTION 3.24 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume the perpetual inventory system is used. The business transactions are listed below. –

Commenced business with cash and inventory

–

Purchased stationery with business debit card

–

Sold inventory on credit

–

Purchase of motor vehicle with bank cheque

–

Purchased inventory on credit

QUESTION 3.25 For each of the service business transactions of a medical doctor listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume any purchase of supplies is expensed against the supply being purchased. The business transactions are listed below. –

Purchased medical and surgery supplies paying by debit card

–

Remitted salary to receptionist

–

Repairs to doctor’s motor vehicle on credit

–

Fees were received from consultations

–

Received stationery on credit

–

Remitted payment for surgical supplies previously received on credit

The first entry for this question is completed as an example.

Business Transaction

Account Names

Debit or Credit

Purchased medical and surgery supplies paying by debit card Medical and Surgery Supplies debit Bank credit

Chart of Account Group

Account Increase or Decrease

E CA

increase decrease

QUESTION 3.26 Copyright © 2018. Cengage. All rights reserved.

For each of the service business transactions of a dentist listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume any purchase of supplies is expensed against the supply being purchased. The business transactions are listed below. –

Dental fees deposited

–

Remitted salary for dental nurse

–

Purchased several types of filling materials on credit

–

Purchased new surgery equipment which had to paid by debit card

–

Used banking facilities to pay for telephone account

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CHAPTER 3

QUESTION 3.27 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume the perpetual inventory system is used. The business transactions are listed below. –

Remitted wages

–

Purchased inventory on credit

–

Sale of inventory on credit

–

Received remittance from customer for inventory sold earlier in the month

–

Purchased office equipment with debit card

QUESTION 3.28 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume the perpetual inventory system is used. The business transactions are listed below. –

Remittance for rent was received

–

Sale of inventory for cash

–

Purchased inventory on credit

–

Remittance processed to supplier for inventory purchased on credit last month

QUESTION 3.29 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume the perpetual inventory system is used.

Copyright © 2018. Cengage. All rights reserved.

The business transactions are listed below. –

Commenced business with cash and motor vehicle

–

Purchase of inventory paying with business debit card

–

Sale of inventory on credit

–

Purchased inventory on credit

–

Purchase of machinery on credit

–

Remittance received for sale of inventory

–

Purchased stationery on credit

–

Salaries remitted

–

Mortgage funds remitted from bank

–

Used debit card to buy equipment

–

Paid for stationery purchased earlier on credit

–

Received remittance for rental property

–

Received funds from customer for inventory sold earlier on credit

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77

THE ACCOUNTING EQUATION

QUESTION 3.30 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with the debit account first b whether the account entry is a debit or credit c the chart of account group name; that is, CA, NCA, CL, NCL, OE, R, E d whether the entry is an increase or decrease to the account balance. Where appropriate, assume the perpetual inventory system is used. The business transactions are listed below. Purchased inventory on credit Purchased motor vehicle with bank cheque

–

Remitted funds for payment of rent

–

Funds for a loan were received from credit union

–

Cash sale of inventory

–

Additional computer and machinery introduced by owner

–

Remittance processed to supplier for inventory purchased earlier on credit

–

Sale of inventory on credit

–

Paid for advertising by electronic remittance

–

Received cheque from customer for inventory sold earlier on credit

–

Used debit card to buy office equipment

–

Electronic remittance received for commission

Copyright © 2018. Cengage. All rights reserved.

– –

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4 Transactions, general journals and double-entry processing Introduction

Copyright © 2018. Cengage. All rights reserved.

The accounting equation, which you learnt in the previous chapter, is a means to an end and not an end in itself. In this chapter we use the principles in the accounting equation to prepare accounts for a business through a general journal, post them to the general ledger and then extract a trial balance.

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79

Transactions, general journals and double-entry processing

An overview of the accounting process Figure 4.1 illustrates where we have been and where we are going: ultimately to prepare reports to show how much profit or loss the business has made. This reveals what it owns and owes; that is, what is the owner’s equity. In this book these reports are called the income statement and balance sheet.

Transactions

SALE ON CREDIT

PURCHASE ON CREDIT

RECEIPT OF CASH/FUNDS

PAYMENT OF CASH/FUNDS

Source Documents

TAX INVOICE TO CUSTOMER

TAX INVOICE FROM SUPPLIER

REMITTANCE RECEIVED

REMITTANCE PAID

MEMO

GENERAL JOURNAL

Journal

General Ledger

GENERAL LEDGER ACCOUNTS

Ledger Balances

Financial Reports

AUTHORISED ADJUSTMENT

TRIAL BALANCE

Profit or loss for the period ended

INCOME STATEMENT

BALANCE SHEET

Owned and owed as at the end of the period

FIGURE 4.1 Business transactions processed through the general journal, entered into the general ledger, summarised through the trial balance and financial reports prepared for the owner

Copyright © 2018. Cengage. All rights reserved.

Internal controls – journal preparation In chapter 2, we discussed the purpose of source documents. We also outlined the need to adopt thorough authorisation and checking procedures to verify the accuracy and authenticity of a transaction. This included the checking of source documents against supporting documentation before authorising the transaction. Chapter 2 also outlined various control procedures for filing source documents and related information. The next stage of the accounting process, the preparation of journals, is dependent upon correctly authorised and accurate documents.

Introduction to the general journal The accounting equation format of recording business transactions, as used in the previous chapter, is cumbersome and time-consuming. It also does not provide enough detail about each business transaction.

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To overcome this problem, the business uses a manual or computerised accounting system to record details of the transaction. The information is transferred from source documents into a ‘book’ of original (or first) entry, commonly called a journal. Business transactions (or events), such as remitting and receiving funds or buying and selling goods or services, are recorded in the journal on a daily basis. The entry must be recorded from the point of view of that business. The simplest form of journal is the general journal. Each transaction is recorded by identifying the account(s) to be debited and the account(s) to be credited. The general journal format is the way most computerised accounting systems report transactions.

KEEP IN MIND In chapter 2, we referred to a source document and a control document. A source document is the originating document and is used to record required information in the books of the business.

Journal name

Business or owner’s name

Journal reference

GENERAL JOURNAL OF [INSERT THE BUSINESS NAME] Date

GJ 1

Particulars

Date

Page number

Ref

Debit

Credit

Ref or Reference

Day month and year (dd mmm yy) is written on the first line and after that only when the date changes.

The account number is written in after the posting of these journal entries to the ledger account and is left blank until posted.

Particulars

Debit account name is entered on the far left of the column. Credit account name is entered 2 cm in from the left. Narration gives a brief reason for the general journal. Leave next line blank and rule a line on its base, only in the particulars column.

Debit

The $ amount the account is to be debited.

Credit

The $ amount the account is to be credited.

Copyright © 2018. Cengage. All rights reserved.

FIGURE 4.2  Headings and their explanations in the general journal

The basic format of a general journal with headings and an explanation of the columns is shown in figure 4.2. Later, in chapter 5, we will look at transactions that are written into separate special journals, one for each of the five basic business transactions: • sell inventory, services and any other items on credit – sales journal. If there are any sales returns or allowances then they are entered as negatives by entering the amount in brackets • buy inventory, services and any other items on credit – purchases journal. If there are any purchase returns or allowances then they are entered as negatives by entering the amount in brackets • receive funds – cash receipts journal • pay funds – cash payments journal • other internal adjustments – general journal. Created from tafenswlib on 2020-05-30 00:32:39.

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In all of these journals it is essential that the information from the source documents is recorded from the point of view of the business that keeps the books. Whether a movement is into or out of the business, that movement is recorded from the point of view of the business recording the details.

Introduction to the goods and services tax (GST) On 1 July 2000 the goods and services tax (GST) was introduced in Australia. This tax significantly changed the accounting of everyday business transactions and impacted on businesses’ reporting obligations to the Australian Taxation Office (ATO). In chapter 1, you learnt that most businesses with an annual turnover of $75 000 or more must be registered for GST. Except in specific circumstances businesses with an annual turnover of less than 1 $75 000 do not have to register for GST. However, they may choose to register for GST if they wish. All businesses registered for GST must provide tax invoices when selling goods and services. They also must provide regular reports to the ATO. Before continuing, you may wish to refer back to chapter 1 to review your understanding of GST registration and chapter 2 for the details of tax invoices. In further Accounting studies you will learn more about how these businesses regularly submit Business Activity Statements (BAS) to the ATO, which include details of their GST tax obligations. However, it is important that at this stage you develop a basic understanding of the GST and how it affects the accounting process. What is a GST? The GST is a tax on the sale of most goods and services and is ultimately paid by the final consumer. The law requires that 10% GST is added to the initial price of most goods and services sold by those businesses registered for GST. In Australia, final prices are required to be quoted inclusive of the tax. Tax invoices and receipts must indicate that GST has been included, and often specify the dollar value of tax. For example, if a good is sold at a price of $1100, this will include a sale of $1000 and GST of $100. To calculate how much GST is included in the final price, divide it by 11. So $1100/11 = $100. This is the amount of the GST. Businesses must remit the GST collected on sales to the ATO. However, they may also claim back (or claim a credit for) the GST that they have paid on most goods and services they have purchased. Therefore, GST payable to the ATO by the selling or supplying business is the: GST on the sales of goods or services LESS the GST on the acquisition or purchase of goods or services. The amount of GST payable to the ATO is the net amount.

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Example: Sale of goods or services for $1000 Purchase of inventory $200 Salaries or wages $500 Other expenses $150 Therefore the GST payable to the ATO is: Sales of goods or services less GST credit on acquisitions purchase of inventory salaries or wages (these are GST-free) other expenses NET GST payable

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10% GST $100 $20 (these are GST-free) $15

Total $1 100 $220 $500 $165 $100

$20 0 $15

$35  $65

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Generally, the amount of GST collected by a business on sales/services is more than the GST the business has paid on the acquisition or purchase of goods and services. This means that the business must pay the ATO the net amount owing. However, you should be aware that in some cases the GST paid on purchases of goods and services could be more than the GST collected on sales/service. In such cases the business may claim a GST credit and receive a refund from the ATO for the net amount. A sale by one business may be a purchase for another business. Therefore, the selling business collects the GST and remits the funds to the ATO. The purchasing business may be able to claim a credit on the GST paid. Only final consumers who are not registered for GST will pay the 10% GST on goods and services that they purchase.

GST payable to ATO or GST collected from customers GST is included in the selling price of the goods and services which a GST-registered business sells. It is owed to the ATO by the business: it is a current liability. The account used to reflect this current liability of the business is GST payable (sometimes called GST collected). Therefore, the GST payable account is used when there are sales of goods and services. In its information on GST, the ATO refers to these as ‘supplies’.

GST receivable from ATO or GST paid to suppliers GST is included in the purchase price of goods, services and some non-current assets that a business acquires. It is owed by the ATO to the business: it is a current asset. The account used to reflect this current asset of the business is GST receivable. The GST receivable (sometimes called GST paid) account is used when the business purchases most goods and services, purchases or incurs most expenses and acquires certain non-current assets. In its information on GST, the ATO refers to these as ‘acquisitions’. It can be thought of as the tax receivable by the business on the inputs (or acquisitions or purchases and expenses) that have GST in them; the tax receivable reduces the GST that is payable on the sales or supplies. Note that salaries and wages are GST-free.

TWO GST ACCOUNTS Throughout this book we will use: • GST payable when goods or services are sold • GST receivable when an asset is purchased or an expense is incurred. When reporting GST on the BAS to the ATO these two amounts must be reported separately.

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GST payable (GST collected) is a current liability in the balance sheet. GST receivable (GST paid) is a current asset in the balance sheet. Some businesses may choose to use only one account to record both the GST receivable and GST payable: GST clearing. The GST clearing account is generally classified as a liability, as in most cases GST payable is greater than GST receivable. Some accounting software packages use two accounts and prepare the form for reporting to the ATO, but summarised into one GST clearing account as a liability account. However, remember that the GST collected and the GST paid must be reported separately.

GST supplies Under the GST, goods and services are classified into one of three types of GST supplies: taxable supplies, input-taxed supplies and GST-free supplies. Figure 4.3 outlines the different categories and applicable tax. It is the responsibility of each business to know the type of GST supply applicable to each service or good, and how to apply the 10% GST when preparing invoices. For the purposes of this book you are not required to classify goods and services into these categories, as this information will be given with the details of each business transaction. Created from tafenswlib on 2020-05-30 00:32:39.

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Type of GST supply

10% GST on acquisition or purchase of supplies

10% GST on sale of supplies

Yes Yes No

Yes No No

Taxable supplies Input-taxed supplies GST-free supplies

FIGURE 4.3  The three types of GST supplies

Transactions entered in the general journal In the previous chapter we looked at examples of transactions for a trading business and their impact on the accounting equation. We will now use examples for service and trading businesses to show how transactions are recorded in the general journal. GST will also be included, where applicable.

KEEP IN MIND In chapter 3 we learnt how business transactions impact on the accounting equation and the effect on assets, expenses, liabilities, owner’s equity and revenue. We referred to assets and expenses as debits, shown on the left-hand side of the accounting equation. Similarly, we referred to liabilities, owner’s equity and revenues as credits, and these were all shown on the credit or right-hand side of the accounting equation. Business transactions increased or decreased the various components or elements of the accounting equation but the accounting equation must always balance: Assets + Expenses = Liabilities + Owner’s Equity + Revenue A + E = L + OE + R This is summarised in figure 4.4.

Accounting equation

Debit

Credit

Assets

+ increase ↑

– decrease ↓

Expenses

+ increase ↑

– decrease ↓

Liabilities

– decrease ↓

+ increase ↑

Owner’s Equity

– decrease ↓

+ increase ↑

Revenues

– decrease ↓

+ increase ↑

FIGURE 4.4  Accounting equation, increases/decreases and debits/credits

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Example 1: Max’s Gardening and Landscaping – service business and the general journal a On 1 March 2022 Max commenced the service business by opening a business bank account with $2000 of his own savings. He also gave the business a $6000 motor vehicle. b On 2 March the business purchased a lawn mower and gardening equipment from Gardening Supplies Ltd for $1200 ($1091 + $109 GST). He paid by electronically transferring the funds from the business’s bank account. c On 2 March the business purchased a computer for the office from Computers Ltd for $1000 ($909 + $91 GST) and was given 30 days to pay. d On 7 March 2022 Max purchased fuel $33 ($30 + $3 GST) for the lawnmower and related equipment. On the same day he mowed lawns and carried out basic landscaping work for $165 ($150 + $15 GST). Both revenue and expense transactions were for cash.

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These transactions are recorded in the general journal for Max in figure 4.5. General Journal of Max’s Gardening and Landscaping Date 1 Mar 22 Bank a Motor Vehicle Capital

Particulars

Ref

GJ 1 Debit 2 000 6 000

Credit

8 000

Assets on commencement of business

2 Mar 22 Equipment b GST Receivable Bank [payment]

1 091 109 1 200

Purchased equipment with cash

2 Mar 22 Computer c GST Receivable Accounts Payable – Computers Ltd

909 91 1 000

Purchased computer from Computers Ltd – given 30 days to pay

7 Mar 22 Fuel for Equipment d GST Receivable Bank [payment]

30 3 33

Cash purchase of fuel for mower and other related equipment

d

Bank [receipt] Sales of Service GST Payable Mowing and landscaping services performed for cash

165 150 15

FIGURE 4.5  General journal for Max’s service business

QUESTION 4.1 Show the following transactions for Cheryl’s Cyclist Courier Service, referenced by date as well as ‘a’ and ‘b’, in the general journal format in the Workbook. a On 1 September 2022 Cheryl starts her Cyclist Courier Service in the Sydney central business district, with $600 in the bank account. Her bicycle, communication equipment and protective clothing valued at $3000 are grouped in her accounts as ‘equipment’. b For the week ended 8 September courier fees received totalled $517 ($470 + $47 GST) with repairs expense $88 ($80 + $8 GST) to cycling equipment and protective clothing; both revenue and expense transactions were processed electronically through the bank account.

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Example 2: Stephanie’s Fabrics and Materials – trading business and the general journal a On 1 August 2022 Stephanie formally commenced business with $5000 in the bank and an inventory of materials valued at $1500. b On 3 August 2022 Stephanie used her new debit card from the bank to purchase various bolts of material (various lengths of material rolled around a cardboard cylinder or rectangle) for $880 ($800 + $80 GST). She purchased other material on credit from Gillian’s Fabrics $495 ($450 + $45 GST). Note that in the general journal, and later in the general ledger, the name used for accounts payable is the accounts payable control account. This control account is used to summarise, rather than record

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in detail, the individual transactions for separate suppliers who have provided goods or services on credit. In chapter 6 we will study this account in more detail, and see where and how to record the individual transactions that affect separate accounts payable or creditors. c On 12 August Stephanie’s cash and debit card sales totalled $726 ($660 + $66 GST), with an inventory cost of $310 for those goods. To encourage a sales base she had made a sale on credit to A Beattie, who was already well known to her; this credit sale totalled $418 ($380 + $38 GST) with a cost of $180 for those goods. Note that in the general journal, and later in the general ledger, the name used for accounts receivable is the accounts receivable control account. This control account is used to summarise, rather than record in detail, the individual transactions for separate customers to whom the business has provided goods or services on credit. In chapter 6, we will study this account in more detail, and see where and how to record the individual transactions that affect accounts receivable or debtors. These transactions are recorded in the general journal for Stephanie’s Fabrics and Materials in figure 4.6. General Journal of Stephanie’s Fabrics and Materials Date 1 Aug 22 Bank a Inventory Capital

Particulars

Ref

GJ 1

Debit 5 000 1 500

Credit

6 500

Assets on commencement of business

3 Aug 22 Inventory b GST Receivable Bank [payment]

800 80 880

Purchased inventory, using debit card to pay

Inventory GST Receivable Accounts Payable Control

450 45 495

Inventory purchased on credit from Gillian’s Fabrics

12 Aug 22 Bank [receipt] Sales c GST Payable

726 660 66

Copyright © 2018. Cengage. All rights reserved.

Cash sales

Cost of Sales Inventory Cost of goods sold for cash

310

Accounts Receivable Control Sales GST Payable Credit sale to A Beattie

418

Cost of Sales Inventory Cost of goods sold on credit to A Beattie

180

FIGURE 4.6  General journal for Stephanie’s trading business

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310

380 38

180

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QUESTION 4.2 Louise commenced business on 1 October 2022 as Louise’s Value Plus, buying inventory in bulk and selling it to customers in much smaller quantities. She operates a trading business with the intention of making a profit. 1 October: Louise deposited $6500 into the business bank account and brought a computer valued at $2000 and a motor vehicle valued at $8500 into the business. 2 October: Louise purchased inventory, paying electronically $2420 ($2200 + $220 GST). She also purchased inventory $1155 ($1050 + $105 GST) on credit from O Randolf. 4 October: Louise sold inventory $1276 ($1160 + $116 GST) for cash. The cost of the goods sold was $800. 5 October: Louise sold inventory on credit to R Olsen for $550 ($500 + $50 GST), which had cost $300. You are required to show the transactions in the Workbook in the general journal format provided.

Example 3: Ann’s trading business – the general journal This example will pick up the trading business transactions of Ann, introduced in the previous chapter, and process them using the general journal. Commencement of business a On 1 July 2022 Ann commenced business with $40 000 in the bank and $4000 in inventory. Acquisition of assets and Ann brought more cash into business b On 2 July Ann’s business paid for motor vehicles $33 000 ($30 000 + $3000 GST) with a bank cheque. c On 3 July Ann’s business purchased a computer system on credit (received the computer but would pay later) for $11 990 ($10 900 + $1090 GST) from Kurrawood, an account payable. d Ann realised that the business required more cash. She deposited a further $7000 into the business’s bank account from her personal savings on 6 July. General Journal of Ann Date 1 Jul 22 Bank a Inventory Capital

Particulars

GJ 1 Ref

Debit 40 000 4 000

Credit

44 000

Assets on commencement of business

2 Jul 22 Motor Vehicles b GST Receivable Bank

30 000 3 000 33 000

Purchase of motor vehicles with bank cheque

3 Jul 22 Computers c GST Receivable Accounts Payable Control

10 900 1 090 11 990

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Purchase of computer system on credit from Kurrawood

6 Jul 22 Bank d Capital Additional cash contributed by owner

7 000 7 000

FIGURE 4.7  General journal of Ann’s trading business

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Perpetual inventory, periodic inventory or no inventory Where a business has inventory, the owner or manager has to decide whether to use either a perpetual or periodic inventory system. The result of this decision is very much dependent upon the cost of running and maintaining the inventory system compared with its benefits for the business. You should be competent with the accounting processes necessary for both perpetual and periodic inventory as both methods are used in the workplace.

PERPETUAL INVENTORY When the accounting equation was introduced in chapter 3, inventory was treated as an asset. The business was able to calculate immediately the original cost of the inventory when it was sold. The cost of the goods that were sold was known at the time the sale was made (using the cost of sales or cost of goods sold account) and the value of the remaining inventory held was also always known (using the inventory account). This system was very helpful when learning and understanding the principles of the accounting equation. If a business has an account called ‘Cost of Sales’ or ‘Cost of Goods Sold’, this indicates that the perpetual inventory method is being used.

PERIODIC INVENTORY For some businesses, perpetual inventory is not a cost-effective way of keeping track of both the physical and cost side of inventory movements as it requires recording on a continuous basis. An alternative to the perpetual inventory method is the periodic inventory method, which does not require the keeping of detailed, continuous or perpetual inventory records. The inventory value is only known: • on commencement of the business, when the owner brings inventory into the business at a given value

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• at the end of the accounting year, when a physical count and valuation is made of all inventory held by the business. The physical count and valuation is done or carried out at the end of the accounting period; hence, it is named the periodic inventory system. The cost of each sale is not known during the year and the total cost of sales is only calculated at the end of the year following the inventory count. The cost of sales is a calculated value and not a general ledger account. The value of the inventory at the end of one year is also the value for the beginning of the next accounting year. This remains the value of the inventory account until another physical count is done at the end of that year. Any additions to the inventory holdings during the year are allocated to the purchases account and not the inventory account.

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COMPARISON OF PERPETUAL AND PERIODIC ACCOUNTING PROCESSES – TRADING BUSINESS Perpetual Inventory

Periodic Inventory

a. Owner commenced business with $10 000 cash and inventory valued at $4000. Bank Inventory Capital Assets when business started

10 000 4 000

Bank Inventory 14 000 Capital Assets when business started

10 000 4 000 14 000

b. Purchase of inventory for $660 ($600 + $60 GST). Inventory GST Receivable Bank Cash purchase of inventory

600 60

Purchases GST Receivable 660 Bank Cash purchase of inventory

600 60 660

c. Purchase of inventory on credit for $770 ($700 + $70 GST). Inventory GST Receivable Accounts Payable Control Credit purchase of inventory

700 70

Purchases GST Receivable 770 Accounts Payable Control Credit purchase of inventory

700 70 770

d. Sale of inventory for cash $2200 ($2000 + $200 GST). With perpetual inventory, the cost of $1320 is known. With periodic inventory, the cost of the sale is not available. Bank 2 200 Bank 2 200 Sales 2 000 Sales 2 000 GST Payable 200 GST Payable 200 Cash sale Cash sale Cost of Sales 1 320 Inventory 1 320 Cost information not available Cost of cash sale

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e. Sale of inventory on credit for $3300 ($3000 + $300 GST). With perpetual inventory, the cost of $1990 is known. With periodic inventory, the cost of the sale is not available. Accounts Receivable Control 3 300 Accounts Receivable Control 3 300 Sales 3 000 Sales 3 000 GST Payable 300 GST Payable 300 Sale on credit Sale on credit Cost of Sales 1 990 Inventory 1 990 Cost information not available Cost of credit sale

FIGURE 4.8  Comparison of perpetual and periodic accounting systems in the general journal

NO OR MINIMAL INVENTORY/SUPPLIES – SERVICE BUSINESS A trading or retail business derives revenue from the sale of inventory. A service business derives revenue primarily from the provision of services. It usually has no inventory for sale, but may have inventory of minor value that it uses to contribute to the service that it sells. Service businesses often use the term ‘supplies’ rather than ‘inventory’. If the value of the supplies is significantly large or ‘material’, it may be classified as a current asset. More often the supplies purchased by a service business are of a low value and generally simply treated as an expense. Service businesses such as accounting, law, real estate, travel and tourism do not acquire and hold an inventory of goods. These types of businesses sell expertise or knowledge; that is, a service for which they charge. This revenue is from fee charges rather than goods sold. Created from tafenswlib on 2020-05-30 00:32:39.

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Other service businesses, such as plumbers and electricians, primarily provide a service but acquire and hold supplies such as plumbing and electrical fittings that are consumed in the provision of services to customers. Other businesses, such as motor vehicle dealerships, combine the selling of goods (parts) and the provision of services. This book illustrates the processing of business transactions for both service and trading businesses assuming for the trading business that either the perpetual inventory system or the periodic system is used.

QUESTION 4.3 Complete the general journals for both the perpetual inventory system and the periodic inventory system using the following transactions: a Owner commenced business with cash $15 000 and inventory $7000. b Cash sale of inventory for $4950 ($4500 + $450 GST). For the perpetual inventory system the cost of the sale is $2800. With the periodic inventory system there are no costs details available. c Credit purchase of inventory $3300 ($3000 + $300 GST). d Credit sale of inventory $5500 ($5000 + $500 GST). For the perpetual inventory system the cost of the sale is $3100. With the periodic inventory system there are no costs details available. e Cash purchase of inventory $2750 ($2500 + $250 GST).

Example 3 continued: The general journal using perpetual inventory and periodic inventory Ann obtained a loan from a bank, paid an account payable and purchased more goods/inventory for resale. e The business obtained on 10 July 2022 a five-year loan of $16 000 from the Natural Bank. f Remitted funds on 11 July for $11 990 owing to the account payable, Kurrawood. g On 15 July purchased inventory, paid by debit card $5500 ($5000 + $500 GST). h On 15 July purchased inventory on credit $6600 ($6000 + $600 GST) from Mareeka & Co, an account payable. Comparative General Journals of Ann

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Perpetual Inventory Date Particulars 10 Jul 22 Bank [receipt] e Loan from Bank 5-year loan received from bank 11 Jul 22 Accounts Payable Control f Bank [payment] Paid account payable Kurrawood 15 Jul 22 Inventory g GST Receivable Bank [payment] Cash purchase of inventory h Inventory GST Receivable Accounts Payable Control Credit purchase of inventory

Ref

GJ 1 Periodic Inventory

Debit 16 000

Credit 16 000

11 990 11 990 5 000 500 5 500 6 000 600 6 600

Particulars Bank [receipt] Loan from Bank 5-year loan received from bank Accounts Payable Control Bank [payment] Paid account payable Kurrawood Purchases GST Receivable Bank [payment] Cash purchase of inventory Purchases GST Receivable Accounts Payable Control Credit purchase of inventory

Ref

Debit 16 000

Credit 16 000

11 990 11 990 5 000 500 5 500 6 000 600 6 600

FIGURE 4.9 Example 3 – Ann (continued): comparative general journals for perpetual inventory and periodic inventory

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QUESTION 4.4 From the following transactions of E Stoddart in March 2022, complete the general journal using the perpetual inventory system.   1 Cash sale $110 ($100 + $10 GST), cost of sales $60.   3 Debit card purchase of inventory $330 ($300 + $30 GST).   5 Credit sale to M Miller $2750 ($2500 + $250 GST), cost of sales $1500.   7 Credit purchase of inventory from A Nubian $726 ($660 + $66 GST).   9 Credit purchase of stationery from Grafton Stationery $55 ($50 + $5 GST). 11 Electronically transferred funds for electricity consumed $220 ($200 + $20 GST). 13 Credit purchase of motor vehicle from Auto Valley $25 630 ($23 300 + $2330 GST) for use within the business. 16 Payment with bank cheque to Auto Valley for purchase of motor vehicle on 13 March $25 630. 17 Received from M Miller amount owing from credit sale on 5 March $2750. 19 Cash sale $550 ($500 + $50 GST), cost of sales $300.

QUESTION 4.5 (This question is similar to question 4.4, except that periodic inventory applies.) From the following transactions of E Stoddart in March 2022 complete the general journal using periodic inventory:   1 Cash sale $110 ($100 + $10 GST).   3 Debit card purchase of inventory $330 ($300 + $30 GST).   5 Credit sale to M Miller $2750 ($2500 + $250 GST).   7 Credit purchase of inventory from A Nubian $726 ($660 + $66 GST).   9 Credit purchase of stationery from Grafton Stationery $55 ($50 + $5 GST). 11 Electronically transferred funds for electricity consumed $220 ($200 + $20 GST). 13 Credit purchase of motor vehicle from Auto Valley $25 630 ($23 300 + $2330 GST) for use within the business. 16 Payment with bank cheque to Auto Valley for purchase of motor vehicle on 13 March $25 630. 17 Received from M Miller amount owing from credit sale on 5 March $2750. 19 Cash sale $550 ($500 + $50 GST).

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QUESTION 4.6 From the following transactions in September 2022 prepare the general journal for P Barrack; the perpetual inventory system applies.   1 September: Commenced business with bank $2000, and other assets with values as shown: inventory $1000, motor vehicles $8000 and premises $35 000.   3 September: Inventory was purchased by P Barrack for $1012 ($920 + $92 GST) and paid cash.   4 September: P Barrack’s bank granted a mortgage of $15 000 over the premises.   6 September: Machinery $8250 ($7500 + $750 GST) was purchased on credit by P Barrack from A Vince, an account payable.   7 September: P Barrack purchased inventory on credit from V Alan (an account payable) $1320 ($1200 + $120 GST). 10 September: Machinery was purchased by P Barrack for $2530 ($2300 + $230 GST) cash. 13 September: Payment was made by P Barrack to account payable, A Vince $8250. This solution is used in questions 4.8 and 4.10.

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QUESTION 4.7 (This question is similar to question 4.6 except that periodic inventory applies.) From the following transactions in September 2022 prepare the general journal for P Barrack; the periodic inventory system applies.   1 September: Commenced business with bank $2000, and other assets with values as shown, inventory $1000, motor vehicles $8000 and premises $35 000.   3 September: Inventory was purchased by P Barrack for $1012 ($920 + $92 GST) and paid cash.   4 September: P Barrack’s bank granted a mortgage of $15 000 over the premises.   6 September: Machinery $8250 ($7500 + $750 GST) was purchased on credit by P Barrack from A Vince, an account payable.   7 September: P Barrack purchased inventory on credit from V Alan (an account payable) $1320 ($1200 + $120 GST). 10 September: Machinery was purchased by P Barrack for $2530 ($2300 + $230 GST) cash. 13 September: Payment was made by P Barrack to account payable, A Vince $8250. This solution is used in questions 4.9 and 4.11.

General journals posted to the general ledger Information is transferred or posted from the general journal into the general ledger. Figure 4.1 on page 80 shows that this is the next step in the accounting process. In a computerised accounting system, posting from the journal to the general ledger is done automatically.

General ledger The chart of accounts is a listing of all accounts used by a business in classification order (ALOERE). Each account is allocated a number based on its classification. The general ledger is the collection of all of these accounts. Information from each of the journals is posted to the relevant accounts in the general ledger. In a manual accounting system, each account may have a separate page or card. The chart of account number is written at the top of the page near the account name.

DEBIT AND CREDIT IN THE GENERAL LEDGER The debits and credits from the general journal are summarised into the general ledger. The account names used in the general journal are the account names in the general ledger. Debits are entered on the left-hand side of the general ledger. Credits are entered on the right-hand side of the general ledger.

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GENERAL LEDGER AND REFERENCE NUMBER In both manual and computerised accounting systems, each ledger account number is the chart of account number. These ledger account numbers are the reference numbers that are entered in the journal ‘Ref’ column when posting from the journal to the ledger.

General ledger formats As shown in figures 4.10 and 4.16, there are two general ledger formats: T account and columnar format.

T ACCOUNT FORMAT This format derives its name from the obvious T shape of the general ledger account (see figure 4.10). You will probably find this format easier to understand and remember the ‘debit on the left, credit on

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the right’ rule, from the accounting equation. It is also necessary to learn how to apply those rules to the balancing of this account format. General Ledger of [insert the business name] Date

Particulars

Ref

Debit

Date

Particulars

Any Account

Ref

Credit

999

FIGURE 4.10  T account general ledger format

BALANCING GENERAL LEDGER ACCOUNTS IN T FORMAT Principles of the balancing process The principle behind the balancing process is that the value of the account needs to be easily seen. The T account method mostly requires the balancing process to be done. • If the balance on the account can be read, then the account is sufficiently balanced. • If the balance on the account cannot be read, then balance the account using the procedures and principles shown below so that the balance in the T account can be read and understood.

One entry, debit or credit The posting in the account, no matter which journal the amount was posted from, can be read or understood, so do nothing (see figure 4.11). The account already has a balance. Any T Account 30

FIGURE 4.11  One entry either debit or credit

More than one entry, either debit or credit but not both From the postings in this account it is not immediately obvious what the balance of the account is (see figure 4.12). It needs to be balanced so that, like figure 4.11, it can be read or understood. The balancing process is to rule a line under the last posted amount (32), and then on the next line write in the total. The single line is a subtotal line.

Copyright © 2018. Cengage. All rights reserved.

Any T Account

Any T Account 25 32

25 32 57

FIGURE 4.12  More than one entry, either debit or credit but not both

One entry debit, and credit, for same amount From the postings in this account (figure 4.13 left), it can be seen that the amounts are equal on the debit (left) and the credit (right) sides. There is no balance for this account: it has a nil balance. The balancing process is to rule a double line immediately underneath the amounts, which must already be on the same line. The double line is a total line and any future adding of either side is not to go past this double line (see figure 4.13 right). Created from tafenswlib on 2020-05-30 00:32:39.

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Transactions, general journals and double-entry processing

Any T Account 125

Any T Account 125

125

125

FIGURE 4.13  One entry debit and credit for the same amount

Debit and credit entries that total the same amount From the postings in this account, it may not be immediately obvious that there is a nil balance; that the total of the debits equals the total of the credits (see figure 4.14 left). The balancing procedure is to add each side. If they agree, then write the totals on the next free (or empty) line in both the debit column and the credit column. Rule a single line above and a double line below the totals (see figure 4.14 right). Unbalanced account Any T Account 155 73 327

Balanced account Any T Account 126 429

155 73 327 555

126 429 555

FIGURE 4.14  Several entries, debit and credit, which total the same amount – balanced account

Debit and credit entries that do not total the same From the postings in this account (figure 4.15 left), it is not obvious whether or not there is a nil balance. Any T Account May

75 May 157

Any T Account 258 125 36 53

May 31 May Balance c/d

75 May 157 240 472 1 Jun Balance b/d

258 125 36 53 472 240

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FIGURE 4.15  Several entries debit and credit, which do not total the same

The balancing procedure commences by separately adding the numbers on the debit side and the credit side. • If they do not agree, as in figure 4.15 (left), then subtract the side with the smaller (or lower) total from the side with the larger (or higher) total to obtain the difference (or balance) and write the difference (or balance) on the next available line on the smaller (or lower) side (figure 4.15 right). • On the line where you have written the difference, write in the ‘Date’ column the last day of that month. • In the ‘Particulars’ column write ‘Balance c/d’ (carried down). • On the next free (or empty) line in both the debit column and the credit column, write in the totals, which should now agree (or balance). • The totals must have a single line above and a double line below them. • On the line below the totals and on the opposite side to the ‘Balance c/d’, write in the ‘Date’ column the first day of that new month, in the ‘Particulars’ column write ‘Balance b/d’ (brought down), and finally in the ‘Amount’ column write the same amount written for the Balance carried down (see figure 4.15 right).

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COLUMNAR FORMAT This format displays the debit, credit and balance in three consecutive columns which gives rise to the format’s name (see figure 4.16). It is also referred to as the running or continuous balance format. Computerised accounting systems usually present general ledger accounts in this format. Manual accounts, which this book is concerned with, can also present ledgers in this format. Its expanding use necessitates that you become accustomed to this format. We will use the columnar format for subsidiary ledgers, which are introduced in chapter 6. General Ledger of [insert the business name] Date

Particulars

Ref

Debit

Credit

Balance Dr/Cr

Any Account

999

FIGURE 4.16  Columnar account general ledger format

CROSS-REFERENCING A reference or cross-reference is needed when posting information from the general journal to a general ledger account, in either T or columnar format. The general ledger account number and journal reference number must be written in the other’s respective ‘Ref’ (reference) column of the journal and the general ledger. In the journal the ‘Ref’ column shows the account number in the general ledger that the debit or credit amount has been posted to. In the general ledger account the ‘Ref’ column shows from which journal and journal number the details were posted.

Copyright © 2018. Cengage. All rights reserved.

Summarising posting the general journal to the general ledger The general journal of Ann, shown in figure 4.17, is posted to the general ledger T account format in figure 4.18. The same journal is then posted to the general ledger in columnar account format, as shown in figures 4.19 and 4.20. As the account details in the general journal have been posted to the general ledger accounts, the ledger account numbers are shown in the ‘Ref’ (reference) column for each debit/ credit entry. The basis for posting these journals to the ledgers, whether in T account or columnar format, is the chart of accounts. At this point you should refer to the section on chart of accounts at the end of chapter 3. It is also recommended that you study the account numbers and references between the journals and ledgers, to ensure you understand these relationships; you are not expected to know what specific account name is shown against which account number as it can change between businesses.

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Example 4: Ann’s trading business – post to the general ledger General Journal of Ann

GJ 1

Date Particulars 1 Jul 22 Bank Inventory Capital Assets on commencement of business

Ref 100 101 300

Debit 40 000 4 000

2 Jul 22 Motor Vehicles GST Receivable Bank Purchase of motor vehicles for cash

150 102 100

30 000 3 000

3 Jul 22 Computers 151 GST Receivable 102 Accounts Payable Control 200 Purchase of computer system on credit from Kurrawood

10 900 1 090

6 Jul 22 Bank

44 000

33 000

100 300

Capital Additional cash contributed by owner

Credit

11 990 7 000 7 000

FIGURE 4.17  General journal posted to the T account general ledger

General Ledger of Ann Date

Particulars

Ref

Debit

Date

Particulars

Bank 1 Jul 22 Capital 6 Jul 22 Capital

GJ1 GJ1

40 000 7 000

1 Jul 22 Capital

GJ1

4 000

2 Jul 22 Bank 3 Jul 22 Accounts Payable Control

GJ1 GJ1

2 Jul 22 Motor Vehicles

Inventory GST Receivable

2 Jul 22 Bank

GJ1

30 000

3 Jul 22 Accounts Payable Control

GJ1

10 900

Computers Accounts Payable Control 3 Jul 22 Computers

Capital Copyright © 2018. Cengage. All rights reserved.

Credit

GJ1

33 000

101 102

3 000 1 090

Motor Vehicles

1 Jul 22 Bank Inventory 6 Jul 22 Bank

FIGURE 4.18  Summarising the general journal in the T account general ledger

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Ref

100

150 151 200 GJ1

11 990

300 GJ1 GJ1 GJ1

40 000 4 000 7 000

CHAPTER 4

General Journal of Ann

GJ 1

Date Particulars 1 Jul 22 Bank Inventory Capital Assets on commencement of business

Ref 100 101 300

Debit 40 000 4 000

2 Jul 22 Motor Vehicles GST Receivable Bank Purchase of motor vehicles for cash

150 102 100

30 000 3 000

3 Jul 22 Computers GST Receivable Accounts Payable Control Purchase of computer system on credit from Kurrawood

151 102 200

10 900 1 090

6 Jul 22 Bank

100 300

7 000

Capital Additional cash contributed by owner

Credit

44 000

33 000

11 990

7 000

FIGURE 4.19  General journal posted to general ledger in columnar account format

General Ledger of Ann Date

Particulars

Ref

Debit

GJ1 GJ1 GJ1

40 000

Credit

Balance Dr/Cr

Bank 1 Jul 22 Capital 2 Jul 22 Motor Vehicles 6 Jul 22 Capital

100 33 000 7 000

40 000 7 000 14 000

Inventory 1 Jul 22 Capital

101 GJ1

4 000

4 000

GST Receivable 2 Jul 22 Bank 3 Jul 22 Accounts Payable Control

GJ1 GJ1

3 000 1 090

3 000 4 090

GJ1

30 000

30 000

10 900

10 900

Accounts Payable Control GJ1

Copyright © 2018. Cengage. All rights reserved.

Dr

200 11 990

11 990

Capital 1 Jul 22 Bank Inventory 6 Jul 22 Bank

Dr

151 GJ1

3 Jul 22 Computers

Dr Dr

150

Computers 3 Jul 22 Accounts Payable Control

Dr

102

Motor Vehicles 2 Jul 22 Bank

Dr Dr Dr

Cr

300 GJ1 GJ1 GJ1

40 000 4 000 7 000

40 000 44 000 51 000

Cr Cr Cr

FIGURE 4.20  Summarising the general journal in the columnar account general ledger

QUESTION 4.8 Refer back to the general journals prepared in answering question 4.6 for P Barrack where perpetual inventory applies. You are required to post these general journals to the general ledger in T and/or columnar ledger format. The general ledger is required to be in elementary chart of account order. This solution is used in question 4.10.

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QUESTION 4.9 Refer back to the general journals prepared in answering question 4.7 for P Barrack, using the periodic inventory. You are required to post these general journals to the general ledger in T and/or columnar ledger format. The general ledger in the Workbook is in elementary chart of accounts order. This solution is used in question 4.11.

Trial balance: summary of general ledger balances Having posted the general journal to the general ledger, a trial or test is done (or carried out) to see if the general ledger balances and that the accounting equation is still in balance. A + E = L + OE + R Total of debit accounts  =  Total of credit accounts

Each ledger account with a balance is listed. If the account has a nil balance then it is generally not listed in the trial balance. The trial listing of the balances in the ledger is carried out ‘as at’ a particular date, usually the end of a month.

Example 5: General ledger and trial balance Using the balanced general ledger accounts of Ann to 6 July 2022 (figure 4.21), prepare a trial balance as at 6 July 2022 (figure 4.22). General Ledger of Ann Date

Particulars

Ref

Debit

Date

Particulars

Bank 1 Jul 22 Capital 6 Jul 22 Capital

GJ1 GJ1

40 000 7 000 47 000 14 000

1 Jul 22 Capital

GJ1

4 000

2 Jul 22 Bank 3 Jul 22 Accounts Payable Control

GJ1 GJ1

7 Jul 22 Balance b/d

2 Jul 22 Motor Vehicles 6 Jul 22 Balance c/d

Inventory GST Receivable

Copyright © 2018. Cengage. All rights reserved.

Credit

GJ1

33 000 14 000 47 000

101 102

3 000 1 090 4 090

Motor Vehicles 2 Jul 22 Bank

GJ1

30 000

3 Jul 22 Accounts Payable Control

GJ1

10 900

Computers Accounts Payable Control 3 Jul 22 Computers

Capital 1 Jul 22 Bank Inventory 6 Jul 22 Bank

FIGURE 4.21  Balanced general ledger of Ann used to prepare a trial balance

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Ref

100

150 151 200 GJ1

11 990

300 GJ1 GJ1 GJ1

40 000 4 000 7 000 51 000

CHAPTER 4

Trial Balance of Ann as at 6 July 2022 Bank 100 Inventory 101 GST Receivable 102 Motor Vehicles 150 Computers 151 Accounts Payable Control 200 Capital 300

14 000 4 000 4 090 30 000 10 900

62 990

11 990 51 000 62 990

FIGURE 4.22  Trial balance of Ann prepared from general ledger

Trial balance: use, abuse and non-balance A trial balance is a listing of general ledger account names and values, which are shown as either a debit or credit balance. The total of the debit balances agree to the total of the credit balances. The trial balance is prepared as at a point of time, usually the end of a month.

USE The trial balance is a useful tool because: • it shows that the total debits equal total credits • it is a summary of general ledger balances and should be checked to see that it ‘looks right’. If there are accounts with much higher or lower balances than expected, the journal posting to the general ledger needs to be checked, as it may be posted to the wrong account or the wrong side • it is the basis for further work in preparing other accounting reports, such as the income statement and the balance sheet • it can be used to obtain a preliminary profit value (or figure). If the trial balance is listed in the order of the general ledger, which should be in the order of the chart of accounts, then a subtotal can be calculated after the accounts of an owner’s equity or a proprietorship nature and before the accounts of a revenue or expense nature. The difference is a profit if the debit subtotal is greater than the credit subtotal and a loss if debits are less than credits.

ABUSE

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A trial balance that balances is considered to be proof that all journals have been posted and posted to the correct accounts. Therefore, it can be abused if the figures are manipulated.

IT DOESN’T BALANCE These things do happen! The suggested procedure to find the error and enable the trial balance to balance is to: • calculate the difference between the totals; halve the difference and then look for either of these two amounts in the: – trial balance, as it may not have been added or was added on the wrong side – general ledger at the balances, as it may be listed on the wrong side of the trial balance or not listed at all in the trial balance • add the trial balance again

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• calculate the difference between the two sides and divide the difference by nine; if the result is a whole number then it could be a: – transposition error in at least one of the account totals such as $154 instead of $514, or – decimal point movement such as $39.10 instead of $391.00 • check the balances in the general ledger to the trial balance • add again the balances in the general ledger • check that the journals balance and cross-balance • check the posting from the journals to the general ledger • give up, and start again after a short break.

QUESTION 4.10 You are required to prepare a trial balance as at 13 September 2022, using the general ledger for P Barrack prepared in answering question 4.8, where perpetual inventory was used.

QUESTION 4.11 You are required to prepare a trial balance as at 13 September 2022, using the general ledger for P Barrack prepared in answering question 4.9, where periodic inventory applied.

General ledger formats This book will concentrate on the general ledger in T account format, as it is believed to be conceptually easier for you to grasp the debit and credit requirements of transactions when compared with the columnar account format. However, the columnar account will be used together with the T account format when looking at the subsidiary ledgers in chapter 6. Computerised accounts are prepared in the columnar format; you should be aware of this and be comfortable working with this format. Any T Account Debit

Credit

Any Columnar Account Debit

Credit

Balance

FIGURE 4.23  General ledger format comparisons

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Example 6: The general journal, general ledger and trial balance We will continue with all of the transactions used in the previous chapter for Ann’s business during the month of July 2022. The inventory will be processed using perpetual inventory (as used in the accounting equation examples) and periodic inventory methods. For completeness, all of Ann’s transactions for July will be processed even though some have been used for the earlier examples in this chapter. All transactions will be entered in a comparative general journal format (figure 4.24), posted to the general ledger in T account format, allowing for the differences in accounts (figure 4.25), and separate trial balances prepared at the end of the month (figure 4.26).   1 July: Ann commenced business with $40 000 in the bank and inventory valued at $4000.   2 July: Ann’s business paid $33 000 ($30 000 + $3000 GST) with bank cheque for motor vehicles.   3 July: Ann’s business purchased a computer system on credit for $11 990 ($10 900 + $1090 GST) from Kurrawood, an account payable.   6 July: Ann realised that the business required more cash. She deposited a further $7000 into the business’s bank account from her personal savings. 10 July: The business obtained a five-year loan of $16 000 from the Natural Bank. 11 July: Remitted funds for $11 990 owing to the account payable, Kurrawood.

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CHAPTER 4

15 July: Ann obtained more inventory for $5500 ($5000 + $500 GST) paying by debit card and $6600 ($6000 + $600 GST) on credit from Mareeka & Co, an account payable. 17 July: Ann sold inventory for $7700 ($7000 + $700 GST) cash, at a perpetual inventory cost of $4200. (Remember, under periodic inventory the individual cost of the goods sold is not known.) 20 July: Sold inventory on credit to Matthew & Assoc. for $9900 ($9000 + $900 GST), at a cost of $5400. 25 July: Electronically transferred funds to Mareeka & Co $6600 for the inventory credit purchase on 15 July. 26 July: Purchased inventory $7150 ($6500 + $650 GST) by debit card and $4950 ($4500 + $450 GST) on credit from Cathy & Co. 29 July: Remitted rent $1100 ($1000 + $100 GST) and remitted wages $2200. Purchased more computers for $2970 ($2700 + $270 GST) paying by debit card. 30 July: Received funds owing from sale on 20 July to Matthew & Assoc. for $9900. Paid Cathy & Co $4950 electronically for inventory purchased on 26 July. Comparative General Journals of Ann

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Perpetual Inventory

GJ 1 Periodic Inventory

Date Particulars 1 Jul 22 Bank Inventory Capital Assets on commencement 2 Jul 22 Motor Vehicles GST Receivable Bank Motor vehicle purchased for cash 3 Jul 22 Computers GST Receivable Accounts Payable Control Credit purchase of computer 6 Jul 22 Bank Capital Additional cash from owner 10 Jul 22 Bank Loan from Bank 5 year loan received from bank 11 Jul 22 Accounts Payable Control

Ref 100 101 300

Debit 40 000 4 000

150 103 100

30 000 3 000

151 103 200

10 900 1 090

100 300

7 000

100 250

16 000

200

11 990

Bank Paid account payable Kurrawood

100

15 Jul 22 Inventory GST Receivable Bank Cash purchase of inventory Inventory GST Receivable Accounts Payable Control Credit purchase of inventory

101 103 100

5 000 500

101 103 200

6 000 600

Credit

Particulars Bank Inventory Capital Assets on commencement Motor Vehicles GST Receivable Bank Motor vehicle purchased for cash Computers GST Receivable Accounts Payable Control Credit purchase of computer Bank Capital Additional cash from owner Bank Loan from Bank 5 year loan received from bank Accounts Payable Control

Ref 100 101 300

Debit 40 000 4 000

150 103 100

30 000 3 000

151 103 200

10 900 1 090

100 300

7 000

100 250

16 000

200

11 990

Bank Paid account payable Kurrawood

100

Purchases GST Receivable 5 500 Bank Cash purchase of inventory Purchases GST Receivable 6 600 Accounts Payable Control Credit purchase of inventory

500 103 100

5 000 500

500 103 200

6 000 600

44 000

33 000

11 990

7 000

16 000

11 990

Credit

44 000

33 000

11 990

7 000

16 000

11 990

5 500

6 600

CONTINUED

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Comparative General Journals of Ann Perpetual Inventory Date 17 Jul 22 Bank

20 Jul 22

25 Jul 22

26 Jul 22

26 Jul 22

29 Jul 22

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30 Jul 22

Particulars

Sales GST Payable Cash sale Cost of Sales Inventory Cost of cash sale Accounts Receivable Control Sales GST Payable Credit sale to Matthew & Asc Cost of Sales Inventory Cost of credit sale Accounts Payable Control Bank Paid a/c payable, Mareeka Inventory GST Receivable Bank Cash purchase of inventory Inventory GST Receivable Accounts Payable Control Credit purchase of inventory, Cathy Rent GST Receivable Bank Paid rent on property Wages Bank Paid wages Computers GST Receivable Bank Cash purchase of computers Bank Acc’nts Receivable Control Receipt from Matthew & Assoc Accounts Payable Control Bank Paid Cathy & Co from 26 Jul

GJ 2 Periodic Inventory

Ref 100 400 201

Debit 7 700

500 101

4 200

102 400 201

9 900

500 101

5 400

200 100

6 600

101 103 100

6 500 650

101 103 200

4 500 450

501 103 100

1 000 100

502 100

2 200

151 103 100

2 700 270

100 102

9 900

200 100

4 950

Credit

Particulars

Ref 100 400 201

Debit 7 700

Accounts Receivable Control Sales GST Payable Credit sale to Matthew & Asc

102 400 201

9 900

Accounts Payable Control Bank Paid a/c payable, Mareeka Purchases GST Receivable Bank Cash purchase of inventory Purchases GST Receivable Accounts Payable Control Credit purchase of inventory, Cathy Rent GST Receivable Bank Paid rent on property Wages Bank Paid wages Computers GST Receivable Bank Cash purchase of computers Bank Acc’nts Receivable Control Receipt from Matthew & Assoc Accounts Payable Control Bank Paid Cathy & Co from 26 Jul

200 100

6 600

500 103 100

6 500 650

500 103 200

4 500 450

501 103 100

1 000 100

502 100

2 200

151 103 100

2 700 270

100 102

9 900

200 100

4 950

Bank 7 000 700

Sales GST Payable Cash Sale

Credit 7 000 700

4 200

9 000 900

9 000 900

5 400

6 600

7 150

4 950

1 100

2 200

2 970

9 900

4 950

6 600

7 150

4 950

1 100

2 200

2 970

9 900

4 950

FIGURE 4.24 Comparative general journals for perpetual inventory and periodic inventory systems after being posted to the general ledger

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CHAPTER 4

General Ledger of Ann Date

Particulars

Ref

Debit

Date

Particulars

Bank 1 Jul 22 6 Jul 22 10 Jul 22 17 Jul 22 30 Jul 22

Capital Capital Loan from Bank Sales Accounts Receivable Control

GJ1 GJ1 GJ1 GJ2 GJ2

Perpetual Inventory Method:

Motor Vehicles Accounts Payable Control Inventory/Purchases Accounts Payable Control Inventory/Purchases Rent Wages Computers Accounts Payable Control 31 Jul 22 Balance c/d

Inventory GJ1 GJ1 GJ1 GJ2 GJ2

1 Aug 22 Balance b/d

Periodic Inventory Method: 1 Jul 22 Capital

2 Jul 22 11 Jul 22 15 Jul 22 25 Jul 22 26 Jul 22 29 Jul 22

4 000 17 Jul 22 Cost of Sales 5 000 20 Jul 22 Cost of Sales 6 000 31 Jul 22 Balance c/d 6 500 4 500 26 000 16 400

Inventory GJ1

101

20 Jul 22 Sales

GJ2

GJ2

2 Jul 22 Bank [payment] 3 Jul 22 Accounts Payable Control 15 Jul 22 Bank [payment] Accounts Payable Control 26 Jul 22 Bank [payment] Accounts Payable Control 29 Jul 22 Bank [payment] Bank [payment]

GJ1 GJ1 GJ1 GJ1 GJ2 GJ2 GJ2 GJ2

9 900 30 Jul 22 Bank [receipt]

GJ1 GJ2 GJ2

150 151

10 900 2 700 13 600

Accounts Payable Control 11 Jul 22 Bank [payment] 25 Jul 22 Bank [payment] 30 Jul 22 Bank [payment]

103

30 000

Computers GJ1 GJ2

9 900

3 000 1 090 500 600 650 450 100 270 6 660

Motor Vehicles

3 Jul 22 Accounts Payable Control 29 Jul 22 Bank [payment]

4 200 5 400 16 400

26 000

102

GJ1

33 000 11 990 5 500 6 600 7 150 1 100 2 200 2 970 4 950 5 140 80 600

101 GJ2 GJ2

Accounts Receivable Control

2 Jul 22 Bank [payment]

Credit

4 000

GST Receivable

Copyright © 2018. Cengage. All rights reserved.

GJ1 GJ1 GJ1 GJ2 GJ2 GJ2 GJ2 GJ2 GJ2

80 600 5 140

1 Aug 22 Balance b/d 1 Jul 22 Capital 15 Jul 22 Bank [payment] Accounts Payable Control 26 Jul 22 Bank [payment] Accounts Payable Control

40 000 7 000 16 000 7 700 9 900

Ref

100

200

11 990 3 Jul 22 Computers 6 600 15 Jul 22 Inventory/Purchases 4 950 26 Jul 22 Inventory/Purchases 23 540

GJ1 GJ1 GJ2

GST Payable

201

17 Jul 22 Bank [receipt] 20 Jul 22 Accounts Receivable Control

GJ2 GJ2

11 990 6 600 4 950 23 540

700 900 1 600

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General Ledger of Ann Date

Particulars

Ref

Debit

Date

Particulars

Ref

Loan from Bank

250

10 Jul 22 Bank [receipt]

GJ1

Capital

GJ1 GJ1 GJ1

Sales

Cost of Sales GJ GJ

Periodic Inventory Method: GJ1 GJ1 GJ GJ2

GJ GJ

7 000 9 000 16 000

500

4 200 5 400 9 600

Purchases

15 Jul 22 Bank [payment] Accounts Payable Control 26 Jul 22 Bank [payment] Accounts Payable Control

40 000 4 000 7 000 51 000

400

17 Jul 22 Bank [receipt] 20 Jul 22 Accounts Receivable Control

Perpetual Inventory Method:

16 000

300

1 Jul 22 Bank [receipt] Inventory 6 Jul 22 Bank [receipt]

17 Jul 22 Inventory 20 Jul 22 Inventory

Credit

500

5 000 6 000 6 500 4 500 22 000

Rent 29 Jul 22 Bank [payment]

GJ2

1 000

29 Jul 22 Bank [payment]

GJ2

2 200

501

Wages

502

FIGURE 4.25 General ledger posted from comparative general journals showing relevant perpetual and periodic inventory, cost of sales and purchases accounts

Trial Balance of Ann

Trial Balance of Ann

as at 31 July 2022

as at 31 July 2022

Copyright © 2018. Cengage. All rights reserved.

Perpetual Inventory Method: Bank Inventory GST Receivable Motor Vehicles Computers GST Payable Loan from Bank Capital Sales Cost of Sales Rent Wages

100 101 103 150 151 201 250 300 400 500 501 502

Periodic Inventory Method:

5 140 16 400 6 660 30 000 13 600 1 600 16 000 51 000 16 000 9 600 1 000 2 200 84 600

84 600

Bank Inventory GST Receivable Motor Vehicles Computers GST Payable Loan from Bank Capital Sales Purchases Rent Wages

100 101 103 150 151 201 250 300 400 500 501 502

5 140 4 000 6 660 30 000 13 600 1 600 16 000 51 000 16 000 22 000 1 000 2 200 84 600

FIGURE 4.26  Trial balance prepared from general ledger showing the two inventory methods

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84 600

CHAPTER 4

QUESTION 4.12

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From the following September 2022 transactions for K Pullen you are required to: a prepare general journals using the comparative general journal format in the Workbook for both perpetual and periodic inventory systems b post the general journals to the general ledger in T format. The Workbook provides a general ledger format for both perpetual and periodic systems c balance the general ledger accounts where necessary d prepare a trial balance as at 30 September 2022. These transactions were also used in chapter 3 when preparing transactions in accounting equation format.   1 September: Commenced business with bank $12 000, inventory valued at $3000, building valued at $37 000, machinery valued at $7500 and mortgage of $8500.   4 September: K Pullen purchased inventory for $2310 ($2100 + $210 GST) with a debit card.   7 September: Additional capital was brought into the business by K Pullen in the form of cash $9500 and motor vehicle valued at $15 000. 10 September: Inventory $3190 ($2900 + $290 GST) was purchased on credit from C Blaxland. 13 September: Machinery costing $4620 ($4200 + $420 GST) was bought by K Pullen with a debit card. 17 September: K Pullen received a three-year loan from V Alan for $10 000. 22 September: Machinery costing $8800 ($8000 + $800 GST) was purchased from C Eastment on credit. 23 September: Debit card was used by K Pullen to purchase inventory for $3960 ($3600 + $360 GST). 26 September: Transferred funds to C Blaxland $3190 owing from the purchase earlier in September. 27 September: K Pullen purchased inventory on credit from C Blaxland $3597 ($3270 + $327 GST). 28 September: Remitted $8800 to C Eastment, an account payable.

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 4.13 What is the difference between inventories and supplies?

QUESTION 4.14 What is the difference between: • taxable supplies • input-taxed supplies • GST-free supplies?

QUESTION 4.15 Your friend runs a small IT consulting practice. She has asked you to help work out why the trial balance is not equal at the end of the month. Your investigation finds that the total of the debit column is not the same as the credit column. Suggest three reasons why the trial balance does not balance.

QUESTION 4.16 Write the missing word(s) in the space provided, using the following words: accounts, asset, balance sheet, expense, general ledger, revenue, liability, income statement, trial balance, owner’s equity. a Journals are summarised into another book called the . . . . . . . . . . b In this summary book, page headings are called . . . . . . . . . . c The general ledger accounts are organised into classifications in the chart of accounts.

What the business owns is in the . . . . . . . . . . classification.



What the business owes externally, or outside the business, is in the . . . . . . . . . . classification.



What the business owes the owner is in the . . . . . . . . . . classification.



What sales the business makes are in the . . . . . . . . . . classification.



What costs the business has are in the . . . . . . . . . . classification.

d A list of the general ledger account balances is called a . . . . . . . . . . e The profit or loss is shown in the . . . . . . . . . . What the business owns and owes is shown in the . . . . . . . . . .

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f

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CHAPTER 4

QUESTION 4.17 From the list of accounts and balances in figure 4.27, which does not follow the chart of accounts order, you are required to: • prepare the trial balance of T Porracin for the end of August 2022 • write in the account numbers next to each name, using the chart of accounts outlined in figure 3.20 on page 70.

Account Number

Account Name Electricity Postage Land and Buildings

Debit

Credit

$

$

$

250 50 50 000

GST Receivable

220

Rent Received

850

Accounts Receivable Control (G Escobar)

715

Commission Received

35

Discount Received

40

Wages

4 670

Machinery

10 000

Telephone

470

Inventory Stationery

2 500 535

Bank

2 100

Sales

12 000

GST Payable

1 180

Furniture and Fittings

7 500

Petty Cash Discount Allowed

100 25

Accounts Payable Control (G Grozdanovska)

2 090

Cost of Sales

1 100

Capital

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Amount

??  040

FIGURE 4.27  Account listing of T Porracin

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QUESTION 4.18 From the list of accounts and balances in figure 4.28, which does not follow the chart of accounts order, you are required to: • prepare the trial balance of C Orellana for the end of July 2022 • write in the account numbers next to each name, using the chart of accounts outlined in figure 3.20 on page 70.

Account Number

Account Name

Credit

$

$

$

7 400

Accounts Receivable Control (L Lechowski)

1 815

Electricity

1 210

Bank

3 637

GST Payable

6 890

Premises

398 25 000

Freight Inwards

940

Customs Duty

760

Plant Advertising Postage Inventory

11 000 1 200 650 2 500

Photocopying

710

Bad Debts

315

Wages and Salaries

15 300

Freight Outwards

250

Petty Cash

150

Office Furniture Commission Received

7 500 475

Capital

?  ???

GST Receivable

3 510

Stationery

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Debit

Government Bonds

Interest on Government Bonds

720

Motor Vehicle

22 000

Sales

75 315

Land

44 000

Discount Allowed Accounts Payable Control (I Oreskovic) Purchases

FIGURE 4.28  Account listing of C Orellana

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Amount

55 220 32 306

CHAPTER 4

QUESTION 4.19 Tracey Bolton commenced business as a sole trader in August 2022. Tracey provides tennis training advice to clients wishing to improve their stroke and on-court performance. She employs some assistants. From the following transactions for the first month of operation you are required to prepare general journal entries; post to the general ledger and prepare a trial balance as at 31 August 2022.   1 August: Tracey contributed $40 000 cash to the business bank account to start the business.   5 August: Paid $740 for business registration fees.   6 August: Paid $6600 ($6000 + $600 GST) for furniture.   7 August: Bought $35 200 ($32 000 + $3200 GST) of tennis training machines from Sports Ltd – half in cash and half on credit to pay next month.   7 August: Bought $3300 ($3000 + $300 GST) of office supplies on account from Office World.   9 August: Received $4180 ($3800 + $380) cash for a group two-day tennis training session. 12 August: Prepared a tax invoice for Keith Rose for tennis coaching services $9350 ($8500 + $850 GST). 14 August: Tracey contributed a further sum of $6400 to the business. 15 August: Invoiced Tennis Australia $7480 ($6800 + $680 GST) for conducting a specialised training day. 17 August: Received full payment from Keith Rose for the transaction recorded on 12 August. 20 August: Paid $1000 of the accounts payable owed to Office World. 25 August: Tracey withdrew $14 000 to pay her son’s college fees. 29 August: Paid $3300 ($3000 + $300 GST) using the bank account debit card to transfer funds for the August rent. 30 August: The business acquired a $24 000 12-month bank loan at 10% p.a. interest. 31 August: Tracey paid wages of $7000 to her assistants.

QUESTION 4.20 From the following business transactions in July 2022 you are required to prepare comparative general journals for both perpetual and periodic inventory; post to the general ledger, where the Workbook format allows for the two inventory systems. Prepare a trial balance for perpetual and also periodic inventory.   1 July: A Argenton commenced business with $6000 cash in the bank and a motor vehicle valued at $25 000.   4 July: A Argenton purchased inventory of $3300 ($3000 + $300 GST) on credit from A Point.   5 July: A Argenton used a debit card for inventory of $2200 ($2000 + $200 GST).   6 July: A Argenton introduced $7500 more capital into the business, being $3000 cash and office equipment valued at $4500. 10 July: A Argenton sold inventory for $2475 ($2250 + $225 GST) cash; inventory cost was $1350. 15 July: A Argenton sold inventory on credit to T Ranch, $3740 ($3400 + $340 GST) which cost $2100.

Copyright © 2018. Cengage. All rights reserved.

18 July: A Argenton remitted $3300 to A Point, an account payable, for inventory purchased on 4 July. 21 July: Inventory was purchased by A Argenton from E Kevin on credit for $2860 ($2600 + $260 GST) and also purchased inventory for $1595 ($1450 + $145 GST) with a debit card. 25 July: A Argenton remitted wages $900 and electricity $110 ($100 + $10 GST). Also A Argenton purchased machinery costing $1540 ($1400 + $140 GST), using a debit card. 29 July: Cheque received from the account receivable T Ranch for $3740 and payment remitted to the account payable E Kevin for $2860.

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QUESTION 4.21 From the following transactions of D Brad made in January 2022, you are required to prepare the general journals using perpetual inventory, post to the general ledger in the format provided in the Workbook and prepare a trial balance.   2 January: D Brad commenced business with $7000 cash and equipment $12 000.   4 January: D Brad purchased machinery for $2233 ($2030 + $203 GST) with a debit card and inventory for $2255 ($2050 + $205 GST) also with the debit card.   7 January: Inventory was sold by D Brad on credit for $4301 ($3910 + $391 GST) to K Camping at a cost of $1800.   9 January: D Brad deposited $2000 into the business bank account and brought a motor vehicle into the business valued at $13 800, being additional capital. 12 January: A loan was obtained by D Brad for $7500 from A Relo. 15 January: Equipment costing $5775 ($5250 + $525 GST) was purchased by D Brad from T Kevin on credit. Inventory $2420 ($2200 + $220 GST) was also purchased on credit from C Curnuck. 17 January: Cash sale was made by D Brad for $3575 ($3250 + $325 GST) costing $1600. 20 January: Sold inventory on credit to K Camping for $1067 ($970 + $97 GST) at a cost of $400. 23 January: Machinery $3520 ($3200 + $320 GST) was purchased with a debit card. 25 January: D Brad paid T Kevin, an account payable, $5775 being the amount owed. 28 January: D Brad remitted funds to C Curnuck, an account payable, $2420 in full payment of account. D Brad also received $4301 from K Camping, an account receivable.

Endnote

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1 https://www.ato.gov.au/Business/GST/Registering-for-GST/

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5 Transactions, specialised journals and double-entry processing

Copyright © 2018. Cengage. All rights reserved.

Introduction We become more efficient in this chapter as we prepare specialised journals, post them to a structured general ledger and then take out a trial balance. The knowledge we have gained from previous chapters is further developed. Most businesses use some form of specialised journals. However, your teacher may also prefer you to continue recording in the general journal format as this is the way some computerised accounting packages display journal entries. While the purpose of the chapter is to demonstrate specialised journals, most questions have been designed to allow you to use either the specialised or the general journal format.

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Specialised journals In a manual accounting system, we can reduce the time needed to enter each business transaction into a journal by introducing four new specialised journals. The general journal is then used for entries that relate to the internal operations of the business (see figure 5.2). As we saw in the previous chapter, an important part of posting from the journal to the ledger is cross-referencing of the entries. The journal prefixes are shown in figure 5.2. The ‘x’ suffix refers to the particular number or page of the journal where the business transaction is located. Similar codings are also used to cross-refer entries in a computerised accounting system. Specialised Journal

Journal/ledger Reference Prefix

Types of Transactions

Sales Journal

SJ x

Purchases Journal

PJ x

Cash Receipts Journal

CR x

Cash Payments Journal

CP x

Cash Book

CB x

General Journal

GJ x

Sell goods, services and all other items on credit Sales returns, allowances and other adjustments are entered as negatives by entering the amount in brackets Buy inventory, services and all other items on credit Purchase returns, allowances and other adjustments are entered as negatives by entering the amount in brackets All funds received including notes and coins, cheques and cash equivalents (i.e. electronic transfers to the bank account) All funds, including electronic transfers and cheques, paid from the bank account Combined cash receipts and cash payments journal; this is an alternative to separate journals, in which all fund transactions are recorded in one book Internal adjustments and any other transactions that cannot be entered in the specialised journals

Copyright © 2018. Cengage. All rights reserved.

FIGURE 5.2  Journals and their specialised uses

In all of these journals it is essential that the information from the source documents is recorded from the point of view of the business that keeps the books. Whether a movement is into or out of the business, that transaction is recorded from the point of view of the business recording the details. For example, when the business supplies goods or services on credit and prepares a tax invoice, then the transaction will be entered in the business’s sales journal. The customer who has purchased the goods or service will enter the details from the tax invoice received from the supplier in its purchases journal. Similarly, if the business receives funds, the details will be entered into the business’s cash receipts journal, but the customer who remits the funds will enter the details into its cash payments journal. An overview of the changes that have occurred with the use of specialised journals as well as the general journal can be seen in figure 5.3. Although this book demonstrates the processes for a manual accounting system, most double-entry based computerised accounting systems include modules similar to the special journals we will present in this chapter. The initial entry of data may be different from a manual system, but a computer system should produce the same outcome in the general ledger, trial balance and financial statements. Many computer systems commence with the electronic preparation of purchase orders or sales invoices as the initial data entry for a transaction. Some even have electronic payment options and bank feeds for recording payments or receipts directly linked through the internet to the business’s bank account. From the one data entry in the computer, the program completes all of the accounting entries and relevant reports. For example, as shown in figure 5.3, the entry for a sale on credit through the sales module will be automatically processed through to the ledger, trial balance and financial statements.

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Sell goods, services and other items on credit: sales journal A business that sells anything on credit expects to be paid at an agreed date in the near future, and records those sales in the sales journal (see figure 5.4); the business has created an account receivable. Sales Journal of HIS

HUNTER INDUSTRY SUPPLIES SINGLETON

Maitland Engineering South Street Maitland 2320

Accounts Receivable Control

770.00 70.00

TOTAL GOODS TOTAL INCLUDES GST

SJ 1

A/c Rec

TAX INVOICE 148

HUNTER INDUSTRY SUPPLIES SINGLETON

TAX INVOICE 149

G Watkins 151 River Road MUSWELLBROOK 2333 GOODS GST TOTAL AMOUNT PAYABLE

350.00 35.00 385.00

FIGURE 5.4  Customer tax invoices processed as sold on credit, entered in sales journal

Buy goods, services and other items on credit: purchases journal A business buying anything on credit – that is, when payment is not immediately required – records those purchases in the purchases journal (see figure 5.5) and is required to pay the supplier, an account payable, in the near future.

Copyright © 2018. Cengage. All rights reserved.

LISMORE FRUIT GROWERS

TAX INVOICE 1195

Jacaranda Tourist Supplies Schaeffer House Grafton 2460 GOODS TOTAL INCLUDES GST

145.75 13.25

Purchases Journal of JTS

PJ 1

A/c Pay

Accounts Payable Control

KEMPSEY CRAFT DISTRIBUTORS TAX INVOICE 358

Jacaranda Tourist Supplies Schaeffer House Grafton 2460 GOODS GST TOTAL AMOUNT PAYABLE

233.50 23.35 256.85

FIGURE 5.5  Supplier tax invoices processed as acquired on credit, entered in purchases journal Created from tafenswlib on 2020-05-30 00:38:45.

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Receive funds: cash receipts journal A business that is owed monetary payment should acknowledge the receiving of those funds. In the past it was a recognised practice to prepare a receipt and send it to the customer. However, this is now very rare as the time and cost of doing this can be relatively high. In practice, the funds received from customers who have previously been provided with goods or services on credit are entered on the customer’s statement as part of the normal procedure to maintain control of the accounts receivable account and in a separate accounts receivable ledger; this is covered in detail in the next chapter. A business that issues printed receipts for cash sales would normally prepare the docket as a tax invoice that shows the sales details and price, and the money or card details tendered. In chapter 2 you were introduced to receipts that also have suffficient detail to be tax invoices, such as those you receive when you buy goods in a supermarket. At the end of the day it is the cash register totals and not the individual details that are entered into the cash receipts journal. Many businesses receive most of their funds as direct electronic transfers or remittances into their bank account from individual customers. For some businesses, receipts are dominated by debit and credit card inflows. All of these methods of receiving funds will result in entries being processed in the cash receipts journal (see figure 5.6).

Receipt No. 3612

Cash Receipts Journal of...

CR 1

Bank

The total price includes GST

Cash Sale Docket No. 1357 Register 25 7 August 2022 $232.00 $23.20 TOTAL $255.20 SALES

GST

Copyright © 2018. Cengage. All rights reserved.

Remittances received electronically

FIGURE 5.6  Receipts processed and funds received into the business, entered in cash receipts journal

Remit funds: cash payments journal In the past, almost all payments made by a business involved writing a cheque and recording the details on the cheque butt or copy of the remittance advice sent to the supplier with the cheque. Most businesses now make many payments electronically or with a debit card (see figure 5.7). If remitting funds electronically, it is important that a relevant reference number (such as supplier’s invoice number) be included in the details so that the business receiving the funds (the payee) can identify who has paid them. Banks often provide the option for an SMS or email to be sent to the payee.

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Other internal adjustments: general journal If a business needs to make an adjustment that does not involve a sale on credit, a purchase on credit, the receipt of funds or payment of funds then that adjustment is made in the general journal (see figure 5.9). General Journal of...

GJ 1

From Manager To Accountant Please make the following adjustment to the accounting records at the end of the current month $150.00

FIGURE 5.9  Memo authorises entries to be processed in general journal

Grouping similar source documents

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GROUPING OR BATCHING Remember, the journals are usually written up on a daily basis. Instead of writing (or recording) information into the journals throughout the day as the source documents are received, it is usual business practice to wait until an agreed time each day and then write (or post) the information into the journal. As the source documents are received during the day, they are separated into groups corresponding to the journals. The money value of the source documents in each group of similar documents is totalled. That total monetary value becomes a control amount to make sure that the correct amount is posted (or entered) in the journal for each group (or batch, as it is often called).

ALLOCATING OR CODING It is also common business practice to code the source documents, usually by using alphabetic or numeric codes, or a combination of both (alphanumeric code). Coding of source documents could be based on the name of the supplier, the customer, or the reason for remittance or receipt.

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CHAPTER 5

QUESTION 5.1 Write the missing word(s) in the space provided, using the following words: cash payments, cash receipts, daily, general, journal, purchase, sales. a In accounting, a book where source documents are first entered is a . . . . . . . . . . and the source documents are written in . . . . . . . . . . b Identify the five journals that record the five basic business transactions below. Sell on credit is written in the Buy on credit is written in the Remittance of funds is written in the Receipt of funds is written in the An internal adjustment is written in the

Journal Journal Journal Journal Journal

QUESTION 5.2 Indicate the journal C Namble would use to enter the following transactions. Transaction

Journal

C Namble remitted wages C Namble received a cheque from F Lee C Namble purchased goods on credit from P Way C Namble issued a tax invoice for services provided on credit to F Anna C Namble transferred funds for rent to W Ren C Namble received a remittance from M Gee C Namble purchased stationery on credit from B Mont C Namble issued a tax invoice for services provided on credit to P Stow C Namble electronically received funds from G Burn C Namble remitted funds to B Mont C Namble sent a tax invoice to B Thurst C Namble received a tax invoice from K Toomba

QUESTION 5.3 During the day a number of source documents were received. You are required to calculate the value of each batch that would be posted to the four journals for that day.

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Source Document Remittance paid Remittance received Remittance paid Remittance paid Remittance received Remittance received Tax invoice from supplier Tax invoice from supplier Tax invoice to customer Tax invoice to customer Tax invoice from supplier Sales journal batch total Purchases journal batch total Cash receipts journal batch total Cash payments journal batch total

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$ 51.81 23.98 45.98 30.58 58.30 64.45 63.47 94.38 121.55 191.07 50.49 $ $ $ $

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

QUESTION 5.4 Indicate the journal A Berdeen would use for each of the following transactions. Transaction

Journal

A Berdeen sold goods to B Allina on credit A Berdeen used a debit card for goods A Berdeen purchased goods from T Rocks on credit A Berdeen made a credit sale to S Campbell A Berdeen made an internal adjustment to the accounts Paid for goods purchased Goods were sold on credit by A Berdeen to B Allina Sold goods for cash Paid electricity account electronically Adjust the books internally A Berdeen received a remittance from B Allina Goods purchased on credit by A Berdeen from C Cadman

QUESTION 5.5 Transactions for C Amden are shown below. Which journal would they be written in? Transaction

Copyright © 2018. Cengage. All rights reserved.

C Amden purchased goods on credit from C Unwin Goods sold by C Amden to T Coachhouse; C Amden expected to receive payment at a later date C Amden sold goods for cash to C Reynolds C Amden purchased goods from F Phillip and agreed to pay later An adjustment to the books is required Cash purchase C Amden sold to S Agar on credit Cash sale C Amden made an adjusting entry to the accounts Paid wages Goods were sold to T Carlson C Amden purchased goods with a debit card Purchased goods from V Richmond Sold goods to N Ark for cash Received payment from S Agar

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Journal

CHAPTER 5

QUESTION 5.6 What is the total of entries made to each of the five journals from the following list of source documents? Source Document Tax invoice to customer Remittance received Tax invoice to customer Remittance paid Internal adjustment Tax invoice from supplier Remittance received Tax invoice to customer Remittance paid Tax invoice from supplier Remittance paid Tax invoice to customer Remittance received Tax invoice from supplier Adjust internally Sales journal batch total Purchases journal batch total Cash receipts journal batch total Cash payments journal batch total General journal

$ 297.22 258.39 256.96 143.55 34.87 68.64 165.00 394.24 86.35 73.81 53.13 498.96 244.09 75.24 29.81 $ $ $ $ $

Copyright © 2018. Cengage. All rights reserved.

QUESTION 5.7 Write the missing word(s) in the space provided, using the following words: accounts, asset, buying, cash, cash payments, credit, debit, document, expense, goods, journals, liability, owner’s equity, payable, receipts, receivable, revenue, source, tax invoice, trial balance.   1 A list of general ledger account balances is called a . . . . . . . . . . . . . . . . . . . . (2 words).   2 What the business owes to the owner is called: . . . . . . . . . . . . . . . . . . . . (2 words).   3 Funds received by another business is recorded in your . . . . . . . . . . . . . . . . . . . . journal (2 words).   4 Funds paid to your business is recorded in the cash . . . . . . . . . . journal.   5 The selling business both prepares it and sends it to the purchaser: . . . . . . . . . . . . . . . . . . . . (2 words).   6 Source documents are recorded in one of five . . . . . . . . . .   7 Every business event or transaction requires a source . . . . . . . . . .   8 A business can make a profit by buying and selling . . . . . . . . . . and services.   9 This document is used to record transactions in the business books: . . . . . . . . . . 10 A business makes a profit by . . . . . . . . . . and selling goods and services. 11 What the business owes is grouped as a . . . . . . . . . . 12 The GST . . . . . . . . . . account is a current asset. 13 When the business sells, the account is grouped as . . . . . . . . . . 14 What it cost the business is grouped as an . . . . . . . . . . 15 Using an electronic . . . . . . . . . . card replaces the need to have notes and coins. 16 Transactions recorded in the cash journals are for . . . . . . . . . . transactions. 17 What the business owns is grouped as an . . . . . . . . . . 18 General ledger page headings are called . . . . . . . . . . 19 Transactions recorded in the sales or purchases journals are made on . . . . . . . . . . terms. 20 The GST . . . . . . . . . . account is a current liability.

Preparation of specialised journals The formats of each of the specialised journals will be illustrated in this chapter. Examples are used to show how each journal is prepared and posted to the general ledger. Created from tafenswlib on 2020-05-30 00:38:54.

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The journals used by a business, and their format, should provide control and information to the owner. They can then be used to manage the business efficiently, to maximise profits and return on invested funds in the business by the owner.

Internal controls – journal preparation Chapter 2 discussed the use of control and supporting documents when checking the validity of transactions and their associated source documents prior to their entry into journals. These internal controls will be briefly reviewed as we examine each of the specialised journals. A business should also implement internal controls to prevent errors and omissions in the preparation of journals themselves. These controls are outlined below. • All journals must have accurate supporting source documents and reports that have been verified correct or working papers to justify the preparation of every journal. • A journal must be prepared by a responsible employee who has checked and used accurate data to prepare the journal for the correct accounting month or period. The journal is signed by the employee who prepares it and the data used is cross-referenced to that particular journal number. • The journal must use correct accounts and correct amounts; almost right or mostly right means that the journal is wrong! An incorrect journal can have a significant effect on the accounting reports that rely on the accuracy of the data processed into the accounts. • The signed journal and referenced data are given to a senior accounting officer, who checks and authorises the journal. The journal for the month must be prepared in time for it to be processed into the accounts to ensure the data are included in the accounting summaries and reports prepared for the owner or manager of the business. The journal and accounting reports must be on time to provide relevant information for decision making.

Sales journal: sell now, be paid later Selling what on credit?

Copyright © 2018. Cengage. All rights reserved.

The main purpose of the sales journal is for the business to record the details of the tax invoices that it prepares for customers. Most of those tax invoices will be for services provided or for the sale of inventory, stock or goods. These would be recorded as fees or sales. The sales journal also records all tax invoices and adjustment credit notes prepared by the business. These include: • inventory, stock or goods and services that are sold on credit in the normal course of the business operations • items, especially non-current assets, which have been used by the business over a number of years and which are sold on credit at the end of their useful life • the value of the GST that is being charged to the customer. Throughout this book, the amount that a business charges or adjusts is given in each business transaction; there is no need for you to decide and calculate if the transaction is taxable, GST-free or input taxed. The original of the tax invoice prepared by the supplying business is given to the customer when selling on credit. A copy of this tax invoice is retained by the supplier and used to record the sale. This was illustrated in chapter 2. Adjustment or credit notes are prepared by the business and issued to customers (whether for the return of goods or items sold or an allowance granted by the business to the customer) are also recorded in the sales journal. The adjustment credit note is recorded or written as a minus or negative figure and the amount should be either shown in parentheses ( ) or written in red. The sales journal is in multi-column format to allow for the grouping of similar account items or services sold on credit, and to record the GST payable from each tax invoice or adjustment credit note.

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CHAPTER 5

Internal controls As discussed in chapter 2, a business should have controls in place for credit sales that will ensure that the required goods or services are supplied to the right customer at the correct price, and that all information in each tax invoice is accurate. This is achieved by checking the supporting documentation such as the relevant customer purchase order, inventory price list, picking/packing slip and despatch docket. By doing these checks, the business confirms that each credit sale transaction is valid and properly authorised before it is processed in the accounting records.

Headings in sales journal The column headings in the journal are intended to indicate what should be recorded in each column. In this way, similar items can be listed together. Study the headings and explanations in the sales journal shown in figure 5.10.

ACCOUNTS RECEIVABLE OR DEBTORS In the sales journal there is a ‘Total’ account column, which shows the total amount of the customer’s tax invoices less credit notes. It is an amount that is owed (an asset) to the business by the customer when the business sold the various items on credit. In accounting, customers to whom items are sold on credit are called accounts receivable or debtors. The terms ‘accounts receivable’ and ‘debtors’ are interchangeable. Journal name

Business or owner’s name

Journal reference

SALES JOURNAL OF [INSERT THE BUSINESS NAME] Date 1

Inv Accounts Receivable and/or Ref Adj Particulars 2

4

Sales

GST Payab

5

6

7

SJ 1 General 8

8

8

2

Inv Adj Customer’s tax invoice number or adjustment credit note number is written on each line.

3 Accounts Receivable and/or Particulars The account receivable person or business to whom the tax invoice or adjustment credit note was sent and/or what the tax invoice or adjustment credit note was for.

4

Acc’nts Receiv Account column for Accounts Receivable Control; total of the customer’s tax invoice or adjustment credit note.

Sales 6 Account column for sales

GST Payab Account column for GST Payable

8 Blank account column headings allow for grouping of similar transactions that can be listed under that account heading; the actual account will depend on the particulars of the sale made.

1 Date Day month and year (dd mmm yy) is written on the first line and after that only when the date changes.

Ref Reference The account number is written in after the posting of these journal entries to the ledger and is left blank until posted. Copyright © 2018. Cengage. All rights reserved.

3

Acc’nts Receiv

7

5

9

General 9 General is used where there are not enough account columns available and the account name is shown as the ‘Particulars’ in the ‘Accounts Receivable and/or Particulars’ column. ‘General’ is NOT an account name.

Customer’s copy of tax invoice/adjustment credit note is the source document.

FIGURE 5.10  Headings and accounts in the sales journal Created from tafenswlib on 2020-05-30 00:39:02.

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RELATIONSHIP BETWEEN TAX INVOICE, ACCOUNTS RECEIVABLE CONTROL ACCOUNT COLUMN AND OTHER ACCOUNT COLUMNS These column names or headings are the general ledger accounts (or account names) referred to in earlier chapters. They play an essential role in summarising the specialised journals to the general ledger accounts. The total monetary value of the tax invoice is shown in the account column headed ‘Acc’nts Receiv’ (accounts receivable control) as this is the amount that will go through the accounting process for the customer. The other account columns in the sales journal are for the business to record the details of what is sold. These include ‘Sales’, being the value of sales, and ‘GST Payab’, being the GST payable account, which shows the amount that is owed to the Australian Taxation Office (ATO) by the business. Example 1 shows how the details on the source documentation are entered in the sales journal, posted to the general ledger and an extract trial balance.

END-OF-MONTH PROCESSING At the end of each month, the sales journal is totalled (or added). In other words, the accounts receivable control account column and other account columns are added down. This is the same for both periodic and perpetual inventory systems. The total of the accounts receivable control account column should equal the total of all the other account columns. It is the monthly totals, and not the individual entries, that are posted to the general ledger. The accounts receivable control total is posted to the debit of the accounts receivable control account. The accounts receivable control account is an asset, which has increased and is therefore a debit, as per the accounting equation from chapter 3. The other account monthly totals are credits to those individual accounts; any totals in brackets will be posted as debits. The main, but possibly not the only, account totals that are credited will be to the sales account and the GST payable account. This will be an increase in the revenue for sales and an increase in the liability for GST payable; again, this satisfies the requirements of the accounting equation (see figure 5.11). Sales Journal

SJ 1

Acc’nt Sales GST Receiv Payab

Copyright © 2018. Cengage. All rights reserved.

Dr

Accounts Receivable Control Dr

Sales

GST Payable Cr

Cr

Cr

Cr

A/c

A/c

A/c

Cr

Cr

Cr

Any A/c Cr

FIGURE 5.11  Sales journal, end-of-month totals posted to the general ledger

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Any A/c Cr

Any A/c Cr

CHAPTER 5

From the accounting equation: Assets Assets Accounts Receivable [debit]  [credit]

+

Expense

= = = =

Liabilities Liabilities GST Payable [credit]

+ Owner’s Equity + + + +

Revenue Revenue Sales [credit]

Total of: Accounts Receivable Control = Sales + GST Payable + Any other account columns

When the total of the accounts receivable control account column equals the total of the sales column plus the total of the GST payable column plus the total of the other account columns, the sales journal can be said to cross-balance. ‘Accounts Receivable Control’ is the correct, full title for the account; it is used because it is the total account that controls all the details for the accounts receivable. All the individual account receivable customer details are kept in a separate or subsidiary ledger: the accounts receivable ledger. The total of the individual accounts receivable must agree with the control account in the general ledger. This account, which controls the total in the general ledger, is the accounts receivable control account. Subsidiary ledgers are covered in chapter 6.

Inventory system used by the business Where the periodic inventory system is used by a business, information about the cost of the item is not normally available at the time of sale; hence, no cost of sales account exists and no additional account entry is made to record the reduction in inventory and expense. If an example or question provides no cost details when a sale (either credit or cash) is made, then the periodic inventory system is being used. Where the perpetual inventory system is used by a business, the cost information will be given to you, in an example or question, when a sale (either credit or cash) is made. Therefore, not only are the sale price details allocated to the accounts but the cost details also need to be included in the sales journal. The account allocations for a credit sale transaction using a perpetual inventory system was covered in chapter 4. It remains the same when entered in the sales journal: Cost of Sales Inventory

xx xx

Cost of credit sale

Copyright © 2018. Cengage. All rights reserved.

Example 1: Source documents, sales journal, extract general ledger and trial balance with periodic inventory From the tax invoices and adjustment credit note prepared by G Wilson (see figure 5.12), prepare the sales journal for June 2022. Total and cross-balance the journal at the end of the month (see figure 5.13), post to the general ledger using the T account format and prepare a trial balance (see figure 5.14). Unless specifically GST-free, all sales will attract the 10% GST and the amount of the sale and the GST payable will be given for each transaction. Sales of items on credit, other than goods purchased for resale, are not very frequent but do occur; their sale on credit should be processed through the sales

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

journal, as the customer will need to be invoiced. For example, machinery that is no longer economically useful can be sold – refer to invoice 851 on 11 June. G WILSON Sold to M Balgo Trading goods GST @ 10% Total Tax Invoice

Tax invoice 848 3 June 2022 41.00   4.10 $45.10

G WILSON Sold to A Deen Trading goods GST @ 10% Total Tax Invoice

G WILSON Sold to C South Machinery GST @ 10% Total Tax Invoice

Tax Invoice 851 11 June 2022 785.00  78.50 $863.50

Returned goods GST @ 10% Total Credit Note

Credit Note 117 19 June 2022 163.00 16.30 $179.30

Sold to P Brown Trading goods GST @ 10% Total Tax Invoice

G WILSON Sold to P Brown Trading goods GST @ 10% Total Tax Invoice

G WILSON Adjustment to A Deen

G WILSON

Tax Invoice 849 5 June 2022 763.00 76.30 $839.30

G WILSON

Tax Invoice 852 13 June 2022 601.00  60.10 $661.10

Sold to Y Cart Trading goods GST @ 10% Total Tax Invoice

G WILSON Sold to M Balgo Trading goods GST @ 10% Total Tax Invoice

Tax Invoice 850 9 June 2022 187.00  18.70 $205.70

Tax Invoice 853 17 June 2022 418.00   41.80 $459.80

G WILSON

Tax Invoice 854 21 June 2022 136.00  13.60 $149.60

Sold to W Grove Trading goods GST @ 10% Total Tax Invoice

Tax Invoice 855 25 June 2022 283.00 28.30 $311.30

FIGURE 5.12  Customer’s source documents for G Wilson – periodic inventory

Sales Journal of G Wilson

Copyright © 2018. Cengage. All rights reserved.

Date 3 Jun 22 5 Jun 22 9 Jun 22 11 Jun 22 13 Jun 22 17 Jun 22 19 Jun 22 21 Jun 22 25 Jun 22

Inv Adj 848 849 850 851 852 853 117 854 855

Accounts Receivable and/or Ref Acc’nts Particulars Receiv M Balgo – Sales 45.10 A Deen – Sales 839.30 P Brown – Sales 205.70 C South – Machinery 863.50 P Brown – Sales 661.10 Y Cart – Sales 459.80 A Deen – Sales Return (179.30) M Balgo – Sales 149.60 W Grove – Sales 311.30 3 356.10 100 [dr]

Sales 41.00 763.00 187.00 601.00 418.00 (163.00) 136.00 283.00 2 266.00 400 [cr]

FIGURE 5.13  Sales journal for G Wilson with periodic inventory

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SJ 1 GST Machinery Payab 4.10 76.30 18.70 78.50 785.00 60.10 41.80 (16.30) 13.60 28.30 305.10 200 [cr]

785.00 150 [cr]

CHAPTER 5

Extract General Ledger of G Wilson

Accounts Receivable Control 30 Jun 22 Sales

SJ1

100

3 356.10

Machinery

150

30 Jun 22 Accounts Receivable Control SJ1 * 785.00 * Machinery, a non-current asset, normally has a debit balance

GST Payable

200

30 Jun 22 Accounts Receivable Control

Sales

SJ1

305.10

400

30 Jun 22 Accounts Receivable Control

SJ1

2 266.00

Trial Balance of G Wilson as at 30 June 2022 Accounts Receivable Control 100 Machinery 150 GST Payable 200 Sales 400

3 356.10 785.00 305.10 2 266.00 3 356.10 3 356.10

FIGURE 5.14  Extract general ledger and trial balance for G Wilson with periodic inventory

QUESTION 5.8 Using the source documents of B Cooper (see figure 5.15), prepare the sales journal (or general journal), post to the general ledger and prepare a trial balance as at 31 August 2022. B COOPER Sold to D Duric

Tax Invoice 647 1 August 2022 Trading goods 640.00 64.00 GST @ 10% Total Tax Invoice $704.00

B COOPER Sold to D Sam

Tax Invoice 648 4 August 2022 Trading goods 188.00 GST @ 10% 18.80 Total Tax Invoice $206.80

B COOPER Tax Invoice 650 11 August 2022 Office equipment 450.00 45.00 GST @ 10% Total Tax Invoice $495.00 Copyright © 2018. Cengage. All rights reserved.

Sold to A Brady

B COOPER Sold to H Wendy & Co

Tax Invoice 651 12 August 2022 Trading goods 655.00 GST @ 10% 65.50 Total Tax Invoice $720.50

B COOPER Adjustment to D Sam

Credit Note 213 20 August 2022 Returned goods 47.00  4.70 GST @ 10% Total Credit Note $51.70

B COOPER Sold to D Duric

Tax Invoice 653 22 August 2022 Trading goods 739.00 GST @ 10% 73.90 Total Tax Invoice $812.90

B COOPER Sold to J Beery

Tax Invoice 649 10 August 2022 Trading goods 162.00 GST @ 10%  16.20 Total Tax Invoice $178.20

B COOPER Sold to Suzanne & Co

Tax Invoice 652 15 August 2022 Trading goods 396.00 GST @ 10%  39.60 Total Tax Invoice $435.60

B COOPER Sold to H Wendy & Co

Tax Invoice 654 26 August 2022 Trading goods 543.00 GST @ 10% 54.30 Total Tax Invoice $597.30

FIGURE 5.15  Source documents of B Cooper

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SALES JOURNAL ACCOUNT COLUMNS WITH PERPETUAL INVENTORY In the sales journal of a business that uses perpetual inventory, there needs to be a column headed ‘Cost of Sales’, which is a debit, and an account column headed ‘Inventory’, which is a credit. When the perpetual inventory system is used, the format of the sales journal needs to allow separately for the cost entries (shown in figure 5.16 on the far right-hand side of the journal). The totals of the cost of sales and inventory do not form part of the accounts receivable control balancing of the sales journal at the end of the month, as shown in figure 5.17. Sales Journal Acc’nt Sales Receiv Dr

Accounts Receivable Control Dr

Sales

Cr

SJ 1

GST Payab

CoS Inventory Dr

Cr

GST Payable Cr

Cr

Cost of Sales

Inventory

Dr

Cr

Cr

FIGURE 5.16  Sales journal, end-of-month totals with perpetual inventory cost accounts

Example 2: Source documents, sales journal, extract general ledger and trial balance with perpetual inventory Use the tax invoices and adjustment credit note prepared by G Wilson that are shown in figure 5.12. Assume G Wilson uses the perpetual inventory system and the cost of the inventory sold is a constant 40% of the sales value, not the tax invoice value. The sales journal is shown in figure 5.17, and the general ledger and trial balance in figure 5.18. Sales Journal of G Wilson

Copyright © 2018. Cengage. All rights reserved.

Date 3 Jun 22 5 Jun 22 9 Jun 22 11 Jun 22 13 Jun 22 17 Jun 22 19 Jun 22 21 Jun 22 25 Jun 22

Inv Adj 848 849 850 851 852 853 117 854 855

Accounts Receivable and/or Ref Acc’nts Receiv Particulars M Balgo – Sales 45.10 A Deen – Sales 839.30 P Brown – Sales 205.70 C South – Machinery 863.50 P Brown – Sales 661.10 Y Cart – Sales 459.80 A Deen – Sales Return (179.30) M Balgo – Sales 149.60 W Grove – Sales 311.30 3 356.10 100 [dr]

Sales 41.00 763.00 187.00 601.00 418.00 (163.00) 136.00 283.00 2 266.00 400 [cr]

SJ 1 GST Payab 4.10 76.30 18.70 78.50 60.10 41.80 (16.30) 13.60 28.30 305.10 200 [cr]

FIGURE 5.17  Sales for G Wilson with perpetual inventory cost accounts

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Machi­ nery

CoS

Inventory

16.40 305.20

16.40 305.20

74.80

74.80

240.40 167.20 (65.20) 54.40 113.20

240.40 167.20 (65.20) 54.40 113.20

906.40

906.40

500 [dr]

101 [cr]

785.00

785.00 150 [cr]

CHAPTER 5

Extract General Ledger of G Wilson

Accounts Receivable Control 30 Jun 22 Sales

SJ1

100

3 356.10

Inventory [usually has a debit balance]

101

30 Jun 22 Cost of Sales

SJ1

Machinery [usually has a debit balance]

30 Jun 22 Account Receivable Control SJ1

GST Payable Sales

305.10

400

30 Jun 22 Account Receivable Control SJ1

Cost of Sales SJ1

785.00

200

30 Jun 22 Account Receivable Control SJ1

30 Jun 22 Inventory

906.40

150

2 266.00

500

906.40

Trial Balance of G Wilson as at 30 June 2022 Accounts Receivable Control 100 Inventory 101 Machinery 150 GST Payable 200 Sales 400 Cost of Sales 500

3 356.10 906.40 785.00 305.10 2 266.00 906.40 4 262.50 4 262.50

FIGURE 5.18  Extract general ledger and trial balance for G Wilson with perpetual inventory

QUESTION 5.9 Using the source documents of H Alwart in figure 5.19, prepare the sales journal (or general journal), post to the general ledger and at the end of the month prepare a trial balance. Use the perpetual inventory method, assuming that cost of sales is 60% of the selling price (excl GST). H ALWART Tax Invoice 714 3 September 2022 Trading goods 234.00 23.40 GST @ 10% Total Tax Invoice $257.40

Copyright © 2018. Cengage. All rights reserved.

Sold to B Bryant

H ALWART Sold to S Watts

Tax Invoice 715 5 September 2022 Trading goods 793.00 GST @ 10%   79.30 Total Tax Invoice $872.30

H ALWART

H ALWART

Tax Invoice 717 10 September 2022 Trading goods 601.00 60.10 GST @ 10% Total Tax Invoice $661.10

Adjustment to Credit Note B Bryant 325 11 September 2022 35.00 Return inv 714 3/9 GST @ 10% 3.50 Total Credit Note $38.50

Sold to S Watts

H ALWART Adjustment to Credit Note C Azita 326 18 September 2022 Adj inv 718 14/9 63.00 6.30 GST @ 10% Total Credit Note $69.30

 

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H ALWART Sold to K Moore

Tax Invoice 716 6 September 2022 Trading goods 33.00 GST @ 10% 3.30 Total Tax Invoice $36.30

H ALWART Sold to C Azita

Tax Invoice 718 14 September 2022 Trading goods 746.00 GST @ 10%   74.60 Total Tax Invoice $820.60

H ALWART Sold to S Alicia

Tax Invoice 719 20 September 2022 Motor vehicle 2 100.00 GST @ 10% 210.00 Total Tax Invoice $2 310.00

H ALWART Sold to A Segee

Tax Invoice 720 28 September 2022 Trading goods 911.00 GST @ 10%  91.10 Total Tax Invoice $1 002.10 129

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

QUESTION 5.10 From the following transactions of Bouasing Trading Co for November 2022, prepare the sales journal (or general journal), post to the general ledger and prepare a trial balance. Assume your own source document numbers.   3 Sold goods on credit to Thuy Le $473 ($430 + $43 GST) at a cost of $190.   3 Credit sales to Cuom Si Lay $770 ($700 + $70 GST), cost $315.   7 Sold goods for $759 ($690 + $69 GST) to V Vo, which cost $300. 10 Thuy Le was invoiced $209 ($190 + $19 GST) for inventory costing $85. 10 Sent tax invoice to Li Hung Tia $704 ($640 + $64 GST), inventory cost $280. 15 Adjustment credit note to Thuy Le for goods returned $44 ($40 + $4 GST) at a cost of $20. 16 V Vo was sold goods on credit $638 ($580 + $58 GST), which cost $260. 21 Mailed adjustment credit note to Cuom Si Lay for overcharge $33 ($30 + $3 GST). 27 Invoiced Li Hung Tia $462 ($420 + $42 GST) for inventory costing $180.

Purchases journal: buy now, pay later Purchasing what on credit? It is important to understand that a business purchases many items on credit. The purchases journal records any item or service that is provided on credit to the business; a tax invoice is received from the supplier charging the business. All entries in the purchases journal are from tax invoices and adjustment credit notes from suppliers. They include: • inventory, stock or goods purchased to then be sold in the normal course of the business operations • expense items for use and consumption in the business, such as electricity, insurance, rates and stationery • non-current assets for use in the business over a number of years, such as motor vehicles, computers, machinery and office equipment

Copyright © 2018. Cengage. All rights reserved.

• the value of GST that is being charged by the supplier. The amount that a supplier charges or adjusts is given in each business transaction; there is no need to decide and calculate if the transaction is taxable, GST-free or input taxed. When the business purchases on credit, the original copy of the supplier’s tax invoice is given to the buyer and used as the source document to record details of the purchase in the purchases journal. This was illustrated in chapter 2. Adjustment credit notes from suppliers, whether for the return of goods or an allowance granted by the supplier, are also the source document for recording adjustments in the purchases journal. An adjustment credit note is the opposite of a tax invoice, as it has the effect of reducing the amount that is owed. It is recorded as a minus or negative figure and the amount should be either shown in parentheses ( ) or written in red. The purchases journal is in multi-column format to allow for the grouping of similar account items, such as goods purchased for resale, expenses or non-current assets, and to record the GST receivable from each supplier’s tax invoice or adjustment credit note.

Internal controls As discussed in chapter 2, a business should have controls in place for credit purchases to ensure that items listed on each purchase invoice have been ordered and received, that the goods were received on time and in a saleable or useable condition, and that the price and other details on the invoice are correct.

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CHAPTER 5

This is achieved by checking supporting documentation such as the relevant purchase request, purchase order, delivery docket and receiving report. Checking will confirm that each credit purchase transaction is valid and properly authorised before it is processed in the accounting records.

Headings in the purchases journal The column headings in the journal are intended to give guidance and direction for what is shown in each column so that similar items can be listed together. Study the headings and explanations in the purchases journal shown in figure 5.20.

ACCOUNTS PAYABLE, OR CREDITORS The ‘Total’ account column in the purchases journal is the total amount of the suppliers’ tax invoices less adjustment credit notes. It is an amount that the business owes (a liability) to the suppliers, following the purchase of various items on credit. In accounting terms, when the business owes (or has a liability) for items purchased on credit, its suppliers are called ‘accounts payable’ or ‘creditors’. These terms are interchangeable, as they mean the same. Journal name

Journal reference

Business or owner’s name

PURCHASES JOURNAL OF [INSERT THE BUSINESS NAME] Date

Inv Adj

1

2

Accounts Payable and/or Particulars

Date 1 Day month and year (dd mmm yy) is written on the first line and after that only when the date changes.

Ref 4 Reference The account number is written in after the posting of these journal entries to the ledger and is left blank until posted.

Copyright © 2018. Cengage. All rights reserved.

8

3

Ref

Acc’nts Payab

4

5

Inv Adj Supplier’s tax invoice number or adjustment credit note number is written on each line. 2

3

Acc’nts Payab Account column for Accounts Payable Control; total of the supplier’s tax invoice or adjustment credit note. 5

Blank account column headings allow for grouping of similar transactions that can be listed under that account heading; the actual account will depend on the particulars of the purchase made.

Purchases

GST Rec

6

7

PJ 1 General 8

8

8

9

Accounts Payable and/or Particulars The account payable person or business from whom the tax invoice or adjustment credit note was sent and/or what the tax invoice or adjustment credit note was for.

Purchases 6 Account column for purchase of periodic inventory.

GST Rec Account column for GST Receivable. 7

General 9 General is used where there are not enough account columns available and the account name is shown as the ‘Particulars’ in the ‘Account Payable and/or Particulars’ column. ‘General’ is NOT an account name.

Supplier’s tax invoice/adjustment credit note is the source document.

FIGURE 5.20  Headings and accounts in the purchases journal

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RELATIONSHIP BETWEEN SUPPLIER’S INVOICE, ACCOUNTS PAYABLE CONTROL ACCOUNT COLUMN AND OTHER ACCOUNT COLUMNS These column names or headings are the general ledger account names (or accounts) referred to in earlier chapters; they will play an essential role in summarising the specialised journals to the general ledger accounts. The value of the invoice is shown in the account column headed ‘Acc’nts Payab’ (accounts payable control) as this is the amount that will go through the accounting process. The other account columns in the purchases journal are used to record the details of what the business has purchased as well as the 10% GST that is owed by the ATO to the business; this is shown in the ‘GST Rec’ or GST receivable account. Example 3 demonstrates the process: source documentation is entered in the purchases journal, then posted to an extract of the general ledger and an extract trial balance.

END-OF-MONTH PROCESSING At the end of each month, the purchases journal is totalled; that is, the accounts payable control account column and other account columns are added down. The total of the accounts payable control account column should equal the total of all the other account columns. It is the monthly totals and not the individual entries that are posted to the general ledger. The accounts payable control total is posted to the credit of the accounts payable control account. The accounts payable control account is a liability, which has increased and is therefore a credit, as per the accounting equation from chapter 3. The other account monthly totals are debits to those individual accounts; any totals in brackets will be posted as credits. The three main – but not the only – account totals that are debited will be to purchases and other expense accounts, and GST receivable, a current asset account. This will be an increase in the expense and assets and again satisfies the requirements of the accounting equation (see figure 5.21). Purchases Journal Acc’nt Purch- GST Payab ases Rec Cr

Accounts Payable Control

Copyright © 2018. Cengage. All rights reserved.

Cr

Purchases

GST Receivable

Dr

Dr

Dr

Dr

PJ 1 A/c

A/c

A/c

Dr

Dr

Dr

Any A/c Dr

Any A/c

Any A/c

Dr

Dr

FIGURE 5.21  Purchases journal, end-of-month totals posted to the general ledger

From the accounting equation: Assets Assets GST Receivable [debit]

+ + + +

Expense Expense Purchases [debit]

= = = =

Liabilities + Liabilities Accounts Payable [credit]

Owner’s Equity

+

Revenue

Total of: Accounts Payable Control  =  Purchases  +  GST Receivable  +  Any other account columns

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CHAPTER 5

When the total of the accounts payable control account column equals the total of the purchases, GST receivable and any other account columns, the purchases journal can be said to cross-balance. ‘Accounts Payable Control’ is the correct, full title for the account; it is used because it is the total account that controls all the details for the accounts payable. All the individual account payable customer details are kept in a separate or subsidiary ledger: the accounts payable ledger. The total of the individual accounts payable must agree with the control account in the general ledger. This account, which controls the total in the general ledger, is the account payable control account. Subsidiary ledgers are covered in chapter 6.

Inventory system used by the business When the periodic inventory system is used by a business, the buying, acquisition or purchase of inventory on credit (or cash) is allocated to the debit of the purchases as well as the GST receivable account. You will remember that the general journal format was: Purchases

xx

GST Receivable

x

Accounts Payable Control

xx

Purchase of inventory on credit [periodic]

When the perpetual inventory system is used by a business, the same information for both inventory systems is obtained from the supplier’s tax invoice. However, the account allocation is: Inventory GST Receivable Accounts Payable Control

xx x xx

Copyright © 2018. Cengage. All rights reserved.

Purchase of inventory on credit [perpetual]

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Example 3: Source documents, purchases journal, extract general ledger and trial balance with periodic inventory From the tax invoices and adjustment credit note received by I Jager (see figure 5.22), prepare the purchases journal for September 2022. Total and cross-balance the journal at the end of the month (see figure 5.23), post to the general ledger and prepare a trial balance (see figure 5.24). Purchases include ‘purchase of inventory’, ‘purchase of stock for resale’ and ‘purchase of goods obtained on credit’ (buy now, pay later). The account column headed ‘Purchases’ can be read as ‘the account for inventory, stock for resale or purchase of goods’. Refer to suppliers’ tax invoices on 2, 4, 10, 12 and 20 September. Purchases of items, which are not for resale, are shown under what they are called or named in the nominal account column headings, which relate to what they are. For example, on 16 September the invoice from Adriano Autos is for service to a business vehicle and is shown under the nominal (name) account heading of ‘Vehicle Expenses’. A LINET Sold to I Jager Trading goods GST @ 10%

2 September 2022 Tax Invoice 374 40.00    4.00 $44.00

M WALK Sold to I Jager Inventory GST @ 10%

B LEWIS Sold to I Jager Trading stock GST @ 10%

10 September 2022 Tax Invoice 683 160.00 16.00 $176.00

A LINET Sold to 12 September 2022 I Jager Tax Invoice 421 Purchase of goods 500.00 GST @ 10%   50.00 $550.00

A LINET Adjustment Credit Note 137 I Jager 18 September 2022 Purchase returns 80.00 8.00 GST @ 10% $88.00

4 September 2022 Tax Invoice 233 110.00    11.00 $121.00

M WALK Sold to I Jager Stocks for trading GST @ 10%

20 September 2022 Tax Invoice 361 60.00 6.00 $66.00

DE SILVA INSURANCE Sold to I Jager Insurance general GST @ 10%

8 September 2022 Tax Invoice 756 370.00    37.00 $407.00

ADRIANO AUTOS Sold to I Jager Service on van GST @ 10%

16 September 2022 Tax Invoice 529 650.00 65.00 $715.00

MORELLI STATIONERY LTD Sold to I Jager Stationery GST @ 10%

24 September 2022 Tax Invoice 249 70.00 7.00 $77.00

FIGURE 5.22  Suppliers’ source documents for I Jager

Copyright © 2018. Cengage. All rights reserved.

Purchases Journal of I Jager Date 2 Sep 22 4 Sep 22 8 Sep 22 10 Sep 22 12 Sep 22 16 Sep 22 18 Sep 22 20 Sep 22 24 Sep 22

Inv Adj 374 233 756 683 421 529 137 361 249

Accounts Payable and/or Ref Particulars A Linet – Purchases M Walk – Purchases De Silva Insurance – Insure B Lewis – Purchases A Linet – Purchases Adriano Autos – Vehicle Exp A Linet – Purchases Return M Walk – Purchases Morelli Ltd – Stationery

Acc’nts Purchases GST Insurance Vehicle Stationery Payab Receiv Exp 44 40 4 121 110 11 407 37 370 176 160 16 550 500 50 715 65 650 (88) (80) (8) 66 60 6 77 7 70 2 068 790 188 370 650 70 500 [dr] 100 [dr] 540 [dr] 541 [dr] 542 [dr] 200 [cr]

FIGURE 5.23  Purchases journal for I Jager with periodic inventory 134tafenswlib on 2020-05-30 00:39:09. Created from

PJ 1

CHAPTER 5

Extract General Ledger of I Jager

GST Receivable 30 Sep 22 Accounts Payable Control

PJ1

100

188

Accounts Payable Control

200

30 Sep 22 Purchases

PJ1

Purchases 30 Sep 22 Accounts Payable Control

PJ1

790

Insurance 30 Sep 22 Accounts Payable Control

PJ1

540

370

Vehicle Expense 30 Sep 22 Accounts Payable Control

PJ1

541

650

Stationery 30 Sep 22 Accounts Payable Control

2 068

500

PJ1

542

70

Trial Balance of I Jager as at 30 September 2022 GST Receivable 100 Accounts Payable Control 200 Purchases 500 Insurance 540 Vehicle Expense 541 Stationery 542

188 2 068 790 370 650 70 2 068

2 068

FIGURE 5.24  Extract general ledger and trial balance for I Jager with periodic inventory

QUESTION 5.11 Using the source documents of D Keogh (see figure 5.25), prepare the purchases journal (or general journal), post to the general ledger and prepare a trial balance where periodic inventory applies. E JOSEPH Sold to D Keogh Trading stock GST @ 10%

4 July 2022 Tax Invoice 169 190.00   19.00 $209.00

S DI MARTINO Sold to 5 July 2022 D Keogh Tax Invoice 863 Goods for trading 40.00 GST @ 10% 4.00 $44.00

Copyright © 2018. Cengage. All rights reserved.

D PALMINO Sold to D Keogh Goods for trading GST @ 10%

8 July 2022 Tax Invoice 759 380.00  38.00 $418.00

BATHURST PRESS Sold to 20 July 2022 D Keogh Tax Invoice 428 Advertising for June 350.00   35.00 GST @ 10% $385.00

S DI MARTINO Sold to D Keogh Stock for trading GST @ 10%

11 July 2022 Tax Invoice 918 120.00  12.00 $132.00

PARKES STATIONERY Sold to D Keogh Stationery GST @ 10%

23 July 2022 Tax Invoice 161 60.00 6.00 $66.00

GRENFELL TYRE CO Sold to D Keogh Tyres for car GST @ 10%

7 July 2022 Tax Invoice 356 250.00 25.00 $275.00

D PALMINO Adjustment D Keogh Inventory returned GST @ 10%

Credit Note 192 11 July 2022 100.00 10.00 $110.00

D PALMINO Sold to D Keogh Trading goods GST @ 10%

25 July 2022 Tax Invoice 418 570.00 57.00 $627.00

FIGURE 5.25  Source documents of D Keogh

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135

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

PURCHASES JOURNAL ACCOUNT COLUMNS WITH PERPETUAL INVENTORY When the perpetual inventory system applies and there is a credit purchase, the change in the purchases journal is simply a matter of heading the account column ‘Inventory’ (see figure 5.26). Purchases Journal

PJ 1

Acc’nt Inven- GST Payab tory Receiv Cr

Accounts Payable Control

Inventory

Cr

Dr

GST Receivable Dr

Dr

Dr

A/c

A/c

A/c

Dr

Dr

Dr

Any A/c

Any A/c

Dr

Any A/c

Dr

Dr

FIGURE 5.26  Purchases journal, end-of-month totals with perpetual inventory

Example 4: Source documents, purchases journal where perpetual inventory applies, extract general ledger and trial balance Use the supplier tax invoices and adjustment credit note received by I Jager that are shown in figure 5.22. Assume I Jager now uses the perpetual inventory system. The purchases journal is shown in figure 5.27, and the general ledger and trial balance in figure 5.28. Purchases Journal of I Jager Date   2 Sep 22   4 Sep 22   8 Sep 22 10 Sep 22 12 Sep 22 16 Sep 22 18 Sep 22 20 Sep 22 24 Sep 22

Inv Adj 374 233 756 683 421 529 137 361 249

Accounts Payable and/or Ref Acc’nts Inventory Particulars Payab A Linet – Inventory 44 40 M Walk – Inventory 121 110 De Silva Insurance – Insurance 407 B Lewis – Inventory 176 160 A Linet – Inventory 550 500 Adriano Autos – Vehicle Exp 715 A Linet – Inventory Return (88) (80) M Walk – Inventory 66 60 Morelli Stationery – Stationery 77 2 068 790 200 [cr] 100 [dr]

GST Receiv 4 11 37 16 50 65 (8) 6 7 188 101 [dr]

Copyright © 2018. Cengage. All rights reserved.

FIGURE 5.27  Purchases journal for I Jager with perpetual inventory

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PJ 1 Insur­ance

Vehicle Exp

Stationery

370

650

370 540 [dr]

650 541 [dr]

70 70 542 [dr]

CHAPTER 5

Extract General Ledger of I Jager

Inventory 30 Sep 22 Accounts Payable Control

PJ1

100

790

GST Receivable 30 Sep 22 Accounts Payable Control

PJ1

101

188

Accounts Payable Control

200

30 Sep 22 Purchase

PJ1

Insurance 30 Sep 22 Accounts Payable Control

PJ1

30 Sep 22 Accounts Payable Control

PJ1

540

370

Vehicle Expense

541

650

Stationery 30 Sep 22 Accounts Payable Control

2 068

PJ1

542

70

Trial Balance of I Jager as at 30 September 2022 Inventory

100

790

GST Receivable

101

188

Accounts Payable Control

200

Insurance

540

370

Vehicle Expense

541

650

Stationery

542

70 2 068

2 068

2 068

FIGURE 5.28  Extract general ledger and trial balance for I Jager with perpetual inventory

QUESTION 5.12 Using the source documents of L Andrews (see figure 5.29), prepare the purchases journal (or general journal), post to the general ledger and prepare a trial balance where perpetual inventory is used. G MENDOSA Sold to L Andrews

LEETON STATIONERS

1 August 2022 Tax Invoice 247

Goods for trading GST @ 10%

3 August 2022 Tax Invoice 307

220.00

Stationery

120.00

22.00

GST @ 10%

  12.00

$242.00

Copyright © 2018. Cengage. All rights reserved.

L Andrews

Trading stock

250.00

GST @ 10%

25.00 $275.00

G MENDOSA

K PACA

Adjustment

Credit Note 161

Sold to

15 August 2022

Tax Invoice 213

L Andrews

12 August 2022

L Andrews

Tax Invoice 356

710.00

GST @ 10%

 71.00

Inventory return

50.00

GST @ 10%

 5.00

$781.00

Goods for trading

L Andrews

Tax Invoice 248 450.00 45.00

 88.00 $968.00

K PACA

24 August 2022

880.00

GST @ 10%

$55.00

OFFICE SUPPLY CO Sold to

GST @ 10%

7 August 2022 Tax Invoice 376

9 August 2022

Trading goods

Office desk and chair

Sold to L Andrews

$132.00

K PACA Sold to

C TRIPODI

Sold to L Andrews

HIGHWAY PETROL

Adjustment

Credit Note 185

Sold to

25 August 2022

L Andrews

24 August 2022

L Andrews

Tax Invoice 763

Overcharge inv 213 GST @ 10%

$495.00

110.00  11.00 $121.00

Petrol for July GST @ 10%

420.00  42.00 $462.00

FIGURE 5.29  Source documents of L Andrews Created from tafenswlib on 2020-05-30 00:39:09.

137

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

QUESTION 5.13 From the following transactions for September 2022 of S Nada, who uses the perpetual inventory system, prepare the purchases journal (or general journal), post to the general ledger and prepare a trial balance. Assume your own source document numbers.   3 Purchased goods from M Karen on credit $968 ($880 + $88 GST).   3 Purchased goods on credit from P Carina $275 ($250 + $25 GST). 10 Purchased office equipment on credit from S Khamsy $726 ($660 + $66 GST). 15 Received tax invoice from Wagga Petrol Co for petrol and oil used by motor vehicles $440 ($400+ $40 GST). 18 Received tax invoice for $1045 ($950 + $95 GST) from M Karen for purchase of stocks. 19 Bought trade goods for $374 ($340 + $34 GST) from S Khamsy. 19 Bought stock on credit from Y Lana $649 ($590 + $59 GST). 21 Received a credit note for $253 ($230 + $23 GST) from M Karen for overcharge on tax invoice dated 18 September. 27 Received $1375 ($1250 + $125 GST) tax invoice from T Claudia & Co, insurance brokers.

Cash receipts journal The cash receipts journal is the summary book used to record all duplicate copies of receipts. If funds are received by the business, for whatever reason, then they are recorded in the cash receipts journal.

Internal controls The internal control procedures relating to the bank deposit process and batching of receipts were discussed and illustrated in chapter 2. Other controls over receipt of notes and coins will be discussed in chapter 8 ‘Management controls over cash’.

Headings in cash receipts journal

Copyright © 2018. Cengage. All rights reserved.

The column headings in the journal are intended to give guidance and direction as to what is to be shown in each column, so that similar items can be listed together. Study the headings and explanations in the cash receipts journal in figure 5.30.

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CHAPTER 5

Journal name

Business or owner’s name

Journal reference

CASH RECEIPTS JOURNAL OF [INSERT THE BUSINESS NAME] Date

Rmt Drawer and/or Particulars Rec

1

2

3

Ref

Bank

Sales

GST Payab

Acc’nt Receiv

4

5

6

7

8

1 Date Day month and year (dd mmm yy) is written on the first line and after that only when the date changes.

2 Rmt Rec Remittance Received Reference number for electronic or manual remittance received into Bank account.

3

Ref Reference The account number is written in after the posting of these journal entries to the ledger and is left blank until posted.

Bank Account column for funds received into Bank account either manually or remitted electronically direct into Bank account.

Sales 6 Account column for sales

4

5

10 Blank account column headings allow for grouping of similar transactions that can be listed under that account heading; the actual account will depend on the particulars of the funds remitted as a receipt of funds.

CR 1 General 10

10

9

Drawer and/or Particulars The person or business from whom the monetary funds were received and/or what the receipt of funds were for.

7 GST Payab Account column for GST Payable

General General is used where there are not enough account columns available and the account name is shown as the ‘Particulars’ in the ‘Drawer and/or Particulars’ column. ‘General’ is NOT an account name.

9

8 Acc’nt Receiv Account column for funds received from Accounts Receivable.

Remittance advice receipt is the source document which needs to be related to other business source documents.

FIGURE 5.30  Headings and accounts in the cash receipts journal

Copyright © 2018. Cengage. All rights reserved.

RELATIONSHIP BETWEEN BANK DEPOSIT, BANK ACCOUNT TOTAL COLUMN, DUPLICATE RECEIPT AND OTHER ACCOUNT COLUMNS The account column headings are the general ledger account names (or accounts). They play an essential role in summarising the journals to the general ledger accounts. The other account columns in the cash receipts journal are for the business to record the details of what is sold and received. These include the ‘Sales’ column, being the value of the cash sales, and ‘GST Payab’, being the GST payable account, which shows the amount that is owed to the ATO by the business. The bank account column is the amount of the bank deposit for that day. The other account details come from the duplicate receipts. If the bank deposit refers to only one duplicate receipt then the bank account total column and the other account details will be the same amounts (see figure 5.31). Funds that the business receives electronically need to be entered in the cash receipts journal so that general ledger accounts can be allocated to offset the debit entry in the bank account.

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139

CHAPTER 5

It is the monthly totals, and not the individual entries, which are posted to the general ledger. The bank total is posted to the debit of the bank account. The bank account, which is an asset, has increased and is therefore a debit, as per the accounting equation from chapter 3. The other account totals are credits to those individual accounts; any totals in brackets will be posted as debits. The main, but not the only, account totals that are credited will be to the sales account, the GST payable account and the accounts receivable control account. This will be an increase in the revenue from cash sales (not credit sales) and an increase in the liability for GST payable, and asset decreases from funds received from accounts receivable; both areas satisfy the accounting equation (see figure 5.33). Cash Receipts Journal Bank Sales

Dr

Bank

Sales

Dr

GST Payable Cr

Cr

CR 1 GST Acc’nt Payab Receiv Cr

Cr

Accounts Receivable Control

Cr

A/c

A/c

Cr

Cr

Any A/c

Cr

Any A/c

Cr

Cr

FIGURE 5.33  Cash receipts journal, end-of-month totals posted to the general ledger

From the accounting equation: Assets + Expense = Liabilities Assets = Liabilities Bank – Accounts Receivable = GST Payable [credit] = [credit] [debit]

+ + + +

Owner’s Equity

+ +

Revenue Revenue Sales [credit]

Total of: Bank = Sales + GST Payable + Accounts Receivable Control + Any other accounts

When the total of the bank account column equals the total of the other account columns, we can say that the cash receipts journal cross-balances.

Copyright © 2018. Cengage. All rights reserved.

Inventory system used by the business When the periodic inventory system operates in a business, no inventory cost information is available at the time a cash sale is made. Hence, no cost of sales account exists and therefore no cost accounts are used on a cash sale. When you encounter an example or question in this book in which a cash sale occurs in a business that operates a perpetual inventory system, the cost information is provided. Therefore, as well as allocating the cash sale price details to the accounts, you will also need to include the cost details in the account allocations in the cash receipts journal. The account allocations of the cost details for a cash sale, as covered in chapter 4, remain the same when entered in the cash receipts journal. Cost of Sales Inventory

xx xx

Cost of cash sale

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141

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Example 5: Source documents, cash receipts journal where periodic inventory applies, extract general ledger and trial balance From the following receipt duplicates of L Portland (figure 5.34), prepare the cash receipts journal for September 2022, total and cross-balance at the end of the month, post to the extract general ledger and prepare a trial balance (see figures 5.35 and 5.36). Sales includes remittances from ‘cash sales’ where the payee’s name is not known and ‘cash’ is shown on the remittance, or the payee’s name is known and is shown on the receipt. When a sale is for cash, the business is not concerned who buys the goods. The business transaction has been completed as it has sold goods and received funds for the sale. How often have you been required to give your name and address when you bought goods for cash? Even when the name is shown, it is not recorded in the books of the business. Look at remittances 712, 192, 521 and 424 in figure 5.34: they are all cash sales. Receipts of funds that are not from cash sales are given column headings that describe the activity to which they are related. For example, the receipt of funds from rent is assumed to be revenue for the business and therefore it is shown under the nominal (or name) account column heading of ‘Rent Received’; look at remittances 128 and 623 in figure 5.34. Remittance Received 712

Remittance Received 128

Remittance Received 192

13 September 2022 Cash Cash sale

15 September 2022 Rain & Hawn Rent received

15 September 2022 J Welldon Cash sale

50.00   5.00 $55.00

GST @ 10%

660.00   66.00 $726.00

GST @ 10%

200.00   20.00 $220.00

Remittance Received 222

Remittance Received 521

Remittance Received 337

18 September 2022 London Credit Ltd Interest received

18 September 2022 Cash Sale of stock

18 September 2022 A Bund Ltd Dividend received

GST @ 10%

83.00   0.00 $83.00

GST @ 10%

130.00   13.00 $143.00

GST @ 10%

156.00    0.00 $156.00

Remittance Received 623

Remittance Received 424

Remittance Received 325

23 September 2022 Dick & Rench Rent received

28 September 2022 F Simile Sale of goods for cash 470.00 GST @ 10%   47.00 $517.00

28 September 2022 U Cell Me Co Commission received 280.00 GST @ 10%   28.00 $308.00

GST @ 10% Copyright © 2018. Cengage. All rights reserved.

GST @ 10%

720.00   72.00 $792.00

FIGURE 5.34  Remittances received by L Portland

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CHAPTER 5

Cash Receipts Journal of L Portland Date 13 Sep 22 15 Sep 22 18 Sep 22

23 Sep 22 28 Sep 22

Rmt Rec 712 128 192 222 521 337 623 424 325

Drawer and/or Particulars

Ref

Bank

Sales Rain & Hawn – Rent Received Sales London Credit – Interest Rec’d Sales A Bund – Dividend Rec’d Dick & Rench – Rent Rec’d Sales U Cell Me – Commission Rec’d

Sales

GST Payab

CR 1 Rent Rec’d

55

50

946

200

5 66 20

130

13 720

470

72 47 28

850 400 [cr]

251 200 [cr]

1 380 410 [cr]

382 792

Divid’d Rec’d

Comm Rec’d

660 83 156

825 3 000 100 [dr]

Int’est Rec’d

280 83 411 [cr]

156 412 [cr]

280 413 [cr]

FIGURE 5.35  Cash receipts journal for L Portland Extract General Ledger of L Portland

Bank 30 Sep 22 Receipts

CR1

100

3 000

GST Payable

200

30 Sep 22 Bank [receipt]

CR1

Sales

251

400

30 Sep 22 Bank [receipt]

CR1

Rent Received

850

410

30 Sep 22 Bank [receipt]

CR1

Interest Received

1 380

411

30 Sep 22 Bank [receipt]

CR1

Dividend Received

83

412

30 Sep 22 Bank [receipt]

CR1

Commission Received

156

413

30 Sep 22 Bank [receipt]

CR1

280

Trial Balance of L Portland

Copyright © 2018. Cengage. All rights reserved.

Bank

as at 30 September 2022 100

3 000

GST Payable

200

251

Sales

400

850

Rent Received

410

1 380

Interest Received

411

83

Dividend Received

412

156

Commission Received

413

280 3 000

3 000

FIGURE 5.36  General ledger and trial balance for L Portland

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143

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

QUESTION 5.14 Using the following remittances received by P Marcela (see figure 5.37), prepare the cash receipts journal (or general journal), post the journal to the general ledger and prepare a trial balance using periodic inventory. Remittance Received 599

Remittance Received 115

Remittance Received 728

3 October 2022 Cash Sale for cash

14 October 2022 Pyramid Investments Interest received 168.00 GST @ 10% 0.00 $168.00

14 October 2022 Leila & Zarif Rent received

Remittance Received 499

Remittance Received 202

Remittance Received 614

20 October 2022 Mary & Jane Rent received

26 October 2022 Cash Stock sold

26 October 2022 J Betty Goods sold for cash 160.00 GST @ 10% 16.00 $176.00

170.00 17.00 $187.00

GST @ 10%

400.00 40.00 $440.00

GST @ 10%

250.00 25.00 $275.00

GST @ 10%

620.00 62.00 $682.00

GST @ 10%

Remittance Received 153

Remittance Received 709

Remittance Received 549

26 October 2022

27 October 2022

30 October 2022

G Smith

W Bruce

BHP Ltd

Cash sale

Received commission

Dividend received

450.00 GST @ 10%

45.00 $495.00

640.00 GST @ 10%

64.00 $704.00

146.00 GST @ 10%

0.00 $146.00

FIGURE 5.37  Remittances received by P Marcela

CASH RECEIPTS JOURNAL ACCOUNT COLUMNS AT COST PRICE WITH PERPETUAL INVENTORY

Copyright © 2018. Cengage. All rights reserved.

As was the case with the sales journal, recording a cash sale in the cash receipts journal requires a column headed ‘Cost of Sales’, which is a debit, and a column headed ‘Inventory’, which is a credit. When there is a cash sale and the perpetual inventory system applies, the format of the cash receipts journal needs to separately allow for the cost entries; these are shown on the far right-hand side of the journal. The totals of the cost of sales and inventory do not form part of the bank account balancing of the cash receipts journal at the end of the month (see figure 5.38). Cash Receipts Journal Bank Sales

Dr

Bank Dr

Sales

GST Payable Cr

Cr

Cr

CR 1

GST Acc’nt Payab Receiv Cr

Cr

Accounts Receivable Control Cr

CoS Inventory Dr

Cr

Cost of Sales Dr

FIGURE 5.38 Cash receipts journal and end-of-month totals when a cash sale occurs with perpetual inventory cost accounts 144tafenswlib on 2020-05-30 00:42:37. Created from

Inventory Cr

CHAPTER 5

Example 6: Source documents, cash receipts journal where perpetual inventory applies, extract general ledger and trial balance Use the remittances received by L Portland, which were shown in figure 5.34. Assume L Portland uses the perpetual inventory system and the cost of the inventory sold as cash sales is a constant 40% of the sales value, not the amount received. The cash receipts journal is shown in figure 5.39, and the general ledger and trial balance in figure 5.40. Cash Receipts Journal of L Portland Date

Rmt Rec 13 Sep 22 712 15 Sep 22 128 192 18 Sep 22 222 521 337 23 Sep 22 623 28 Sep 22 424 325

Drawer and/or Particulars

Ref

Sales Rain & Hawn – Rent Rec’d Sales London Credit – Interest Rec’d 411 Sales A Bund – Dividend Rec’d 412 Dick & Rench – Rent Rec’d Sales U Cell Me – Commiss. Rec’d 413

Bank

Sales

55

GST Payab

50

946

5 66 20

200 130

CR 1 Rent Rec’d

General

Inventory 20

20

80

80

52

52

188

188

660 83

13

382 792

CoS

156 470

825

72 47 28

720 280

3 000

850

251

1 380

519

340

340

100 [dr]

400 [cr]

200 [cr]

410 [cr]

[cr]

500 [dr]

101 [cr]

FIGURE 5.39  Cash receipts journal for L Portland with cash sales and perpetual inventory Extract General Ledger of L Portland

Bank 30 Sep 22 Receipts

CR1

Inventory 30 Sep 22 Cost of Sales

GST Payable 30 Sep 22 Bank [receipt]

Sales 30 Sep 22 Bank [receipt]

Rent Received 30 Sep 22 Bank [receipt]

Interest Received 30 Sep 22 Bank [receipt] Copyright © 2018. Cengage. All rights reserved.

Dividend Received 30 Sep 22 Bank [receipt]

Commission Received 30 Sep 22 Bank [receipt]

Cost of Sales 30 Sep 22 Inventory

CR1

100

3 000

101 CR1

340

200 CR1

251

400 CR1

850

410 CR1

1 380

411 CR1

83

412 CR1

156

413 CR1

280

500

340 CONTINUED

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Trial Balance of L Portland as at 30 September 2022 100

Bank

3 000

Inventory

101

340

GST Payable

200

251

Sales

400

850

Rent Received

410

1 380

Interest Received

411

83

Dividend Received

412

156

Commission Received

413

280

Cost of Sales

500

340 3 340

3 340

FIGURE 5.40  Extract general ledger and trial balance for L Portland with perpetual inventory

QUESTION 5.15 Use the remittances received by P Damico (see figure 5.41). Assume P Damico uses the perpetual inventory system and the cost of the inventory sold as cash sales is a constant 60% of the sales value, not the amount received. Prepare and balance the journal (or prepare the general journal), post to the general ledger and prepare a trial balance. Remittance Received 959

Remittance Received 912

Remittance Received 027

3 August 2022 P Rolf Cash sale of goods

3 August 2022 Cash Sale of inventory

3 August 2022 Read n Resell Commission Received 450.00 GST @ 10% 45.00 $495.00

GST @ 10%

210.00 21.00 $231.00

Remittance Received 518 8 August 2022 ANP Limited Interest received

Copyright © 2018. Cengage. All rights reserved.

GST @ 10%

421.00 0.00 $421.00

Remittance Received 437 25 August 2022 CRA Ltd Dividend received 158.00 GST @ 10% 0.00 $158.00

GST @ 10%

Remittance Received 151 10 August 2022 C Daniel Cash sale GST @ 10%

150.00 15.00 $165.00

Remittance Received 322 28 August 2022 Julie & James Received rent 490.00 GST @ 10% 49.00 $539.00

FIGURE 5.41  Remittances received by P Damico

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680.00 68.00 $748.00

Remittance Received 213 25 August 2022 Ernst & Henry Rent received GST @ 10%

990.00 99.00 $1 089.00

Remittance Received 441 28 August 2022 V Stark Cash sale 270.00 GST @ 10% 27.00 $297.00

CHAPTER 5

Cash payments journal The cash payments journal is the summary book for all the cheques that a business draws to pay for inventory (goods or stock) that it buys to resell, and for other items such as assets it has purchased and expenses it has incurred, or drawings to obtain funds from its bank for the owner.

Internal controls The internal control procedures relating to cheque requests, payment authorisation and cheque preparation were discussed in chapter 2. These procedures, together with other internal controls over cash payments, are also covered in chapter 8 ‘Management controls over cash’.

Headings in cash payments journal The column headings in the journal are intended to give guidance and direction as to what is to be shown in each column, so that similar items can be shown or listed together. Study the headings and explanations in the cash payments journal shown in figure 5.42. Journal name

Journal reference

Business or owner’s name

CASH PAYMENTS JOURNAL OF [INSERT THE BUSINESS NAME] Date

Rmt Pmt

1

2

Payee and/or Particulars

Bank

Purchases

GST Receiv

Acc’nt Payab

4

5

6

7

8

3

Date 1 Day month and year (dd mmm yy) is written on the first line and after that only when the date changes.

4

Ref Reference The account number is written in after the posting of these journal entries to the ledger and is left blank until posted.

CP 1

Ref

Rmt Pmt 2 Remittance payment Reference number for electronic or manual remittance payment from Bank account.

3

Copyright © 2018. Cengage. All rights reserved.

10

10

9

Payee and/or Particulars The person or business to whom the funds were paid and/or what the payments of funds were for.

Bank Account column for funds paid from Bank account either manually or remitted electronically direct from Bank account.

5

6

Purchases Account column for cash purchases of inventory with periodic inventory.

7

10 Blank account column headings allow for grouping of similar transactions that can be listed under that account heading; the actual account will depend on the particulars of the funds remitted as a payment.

General

9 General General is used where there are not enough account columns available and the account name is shown as the ‘Particulars’ in the ‘Payee and/or Particulars’ column. ‘General’ is NOT an account name.

GST Receiv Account column for GST Receivable.

8

Acc’nt Payab Account column for funds remitted to Accounts Payable (Creditors).

Remittance advice payment is the source document, which needs to be related to other business source documents.

FIGURE 5.42  Headings and accounts in the cash payments journal

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TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

END-OF-MONTH PROCESSING At the end of each month the cash payments journal is totalled (or added); that is, the bank account column and other account columns should be added down. The total of the bank column should equal the total of all the other account columns. It is the monthly totals and not the individual entries that are posted to the general ledger. The bank total is posted to the credit of the bank account. The bank account, which is an asset, has decreased and is therefore a credit, as per the accounting equation from chapter 3. The other account totals are debits to those individual accounts; any totals in brackets will be posted as credits. The main, but not the only, account totals that are debited will be to purchases and other expense accounts and GST receivable, a current asset account, and accounts payable control account, a current liability. This will be an increase in the expense and assets with a decrease in the liability that again satisfies the requirements of the accounting equation (see figure 5.43). Cash Payments Journal Bank Purch- GST ases Rec Cr

Bank

Purchases Cr

Dr

GST Receivable

Dr

Dr

Dr

CP 1 Acc’nt Payab

A/c

A/c

Dr

Dr

Dr

Accounts Payable Control

Any A/c

Dr

Dr

Any A/c Dr

FIGURE 5.43  Cash payments journal, end-of-month account entries to general ledger – periodic inventory

From the accounting equation: Assets Assets Bank + GST Receivable [credit] [debit]

+ Expense = + Expense = + Purchases = [debit]

Liabilities + Owner’s Equity + Revenue Liabilities Accounts Payable [debit]

Total of:

Copyright © 2018. Cengage. All rights reserved.

Bank = Purchases + GST Receivable + Accounts Payable Control + Any other account

When the total of the bank account column equals the total of the purchases, GST receivable, accounts payable control and any other account columns, the purchases journal can be said to cross-balance.

Inventory system used by the business When the periodic inventory system is used by a business, the acquisition or purchase of inventory for cash is allocated to the debit of the purchases account as well as the GST receivable account. You will remember that the general journal format was: Purchases GST Receivable Bank [payment] Cash purchase of inventory [periodic]

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xx x xx

CHAPTER 5

Where the perpetual inventory system is used by a business, the payment for the cash purchase of inventory is: Inventory

xx

GST Receivable

x

Bank [payment]

xx

Cash purchase of inventory [perpetual]

Example 7: Source documents, cash payments journal where periodic inventory applies, extract general ledger and trial balance

Copyright © 2018. Cengage. All rights reserved.

From the remittance payments of Blaxlands Ridge Co (figure 5.44), prepare the cash payments journal for September 2022, total and cross-balance at the end of the month, post to the extract general ledger and prepare a trial balance (see figures 5.45 and 5.46). Purchases include payments made for the ‘purchase of inventory’, as we are now assuming the use of the periodic inventory system. Payments for items that are purchased for resale are listed under the account column headed ‘Purchases’, which can be read as ‘the account for purchase of inventory, stock or goods for resale’. Refer to remittance payments 213 and 623 in figure 5.44. Payments for items that are not for resale are shown as they are called or named. They are given nominal (name) column headings that relate to what they are. For example, the payment for stationery is assumed to be for use by the business and not for resale, and therefore it is shown under the nominal column heading of ‘Stationery’. Refer to remittance payments 312 and 521 in figure 5.44. 3 September 2022 To: U Colo For: Purchase of goods 60.00 6.00 GST @ 10% $66.00 213 Remittance Payment

5 September 2022 To: Bilpin Repairs For: Car repairs and service 250.00 GST @ 10% 25.00 $275.00 131 Remittance Payment

6 September 2022 To: Ebenezer Stationery For: Stationery purchases 70.00 GST @ 10% 7.00 $77.00 312 Remittance Payment

6 September 2022 To: Broks Tyre Service For: 4 new tyres & wheel alignment 400.00 40.00 GST @ 10% $440.00 124 Remittance Payment

15 September 2022 To: Ebenezer Stationery For: Purchased stationery supplies 50.00 GST @ 10% 5.00 $55.00 521 Remittance Payment

18 September 2022 To: G Vale Wholesalers For: Purchase of stock for resale 140.00 GST @ 10% 14.00 $154.00 623 Remittance Payment

23 September 2022 To: Hawkesbury Electricity For: Electricity for one month 150.00 15.00 GST @ 10% $165.00 713 Remittance Payment

25 September 2022

28 September 2022

To: Telstra For: Telephone calls and charges GST @ 10%

200.00 20.00 $220.00 923 Remittance Payment

To: W Force For: Inventory purchase GST @ 10%

320.00   32.00 $352.00 812 Remittance Payment

FIGURE 5.44  Remittance payments for Blaxlands Ridge Co

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149

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Cash Payments Journal of Blaxlands Ridge Co Date

Rmt Payee and/or Particulars Ref Pmt 3 Sep 22 213 U Colo – Purchases 5 Sep 22 131 Bilpin Repairs – Vehicle Expense

Bank 66 275

6 Sep 22 312 Ebenezer Stationery 15 Sep 22 18 Sep 22 23 Sep 22 25 Sep 22

124 521 623 713 923

Broks Tyres – Vehicle Expense Ebenezer Stationery G Vale W’sale – Purchases Hawkesbury Electricity Telstra – Telephone

28 Sep 22 812 W Force – Purchases

Purchases 60

GST Receiv

CP 1

Vehicle StationeryElectricity Exp

6 25

77

7

440 55 154 165 220

140

40 5 14 15 20

352

320

250 70 400 50 150 200

32

1 804

520

164

650

120

150

200

100 [cr]

500 [dr]

101 [dr]

540 [dr]

541 [dr]

542 [dr]

543 [dr]

FIGURE 5.45  Cash payments journal of Blaxlands Ridge Co – periodic inventory Extract General Ledger of Blaxlands Ridge Co

Bank

100

30 Sep 22 Payments

CP1

GST Receivable 30 Sep 22 Bank [payment]

CP1

101

164

Purchases 30 Sep 22 Bank [payment]

CP1

500

520

Vehicle Expense 30 Sep 22 Bank [payment]

CP1

540

650

Stationery 30 Sep 22 Bank [payment]

CP1

541

120

Electricity 30 Sep 22 Bank [payment]

CP1

30 Sep 22 Bank [payment]

CP1

542

150

Telephone

543

200

Copyright © 2018. Cengage. All rights reserved.

Trial Balance of Blaxlands Ridge Co Bank GST Receivable Purchases Vehicle Expense Stationery Electricity Telephone

as at 30 September 2022 100 101 500 540 541 542 543

1 804 164 520 650 120 150 200 1 804

1 804

FIGURE 5.46  General ledger and trial balance of Blaxlands Ridge Co – periodic inventory

150tafenswlib on 2020-05-30 00:42:48. Created from

Telephone

1 804

CHAPTER 5

QUESTION 5.16 Using the remittance payments of L Cheng (see figure 5.47), prepare the cash payments journal (or general journal), post to the general ledger and prepare a trial balance; assume periodic inventory applies. 2 March 2022

80.00 8.00 $88.00 359 Remittance Payment

430.00 43.00 $473.00 206 Remittance Payment

7 March 2022 To: Farrer Supplies For: Stock purchases 100.00 GST @ 10% 10.00 $110.00 454 Remittance Payment

11 March 2022 To: Wages For: 2 weeks ended 10 March 1 742.00 0.00 GST @ 10% $1 742.00 678 Remittance Payment

13 March 2022 To: Delungra Stationery For: Stationery supplies 110.00 GST @ 10% 11.00 $121.00 479 Remittance Payment

17 March 2022 To: On Line Advertisers For: Advertising online 170.00 GST @ 10% 17.00 $187.00 995 Remittance Payment

To: E Acton For: Purchase of goods GST @ 10%

24 March 2022 To: Cabarita Brakes For: Repairs to vehicle 280.00 GST @ 10% 28.00 $308.00 835 Remittance Payment

4 March 2022 To: All Wite Motors For: Service of vehicle GST @ 10%

25 March 2022 To: Wages For: 2 weeks ended 24 March GST @ 10%

1 824.00 0.00 $1 824.00 843 Remittance Payment

25 March 2022 To: Sharp ’n Kutt For: Inventory purchased GST @ 10%

880.00

88.00 $968.00 672 Remittance Payment

FIGURE 5.47  Remittance payments of L Cheng

CASH PAYMENTS JOURNAL ACCOUNT COLUMNS WITH PERPETUAL INVENTORY The change in the cash payments journal is simply a matter of heading the account column as ‘Inventory’ when there is a cash purchase and perpetual inventory system applies (see figure 5.48). Cash Payments Journal

CP 1

Copyright © 2018. Cengage. All rights reserved.

Bank Inven- GST Acc’nts Any tory Receiv Payab A/c Cr

Bank

Inventory Cr

Dr

GST Receivable Dr

Dr

Dr

Dr

Dr

Dr

Accounts Payable Control Dr

Any A/c

Any A/c Dr

Any A/c Dr

FIGURE 5.48  Cash payments journal end-of-month totals – perpetual inventory

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151

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Example 8: Source documents, cash payments journal where perpetual inventory applies, extract general ledger and trial balance Use the remittance payments prepared by Blaxlands Ridge Co that were shown in figure 5.44, but assume Blaxlands Ridge Co now uses the perpetual inventory system. The cash payments journal is shown in figure 5.49, and the general ledger and trial balance in figure 5.50. Cash Payments Journal of Blaxlands Ridge Co Date 3 Sep 22 5 Sep 22 6 Sep 22

Rmt Pmt 213 131 312 124 521

Payee and/or Particulars

Ref

Inventory

GST Receiv

CP 1

Vehicle Stationery Electricity Telephone Exp

66 275 77 440 55

60

18 Sep 22 623 G Vale W’sale – Inventory

154

140

23 Sep 22 713 Hawkesbury Electricity

165

25 Sep 22 923 Telstra – Telephone

220

28 Sep 22 812 W Force – Inventory

352

320

32

1 804 100 [cr]

520 101 [dr]

164 102 [dr]

15 Sep 22

U Colo – Inventory Bilpin Repairs – Vehicle Exp Ebenezer Stationery Broks Tyres – Vehicle Exp Ebenezer Stationery

Bank

6 25 7 40 5

250 70 400 50

14 15

150

20

200 650 540 [dr]

120 541 [dr]

150 542 [dr]

FIGURE 5.49  Cash payments journal for Blaxlands Ridge Co – perpetual inventory Extract General Ledger of Blaxlands Ridge Co

100

Bank 30 Sep 22 Payments

CP1

101

Inventory 30 Sep 22 Bank [payment]

CP1

520

102

GST Receivable 30 Sep 22 Bank [payment]

CP1

164

540

Vehicle Expense 30 Sep 22 Bank [payment]

CP1

30 Sep 22 Bank [payment]

CP1

30 Sep 22 Bank [payment]

CP1

30 Sep 22 Bank [payment]

CP1

650

541

Stationery 120

542

Electricity 150

543

Telephone Copyright © 2018. Cengage. All rights reserved.

1 804

200

Trial Balance of Blaxlands Ridge Co Bank Inventory

as at 30 September 2022 100 101

1 804 520

GST Receivable

102

164

Vehicle Expense

540

650

Stationery

541

120

Electricity

542

150

Telephone

543

200 1 804

1 804

FIGURE 5.50  Extract general ledger and trial balance for Blaxlands Ridge Co – perpetual inventory 152tafenswlib on 2020-05-30 00:42:48. Created from

200 543 [dr]

CHAPTER 5

QUESTION 5.17 Using the documents of S Melissa (see figure 5.51), prepare the journal, post to the general ledger and prepare a trial balance where the perpetual inventory system is used. 2 May 2022 To: C Leon For: Goods purchased GST @ 10%

510.00 51.00 $561.00 579 Remittance Payment 17 May 2022 To: Ampol Petroleum For: Petrol account 370.00 37.00 GST @ 10% $407.00 669 Remittance Payment

10 May 2022 To: Peel County Council For: Electricity account 570.00 GST @ 10% 57.00 $627.00 305 Remittance Payment 19 May 2022 To: F Benefit For: Purchased goods for resale GST @ 10%

790.00 79.00 $869.00 919 Remittance Payment

26 May 2022 To: Wages For: Fortnightly wages to 25 May GST @ 10%

1 837.00 0.00 $1 837.00 201 Remittance Payment

26 May 2022 To: L Carol For: Purchased stock GST @ 10%

290.00 29.00 $319.00 973 Remittance Payment

12 May 2022 To: Wages For: Fortnightly wages to 11 May 1 386.00 GST @ 10% 0.00 $1 386.00 236 Remittance Payment 24 May 2022 To: Lisa Auto Electrics For: Repairs to vehicle 380.00 GST @ 10% 38.00 $418.00 704 Remittance Payment 29 May 2022 To: Balranald Council For: Rates for the year 949.00 GST @ 10% 0.00 $949.00 769 Remittance Payment

Copyright © 2018. Cengage. All rights reserved.

FIGURE 5.51  Remittance payments of S Melissa

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153

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

QUESTION 5.18 S Wong uses the perpetual inventory system in her accounts. From the source documents of S Wong (see figure 5.52) for November and December 2022, for each month prepare the cash payments journal and cash receipts journal (or general journal), post to the general ledger and prepare a trial balance as at the end of each month. The cost of the inventory sold as cash sales is a constant 60% of the sales value, not the amount received. 6 November 2022 To: W Susan

Remittance Received 106

Remittance Received 669

Remittance Received 451

7 November 2022

14 November 2022

14 November 2022

For: Purchase of goods 260.00

Cash

O Soner

M Sandra

Cash sale

Cash sale

Rent received

26.00

GST @ 10%

$286.00

1 600.00   160.00

GST @ 10%

549 Remittance Payment

GST @ 10%

76.00

$1 760.00

$836.00

15 November 2022

15 November 2022

27 November 2022

To: Wages For: November payroll 2 500.00 0.00 GST @ 10% $2 500.00 183 Remittance Payment

To: Riverina Electricity For: Electricity for month 500.00 GST @ 10% 50.00 $550.00 562 Remittance Payment

To: Simpson Petroleum For: Petrol and oil October 170.00 GST @ 10%   17.00 $187.00 147 Remittance Payment

Remittance Received 504

Remittance Received 874

Remittance Received 832

28 November 2022

30 November 2022

1 December 2022

Cash

Cash

KCR Real Estate

Sale of inventory

Rent received

750.00 75.00

GST @ 10%

$825.00 2 December 2022 To: Albury City Council 751.00

For: Purchased inventory 760.00 740.00

730.00   73.00

GST @ 10%

$803.00 213 Remittance Payment Remittance Received 402 M Sandra Rent received

76.00 $836.00

770.00 GST @ 10%

77.00

Remittance Received 333

Remittance Received 198

30 December 2022

30 December 2022

To: Simpson Petroleum 2 800.00

November

200.00

0.00

GST @ 10%

20.00 $220.00

$847.00

KCR Real Estate

Cash

Rent received

Cash sale 500.00

GST @ 10%

409 Remittance Payment

FIGURE 5.52  Remittances received and paid by S Wong

154tafenswlib on 2020-05-30 00:42:48. Created from

2 December 2022

27 December 2022 For: Petrol and oil for

$2 800.00

28 November 2022 Spiegel Investments Interest received 197.00 0.00 GST @ 10% $197.00

198 Remittance Payment

To: Wages

294 Remittance Payment

Remittance Received 646

$814.00

For: December payroll GST @ 10%

GST @ 10%

74.00

GST @ 10%

82.00 $902.00

14 December 2022

Cash Sale

479 Remittance Payment 15 December 2022

12 December 2022 To: M Silva

S James

 0.00 $751.00

$550.00

Remittance Received 146

GST @ 10%

For: Telephone for month

500.00 50.00

GST @ 10%

$957.00

6 December 2022

For: Local government rates GST @ 10%

870.00  87.00

820.00

To: Telstra

Sale of inventory GST @ 10%

Copyright © 2018. Cengage. All rights reserved.

760.00

50.00 $550.00

860.00 GST @ 10%

86.00 $946.00

CHAPTER 5

Cash receipts journal with accounts receivable Having sold items on credit, the business should eventually receive the funds owed to it. Another account column heading is required in the cash receipts journal: ‘Accounts Receivable Control’. This column heading was used when the customer’s tax invoice was entered in the sales journal. It is again used in the cash receipts journal when the funds are received from the customer or account receivable arising from the same tax invoices. The total of this column will be posted at the end of the month to the ‘Accounts Receivable Control’ account in the general ledger.

Cash payments journal with accounts payable Having purchased items on credit, the business must eventually pay the account. Another account column is required in the cash payments journal: ‘Accounts Payable Control’. This column heading was used when the supplier’s tax invoice was entered in the purchases journal. It is again used in the cash payments journal when those tax invoices are paid to the supplier or account payable. The total of this column will be posted at the end of the month to the ‘Accounts Payable Control’ account in the general ledger.

Copyright © 2018. Cengage. All rights reserved.

Example 9: Process credit and cash transactions by preparation of journals, ledger and trial balance where periodic inventory applies From the transactions of R Warburton for May 2022, prepare the sales journal, purchases journal, cash receipts journal and cash payments journal, then post to a structured extract general ledger and prepare a trial balance (refer to figures 5.53 to 5.58). Assume periodic inventory applies.   3 R Warburton purchased goods on credit from P Victor $429 ($390 + $39 GST).   5 Purchased stationery on credit from L Jeff $66 ($60 + $6 GST).   7 Sold goods to S Luis for $1617 ($1470 + $147 GST) on credit.   7 Goods sold on credit to M Milton $1540 ($1400 + $140 GST).   9 Purchase of inventory $352 ($320 + $32 GST) from W Margaret, paid by a debit card.   9 Cash sale $1221 ($1110 + $111 GST). 13 Sold $1881 ($1710 + $171 GST) of goods on credit to S Luis. 21 Purchased inventory $297 ($270 + $27 GST) on credit from P Victor. 25 Sold goods for cash $2101 ($1910 + $191 GST). 26 R Warburton purchased stock by debit card $407 ($370 + $37 GST). 29 Received $3498 from S Luis in settlement of account. 29 Funds remitted from M Milton for goods previously sold on credit, $1540. 29 Electronically transferred $726 to P Victor for amount owing. 29 Remitted amount for credit purchases from L Jeff on 5th, $66. 30 Despatched goods and tax invoice for $1584 ($1440 + $144 GST) to S Luis. 30 Received stock and tax invoice for $572 ($520 + $52 GST) from P Victor.

Created from tafenswlib on 2020-05-30 00:39:21.

155

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Sales Journal of R Warburton Date

Inv Adj 7 May 22 123 124 13 May 22 125 30 May 22 126

Accounts Receivable and/or Ref Acc’nts Particulars Receiv S Luis – Sales 1 617 M Milton – Sales 1 540 S Luis – Sales 1 881 S Luis – Sales 1 584 6 622 101 [dr]

Sales 1 470 1 400 1 710 1 440 6 020

GST Payab 147 140 171 144 602

400 [cr]

201 [cr]

SJ 1

FIGURE 5.53  Sales journal of R Warburton – periodic inventory Purchases Journal of R Warburton Date 3 May 22 5 May 22 21 May 22 30 May 22

Inv Adj 678 901 234 428

Accounts Payable and/or Particulars P Victor – Purchases L Jeff – Stationery P Victor – Purchases P Victor – Purchases

Ref Acc’nts Payab 429 66 297 572 1 364 200 [cr]

Purchases 390 270 520 1 180 500 [dr]

GST Receiv 39 6 27 52 124 102 [dr]

PJ 1 Stationery 60

60 540 [dr]

FIGURE 5.54  Purchase journal of R Warburton – periodic inventory Cash Receipts Journal of R Warburton Date

Rmt Rec 9 May 22 567 25 May 22 865 29 May 22 659 750

Drawer and/or Particulars

Ref

Sales Sales S Luis – Accounts Receivable M Milton – Acc’nts Receivable

Bank 1 221 2 101 5 038 8 360 100 [dr]

Sales 1 110 1 910

3 020 400 [cr]

GST Payab 111 191

302 201 [cr]

CR 1 Acc’nts Receiv

3 498 1 540 5 038 101 [cr]

FIGURE 5.55  Cash receipts journal of R Warburton – periodic inventory Cash Payments Journal of R Warburton

Copyright © 2018. Cengage. All rights reserved.

Date

Rmt Pmt 9 May 22 456 26 May 22 574 29 May 22 485 954

Payee and/or Particulars W Margaret – Purchases Purchases P Victor – Accounts Payable L Jeff – Accounts Payable

Ref

Bank 352 407 726 66 1 551 100 [cr]

Purchases 320 370

690 500 [dr]

GST Receiv 32 37

69 102 [dr]

FIGURE 5.56  Cash payments journal of R Warburton – periodic inventory

156tafenswlib on 2020-05-30 00:43:33. Created from

CP 1 Acc’nts Payab

726 66 792 200 [dr]

CHAPTER 5

Extract General Ledger of R Warburton

Bank 31 May 22 Receipts

CR1

100

8 360 31 May 22 Payments

CP1

Balance c/d 8 360 1 Jun 22 Balance b/d

1 551 6 809 8 360

6 809

31 May 22 Sales

Accounts Receivable Control

101

SJ1

CR1

6 622 31 May 22 Bank [receipt] Balance c/d 6 622

1 Jun 22 Balance b/d

5 038 1 584 6 622

1 584

GST Receivable 31 May 22 Accounts Payable Control

PJ1

Bank [payment]

CP1

102

124 69 193

Accounts Payable Control 31 May 22 Bank [payment]

CP1

Balance c/d

200

792 31 May 22 Purchase

PJ1

1 364

572 1 364

1 364 1 Jun 22 Balance b/d

572

GST Payable

201

31 May 22 Accounts Receivable Control

SJ1 CR1

Bank [receipt]

602 302 904

Sales

400

31 May 22 Accounts Receivable Control Bank [receipt]

SJ1

6 020

CR1

3 020 9 040

Purchases 31 May 22 Accounts Payable Control

PJ1

1 180

Bank [payment]

CP1

690

500

1 870

Stationery 31 May 22 Accounts Payable Control

PJ1

540

60

FIGURE 5.57  General ledger of R Warburton – periodic inventory

Copyright © 2018. Cengage. All rights reserved.

Trial Balance of R Warburton as at 31 May 2022 Bank 100 Accounts Receivable Control 101 GST Receivable 102 Accounts Payable Control 200 GST Payable 201 Sales 400 Purchases 500 Stationery 540

6 809 1 584 193 572 904 9 040 1 870 60 10 516

10 516

FIGURE 5.58  Trial balance of R Warburton – periodic inventory

From example 9, R Warburton owes the ATO a net amount of $711 for GST; that is, GST payable $904 less GST receivable $193. Created from tafenswlib on 2020-05-30 00:43:33.

157

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Example 10: Process credit and cash transactions by preparation of journals, ledger and trial balance where perpetual inventory applies R Warburton maintains inventory records using the perpetual inventory system. From the transactions of R Warburton for May 2022, prepare the sales journal, purchases journal, cash receipts journal and cash payments journal, then post to a structured extract general ledger and prepare a trial balance (refer to figures 5.59 to 5.64).   3 R Warburton purchased goods on credit from P Victor $429 ($390 + $39 GST).   5 Purchased stationery on credit from L Jeff $66 ($60 + $6 GST).   7 Sold goods to S Luis for $1617 ($1470 + $147 GST) on credit, at a cost of $662.   7 Goods sold on credit to M Milton $1540 ($1400 + $140 GST), costing $610.   9 Purchase of inventory $352 ($320 + $32 GST) from W Margaret, paid by a debit card.   9 Cash sale $1221 ($1110 + $111 GST), cost $510. 13 Sold $1881 ($1710 + $171 GST) of goods on credit to S Luis, costing $769. 21 Purchased inventory $297 ($270 + $27 GST) on credit from P Victor. 25 Sold goods for cash $2101 ($1910 + $191 GST), at a cost of $863. 26 R Warburton purchased stock by debit card $407 ($370 + $37 GST). 29 Received $3498 from S Luis in settlement of account. 29 Funds remitted from M Milton for goods previously sold on credit, $1540. 29 Electronically transferred $726 to P Victor for amount owing. 29 Remitted amount for credit purchases from L Jeff on 5 May, $66.  espatched goods and tax invoice for $1584 ($1440 + $144 GST) to S Luis, inventory cost $648. 30 D 30 Received stock and tax invoice for $572 ($520 + $52 GST) from P Victor. Sales Journal of R Warburton Date

Inv Accounts Receivable and/or Ref Acc’nts Adj Particulars Receiv 7 May 22 123 S Luis – Sales 1 617 421 M Milton – Sales

1 540

Sales 1 470

GST Payab 147

1 400

140

SJ 1 CoS 662

Inventory 662

610

610

13 May 22 512 S Luis – Sales

1 881

1 710

171

769

769

30 May 22 621 S Luis – Sales

1 584

1 440

144

648

648

6 622

6 020

602

2 689

2 689

101 [dr]

400 [cr]

201 [cr]

500 [dr]

102 [cr]

Copyright © 2018. Cengage. All rights reserved.

FIGURE 5.59  Sales journal of R Warburton – perpetual inventory

158tafenswlib on 2020-05-30 00:43:33. Created from

CHAPTER 5

Purchases Journal of R Warburton Date

Inv Accounts Payable and/or Adj Particulars 3 May 22 678 P Victor – Inventory

Ref Acc’nts Payab 429

Inventory 390

PJ 1

GST Sta­tion­ ery Receiv 39

5 May 22 901 L Jeff – Stationery

66

21 May 22 234 P Victor – Inventory

297

270

27

6

60

30 May 22 428 P Victor – Inventory

572 1 364

520 1 180

52 124

60

200 [cr]

102 [dr]

103 [dr]

540 [dr]

FIGURE 5.60  Purchases journal of R Warburton – perpetual inventory Cash Receipts Journal of R Warburton Date

Rmt Drawer and/or Particulars Rec 9 May 22 567 Sales

Ref

25 May 22 658 Sales

Bank

Sales

1 221

1 110

GST Payab 111

2 101

1 910

191

29 May 22 956 S Luis – Accounts Receivable

CR 1 Acc’nts Receiv

CoS 510

Inventory 510

863

863

3 498

750 M Milton – Acc’nts Receivable

5 038 8 360

3 020

302

1 540 5 038

1 373

1 373

100 [dr]

400 [cr]

201 [cr]

101 [cr]

500 [dr]

102 [cr]

FIGURE 5.61  Cash receipts journal of R Warburton – perpetual inventory Cash Payments Journal of R Warburton Date

Rmt Payee and/or Particulars Pmt 9 May 22 456 W Margaret – Inventory

352

Inven­tory 320

26 May 22 574 Inventory

407

370

29 May 22 854 P Victor – Accounts Payable

726

549 L Jeff – Accounts Payable

Ref

Bank

GST Receiv 32 37

CP 1 Acc’nts Payab

726 66

66 1 551

690

69

792

100 [cr]

102 [dr]

103 [dr]

200 [dr]

Copyright © 2018. Cengage. All rights reserved.

FIGURE 5.62  Cash payments journal of R Warburton – perpetual inventory

Created from tafenswlib on 2020-05-30 00:43:33.

159

TRANSACTIONS, SPECIALISED JOURNALS AND DOUBLE-ENTRY PROCESSING

Extract General Ledger of R Warburton

Bank 31 May 22 Receipts

CR1

1 Jun 22 Balance b/d 31 May 22 Sales

100

8 360 31 May 22 Payments Balance c/d 8 360 6 809

Accounts Receivable Control

101

SJ1

6 622 31 May 22 Bank [receipts] Balance c/d 6 622 1 584

CR1

PJ1 CP1

1 180 31 May 22 Cost of Sales 690 Cost of Sales 2 192 4 062 1 Jun 22 Balance b/d

1 Jun 22 Balance b/d

Inventory 31 May 22 Accounts Payable Control Bank [payment] Balance c/d

PJ1 CP1

CP1

GST Payable

201

31 May 22 Accounts Receivable Control Bank [receipt]

Cost of Sales

PJ1

Copyright © 2018. Cengage. All rights reserved.

60

FIGURE 5.63  Extract general ledger of R Warburton – perpetual inventory

1 364 1 364 572

SJ1

602

CR1

302 904

400 SJ1 CR1

500

2 689 1 373 4 062

Stationery

160tafenswlib on 2020-05-30 00:43:33. Created from

200 PJ1

Sales

31 May 22 Accounts Payable Control

2 689 1 373 4 062 2 192

792 31 May 22 Purchase 572 1 364 1 Jun 22 Balance b/d

Bank [receipt]

SJ1 CR1

SJ1 CR1

103

31 May 22 Accounts Receivable Control

31 May 22 Inventory Inventory

5 038 1 584 6 622

124 69 193

Accounts Payable Control 31 May 22 Bank [payment] Balance c/d

1 551 6 809 8 360

102

GST Receivable 31 May 22 Accounts Payable Control Bank [payment]

CP1

540

6 020 3 020 9 040

CHAPTER 5

Trial Balance of R Warburton as at 31 May 2022 Bank 100 Accounts Receivable Control 101 Inventory 102 GST Receivable 103 Accounts Payable Control 200 GST Payable 201 Sales 400 Cost of Sales 500 Stationery 540

6 809 1 584 2 192 193 572 904 9 040 4 062 60 12 708

12 708

FIGURE 5.64  Trial balance for R Warburton – perpetual inventory

Journal preparation and posting sequence to general ledger There is no right or wrong order for the preparation of journals and their posting to the general ledger. In practice, all journals should be prepared on a daily basis and written up, balanced and posted at the end of the month. However, when answering questions it is strongly recommended to adopt the following order for the preparation of journals and posting to the general ledger: • sales journal • purchases journal • cash receipts journal • cash payments journal • general journal. This order allows for the calculation of receipt or payment amounts arising from credit transactions. Usually, this order also presents transactions in correct date sequence in the general ledger.

REVIEW OF JOURNALS AND COMPARISON OF PERIODIC AND PERPETUAL INVENTORY ACCOUNT HEADINGS You will find it very helpful if you can visualise: • what these journals do with reference to the accounting equation • their minimum account headings using either the periodic or the perpetual inventory system Copyright © 2018. Cengage. All rights reserved.

• how they are summarised at the end of each month, especially for debit or credit processing • the terms used in the ledger accounts • the cross-referencing of ledger accounts and journal reference numbers. The difference between the journals for periodic and perpetual inventory systems is shown in figure 5.65.

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Periodic Inventory

Perpetual Inventory

Sales Journal

SJ 1

Acc’nt Sales GST Payab Receiv

Dr

Cr

Cr

Dr

Purchases Journal Acc’nt Pur-­ GST Payab ch­a ses Receiv

Cr

Dr

Dr

PJ 1 Exp A/c

Sales

Dr

Cr

Cr

CR 1

Cr

Cash Payments Journal Bank

CP 1

Dr

General Journal

Cr

Inventory

Dr

Cr

Dr

Dr

PJ 1

Exp A/c

Dr

Cash Receipts Journal Bank

Sales

Dr

Cr

CR 1

GST Acc’nt Payab Receiv

Cr

Cr

CoS

Inven­ tory

Dr

Cr

Cash Payments Journal

CP 1

Bank Inven­ GST Acc’nt tory Receiv Payab

PurGST Acc’nt chases Receiv Payab

Dr

SJ 1 CoS

Purchases Journal

Cr

GST Acc’nt Payab Receiv

Cr

Cr

Acc’nt Inven­ GST Payab tory Receiv

Dr

Cash Receipts Journal Bank

Sales Journal Acc’nt Sales GST Receiv Payab

Dr

Cr

GJ 1

Dr

Dr

Dr

General Journal

GJ 1

FIGURE 5.65  Review of journals and comparison of periodic and perpetual inventory headings

Copyright © 2018. Cengage. All rights reserved.

QUESTION 5.19 From the following transactions of C Noble for January 2022, prepare the sales journal, purchases journal, cash receipts journal and cash payments journal (or general journal). The perpetual inventory system operates. Assume your own source document numbers. Post to a structured general ledger and prepare a trial balance. Note that by ignoring the cost details of inventory sold, the question can also be answered as if periodic inventory operates. The Workbook that accompanies this text will allow you to complete this question using both inventory systems.   7 Cash sale of goods $517 ($470 + $47 GST), inventory cost $223.   7 Sold goods on credit to G Griggs $2321 ($2110 + $211 GST), at a cost of $1002.   9 Debit card used for purchase of goods $550 ($500 + $50 GST).   9 Purchased goods on credit from S Roff $693 ($630 + $63 GST). 12 Sold goods for $1661 ($1510 + $151 GST) to J Pollard on credit, costing $717. 12 Sent tax invoice to G Griggs $1573 ($1430 + $143 GST), inventory cost $679.

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13 14 18 20 21 21 21 22 25 25 29 30 31

Purchased goods for $352 ($320 + $32 GST) with debit card from M Barriball. Received a tax invoice for $473 ($430 + $43 GST) from R Huber for stock purchases. Remitted wages $1453. Purchased office equipment on credit from Office Supply Co for $1551 ($1410 + $141 GST). Sent credit note to J Pollard for damaged goods $22 ($20 + $2 GST), not returned to stock. Received credit note from S Roff $88 ($80 + $8 GST). Received cheque for $1639 from J Pollard, relating to previous transactions. Electronically remitted to R Huber $473, relating to previous transactions. Received commercial rent from tenants $825 ($750 + $75 GST). Sold stock to J Barry who paid $1485 ($1350 + $135 GST) by cheque, cost $641. Received funds from tenants $528 ($480 + $48 GST) for the following month’s rent. Paid Office Supply Co $1551. Received amount owing from G Griggs $3894.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 5.20 From the transactions of A Gregory for the month of July 2022 where perpetual inventory applies, prepare the sales, purchases, cash receipts and cash payments journals (or general journal); post to the extract general ledger and prepare a trial balance. Ignore or disregard any cents in your calculations. Note that by ignoring the cost details of inventory sold, the question can also be answered as if periodic inventory operates. The Workbook that accompanies this text will allow you to complete this question using both inventory systems.   3 Sold goods on credit to J Stone $2013 ($1830 + $183 GST), at a cost of $1006.   4 Purchased stock from Reid & Co, paid using a debit card $363 ($330 + $33 GST). 10 Remitted funds received from G Byrt, goods then despatched, for $968 ($880 + $88 GST), at a cost of $484. 10 Direct deposit made into bank account from Davis R Estate being rent received for the following month $814 ($740 + $74 GST). 13 Remitted wages for fortnight ended 12 July $1950. 15 Funds remitted to RAGS Autos for second-hand motor vehicle $2695 ($2450 + $245 GST). 17 Credit sale of trading goods to J Stone for $2607 ($2370 + $237 GST), cost $1303. 17 Remittance received from P Carmichael for inventory despatched today for $1518 ($1380 + $138 GST), which cost $759. 20 Funds received direct into bank account from credit customer J Stone $4620. 20 Credit sale of inventory to G Shinfield $1859 ($1690 + $169 GST); cost of sales was $929. 20 Purchased machinery on credit from Machine Sales Co for $4587 ($4170 + $417 GST). 23 Remitted funds to Machine Sales Co $4587. 24 Sold old machine at book value to C Dolanski for $880 ($800 + $80 GST). 25 Adjustment credit note sent to G Shinfield for goods returned $77 ($70 + $7 GST) at a cost of $38. 25 Purchased inventory from K King with a debit card $638 ($580 + $58 GST). 25 Funds received direct into account from L Variko for cash sale $1683 ($1530 + $153 GST), cost $841. 27 Trading goods purchased on credit from G Demby $517 ($470 + $47 GST). 27 J Shumack sold inventory on credit to A Gregory $176 ($160 + $16 GST). 27 Remitted wages for fortnight ended 26 July $2000. 29 Direct deposit into bank for rent received from Holmes Real Estate for next month $1298 ($1180 + $118 GST).

Transactions review You should by now have an understanding of which business transactions are entered in which journals. Transactions are entered in the journals from the point of view of the business whose journals are being prepared. Remember that every business transaction has two ways of being considered. A sale by one business is a purchase by the other business. Is your business the seller or the purchaser? The payment by one business is a receipt by the other business. Is your business making the payment of funds or receiving funds? Created from tafenswlib on 2020-05-30 00:43:41.

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Sales journal for one business is purchases journal for the other business Business

A

Tax Invoice

Business

D

FIGURE 5.66  Business A sells on credit to D or Business D buys on credit from A

TRANSACTION FROM A’S POSITION IN A’S JOURNAL In figure 5.66, from A’s position (or how business A would look at it), business A has sold to customer D on credit, as there is no indication that funds were received at the time of the sale. In A’s journals this transaction would be entered in the sales journal of A. This same transaction can also be written as: ‘business D purchased/bought on credit from A’; as it is A’s journal that is being prepared, then that transaction is still a credit sale in the sales journal of A.

TRANSACTION FROM D’S POSITION IN D’S JOURNAL In figure 5.66, from D’s position (or how business D would look at it), business D has purchased on credit from its supplier A. In D’s journals this transaction would be entered in the purchases journal of D. This same transaction can also be written as: ‘business A sold on credit to D’; as it is D’s journal that is being prepared, then that transaction is still a credit purchase in the purchases journal of D.

Purchases journal for one business is sales journal for the other business Business

A

Tax Invoice

Business

E

FIGURE 5.67  Business A buys on credit from E or Business E sells on credit to A

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TRANSACTION FROM A’S POSITION IN A’S JOURNAL In figure 5.67 from A’s position, it has bought from its supplier E on credit and this transaction would be entered in the purchases journal of A. This same transaction can be written as: ‘business E sold on credit to A’; as the journal being prepared is A’s, then that is still a credit purchase in the purchases journal of A.

TRANSACTION FROM E’S POSITION IN E’S JOURNAL In figure 5.67, from E’s position, it has sold to its customer A on credit and this transaction would be entered in the sales journal of E. This same transaction can be written as: ‘business A purchased on credit from E’; as the journal being prepared is E’s, then that is still a credit sale in the sales journal of E.

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Cash receipts journal for one business is cash payments journal for the other business Business

A

$

Business

D

FIGURE 5.68  Business A receives funds from D or Business D pays funds to A

TRANSACTION FROM A’S POSITION IN A’S JOURNAL, FOLLOWING A CREDIT TRANSACTION In figure 5.68, from A’s position, a remittance has been received from its customer D who, it is assumed (as businesses do not send funds to each other without a reason), had previously been sold inventory on credit (this would have already been entered in the sales journal of A). In A’s journals, receiving this remittance would be entered in the cash receipts journal. This same transaction can be written as: ‘business D paid business A, for an earlier purchase by D’; as the journal being prepared is A’s, then this is still a receipt in the cash receipts journal of A.

TRANSACTION FROM D’S POSITION IN D’S JOURNAL, FOLLOWING A CREDIT TRANSACTION In figure 5.68, from D’s position, a remittance has been sent to its supplier A, as D had previously purchased on credit from A (this would already have been entered in the purchases journal of D). In D’s journals, this remittance would be entered in the cash payments journal. This same transaction can be written as: ‘business A received a remittance from business D, following an earlier sale by A’; as the journal being prepared is D’s, then this is still a remittance paid in the cash payments journal of D.

TRANSACTION FROM A’S POSITION IN A’S JOURNAL, CONCURRENT FUNDS AND INVENTORY TRANSACTIONS $ Business

A

Business

C

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FIGURE 5.69  Business A makes a cash sale to C or Business C makes a cash purchase from A

In figure 5.69, from A’s position, a remittance has been received from C, together with an order for inventory to be sent to C. This is entered in the cash receipts journal of A as a cash sale to C. This same transaction can be written as: ‘business G paid A for inventory to be delivered to C’; as the journal being prepared is A’s, then this is still a cash sale in the cash receipts journal of A.

TRANSACTION FROM C’S POSITION IN C’S JOURNAL, CONCURRENT FUNDS AND GOODS TRANSACTIONS In figure 5.69, from C’s position, a remittance has been paid to A together with a purchase order for goods to be sent to C. This is entered in the cash payments journal of C. If the purchase order is for inventory that C will then sell at a later date, then in the cash payments journal of C it is allocated to the purchases account, if periodic inventory applies, or inventory account, if perpetual inventory applies. Created from tafenswlib on 2020-05-30 00:43:41.

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If the order is for other items to be consumed in the business of C, such as stationery, then it is allocated as stationery account in the cash payments journal of C. If the order is for a non-current asset, such as a computer, then it is allocated as computer account in the cash payments journal of C. This same transaction can be written as: ‘business A received a remittance and purchase order from C for goods to be delivered to C’; as the journal being prepared is C’s, then this is still an entry in the cash payments journal of C.

Cash payments journal for one business is cash receipts journal for the other business Business

A

$

Business

E

FIGURE 5.70  Business A pays funds to E or Business E receives funds from A

TRANSACTION FROM A’S POSITION IN A’S JOURNAL, FOLLOWING A CREDIT TRANSACTION In figure 5.70, from A’s position, a remittance has been sent to its supplier E (A had previously purchased inventory or other items or a non-current asset on credit from E, which had already been entered in the purchases journal of A). In A’s journals this remittance would be entered in the cash payments journal of A. This same transaction can be written as: ‘business E received a remittance from business A, following an earlier sale by E’; as the journal being prepared is A’s, then this is still a payment in the cash payments journal of A.

TRANSACTION FROM B’S POSITION IN E’S JOURNAL, FOLLOWING A CREDIT TRANSACTION In figure 5.70, from E’s position, a remittance has been received from its customer A (it is assumed A had previously been sold inventory on credit, which would have been entered in the sales journal of E). In E’s journals this receipt of a remittance would be entered in the cash receipts journal of E. This same transaction can be written as: ‘business A paid business E, for an earlier purchase by A’; as the journal being prepared is E’s, then this is still a receipt in the cash receipts journal of E.

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TRANSACTION FROM A’S POSITION IN A’S JOURNAL, CONCURRENT FUNDS AND GOODS TRANSACTIONS $ Business

A

Business

B

FIGURE 5.71  Business A makes a cash purchase from B or Business B makes a cash sale to A

In figure 5.71, from A’s position, a remittance has been paid to B together with a purchase order for goods to be sent to A (this is entered in the cash payments journal of A). If the purchase order is for inventory that A will sell at a later date, then in the cash payments journal of A it is allocated to the purchases account if periodic inventory applies, or the inventory account if perpetual inventory applies.

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If the order is for other items to be consumed in the business of A, such as advertising, then it is allocated as advertising account in the cash payments journal of A. If the order is for a non-current asset such as office equipment, then it is allocated as office equipment account in the cash payments journal of A. This same transaction can be written as: ‘business F received a remittance and purchase order from A for goods to be delivered to A’; as the journal being prepared is A’s, then this is still an entry in the cash payments journal of A.

TRANSACTION FROM B’S POSITION IN B’S JOURNAL, CONCURRENT FUNDS AND INVENTORY TRANSACTIONS In figure 5.71, from B’s position, a remittance has been received from A, together with an order for inventory to be sent to A (this is entered in the cash receipts journal of B as a cash sale to A). This same transaction can be written as: ‘business A paid B for inventory to be delivered to A’; as the journal being prepared is B’s, then this is still a cash sale in the cash receipts journal of B.

QUESTION 5.21 From the following transactions you are required to indicate in which journal, if any, the transactions would be entered for the business of Mia and the business of Gus. The first two transactions are completed as a guide. Transactions

Journals of Mia

Journals of Gus

Mia sold inventory to Gus

SJ

PJ

Gus received goods from Mia

SJ

PJ

Gus sold inventory to Mia Mia sent a tax invoice to Gus Mia paid Gus Mia received a remittance from Gus Gus received goods from Mia; remittance advice sent with purchase order Gus paid salaries Gus received a remittance from Martha Gus processed a cash sale to Mia Mia received a tax invoice from Gus Mia purchased for cash from Gus

QUESTION 5.22

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From the following transactions you are required to indicate in which journal, if any, the transactions would be entered for the business of Glen and the business of Rae. Transactions

Journals of Glen

Journals of Rae

Glen purchased office furniture from Rae Rae received a tax invoice from Glen Rae paid Glen Glen received goods from Rae having sent a remittance to Rae Glen paid wages Glen received a remittance from Trudy Glen processed a cash sale to Rae Rae sent a credit note to Glen Rae received a tax invoice from Glen Rae purchased inventory from Glen for cash Created from tafenswlib on 2020-05-30 00:43:41.

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QUESTION 5.23 From the following transactions of T Gail you are required to indicate in which journal the transaction would be entered. Transactions of T Gail

Journal

Received funds from a customer who had purchased inventory Purchased inventory on credit from a supplier Sold inventory to customer Sold inventory to customer for cash Paid wages An account receivable customer paid their outstanding debt Purchased stationery Sent tax invoice with inventory despatched to customer Received tax invoice from supplier Purchased inventory on credit Sold inventory to customer; remittance advice with purchase order Received cleaning products and tax invoice from supplier Received rent from tenant Paid transport business for previous month’s customer deliveries Customer was sent their tax invoice

QUESTION 5.24 From the following transactions of T Steven you are required to indicate in which journal the transaction would be entered. Transactions of T Steven Received remittance from customer Customer paid their account Forwarded remittance to supplier Prepared a remittance for wages Received credit note for overcharge Sent tax invoice to … Sold inventory for cash Received interest from investment Received inventory on credit Telephone bill was paid Received tax invoice Sold inventory Copyright © 2018. Cengage. All rights reserved.

Sold inventory on credit Sold inventory having received remittance Bought office equipment

QUESTION 5.25 From the following transactions of L Scott, who operates with periodic inventory: • enter the appropriate journal abbreviation next to each transaction • prepare the relevant journals (or general journal) for the month of March 2022 • post journals to a structured extract general ledger and balance the accounts • prepare a trial balance as at 31 March 2022.

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Note that by calculating the cost details of inventory sold at a constant cost of 65% of the sales value (rounded to the nearest $), the question can also be answered as if perpetual inventory operates. The Workbook that accompanies this text will allow you to complete this question using both inventory systems. __________  1  Bought goods on credit from M Robertson $715 ($650 + $65 GST). __________  3 Received tax invoice for $99 ($90 + $9 GST) from the Stationery Shop for stationery. __________  4 Remittance $1507 ($1370 + $137 GST) received from P Houstein for the sale of stock. __________  4 Dividend received from CSR Ltd $205. __________  7 Tax invoice for $1584 ($1440 + $144 GST) sent to S Blayney. __________  7 Received credit note adjustment from M Robertson $99 ($90 + $9 GST) for error in pricing. __________  8 Sold goods for $957 ($870 + $87 GST) cash to J Vigna. __________  8 Processed remittance for telephone account to Telstra $396 ($360 + $36 GST). __________  9 Remittance sent to Prosperous Electricity for electrical use $858 ($780 + $78 GST). __________  9 C Hunter purchased goods on credit for $1650 ($1500 + $150 GST) from L Scott. __________  9 Sent tax invoice for goods to S Blayney $1793 ($1630 + $163 GST). __________ 15 Sold goods to B Watkins $1551 ($1410 + $141 GST). __________ 16 Debit card used for inventory purchases $550 ($500 + $50 GST). __________ 17 Sold machinery to J Muller at book value $693 ($630 + $63 GST). __________ 17 Credit note adjustment posted to B Watkins $110 ($100 + $10 GST). __________ 19 Paid $363 ($330 + $33 GST) for stock from J Major. __________ 20 Monthly salaries $2800. __________ 27 Received funds from B Watkins for all amounts owing. __________ 27 S Blayney paid her account in full. __________ 27 Interest of $371 received from investment. __________ 29 Paid M Robertson’s account in full.

QUESTION 5.26 From the following transactions of W Tucker, who operates with the perpetual inventory system, for July 2022 you are required to: • enter the appropriate journal abbreviation next to each transaction • prepare relevant journals (or general journal) • post journals to a structured general ledger and balance the ledger accounts • prepare a trial balance.

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__________  __________  __________  __________  __________ 

1 W Tucker sent tax invoice to R Pennings $1991 ($1810 + $181 GST) at a cost of $810. 2 W Tucker received tax invoice from J David $561 ($510 + $51 GST) for inventory taken. 4 Paid NAP Vehicle Repairs $319 ($290 + $29 GST) for vehicle expense. 4 Sold goods valued at $1837 ($1670 + $167 GST) to R Stephen at a cost of $750. 6 Sold goods valued at $2057 ($1870 + $187 GST) at a cost of $830 to P Gordon and accepted a cheque. __________  7 Received $770 ($700 + $70 GST) rent from tenants. __________  8 Received tax invoice for $132 ($120 + $12 GST) from B Ruddy for stock purchased. __________ 10 Remitted wages $1432. __________ 10 Received tax invoice $88 ($80 + $8 GST) from S Norah for stationery purchased on credit. __________ 12 W Tucker mailed an adjustment credit note for $22 ($20 + $2 GST) to R Pennings for damaged stock. __________ 13 Cash sales of $1859 ($1690 + $169 GST) costing $800 were banked. __________ 13 Received adjustment credit note $99 ($90 + $9 GST) from J David for allowance on damaged goods. __________ 18 Purchased goods from S Jane and paid by debit card $187 ($170 + $17 GST). CONTINUED

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__________ 18 R Pennings purchased goods on credit at a tax invoice price of $726 ($660 + $66 GST), costing $300. __________ 19 Purchased machinery for use in business $1947 ($1770 + $177 GST) by debit card. __________ 20 Purchased goods $286 ($260 + $26 GST) from J David. __________ 20 Paid local Ampol garage for petrol account and repairs to vehicle $418 ($380 + $38 GST). __________ 23 Invoiced R Stephen $1793 ($1630 + $163 GST) for stock taken that cost $730. __________ 24 Cash purchases $253 ($230 + $23 GST). __________ 28 Received amount owing by R Pennings. __________ 28 Cash sale $1969 ($1790 + $179 GST) costing $800. __________ 29 Electronically remitted funds to B Ruddy for this month’s account. __________ 29 R Stephen paid her purchases for this month. __________ 31 J David was paid amount owing for this month’s purchases. __________ 31 Remitted $1520 for payment of wages.

Discounts: result of credit transactions Discounts In some businesses it is normal to have discounts. However, there are two quite separate and distinct types of discounts, which result in very different reporting in the books of the business: there is trade discount and cash or settlement discount.

TRADE This discount is generally given when the buyer is in the same trade or industry as the seller. Trade discount itself is not shown in the journals, as the discount is taken off the value of the items being purchased. Only the net amount – that is, after the trade discount has been deducted – is shown in the purchases journal if a credit purchase, or cash payments journal if a cash purchase. A trade discount below the normal selling price given by the seller is recorded at the net amount. The trade discount itself is not recorded in the journals.

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CASH OR SETTLEMENT This discount arises when a lesser (or smaller) amount of payment is accepted than was originally invoiced, because the funds are received by an agreed date. This date is usually earlier than the normally accepted date for payment for the tax invoice amount. The discount is the difference between the tax invoice value and the value of the remittance or payment. A cash or settlement discount can only arise from credit transactions, which are a sale on credit (sell now, be paid later) or a purchase on credit (buy now and pay later). Cash discount is not a right; it is an option that may be offered on the tax invoice. There is no obligation to pay earlier and a customer may be happier taking the extra time before payment has to be made and miss out on the discount. Cash discount is usually shown as an alternative to pay a lesser amount by an early date or the full amount by a later date. For example, ‘2% 10 days/Net 30 days’ means that if the seller receives the funds within 10 days from the tax invoice date then 2% of the tax invoice value can be deducted from the amount of the tax invoice when paying. If this alternative of a cash discount is not taken, then payment is required 30 days from the end of the month following the date of the tax invoice. Adjustments for discounts are internal adjustments to the business books and you need to know how to calculate and show adjustments, which will probably include GST adjustments. There are two groups of cash or settlement discount: discount allowed and discount received.

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Go back and read the example again from the beginning; it is not easy and the GST receivable account complicates the adjustment.

QUESTION 5.29 J Altimo purchased $550 worth of goods from L Barchi on 15 July. The tax invoice from L Barchi showed a discount of $22 if payment was received by 25 July. On 23 July J Altimo paid the tax invoice less the discount received. Show the payment in the cash payments journal (or general journal) of J Altimo.

QUESTION 5.30 D Anderson received a tax invoice on 10 August from A Barrozo for $1100, which showed the terms of payment as 5% 10 days/net 30 days. D Anderson processed the remittance on 15 August. Show the payment in the books of D Anderson.

Cash accounting Until now this book has demonstrated how to process business transactions in an accrual accounting system. In the following chapters you will continue to use the principles of an accrual accounting system.

KEEP IN MIND Accrual accounting is a system where expenses and revenues are recorded when they occur. Sales on credit are processed using the date of the sale, and the customer pays at a later date. When recording credit sales we increase the asset, accounts receivable. Similarly, credit purchases are recorded on the date of the purchase, and the business remits funds to the supplier at a later date. When recording a credit purchase we increase the liability, accounts payable.

In chapter 10 you will apply the matching principle that was mentioned in chapter 1. You will see how adjustments are needed to match expenses to the revenues they earned. In this way profit or a loss is recorded for a period when it was actually earned. However, some small businesses use a cash accounting system. Revenues and expenses are recognised and recorded only when there is a flow of funds. Revenues are recorded when funds are received. Expenses are recorded when funds are remitted. In a cash accounting system, cash receipts and cash payments journals (or general journal) are used. Credit sales and credit purchases journals are not used. Small businesses with an annual turnover of less than $2 million may account for GST on a cash basis under current Australian taxation legislation.

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Sales In a cash accounting system, cash sales and receipt of other revenues are recorded as normal in a cash receipts journal. Credit sales, however, are not recorded when the sale is made. It is only when the business receives the funds from the customer that the sales transaction is recorded. Credit sales journals are not used. No account is maintained for accounts receivable, and the asset is not recognised. A tax invoice must still be prepared when the goods are taken or services are provided, but it is not recognised as a sale at this point in time and it is not processed in the journals. The sale only occurs when the customer remits funds for the tax invoice, and the GST payable is also now recognised. When the funds are received then the transaction is entered into the cash receipts journal as if it were a cash sale: debit bank, credit sales and GST payable.

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As no account receivable is recorded in the accounts, it is important that the business develops a tracking system to follow up invoices and ensure funds are received. Small businesses may choose to file tax invoices in alphabetical or chronological order and flag invoices that are outstanding. Alternatively, a listing of customers and unpaid invoices may be kept and regularly reviewed.

Expenses and purchases Cash purchases, expenses and other outflows are recorded as normal through the cash payments journal or general journal. However, credit purchases or expenses are not recorded when the purchase or expense is incurred. It is only when the business remits the amount owing to the supplier that the purchase is recorded. Credit purchases journals are not used. No account is maintained for accounts payable, and the liability is not recognised. A tax invoice would be provided by the supplier to the business with the goods or service, but it is not recognised as a purchase or expense at this point in time and it is not processed in the journals. The purchase or expense is only incurred when the business remits funds to the supplier, and the GST receivable (credit) is recognised. When the funds are remitted then the transaction is entered into the cash payments journal as if it was a cash purchase or expense: debit purchases/expense/inventory/asset and GST receivable, and credit bank. As no account payable is recognised in the accounts, it is important that the business develops a tracking system to follow up invoices and ensure that funds are remitted to the supplier on time. It may be appropriate to file the invoices in the same way as sales invoices, in alphabetical or chronological order along with delivery dockets and supplier statements.

Accounting for GST Businesses who choose to account for GST on a cash basis must: • account for GST payable on sales in the tax period in which the customer paid for them, and • account for GST receivable in the tax period in which funds were remitted to the supplier.

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Example 13: Recording using a cash accounting system On 1 July 2022 K Graham commenced business with bank $4000, inventory $3500, motor vehicle $10 000, computer $2500. Process this data through the general journal and post to the general ledger. K Graham has elected to prepare and maintain the accounts using the cash basis of accounting and not the accrual basis of accounting. Enter the following transactions, where appropriate, in the cash receipts journal and the cash payments journal, post them to the general ledger and extract a trial balance as at 31 July 2022 (see figures 5.76 and 5.77).   2 Cash sale of inventory for $726 ($660 + $66 GST).   4 M Abrahamowicz purchased inventory from K Graham and funds were received by debit card transaction $616 ($560 + $56 GST).   5 Sold inventory on credit to D Dam, payable by the end of month, $462 ($420 + $42 GST). 17 Paid Orana Electricity by external transfer of funds for usage of power $220 ($200 + $20). 17 Purchased various stationery items on credit, with 30 day terms as per tax invoice, from Harbour Stationery $55 ($50 + $5 GST).

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18 Purchased inventory on credit from D Dikien payable end of this month $231 ($210 + $21 GST), as per tax invoice. 18 Purchased goods from A Myriam $473 ($430 + $43 GST) paying by debit card. 23 Sale of stock to A Won $99 ($90 + $9), payable by end of month. 23 Sold goods to J Tran $957 ($870 + $87), who paid by using their debit card. 30 Received funds direct into bank account from A Won for tax invoice 23 July $99 ($90 + $9). 30 Paid D Dikien electronically for inventory purchased on 18 July $231 ($210 + $21 GST). General Journal of K Graham Date

GJ 1

Particulars

Ref

1 Jul 22 Bank

Debit

100

Credit

4 000

Inventory

101

3 500

Motor Vehicle

150

10 000

Computer Capital

151 300

2 500 20 000

Assets on commencement of business

Cash Receipts Journal of K Graham Date

Rmt Drawer and/or Particulars Rec 2 Jul 22 262 Sales

Ref

4 Jul 22 049 M Abrahamowicz – Sales 23 Jul 22 556 J Tran – Sales 30 Jul 22 858 A Won – Sales [ex 23.7.22]

Bank 726

660

GST Payab 66

616

560

56

957

870

87

99

90

9

2 398

2 180

218

100 [dr]

Sales

400 [cr]

CR 1

200 [cr]

Cash Payments Journal of K Graham Date

Rmt Payee and/or Particulars Pmt 17 Jul 22 442 Orana Electricity – Electricity 18 Jul 22 548 A Myriam – Purchases 30 Jul 22 747 D Dikien – Purchases [18.7]

Ref

Bank

Purchases

220 473 231 924 100 [cr]

GST Receiv 20

430 210 640 500 [dr]

CP 1 Electricity 200

43 21 84 102 [dr]

200 540 [dr]

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FIGURE 5.76  Journals for K Graham – cash-based accounting

Note that: • the credit sale of inventory on 5 July to D Dam does not appear in the accounts, as the amount had not been received by the end of the month and so was still not acknowledged in the accounts as a sale • the credit purchase of stationery on 17 July from Harbour Stationery does not appear in the accounts as the amount is not due to be paid until 30 days following the end of the month of July, which is the end of August.

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Extract General Ledger of K Graham

Bank

100

1 Jul 22 Capital

GJ1

4 000 31 Jul 22 Payments

31 Jul 22 Receipts

CR1

2 398

CP1

Balance c/d

6 398 1 Aug 22 Balance b/d

924 5 474 6 398

5 474

Inventory 1 Jul 22 Capital

GJ1

101

3 500

GST Receivable 31 Jul 22 Bank [payment]

CP1

102

84

Motor Vehicle 1 Jul 22 Capital

GJ1

10 000

1 Jul 22 Capital

GJ1

2 500

150

Computer

151

GST Payable

200

31 Jul 22 Bank [receipt]

CR1

218

GJ1

20 000

Capital

300

1 Jul 22 Assets

Sales

400

31 Jul 22 Bank [receipt]

CR1

Purchases 31 Jul 22 Bank [payment]

CP1

31 Jul 22 Bank [payment]

CP1

2 180

500

640

Electricity

540

200

Trial Balance of K Graham as at 31 July 2022 100

5 474

Inventory

101

3 500

GST Receivable

102

84

Motor Vehicle

150

10 000

Computer

151

2 500

GST Payable

200

218

Capital

300

20 000

Sales

400

Purchases

500

640

Electricity

540

200 22 398

Bank

2 180

22 398

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FIGURE 5.77  General ledger and trial balance for K Graham – cash-based accounting

QUESTION 5.31 G Rettkowicz commenced business from 1 August 2022 with bank $9000, inventory $2000, motor vehicle $8000, computer $2800; process this data through the general journal and post to the general ledger. G Rettkowicz has elected to prepare and maintain the accounts using the cash basis of accounting and not the accrual basis of accounting. Enter the following transactions, where appropriate, in the cash receipts journal and the cash payments journal; post them to the general ledger and extract a trial balance as at 31 August 2022.   2 Cash sale $814 ($740 + $74 GST).   5 Purchased inventory $550 ($500 + $50 GST) on credit from N Green.   9 Customer paid $825 ($750 + $75 GST) for inventory purchased. 17 Supplier was paid $110 ($100 + $10 GST) for stock taken by G Rettkowicz. 17 Sold $880 ($800 + $80 GST) of goods on credit to G Norman.

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17 21 21 23 23 27 28 29 30

Purchased machinery for $3300 ($3000 + $300 GST) with a debit card. G Rettkowicz sold goods to V Kapruziak for $990 ($900 + $90 GST) and accepted a cheque in payment. Purchased with a debit card four new tyres for business vehicle $660 ($600 + $60 GST). Credit sale of inventory for $935 ($850 + $85 GST) to G Bennett. Received direct into account from R Sahni $429 ($390 + $39 GST) for stock sold. G Rettkowicz obtained goods from S Rentzsch costing $330 ($300 + $30 GST) on 10-day credit terms. Paid $242 ($220 + $22 GST) petrol account for business vehicle. Deposited the cash sales $1925 ($1750 + $175 GST). Received funds direct into bank account from G Norman as per transaction on 17 August.

QUESTION 5.32 P Forrester has elected to prepare and maintain the accounts using the cash basis of accounting and not on the accrual basis of accounting. Enter the following transactions, where appropriate, in the cash receipts journal and the cash payments journal, post them to the extract general ledger and prepare a trial balance as at 30 September 2022.   1 Deposited $858 ($780 + $78 GST) cheques and cash for sales made.   1 Received $165 interest from investment direct into account.   7 Paid salaries $951.   7 Purchased equipment from N Seddon for $2948 ($2680 + $268 GST) cash. 10 Sold goods for cash $1969 ($1790 + $179 GST) to H Suzanne. 15 Inventory obtained on credit $990 ($900 + $90 GST) from B Georges. 18 P Forrester paid commission to G Marie $352 ($320 + $32 GST) with bank transfer. 19 P Forrester paid by debit card $330 ($300 + $30 GST) for goods. 20 Sale of inventory on credit to D Pullen for $1529 ($1390 + $139 GST). 20 Sold inventory $297 ($270 + $27 GST) to S Rebecca for cash. 21 Salaries remitted $1003. 22 Cash sales $1782 ($1620 + $162 GST). 27 P Forrester received a cheque for $1243 ($1130 + $113 GST) from H Margaret for inventory sold last month. 27 Paid $88 ($80 + $8 GST) for stationery. 29 Deposited $1540 ($1400 + $140 GST) from goods sold to P James.

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Organisational standards and procedures As will now be evident from material contained in earlier sections of this book, it is very important that businesses establish clear and comprehensive accounting policies and procedures relating to all phases of transaction processing, recording and reporting. These policies and procedures should be contained in the organisation’s operations manuals and be made available to all staff, particularly those employed directly in accounting roles. The use of strict accounting policies and procedures will ensure that: • transaction documents are accurately prepared, properly checked and authorised • data entered into journals and ledgers meets clear organisational input standards, with all transactions recorded and amounts allocated to correct accounts • documents, accounting records and reports are filed appropriately • all accounting information is processed in a timely manner. All practical examples and questions in this book assume compliance with typical organisational input standards and procedures.

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 5.33 On 1 February 2022, the balances of J Kelaher were: bank $4000, GST receivable $100, inventory $12 000 (the perpetual inventory system is used), plant and equipment $15 000, GST payable $200, loan from the bank $7000 and capital $ . . . . . . . . . Transactions for February 2022 were:   2  Purchased goods using debit card $781 ($710 + $71 GST).   4 Sold goods for cash to D Bacik for $1727 ($1570 + $157 GST), costing $746.   4 Cash sale $1518 ($1380 + $138 GST), at a cost of $656. 10 Purchased stock from V Handley on credit $902 ($820 + $82 GST). 15 J Kelaher bought $682 ($620 + $62 GST) of goods for resale from L Smith. 18 Sent tax invoice to J Leahy for $3861 ($3510 + $351 GST), cost $1607. 19 K Diprose was sent a tax invoice for $1947 ($1770 + $177 GST) being goods bought on credit, with an inventory cost of $752. 19 Banked cash sales $1716 ($1560 + $156 GST), which cost $663. 23 Received adjustment credit note $88 ($80 + $8 GST) for overcharge on purchase from V Handley. 24 Tax invoice $1617 ($1470 + $147 GST) to K Kloos, at a cost of $624. 24 Adjustment credit note for $99 ($90 + $9 GST) was sent to J Leahy. 25 Received tax invoice from Williams and Johns for new equipment $3300 ($3000 + $300 GST). 27 Paid V Handley for transactions this month, less $44 discount. 28 Received remittance from K Diprose for current transactions less $11 discount. 28 J Leahy remitted the total account. You are required for the month of February to: • enter the appropriate journal abbreviation next to each transaction above • prepare all relevant journals (or prepare the general journal) • post to a structured general ledger and balance the accounts • prepare a trial balance.

QUESTION 5.34 There are several internal controls that should be implemented in relation to the preparation of journals. Briefly describe

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two such controls.

QUESTION 5.35 Briefly outline two reasons why clear and comprehensive policies and procedures are important in an accounting system.

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QUESTION 5.36 Marty Joh started Marty’s Mower and Small Engine Repairs business on 1 March 2022 with bank $6000 and equipment valued at $3000; a spare shed on his property is used as the workshop. This service business uses cash-based accounting. Use the general journal for the commencement of the business. Enter the following transactions, where appropriate, in the relevant journal. Post all journals to the general ledger and prepare a trial balance as at 31 March 2022.   3  Received cash for repairs made to mower, invoiced as $132 ($120 + $12 GST).   5 Purchased spare parts and oils on credit from Johns Distributors; tax invoice showed $154 ($140 + $14 GST). 10  Received cash for repairs to ride-on mower, $220 ($200 + $20 GST). 12 Purchased parts on credit from Johns Distributors for a major rebuild of large ride-on mower $385 ($350 + $35 GST). 17  Tax invoice to S Joyce for major rebuild $2750 ($2500 + $250 GST); payment terms net 7 days. 19  Repaired three mowers totalling $616 ($560 + $56 GST) and received cash and cheque in payment. 23  Received $2750 from S Joyce as per tax invoice date 17 March. 25 Repairs to pump engine, would not work $440 ($400 + $40); received customer’s remitted funds the same day. 26 Ride-on mower received; it had been fully submerged in water for 15 hours. Ordered necessary parts. 28 Received parts from Johns Distributors ordered on 26 March; tax invoice totals were $495 ($450 + $45). 31 Paid electronically for the parts received during the month from Johns Distributors $1034 ($940 + $94).

QUESTION 5.37 A farmer and his family, known locally as the ‘Oonchies’, had for a number of years carried out a contracted service for many owners of local and surrounding farming properties. For an agreed or contracted price they would sow seeds over many hectares and harvest the resulting crops on behalf of the other farmer. This contract work was included as part of the Oonchies’ family farm revenue and expense, and was part of the total profit or loss of the whole family farming business. It has been decided to separate and formalise this service business from 1 July 2022 by creating a separate new business: Oonchies Contract Seeding & Harvesting, under the ownership and control of Julie, the daughter. The accounts are to be prepared using the accrual method of accounting. Using the chart of accounts for account allocation (see figure 5.78), you are required to prepare the general journal and specialised journals as required, post to the general ledger and extract a trial balance as at 31 July 2022. An initial service chart of accounts was prepared with the expectation that it would be expanded over time as the business developed and hopefully grew.

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CONTINUED

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Oonchies Contract Seeding & Harvesting Chart of Accounts Assets, Liabilities, Owner’s Equity Assets [debit] Current Assets Bank

Revenue and Expense Revenue [credit] 100

Contract Fee – Seeding

400

Petty Cash

101

Contract Fee – Harvesting

401

Accounts Receivable Control

102

GST Receivable

103

Direct Costs [debit] Fuel and Oil – Seeding

500

Non-current Assets

Fuel and Oil – Harvesting

501

150

Repairs and Maintenance – Seeding

502

Equipment – Harvesting

151

Repairs and Maintenance – Harvesting

503

Office Equipment

152

Seeds Purchased

504

Equipment – Seeding

Liabilities [credit] Current Liabilities Accounts Payable Control

200

GST Payable

201

Wages – Seeding

505

Wages – Harvesting Accommodation – Seeding

506 507

Accommodation – Harvesting

508

Indirect Costs [debit] Communication Expense

Non-current Liabilities Loan – Bank

250

Owner’s Equity [credit] Capital

FIGURE 5.78

300

550

Workshop Rent

551

Workshop Expense

552

Computer, Copier and Stationery

560

Office Rent

561

Insurance

562

Other Office Expenses

563

Chart of accounts for Oonchies Contract Seeding & Harvesting

On 1 July the service business commenced with bank $60 000; seeding equipment $50 000; harvesting equipment $80 000 and office equipment $5000. A loan from the bank had been established $30 000. Transactions for July were:   3 Purchased various stationery supplies from Theodore Newsagency paying with debit card $495 ($450 + $45 GST).   5 Relevant insurance policies for the year from Contractors Insurance were entered into and remitted funds electronically $3080 ($2800 + $280 GST). 10 Remitted monthly rent for office area $110 ($100 + $10 GST) and workshop area $220 ($200 + $20 GST) to landlord.

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10 Emailed tax invoice to Ray Peak for seeding completed today as per contract $22 000 ($20 000 + $2000 GST). 15 Received direct into bank account from Ray Peak $18 260. 15 Accommodation account settled electronically for contract seeding work $550 ($500 + $50 GST). 15 Received tax invoice from Emerald Fuel Supplies $4455 ($4050 + $405 GST) for diesel and oils received on credit during seeding contract. 16 Tax invoice received on account for parts from Capella Machinery Suppliers required for equipment during recent seeding operations $1837 ($1670 + $167 GST). 20 Tax invoices received on accounts for repair, maintenance and cleaning of all harvesting equipment; parts from Capella Machinery Suppliers $5137 ($4670 + $467 GST); fuel, oils and lubricants from Emerald Fuel Supplies $2937 ($2670 + $267 GST). 31 Paid by direct transfer the amounts owing to Emerald Fuel Supplies and Capella Machinery Suppliers.

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QUESTION 5.38 From the following balances and transactions of P Sullivan for the month of September 2022, where perpetual inventory applies, you are required to: a enter the appropriate journal abbreviation next to each transaction below and prepare all relevant journals (or prepare the general journal), and b post to a structured general ledger and balance the accounts, and c prepare a trial balance. The cost of sales is to be calculated at 60% of the sales value (rounded to the nearest $). The account balances at the end of August 2022 were: land and buildings $35 000, plant and machinery $17 000, accounts receivable control $ …… (F Cambourn $1738, L Horner $2563), inventory $18 000, bank overdraft $1650, accounts payable control $ …… (E Longville $737), mortgaged loan on land and buildings $30 000, GST receivable $875, GST payable $1765 and capital $ …… Transactions for September were:   1 Received remittance for $2497 from L Horner, discount of $66 had been taken.   1 F Cambourn remitted $1705 in full settlement of amount owing.   3 Electronically transferred funds to E Longville $704 in full settlement of account.   5 Tax invoiced F Cambourn $3762 ($3420 + $342 GST).   5 Mailed tax invoice to L Horner $2629 ($2390 + $239 GST).   8 Received rent from tenants $660 ($600 + $60 GST). 12 Tax invoice from J Malloy for $506 ($460 + $46 GST) for deliveries to customers. 15 Stock sold to G Wild $1936 ($1760 + $176 GST) cash. 17 Sold goods to L Horner $2860 ($2600 + $260 GST). 17 Tax invoice received from L Paragon for photocopy paper (stationery) $286 ($260 + $26 GST). 18 Purchased stock from E Longville $583 ($530 + $53 GST). 20 Adjustment credit note raised for error in pricing and sent to L Horner $88 ($80 + $8 GST). 23 Transferred three-monthly interest on mortgaged loan $1275. 23 Remitted funds to Shortland Electricity for electricity consumption $1848 ($1680 + $168 GST). 27 Received tax invoice from B Stooke and Co for minor repairs and repainting of office $1749 ($1590 + $159 GST). 28 Sold stock to D Craig $3608 ($3280 + $328 GST).

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30 Paid Australia Post for postage stamps $45 ($41 + $4 GST).

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QUESTION 5.39 From the following transactions you are required to: a enter the appropriate journal abbreviation next to each transaction below and prepare all relevant journals (or prepare the general journal), and b post to a structured general ledger and balance the accounts, and c prepare a trial balance. C Holmes’ balances as at 1 July 2022 were: $35 000 bank; accounts receivable control $2222 (A McGregor $1496, D Falconer $726); inventory $12 000; GST receivable $360; premises $30 000, motor vehicle $8000; office furniture and equipment $10 500; GST payable $1560; loan from West Bank $35 000; capital $ …… Transactions for July were:   3 Remitted funds to Telstra $737 ($670 + $67 GST) for new connection and rental fee.   6 Sold stock for cash $1848 ($1680 + $168 GST) at a cost of $714.   9 Received tax invoice $187 ($170 + $17 GST) from Wauchope Stationery for various stationery items.   9 Tax invoiced G Sherborne for goods $1463 ($1330 + $133 GST), costing $565.   9 Tax invoice for $5093 ($4630 + $463 GST) received from Kanon Copier for new photocopier, allocated as office furniture and equipment. 10 Photocopier paper received from Wauchope Stationery $143 ($130 + $13 GST). 12 Purchased stock from G Williams $330 ($300 + $30 GST). 13 Received remittance from D Falconer in full settlement of account. 15 Direct deposit received for $2838 ($2580 + $258 GST) from P Crowley for goods sold today, at a cost of $1097. 15 Received $500 from A McGregor in part payment of account owing from last month. 15 Remitted wages $2850. 17 Tax invoice sent to G Sherborne for goods $2904 ($2640 + $264 GST), at a cost of $1122. 17 Remitted funds to Australian Taxation Office (ATO) the GST for the June quarter $1200 (GST payable $1560 – GST receivable $360). 20 Credit sale to E Gunning for goods $1793 ($1630 + $163 GST), which cost $693. 22 Electronically transferred $495 ($450 + $45 GST) to Marilyn and Rose, insurance brokers. 23 Received $750 from A McGregor following visit to customer regarding concerns over slow payment. 28 Received $1463 as a direct deposit from G Sherborne being part payment of this month’s transactions. 28 E Gunning remitted funds in full for transaction on 20th, less $44 settlement discount. 29 Transferred funds to Kanon Copier $5093 for transaction on 9 July.

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29 Remitted $2850 to pay for wages.

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QUESTION 5.40 The balance in the accounts of W Beavan at the end of April 2022 were: bank $3215, motor vehicle $13 200, machinery $2400, accounts receivable control $1101 (M Griggs $715 and G Bartlett $386), inventory $8850, GST receivable $150, accounts payable $560 (L Robinson $427 and C Hunter $133), GST payable $400 and capital $ …… Using a perpetual system, assume that the cost of sales is to be calculated at 60% of the sales value (rounded to the nearest $). The transactions for May were:   1 Electronically received funds from M Griggs for balance owing, less discount $22.   1 Remitted funds to L Robinson’s account less $33 discount.   1 Direct deposit for $342 received from G Bartlett in full settlement.   3 Received adjustment credit note from C Hunter $33 ($30 + $3 GST).   4 Banked cash sale $1936 ($1760 + $176 GST).   4 Tax invoiced M Seaford $1815 ($1650 + $165 GST).   5 Mailed adjustment credit note $44 ($40 + $4 GST) to G Bartlett for a quality problem.   6 Remitted to C Hunter amount owing in April after deducting adjustment credit note issued this month.   6 Purchased stock from C Lucre on credit $407 ($370 + $37 GST). 17 Remitted funds to Australian Taxation Office (ATO) the GST for the March quarter $250 (GST payable $400 – GST receivable $150). 18 Sold goods to F Proctor $1595 ($1450 + $145 GST). 20 G Bartlett was tax invoiced for stock despatched $1749 ($1590 + $159 GST). 25 Mailed $1661 ($1510 + $151 GST) tax invoice to F Proctor. 25 Debit card used for purchase of inventory for $506 ($460 + $46 GST) from S Driscoll. 26 Purchased machinery from Alexander Machinery Sales costing $8899 ($8090 + $809 GST). 27 Received funds from $9000 loan from J M Hulewicz. 28 Remitted $253 ($230 + $23 GST) to Colo Caltex for petrol and oil for the month. Transactions for June were:   1 Direct deposit received from M Seaford for $1760 in full settlement of account dated 4 May.   1 F Proctor remitted funds paying for the accounts on 18th and 25th less discount, which totalled $88.   1 Sold stock to T Legge for $1419 ($1290 + $129 GST) cash.   2 Transferred funds to C Lucre $396 in full settlement of tax invoice on 6 May.   5 Received direct deposit for the balance of account from G Bartlett, that is, 5th and 20th of last month.   5 Cash sale $1573 ($1430 + $143 GST). 10 Remitted funds to Alexander Machinery Sales the balance on its account from 26th.

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20 L Robinson sold goods to W Beavan $385 ($350 + $35 GST). 20 M Seaford was sold goods $1287 ($1170 + $117 GST). 25 F Proctor purchased $2541 ($2310 + $231 GST) of goods. 26 Electronically transferred $1280 to Northern Rivers Council for rates. 28 Remitted $297 ($270 + $27 GST) to Colo Caltex for petrol and oil for the month. You are required to: a enter the appropriate journal abbreviation next to each of the above transactions and prepare all relevant journals (or prepare the general journal) for May and then for June b post to a structured general ledger and balance the accounts at the end of each month c prepare a trial balance at the end of each month. The Workbook that accompanies this text will allow you to complete this question using a periodic inventory system.

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183

6 Separate ledgers for accounts receivable and accounts payable

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Introduction

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In the previous chapter you prepared four specialised journals and also continued to use the general journal. Information from all journals was then posted to accounts in a structured general ledger. At a point in time the accounts in the general journal were balanced and a trial balance was prepared. However, we could not easily calculate how much each individual account receivable owed the business. All accounts receivable were posted to one account, called accounts receivable control. Neither could we easily calculate how much the business owed to each individual account payable. All accounts payable were posted to one account, called accounts payable control. This chapter provides businesses with the process to easily identify amounts owed by individual customers, and amounts owed to individual suppliers.

CHAPTER 6

What can we now do? Based on the accounting equation of A = L + OE + P (or A + E = L + OE + R), and the principles of double-entry accounting, it should be appreciated that the business now has: • a chart of accounts that is a structured listing of all the accounts in the general ledger • a set of journals enabling it to record the sale of all goods, services or assets on credit (sales journal) or for cash (cash receipts journal) and to purchase all goods, services, assets and expenses on credit (purchases journal) or for cash (cash payments journal) • the ability to process some adjustments to its own records through the general journal • the process for posting information from the five journals to the general ledger and to prepare a trial balance.

Subsidiary ledgers and control accounts This chapter demonstrates the use of accounts receivable and accounts payable subsidiary ledgers, and shows their relationship to control accounts in the general ledger. Later in this chapter you will see how the same principles may be used for other accounts – particularly assets and liabilities. Until now we have used the T account format for the general ledger. The columnar format is commonly used for subsidiary ledgers. You may wish to refer to figure 4.16 on page 95 to recall the format of a columnar ledger. So that you have practice in using both ledger formats, we will continue to use the T account format for the general ledger, and the columnar format for subsidiary ledgers.

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Accounts receivable subsidiary ledger At this stage the business can identify the total value of the accounts receivable, as this is the balance in the accounts receivable control account in the general ledger. However, it does not know the identity of each account receivable or credit customer and how much it is owed by each. The business needs this information on an ongoing daily basis so that it can ensure that it collects funds that it is owed. It also needs the information so that it only sells to those accounts receivable who do pay on time. To obtain this detailed, daily information the business maintains a subsidiary, or separate, accounts receivable ledger. This subsidiary accounts receivable ledger consists of an account for every credit customer. Each account records the details of all credit transactions between the business and the specified account receivable: credit sales, returns and remittances received. In chapter 5 we saw how the sales and cash receipts journals provide the total for accounts receivable, which is posted monthly to the accounts receivable control account in the general ledger. In addition, details and amounts from each individual customer tax invoice, adjustment or credit note and remittance are posted daily to the relevant account receivable in the accounts receivable subsidiary ledger. Figure 6.1 shows the relationship between the general ledger and the accounts receivable ledger. The total debited (usually from the sales journal) to the accounts receivable control account is also debited in detail to the individual account receivable in the subsidiary ledger. Similarly, the total credited (usually from the cash receipts journal) to the accounts receivable control account is also credited in detail to the individual account receivable in the subsidiary ledger. At the end of the month, a list is made of all the accounts receivable accounts in the subsidiary accounts receivable ledger with their respective balances. This is called an accounts receivable listing. The total of the balances in the listing must agree with the balance of the accounts receivable control Created from tafenswlib on 2020-05-30 05:38:12.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

account in the general ledger. As it is a list of asset accounts and their balances, the total of the accounts receivable listing should be a debit balance. It will not have both debit and credit columns, as in a trial balance. In summary, we can make the following statements. • The accounts receivable ledger is only part of one side of the accounting equation, and therefore does not have total debits equalling total credits. • The accounts receivable ledger is a detailed presentation of transactions with individual accounts receivable (or debtors), and the total balance must agree with the balance of the accounts receivable control account in the general ledger. • A trial balance is not prepared. Instead, a listing of individual account receivable balances is prepared. The total should agree with the balance of the accounts receivable control in the general ledger.

Copyright © 2018. Cengage. All rights reserved.

Accounts payable subsidiary ledger The business knows the total value of the accounts payable, as this is the balance in the accounts payable control account in the general ledger. However, it cannot easily identify each account payable or credit supplier and how much it owes to each. Just as the business gives credit terms on tax invoices for credit sales, it may also be given credit terms on credit purchases by suppliers. Its suppliers expect the business to pay them within the terms of trade on the purchase tax invoices. The business needs information about each account payable on a daily basis so that it can pay its creditors on time. If the business does not pay suppliers’ tax invoices according to the terms of trade, those suppliers/accounts payable/creditors may refuse to continue selling on credit, or to extend credit, to the business. The business may then be forced to make its purchases for cash rather than be given time to pay. To obtain this detailed daily information, the business maintains a subsidiary accounts payable ledger, which consists of an account for every credit supplier. Each account records the details of all credit transactions between the business and the specified account payable: credit purchases, returns and remittances made. In chapter 5 we saw how the purchases and cash payments journals provide the total for accounts payable, which is posted monthly to the accounts payable control account in the general ledger. The details and amounts from each individual supplier’s tax invoices, adjustments or credit notes, and payment details are posted daily to the relevant account payable in the accounts payable subsidiary ledger. Figure 6.1 shows the relationship between the general ledger and the accounts payable ledger. The total debited (usually from the cash payments journal) to the accounts payable control account is also debited in detail to the individual account payable accounts in the subsidiary ledger. Similarly, the total credited (usually from the purchases journal) to the accounts payable control account is also credited in detail to the individual account payable accounts in the subsidiary ledger. At the end of the month, a listing is made of all the individual account payable accounts in the subsidiary accounts payable ledger with their respective balances. This is called the accounts payable listing. The total of this listing must agree with the balance in the general ledger of the accounts payable control account. As it is a one column list of liability accounts and their balances, the total of the accounts payable listing is a credit total only. It will not have both a debit and credit column as in a trial balance. In summary, we can make the following statements. • The accounts payable ledger does not have total debits equalling total credits. • The accounts payable ledger is a detailed presentation, and must in total equal the accounts payable control account in the general ledger. • A trial balance is not prepared, but a listing of individual account payable balances is prepared. This should agree with the balance of the accounts payable control account in the general ledger. 186tafenswlib on 2020-05-30 05:38:12. Created from

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Periodic inventory will be used throughout the chapter, as it is simpler and uses fewer accounts in the journals and the general ledger.

Accounts receivable control and subsidiary ledger There are no changes required to the preparation and format of the sales journal and the cash receipts journal. There is, however, a change required to the posting procedures from the journals to the accounts receivable ledger.

Posting sales journal WITH GENERAL LEDGER ONLY KEEP IN MIND At the end of each month the sales journal is totalled; that is, the accounts receivable control account column and other account columns are added down and cross-balanced (see figure 6.2). The total of the accounts receivable control account column should equal the sum of the totals of all the other account columns.

Sales Journal

SJ 1

Acc’nt Sales GST Receiv Payab Dr

Accounts Receivable Control Dr

Sales Cr

Cr

Cr

Any A/c Cr

GST Payable

Any Account

Cr

Cr

FIGURE 6.2  Sales journal, end-of-month totals posted to the general ledger

WITH GENERAL LEDGER AND ACCOUNTS RECEIVABLE LEDGER

Copyright © 2018. Cengage. All rights reserved.

General ledger The posting to the general ledger stays the same whether or not there is a separate subsidiary accounts receivable ledger.

Accounts receivable ledger The individual account transactions that make up the total accounts receivable account column in the sales journal are debited to their respective accounts in the separate accounts receivable ledger, as shown in figure 6.3.

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A/c Rec A

Sales Journal

Dr

SJ 1

Acc’nt Sales GST Receiv Payab

A/c Rec B

Any A/c

Dr Dr

Cr

Cr

Cr

A/c Rec C Dr Accounts Receivable Control

Sales

Dr

GST Payable

Any Account

Cr

Cr

Cr

FIGURE 6.3 Sales journal, posted daily in the accounts receivable ledger to the debit of individual accounts. At the end of the month, total of the accounts receivable control account and other account totals are posted in the general ledger.

Posting cash receipts journal WITH GENERAL LEDGER ONLY KEEP IN MIND At the end of each month, the cash receipts journal is totalled; that is, the bank account column and other account columns should be added down and cross-balanced. The total of the bank account column should equal the sum of the totals of all the other account columns (see figure 6.4). It would be normal for funds from accounts receivable to be received during the month and this is credited to the accounts receivable control account. If there is discount allowed, then 1/11th of the total discount allowed is debited to GST payable and the remaining 10/11ths is debited to the discount allowed account; both amounts are shown in brackets.

Cash Receipts Journal

CR 1

Bank Acc’nt Disc GST Sales Receiv Allow’d Payab

Copyright © 2018. Cengage. All rights reserved.

Dr

Bank Dr

Accounts Receivable Control Cr

Cr

Discount Allowed Dr

(Dr)

Cr

Cr

GST Payable Cr

Sales Cr

FIGURE 6.4  Cash receipts journal, end-of-month totals posted to the general ledger

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

WITH GENERAL LEDGER AND ACCOUNTS RECEIVABLE LEDGER General ledger The posting to the general ledger stays the same whether or not there is a separate subsidiary accounts receivable ledger.

Accounts receivable ledger The individual account transactions that make up the total accounts receivable column in the cash receipts journal are credited to their respective accounts in the accounts receivable subsidiary ledger (see figure 6.5). The remittance received from the customer, together with the GST and any discount allowed, is shown as a credit. The sum of these three amounts should be the same as the total of the tax invoice(s) owed by the account receivable. A/c Rec A

Cash Receipts Journal

Cr

CR 1

Bank Acc’nt Disc GST Sales Receiv Allow’d Payab

A/c Rec B Cr

Dr

Cr

(Dr)

Cr

Cr

A/c Rec C Cr

Bank Dr

Accounts Receivable Control Cr

Discount Allowed

GST Payable

Dr

Sales

Cr

Cr

FIGURE 6.5 Cash receipts journal, posted daily in the accounts receivable ledger to the credit of individual accounts. At the end of the month, the total of the accounts receivable control account and other account totals are posted in the general ledger.

Example 1: Sales journal, cash receipts journal, general ledger and accounts receivable ledger

Copyright © 2018. Cengage. All rights reserved.

From the summaries and journals for D Palm (figures 6.6 to 6.8), post to the general ledger and the accounts receivable ledger, then prepare a trial balance and accounts receivable listing as at 30 September 2022 (see figures 6.9 to 6.11). At the end of August the accounts receivable control account of $1309 in the general ledger agreed with the accounts receivable listing from the accounts receivable ledger. Trial Balance of D Palm as at 31 August 2022 Bank 100 4 181 Accounts Receivable Control 101 1 309 GST Payable 200 Capital 300 5 490

D Palm Accounts Receivable Listing

790 4 700 5 490

E Eid F Faber G Galea

as at 31 August 2022 1 2 3

  

FIGURE 6.6  Trial balance and accounts receivable listing of D Palm as at end of August

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638 495 176 1 309

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Sales Journal of D Palm Date Inv Adj 5 Sep 22 235 8 Sep 22 236 9 Sep 22 237 19 Sep 22 238 25 Sep 22 239 28 Sep 22 240

Accounts Receivable and/or Particulars G Galea – Sales E Eid – Sales F Faber – Sales H Hold – Sales G Galea – Sales E Eid – Sales

Ref R3 R1 R2 R4 R3 R1

Acc’nts Receiv 330 1 067 473 1 122 726 781 4 499 101 [dr]

Sales 300 970 430 1 020 660 710 4 090 400 [cr]

SJ 1

GST Payab 30 97 43 102 66 71 409 200 [cr]

FIGURE 6.7  Sales journal of D Palm Cash Receipts Journal of D Palm Date 2 Sep 22 3 Sep 22 10 Sep 22 19 Sep 22 30 Sep 22

Rmt Rec 159 610 361 261 163

Drawer and/or Particulars

Ref

Bank

F Faber – Accounts Receivable E Eid – Accounts Receivable Sales G Galea – Accounts Receivable H Hold – Accounts Receivable

R2 R1

473 627 1 221 176 1 078 3 575 100 [dr]

R3 R4

Acc’nts Receiv 495 638 176 1 122 2 431 101 [cr]

Disc Allow’d (20) (10)

(40) (70) 560 [dr]

CR 1 GST Payab (2) (1) 111 (4) 104 200 [cr]

Sales

1 110

1 110 400 [cr]

FIGURE 6.8  Cash receipts journal of D Palm

In the general ledger the accounts receivable control account shows the total for September of the accounts receivable column in the sales journal of $4499 and the accounts receivable column in the cash receipts journal of $2431 (see figures 6.7 and 6.8). In the subsidiary ledger the entries are to be entered chronologically (in date order), as they are posted on a daily basis to the accounts receivable subsidiary ledger. The posting to the subsidiary ledger from the sales journal to the accounts receivable ledger is the amount from the individual accounts receivable column entry. When posting to the subsidiary ledger from the cash receipts journal, the amount is again taken from the individual accounts receivable column. However, if there is a discount allowed, then: • the value of the remittance received, as well as Copyright © 2018. Cengage. All rights reserved.

• the combined total value of discount allowed plus GST payable are shown. The sum of these three amounts should be the same as the amount in the accounts receivable column of the cash receipts journal. See, for example, the receipt from F Faber on 2 September in the cash receipts journal (figure 6.8), which was recorded in the following columns: Account Receivable $495 (Cr) = $473 Bank (Dr) + $20 Discount Allowed (Dr) + $2 GST Payable (−Cr).

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191

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

General Ledger of D Palm Bank 1 Sep 22 Balance b/d 30 Sep 22 Receipts

CR1

100

4 181 3 575 7 756

Accounts Receivable Control 1 Sep 22 Balance b/d 30 Sep 22 Sales

SJ1

1 Oct 22 Balance b/d

101

1 309 30 Sep 22 Bank [receipt] 4 499 Balance c/d 5 808 3 377

CR1

GST Payable

2 431 3 377 5 808

200

1 Sep 22 Balance b/d 30 Sep 22 Accounts Receivable Control SJ1 Bank [receipt] CR1

Capital

790 409 104 1 303

300

1 Sep 22 Balance b/d

4 700

Sales

400

30 Sep 22 Accounts Receivable Control SJ1 Bank [receipt] CR1

Discount Allowed 30 Sep 22 Bank [receipt]

CR1

4 090 1 110 5 200

560

70

FIGURE 6.9  General ledger of D Palm Accounts Receivable Ledger of D Palm E Eid 1 Sep 22 Balance 3 Sep 22 Bank [receipt] Discount Allowed and GST 8 Sep 22 Sales 28 Sep 22 Sales

1 638 CR1 CR1 SJ1 SJ1

627 11 1 067 781

638 11 0 1 067 1 848

Dr Dr

495 22 0 473

Dr Dr

176 506 330 1 056

Dr Dr Dr Dr

1 122 44 0

Dr Dr

F Faber 1 Sep 22 Balance 2 Sep 22 Bank [receipt] Discount Allowed and GST 9 Sep 22 Sales

2 495 CR1 CR1 SJ1

473 22 473

Copyright © 2018. Cengage. All rights reserved.

G Galea 1 Sep 22 5 Sep 22 19 Sep 22 25 Sep 22

Balance Sales Bank [receipt] Sales

176 330 176 726

H Hold

FIGURE 6.10  Accounts receivable subsidiary ledger of D Palm

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Dr

3 SJ1 CR1 SJ1

19 Sep 22 Sales 30 Sep 22 Bank [receipt] Discount Allowed and GST

Dr Dr

4 SJ1 CR1 CR1

1 122 1 078 44

CHAPTER 6

Trial Balance of D Palm

D Palm Accounts Receivable Listing

as at 30 September 2022 100 7 756

Bank

as at 30 September 2022 1

E Eid

3 377

1 848

Accounts Receivable Control GST Payable

101 200

1 303

F Faber

2

473

Capital

300

4 700

G Galea

3

Sales

400

5 200

1 056 3 377

Discount Allowed

500

70 11 203

11 203

FIGURE 6.11  Trial balance and accounts receivable listing of D Palm as at 30 September

QUESTION 6.1 Using the information of P Alexander for April and May 2022, as shown in figures 6.12, 6.13 and 6.14: • enter the opening balances in the appropriate ledgers • post the sales journal and the cash receipts journal to the general ledger in T account format and the accounts receivable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts receivable listing that balances with the accounts receivable control account in the general ledger. P Alexander Accounts Receivable Listing

Trial Balance of P Alexander as at 30 April 2022 Bank 100 Accounts Receivable Control 101 GST Payable 200 Capital 300

as at 30 April 2022 R Routledge 1 S Stalder 2 T Taylor 3

2 092 4 147

6 239

439 5 800 6 239

1 067 1 254 1 826 4 147

FIGURE 6.12  Trial balance and accounts receivable listing of P Alexander, as at 30 April

Sales Journal of P Alexander

Copyright © 2018. Cengage. All rights reserved.

Date 4 May 22 7 May 22 8 May 22 15 May 22 21 May 22 25 May 22 27 May 22 28 May 22 30 May 22

Inv Adj 531 532 533 534 535 536 537 538 539

Accounts Receivable and/or Ref Particulars S Stalder – Sales T Taylor – Sales R Routledge – Sales D Unwin – Sales T Taylor – Sales R Routledge – Sales D Unwin – Sales V Veness – Sales T Taylor – Sales

Acc’nts Receiv 715 682 1 045 297 968 814 396 319 616 5 852

Sales

[dr]

[cr]

650 620 950 270 880 740 360 290 560 5 320

SJ 1

GST Payab 65 62 95 27 88 74 36 29 56 532 [cr]

FIGURE 6.13  Sales journal of P Alexander

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Cash Receipts Journal of P Alexander Date 1 May 22 2 May 22 17 May 22 23 May 22 31 May 22

Rmt Rec 247 842 924 520 152

Drawer and/or Particulars

Ref

Bank

R Routledge – Acc Receivable T Taylor – Acc’nts Receivable S Stalder – Acc’nts Receivable Sales D Unwin – Acc’nts Receivable

1 001 1 826 1 210 517 671 5 225

Acc’nts Disc Receiv Allow’d  (60) 1 067 1 826 1 254  (40)  (20) (120)

693 4 840

[dr]

[cr]

[dr]

CR 1 GST Payab  (6)

Sales

 (4) 47  (2) 35 [cr]

470 470 [cr]

FIGURE 6.14  Cash receipts journal of P Alexander

QUESTION 6.2 Using the information of P Brushgrove for April and May shown in figures 6.15, 6.16 and 6.17: • enter the opening balances in the appropriate ledgers • post the sales journal and the cash receipts journal to the general ledger in T account format and the accounts receivable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts receivable listing that balances with the accounts receivable control account in the general ledger. Trial Balance of P Brushgrove as at 30 April 2022 Bank 100 Accounts Receivable Control 101 GST Payable 200 Capital 300 Sales 400

P Brushgrove Accounts Receivable Listing

9 730 1 782

11 512

E Bore I Glen G Innes W Willi

1 072 1 500 8 940 11 512

as at 30 April 2022 1 3 4 7

341 484 572 385 1 782

FIGURE 6.15  Trial balance and accounts receivable listing of P Brushgrove

Sales Journal of P Brushgrove Date

Copyright © 2018. Cengage. All rights reserved.

1 May 22 10 May 22 15 May 22 16 May 22 18 May 22 20 May 22 21 May 22 28 May 22

Inv Adj 356 357 358 359 360 361 019 362 020 363

Accounts Receivable and/or Ref Acc’nts Particulars Receiv W Willi – Sales 1 947 C Clouds – Sales 2 431 N Werrikimbe – Sales 1 650 I Glen – Sales 1 881 B Lomond – Sales 1 914 G Innes – Sales 1 793 G Innes – Sales Return (33) W Willi – Sales 1 980 W Willi – Sales Return (44) E Bore – Sales 1 232 14 751 [dr]

FIGURE 6.16  Sales journal of P Brushgrove

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Sales 1 770 2 210 1 500 1 710 1 740 1 630 (30) 1 800 (40) 1 120 13 410 [cr]

GST Payab 177 221 150 171 174 163 (3) 180 (4) 112 1 341 [cr]

SJ 1

CHAPTER 6

Cash Receipts Journal of P Brushgrove Date

Rmt Drawer and/or Rec Particulars 1 May 22 427 W Willi – Accounts Receivable

Ref

Bank 374

2 May 22 345 G Innes – Accounts Receivable

550

Acc’nts Disc Receiv Allow’d 385 (10)

CR 1 GST Payab (1)

572

(20)

(2)

(10)

(1)

3 May 22 474 E Bore – Accounts Receivable

330

341

5 May 22 546 I Glen – Accounts Receivable

484

484

Sales

17 May 22 468 Sales

957

87

870

21 May 22 741 Sales

1 925

175

1 750

129

1 290

31 May 22 842 Sales 497 C Clouds – Accounts Receivable

3 784

2 431

(60)

(6)

8 404

4 213

(100)

381

[dr]

[cr]

[dr]

3 910

[cr]

[cr]

FIGURE 6.17  Cash receipts journal of P Brushgrove

QUESTION 6.3 Using the information of Stan Thorpe for June and July shown in figures 6.18, 6.19 and 6.20: • enter the opening balances in the appropriate ledgers • post the sales journal and the cash receipts journal to the general ledger in T account format and the accounts receivable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts receivable listing that balances with the accounts receivable control account in the general ledger. Trial Balance of Stan Thorpe

Stan Thorpe Accounts Receivable Listing

as at 30 June 2022 Bank Accounts Receivable Control GST Payable Capital

100 101 200 300

as at 30 June 2022

578 5 610

6 188

888 5 300 6 188

B Corindi J Jeogla U Runga

1 2 4

2 200 1 683 1 727 5 610

FIGURE 6.18  Trial balance and accounts receivable listing of Stan Thorpe Sales Journal of Stan Thorpe

Copyright © 2018. Cengage. All rights reserved.

Date 1 Jul 22 3 Jul 22 8 Jul 22 9 Jul 22 15 Jul 22 22 Jul 22 27 Jul 22 28 Jul 22 31 Jul 22

Inv Adj 189 190 191 286 192 193 194 195 196 287

Accounts Receivable and/or Particulars U Runga – Sales H Nambucca – Sales B Corindi – Sales U Runga – Sales Return J Jeogla – Sales W Whiporie – Sales U Runga – Sales W Whiporie – Sales B Corindi – Sales B Corindi – Sales Return

Ref Acc’nts Receiv 2 178 2 618 869 (253) 1 353 2 035 1 749 1 232 1 430 (583) 12 628 [dr]

Sales 1 980 2 380 790 (230) 1 230 1 850 1 590 1 120 1 300 (530) 11 480 [cr]

SJ 1

GST Payab 198 238 79 (23) 123 185 159 112 130 (53) 1 148 [cr]

FIGURE 6.19  Sales journal of Stan Thorpe

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Cash Receipts Journal of Stan Thorpe Date 1 Jul 22 2 Jul 22 15 Jul 22 20 Jul 22 25 Jul 22

Rmt Rec 531 325 353 435 553 658 573

Drawer and/or Particulars

Ref

B Corindi – Accounts Receivable U Runga – Accounts Receivable Sales J Jeogla – Accounts Receivable Sales Sales H Nambucca – Acc’nts Receivable

Bank 2 145 1 694 1 474

Acc’nts Receiv 2 200 1 727

Disc Allow’d (50) (30)

CR 1 GST Payab (5) (3) 134

Sales

1 340

1 683 3 542 3 762 12 617 [dr]

2 618 8 228 [cr]

(70) (150) [dr]

169 111 (7) 399 [cr]

1 690 1 110 4 140 [cr]

FIGURE 6.20  Cash receipts journal of Stan Thorpe

Copyright © 2018. Cengage. All rights reserved.

Accounts receivable in computerised accounting Off-the-shelf accounting software packages generally include a sales module or tab that is used to record all transactions related to credit sales. This includes the tax invoice for the credit sale, receipts from customers for services and goods sold on credit, and adjustments such as credit notes. These packages employ onetime data entry: when the transaction is entered into the sales module, through the use of coding, the entry is automatically posted to the appropriate general ledger accounts, including the accounts receivable control account. The transaction is also posted to the relevant accounts receivable in the accounts receivable subsidiary ledger. Reports such as the trial balance and accounts receivable listings will also be automatically updated and generated. In many accounting software packages the entry of a credit sale in the sales module will produce a sales invoice that can be forwarded to the customer. The preparation of the sales invoice would be the onetime entry that automatically generates the credit sales journal entry and postings to the ledger accounts. In addition, the receipt of funds from customers is often automated through direct bank data feeds, which minimises the amount of data processing into the business’s accounting system. Therefore, when transmitting funds directly into a business’s bank account, it is important that customers include a customer reference number or invoice number details. This will assist the business receiving the funds to ensure that the funds are allocated against the correct invoice. Some computer systems allow a business to capture data from hard copy mail and email attachments. Some systems use electronic data interchange (EDI), which is the automatic transfer of data from one business’s computer system to another business’s computer system. For example, the supplier can automatically accept electronic purchase orders from a customer and generate a sales invoice without having to manually input the information into their computer system. EDI permits multiple companies, such as the big supermarkets, to instantly place orders with suppliers. In some cases, suppliers monitor levels of their inventory for their customer and will automatically generate a sales order where appropriate.

Accounts payable control and subsidiary ledger There are no changes required to the preparation and format of the purchases journal and the cash payments journal. There is, however, a change required to the posting procedures from the journals to the accounts payable ledger.

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Posting purchases journal WITH GENERAL LEDGER ONLY KEEP IN MIND At the end of each month, the purchases journal is totalled; that is, the accounts payable control account column and other account columns are added down and cross-balanced. The total of the accounts payable control account column should equal the sum of the totals of all the other account columns.

Purchases Journal

PJ 1

Acc’nt Pur-­ GST Any Payab chases Receiv A/c Cr

Accounts Payable Control Cr

Purchases Dr

Dr

Dr

Dr

GST Receivable

Any A/c Dr

Dr

FIGURE 6.21  Purchases journal, end-of-month totals posted to the general ledger

WITH GENERAL LEDGER AND ACCOUNTS PAYABLE LEDGER General ledger The posting to the general ledger stays the same whether or not there is a separate subsidiary accounts payable ledger.

Accounts payable ledger The individual account transactions that make up the total accounts payable column in the purchases journal are credited to their respective accounts in the separate accounts payable ledger. A/c Pay X

Purchases Journal

PJ 1

Acc’nt Pur­GST Any Payab chases Receiv A/c

Cr

Copyright © 2018. Cengage. All rights reserved.

A/c Pay Y Cr Cr

Dr

Dr

Dr

A/c Pay Z Cr

Accounts Payable Control Cr

Purchases Dr

GST Receivable Dr

Any A/c Dr

FIGURE 6.22 Purchases journal, posted daily in the accounts payable ledger to the credit of individual accounts. At the end of the month, the total of the accounts payable control account and other account totals are posted in the general ledger.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Posting cash payments journal WITH GENERAL LEDGER ONLY KEEP IN MIND At the end of each month, the cash payments journal is totalled; that is, the bank account column and other account columns should be added down and cross-balanced. The total of the bank column should equal the sum of the totals of all the other account columns. It would be normal for payments to accounts payable to be made during the month; these are debited to the accounts payable control account. If there is discount received, then 1/11th of the total discount received is credited to the GST receivable account and the remaining 10/11ths of the total discount received, which is also in brackets, is credited to the discount received account.

Cash Payments Journal

CP 1

Bank Acc’nt Disc GST Pur­Payab Rec’d Receiv chases Cr

Accounts Payable Control

Bank Cr

Dr

Dr

(Cr)

Discount Received Cr

Dr

Dr

GST Receivable Dr

Purchases Dr

FIGURE 6.23  Cash payments journal: end-of-month totals posted to the general ledger

WITH GENERAL LEDGER AND ACCOUNTS PAYABLE LEDGER General ledger The posting to the general ledger stays the same whether or not there is a separate subsidiary accounts payable ledger.

Copyright © 2018. Cengage. All rights reserved.

Accounts payable ledger The individual account transactions that make up the total accounts payable column in the cash payments journal are debited to their respective accounts in the accounts payable subsidiary ledger. The remittance paid to the supplier, together with the GST receivable and any discount received, is shown as a debit. The sum of the three amounts should be the same as the total of the tax invoice(s) owed to the supplier.

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A/c Pay X

Cash Payments Journal

CP 1

Bank Acc’nt Disc GST PurPayab Rec’d Receiv chases

Dr A/c Pay Y Dr

Cr

Dr

(Cr)

Dr

Dr

A/c Pay Z Dr

Accounts Payable Control

Bank Cr

Discount Received

Dr

Cr

GST Receivable Dr

Purchases Dr

FIGURE 6.24 Cash payments journal, posted daily in the accounts payable ledger to the debit of individual accounts. At the end of the month, the total of the accounts payable control account and other account totals is posted in the general ledger.

Example 2: Purchases journal, cash payments journal, general ledger and accounts payable ledger From the summaries and journals for D Mothers (figures 6.25 to 6.27), post the purchases journal and the cash payments journal to the general ledger and the accounts payable ledger. Now prepare a trial balance and accounts payable listing as at 30 June 2022 (see figures 6.28 to 6.30). At the end of May, the accounts payable control account of $1045 in the general ledger agreed to the accounts payable listing from the accounts payable ledger. Trial Balance of D Mothers as at 31 May 2022 Bank 100 GST Receivable 101 Accounts Payable Control 200 Capital 300

D Mothers Accounts Payable Listing

2 845 200

3 045

1 045 2 000 3 045

A Alva B Brutto C Chasp

as at 31 May 2022 1 2 3

330 253 462 1 045

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.25  Trial balance and accounts payable listing of D Mothers as at end of May

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Purchases Journal of D Mothers Date 6 Jun 22 7 Jun 22 9 Jun 22 18 Jun 22 26 Jun 22 29 Jun 22

Inv Adj 172 239 716 658 463 525

Accounts Payable and/or Particulars A Alva – Purchases B Brutto – Stationery A Alva – Purchases D Dwyer – Vehicle Expense C Chasp – Purchases B Brutto – Stationery

Ref Acc’nts Payab P1 121 P2 165 P1 187 P4 869 P3 572 P2 231 2 145 200 [cr]

Purchases 110 170 520 800 500 [dr]

PJ 1

GST Station­ ery Receiv 11 15 150 17 79 52 21 210 195 360 101 [dr] 540 [dr]

Vehicle Exp

790

790 541 [dr]

FIGURE 6.26  Purchases journal of D Mothers

Cash Payments Journal of D Mothers Date 2 Jun 22 7 Jun 22 20 Jun 22 25 Jun 22

Rmt Pmt 753 457 575 657

Payee and/or Particulars

Ref

A Alva – Accounts Payable P1 C Chasp – Accounts Payable P3 Cash – Purchases B Brutto – Accounts Payable P2

Bank 319 440 330 253 1 342 100 [cr]

Acc’nts Payab 330 462 253 1 045 200 [dr]

Disc Rec’d (10) (20)

(30) 410 [cr]

CP 1 GST Receiv (1) (2) 30

Purchases

27 101 [dr]

300 500 [dr]

300

FIGURE 6.27  Cash payments journal of D Mothers

In the general ledger, the accounts payable control shows the totals for June of the accounts payable column in the purchases journal to be $2145, and the accounts payable column in the cash payments journal to be $1045. In the subsidiary ledger, the entries are to be entered chronologically (in date order), as they are posted on a daily basis. The posting to the subsidiary ledger from the purchases journal is the amount from the individual accounts payable column entry. When posting from the cash payments journal to the subsidiary ledger, the amount is again taken from the individual accounts payable column. However, if there is discount received then: • the value of the payment, as well as

Copyright © 2018. Cengage. All rights reserved.

• the combined total value of discount received plus GST receivable are shown. The sum of these three amounts should be the same as the amount in the accounts payable column of the cash payments journal. For example, the remittance to A Alva on 2 June in the cash payment journal (figure 6.27) was recorded in the following columns: Account Payable $330 (Dr) = $319 Bank (Cr) + $10 Discount Received (Cr) + $1 GST Receivable (-Dr).

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CHAPTER 6

General Ledger of D Mothers Bank 1 Jun 22 Balance b/d

100

2 845 30 Jun 22 Payments Balance c/d 2 845 1 503

1 Jul 22 Balance b/d

CP1

GST Receivable 1 Jun 22 Balance b/d 30 Jun 22 Accounts Payable Control Bank [payment]

PJ1 CP1

101

200 195 27 422

Accounts Payable Control 30 Jun 22 Bank [payment] Balance c/d

CP1

1 342 1 503 2 845

200

1 045 1 Jun 22 Balance b/d 2 145 30 Jun 22 Purchases 3 190 1 Jul 22 Balance b/d

1 045 2 145 3 190 2 145

PJ1

Capital

300

1 Jun 22 Balance b/d

2 000

Discount Received

410

30 Jun 22 Bank [payment]

CP1

Purchases 30 Jun 22 Accounts Payable Control Bank [payment]

PJ1 CP1

800 300 1 100

Stationery 30 Jun 22 Accounts Payable Control

PJ1

540

360

Vehicle Expense 30 Jun 22 Accounts Payable Control

PJ1

30

500

541

790

FIGURE 6.28  General ledger of D Mothers Accounts Payable Ledger of D Mothers A Alva 1 Jun 22 Balance 2 Jun 22 Bank [payment] Discount Received and GST 6 Jun 22 Purchases 9 Jun 22 Purchases

1 330 CP1 CP1 PJ1 PJ1

319 11 121 187

330 11 0 121 308

Copyright © 2018. Cengage. All rights reserved.

B Brutto 1 Jun 22 7 Jun 22 25 Jun 22 29 Jun 22

Balance Purchases Bank [payment] Purchases

253 165

253 418 165 396

Cr Cr Cr Cr Cr Cr

572

462 22 0 572

869

869

Cr

253 231

C Chasp

3 462 CP1 CP1 PJ1

440 22

D Dwyer 18 Jun 22 Purchases

Cr Cr

2 PJ1 CP1 PJ1

1 Jun 22 Balance 7 Jun 22 Bank [payment] Discount Received and GST 26 Jun 22 Purchases

Cr Cr

Cr

4 PJ1

FIGURE 6.29  Accounts payable subsidiary ledger of D Mothers

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201

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Trial Balance of D Mothers as at 30 June 2022 Bank 100 1 503 GST Receivable 101 422 Accounts Payable Control 200 Capital 300 Discount Received 410 Purchases 500 1 100 Stationery 540 360 Vehicle Expense 541 790 4 175

D Mothers Accounts Payable Listing

2 145 2 000 30

as at 30 June 2022 1 2 3 4

A Alva B Brutto C Chasp D Dwyer

308 396 572 869 2 145

4 175

FIGURE 6.30  Trial balance and accounts payable listing of D Mothers as at 30 June

QUESTION 6.4 Using the information of T Aree for January and February shown in figures 6.31, 6.32 and 6.33: • enter the opening balances in the appropriate ledgers • post the purchases journal and the cash payments journal to the general ledger in T account format and the accounts payable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts payable listing that balances with the accounts payable control account in the general ledger. Trial Balance of T Aree as at 31 January 2022 Bank 100 8 450 GST Receivable 101 250 Accounts Payable Control 200 Capital 300 8 700

T Aree Accounts Payable Listing

2 750 5 950 8 700

as at 31 January 2022 B Arrington 2 W Ingham 4 G Loster 5

1 056 869 825 2 750

FIGURE 6.31  Trial balance and accounts payable listing as at 31 January of T Aree Purchases Journal of T Aree

Copyright © 2018. Cengage. All rights reserved.

Date 1 Feb 22 6 Feb 22 7 Feb 22 16 Feb 22 18 Feb 22 22 Feb 22 23 Feb 22 28 Feb 22

Inv Adj 466 219 116 310 501 96 158 586 188

Accounts Payable and/or Ref Acc’nts Particulars Payab G Loster – Purchases 891 Taree Tyres – Vehicle Expense 473 W Ingham – Purchases 759 N Abiac – Photocopy Expense 187 G Loster – Purchases 682 Purfleet Petrol – Vehicle Expense 506 W Ingham – Purchases 209 K Imbriki – Office Repair 528 W Ingham – Purchases 253 4 488 [cr]

FIGURE 6.32  Purchases journal of T Aree

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Purchases 810 690 620 190 230 2 540 [dr]

PJ 1

GST Receiv 81 43 69 17 62 46 19 48 23 408 [dr]

Vehicle Exp

Photocopy

Office Repair

430 170 460 480 890 [dr]

170 [dr]

480 [dr]

CHAPTER 6

Cash Payments Journal of T Aree Date 1 Feb 22 2 Feb 22 15 Feb 22 28 Feb 22

Rmt Pmt 306 703 803 930 130 113

Payee and/or Particulars

Ref

W Ingham – Accounts Payable G Loster – Accounts Payable B Arrington – Accounts Payable Eland Copy – Photocopy Exp Taree Tyres – Accounts Payable Purfleet Petrol – Acc’nts Payable

Bank 847 825 1 023 253 473 506 3 927 [cr]

Acc’nts Payab 869 825 1 056

CP 1

Disc Rec’d (20)

GST Receiv (2)

(30)

(3) 23

473 506 3 729

(50)

[dr]

[cr]

Photocopy

18 [dr]

230

230 [dr]

FIGURE 6.33  Cash payments journal of T Aree

QUESTION 6.5 Using the information of Emma Ville for March and April shown in figures 6.34, 6.35 and 6.36: • enter the opening balances in the appropriate ledgers • post the purchases journal and the cash payments journal to the general ledger in T account format and the accounts payable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts payable listing that balances with the accounts payable control account in the general ledger. Emma Ville Accounts Payable Listing

Trial Balance of Emma Ville as at 31 March 2022 Bank 100 4 295 GST Receivable 101 351 Accounts Payable Control 200 Capital 300 Purchases 500 8 366 13 012

2 387 10 625

as at 31 March 2022 R Aspley 1 C Crossing 2 H Lennox 3 C Sawtell 5

13 012

825 803 605 154 2 387

FIGURE 6.34  Trial balance and accounts payable listing of Emma Ville Purchases Journal of Emma Ville

Copyright © 2018. Cengage. All rights reserved.

Date 1 Apr 22 10 Apr 22 15 Apr 22 18 Apr 22 22 Apr 22 25 Apr 22 28 Apr 22

Inv Adj 189 012 345 678 192 901 234

Accounts Payable and/or Particulars H Lennox – Purchases Neat Stationery – Stationery H Lennox – Purchases C Sawtell – Purchases C Sawtell – Purchases Return R Aspley – Purchases C Crossing – Purchases

Ref Acc’nts Payab 748 253 924 968 (88) 418 308 3 531 [cr]

Purchases 680 840 880 (80) 380 280 2 980 [dr]

PJ 1

GST Station­ Receiv ery 68 23 230 84 88 (8) 38 28 321 230 [dr]

[dr]

FIGURE 6.35  Purchases journal of Emma Ville

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203

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Cash Payments Journal of Emma Ville Date

Rmt Pmt 1 Apr 22 567 865 2 Apr 22 956 750 25 Apr 22 175

Payee and/or Particulars

Ref

Bank

C Sawtell – Accounts Payable R Aspley – Accounts Payable C Crossing – Acc’nts Payable H Lennox – Accounts Payable Cash – Stationery

154 814 803 594 264 2 629 [cr]

Acc’nts Payab 154 825 803 605 2 387 [dr]

Disc Rec’d

CP 1 GST Receiv

(10)

(1)

(10)

(1) 24 22

(20) [cr]

Stationery

[dr]

240 240 [dr]

FIGURE 6.36  Cash payments journal of Emma Ville

QUESTION 6.6 Using the information of Jack Adgery for January and February shown in figures 6.37, 6.38 and 6.39: • enter the opening balances in the appropriate ledgers • post the purchases journal and the cash payments journal to the general ledger in T account format, and the accounts payable ledger in columnar account format • prepare a trial balance from the general ledger • prepare an accounts payable listing that balances with the accounts payable control account in the general ledger. Jack Adgery Accounts Payable Listing

Trial Balance of Jack Adgery as at 31 January 2022 Bank 100 5 587 GST Receivable 101 270 Accounts Payable Control 200 Capital 300 Purchases 500 3 015 8 872

4 191 4 681

as at 31 January 2022 H Copman 1 J Hill 3 H Wooli 5

968 1 694 1 529 4 191

8 872

FIGURE 6.37  Trial balance and accounts payable listing as at 31 January of Jack Adgery

Purchases Journal of Jack Adgery

Copyright © 2018. Cengage. All rights reserved.

Date 4 Feb 22 7 Feb 22 8 Feb 22 15 Feb 22 17 Feb 22 18 Feb 22 21 Feb 22 24 Feb 22 28 Feb 22

Inv Adj 159 257 183 862 953 735 357 418 497 143

Accounts Payable and/or Ref Acc’nts Particulars Payab H Copman – Purchases 627 H Wooli – Purchases 902 H Copman – Purchases Return (66) J Hill – Purchases 187 C Coutt – Purchases 440 H Copman – Purchases 528 H Junction – Purchases 330 J Hill – Purchases 374 H Wooli – Purchases 132 C Coutt – Purchases 979 4 433 [cr]

FIGURE 6.38  Purchases journal of Jack Adgery

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Purchases 570 820 (60) 170 400 480 300 340 120 890 4 030 [dr]

GST Receiv 57 82 (6) 17 40 48 30 34 12 89 403 [dr]

PJ 1

CHAPTER 6

Cash Payments Journal of Jack Adgery Date

Rmt Pmt 1 Feb 22 582 385 458 2 Feb 22 855 26 Feb 22 685

Payee and/or Particulars

Ref

K Pooka – Purchases J Hill – Accounts Payable H Wooli – Accounts Payable H Copman – Accounts Payable Cash – Purchases

Bank 154 1 650 1 496 968 484 4 752 [cr]

Purchases 140

GST Receiv 14 (4) (3)

440 580 [dr]

CP 1 Acc’nts Payab

44 51 [dr]

1 694 1 529 968 4 191 [dr]

Disc Rec’d (40) (30)

(70) [cr]

FIGURE 6.39  Cash payments journal of Jack Adgery

QUESTION 6.7 Using the information of Bell Ingen for July and August shown in figures 6.40 to 6.44: • enter the opening balances in the appropriate ledgers • post the sales and purchases journals and then the cash receipts and payments journals to the general ledger in T account format, and the accounts receivable and payable ledgers in columnar account format • prepare a trial balance from the general ledger • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger. Trial Balance of Bell Ingen as at 31 July 2022 Bank 100 Accounts Receivable Control 101 GST Receivable 102 Accounts Payable Control 200 GST Payable 201 Capital 300 Sales 400 Purchases 500

Bell Ingen Accounts Receivable listing

Copyright © 2018. Cengage. All rights reserved.

R Angourie S Barri T Park

as at 31 July 2022 1 2 3

7 372 1 749 108 748 274 4 587 6 490 2 870 12 099

12 099

Bell Ingen Accounts Payable listing 924 374 451 1 749

as at 31 July 2022 A Bay 1 E Crescent 2 L Wooloweyah 3

242 308 198 748

FIGURE 6.40  Trial balance and accounts receivable and payable listings as at 31 July of Bell Ingen

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205

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Sales Journal of Bell Ingen Date 10 Aug 22 18 Aug 22 22 Aug 22 26 Aug 22

Inv Adj 753 754 755 756

Accounts Receivable and/or Particulars R Angourie – Sales T Park – Sales R Angourie – Sales S Barri – Sales

Ref Acc’nts Receiv 6 567 4 389 2 057 3 564 16 577 [dr]

Sales 5 970 3 990 1 870 3 240 15 070 [cr]

SJ 1

GST Payab 597 399 187 324 1 507 [cr]

FIGURE 6.41  Sales journal of Bell Ingen Purchases Journal of Bell Ingen Date

Inv Accounts Payable and/or Adj Particulars 15 Aug 22 742 L Wooloweyah – Purchases 25 Aug 22 257 E Crescent – Purchases

Ref Acc’nts Payab 1 760 1 991 3 751 [cr]

Purchases 1 600 1 810 3 410 [dr]

PJ 1

GST Receiv 160 181 341 [dr]

FIGURE 6.42  Purchases journal of Bell Ingen

Cash Receipts Journal of Bell Ingen Date 8 Aug 22 16 Aug 22 24 Aug 22 28 Aug 22

Rmt Rec 35 63 78 83

Drawer and/or Particulars

Ref

Bank

T Park – Accounts Receivable R Angourie – Acc’nts Receivable S Barri – Accounts Receivable Sales

451 924 374 2 035 3 784 [dr]

Acc’nts Receiv 451 924 374

185 185

1 749 [cr]

CR 1

GST Payab

[cr]

Sales

1 850 1 850 [cr]

FIGURE 6.43  Cash receipts journal of Bell Ingen

Cash Payments Journal of Bell Ingen Date

Copyright © 2018. Cengage. All rights reserved.

5 Aug 22 10 Aug 22 15 Aug 22 21 Aug 22

Rmt Pmt 327 832 923 303

Payee and/or Particulars

Ref

Bank

E Crescent – Acc’nts Payable E Richmond – Purchases L Wooloweyah – Acc’nts Payable A Bay – Accounts Payable

308 473 198 242 1 221 [cr]

FIGURE 6.44  Cash payments journal of Bell Ingen

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Acc’nts Payab 308

CP 1

GST Receiv 43

198 242 748 [dr]

43 [dr]

Purchases 430

430 [dr]

CHAPTER 6

QUESTION 6.8 Using the information of Dorri Go for September and October shown in figures 6.45 to 6.49: • enter the opening balances in the appropriate ledgers • post the sales and purchases journals and then the cash receipts and payments journals to the general ledger in T account format, and the accounts receivable and payable ledgers in columnar account format • prepare a trial balance from the general ledger • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger. Trial Balance of Dorri Go as at 30 September 2022 Bank 100 6 867 Accounts Receivable Control 101 8 162 GST Receivable 102 320 Accounts Payable Control 200 GST Payable 201 Capital 300 Sales 400 Purchases 500 4 948 20 297

5 742 1 798 4 379 8 378 20 297

Dorri Go Accounts Receivable Listing

Dorri Go Accounts Payable Listing

as at 30 September 2022

as at 30 September 2022

F Ashby S Donaldson A Tullymorgan

1 3 4

2 013 3 377 2 772 8 162

L Esk S Lismore C Prince

1 2 3

1 848 1 958 1 936 5 742

FIGURE 6.45  Trial balance, accounts receivable and payable listings as at 30 September of Dorri Go Sales Journal of Dorri Go Date

Copyright © 2018. Cengage. All rights reserved.

8 Oct 22 12 Oct 22 14 Oct 22 19 Oct 22 23 Oct 22 25 Oct 22 27 Oct 22

Inv Adj 247 248 073 249 250 251 074

Accounts Receivable and/or Particulars S Donaldson – Sales A Tullymorgan – Sales A Tullymorgan – Sales Return C Clarence – Sales S Donaldson – Sales F Ashby – Sales F Ashby – Sales Return

Ref Acc’nts Receiv 2 750 1 595 (209) 2 123 2 717 1 694 (99) 10 571 [dr]

Sales 2 500 1 450 (190) 1 930 2 470 1 540 (90) 9 610 [cr]

SJ 1

GST Payab 250 145 (19) 193 247 154 (9) 961 [cr]

FIGURE 6.46  Sales journal of Dorri Go

207

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Purchases Journal of Dorri Go Date

Inv Accounts Payable and/or Adj Particulars 12 Oct 22 345 R Sandon – Purchases 17 Oct 22 678 C Prince – Purchases 24 Oct 22 912 L Esk – Purchases

Ref Acc’nts Payab 583 1 903 1 617 4 103

Purchases 530 1 730 1 470 3 730

[cr]

[dr]

PJ 1

GST Receiv 53 173 147 373 [dr]

FIGURE 6.47  Purchases journal of Dorri Go Cash Receipts Journal of Dorri Go Date

Rmt Rec 1 Oct 22 631 326 13 Oct 22 363 26 Oct 22 463

Drawer and/or Particulars

Ref

Bank

F Ashby – Accounts Receivable A Tullymorgan – A/c Receivable Sales Sales

4 785 935 1 452 7 172 [dr]

Acc’nts Receiv 2 013 2 772

4 785 [cr]

Sales

850 1 320 2 170 [cr]

CR 1 GST Payab

85 132 217 [cr]

FIGURE 6.48  Cash receipts journal of Dorri Go Cash Payments Journal of Dorri Go Date 2 Oct 22 4 Oct 22 7 Oct 22 18 Oct 22 22 Oct 22 27 Oct 22

Rmt Pmt 851 258 353 458 865 656

Payee and/or Particulars

Ref

Bank

L Esk – Accounts Payable S Lismore – Accounts Payable Cash – Purchases Aust Taxation Office – GST C Prince – Accounts Payable S Queen – Purchases

1 848 1 958 1 331 1 478 1 936 924 9 475 [cr]

Acc’nts Payab 1 848 1 958

Purchases

1 210

CP 1 GST Receiv

121 (320)

GST Payab

1 798

1 936 5 742 [dr]

840 2 050 [dr]

84 (115) [cr]

1 798 [dr]

FIGURE 6.49  Cash payments journal of Dorri Go

QUESTION 6.9

Copyright © 2018. Cengage. All rights reserved.

D Timbers runs a business providing gardening services. Using the information for May and June (shown in figures 6.50 to 6.54), post the journals to the general ledger in T account format, and subsidiary ledger in columnar account format. At the end of May, balances were: bank $1500, GST receivable $365, GST payable $712 and capital $???. Show that the general ledger control account balances agree with the subsidiary ledger totals as at the end of June 2022. D Timbers Accounts Payable Listing

D Timbers Accounts Receivable Listing D Hurst M Point E Sydney

as at 31 May 2022 4 6 7

979 935 759 2 673

as at 31 May 2022 W Averton 1 L Cove 2 W Stonecraft 6

891 198 737 1 826

FIGURE 6.50  Accounts receivable and accounts payable listings of D Timbers as at 31 May

208

CHAPTER 6

Sales Journal of D Timbers Date 5 Jun 22 8 Jun 22 15 Jun 22 20 Jun 22 21 Jun 22 23 Jun 22 25 Jun 22 29 Jun 22

Inv Adj 159 160 161 162 163 164 025 165 166

Accounts Receivable and/or Ref Particulars M Point – Service Fee D Hurst – Service Fee S Hills – Service Fee K Cross – Service Fee P Addington – Service Fee D Hurst – Service Fee S Hills – Service Fee Adjust D Linghurst – Service Fee P Addington – Service Fee

Acc’nts Service Receiv Fees 1 584 1 440 275 250 1 309 1 190 1 914 1 740 1 749 1 590 2 563 2 330 (66) (60) 1 804 1 640 2 904 2 640 14 036 12 760

SJ 1

GST Payab 144 25 119 174 159 233 (6) 164 264 1 276

FIGURE 6.51  Sales journal of D Timbers

Purchases Journal of D Timbers Date 5 Jun 22 6 Jun 22 8 Jun 22 15 Jun 22 18 Jun 22 20 Jun 22 23 Jun 22 24 Jun 22 28 Jun 22

Inv Adj 271 293 367 587 113 309 667 675 981 147

Accounts Payable and/or Ref Particulars W Averton – Supplies L Cove – Stationery C Remorne – Advertising W Averton – Supplies W Averton – Supplies Return L Cove – Stationery W Stonecraft – Supplies W Stonecraft – Supplies P McMahon – Equipment M Point – Supplies

Acc’nts Supplies Payab 748 680 110 649 1 914 1 740 (77) (70) 275 451 410 616 560 473 968 880 6 127 4 200

PJ 1

GST Station­ AdvertReceiv ery ising 68 10 100 59 590 174 (7) 25 250 41 56 43 88 557 350 590

Equip­ ment

430 430

FIGURE 6.52  Purchases journal of D Timbers

Cash Receipts Journal of D Timbers Date 1 Jun 22 2 Jun 22 10 Jun 22

Copyright © 2018. Cengage. All rights reserved.

20 Jun 22 30 Jun 22

Rmt Rec 205 620 727 830 230 739 301

Drawer and/or Particulars

Ref

Bank

M Point – Accounts Receivable D Hurst – Accounts Receivable Service Fees E Sydney – Acc’nts Receivable Service Fees C Cook R E – Rent Received K Cross – Accounts Receivable

902 957

Acc’nts Receiv 935 979

2 233 1 760

759

2 640 8 492

1 914 4 587

Disc Allow’d (30) (20)

(40) (90)

CR 1 GST Service Payab Fees (3) (2) 134 1 340 160 70 (4) 355

Rent Rec’d

1 600 700 2 940

700

FIGURE 6.53  Cash receipts journal of D Timbers

Cash Payments Journal of D Timbers Date

Rmt Pmt 2 Jun 22 183 7 Jun 22 402 25 Jun 22 464 114 273

Payee and/or Particulars

Ref

Bank

W Averton – Accounts Payable L Cove – Accounts Payable G Reenwich – Supplies W Stonecraft – Acc’nts Payable Australia Post – Postage

847 198 1 276 737 190 3 248

Acc’nts Payab 891 198

Disc Rec’d (40)

CP 1 GST Supplies Postage Receiv (4) 116

1 160

17 129

1 160

737 1 826

(40)

173 173

FIGURE 6.54  Cash payments journal of D Timbers 209

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Accounts payable in computerised accounting Many off-the-shelf accounting software packages include a purchases module that is used to record all transactions related to credit purchases. This includes the processing of credit purchases, payments to suppliers for services and goods previously sold on credit, and adjustments such as supplier credit notes. With one-time data entry, the details of the transaction will automatically post to both the appropriate general ledger accounts, including the accounts payable control account, and the accounts payable subsidiary ledger. Reports such as the trial balance and accounts receivable listings will also be automatically updated and generated.

Administration of accounts receivable and accounts payable So far in this chapter we have seen how transactions are recorded in the accounts receivable ledger and also examined the relationship of this subsidiary ledger to the accounts receivable control account in the general ledger. We have also seen how transactions are recorded in the accounts payable subsidiary ledger and its relationship to the accounts payable control account in the general ledger. This recording process is supported by a range of administrative procedures and controls that exist to promote efficiency and accuracy in the recording of transactions. They also ensure that funds owed are received in a timely manner, and funds are remitted to suppliers as per the credit terms. Some of these procedures and controls are discussed in the remaining sections of this chapter.

Administration of accounts receivable The accounts receivable function of a business involves all facets of a business’s financial dealings with its debtors and should include the following: • development of a credit policy • credit terms • credit approval • recording and processing of accounts receivable transactions – sales invoices – credit notes – remittances from customers • statements of account Copyright © 2018. Cengage. All rights reserved.

• monitoring of accounts receivable – credit limits – overdue accounts – disputed accounts • identification of bad and doubtful debts • writing off bad debts • reasonableness checks • answering customer enquiries. Each of these functions and their internal control implications are discussed below.

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CHAPTER 6

DEVELOPMENT OF A CREDIT POLICY Where a business provides credit to customers it is important to establish an effective credit policy. A credit policy will cover areas such as credit approval process, credit terms, credit limits, procedures for recording accounts receivable transactions, monitoring of accounts receivable and debt collection procedures. In larger organisations, these duties would normally be the responsibility of a separate credit department that would have clearly defined levels of responsibility, authority and reporting. The manager of the credit department (or credit manager) would normally report to the chief financial officer of the organisation. Clear account receivable and credit policies, with well-documented procedures, provide the framework for the development of effective internal control measures. Once established, it is important that credit policies are regularly reviewed so that they remain effective tools in recovering monies owed to the organisation. In this way, they will assist in optimising the organisation’s cash flow management.

CREDIT TERMS An important part of an organisation’s credit policy is the terms upon which it offers credit to customers. Credit terms include the credit period (funds must be received within 7 days, 14 days or 30 days from invoice date or otherwise agreed), discounts for prompt payment (such as 2% if paid within 7 days), credit limits (the maximum amount that a customer can owe the business at any time) and policies regarding late payment. Credit terms should be included on an invoice. For example, ‘2% 7 days/Net 30’ means that, if paid within 7 days of the invoice date, a 2% discount is allowed. Net 30 means payment in full within 30 days of the invoice date or as otherwise agreed by the supplier and customer.

CREDIT APPROVAL Before a business agrees to supply goods or services to a customer on credit terms, the business should investigate the creditworthiness of the customer. This may be achieved in two ways: 1 Credit application: Before any goods or services are supplied to the customer on credit terms, the customer is required to complete a credit application form, providing details of their credit history and nominating referees who can vouch for their creditworthiness. 2 Credit check: A number of private agencies (such as Dun & Bradstreet or Equifax) can, for a fee to a business, provide information on individual and business credit history.

Copyright © 2018. Cengage. All rights reserved.

Once a customer’s application for credit is approved, it is practice to grant the customer an initial credit limit. A credit limit is the maximum amount that the business will allow the customer to owe the business at any one time.

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211

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

RECORDING AND PROCESSING OF ACCOUNTS RECEIVABLE TRANSACTIONS An accounts receivable system involves the preparation and recording of sales invoices and credit notes, and the processing and recording of remittances from debtors. Because accounts receivable are an important source of cash flow to a business, it is necessary for accurate records to be maintained of amounts owed to the business by its debtors. This is usually achieved by maintaining an accounts receivable subsidiary ledger linked to an accounts receivable control account in the general ledger, as illustrated earlier in this chapter. A business should have documented internal control measures in place for processing accounts receivable transactions. These should be outlined in the business’s credit policies and procedures. Some of these measures have been briefly discussed in earlier chapters of this book. The following is a more comprehensive discussion of control measures that should be in place when processing the most commonly occurring accounts receivable transactions.

Sales invoices • When a customer order is received it is important to confirm that the customer has been approved for credit and, if so, whether the proposed sale will cause the customer’s credit limit to be exceeded. • Before the sales invoice or delivery docket is prepared, it is necessary to check stock availability. A picking slip may be used to help the store personnel to locate the correct items. • A sales invoice and a delivery docket are prepared. Where the price to be charged differs from the standard price list, it must be approved by a person in authority (such as the sales manager). • A copy of the invoice or a delivery docket/despatch docket should be forwarded to the despatch department as authority to ship the goods to the customer. Another copy of the sales invoice should be sent to accounts receivable staff for recording. • Sales invoices should be sequentially numbered to ensure that all invoices issued are accounted for. • In order to maximise cash flow, customers should be invoiced promptly, preferably at the time of sale.

Credit notes • Customer requests for credit should be carefully checked and approved by the appropriate authorised person, before a credit note is prepared and issued. • Sales credit notes should be sequentially numbered to ensure that all credit notes issued are accounted for.

Copyright © 2018. Cengage. All rights reserved.

Remittances from customers • Each customer remittance must be matched against the invoices and credit notes to which the payment relates. • Where a remittance receipt from a customer has insufficient documentation to enable this matching, it is normal practice to assume that the remittance relates to the earliest invoices/credit notes for that customer. Alternatively, the customer may be contacted to clarify the details relating to the remittance. Any action taken should be in accordance with the organisation’s established credit policy and procedures. • In some cases, customers may make part payment, underpayment or overpayment of an amount owing. Such instances must be identified, investigated and recorded according to the organisation’s credit policy and procedures. • Internal control over receipts from customers should conform to the principles of cash control. These principles are discussed in chapter 8. 212tafenswlib on 2020-05-30 05:38:45. Created from

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The reconciliation of accounts receivable remittances is discussed further in the section titled ‘Reconciliations: accounts receivable’, commencing on page 220. In all processing and recording of transactions it is of course important that errors are kept to a minimum. Documents should be checked for accuracy and completeness before they are recorded in the accounts receivable system. Errors will inevitably be discovered after processing, often following customer enquiries relating to discrepancies in their statement of account. Such errors should be rectified without delay. Accounts receivable records should be stored in a secure place with only authorised persons having access. Where accounts receivable records are computerised, access can be restricted by appropriate user identification and passwords. Proper storage and filing of records is important for statutory and audit purposes as well as for accounts receivable enquiries.

STATEMENTS OF ACCOUNT An important control measure is for the supplier to issue regular statements of account to customers, at least monthly. Statement of accounts are discussed in more detail later in this chapter. Account irregularities are often brought to the attention of the business by customers who have discovered discrepancies between the statement and their records.

MONITORING OF ACCOUNTS RECEIVABLE As part of a business’s cash flow management, it is important that the account of each debtor is monitored to ensure they are complying with the business’s trading terms; that is, that accounts receivable have not exceeded their agreed credit limits and they are paying their accounts on time.

Credit limits Where a customer exceeds their credit limit the business should not supply any further goods/services on credit until the customer has paid for previous purchases. If a customer’s payment history proves to be satisfactory, the business should review the customer’s credit limit with a view to increasing it. However, if the customer does not have an acceptable credit history and has not always paid its account within the trading terms, then the customer should be immediately advised of their account balance position. Options should be given to the customer as to how the situation can be rectified so that the customer’s purchase order can be processed and completed by the supplier.

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Overdue accounts The accounts receivable age analysis report is an invaluable tool in monitoring accounts receivable. This report, which is normally prepared monthly, shows the amount owing by each debtor by age (that is, how long the debt has been outstanding). A simple age analysis report is shown in figure 6.55. Polly Pipe Irrigation Supplies Accounts Receivable Age Analysis Acc No.

Name

as at 31 May 2022 Balance Current

BR25 BO47 SC28

Brian Bragg Marek Bowman Meredith Scott Total

178.50 345.45 260.00 783.95

Age Analysis 30 days

155.00 167.45

23.50 148.00

322.45

171.50

60 days 30.00 80.00 110.00

90+ days

180.00 180.00

FIGURE 6.55  Monthly accounts receivable age analysis

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This report allows a business to easily identify customer accounts that are overdue and serves as a trigger for follow-up action. The organisation’s credit policy and procedures should specify actions to be taken when a customer’s account is overdue. These actions may include: • enquiries to credit department staff to ascertain whether contact has been made with customers whose accounts are overdue and whether all recovery avenues have been exhausted • direct contact with the customer in the form of reminder notices, telephone calls or letters of demand • placing the debt in the hands of a debt collection agency, and/or instigating legal action to recover the debt. The accounts receivable age analysis report illustrated above is designed to provide a convenient overview of the status of all of a business’s current accounts receivable balances. A business may also conduct a more detailed analysis of each individual accounts receivable balance by preparing an extract accounts receivable listing for each of its debtors. Extract accounts receivable listings are illustrated in the section titled ‘Reconciliations: accounts receivable’, commencing on page 220. From a management perspective it is important that the activities of the credit department are regularly monitored. The department should account for its actions through regularly reporting to management, providing details of customer payment frequency, debt collection, bad debt write-offs and other debt recovery issues. Management reporting requirements should be specified in the organisation’s credit policies and procedures. As a rule, computerised accounting systems can automatically generate a number of account receivable reports for control and management purposes, including the account receivable age analysis report.

Disputed accounts In offering credit facilities to customers it is inevitable that disputes will arise over customer account balances. Disputes can result from such circumstances as: • errors in invoicing, such as incorrect prices or extensions or missing invoices • short deliveries • inadequate record keeping • disputed returns and discounts • damaged or faulty merchandise. An organisation’s credit policies and procedures should contain guidelines relating to resolution of disputes with credit customers. Disputes should be handled in a prompt and efficient manner with the aim of preserving customer relations and minimising costs and disruptions to business routines.

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IDENTIFICATION OF BAD AND DOUBTFUL DEBTS Bad debts are an inevitable outcome of providing credit facilities to customers. A sound system of internal control over accounts receivable, including effective credit management procedures, will assist in minimising bad debt write-offs. A key component in a bad debt minimisation strategy is the early identification of doubtful debts. Doubtful debts are amounts owed by customers where there are reasonable doubts as to the collectability of the amount owed. The most effective method of identifying doubtful debts is the preparation of an accounts receivable age analysis, coupled with a detailed analysis of problem accounts. Communication with the customer during this process would assist in further clarifying the collection status of the debt. The identification of doubtful debts has important implications for:

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• bad debt minimisation; early identification of problem accounts may lead to more positive collection outcomes • the preparation of end-of-period financial statements (income statement and balance sheet) • the continuous improvement of an organisation’s credit policies and procedures. A business should take all reasonable steps to identify doubtful debts and collect amounts owing by its customers. Where a debt proves to be uncollectable, any decision to write it off as a bad debt should be approved by the appropriate person. In most organisations, the level of authority required to approve a bad debt write-off will depend on the amount of the debt. Senior management should periodically review the extent of bad debt write-offs and take appropriate policy action where necessary.

REASONABLENESS CHECKS Periodically, a senior member of the accounting staff should review the accounts receivable records. In particular, the accounts receivable age analysis report should be checked for reasonableness. This involves reviewing accounting records with an emphasis on investigating amounts, accounts or transactions that appear unusual. Any items identified should be further analysed and investigated. Reasonableness checks can also act as a deterrent to fraudulent practices by staff.

ANSWERING CUSTOMER ENQUIRIES Accounts receivable staff have the responsibility of dealing with customer account enquiries. Enquiries could relate to such things as transaction amounts, late deliveries, prices, requests for credit adjustments and account balances.

Administration of accounts payable The accounts payable function of a business involves all facets of a business’s financial dealings with its creditors and involves the following functions: • development of accounts payable policies and procedures • issue of purchase orders • receipt of goods or services from suppliers • recording and processing of accounts payable transactions

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– supplier invoices – supplier credit notes – payments to suppliers • reconciliation of supplier statements of account • monitoring of accounts payable • reasonableness checks • answering supplier enquiries • issue of and control over business credit/debit cards. Internal control over accounts payable transactions is important as it ensures that the business only accepts liability for goods and services that it has requested and has received. Some of the internal control implications of each of the above accounts payable functions are discussed below.

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DEVELOPMENT OF ACCOUNTS PAYABLE POLICIES AND PROCEDURES In order for an organisation to effectively monitor and record its credit dealings with suppliers of goods and services, it must have properly documented accounts payable policies and procedures. An accounts payable policy will cover areas such as identification and use of approved suppliers, obtaining quotes, purchase order approval, acceptance of goods and services, procedures for recording accounts payable transactions, requests for credit for returns and allowances, monitoring of accounts payable and accounts payable payment procedures. In large organisations, the above functions may be spread over several departments such as purchasing, receiving, accounts payable and accounting. Lines of authority will vary between organisations with the final responsibility generally resting with the chief financial officer. Once established, it is important that accounts payable policies and procedures are regularly reviewed so that they remain effective tools in ensuring that accounts payable transactions are effectively authorised, monitored and recorded. Clear accounts payable policies and well-documented procedures provide the framework for the development of effective internal control measures.

ISSUE OF PURCHASE ORDERS As outlined in chapter 2, a purchase order is a request by a business to a supplier to supply goods and/or services. Internal controls that should exist over purchase orders are listed below. • A purchase order should be raised for each purchase of goods or services. • Purchase orders should be in writing. This provides written evidence that goods and/or services have been ordered. • Purchase orders should be sequentially pre-numbered and all numbers accounted for. • Purchase orders should be authorised by a designated person. This helps to ensure that only goods and services required for the efficient running of the business are purchased. • Blank purchase order forms should be stored securely and controlled by a register held by a nominated person, who only issues them to authorised persons. • Persons who authorise purchase orders should not be involved in recording goods received or in processing supplier invoices. Even where a business places an order with a supplier over the telephone or over the internet, some form of purchase authority should exist. For example, a written purchase order may be completed and filed by the business even though the goods are ordered verbally or electronically. In this way, there is written evidence that the purchase has been properly authorised.

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RECEIPT OF GOODS OR SERVICES FROM SUPPLIERS Internal controls that should exist over the receipt of goods are listed below. • Goods received should be immediately counted and, where possible, examined to ensure that they are in good order and condition. Any damaged goods should be noted and set aside for return to the supplier. • The goods delivered should be reconciled with a copy of the purchase order and any short deliveries noted. • A receiving report should be prepared as evidence that the goods have been received. • Persons receiving goods should not be able to authorise purchase orders or be involved in the processing of supplier invoices.

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RECORDING AND PROCESSING OF ACCOUNTS PAYABLE TRANSACTIONS A business should have internal control measures in place when processing accounts payable transactions. Some of these measures have been briefly discussed in earlier chapters of this book. The following is a more comprehensive discussion of the control measures that should be in place when processing the most commonly occurring accounts payable transactions.

Supplier invoices • The person processing supplier invoices should not be able to authorise purchase orders or be involved in recording the receipt of goods. • All supplier invoices should be sent to the accounts payable department for processing. • Where the invoice is for the supply of goods, the accounts department should match the details contained in the invoice with their copy of the purchase requisition, purchase order and the delivery docket and/or receiving report. These documents should be stapled together. • Where the invoice is for the supply of services, the accounts department should match the details with their copy of the purchase requisition and purchase order, and staple these documents together. As there would be no receiving report, the invoice may be presented to an appropriate person (such as the head of department who requested the service) to indicate on the invoice that the service has been supplied. • All calculations on the invoice should be checked by the accounts department. Any discrepancies identified should be investigated and rectified without delay. • The accounts department should record the correct general ledger account number(s) on each invoice with reference to the general ledger chart of accounts and the nature of the goods or services supplied.

Supplier credit notes • After the supply of goods or services, it is sometimes necessary for a business to seek an adjustment to the amount charged by the supplier. In such circumstances, a request for credit should be completed and forwarded to the supplier. A copy of this document should also be retained by the business. It should be matched with the relevant supplier invoice and quarantined from payment pending receipt of the requested supplier credit note. • When the credit note is received from the supplier it should be matched against the appropriate request for credit and the relevant invoice from the supplier.

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Payments to suppliers • A remittance or payment advice providing details of all relevant transactions should be prepared for each supplier payment. • Supporting documentation (remittance advices, purchase requisitions, purchase orders, invoices, delivery dockets and/or receiving reports and credit notes) should be forwarded to the person responsible for initiating payments to suppliers. • Payments should be processed using the remittance request and authorised electronic payment procedures. • A report summarising accounts payable payments should be prepared for approval by appropriate management. • Internal control over payments to suppliers should conform to the principles of cash control. These principles are outlined in chapter 8. As with accounts receivable records, accounts payable records should be stored in a secure place with access limited to authorised personnel. Created from tafenswlib on 2020-05-30 05:38:45.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

RECONCILIATION OF SUPPLIER STATEMENTS OF ACCOUNT In some cases where a business deals with a supplier on a regular basis, rather than processing a payment for each invoice received from the supplier, the business may wait until it receives a monthly statement of account from the supplier and then make a payment for the full amount owing. As outlined in chapter 2, a statement of account is a document that summarises the transactions with the supplier for the month and indicates the total amount owing. An important internal control measure is to reconcile the supplier’s statement of account with the business’s records prior to making any payment. The aim of this reconciliation is to ensure that: • the business does not pay invoices that it has not received • there are no errors or omissions on the supplier’s statement of account • the business does not pay for goods that have been returned or an allowance requested, and • all payments made to the supplier have been taken into account. The reconciliation of accounts payable is discussed further in the section titled ‘Reconciliations: accounts payable’, commencing on page 233.

MONITORING OF ACCOUNTS PAYABLE As part of a business’s cash flow management, it is important that the account of each creditor is monitored to ensure that the business is complying with the supplier’s trading terms; that is, that the business is paying its accounts on time. The accounts payable age analysis report is an invaluable tool in monitoring accounts payable. This report, which is normally prepared monthly, shows the amount owing to each creditor by age (that is, how long the debt has been outstanding). A simple age analysis report is shown in figure 6.56. Walter Industries Accounts Payable Age Analysis as at 31 May 2022 Acc No.

Name

Age Analysis

Balance Current

A07 D15 H21

Ace Distributors Duffy Industries Hi-Tech Supplies Total

3 469.95 949.96 2 530.00 6 949.91

3 249.95 949.96

30 days

60 days

90+ days

220.00

2 200.00 4 199.91 2 420.00

330.00 330.00

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.56  Monthly accounts payable age analysis

This report allows a business to easily identify supplier accounts that are overdue and serves as a trigger for further action. Each overdue balance should be carefully investigated and payment made without undue delay. Late payment to suppliers could result in: • loss of prompt payment discounts • damage to the business’s credit rating • possible refusal of further credit from suppliers. As a rule, computerised accounting systems can automatically generate a number of accounts payable reports for control and management purposes, including the accounts payable age analysis report.

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REASONABLENESS CHECKS Periodically, a senior member of the accounting staff should review the accounts payable records. In particular, the accounts payable age analysis report should be checked for reasonableness. Regular reviewing of reconciled supplier statements will also indicate outstanding invoices that have not yet been paid. Checking for reasonableness involves a scrutiny of accounting records with an emphasis on investigating amounts, accounts or transactions that appear unusual. Any items identified should be further analysed and investigated. Reasonableness checks can act as a deterrent to fraudulent practices by staff.

ANSWERING SUPPLIER ENQUIRIES Accounts payable staff have the responsibility of dealing with supplier account enquiries. Enquiries could relate to such things as transaction amounts, late deliveries, prices, requests for credit adjustments, account balances and overdue accounts.

ISSUE OF AND CONTROL OVER BUSINESS CREDIT/DEBIT CARDS As mentioned in chapter 2, businesses are able to use debit or credit cards to pay for goods and services purchased from another business. In these instances, the issue of credit/debit cards would be restricted to designated staff, who are then able to purchase goods and services on behalf of the business. The issue of debit and credit cards should be strictly controlled and subject to the organisation’s accounts payable policies and procedures. Policies and procedures would, for example, govern: • personnel entitled to a business debit or credit card • the types of approved expenditure • appropriate credit limits • staff expenditure reporting, and • management review of business debit and credit card use and expenditure.

QUESTION 6.10 a Briefly explain the importance of the development of a credit policy and procedures. b Briefly outline the areas that may be covered by an organisation’s credit policy.

QUESTION 6.11 Briefly outline the importance of customer credit approval in the accounts receivable process.

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QUESTION 6.12 Briefly outline the internal controls that should exist over: a the processing of sales invoices, and b remittances from customers.

QUESTION 6.13 Outline one internal control benefit of issuing statements of accounts to customers.

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QUESTION 6.14 a Briefly explain the nature and content of the report that businesses prepare to determine debtors with overdue amounts. b Once overdue accounts receivable amounts have been determined, what action should the business take to facilitate prompt collection of the amounts overdue? c How does a business’s credit department account to management for its actions relating to overdue accounts receivable balances?

QUESTION 6.15 Briefly comment on the following statement. ‘A key component in a bad debt minimisation strategy is the early identification of doubtful debts.’

QUESTION 6.16 Briefly outline the internal controls that should exist over: a receipt of goods from suppliers b processing of supplier tax invoices c payments to suppliers.

QUESTION 6.17 Briefly explain why it is important for a business to monitor its accounts payable.

QUESTION 6.18 Briefly comment on the following statement. ‘The issue of business credit cards to staff should be strictly controlled and subject to the organisation’s accounts payable policies and procedures.’

QUESTION 6.19 Briefly explain the concept of reasonableness checks in relation to accounts receivable and accounts payable.

Reconciliations General

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All external transactions consist of two parties: a buyer and a seller, or a receiver and a giver. Business transactions are processed and referred to from the point of view of the business whose books are being prepared. A confirmation or check on the accuracy of the business records is to compare their records with the records of another business.

Reconciliations: accounts receivable Earlier in this chapter we saw how a business prepares its accounts receivable ledger by processing on a daily basis all tax invoices and adjustment credit notes as well as funds received and discounts allowed. It is also common practice to prepare a statement of account (or account receivable statement) for each credit customer (account receivable) at the end of the month. The statement of account is a copy of the transactions processed during the month by the business for each account receivable, and is forwarded to the customer. The final balance indicates the amount the customer owes the business, from its point of view.

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QUESTION 6.14 a Briefly explain the nature and content of the report that businesses prepare to determine debtors with overdue amounts. b Once overdue accounts receivable amounts have been determined, what action should the business take to facilitate prompt collection of the amounts overdue? c How does a business’s credit department account to management for its actions relating to overdue accounts receivable balances?

QUESTION 6.15 Briefly comment on the following statement. ‘A key component in a bad debt minimisation strategy is the early identification of doubtful debts.’

QUESTION 6.16 Briefly outline the internal controls that should exist over: a receipt of goods from suppliers b processing of supplier tax invoices c payments to suppliers.

QUESTION 6.17 Briefly explain why it is important for a business to monitor its accounts payable.

QUESTION 6.18 Briefly comment on the following statement. ‘The issue of business credit cards to staff should be strictly controlled and subject to the organisation’s accounts payable policies and procedures.’

QUESTION 6.19 Briefly explain the concept of reasonableness checks in relation to accounts receivable and accounts payable.

Reconciliations General

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All external transactions consist of two parties: a buyer and a seller, or a receiver and a giver. Business transactions are processed and referred to from the point of view of the business whose books are being prepared. A confirmation or check on the accuracy of the business records is to compare their records with the records of another business.

Reconciliations: accounts receivable Earlier in this chapter we saw how a business prepares its accounts receivable ledger by processing on a daily basis all tax invoices and adjustment credit notes as well as funds received and discounts allowed. It is also common practice to prepare a statement of account (or account receivable statement) for each credit customer (account receivable) at the end of the month. The statement of account is a copy of the transactions processed during the month by the business for each account receivable, and is forwarded to the customer. The final balance indicates the amount the customer owes the business, from its point of view.

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Example 3: Peter Robert prepares a statement of account for account receivable L Grace At the end of July 2022 Peter Robert reviews the accounts for each of the customers in his account receivable ledger. The following is the account in the account receivable ledger for a customer, L Grace. Extract Accounts Receivable Ledger of Peter Robert

L Grace

124

1 Jul 22 Sales

Tax inv 475

SJ1

Sales

Tax inv 586

SJ1

Rec 159

CR1

2 Jul 22 Bank

363.00

Discount Allowed

Rec 159

CR1

Sales

Tax inv 625

SJ1

132.00

13 Jul 22 Sales

Tax inv 650

SJ1

176.00

14 Jul 22 Sales Return

Adj c/n 118

SJ1

24 Jul 22 Sales

Tax inv 717

SJ1

297.00

28 Jul 22 Sales

Tax inv 753

SJ1

550.00

29 Jul 22 Sales Return

Adj c/n 125

SJ1

792.00

Dr

1 155.00

Dr

748.00

407.00

Dr

44.00

363.00

Dr

495.00

Dr

77.00

55.00

671.00

Dr

594.00

Dr

891.00

Dr

1 441.00

Dr

1 386.00

Dr

FIGURE 6.57  Peter Robert’s account receivable ledger account for L Grace

Peter Robert then prepares and sends to L Grace the following statement of account. You should note that it is a reflection of the above ledger account. STATEMENT Peter Robert

MONTH ENDED

18 March Street

31 July 2022

Orange 2800 L Grace 93 William Street Bathurst NSW 2795 Date

Particulars and Reference

1 Jul 22 Balance Sales

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2 Jul 22 Bank

Customer No. 0153

Debit

Credit

Balance

Tax inv 475

792.00

792.00

Tax inv 586

363.00

1 155.00

Rec 159

748.00

407.00

44.00

363.00

Discount Allowed

Rec 159

Sales

Tax inv 625

132.00

495.00

13 Jul 22 Sales

Tax inv 650

176.00

671.00

14 Jul 22 Sales Return

Adj c/n 118

24 Jul 16 Sales

Tax inv 717

297.00

28 Jul 16 Sales

Tax inv 753

550.00

29 Jul 16 Sales Return

Adj c/n 125

TERMS: 5% discount end of month/net 30 days 90+ days

60 days

77.00

891.00 1 441.00 55.00

AMOUNT DUE 30 days

594.00

1 386.00 1 386.00 Current 1 386.00

FIGURE 6.58  Peter Robert has prepared this statement of account for his customer, L Grace.

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An important internal control procedure for any business is to reconcile its records with the customer’s records. The equivalent of the statement from the supplier is the customer’s remittance advice, attached to the funds when received. Some suppliers prepare and issue accounts receivable statements in duplicate so that the customer can return one copy, indicating the tax invoices being paid and providing reasons for any adjustments being claimed. Alternatively, a tear-off section to the account receivable statement may serve the same purpose as the duplicate statement. The essential aspect is that funds received are matched to specific tax invoices and any queries are resolved quickly by the business. An accounts receivable statement is a chronological list of tax invoices less adjustment credit notes where funds have not been received in payment of those invoices and adjustments. The accounts receivable statement is from the point of view of the supplying business, which prepares the statement for the other party to the business transaction. The reconciliation between the accounts receivable ledger records and the customer’s remittance advices may result in: • adjustments in the books of the business, or • adjustments required in the customer’s books, or • a note that funds for certain tax invoices will be received by a specified date, or • no adjustment, as both records are in agreement.

Procedure for reconciliation of accounts receivable account to remittance advice REMITTANCE ADVICE AND FUNDS RECEIVED FROM CREDIT CUSTOMER This procedure will need to be carried out whenever funds are received from an account receivable customer.

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REMITTANCE ADVICE TICKED AGAINST ACCOUNTS RECEIVABLE LISTING Use the remittance advice received from the customer and start from the details of the first tax invoice number and the amount listed. Find the same tax invoice number and amount in the detailed account listing of the accounts receivable ledger and tick them both. Continue down the remittance advice until all the amounts are ticked. If there are differences in the tax invoice or amount, make a note of them in the accounts receivable listing and on the remittance advice. From the office copy of the tax invoice, check the details to confirm which is correct. Any alteration to a specific account receivable account must be authorised by a senior accounting officer. If all entries on the remittance advice are ticked and all items in the detailed accounts receivable listing are ticked then there is no need for a reconciliation, as there is full agreement to that remittance. The account receivable account should have a nil balance for that period after the remittance is posted to the specific account in the account receivable ledger. However, there may be amounts outstanding in the accounts receivable ledger that are not on the remittance advice because the customer has still not paid those invoices. These must be promptly followed up with the customer.

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The business will have a specific procedure to be followed for entry into the accounts receivable ledger that will either: • enter the total remittance advice on the credit of the account, or • enter individual credit amounts against the individual amounts owed, or • employ some other system, all of which are usually computerised due to the volume of transactions.

DISCOUNT ALLOWED Any discount taken off the amount remitted will need to be processed into both the general ledger and the accounts receivable ledger. The amount of discount allowed must be authorised by a senior accounting officer after the details are prepared by the person who processes the remittance advices into the accounts receivable ledger. This person is often called the credit officer, credit clerk or accounts receivable officer.

RESOLVE ANY QUERIES BY DIRECT AND IMMEDIATE CUSTOMER CONTACT There will sometimes be entries on the remittance advice that are not ticked and do not make sense. An unresolved amount on the remittance advice must be queried as soon as possible. After a brief internal check through the business’s records and with the sales and dispatch staff, the customer should be contacted by phone during that day to clarify the matter. This applies to entries on the remittance advice, which may be: • tax invoices • credit notes • adjustments, or • where discount has been taken by a customer who was not entitled to it, due to the lateness of the remittance or lateness in processing of a specific tax invoice. It is essential that all queries and any outstanding amounts still in the accounts receivable ledger are resolved promptly wherever possible. There should be continual follow-up until the amount is received or a credit note is issued by the business to resolve any claim from the customer. Details of any contact with a customer must be noted specifically on the account receivable listing and include date, time, contact name and commitments by either party. Follow-up dates should also be recorded.

REASONS FOR RECONCILING ITEMS Items not received

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The customer did not receive the items in the current month and is processing the tax invoice in the following month. A tax invoice should normally be processed through the accounting system during the month when the item was actually received.

Adjustment credit note required If an adjustment credit note is required, then it would be normal business practice for the customer to hold the tax invoice and not process it until the adjustment credit note is received. However, the supplying business will probably encourage its account receivable to pay either all or part of the tax invoice before an adjustment credit note has been processed.

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Discount taken but not allowed or applicable This is perhaps the biggest problem with discounts; it occurs when accounts receivable take off discounts but do not comply with the payment terms. The supplying business needs to adopt a policy that will or will not allow some degree of tolerance when funds are received after the expiry of the discount date.

REALITY OF ACCOUNTS RECEIVABLE RECONCILIATIONS The simple reconciliation task of determining which tax invoices have or have not been paid is not difficult. It is the analysis and liaison with colleagues as well as customers and the documentation of what has transpired that makes this task time-consuming. It is, however, necessary if funds are to be collected in a timely manner from credit customers. The older an account receivable debt becomes, the more likely it will not be paid, and the greater the chance of it becoming a doubtful debt or even a bad debt.

Example 4: Reconciliation in the accounts of D Teale of an account receivable T Peter, with discount On 1 August 2022 a payment from T Peter for $721.05 together with a remittance advice (shown in figure 6.59) is received and processed. Remittance Advice of T Peter

31 July 2022

3 Dorrigo Street Station Heights 2445

Date 5 Jul 22 15 Jul 22 25 Jul 22 26 Jul 22 31 Jul 22 31 Jul 22

Particulars and Reference Purchases Purchases Return Purchases Purchases Discount Received Bank

Customer 264

D Teale 18 Bucca Road Lanitza    2460 Debit

Tax inv 586 Adj c/n 118 Tax inv 650 Tax inv 717 Pay ref 23456 Pay ref 23456

Credit 363.00

77.00 176.00 297.00 37.95 721.05

Balance 363.00 286.00 462.00 759.00 721.05 0.00

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.59  Remittance advice from T Peter received by D Teale

The extract accounts receivable ledger of D Teale (figure 6.60) shows the account of T Peter as owing $1386.00 as at 31 July 2022. Terms allowed by D Teale to T Peter are 5% discount allowed if the invoice is paid by the end of the current month or net 30 days from the end of the month when the invoice was sold by D Teale; that is, the terms are 5% discount end of month/net 30 days. Funds received by D Teale on 1 August are treated as July receipts and any discount taken is allowed. Discounts are allowed on receipts for 2 August but the deposit is treated as an August and not a July receipt. After that date no discount is allowed for July sales, unless there are exceptional reasons. The extract accounts receivable ledger and the extract accounts receivable aged listing of D Teale are shown for the account receivable customer T Peter in figure 6.60.

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CHAPTER 6

Extract Accounts Receivable Ledger of D Teale

T Peter 1 Jul 22 2 Jul 22 13 Jul 22 14 Jul 22 24 Jul 22 28 Jul 22 29 Jul 22

Sales Sales Sales Sales Return Sales Sales Sales Return

Tax inv 586 Tax inv 625 Tax inv 650 Adj c/n 118 Tax inv 717 Tax inv 753 Adj c/n 125

124 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1

363.00 132.00 176.00 297.00 550.00

363.00 495.00 671.00 77.00 594.00 891.00 1 441.00 55.00 1 386.00

Dr Dr Dr Dr Dr Dr Dr

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of D Teale T Peter Date

Inv/ (C/n)

1 Jul 22 2 Jul 22 13 Jul 22 14 Jul 22 24 Jul 22 28 Jul 22 29 Jul 22

586 625 650 (118) 717 753 (125)

124 account Ageing

Amount 363.00 132.00 176.00 (77.00) 297.00 550.00 (55.00)

Cumulative 363.00 495.00 671.00 594.00 891.00 1 441.00 1 386.00

Current

30 days

60 days

90+ days

363.00 132.00 176.00 (77.00) 297.00 550.00 (55.00) 1 386.00

FIGURE 6.60 Accounts receivable ledger account and accounts receivable aged listing for T Peter, extracted from D Teale’s accounts receivable ledger

Having ticked all items on the remittance advice against the accounts receivable listing and noted the discount to be allowed, the remittance advice from T Peter would be as shown in figure 6.61. Remittance Advice of T Peter

31 July 2022

3 Dorrigo Street Station Heights 2445

Copyright © 2018. Cengage. All rights reserved.

Date 5 Jul 22 15 Jul 22 25 Jul 22 26 Jul 22 31 Jul 22 31 Jul 22

D Teale 18 Bucca Road Lanitza      2460

Particulars and Reference Purchases Purchases Return Purchases Purchases Discount Received Bank

Tax inv 586 Adj c/n 118 Tax inv 650 Tax inv 717 Pay ref 23456 Pay ref 23456

Debit

Customer 264

Credit ✓ 363.00

✓ 77.00 ✓ 176.00 ✓ 297.00 ✓ 37.95 721.05

Balance 363.00 286.00 462.00 759.00 721.05 0.00

FIGURE 6.61 Remittance advice from T Peter received by D Teale after ticking against entries in the accounts receivable ledger for T Peter

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

The ticked accounts receivable listing would appear as shown in figure 6.62. Extract Accounts Receivable Ledger of D Teale

T Peter 1 Jul 22 2 Jul 22 13 Jul 22 14 Jul 22 24 Jul 22 28 Jul 22 29 Jul 22

Sales Sales Sales Sales Return Sales Sales Sales Return

Tax inv 586 Tax inv 625 Tax inv 650 Adj c/n 118 Tax inv 717 Tax inv 753 Adj c/n 125

124 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1

363.00 132.00 176.00 297.00 550.00

363.00 495.00 671.00 77.00 594.00 891.00 1 441.00 55.00 1 386.00

Dr Dr Dr Dr Dr Dr Dr

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of D Teale

T Peter Date

Inv/ (C/n)

1 Jul 22 2 Jul 22 13 Jul 22 14 Jul 22 24 Jul 22 28 Jul 22 29 Jul 22

586 625 650 (118) 717 753 (125)

124 account Ageing

Amount 363.00 132.00 176.00 (77.00) 297.00 550.00 (55.00)

Cumulative 363.00 495.00 671.00 594.00 891.00 1 441.00 1 386.00

Current

30 days

60 days

90+ days

✓ 363.00 132.00 ✓ 176.00 ✓ (77.00) ✓ 297.00 550.00 (55.00) 1 386.00

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.62 Accounts receivable ledger account and accounts receivable aged listing for T Peter, extracted from D Teale’s account receivable ledger listing, after ticking from the remittance advice

Unticked entries that have not been paid are: 2 July #625 $132.00, 28 July #753 $550.00 and 29 July #(125) ($55.00). Let us assume D Teale’s credit officer cannot find any reason for non-payment of tax invoice #625 $132.00, as the delivery docket indicates that it was signed for by T Peter on 3 July. Assume also that there was no problem with price, quality or quantity. It appears that it should have been paid and would not now be entitled to the 5% settlement discount allowed. The credit officer has established that invoice #753 $550.00 and credit note #125 $55.00 relate to each other. The customer’s original of the credit note had been given to a sales representative to hand deliver to T Peter but this would not now happen until 4 August. The credit officer has had the discount allowed of $37.95 authorised by the designated senior accounting officer, and has also confirmed the position of discount on the unpaid tax invoices and credit note. If the actual events were accurately recorded in D Teale’s records, then payment of invoice #625 $132.00 would receive no discount but the invoice #753 $550.00 and credit note #125 $55.00 would receive a discount if paid by 31 August 2022. The credit officer rang the accounts payable officer of T Peter and found that invoice #625 $132.00 was being processed in August; it was acknowledged that no discount would be claimed or allowed. The credit officer also explained what had happened with credit note #125 $55.00 and indicated that settlement discount would be allowed for the invoice and related credit note, provided the funds were received by 31 August 2022. D Teale’s credit officer noted all these relevant details on the account receivable listing for T Peter and included dates, times and names for any future reference.

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CHAPTER 6

Example 5: Reconciliation in the accounts of J Petersen of an account receivable P Alfred, without discount On 30 September 2022 J Petersen received funds for $2299.00 attached to a remittance advice from P Alfred, as shown in figure 6.63. Remittance Advice of P Alfred

30 September 2022

500 Lyons Road

Date 2 Aug 22 4 Aug 22 6 Aug 22 12 Aug 22 13 Aug 22 15 Aug 22 18 Aug 22 27 Aug 22 27 Sep 22

Customer 567

J Petersen 251 Oscar Ramsey Drive 2470 Toormina   

Sawtell 2500

Particulars and Reference Purchases Purchases Purchases Purchases Purchases Purchases Purchases Return Purchases Bank

Debit

Tax inv 285 Tax inv 302 Tax inv 315 Tax inv 366 Tax inv 340 Tax inv 370 Adj c/n 561 Tax inv 383 Pay ref 34567

Credit

Balance

132.00 495.00 759.00 418.00 253.00 77.00 22.00 187.00 2 299.00

132.00 627.00 1 386.00 1 804.00 2 057.00 2 134.00 2 112.00 2 299.00 0.00

FIGURE 6.63  Remittance advice from P Alfred received by J Petersen

The extract accounts receivable ledger and the extract accounts receivable aged listing of J Petersen are shown for the account receivable customer, P Alfred, in figure 6.64. Extract Accounts Receivable Ledger of J Petersen

Copyright © 2018. Cengage. All rights reserved.

P Alfred 17 Jun 22 19 Jul 22 3 Aug 22 5 Aug 22 8 Aug 22 11 Aug 22 13 Aug 22 17 Aug 22 21 Aug 22 31 Aug 22 5 Sep 22 15 Sep 22 27 Sep 22

Sales Sales Sales Sales Sales Sales Sales Sales Return Sales Sales Sales Sales Sales

Tax inv 223 Tax inv 285 Tax inv 302 Tax inv 315 Tax inv 340 Tax inv 366 Tax inv 370 Adj c/n 561 Tax inv 383 Tax inv 395 Tax inv 473 Tax inv 517 Tax inv 601

222 SJ1 SJ2 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ4 SJ4 SJ4

627.00 132.00 495.00 759.00 253.00 418.00 77.00 187.00 429.00 183.00 834.00 532.00

627.00 759.00 1 254.00 2 013.00 2 266.00 2 684.00 2 761.00 22.00 2 739.00 2 926.00 3 355.00 3 538.00 4 372.00 4 904.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

CONTINUED

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of J Petersen

P Alfred Date

Inv/ (C/n)

17 Jun 22 19 Jul 22 3 Aug 22 5 Aug 22 8 Aug 22 11 Aug 22 13 Aug 22 17 Aug 22 21 Aug 22 31 Aug 22 5 Sep 22 15 Sep 22 27 Sep 22

223 285 302 315 340 366 370 (561) 383 395 473 517 601

222 account Ageing

Amount 627.00 132.00 495.00 759.00 253.00 418.00 77.00 (22.00) 187.00 429.00 183.00 834.00 532.00

Cumulative 627.00 759.00 1 254.00 2 013.00 2 266.00 2 684.00 2 761.00 2 739.00 2 926.00 3 355.00 3 538.00 4 372.00 4 904.00

Current

30 days

60 days

90+ days 627.00

132.00 495.00 759.00 253.00 418.00 77.00 (22.00) 187.00 429.00 183.00 834.00 532.00 1 549.00

2 596.00

132.00

627.00

FIGURE 6.64 Accounts receivable ledger account and accounts receivable aged listing for P Alfred extracted from J Petersen’s accounts receivable ledger

The extract accounts receivable aged listing in figure 6.64, showing the ageing of the tax invoices and credit note adjustments, is taken from the account of P Alfred in the accounts receivable ledger of J Petersen as at 30 September 2022. The trading terms of J Petersen are net 30 days; that is, the customer is to pay for sales made during the month within 30 days of the end of that month. No discount is offered or given. Credit sales made in the month of August are due for payment by the end of September. At the end of September, J Petersen’s accounts receivable listing shows a debt from P Alfred totalling $4904.00, where: • $1549.00 is sales from the current month of September, where payment is due to be received by the end of October; listed as current • $2596.00 is sales during August, where payment is due to be received by the end of September; listed as 30 days • $132.00 is sales during July, where payment should have been received by the end of August but is still outstanding; listed as 60 days

Copyright © 2018. Cengage. All rights reserved.

• $627.00 is sales during June or earlier, where payment should have been received (in this case, by the end of July); listed as 90+ days. Having ticked all items on the remittance advice against the accounts receivable listing, the ticked remittance advice would look like figure 6.65.

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CHAPTER 6

Remittance Advice of P Alfred

30 September 2022

500 Lyons Road

Date 2 Aug 22 4 Aug 22 6 Aug 22 12 Aug 22 13 Aug 22 15 Aug 22 18 Aug 22 27 Aug 22 27 Sep 22

Customer 567

J Petersen 251 Oscar Ramsey Drive Toormina    2470

Sawtell 2500

Particulars and Reference Purchases Purchases Purchases Purchases Purchases Purchases Purchases Return Purchases Bank

Tax inv 285 Tax inv 302 Tax inv 315 Tax inv 366 Tax inv 340 Tax inv 370 Adj c/n 561 Tax inv 383 Pay ref 34567

Debit

Credit ✓ 132.00 ✓ 495.00 ✓ 759.00 ✓ 418.00 ✓ 253.00 ✓   77.00

✓ 22.00 ✓  187.00 2 299.00

Balance 132.00 627.00 1 386.00 1 804.00 2 057.00 2 134.00 2 112.00 2 299.00 0.00

FIGURE 6.65 Remittance advice from P Alfred received by J Petersen, after ticking against entries in the accounts receivable listing of P Alfred

The ticked accounts receivable listing would appear as shown in figure 6.66. Extract Accounts Receivable Ledger of J Petersen

222

P Alfred 17 Jun 22 19 Jul 22 3 Aug 22 5 Aug 22 8 Aug 22 11 Aug 22 13 Aug 22 17 Aug 22 21 Aug 22 31 Aug 22 5 Sep 22 15 Sep 22 27 Sep 22

Sales Sales Sales Sales Sales Sales Sales Sales Return Sales Sales Sales Sales Sales

Tax inv 223 Tax inv 285 Tax inv 302 Tax inv 315 Tax inv 340 Tax inv 366 Tax inv 370 Adj c/n 561 Tax inv 383 Tax inv 395 Tax inv 473 Tax inv 517 Tax inv 601

SJ1 SJ2 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ4 SJ4 SJ4

627.00 132.00 495.00 759.00 253.00 418.00 77.00 187.00 429.00 183.00 834.00 532.00

627.00 759.00 1 254.00 2 013.00 2 266.00 2 684.00 2 761.00 22.00 2 739.00 2 926.00 3 355.00 3 538.00 4 372.00 4 904.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Copyright © 2018. Cengage. All rights reserved.

CONTINUED

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of J Petersen

P Alfred Date

Inv/ (C/n)

17 Jun 22 19 Jul 22 3 Aug 22 5 Aug 22 8 Aug 22 11 Aug 22 13 Aug 22 17 Aug 22 21 Aug 22 31 Aug 22 5 Sep 22 15 Sep 22 27 Sep 22

223 285 302 315 340 366 370 (561) 383 395 473 517 601

222 account Ageing

Amount 627.00 132.00 495.00 759.00 253.00 418.00 77.00 (22.00) 187.00 429.00 183.00 834.00 532.00

Cumulative

Current

627.00 759.00 1 254.00 2 013.00 2 266.00 2 684.00 2 761.00 2 739.00 2 926.00 3 355.00 3 538.00 4 372.00 4 904.00

30 days

60 days

90+ days 627.00

✓ 132.00 ✓ 495.00 ✓ 759.00 ✓ 253.00 ✓ 418.00 ✓ 77.00 ✓ (22.00) ✓ 187.00 429.00 183.00 834.00 532.00 1 549.00

2 596.00

132.00

627.00

FIGURE 6.66 Accounts receivable ledger account and accounts receivable aged listing for P Alfred, extracted from J Petersen’s accounts receivable ledger after ticking from the remittance advice

From the ticked aged accounts receivable listing, the credit officer would clearly see that the tax invoice #223 for $627.00 from 17 June has still not been paid and that the tax invoice #395 $429.00 sold on 31 August has not been paid either. The main concern, however, is the June invoice; the credit officer would need to refer to the record of previous agreements, and commitments that were made but apparently not kept. The credit officer rang P Alfred and was promised that payment of the June invoice would be received by the end of the next week. The sale on 31 August was received by P Alfred that afternoon, but their receiving area had closed off for the end of the month in the morning. It was therefore treated by P Alfred as a September receipt instead of August, and was already processed for payment at the end of October. All these relevant details would be noted on the account receivable listing for P Alfred and include dates, times and names noted for future reference.

QUESTION 6.20 On 30 April 2022, Norma M Spence received a payment for $1133.00 attached to a remittance advice from S Hassal for payment of March tax invoices, as shown in figure 6.67.

Copyright © 2018. Cengage. All rights reserved.

Remittance Advice of S Hassal

30 April 2022

140 Shannon Highway Norma M Spence 1 Tibbles Street Beaumaris   3193

Shipman 2473

Date 6 Mar 22 15 Mar 22 17 Mar 22 20 Mar 22 24 Mar 22 27 Apr 22

Particulars and Reference Purchases Purchases Return Purchases Purchases Purchases Return Bank

Tax inv 254 Adj c/n 025 Tax inv 375 Tax inv 286 Adj c/n 030 Pay ref 45678

Customer 106

Debit

Credit 143.00

198.00 759.00 473.00 44.00 1 133.00

FIGURE 6.67  Remittance advice from S Hassal received by Norma M Spence 230tafenswlib on 2020-05-30 06:08:24. Created from

Balance 143.00 (55.00) 704.00 1 177.00 1 133.00 0.00

CHAPTER 6

The extract accounts receivable ledger and the extract accounts receivable aged listing of Norma M Spence (see figure 6.68) show the customer’s account of S Hassal as at 30 April. Trading terms of Norma M Spence are net 30 days. Extract Accounts Receivable Ledger of Norma M Spence

S Hassal 4 Mar 22 7 Mar 22 15 Mar 22 16 Mar 22 23 Mar 22 24 Mar 22 27 Mar 22 17 Apr 22 26 Apr 22 29 Apr 22

Sales Sales Sales Return Sales Sales Sales Return Sales Sales Sales Sales

Tax inv 254 Tax inv 286 Adj c/n 025 Tax inv 375 Tax inv 415 Adj c/n 030 Tax inv 465 Tax inv 615 Tax inv 686 Tax inv 727

281 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1 SJ1 SJ2 SJ2 SJ2

143.00 473.00 759.00 209.00 715.00 689.00 549.00 538.00

143.00 616.00 198.00 418.00 1 177.00 1 386.00 44.00 1 342.00 2 057.00 2 746.00 3 295.00 3 833.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of Norma M Spence S Hassal Date 4 Mar 22 7 Mar 22 15 Mar 22 16 Mar 22 23 Mar 22 24 Mar 22 27 Mar 22 17 Apr 22 26 Apr 22 29 Apr 22

Inv/ (C/n) 254 286 (025) 375 415 (030) 465 615 686 727

281 account Ageing

Amount Cumulative 143.00 143.00 473.00 616.00 (198.00) 418.00 759.00 1 177.00 209.00 1 386.00 (44.00) 1 342.00 715.00 2 057.00 689.00 2 746.00 549.00 3 295.00 538.00 3 833.00

Current

30 days

60 days

90+ days

143.00 473.00 (198.00) 759.00 209.00 (44.00) 715.00 689.00 549.00 538.00 1 776.00

2 057.00

FIGURE 6.68 Accounts receivable ledger account and accounts receivable aged listing for S Hassal, extracted from Norma M Spence’s accounts receivable ledger

Copyright © 2018. Cengage. All rights reserved.

Using the remittance advice from S Hassal and the accounts receivable aged listing of Norma M Spence, you are required to clearly show those tax invoices that are overdue by ticking the relevant entries and reporting them. Also indicate what action should be taken to confirm that payment for the overdue tax invoices (if any) will be received in the next remittance advice from S Hassal.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

QUESTION 6.21 Breeze Towers received a remittance advice with attached payment for $3817.00 from E von Stephenson on 31 May 2022 (shown in figure 6.69). This remittance is for April credit sales by Breeze Towers to E von Stephenson, where the agreed trading terms are net 30 days. Remittance Advice of E von Stephenson

25 May 2022

3 Cottonwood Close Breeze Towers 13 Gale Road Stevenston 2467

Tallawudjah 2450

Date 8 Mar 22 2 Apr 22 5 Apr 22 6 Apr 22 16 Apr 22 18 Apr 22 21 Apr 22 21 Apr 22 28 Apr 22 25 May 22

Particulars and Reference Purchases Purchases Purchases Purchases Purchases Purchases Purchases Purchases Return Purchases Bank

Customer 125

Debit

Tax inv 391 Tax inv 455 Tax inv 513 Tax inv 541 Tax inv 563 Tax inv 588 Tax inv 603 Adj c/n 113 Tax inv 687 Pay ref 56789

Credit

Balance

946.00 33.00 660.00 550.00 220.00 440.00 649.00 66.00 385.00 3 817.00

946.00 979.00 1 639.00 2 189.00 2 409.00 2 849.00 3 498.00 3 432.00 3 817.00 0.00

FIGURE 6.69  Remittance advice from E von Stephenson received by Breeze Towers The extract accounts receivable aged listing of Breeze Towers is obtained from the accounts receivable ledger and in figure 6.70 shows the account of E von Stephenson as at 31 May 2022. Extract Accounts Receivable Ledger of Breeze Towers

Copyright © 2018. Cengage. All rights reserved.

E von Stephenson 19 Feb 22 4 Mar 22 27 Mar 22 3 Apr 22 4 Apr 22 9 Apr 22 10 Apr 22 15 Apr 22 20 Apr 22 26 Apr 22 28 Apr 22 2 May 22 11 May 22 19 May 22 25 May 22

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Sales Sales Sales Sales Sales Sales Sales Sales Sales Return Sales Sales Sales Sales Sales Sales

Tax inv 174 Tax inv 391 Tax inv 455 Tax inv 513 Tax inv 541 Tax inv 563 Tax inv 588 Tax inv 603 Adj c/n 113 Tax inv 687 Tax inv 792 Tax inv 827 Tax inv 889 Tax inv 919 Tax inv 956

SJ1 SJ2 SJ2 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ4 SJ4 SJ4 SJ4

249 528.00 946.00 33.00 660.00 550.00 220.00 440.00 649.00 385.00 803.00 791.00 548.00 413.00 586.00

528.00 1 474.00 1 507.00 2 167.00 2 717.00 2 937.00 3 377.00 4 026.00 66.00 3 960.00 4 345.00 5 148.00 5 939.00 6 487.00 6 900.00 7 486.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

CONTINUED

CHAPTER 6

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of Breeze Towers E von Stephenson Date 19 Feb 22 4 Mar 22 27 Mar 22 3 Apr 22 4 Apr 22 9 Apr 22 10 Apr 22 15 Apr 22 20 Apr 22 26 Apr 22 28 Apr 22 2 May 22 11 May 22 19 May 22 25 May 22

Inv/ (C/n) 174 391 455 513 541 563 588 603 (113) 687 792 827 889 919 956

249 account Ageing

Amount Cumulative 528.00 528.00 946.00 1 474.00 33.00 1 507.00 660.00 2 167.00 550.00 2 717.00 220.00 2 937.00 440.00 3 377.00 649.00 4 026.00 (66.00) 3 960.00 385.00 4 345.00 803.00 5 148.00 791.00 5 939.00 548.00 6 487.00 413.00 6 900.00 586.00 7 486.00

Current

30 days

60 days

90+ days 528.00

946.00 33.00 660.00 550.00 220.00 440.00 649.00 (66.00) 385.00 803.00 791.00 548.00 413.00 586.00 2 338.00

3 641.00

979.00

528.00

FIGURE 6.70 Accounts receivable ledger account and accounts receivable aged listing of E von Stevenson, extracted from Breeze Towers’ accounts receivable ledger Using the remittance advice from E von Stephenson and the accounts receivable listing of Breeze Towers, you are required to clearly show those tax invoices that are overdue by ticking the relevant entries and reporting them. Also indicate what action should be taken to confirm that payment for the overdue tax invoices will be received in the next remittance advice from E von Stephenson.

Copyright © 2018. Cengage. All rights reserved.

Reconciliations: accounts payable At the end of each month when a business processes payments to its individual creditors (accounts payable), it normally prepares a remittance advice to accompany each payment. The remittance advice indicates which supplier tax invoices and credit notes have been processed and included in the funds now being remitted. The format of the remittance advice is usually columnar as the subsidiary ledgers are also usually in a columnar format. The business prepares its accounts payable ledger and the remittance payment advice from the processing of tax invoices and adjustment credit notes received, as well as payments made and discounts received. The business also receives a statement from the supplier indicating the amount the supplier believes it is owed by the business. An important, if not essential, internal control procedure for any business is to reconcile its records of amounts owed with the details on the supplier’s statement. The reconciliation is known as the accounts payable statement. It is the same as the accounts receivable statement, which is prepared from the supplier’s point of view. An accounts payable statement is a chronological (by date order) list of events that have occurred, from the point of view of the purchasing business that is preparing the statement. The reconciliation (or agreement) between the account payable statement prepared by the business and the supplier’s account receivable statement may result in: • adjustments in the books of the business, or • adjustments required in the supplier’s books, or Created from tafenswlib on 2020-05-30 07:06:50.

233

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

• a note that certain source documents have not yet been processed by the business, or • no adjustment, as both statements are in agreement. In practice, the details on the accounts payable and accounts receivable accounts in the subsidiary ledgers would show the tax invoice, adjustment credit note and receipt numbers.1 In the work now being covered for reconciliations, these details will be shown. The details of the address will not be shown, even though in practice they would be. It is to the advantage of both the purchasing and supplying businesses to ensure that any differences in records are corrected as quickly as possible and that the other business is advised of any problems with tax invoices, adjustment credit notes, payments or discounts.

Procedure for reconciliation of accounts payable statement • Start from the last reconciliation, at a point where the accounts payable ledger agrees with the supplier’s statement. • Tick items in the business’s account payable ledger account and supplier’s statement if there is agreement of amount and document number. The dates will normally be different, due to the lapse of time between the date sent and the date received. • Investigate any amounts not ticked in either the account payable account or the supplier’s statement. • Correct errors identified and confirmed in the business records. • Start the reconciliation for the statement of account payable with the supplier’s statement balance. Deduct supplier’s tax invoices not yet processed by the business (not in the account payable ledger), deduct discounts not recorded by the supplier, add back supplier’s adjustment credit notes not yet processed, and any other transactions not in agreement. This should now reconcile back to the accounts payable ledger. • Advise the supplier on the remittance advice of any tax invoice or credit note adjustments required or copies of any source documents required.

REASONS FOR RECONCILING ITEMS

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Items not received The business did not receive the items shown on a tax invoice in the current month and is processing the tax invoice in the following month. A tax invoice should normally be processed through the accounting system during the month that the item was actually received, and not on the date on the supplier’s invoice. If items have been received but no tax invoice received, then the account payable (or supplier) should be requested to provide a copy of the tax invoice.

Adjustment credit note required If an adjustment credit note is required then it would be normal business practice to hold the tax invoice and not process it until the adjustment credit note is received. This encourages the supplier to issue an adjustment credit note if it wants any payment for that tax invoice. The supplier must at least be advised on the remittance advice that an adjustment credit note is required before it can expect payment of a specific tax invoice. Also, the adjustment credit note may have been received but is to be processed in the following month with the tax invoice.

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CHAPTER 6

Error in amount If the supplier’s tax invoice does not show the correct amount, then the comments above for the credit note should be followed. If the business has not processed the source document correctly, then the amount should be adjusted by general journal.

Discount not allowed The business has reduced its payment by the amount of discount according to the agreed terms for payment, but the supplier has failed to record the discount as part of the payment amount. This reconciliation item should also be advised to the supplier on the remittance advice.

Example 6: Reconciliation in the accounts of L Grace of an account payable, Peter Robert L Grace has received the statement from her supplier, Peter Robert, for the month of July 2022 (see figure 6.71). An extract of the accounts payable ledger of L Grace indicates that Peter Robert is only owed $759 (see figure 6.72). The reconciliation of the supplier’s statement to the accounts payable ledger (figure 6.73) shows the reasons why there is a difference between the two records. While no adjustments are required to the records of L Grace, she should confirm that the tax invoices not yet processed have actually been received and that there are no problems that should be brought to the notice of the supplier, Peter Robert. STATEMENT Peter Robert

18 March Street

MONTH ENDED

Orange 2800

31 July 2022 L Grace 93 William Street Bathurst 2795

Copyright © 2018. Cengage. All rights reserved.

Date

Particulars and Reference

1 Jul 22 Balance Sales 2 Jul 22 Bank Discount Allowed Sales 13 Jul 22 Sales

Tax inv 586 Rec 159 Rec 159 Tax inv 625 Tax inv 650

14 Jul 22 Sales Return

Adj c/n 118

24 Jul 22 Sales 28 Jul 22 Sales

Tax inv 717 Tax inv 753

29 Jul 22 Sales Return

Adj c/n 125

TERMS: 5% discount end of month/net 30 days 90+ days 60 days

Customer No. 0153 Debit

Credit

792.00 363.00 748.00 44.00

792.00 1 155.00 407.00 363.00 495.00 671.00

77.00

594.00

132.00 176.00 297.00 550.00

891.00 1 441.00 55.00

AMOUNT DUE 30 days

Balance

1 386.00 1 386.00 Current $1 386.00

FIGURE 6.71  L Grace received this accounts payable statement from her supplier, Peter Robert

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Extract Accounts Payable Ledger of L Grace

Peter Robert 1 Jul 22 Balance 2 Jul 22 Bank [payment] Discount Received and GST 5 Jul 22 Purchases 15 Jul 22 Purchases Return 25 Jul 22 Purchases 26 Jul 22 Purchases

1 792.00

Pay ref 125 Pay ref 125 Tax inv 586 Adj c/n 118 Tax inv 650 Tax inv 717

CP1 CP1 PJ1 PJ1 PJ1 PJ1

792.00 44.00 0.00 363.00 286.00 462.00 759.00

748.00 44.00 363.00 77.00 176.00 297.00

Cr Cr Cr Cr Cr Cr

FIGURE 6.72  Peter Robert’s account in L Grace’s accounts payable ledger Reconciliation of Accounts Payable Statement from Peter Robert for the month of July 2022 Balance as per supplier’s statement Less supplier’s tax invoices not yet processed

Add back supplier’s adjustment credit note not yet processed Balance as per accounts payable ledger Less 5% discount on accounts payable ledger balance Value of payment to be processed

1 386.00 #625 #753

132.00 550.00

#125

682.00 704.00 55.00 759.00 37.95 721.05

FIGURE 6.73  Reconciliation of Peter Robert’s statement to L Grace’s accounts payable ledger balance

Example 7: Reconciliation in the accounts of G Lagudi of an account payable, Toni Sharon G Lagudi has received a statement from her supplier Toni Sharon for the month of August 2022 (see figure 6.74). STATEMENT Toni Sharon

MONTH ENDED

251 Narellan Road Campbelltown 2560

31 August 2022 G Lagudi 500 Chapel Road Bankstown 2200

Copyright © 2018. Cengage. All rights reserved.

Date

Particulars and Reference

17 Jun 22 Sales Tax inv 223 12 Jul 22 Sales Tax inv 265 19 Jul 22 Sales Tax inv 285 1 Aug 22 Bank Rec 854 3 Aug 22 Sales Tax inv 302 5 Aug 22 Sales Tax inv 315 8 Aug 22 Sales Tax inv 340 11 Aug 22 Sales Tax inv 366 13 Aug 22 Sales Tax inv 370 17 Aug 22 Sales Return Adj c/n 561 21 Aug 22 Sales Tax inv 383 31 Aug 22 Sales Tax inv 395 TERMS: 5% discount end of month/net 30 days 90+ days 60 days 627.00

Customer No. 758

Debit

Credit

627.00 275.00 132.00 261.25 495.00 759.00 253.00 418.00 77.00 22.00 187.00 429.00 AMOUNT DUE 30 days 145.75

Balance 627.00 902.00 1 034.00 772.75 1 267.75 2 026.75 2 279.75 2 697.75 2 774.75 2 752.75 2 939.75 3 368.75 3 368.75 Current 2 596.00

FIGURE 6.74  G Lagudi received this accounts payable statement from her supplier Toni Sharon 236tafenswlib on 2020-05-30 07:06:50. Created from

CHAPTER 6

An extract of the accounts payable ledger of G Lagudi indicates that Toni Sharon is only owed $2299.00 (see figure 6.75). Extract Accounts Payable Ledger of G Lagudi

Toni Sharon 14 Jul 22 Purchases 1 Aug 22 Bank [payment] Discount Received and GST 2 Aug 22 Purchases 4 Aug 22 Purchases 6 Aug 22 Purchases 12 Aug 22 Purchases 13 Aug 22 Purchases 15 Aug 22 Purchases 18 Aug 22 Purchases Return 27 Aug 22 Purchases 31 Aug 22 Reversal of error 31 Aug 22 Correction of error

Tax inv 265 Pay ref 717 Pay ref 717 Tax inv 285 Tax inv 302 Tax inv 315 Tax inv 366 Tax inv 340 Tax inv 370 Adj c/n 561 Tax inv 383 Tax inv 366 Tax inv 366

1 PJ1 CP1 CP1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 GJ1 GJ1

275.00 261.25 13.75 132.00 495.00 759.00 484.00 253.00 77.00 22.00 187.00 484.00 418.00

275.00 13.75 0.00 132.00 627.00 1 386.00 1 870.00 2 123.00 2 200.00 2 178.00 2 365.00 1 881.00 2 299.00

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

FIGURE 6.75  Toni Sharon’s account in G Lagudi’s accounts payable ledger for August

A copy of the last month’s reconciliation provides a point to commence this month’s reconciliation (see figure 6.76). Reconciliation of Accounts Payable Statement from Toni Sharon for the month of July 2022 Balance as per supplier’s statement Less supplier’s tax invoices not yet processed Balance as per accounts payable ledger Less 5% discount on accounts payable ledger balance Value of payment to be processed

1 034.00 #223 #285

627.00 132.00

759.00 275.00 13.75 261.25

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.76 Reconciliation of Toni Sharon’s statement to G Lagudi’s accounts payable ledger balance for the previous month of July

The July reconciliation of the supplier’s statement and the accounts payable ledger shows the reasons why there is a difference between the two records: two tax invoices (223 and 285) have not been processed by G Lagudi. An adjustment to tax invoice 366 was required in the records of G Lagudi (see the bold text at the bottom of figure 6.75). It should be confirmed that the tax invoices not yet processed at the end of August have actually been received and that there are no problems preventing them from being processed next month. The failure of Toni Sharon to allow the discount should be brought to her notice so that it can be corrected for next month (see August’s reconciliation, shown in figure 6.77).

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Reconciliation of Accounts Payable Statement from Toni Sharon for the month of August 2022 Balance as per supplier’s statement Less supplier’s tax invoices not yet processed

3 368.75 627.00 429.00 1 056.00 2 312.75 13.75 2 299.00 114.95 2 184.05

#223 #395

Less discount not yet allowed on receipt #854 on 1 August Balance as per accounts payable ledger Less 5% discount on accounts payable ledger balance Value of payment to be processed

FIGURE 6.77 Reconciliation of Toni Sharon’s statement to G Lagudi’s accounts payable ledger balance for the current month of August

QUESTION 6.22 G Attard has received the statement shown in figure 6.78 from her supplier Darren Copland for the month of March 2022. STATEMENT Darren Copland

Foleys Road

MONTH ENDED

North Wollongong 2500

31 March 2022 G Attard 140 Princes Highway Bomaderry 2541

Date

Particulars and Reference

1 Mar 22 Balance 2 Mar 22 Bank Discount Allowed 4 Mar 22 Sales 7 Mar 22 Sales 15 Mar 22 Sales Return Sales 23 Mar 22 Sales 24 Mar 22 Sales Return 27 Mar 22 Sales

Debit

Credit

704.00 Rec 745 Rec 745 Tax inv 254 Tax inv 286 Adj c/n 025 Tax inv 375 Tax inv 415 Adj c/n 030 Tax inv 465

TERMS: 3% discount end of month/net 30 days 90+ days 60 days Copyright © 2018. Cengage. All rights reserved.

Customer No. 071

682.00 22.00 143.00 473.00 198.00 759.00 209.00 44.00 715.00 AMOUNT DUE 30 days

Balance 704.00 22.00 0.00 143.00 616.00 418.00 1 177.00 1 386.00 1 342.00 2 057.00 2 057.00 Current $2 057.00

FIGURE 6.78  G Attard received this accounts payable statement from her supplier Darren Copland However, the accounts payable ledger shows a different amount owing (see figure 6.79).

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Extract Accounts Payable Ledger of G Attard

Darren Copland 1 Mar 22 Balance Bank [payment] Discount Received and GST 6 Mar 22 Purchases 15 Mar 22 Purchases Return 17 Mar 22 Purchases 20 Mar 22 Purchases 24 Mar 22 Purchases Return

1 704.00

Pay ref 863 Pay ref 863 Tax inv 254 Adj c/n 025 Tax inv 375 Tax inv 286 Adj c/n 030

CP1 CP1 PJ1 PJ1 PJ1 PJ1 PJ1

682.00 22.00 198.00

44.00

704.00 22.00 0.00 143.00 143.00 55.00 759.00 704.00 473.00 1 177.00 1 133.00

Cr Cr Cr Dr Cr Cr Cr

FIGURE 6.79  Darren Copland’s account in G Attard’s accounts payable ledger You are required to reconcile the statement to the accounts payable ledger balance for G Attard.

QUESTION 6.23 W Johnson has received a statement for the month of January 2022 from his supplier, Lesley Richmond (shown in figure 6.80). However, the accounts payable ledger shows a different amount owing (see figure 6.81). You are required to reconcile the statement to the accounts payable ledger balance for W Johnson. STATEMENT Lesley Richmond

The Horsley Drive

MONTH ENDED

Wetherill Park 2164

31 January 2022 W Johnson 118 Gertrude Street South Gosford 2250

Copyright © 2018. Cengage. All rights reserved.

Date

Particulars and Reference

1 Jan 22 Balance 2 Jan 22 Sales Tax inv 256 3 Jan 22 Bank Rec 312 Discount Allowed Rec 312 8 Jan 22 Sales Tax inv 273 10 Jan 22 Sales Tax inv 287 15 Jan 22 Sales Return Adj c/n 079 21 Jan 22 Sales Tax inv 351 27 Jan 22 Sales Return Adj c/n 086 29 Jan 22 Sales Tax inv 439 TERMS: 5% discount end of month/net 30 days 90+ days 60 days

Customer No. 219

Debit

Credit

1 001.00 451.00 950.95 50.05 110.00 264.00 66.00 627.00 88.00 418.00 AMOUNT DUE 30 days

Balance 1 001.00 1 452.00 501.05 451.00 561.00 825.00 759.00 1 386.00 1 298.00 1 716.00 1 716.00 Current $1 716.00

FIGURE 6.80  W Johnson received this accounts payable statement from her supplier, Lesley Richmond

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Extract Accounts Payable Ledger of W Johnson

Lesley Richmond 1 Jan 22 Balance Bank [payment] Discount Received and GST 8 Jan 22 Purchases 15 Jan 22 Purchases Return 18 Jan 22 Purchases 28 Jan 22 Purchases

1 1 001.00

Pay ref 713 Pay ref 713 Tax inv 256 Adj c/n 079 Tax inv 287 Tax inv 351

CP1 CP1 PJ1 PJ1 PJ1 PJ1

950.95 50.05 451.00 66.00 264.00 627.00

1 001.00 50.05 0.00 451.00 385.00 649.00 1 276.00

Cr Cr Cr Cr Cr Cr

FIGURE 6.81  Lesley Richmond’s account in W Johnson’s accounts payable ledger

QUESTION 6.24 A Martinez has received the statement from her supplier Lisa Jackson for the month of April 2022 (figure 6.82); however, the accounts payable ledger shows a different amount owing (see figures 6.83 and 6.84). You are required to reconcile the statement for April to the accounts payable ledger balance for A Martinez. Assume the value of invoices shown on the supplier’s statement is correct. STATEMENT Lisa Jackson

MONTH ENDED

Conway Street Lismore 2480

30 April 2022 A Martinez Clarence Street Grafton 2460

Copyright © 2018. Cengage. All rights reserved.

Date

Particulars and Reference

19 Feb 22 Sales Tax inv 174 4 Mar 22 Sales Tax inv 391 27 Mar 22 Sales Tax inv 455 1 Apr 22 Bank Rec 216 3 Apr 22 Sales Tax inv 513 4 Apr 22 Sales Tax inv 541 9 Apr 22 Sales Tax inv 563 10 Apr 22 Sales Tax inv 588 15 Apr 22 Sales Tax inv 603 20 Apr 22 Sales Return Adj c/n 113 26 Apr 22 Sales Tax inv 687 28 Apr 22 Sales Tax inv 792 TERMS: 2% discount end of month/net 30 days 90+ days 60 days

Customer No. 480

Debit

Credit

528.00 946.00 33.00 927.08 660.00 550.00 220.00 440.00 649.00 66.00 385.00 803.00 AMOUNT DUE 30 days

Balance 528.00 1 474.00 1 507.00 579.92 1 239.92 1 789.92 2 009.92 2 449.92 3 098.92 3 032.92 3 417.92 4 220.92 4 220.92 Current $3 641.00

FIGURE 6.82  A Martinez received this accounts payable statement from her supplier Lisa Jackson

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Extract Accounts Payable Ledger of A Martinez

Lisa Jackson 8 Mar 22 Purchases 1 Apr 22 Bank Discount Received and GST 2 Apr 22 Purchases 5 Apr 22 Purchases 6 Apr 22 Purchases 16 Apr 22 Purchases 18 Apr 22 Purchases 21 Apr 22 Purchases Purchases Return 28 Apr 22 Purchases

Tax inv 391 Pay ref 556 Pay ref 556 Tax inv 455 Tax inv 513 Tax inv 541 Tax inv 563 Tax inv 588 Tax inv 603 Adj c/n 113 Tax inv 687

1 PJ1 CP1 CP1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1

946.00 927.08 18.92 33.00 660.00 550.00 220.00 418.00 649.00 66.00 385.00

946.00 18.92 0.00 33.00 693.00 1 243.00 1 463.00 1 881.00 2 530.00 2 464.00 2 849.00

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

FIGURE 6.83  Lisa Jackson’s account in A Martinez’s accounts payable ledger Reconciliation of Accounts Payable Statement from Lisa Jackson for the month of March 2022 Balance as per supplier’s statement Less supplier’s tax invoices not yet processed #174 #455 Balance as per accounts payable ledger Less 2% discount on accounts payable ledger balance Value of payment to be processed

1 507.00 528.00 33.00

561.00 946.00 18.92 927.08

FIGURE 6.84 Reconciliation of Lisa Jackson’s statement to A Martinez’s accounts payable ledger balance for the previous month of March

Copyright © 2018. Cengage. All rights reserved.

Other subsidiary ledgers and control accounts In chapter 3, we grouped similar items under meaningful headings called accounts. Transactions were then analysed and recorded using these accounts, including accounts receivable control and accounts payable control. If there are many different items within an account such as the accounts receivable control and the accounts payable control accounts, it may be useful for a business to establish subsidiary ledgers linked to that account. Information is posted to the control account in the general ledger, and detailed transactions are kept in the relevant subsidiary ledger. A range of assets and liabilities, such as inventory, motor vehicles, loans and GST, may be represented by a control account in the general ledger and detailed transactions recorded in a subsidiary ledger. The same principles used for recording to the accounts receivable or accounts payable control and their subsidiary ledgers are used for other control accounts and their subsidiary ledgers. The balance in the control account and the total of the subsidiary ledger must agree at any point in time. Off-the-shelf accounting software packages may also include other subsidiary ledgers such as inventory or payroll and related reports as standard features. Alternatively, these may be available as additional modules that can be purchased and linked to the basic package. These would then be linked to a relevant control account in the general ledger, in the same way that we have seen the accounts receivable and accounts payable subsidiary ledgers linked to general ledger accounts receivable and accounts payable accounts.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 6.25 Using the information of Ku Cumbit shown in figures 6.85 to 6.89 for August and September 2022, enter relevant account balances and post the journals to the general, accounts receivable and accounts payable ledgers using the relevant account format. Prepare a trial balance and appropriate listings for the subsidiary ledgers as at 30 September 2022.

Trial Balance of Ku Cumbit as at 31 August 2022 Bank 24 833 Accounts Receivable Control 19 635 GST Receivable 700 Machinery 1 000 Accounts Payable Control GST Payable Capital Sales Purchases 6 320 52 488

3 718 4 000 3 500 41 270 52 488

Ku Cumbit Accounts Receivable Listing

Ku Cumbit Accounts Payable Listing

as at 31 August 2022 D P Creek 8 415 P Killawarra 4 466 Kindle Hill & Co 6 754 19 635

as at 31 August 2022 R Ashlea 1 353 C K Dingo 847 Warroo & Co 1 518 3 718

FIGURE 6.85  Trial balance, accounts receivable and accounts payable listings as at 31 August of Ku Cumbit Sales Journal of Ku Cumbit

Copyright © 2018. Cengage. All rights reserved.

Date 3 Sep 22 9 Sep 22 13 Sep 22 15 Sep 22 19 Sep 22 21 Sep 22 22 Sep 22 23 Sep 22 25 Sep 22 26 Sep 22 29 Sep 22

Inv Adj 979 980 981 982 983 984 985 058 986 987 988

Accounts Receivable and/or Ref Particulars D P Creek – Sales B Boorawhanga – Sales Kindle Hill & Co – Sales F Munyaree – Sales B Beitibombi – Sales C Wombateeni – Sales P Killawarra – Sales F Munyaree – Sale Return B Koorapei – Machinery C Wombateeni – Sales Kindle Hill & Co – Sales

FIGURE 6.86  Sales journal of Ku Cumbit

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Acc’nts Receiv 2 618 451 2 838 2 156 3 157 2 882 4 224 (110) 1 100 2 981 4 796 27 093

Sales 2 380 410 2 580 1 960 2 870 2 620 3 840 (100) 2 710 4 360 23 630

GST Payab 238 41 258 196 287 262 384 (10) 100 271 436 2 463

SJ 1 Machinery

1 000

1 000

CHAPTER 6

Purchases Journal of Ku Cumbit Date 4 Sep 22 7 Sep 22 9 Sep 22 12 Sep 22 15 Sep 22 19 Sep 22 22 Sep 22 23 Sep 22 24 Sep 22 27 Sep 22 29 Sep 22

Inv Adj 172 392 763 785 311 903 275 776 567 189 741

Accounts Payable and/or Ref Acc’nts Particulars Payab Warroo & Co – Purchases 1 870 C K Dingo – Office Expense 473 C Ramsay – Vehicle Expense 990 Wallaby Joe – Purchases 2 651 Belbourie Co – Delivery Costs 737 Warroo & Co – Purchase Return (165) C K Dingo – Office Expense 187 R Ashlea – Purchases 1 562 K Atabundah – Machinery 7 216 Wallaby Joe – Vehicle Expense 1 188 Belbourie Co – Purchases 3 542 20 251

Purchases 1 700

2 410 (150) 1 420

3 220 8 600

GST Receiv 170 43 90 241 67 (15) 17 142 656 108 322 1 841

PJ 1 Office Exp

Vehicle Exp

Delivery Costs

Machinery

430 900 670 170 6 560 1 080 600

1 980

670

6 560

FIGURE 6.87  Purchases journal of Ku Cumbit Cash Receipts Journal of Ku Cumbit Date 1 Sep 22 15 Sep 22 20 Sep 22 30 Sep 22

Rmt Rec 116 721 953 945 116 295 868

Drawer and/or Particulars

Ref

Bank

Kindle Hill & Co – Acc’nts Receiv P Killawarra – Acc’nts Receiv D P Creek – Acc’nts Receivable Sales Sales Y Oming – Comm Receivable B Beitibombi – Acc’nts Receiv

10 945

Acc’nts Receiv 6 754 4 466 8 415

Disc Allow’d (150) (100)

GST Payab (15) (10)

(60) (310)

168 62 51 (6) 250

10 263 682 3 652 25 542

3 157 22 792

CR 1 Sales

Comm Rec’d

1 680 620 510 2 300

510

FIGURE 6.88  Cash receipts journal of Ku Cumbit Cash Payments Journal of Ku Cumbit Date

Copyright © 2018. Cengage. All rights reserved.

1 Sep 22 9 Sep 22 12 Sep 22 20 Sep 22 25 Sep 22 30 Sep 22

Rmt Pmt 381 365 015 247 498 501

Payee and/or Particulars

Ref

Bank

Warroo & Co – Acc’nts Payable R Ashlea – Accounts Payable Cash – Stationery Lauders Real Estate – Rent Cash – Purchases K Atabundah – Acc’nts Payable

1 474 1 353 154 275 594 6 853 10 703

Acc’nts Payab 1 518 1 353

7 216 10 087

Disc Rec’d (40)

(330) (370)

CP 1 GST Station­ Receiv ery (4) 14 25 54 (33) 56

Rent

Purchases

140 250 540 140

250

540

FIGURE 6.89  Cash payments journal of Ku Cumbit

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

KEEP IN MIND Transactions are entered in the relevant journal from the point of view of the business whose journals are being prepared. Also remember that every business transaction has two ways of being considered. A sale by one business is a purchase by the other business and the payment by one business is a receipt by the other business.

QUESTION 6.26 Using the information of Val Orara at the end of April 2022 (shown in figure 6.90) and the transactions for May: • enter the appropriate journal abbreviation next to each transaction • prepare the relevant journals for the month of May 2022 • enter the opening balances in the appropriate ledgers • post the journals to the general ledger in T account format, and the accounts receivable and accounts payable ledgers in columnar account format • prepare a trial balance from the general ledger, and • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger.

Trial Balance of Val Orara as at 30 April 2022 Bank 5 443 Accounts Receivable Control 2 255 GST Receivable 478 Accounts Payable Control GST Payable Capital Sales Purchases 2 705 10 881

Val Orara Accounts Receivable Listing as at 30 April 2022 G Clifton B Dolan A Jameson

572 781 902 2 255

264 1 703 4 814 4 100 10 881

Val Orara Accounts Payable Listing as at 30 April 2022 Mayfield Stationers B Mont

88 176 264

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.90  Trial balance and accounts receivable and payable listings as at 30 April of Val Orara __________  1

Received funds from B Dolan $781.

__________  1

A Jameson direct deposited funds for April invoices less $33 discount.

__________  1

Electronic transfer to B Mont $176 for last month’s account.

__________  2

Direct deposit from G Clifton for $550 received in full settlement of April invoices.

__________  7

Received tax invoice for $297 ($270 + $27 GST) from A Waratah for inventory.

__________13

Photocopy paper (stationery expense) $165 ($150 + $15 GST) received from Mayfield Stationers.

__________15

Sold goods to B Dolan $2156 ($1960 + $196 GST).

__________16

Inventory purchased $187 ($170 + $17 GST) from B Mont.

__________16

Sent tax invoice for $2211 ($2010 + $201 GST) to R Daley for stock delivered.

__________18

A Jameson purchased $2057 ($1870 + $187 GST) of stock. CONTINUED

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CHAPTER 6

__________ 19 Adjustment credit note received from B Mont $33 ($30 + $3 GST) for damaged inventory. __________ 20 Mailed adjustment credit note for $44 ($40 + $4 GST) to A Jameson for overcharge. __________ 21 Purchased inventory on credit from A Waratah $374 ($340 + $34 GST). __________ 21 Cash sales $2563 ($2330 + $233 GST). __________ 25 Tax invoice received for $407 ($370 + $37 GST) from B Mont for inventory. __________ 25 Tax invoice for 12 months insurance for $363 ($330 + $33 GST) from A Merewether. __________ 26 Val Orara returned goods to B Mont $55 ($50 + $5 GST). __________ 28 Tax invoice $1419 ($1290 + $129 GST) mailed to G Clifton for inventory.

QUESTION 6.27 Using the information of Glen Reagh at the end of March 2022 (shown in figure 6.91) and the transactions for April: • enter the appropriate journal abbreviation next to each transaction • prepare the relevant journals for the month of April 2022 • enter the opening balances in the appropriate ledgers • post the journals to the general ledger in T account format, and the accounts receivable and accounts payable ledgers in columnar account format • prepare a trial balance from the general ledger, and • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger.

Trial Balance of Glen Reagh as at 31 March 2022 Bank 1 763 Accounts Receivable Control 2 464 GST Receivable 100 Accounts Payable Control GST Payable Capital Sales Purchases 1 913 6 240

Glen Reagh Accounts Receivable Listing

Copyright © 2018. Cengage. All rights reserved.

6 240

Glen Reagh Accounts Payable Listing

as at 31 March 2022 C Noble S Smith

704 376 1 712 3 448

as at 31 March 2022 858 1 606 2 464

N Castle K Kurri G Lendale

165 286 253 704

FIGURE 6.91 Trial balance and accounts receivable and payable listings as at 31 March of Glen Reagh __________   1 Sold stock to S Smith $2244 ($2040 + $204 GST). __________   1 Direct deposit received for March invoices less $22 discount from S Smith. __________   1 Purchased stock from G Lendale $198 ($180 + $18 GST). __________   1 Transferred funds for $154 to N Castle in full settlement of March account. __________   2 Remitted funds to K Kurri to pay March tax invoices $286. __________   2 G Lendale’s March account was paid less $22 discount. __________ 10 N Lambton forwarded $2893 ($2630 + $263 GST) tax invoice for a new photocopier. __________ 10 Sold goods on credit to F White for $2794 ($2540 + $254 GST).

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

__________ 15 Glen Reagh sold inventory on credit $1903 ($1730 + $173 GST) to C Noble. __________ 15 Purchased goods on credit from G Lendale $231 ($210 + $21 GST). __________ 17 Sold goods following direct deposit from F Williams for $1133 ($1030 + $103 GST). __________ 19 Tax invoice from N Castle $286 ($260 + $26 GST) for goods. __________ 20 Bought goods from K Kurri $385 ($350 + $35 GST). __________ 21 S Smith was sold goods on credit for $2277 ($2070 + $207 GST). __________ 25 E Cooper purchased goods $1628 ($1480 + $148 GST) and paid by debit card. __________ 28 Forwarded adjustment credit note to S Smith for damaged goods $33 ($30 + $3 GST). __________ 29 Paid Charlestown BP $396 ($360 + $36 GST) for this month’s petrol. __________ 30 Received funds from F White in full settlement of account less $77 discount.

QUESTION 6.28 From the transactions shown below, enter the appropriate journal abbreviation next to each transaction. Using the information (shown in figure 6.92) and transactions, prepare the journals of B Wellington for August 2022. Post the journals to the general, accounts receivable and accounts payable ledgers using the relevant account format. Prepare a trial balance and appropriate listings for the subsidiary ledgers as at 31 August 2022.

Trial Balance of B Wellington as at 31 July 2022 Bank Accounts Receivable Control GST Receivable Accounts Payable Control GST Payable Capital Sales Purchases

B Wellington Accounts Receivable Listing as at 31 July 2022 Y Anga E Ballimore W Garbon T Rangie

561 869 880 682 2 992

4 243 2 992 140 1 375 300 3 700 3 600 1 600 8 975

8 975

B Wellington Accounts Payable Listing as at 31 July 2022 A Brocklehurst R Dandaloo E Elong L Mookerawa

187 484 385 319 1 375

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.92  Trial balance, accounts receivable and accounts payable listings as at 31 July of B Wellington __________   1 Allowed W Garbon $33 discount as the July account was settled in full. __________   1 Direct deposit received from T Rangie $682 for July account. __________   1 Remitted funds to R Dandaloo for $440 in full settlement of July purchases. __________   1 Electronic transfer to pay E Elong’s July account and took $11 off as discount. __________   2 Received funds from Y Anga in full settlement of July account. __________   2 Sold goods for cash to Maryvale Co-op $1870 ($1700 + $170 GST). __________   5 Purchased stock from Montefiores and Co $528 ($480 + $48 GST) and paid by a debit card. __________   5 Received adjustment credit note for $22 ($20 + $2 GST) from A Brocklehurst for over-pricing. __________   6 Funds were remitted to L Mookerawa for all of last month’s purchases. CONTINUED Created from tafenswlib on 2020-05-30 07:07:00.

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CHAPTER 6

__________   7 E Ballimore paid July account. __________ 10 Sold goods to W Garbon $1848 ($1680 + $168 GST). __________ 12 Paid electronically $165 to A Brocklehurst being the amount now owed on account. __________ 13 Sent adjustment credit note to W Garbon for goods returned $143 ($130 + $13 GST). __________ 15 Goolma Supplies bought inventory by payment for $1980 ($1800 + $180 GST). __________ 15 L Mookorawa forwarded tax invoice $385 ($350 + $35 GST) for stocks obtained. __________ 18 Y Anga took stock on credit for $2640 ($2400 + $240 GST). __________ 18 Dripstone Co sold goods to B Wellington $649 ($590 + $59 GST). __________ 19 Tax invoiced T Rangie for goods $2904 ($2640 + $264 GST). __________ 19 Mailed tax invoice for $1716 ($1560 + $156 GST) to Bakers Swamp Co for inventory supplied. __________ 20 Bought goods for $451 ($410+ $41 GST) from R Dandaloo. __________ 20 Sent tax invoice $1991 ($1810 + $181 GST) to Y Anga for inventory taken. __________ 25 Sold goods $2761 ($2510 + $251 GST) to E Ballimore. __________ 25 Received tax invoice for $1254 ($1140 + $114 GST) from E Elong for stock purchases. __________ 25 Goods sold on credit to W Garbon for $2563 ($2330 + $233 GST). __________ 30 W Garbon bought inventory $1969 ($1790 + $179 GST) on credit.

QUESTION 6.29 Margaret O’Reilly keeps three ledgers. Before you prepare the relevant journals, she requires you to enter the appropriate journal abbreviation next to each transaction. She then asks you to prepare the relevant journals for July and post these to the general, accounts receivable and accounts payable ledgers as appropriate. Listings showing the three ledger balances are also required. The general ledger accounts at 30 June 2022 were bank $4166, inventory $484, GST receivable $500, GST payable $1200, capital unknown, sales $9339, purchases $4312. The accounts receivable ledger accounts were J Goulburn $2838, W Jasper $1518, T Ralga $2761. The accounts payable ledger accounts were K Less $1188, C Rookwell $1133, M Vale $1419. The two subsidiary ledgers agreed to their respective control accounts in the general ledger at the end of June 2022. __________   1 Received direct into bank account from J Goulburn $2750 after allowing $88 discount on last month’s account. __________   1 T Ralga forwarded remittance for $2684 in full settlement of June account. __________   1 Sold goods for cash to the Bungendore Co $2002 ($1820 + $182 GST). __________   2 Bought stock from Tirranaville Co-op for $473 ($430 + $43 GST) with a debit card. __________   2 Transferred funds to K Less for $1155 in full settlement of June account. __________   3 Paid C Rookwell balance on the June account. __________   7 Sold goods on credit to J Goulburn $2728 ($2480 + $248 GST).

Copyright © 2018. Cengage. All rights reserved.

__________   7 Paid T Strar $715 ($650 + $65 GST) for stationery and office expense, used a debit card. __________   8 Received electronic transfer from W Jasper. No discount was allowed in settling the account. __________   8 Paid with debit card, $1243 ($1130 + $113 GST) for cash purchase of stock. __________ 10 Tax invoice sent to W Jasper $2629 ($2390 + $239 GST) for inventory despatched. __________ 13 Cash sale to A McAlister $1936 ($1760 + $176 GST). __________ 16 Goods bought on credit by Ken More & Co $2101 ($1910 + $191 GST). __________ 17 Paid Yarra Stationery by direct transfer for stationery and office expense $847 ($770 + $77 GST). __________ 17 Direct deposit to Australian Taxation Office (ATO) the April–June GST $700 ($1200 payable – $500 credit). __________ 18 T Ralga purchased $1859 ($1690 + $169 GST) of stock on credit. __________ 18 Purchased stationery on credit $286 ($260 + $26 GST) from Kialla Co; use stationery and office expense.

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CONTINUED 247

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

__________ 19 Mailed adjustment credit note for $33 ($30 + $3 GST) to T Ralga for overcharge on goods. __________ 20 Received adjustment credit note from M Vale for $44 ($40 + $4 GST) for damaged stock. __________ 20 Sent tax invoice for inventory to Pudman and Co $2772 ($2520 + $252 GST). __________ 23 Remitted funds to M Vale only $1375 on account, no discount is involved. __________ 27 Sold stock to W Jasper $2607 ($2370 + $237 GST) on credit. __________ 27 Marulan and Co purchased $1683 ($1530 + $153 GST) of goods and paid by a debit card. __________ 28 Tax invoice and goods for $2739 ($2490 + $249 GST) sent to J Goulburn. __________ 28 Received tax invoice for $1628 ($1480 + $148 GST) from Grabben & Gullen insurance brokers. __________ 28 Commercial rent received from Taylors Flat tenants $550 ($500 + $50 GST). __________ 29 Adjustment credit note mailed to J Goulburn $55 ($50 + $5 GST) for damaged goods. __________ 30 Tax invoiced J Goulburn $1958 ($1780 + $178 GST) for goods. __________ 31 Commercial rent from Blankets Flat $451 ($410 + $41 GST) was received. __________ 31 Paid with debit card, I Inveralochy for inventory $1419 ($1290 + $129 GST) purchased.

QUESTION 6.30 Using the information of Gloster Udy at the end of June 2022 (shown in figure 6.93) and the transactions for July: • enter the appropriate journal abbreviation next to each transaction • prepare the relevant journals for the month of July 2022 • enter the opening balances in the appropriate ledgers • post the journals to the general ledger in T account format, and the accounts receivable and accounts payable ledgers in columnar account format • prepare a trial balance from the general ledger, and • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger.

Trial Balance of Gloster Udy as at 30 June 2022 Bank Accounts Receivable Control GST Receivable Accounts Payable Control GST Payable Capital

953 1 551 105

2 609

Copyright © 2018. Cengage. All rights reserved.

Gloster Udy Accounts Receivable Listing as at 30 June 2022 P Gordon R Joy

847 704 1 551

1 496 291 822 2 609

Gloster Udy Accounts Payable Listing as at 30 June 2022 C Lomon K Pooka

693 803 1 496

FIGURE 6.93  Trial balance and accounts receivable and payable listings as at 30 June of Gloster Udy __________   1 Sold stock on credit to R Joy $1617 ($1470 + $147 GST). __________   1 R Joy paid amount owing at the end of June less $11 discount. __________   1 Remitted to C Lomon the balance on the account from last month. __________   1 Transferred funds to K Pooka $781 in full settlement of last month’s account. __________   4 Purchased stock from K Pooka $418 ($380 + $38 GST).

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CHAPTER 6

__________   8 Received adjustment credit note for overcharge on tax invoice from K Pooka $44 ($40 + $4 GST). __________   9 R Joy returned goods for an adjustment credit $55 ($50 + $5 GST). __________ 10 P Gordon settled the account from last month. __________ 10 Purchased stationery $187 ($170 + $17 GST) with a debit card. __________ 15 P Gordon purchased stock for $2343 ($2130 + $213 GST) from Gloster Udy. __________ 15 C Lomon sold inventory to Gloster Udy for $209 ($190 + $19 GST). __________ 17 F Jemalong forwarded tax invoice for goods $462 ($420 + $42 GST). __________ 18 Gloster Udy sold goods for cash $2508 ($2280 + $228 GST). __________ 22 Sent tax invoice to R Joy $2178 ($1980 + $198 GST) for inventory. __________ 23 Purchased goods on credit for $913 ($830 + $83 GST) from K Pooka. __________ 24 Gloster Udy purchased inventory from C Lomon $473 ($430 + $43 GST). __________ 26 Paid by direct transfer to R E Dullah for inventory picked up $880 ($800 + $80 GST). __________ 28 Tax invoice received for $396 ($360 + $36 GST) from F Jemalong for inventory. __________ 30 Rent received $407 ($370 + $37 GST) from Koles Real Estate.

QUESTION 6.31 Using the information of William Dumbrell at the end of January 2022 (shown in figure 6.94) and the transactions for February: • enter the appropriate journal abbreviation next to each transaction • prepare the relevant journals for the month of February 2022 • enter the opening balances in the appropriate ledgers • post the journals to the general ledger in T account format, and the accounts receivable and accounts payable ledgers in columnar account format • prepare a trial balance from the general ledger, and • prepare accounts receivable and payable listings that balance with the respective accounts in the general ledger.

Trial Balance of William Dumbrell

Copyright © 2018. Cengage. All rights reserved.

as at 31 January 2022 Bank 5 587 Accounts Receivable Control 990 GST Receivable 270 Accounts Payable Control GST Payable Capital Sales Purchases 3 015 9 862

William Dumbrell Accounts Receivable Listing as at 31 January 2022 R Creagh

1 309 785 1 500 6 268 9 862

William Dumbrell Accounts Payable Listing as at 31 January 2022

990

E June W Wyalong

473 836 1 309

FIGURE 6.94  Trial balance, accounts receivable and payable listings as at 31 January of William Dumbrell

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249

SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

__________   1 R Creagh settled her account and took advantage of the $22 discount. __________   1 Purchased inventory from B Atlow $275 ($250 + $25 GST) and paid by direct deposit. __________   2 Remitted funds to W Wyalong for $803 in full settlement of last month’s balance. __________   2 Electronic transfer of $429 to E June as received $44 discount. __________   3 N Hodges bought goods on credit $1881 ($1710 + $171 GST). __________   3 Received tax invoice for advertising from Khan Berra and Co for $792 ($720 + $72 GST). __________   5 Sold inventory for cash to M Hextall for $2464 ($2240 + $224 GST). __________   7 Tax invoice arrived with stock from W Wyalong $385 ($350 + $35 GST). __________   8 Tax invoice mailed to R Creagh $2904 ($2640 + $264 GST) for stock. __________ 10 Cash sale $1716 ($1560 + $156 GST). __________ 12 I Pritchard bought stock on credit for $1661 ($1510 + $151 GST). __________ 15 Forwarded tax invoice for $2915 ($2650 + $265 GST) to G Laming for goods. __________ 20 Sold goods on credit to I Pritchard $1188 ($1080 + $108 GST). __________ 22 Commission received $286 ($260 + $26 GST) from K Ninos and Co. __________ 25 Sold stock to S Cooper, who had remitted funds direct into the bank account for $1925 ($1750 + $175 GST). __________ 27 G Laming purchased on credit and goods were tax invoiced for $2101 ($1910 + $191 GST). __________ 28 W Wyalong’s tax invoice received $352 ($320 + $32 GST) for goods. __________ 28 Received funds from N Hodges who took the $44 discount allowed.

QUESTION 6.32 Enter the appropriate journal abbreviation next to each transaction listed below. Use these transactions and the following information (shown in figure 6.95) to prepare the journals of T W Bucketts for May 2022. Post the journals to the general, accounts receivable and accounts payable ledgers using the relevant account format. Prepare a trial balance and appropriate listings for the subsidiary ledgers as at 31 May 2022.

Trial Balance of T W Bucketts

Copyright © 2018. Cengage. All rights reserved.

as at 30 April 2022 Bank Accounts Receivable Control GST Receivable Accounts Payable Control GST Payable Capital Sales Purchases

T W Bucketts Accounts Receivable Listing as at 30 April 2022 B Booral C Limeburner H Pacific T Stroud

2 079 1 793 1 320 1 397 6 589

9 457 6 589 300 2 046 1 200 4 000 11 800 2 700 19 046

19 046

T W Bucketts Accounts Payable Listing as at 30 April 2022 L Clareval C Craven L Telegherry R Wards

671 407 385 583 2 046

FIGURE 6.95  Trial balance, accounts receivable and payable listings as at 30 April of T W Bucketts

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__________   1 Sold stock to T Stroud $1001 ($910 + $91 GST). __________   1 Received from C Limeburner for April account $1749 and allowed discount. __________   1 Funds received for April invoices $1397 from T Stroud. __________   1 B Booral paid April invoices less $55 discount. __________   1 Purchased stock from R Wards $341 ($310 + $31 GST). __________   1 Remitted funds to C Craven $407 for last month’s account. __________   1 Transferred $374 to L Telegherry in full settlement of April account. __________   2 H Pacific’s direct deposit of $1320 received in full settlement of April invoices. __________   2 Electronic transfer to L Clareval of $649 to pay April tax invoices and took discount. __________   2 R Wards’ April account was paid in full by electronic transfer. __________   7 Received tax invoice for $528 ($480 + $48 GST) from K Krambach for inventory. __________ 10 Sold goods on credit to S Stratford for $1782 ($1620 + $162 GST). __________ 10 B Kundibakh forwarded $3883 ($3530 + $353 GST) tax invoice for a new computer. __________ 12 Purchased stationery for $341 ($310 + $31 GST) with a debit card. __________ 13 Computer paper and toner (use stationery account) $671 ($610 + $61 GST) received from Burrell Stationery. __________ 15 T W Bucketts sold inventory on credit $1441 ($1310 + $131 GST) to Dale Forbes. __________ 15 Sold goods to C Limeburner $2332 ($2120 + $212 GST). __________ 15 Purchased goods on credit from R Wards $693 ($630 + $63 GST). __________ 16 Sent tax invoice $1969 ($1790 + $179 GST) to G Gloucester for stock delivered. __________ 16 Inventory purchased $594 ($540 + $54 GST) from C Craven. __________ 17 Sold goods for cash to L Mograni for $1177 ($1070 + $107 GST). __________ 18 B Booral purchased $3003 ($2730 + $273 GST) of stock. __________ 19 Adjustment credit note received from C Craven $66 ($60 + $6 GST) for damaged inventory. __________ 19 Tax invoice received from L Telegherry $1716 ($1560 + $156 GST) for goods. __________ 20 Mailed adjustment credit note for $154 ($140 + $14 GST) to B Booral for overcharge. __________ 20 Bought goods from L Clareval $1507 ($1370 + $137 GST). __________ 20 Used debit card to pay T Tinonee $253 ($230 + $23 GST) for stationery. __________ 21 Cash sales $1760 ($1600 + $160 GST). __________ 21 T Stroud was sold goods on credit for $1837 ($1670 + $167 GST). __________ 21 Purchased inventory on credit from K Krambach $924 ($840 + $84 GST). __________ 25 G Angat purchased goods $1122 ($1020 + $102 GST) and remitted funds direct into bank.

Copyright © 2018. Cengage. All rights reserved.

__________ 25 Tax invoice received for $858 ($780 + $78 GST) from C Craven for inventory. __________ 25 Tax invoice for 12 months’ insurance for $1012 ($920 + $92 GST) from R Kimbriki. __________ 26 T W Bucketts returned goods to C Craven $88 ($80 + $8 GST). __________ 28 Forwarded adjustment credit note to T Stroud for damaged goods $77 ($70 + $7 GST). __________ 28 Tax invoice $3542 ($3220 + $322 GST) mailed to H Pacific for inventory. __________ 29 Paid Purfleet Garage $737 ($670 + $67 GST) for this month’s petrol. __________ 31 Received funds from S Stratford in full settlement of account less $44 discount.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

QUESTION 6.33 Enter the appropriate journal abbreviation next to each transaction listed below. Use these transactions and the following information to prepare the journals of Tony Lowman for October 2022. Post the journals to the general, accounts receivable and accounts payable ledgers using the relevant account format. Prepare a trial balance and appropriate listings for the subsidiary ledgers as at 31 October 2022. The general ledger balances at 30 September 2022 were bank $3480, accounts receivable control unknown, GST receivable $1000, accounts payable control unknown, GST payable $1900, capital unknown. The accounts receivable ledger, at the end of September, showed R Coolongolook $2288, A Nabiac $2189, F Rainbow $1496 and B Sapphire $528. The accounts payable ledger, at the end of September, showed H Arrawarra $319, Bulah Delah $924, Karuah & Co $1364 and W Wooton $1474. __________   1 Purchased inventory from H Cundletown $1628 ($1480 + $148 GST) and paid with a debit card. __________   1 Remitted funds to W Wooton the balance of the account from last month. __________   1 Sold stock on credit to F Rainbow $4092 ($3720 + $372 GST). __________   1 R Coolongolook settled her account and took advantage of the $55 discount. __________   1 F Rainbow paid amount owing at the end of September less $33 discount. __________  2 Electronic transfer to Karuah & Co for $1320 in full settlement of last month’s balance. __________  2 Remitted $902 to Bulah Delah and received $22 discount. __________  3 Received tax invoice for advertising from C Coopernook for $968 ($880 + $88 GST). __________  3 K Kew bought goods on credit $4719 ($4290 + $429 GST). __________  4 Purchased stock from Bulah Delah $1771 ($1610 + $161 GST). __________  5 Waugh & Hope tax invoice for $2992 ($2720 + $272 GST) was received for office repairs. __________  5 Sold inventory to P Telegraph for $4488 ($4080 + $408 GST); had received electronic transfer of funds. __________  7 Tax invoice arrived with stock from Karuah & Co $3443 ($3130 + $313 GST). __________  8 Received adjustment credit note for overcharge on invoice from Bulah Delah $132 ($120 + $12 GST). __________  8 Tax invoice mailed to R Coolongolook $2959 ($2690 + $269 GST) for stock. __________  9 F Rainbow returned goods for an adjustment credit $55 ($50 + $5 GST). __________ 10 Paid by debit card for stationery $231 ($210 + $21 GST). __________ 10 A Nabiac settled the account from last month. __________ 10 Cash sale $2167 ($1970 + $197 GST). __________ 12 K Empsey bought stock on credit for $2882 ($2620 + $262 GST). __________ 15 W Wooton sold inventory to Tony Lowman for $1100 ($1000 + $100 GST). __________ 15 A Nabiac purchased stock for $3366 ($3060 + $306 GST) from Tony Lowman.

Copyright © 2018. Cengage. All rights reserved.

__________ 15 Forwarded tax invoice for $3498 ($3180 + $318 GST) to F Clybucca for goods. __________ 17 Purchased goods on credit for $2464 ($2240 + $224 GST) from M Macksville. __________ 17 H Nambucca forwarded tax invoice for goods $1276 ($1160 + $116 GST). __________ 18 Tax invoice and goods arrived $2057 ($1870 + $187 GST) from Bulah Delah. __________ 18 Tony Lowman sold goods for cash $2255 ($2050 + $205 GST). __________ 18 Direct transfer to ATO the GST for September quarter $900 ($1900 – $1000). __________ 20 Sold goods on credit to K Empsey $4092 ($3720 + $372 GST). __________ 21 Stock purchased for $803 ($730 + $73 GST) from U Runga. __________ 22 Sent tax invoice to F Rainbow $4224 ($3840 + $384 GST) for inventory. __________ 22 Commission received $737 ($670 + $67 GST) from W Raleigh. __________ 24 Tony Lowman purchased inventory from W Wooton $1265 ($1150 + $115 GST).

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CHAPTER 6

__________ 25 Sold stock to Saw & Tell who had remitted funds for $1650 ($1500 + $150 GST). __________ 26 Remitted funds to A Boambee for inventory picked up today $1694 ($1540 + $154 GST). __________ 27 F Clybucca purchased on credit and goods were tax invoiced for $4345 ($3950 + $395 GST). __________ 28 Karuah & Co’s tax invoice received $1485 ($1350 + $135 GST) for goods. __________ 28 Tax invoice received for $1529 ($1390 + $139 GST) from H Nambucca for inventory. __________ 28 Sold goods on credit $2112 ($1920 + $192 GST) to R Coolongolook. __________ 30 Rent received $715 ($650 + $65 GST) from Wool & Goolga. __________ 30 Received funds electronically from K Kew who took the $121 discount allowed. __________ 31 Sent adjustment credit note to R Coolongolook $143 ($130 + $13 GST) to correct error in pricing.

QUESTION 6.34 M Silveri has received a statement for the month of June 2022 from her supplier Suzan Koleda, shown in figure 6.96. However, the accounts payable ledger shows a different amount owing (see figures 6.97 and 6.98). You are required to reconcile the statement to the accounts payable ledger balance for M Silveri. Assume that the statement values from Suzan Koleda are correct. Investigations showed that tax invoice number 813 from V Kolesnikov was posted to the wrong account.

STATEMENT Suzan Koleda

William Street

MONTH ENDED

Bathurst 2795

30 June 2022 Customer No. 275

M Silveri Browne Street Forbes 2871 Date

Copyright © 2018. Cengage. All rights reserved.

26 Apr 22 15 May 22 29 May 22 2 Jun 22 7 Jun 22 9 Jun 22 15 Jun 22 18 Jun 22 20 Jun 22 24 Jun 22 27 Jun 22

Particulars and Reference

Sales Tax inv 016 Sales Tax inv 129 Sales Tax inv 147 Bank Rec 458 Sales Tax inv 186 Sales Tax inv 209 Sales Tax inv 281 Sales Tax inv 333 Sales Tax inv 400 Sales Tax inv 477 Sales Tax inv 519 Sales Return Adj c/n 058 TERMS: 2% discount end of month/net 30 days 90+ days 60 days $660.00

Debit

Credit

660.00 352.00 781.00 344.96 583.00 924.00 726.00 913.00 847.00 638.00 682.00 66.00 AMOUNT DUE 30 days $788.04

Balance 660.00 1 012.00 1 793.00 1 448.04 2 031.04 2 955.04 3 681.04 4 594.04 5 441.04 6 079.04 6 761.04 6 695.04 6 695.04 Current $5 247.00

FIGURE 6.96  M Silveri received this accounts payable statement from her supplier, Suzan Koleda

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

Extract Accounts Payable Ledger of M Silveri

Suzan Koleda 19 May 22 Purchases 1 Jun 22 Bank Discount Received 2 Jun 22 Purchases 9 Jun 22 Purchases 11 Jun 22 Purchases 15 Jun 22 Purchases 20 Jun 22 Purchases Purchases 25 Jun 22 Purchases 30 Jun 22 Purchases

Tax inv 129 Pay ref 612 Pay ref 612 Tax inv 147 Tax inv 186 Tax inv 209 Tax inv 813 Tax inv 281 Tax inv 333 Tax inv 400 Tax inv 519

1 PJ1 CP1 CP1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1 PJ1

352.00 344.96 7.04 781.00 583.00 924.00 297.00 726.00 935.00 847.00 682.00

352.00 7.04 0.00 781.00 1 364.00 2 288.00 2 585.00 3 311.00 4 246.00 5 093.00 5 775.00

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

FIGURE 6.97  Suzan Koleda’s account in M Silveri’s accounts payable ledger Reconciliation of Accounts Payable Statement from Suzan Koleda for the month of May 2022 Balance as per supplier’s statement Less supplier’s tax invoices not yet processed #016 #147 Balance as per accounts payable ledger Less 2% discount on accounts payable ledger balance Value of payment to be drawn

1 793.00 660.00 781.00

1 441.00 352.00 7.04 344.96

FIGURE 6.98 Reconciliation of Suzan Koleda’s statement to M Silveri’s accounts payable ledger balance for the previous month of May

QUESTION 6.35 On 28 February 2022 H White received funds for $2276.00 attached to a remittance advice from A Beattie, as shown in figure 6.99, for payment of January tax invoices.

Remittance Advice of A Beattie

28 February 2022

412 Angle Lane Gooloogong 2805

Copyright © 2018. Cengage. All rights reserved.

Date 22 Dec 21 23 Dec 21 8 Jan 22 15 Jan 22 18 Jan 22 28 Jan 22 24 Feb 22

H White 23 Coramba Road Coffs Harbour 2450 Particulars and Reference

Purchases Purchases Purchases Purchases Return Purchases Purchases Bank

Tax inv 240 Tax inv 245 Tax inv 256 Adj c/n 79 Tax inv 287 Tax inv 351 Pay ref 26789

Customer No. 615

Debit

950.00 50.00 451.00 66.00 264.00 627.00 2 276.00

FIGURE 6.99  Remittance advice from A Beattie received by H White

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Credit

Balance 950.00 1 000.00 1 451.00 1 385.00 1 649.00 2 276.00 0.00

CHAPTER 6

The extract accounts receivable ledger and the extract accounts receivable aged listing of H White in figure 6.100 show the customer’s account of A Beattie as at 28 February. Trading terms of H White are net 30 days. Extract Accounts Receivable Ledger of H White

A Beattie 20 Dec 21 21 Dec 21 3 Jan 22 8 Jan 22 10 Jan 22 15 Jan 22 21 Jan 22 27 Jan 22 29 Jan 22 4 Feb 22 15 Feb 22 26 Feb 22 27 Feb 22

Sales Sales Sales Sales Sales Sales Return Sales Sales Return Sales Sales Sales Sales Sales

Tax inv 240 Tax inv 245 Tax inv 256 Tax inv 273 Tax inv 287 Adj c/n 79 Tax inv 351 Adj c/n 86 Tax inv 439 Tax inv 450 Tax inv 541 Tax inv 589 Tax inv 613

54 SJ1 SJ1 SJ2 SJ2 SJ2 SJ2 SJ2 SJ2 SJ2 SJ3 SJ3 SJ3 SJ3

950.00 50.00 451.00 110.00 264.00 627.00 418.00 774.00 149.00 133.00 660.00

950.00 1 000.00 1 451.00 1 561.00 1 825.00 66.00 1 759.00 2 386.00 88.00 2 298.00 2 716.00 3 490.00 3 639.00 3 772.00 4 432.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of H White

A Beattie Date 20 Dec 21 21 Dec 21 3 Jan 22 8 Jan 22 10 Jan 22 15 Jan 22 21 Jan 22 27 Jan 22 29 Jan 22 4 Feb 22 15 Feb 22 26 Feb 22 27 Feb 22

Inv/ (C/n) 240 245 256 273 287 (79) 351 (86) 439 450 541 589 613

54 account Ageing

Amount Cumulative 950.00 950.00 50.00 1 000.00 451.00 1 451.00 110.00 1 561.00 264.00 1 825.00 (66.00) 1 759.00 627.00 2 386.00 (88.00) 2 298.00 418.00 2 716.00 774.00 3 490.00 149.00 3 639.00 133.00 3 772.00 660.00 4 432.00

Current

30 days

60 days

90+ days

950.00 50.00 451.00 110.00 264.00 (66.00) 627.00 (88.00) 418.00 774.00 149.00 133.00 660.00 1 716.00

1 716.00

1 000.00

Copyright © 2018. Cengage. All rights reserved.

FIGURE 6.100 Accounts receivable ledger account and accounts receivable aged listing as at 28 February for A Beattie, extracted from H White’s accounts receivable ledger Using the remittance advice from A Beattie and the accounts receivable aged listing of H White, you are required to report those tax invoices that are overdue. Indicate what action should be taken to confirm that payment for any overdue tax invoices will be received in the next remittance advice from A Beattie.

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SEPARATE LEDGERS FOR ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

QUESTION 6.36 Elizabeth Webb received a remittance advice with funds for $6127.00 from Nic Matthew on 31 July 2022 (shown in figure 6.101). This remittance is for June credit sales by Elizabeth Webb to Nic Matthew, where the agreed trading terms are net 30 days.

Remittance Advice of Nic Matthew

31 July 2022

Quarygoe Road Elizabeth Webb 41 James Street Llandilo       2747

Ballina 2478

Date 19 May 22 2 Jun 22 9 Jun 22 11 Jun 22 15 Jun 22 20 Jun 22 21 Jun 22 25 Jun 22 30 Jun 22 27 Jul 22

Particulars and Reference Purchases Purchases Purchases Purchases Purchases Purchases Purchases Purchases Purchases Bank

Tax inv 129 Tax inv 147 Tax inv 186 Tax inv 209 Tax inv 231 Tax inv 281 Tax inv 333 Tax inv 400 Tax inv 519 Pay ref 29522

Customer No. 295

Debit

Credit

Balance

352.00 781.00 583.00 924.00 297.00 726.00 935.00 847.00 682.00 6 127.00

352.00 1 133.00 1 716.00 2 640.00 2 937.00 3 663.00 4 598.00 5 445.00 6 127.00 0.00

FIGURE 6.101  Remittance advice from Nic Matthew received by Elizabeth Webb The extract accounts receivable aged listing of Elizabeth Webb is obtained from the accounts receivable ledger. Figure 6.102 shows the account of Nic Matthew as at 31 July 2022. Extract Accounts Receivable Ledger of Elizabeth Webb

Copyright © 2018. Cengage. All rights reserved.

Nic Matthew 26 Apr 22 15 May 22 29 May 22 7 Jun 22 9 Jun 22 14 Jun 22 15 Jun 22 18 Jun 22 20 Jun 22 24 Jun 22 27 Jun 22 28 Jun 22 1 Jul 22 14 Jul 22 20 Jul 22 27 Jul 22

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Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales Return Sales Sales Sales Sales

Tax inv 016 Tax inv 129 Tax inv 147 Tax inv 186 Tax inv 209 Tax inv 231 Tax inv 281 Tax inv 333 Tax inv 400 Tax inv 477 Tax inv 519 Adj c/n 57 Tax inv 587 Tax inv 623 Tax inv 671 Tax inv 718

522 SJ1 SJ2 SJ2 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ3 SJ4 SJ4 SJ4 SJ4

660.00 352.00 781.00 583.00 924.00 297.00 726.00 935.00 847.00 638.00 682.00 774.00 660.00 525.00 211.00

660.00 1 012.00 1 793.00 2 376.00 3 300.00 3 597.00 4 323.00 5 258.00 6 105.00 6 743.00 7 425.00 66.00 7 359.00 8 133.00 8 793.00 9 318.00 9 529.00

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

CONTINUED

CHAPTER 6

Extract Accounts Receivable Aged Listing

from the Accounts Receivable Ledger of Elizabeth Webb

Nic Matthew Date 26 Apr 22 15 May 22 29 May 22 7 Jun 22 9 Jun 22 14 Jun 22 15 Jun 22 18 Jun 22 20 Jun 22 24 Jun 22 27 Jun 22 28 Jun 22 1 Jul 22 14 Jul 22 20 Jul 22 27 Jul 22

Inv/ (C/n) 016 129 147 186 209 231 281 333 400 477 519 (57) 587 623 671 718

522 Account Ageing

Amount Cumulative 660.00 660.00 352.00 1 012.00 781.00 1 793.00 583.00 2 376.00 924.00 3 300.00 297.00 3 597.00 726.00 4 323.00 935.00 5 258.00 847.00 6 105.00 638.00 6 743.00 682.00 7 425.00 (66.00) 7 359.00 774.00 8 133.00 660.00 8 793.00 525.00 9 318.00 211.00 9 529.00

Current

30 days

60 days

90+ days 660.00

352.00 781.00 583.00 924.00 297.00 726.00 935.00 847.00 638.00 682.00 (66.00) 774.00 660.00 525.00 211.00 2 170.00

5 566.00

1 133.00

660.00

FIGURE 6.102 Accounts receivable ledger account and accounts receivable aged listing as at 31 July for Nic Matthew, extracted from Elizabeth Webb’s accounts receivable ledger Using the remittance advice from Nic Matthew and the accounts receivable aged listing of Elizabeth Webb, you are required to report those tax invoices that are overdue. Also indicate what action should be taken to confirm that payment

Copyright © 2018. Cengage. All rights reserved.

for any overdue tax invoices will be received in the next remittance advice received from Nic Matthew.

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257

7 Journals and ledgers for special transactions Introduction

Copyright © 2018. Cengage. All rights reserved.

In chapters 3 and 4 we commenced the operations of several businesses. After the original entries, we proceeded to process transactions for businesses as they continued to trade. In this chapter we will revisit the early journal entries for the commencement of a business and then show how to record some special transactions that may not occur very often.

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Commencement of a business KEEP IN MIND The accounting equation A = L + OE was introduced at the commencement of a business. It was then expanded to A + E = L + OE + R

When a business commences, it acquires assets. As the asset side of the equation increases, the asset accounts are debited. The owner’s equity – what the business owes to the owner – also increases, and the account is credited. The entry for commencement of business is recorded in the general journal, as it is a one-off event that is an internal entry. Before continuing, you may wish to go back to chapter 3 to review the commencement of a business through the accounting equation. In chapter 4, the example of Ann’s business demonstrated the processing of entries through the general journal and posting to the general ledger. In previous chapters you were introduced to the goods and services tax (GST). Under Division 60 of the A New Tax System (Goods and Services Tax) Act 1999 (Cwlth), a GST-registered business may be able to claim GST input tax credits1 (GST receivable) on pre-establishment costs, purchase of inventory, purchase of non-current assets and some expenses. In this book, if details on GST receivable are given to you at the commencement of a business, then it should be treated as an asset in the opening journal entry. Remember: you are learning accounting, which includes some basics of GST. You are not learning the complexities of when or if GST is receivable or payable, but rather how to account for GST when advised that it is receivable or payable.

Example 1: Opening journal on commencement of business Prepare the general journal for L Hay, who commenced business on 1 April 2022 with bank $5000, inventory $10 000, GST receivable $9000, motor vehicle $30 000, machinery $50 000 and a loan from Southpak $8000 (see figure 7.1).

Copyright © 2018. Cengage. All rights reserved.

General Journal of L Hay 1 Apr 22 Bank Inventory GST Receivable Motor Vehicle Machinery Loan from Southpak Capital

GJ 1 5 000 10 000 9 000 30 000 50 000 8 000 96 000

Assets and liability on commencement of business

FIGURE 7.1  Opening journal on commencement of business

QUESTION 7.1 G Attard commenced business on 1 December 2022 with capital $14 000 and the following assets and liability: bank $5000, inventory $4000, motor vehicle $8000, office furniture and equipment $1000 and a loan from B Abigail $4000. Prepare the general journal.

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QUESTION 7.2 M Gonzalez commenced business on 1 November 2022 with the following assets and liabilities: bank $2000, inventory $1500, accounts receivable control of $ . . . . . . . . . . for P Chain $451 and G Goran $748, machinery and equipment $25 000, motor vehicle $15 000, GST receivable $4150, accounts payable control of $ . . . . . . . . . . for A Losurdo $330 and L Lukic $253. Prepare the opening journal.

Buying another business The business may wish to expand. One way is to buy another business and combine it with the existing business. When buying another business it is usual for an amount of goodwill to be included in the purchase price. Goodwill is the difference between the amount paid for the business and the fair value of the acquired assets less its liabilities. It is the benefit the buyer expects to receive from acquiring an operating business with an established customer base and the established name, reputation and location of the business. Details of the individual accounts receivable or accounts payable should be provided by the seller. The names and amounts of each separate account receivable and payable are shown in the particulars section of the general journal. The sum of the amounts for each accounts receivable should agree with the amount entered in the account receivable control account as a debit balance. Similarly, the sum of the amounts for each account payable account should agree with the amount entered in the accounts payable control account as a credit balance. The details of individual accounts receivable and accounts payable should also be added to the subsidiary ledgers of the acquiring business.

Example 2: Buying another business On 1 May 2022, J Swift purchased the existing business of H Grown for $85 000 and obtained the following assets: land $50 000, equipment $18 000, accounts receivable control $ . . . . . . . . . . for P Body $2497, B Carrot $1705 and inventory $5798 (see figure 7.2). General Journal of J Swift

Copyright © 2018. Cengage. All rights reserved.

1 May 22 Land Equipment Accounts Receivable Control 2 497 — P Body        1 705 — B Carrot        Inventory Goodwill H Grown

GJ 1 50 000 18 000 4 202

5 798 7 000 85 000

Business assets purchased from H Grown

FIGURE 7.2  Buying an additional business

The value of the goodwill is calculated so that the total debits equal total credits (50 000 + 18 000 + 4202 + 5798 + goodwill = 85 000, therefore goodwill = 7000). The amount owing to H Grown ($85 000) would be paid by remittance and processed through the cash payments journal.

QUESTION 7.3 On 1 February 2022, T Abella commenced business with $50 000 bank and a loan from Strate bank $20 000. On 3 February T Abella purchased the existing continuing business of T Longman for $48 000 and acquired premises $25 000, machinery $9000 and inventory $4000. Show both transactions in the general journal of T Abella.

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Introduction of additional capital Having commenced and run a business, the owner may find it necessary to introduce additional funds or other assets to enable the business to be maintained at its present level or to expand.

KEEP IN MIND In chapter 3 we processed the transactions for additional capital through the accounting equation, and also in chapter 4 through the use of the general journal. The assets were increased on commencement and were debits; so too are any additions of assets after the commencement. The owner’s equity was increased on commencement and was a credit; so, too, any additions that the owner makes will also be a credit to the capital account.

QUESTION 7.4 On 1 January 2022, S Aravena commenced business with bank $5000, GST receivable $1000 and computer $10 000. By the end of May 2022 the business had expanded and S Aravena found it necessary to put in further funds $15 000. Enter the above transactions in the general journal of S Aravena.

QUESTION 7.5 On 1 July 2022, M Biel commenced business with bank $1000 and earthmoving equipment $36 000. On 1 August 2022 M Biel contributed further funds $10 000, GST receivable $5000 and a grader $50 000. On 1 September the business obtained a $25 000 loan from the bank. Enter the above transactions in the general journal of M Biel.

Drawings of funds and goods Drawings of funds If the owner takes funds from the business for private use – that is, for non-business use, such as an education fee for a child at school or college – then that amount must be shown in the cash payments journal under the account heading ‘Drawings’. The owner has drawn, withdrawn or taken funds out of the business. As it is the opposite of depositing or putting funds into the business, the drawing account will be recorded as a debit and overall owner’s equity will decrease.

Copyright © 2018. Cengage. All rights reserved.

Example 3: Owner withdraws funds for private use from the business On 3 July 2022, M Suda withdrew $400 from the business bank account for non-business or private use (see figure 7.3). Extract Cash Payments Journal of M Suda

Date

Rmt Payee and/or Particulars Pmt 3 Jul 22 743 Cash – Drawings

Ref

Bank 400 [cr]

CP 1

Drawings 400 [dr]

FIGURE 7.3  Owner withdraws funds for private use from the business

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QUESTION 7.6 On 1 May 2022, D Copland withdrew $355 from the business to pay for private expenditure. Show this in the journal.

QUESTION 7.7 On 14 July 2022, P Chaing used the debit card to pay the ABC Concert Department for two tickets to the Sydney Symphony Orchestra. This payment was not related to the business at all. Show the payment of $160 in the journal.

Drawings of goods When the owner takes good from the business for private use, the accounts that were debited when the stock was acquired for business use now need to be credited. The goods or stock are no longer available for sale by the business. There is also a drawing down or taking by the owner of some of the owner’s equity. The accounts used when drawing of goods occurs will differ, depending on whether the business uses the perpetual inventory or the periodic inventory system.

IMPACT OF THE INVENTORY SYSTEM USED Perpetual Inventory

Periodic Inventory

i. Purchase of stock for cash or credit (normally in cash payments journal or purchases journal) Inventory 2 000 Purchases 2 000 GST Receivable 200 GST Receivable 200 Bank/Accounts Payable Control 2 200 Bank/Accounts Payable Control Purchase of stock Purchase of stock ii. Drawing by owner of stock for private use Drawings 110 Inventory GST Receivable Owner took stock for private use

100 10

Drawings Purchases GST Receivable Owner took stock for private use

2 200

110 100 10

Copyright © 2018. Cengage. All rights reserved.

FIGURE 7.4  Comparison of inventory systems for the acquisition and drawing of stock by the owner

With perpetual inventory, the reduction of the owner’s equity occurs by debiting the ‘Drawings’ account. The current asset account ‘Inventory’ is reduced and is therefore credited, and the current asset account ‘GST Receivable’ is also reduced and is credited. With periodic inventory, the reduction of the owner’s equity also occurs by debiting the ‘Drawings’ account. The expense account ‘Purchases’ is reduced and is therefore credited, and the current asset account ‘GST Receivable’ is also reduced and is credited. Figure 7.4(ii) demonstrates the journal entries for recording drawings where both perpetual and periodic inventory apply.

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CHAPTER 7

Example 4: Drawings of goods for both inventory systems To illustrate, on 15 April 2022, Y Chan, the owner, took inventory with a GST-inclusive value of $220 ($200 + $20 GST) for personal use. The entry in the general journal is shown in figure 7.5 for the perpetual and then the periodic inventory system. General Journal of Y Chan 15 Apr 22 Drawings Inventory GST Receivable

GJ 1 220 200 20

Stock for owner’s personal use; perpetual inventory applies

Drawings Purchases GST Receivable

220 200 20

Stock for owner’s personal use; periodic inventory applies

FIGURE 7.5  Drawing of stock by the owner for both inventory systems

Note that the value in the inventory account or the purchases account in the general ledger does not include GST, but the value of the drawings account does include GST.

QUESTION 7.8 Drawing of goods by D Bonita totalled $385 ($350 + $35 GST). Prepare two general journals showing the entry where perpetual inventory applies and then where periodic inventory applies.

QUESTION 7.9 On 25 June 2022 F Stool withdrew inventory for private use at a cost of $825 ($750 + $75 GST). On 29 June $1000 was taken by F Stool from the business bank account for private use. Prepare the necessary journals where perpetual inventory applies and then where periodic inventory applies.

Purchase of non-current assets

Copyright © 2018. Cengage. All rights reserved.

KEEP IN MIND The purchase by the business of anything on credit is processed through the purchases journal. The non-current asset is debited, as an asset has increased; and the accounts payable control is credited, as a liability has also been increased. The GST account is the current asset GST receivable account and is debited. The payment or purchase of anything using funds from the bank account is processed through the cash payments journal. The non-current asset is debited, as an asset has increased; and the bank account is credited, as the asset has decreased. The GST account is the current asset GST receivable account and is debited.

Example 5: Purchase of non-current assets and remittance of funds G Elena buys a Toyota panel van to be used in the business for $27 500 ($25 000 + $2500 GST) from T Venegas. It is paid for when the Toyota panel van is delivered on 1 August 2022. On 2 August machinery costing $19 800 ($18 000 + $1800 GST) is purchased on credit from G Carbone. On 31 August G Carbone is paid $19 305 in full settlement of the purchase on 2 August. Relevant journals are shown in figure 7.6. Created from tafenswlib on 2020-05-30 07:37:32.

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JOURNALS AND LEDGERS FOR SPECIAL TRANSACTIONS

Extract Purchases Journal of G Elena

Date

Inv Accounts Payable and/or Adj Particulars 2 Aug 22 123 G Carbone – Machinery

Ref Acc’nts Payab 19 800 [cr]

Machi­nery 18 000 [dr]

PJ 1

GST Receiv 1 800 [dr]

Extract Cash Payments Journal of G Elena

Date

Rmt Payee and/or Particulars Ref Pmt 1 Aug 22 789 T Venegas – Motor Vehicle 31 Aug 22 805 G Carbone – Accounts Payable

Bank 27 500 19 305 [cr]

Motor Vehicle 25 000 [dr]

GST Receiv 2 500 (45)

CP 1

Acc’nts Payab

Disc Rec’d

19 800

[dr]

(450)

[dr]

[cr]

FIGURE 7.6  Purchase on credit, cash purchase and then payment for non-current assets

Sale of a non-current asset at book value The sale of a non-current asset on credit through the sales journal or for cash through the cash receipts journal was introduced in chapter 5.

KEEP IN MIND The sale by the business of anything on credit is processed through the sales journal. The accounts receivable control is debited, as an asset has been increased; and the non-current asset is credited, as an asset has been decreased. The GST account is the current liability GST payable account and is credited. The receipt or sale of anything where funds are received is processed through the cash receipts journal. The bank account is debited, as the asset has increased; and the non-current asset is credited, as an asset has been decreased. The GST account is the current liability GST payable account and is credited.

Example 6: Sale of non-current assets and receipt of funds J Maroun sells a machine to L Andy for $5500 ($5000 + $500 GST) with immediate receipt of funds on 3 April 2022. The book value or carrying amount of the machine was also $5000 (see the cash receipts journal in figure 7.7). On 5 April, office equipment is sold on credit to B Dacombe for $440 ($400 + $40 GST). The book value of the asset is also $400 (see the sales journal in figure 7.7). On 30 April, J Maroun receives $429 in full settlement of the debt owing by B Dacombe (see the cash receipts journal in figure 7.7).

Copyright © 2018. Cengage. All rights reserved.

Extract Sales Journal of J Maroun

Date

Inv Accounts Receivable and/or Ref Acc’nts Adj Particulars Receiv 5 Apr 22 678 B Dacombe – Office Equipment 440 [dr]

Office Equip’t 400 [cr]

SJ 1

GST Payab 40 [cr]

Extract Cash Receipts Journal of J Maroun

Date

Rmt Drawer and/or Particulars Ref Rec 3 Apr 22 258 L Andy – Machinery 30 Apr 22 275 B Dacombe – A/c Receivable

Bank 5 500 429 [dr]

Machi­nery 5 000 [cr]

GST Payab 500 (1) [cr]

CR 1

Acc’nts Receiv 440 [cr]

Disc Allow (10) [dr]

FIGURE 7.7  Sale on credit, cash sale and then receipt of funds for a non-current asset at book value

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CHAPTER 7

QUESTION 7.10 S Matthews paid $3850 ($3500 + $350 GST) to R Badger for an office desk, cabinet and chair (office furniture). Prepare the journal for S Matthews.

QUESTION 7.11 R Pessotto sold a truck (motor vehicle) to J Aitkens for $5720 ($5200 + $520 GST) who paid with a direct deposit into the bank account. Prepare the journal for R Pessotto.

QUESTION 7.12 J Leeson commenced business on 15 April 2022 with $5000 in the bank, GST receivable $350 and a computer valued at $3500. 20 April: Additional funds of $15 000 were injected by J Leeson into the business. 20 April: A loan of $12 000 was received from Uncle Terry. 23 April: The computer was sold for $3850 ($3500 + $350 GST) cash and a new Sultana computer that cost $11 000 ($10 000 + $1000 GST) was purchased on credit from Search Light Computers. 29 April: J Leeson withdrew $800 funds for private use. 30 April: The balance owing to Search Light Computers was paid less $275 ($250 + $25 GST) settlement discount. Prepare the appropriate journals to process the above transactions.

Interest receivable and payable on overdue accounts Sometimes accounts receivable or accounts payable may not be settled within the normal trading terms for receipt or payment. The credit terms, including length of time to pay and interest charged on overdue amounts, should be clearly stated on the tax invoice prepared by the supplier. As interest is an input-taxed supply, GST is not applicable to interest expense or interest received. You may recall that in chapter 4 you learnt input-taxed supplies do not include GST.

Interest receivable on overdue account receivable

Copyright © 2018. Cengage. All rights reserved.

An overdue account occurs where funds have not been received by the business within the trading terms noted on the tax invoice. The tax invoice should indicate that interest will be charged on the overdue account, and specify the rate. In the books of the supplier, the effect of interest being charged is that a revenue account such as ‘Interest Received’ or ‘Interest Income/Revenue’ is increased and is therefore credited.

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Example 7: Account receivable two months overdue L Justine sold inventory for $3200 on credit to A Wong. The amount owing by A Wong on 31 August 2022 is now two months overdue. The invoice terms stated that interest of 12% per annum would be charged for the time that the account is overdue. Prepare the entry in the general journal of L Justine for the two months’ interest revenue. L Justine uses a subsidiary ledger as well as the general ledger (see figure 7.8). The calculation is: $3200 × 12% [interest p.a.] × 2 [months overdue] = $64 12 [months] General Journal of L Justine

GJ 1

31 Aug 22 Accounts Receivable Control — A Wong    64    Interest Revenue   Interest income receivable on account receivable 2 months overdue

64 64

FIGURE 7.8  Overdue account receivable charged interest

Interest payable on overdue account payable An overdue account occurs when a business does not remit funds within the trading terms noted on the supplier’s tax invoice. The tax invoice should indicate that, if funds have not been paid to the supplier by a certain time, interest will be charged on the overdue account payable at a specified rate. In the books of the creditor, the effect of interest being charged by the supplier is that an expense account such as ‘Interest Paid’ or ‘Interest Expense’ is increased and is therefore debited.

Example 8: Account payable three months overdue W Annie purchased inventory for $4000 on credit from P Ross. The amount owing by W Annie on 30 November 2022 is now three months overdue. The tax invoice terms stated that interest of 10% p.a. would be charged from the time that the account is overdue. Prepare the entry in the general journal of W Annie, who also used a subsidiary ledger (see figure 7.9). The calculation is: $4000 × 10% [interest p.a.] ×  3 [months overdue]   =  $100 12 [months]

Copyright © 2018. Cengage. All rights reserved.

General Journal of W Annie 30 Nov 22 Interest Expense Accounts Payable Control — P Ross    100 Interest expense payable on 3 month overdue account payable

GJ 1 100 100

FIGURE 7.9  Overdue account payable charged interest expense

QUESTION 7.13 C Craft has been having trouble collecting monies owed from accounts receivable and has decided to apply the interest rates that are shown on the customers’ tax invoices for amounts that are overdue. Accounts owing beyond the normal trading terms are: W Melinda $4500 for two months and K Le $8700 for three months. Interest is 12% p.a. for the overdue period. Prepare the appropriate journal to process the above transactions in C Craft’s books.

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CHAPTER 7

QUESTION 7.14 S Sing has liquidity problems and an account payable, S Arnautovic, has applied interest on the overdue portion of the account still not paid. The amount owing to S Arnautovic is $14 000 and interest has been charged at 10% p.a. for four months (rounded to the nearest dollar). Prepare the appropriate journal for S Sing to process the above transaction.

QUESTION 7.15 C Kevin is having financial problems. He has not been receiving funds from some accounts receivable according to the trading terms and also has not been paying some credit suppliers according to their trading terms. Interest is to be applied to accounts receivable and has been applied by accounts payable (rounded to the nearest dollar). You are required to show the appropriate journals for C Kevin. Accounts receivable: interest of 15% p.a., C Bolenski $8000 for three months, W Ling $23 000 for four months and R Fleming $28 000 for four months. Accounts payable: B Christoph $5500 for two months at 10% p.a. and J Burgess $9000 for three months at 12% p.a.

Dishonour of a cheque Although cheques are less frequently used as a means of payment, you should understand how to record a payment by cheque that has been dishonoured. Sometimes a cheque that has been received and deposited goes through the banking process but is dishonoured (bounced, not met or not paid) when presented at the drawer’s bank. The bank may dishonour a cheque because: • there are not enough funds in the account to cover (or meet) the cheque value; this situation is sometimes described by the abbreviation NSF (not sufficient funds) on a bank statement • the cheque is not signed • the amount in words does not agree with the amount in figures • it is incorrectly dated or not dated. It is important that the business tries to recover the funds that it is owed, but meanwhile the books must be corrected to show events that have occurred. Originally the cheque would have been written in the cash receipts journal as funds received. Following the dishonour of a cheque, an entry is made in the cash payments journal. This has the effect of reversing or cancelling the original entry made in the cash receipts journal.

Copyright © 2018. Cengage. All rights reserved.

Cheque dishonoured from a cash sale If the original entry in the cash receipts journal was for a cash sale, then the entry in the cash payments journal will need to reverse the accounts recorded in the cash receipts journal.

IMPACT OF THE INVENTORY SYSTEM USED If periodic inventory applies, then there were no cost details shown in the cash receipts journal. However, with perpetual inventory, the cost details, as well as the cash sale details, were recorded in the cash receipts journal. After the cheque has been dishonoured, there is a reversal in the cash payments journal of those cash sale account details. However, the inventory has not been returned to stock; it is still with the customer, and so there is no reversal of the cost details. It is the cheque that is the problem, as the goods are still with the customer.

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Example 9: Cash sale but cheque is dishonoured On 11 May 2022 D Martin received a $176 ($160 + $16 GST) cheque from G Leiva for a cash sale, with a perpetual inventory cost of $100. On 18 May, D Martin’s bank advised that the cheque from G Leiva had been dishonoured. On 19 May D Martin contacted G Leiva, who advised that she had problems with the bank, and asked that the cheque be deposited again. Figure 7.10 shows the extracts of relevant journals using the periodic inventory system, followed by the perpetual inventory system. The deposit on 11 May was recorded as normal in the cash receipts journal. On 18 May, when the bank advised of the dishonour, the original deposit is reversed in the cash payments journal (the opposite of the cash receipts journal). The second deposit is entered in the cash receipts journal. Where periodic inventory applies: Extract Cash Receipts Journal of D Martin

Date

Rmt Drawer and/or Particulars Ref Rec xx May 22 Other receipts 11 May 22 61 Sales 19 May 22 81 Sales – G Leiva chq represented

Bank 3 300 176 176 [dr]

Sales 3 000 160 160 [cr]

CR 1

GST Payab 300 16 16 [cr]

Extract Cash Payments Journal of D Martin

Date

Rmt Pmt

Payee and/or Particulars

Ref

xx May 22 Other payments 18 May 22 B/S Sales – G Leiva chq dishonoured B/S = bank statement

Bank 1 550 176 [cr]

Purchases 500

GST Receiv 50

CP 1

Acc’nts Payab 1 000

Sales

GST Payab

160 [dr]

[dr]

[dr]

[dr]

16 [dr]

Where perpetual inventory applies: Extract Cash Receipts Journal of D Martin

Date

Rmt Drawer and/or Particulars Ref Rec xx May 22 Other receipts 11 May 22 61 Sales 19 May 22 81 Sales – G Leiva chq represented

Bank 3 300 176 176 [dr]

Sales 3 000 160 160 [cr]

CR 1

GST Payab 300 16 16

CoS

Inventory

1 800 100

[cr]

[dr]

[cr]

Extract Cash Payments Journal of D Martin

Copyright © 2018. Cengage. All rights reserved.

Date

Rmt Pmt

Payee and/or Particulars

xx May 22 Other payments 18 May 22 B/S Sales – G Leiva chq dishonoured B/S = bank statement

Ref

Bank 1 550 176 [cr]

Inventory 500

GST Receiv 50

CP 1

Acc’nts Payab 1 000

Sales

GST Payab

160 [dr]

[dr]

[dr]

[dr]

16 [dr]

FIGURE 7.10 Cheque from cash sale deposited, dishonoured and re-deposited with different inventory systems

Note that in the perpetual method, only the receipt of funds is reversed. The entry recording the increase in CoS and decrease in inventory is not relevant.

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1 800 100

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QUESTION 7.16 Show the following transactions in the two journals of S Alderson. Assume first that periodic inventory applies and then that perpetual inventory applies. 19 June 2022: Goods were sold to R Friscioni, who paid for the $220 ($200 + $20 GST) sale by cheque, which had an inventory cost of $120. The cheque was deposited that day. 23 June: The bank advised that the $220 cheque from R Friscioni had been dishonoured. 24 June: R Friscioni advised that the temporary problem with the account had been corrected and that the cheque should be deposited again.

QUESTION 7.17 Show the following transactions in the two journals of P Kulevska. Assume that perpetual inventory applies. 5 October 2022: P Kulevska deposited $792 into her bank account. This was from a cash sale of $297 ($270 + $27 GST), at an inventory cost of $160, paid in notes and coins from U Calic and a $495 ($450 + $45 GST) cash sale, with an inventory cost of $300, paid by cheque from F Bruzzano. 8 October: The bank advised that the cheque from F Bruzzano had been dishonoured. 11 October: F Bruzzano was finally contacted and he advised that there were now sufficient funds in the account to meet the cheque. P Kulevska deposited the cheque again on that day.

Cheque dishonoured from an accounts receivable deposit When a deposited cheque is dishonoured, the objective is still the same whether it was a cash sale or a receipt from an account receivable. The original entry must be reversed as if the cheque had not been received. Payment of the tax invoice is therefore still owed by the customer.

IMPACT OF THE INVENTORY SYSTEM USED

Copyright © 2018. Cengage. All rights reserved.

If periodic inventory applies with a credit sale, then there are no cost details available to be shown in the sales journal. However, with perpetual inventory, the cost details were recorded in the sales journal. The amount received from the account receivable is entered in the cash receipts journal without any entry relating to the cost details of the original sale. If the deposited cheque is dishonoured, then there is a reversal required in the cash payments journal of the detail of the account receivable deposit. However, the inventory has not been returned to stock; it is still with the account receivable customer and so there is no reversal of the cost details. It is the cheque that is the problem, as the goods sold on credit are still with the account receivable customer.

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Example 10: Cheque deposited from an account receivable but cheque is dishonoured On 12 August 2022, B Wren sold inventory on credit to W Tail for $1309 ($1190 + $119 GST), at a cost of sales of $700. On 21 August 2022, B Wren received a cheque from W Tail for $1309. On 25 August the bank advised that W Tail’s cheque had been dishonoured. The relevant extract journals, general and subsidiary ledgers are shown in figures 7.11 and 7.12, assuming first that periodic inventory applies (see figure 7.11) and then that perpetual inventory applies (see figure 7.12). Where periodic inventory applies: Extract Sales Journal of B Wren

Date

Inv Accounts Receivable Adj and/or Particulars 12 Aug 22 456 W Tail – Sales

Ref Acc’nts Receiv 1 309 101 [dr]

Sales 1 190 400 [cr]

SJ 1

GST Payab 119 200 [cr]

Extract Cash Receipts Journal of B Wren

Date

Rmt Drawer and/or Particulars Ref Rec

21 Aug 22 249 W Tail – Accounts Receivable

Bank

CR 1

Acc’nts Receiv

1 309 100 [dr]

1 309 101 [cr]

Extract Cash Payments Journal of B Wren

Date

Rmt Payee and/or Particulars Pmt 25 Aug 22 B/S W Tail – A/c Rec chq dishon B/S = bank statement

Ref

Bank

Purchases

GST Receiv

Acc’nts Payab

1 309 100 [cr]

CP 1 Acc’nts Receiv 1 309 101 [dr]

Extract General Ledger of B Wren

Bank 31 Aug 22 Receipts

31 Aug 22 Sales 31 Aug 22 Bank [payment] 1 Sep 22 Balance b/d

CR1

100

1 309 31 Aug 22 Payments

CP1

Accounts Receivable Control

101

SJ1 CP1

CR1

1 309 31 Aug 22 Bank [receipt] 1 309 Balance c/d

1 309 1 309

2 618 1 309

2 618

GST Payable

200

31 Aug 22 Accounts Receivable Control Copyright © 2018. Cengage. All rights reserved.

1 309

Sales

SJ1

119

400

31 Aug 22 Accounts Receivable Control

SJ1

1 190

Extract Accounts Receivable Ledger of B Wren

W Tail 12 Aug 22 Sales 21 Aug 22 Bank [receipt] 25 Aug 22 Bank [payment]

1 SJ1 CR1 CP1

1 309 1 309 1 309

1 309 0 1 309

Dr Dr

FIGURE 7.11 Credit sale, receipt and dishonour of cheque, entered in journals and ledgers where periodic inventory system applies

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Where perpetual inventory applies: Extract Sales Journal of B Wren

Date

Inv Accounts Receivable and/or Ref Acc’nts Adj Particulars Receiv 12 Aug 22 456 W Tail – Sales 1 309 101 [dr]

Sales 1 190 400 [cr]

SJ 1

GST Payab 119 200 [cr]

CoS

Inventory

700 500 [dr]

700 102 [cr]

Extract Cash Receipts Journal of B Wren

Date

Rmt Drawer and/or Particulars Ref Rec 21 Aug 22 249 W Tail – Acc’nts Receivable

Bank 1 309 100 [dr]

CR 1

Acc’nts Receiv 1 309 101 [cr]

Extract Cash Payments Journal of B Wren

Date

Rmt Payee and/or Particulars Pmt 25 Aug 22 B/S W Tail – A/c Rec chq dishon B/S = bank statement

Ref

Bank

Inventory

GST Receiv

Acc’nts Payab

1 309 100 [cr]

CP 1 Acc’nts Receiv 1 309 101 [dr]

Extract General Ledger of B Wren

Bank 31 Aug 22 Receipts

CR1

100

1 309 31 Aug 22 Payments

CP1

Accounts Receivable Control 31 Aug 22 Sales 31 Aug 22 Bank [payment]

SJ1 CP1

1 Sep 22 Balance b/d

101

1 309 31 Aug 22 Bank [receipt] 1 309 Balance c/d 2 618 1 309

CR1

Inventory

SJ1

GST Payable

700

200

31 Aug 22 Accounts Receivable Control

Sales

SJ1

119

400

31 Aug 22 Accounts Receivable Control

Cost of Sales SJ1

1 309 1 309 2 618

102

31 Aug 22 Cost of Sales

31 Aug 22 Inventory

1 309

SJ1

1 190

500

700

Extract Accounts Receivable Ledger of B Wren

Copyright © 2018. Cengage. All rights reserved.

W Tail 12 Aug 22 Sales 21 Aug 22 Bank [receipt] 25 Aug 22 Bank [payment]

1 SJ1 CR1 CP1

1 309 1 309 1 309

1 309 0 1 309

Dr Dr

FIGURE 7.12 Credit sale, receipt and dishonour of cheque, entered in journals and ledgers where perpetual inventory system applies

QUESTION 7.18 Show the following transactions in the journals of R Angara, initially assuming periodic inventory applies and then where perpetual inventory applies.   2 October 2022: R Angara sold goods on tax invoice 123 to P Boogers $2772 ($2520 + $252 GST) at a cost of $1500. 10 October: A cheque was received by R Angara paying the full amount. 15 October: The cheque was dishonoured. Created from tafenswlib on 2020-05-30 07:37:32.

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QUESTION 7.19 Show the following transactions in the journals of L Buhinjak, initially assuming periodic inventory applies and then where perpetual inventory applies. 29 August 2022: Stock costing $1200 and tax invoice was sent to A Ciantar for $2222 ($2020 + $202 GST) by L Buhinjak.   3 September: L Buhinjak received a cheque from A Ciantar for the $2222.   6 September: The bank returned the cheque as dishonoured due to insufficient funds. 19 September: A Ciantar remitted funds of $2222 owing on the tax invoice.

QUESTION 7.20 On 5 February 2022, N Wayne sold goods on credit to H Garden for $1199 ($1090 + $109 GST). On 14 February, he received a cheque from H Garden for $1199. However, on 17 February N Wayne’s bank advised that the cheque from H Garden had been dishonoured. A charge of $55 (an input taxed supply, therefore no GST) had been made to N Wayne’s account by the bank for handling the dishonoured cheque and this was passed on to H Garden’s account. Show all relevant journals and post to the general and subsidiary ledgers of N Wayne.

QUESTION 7.21 On 18 February 2022, P Jackson sold stock to R Parramatta on credit for $3300 ($3000 + $300 GST); the cost of the goods sold was $1800. R Parramatta paid by cheque, which was banked on 27 February. On 6 March P Jackson’s bank advised that the cheque from R Parramatta had been dishonoured and a bank fee of $45 for handling the dishonoured cheque had been charged to the account. On 9 March R Parramatta remitted funds for the total amount owing. Show all relevant journals and post to the general and subsidiary ledgers of P Jackson.

QUESTION 7.22 L Narrabeen mailed a $4400 ($4000 + $400 GST) tax invoice to D Why on 2 April 2022. On 8 April L Narrabeen received a cheque from D Why for the full amount owing. The deposit for that day included D Why’s cheque and a cash sale for $1430 ($1300 + $130 GST). L Narrabeen’s bank advised on 11 April that the cheque from D Why had been dishonoured and a $50 charge had been made to the account. On 13 April L Narrabeen received another cheque from D Why for the total amount owing and this was banked as a separate deposit. Show all relevant journals and post to the general and subsidiary ledgers of L Narrabeen.

Copyright © 2018. Cengage. All rights reserved.

Bad debt write-offs When goods or other items are sold on credit there is the possibility that the account receivable may not pay for those goods. Eventually the business has to treat the expected receipt of funds as not recoverable. If the funds cannot be collected then the amount owing cannot remain as an asset, or account receivable. It must be transferred to an expense; that is, an expense in running the business. It is written off as an asset to an expense account called ‘Bad Debts’ – a debt or account receivable that is bad. This is known as the direct method of writing off an account receivable as it is directly transferred to the bad debts account. The alternative method of bad and doubtful debts written off against an allowance for doubtful debts is covered in chapter 10.

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IMPACT OF THE INVENTORY SYSTEM USED If periodic inventory applies with a credit sale, then there are no cost details available to be shown in the sales journal. However, if perpetual inventory applies with a credit sale, then the cost details are shown in the sales journal. Unless the customer returns some of the inventory and it is returned to inventory as saleable stock, there are no further entries relating to the cost of sales and inventory accounts.

Example 11: Sale on credit later written off as a bad debt On 15 January 2022, O Carmen sold goods on credit to J Daoud for $1298 ($1180 + $118 GST) with a cost of $650. Following many unsuccessful attempts to obtain the funds, it was decided on 30 June 2022 to write off the debt as bad. Show the January sales journal and June general journal as well as the general and subsidiary ledgers (see figure 7.13). Extract Sales Journal of O Carmen

Date

Inv Accounts Receivable and/or Ref Adj Particulars 15 Jan 22 789 J Daoud – Sales

Acc’nts Receiv 1 298 100

Sales

[dr]

[cr]

1 180 400

SJ 1

GST Payab 118 200 [cr]

General Journal of O Carmen 30 Jun 22 Bad Debts GST Payable Accounts Receivable Control — J Daoud      1 298 Write off J Daoud as a bad debt

GJ 1 560 200 100 R1

1 180 118 1 298

Extract General Ledger of O Carmen

31 Jan 22 Sales

Accounts Receivable Control

100

SJ1

GJ1 GJ1

1 298 30 Jun 22 Bad Debts GST Payable 1 298

GST Payable 30 Jun 22 Accounts Receivable Control

GJ1

200

118 31 Jan 22 Accounts Receivable Control

Sales 31 Jan 22 Accounts Receivable Control

Copyright © 2018. Cengage. All rights reserved.

GJ1

SJ1

118

400

Bad Debts 30 Jun 22 Accounts Receivable Control

1 180 118 1 298

SJ1

1 180

560

1 180

Extract Accounts Receivable Ledger of O Carmen

J Daoud 15 Jan 22 Sales 30 Jun 22 Bad Debts 30 Jun 22 GST Payable

1 SJ1 GJ1 GJ1

1 298 1 180 118

1 298 118 0

Dr Dr

FIGURE 7.13 Credit sale and later write-off as a bad debt, entered in journals and ledgers where periodic inventory system applies

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For GST, the principle is to reverse in June the GST payable entry that was made when the original sale occurred on 15 January ($1298/11 = $118). If O Carmen used perpetual inventory, and the cost of the credit sale to J Daoud was $650, then the sales journal would appear as shown in figure 7.14. The write-off journal entry of 30 June shown in figure 7.13 is the same, and applies irrespective of the inventory system used. Extract Sales Journal of O Carmen

Date

Inv Accounts Receivable Adj and/or Particulars 15 Jan 22 789 J Daoud – Sales

Ref Acc’nts Receiv 1 298 [dr]

Sales 1 180 [cr]

SJ 1

GST Payab 118

CoS 650

[cr]

[dr]

General Journal of O Carmen 30 Jun 22 Bad Debts GST Payable Accounts Receivable Control — J Daoud      1 298 Write off J Daoud as a bad debt

Inventory 650 [cr]

GJ 1 560 200 100 R1

1 180 118 1 298

FIGURE 7.14 Credit sale in sales journal where perpetual inventory system applies and later write-off as a bad debt

QUESTION 7.23 B Borko sent a tax invoice to B Andres $1727 ($1570 + $157 GST) four months ago. All attempts to obtain payment have failed and B Andres can no longer be contacted. On 30 June 2022, B Andres is written off as a bad debt. Prepare the journal for June and post to the general and subsidiary ledgers showing all relevant entries.

QUESTION 7.24 M Mandic sent a tax invoice to S Miguel $2695 ($2450 + $245 GST) in July 2022. Funds had been promised but not received. On 7 December 2022, S Miguel paid $990 and was unable to pay any more. Write off the balance of S Miguel’s account at the end of December as a bad debt. Show the transactions for December only in the relevant journals but show all transactions in the general and subsidiary ledgers.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 7.25 C Gymea invoiced T Kingsway $1331 ($1210 + $121 GST) in March 2022. After many attempts to obtain payment for the tax invoice it was decided that on 30 June 2022 the debt from T Kingsway would be written off as a bad debt. Show the June general journal and all transactions in the ledgers.

QUESTION 7.26 Brook Lyn sold goods on credit to T Causeway $2541 ($2310 + $231 GST) on 17 April 2022. The accounts are kept using subsidiary ledgers.   7 May: Brook Lyn received $550 from T Causeway. 12 May: The bank advised the cheque had been dishonoured and a $55 bank fee had been applied. The fee was also added to Causeway’s account, as was Brook Lyn’s policy with dishonoured cheques. 31 May: T Causeway had closed the business and was no longer at the premises. It was decided to write the sale off as a bad debt and transfer the bank’s dishonour fee to bank charges account. Show the relevant journals and ledgers.

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Bad debts recovered Eventually the efforts to obtain payment from an account receivable may result in the receipt of funds, even though the account has been written off as a bad debt. The amount received is called a bad debt recovered. The receipt is not credited against the bad debts account but is credited to a new account ‘Bad Debts Recovered’. The first a business knows of a bad debt being paid may be when the remittance arrives. As the funds came from an account receivable that has previously been written off, the account receivable is recreated. The funds are allocated to the reinstated account receivable so there is a complete history in the one place. The remittance is processed and then adjustments are made in the accounts. The sequence of events is shown in figure 7.15. Extract Cash Receipts Journal of ...

Date

Rmt Drawer and/or Particulars Ref Rec Kuz Tumr – A/c Receivable

Bank XX [dr]

CR ...

Acc’nts Receiv XX [cr]

General Journal of ... Accounts Receivable Control — Kuz Tumr    XX Bad Debts Recovered GST Payable Adjustment to accounts receivable for bad debt recovered

GJ ... XX XX X

FIGURE 7.15  Receipt and adjustment for bad debt recovered including GST

Example 12: Receipt and adjustment for bad debt recovered Two years ago B Julian had written off G Bolton as a bad debt for $2497. On 24 December 2022, the business received a cheque for $1254 as part payment of the old debt ($1140 + $114 GST) (see figure 7.16). Extract Cash Receipts Journal of B Julian

Date

Rmt Drawer and/or Particulars Ref Rec 24 Dec 22 567 G Bolton – A/c Receivable

Bank 1 254 [dr]

CR 1

Acc’nts Receiv 1 254 [cr]

Copyright © 2018. Cengage. All rights reserved.

General Journal of B Julian 31 Dec 22 Accounts Receivable Control — G Bolton    1 254 Bad Debts Recovered GST Payable Bad debt previously written off now partly recovered

GJ 1 1 254 1 140 114

FIGURE 7.16  Receipt and adjustment for bad debt recovered including GST

For GST, the principle behind bad debts recovered is to increase the GST payable, which had been reduced when the debt was originally written off as a bad debt.

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JOURNALS AND LEDGERS FOR SPECIAL TRANSACTIONS

QUESTION 7.27 On 30 June 2022, $528 was received from C Hawkesbury ($480 + $48 GST), which had previously been written off as a bad debt. Prepare the cash receipts journal and general journal using control accounts to reflect this transaction.

QUESTION 7.28 On 31 July 2022, R Hunter, who uses the general ledger with control accounts, received $1705 from V Macdonald ($1550 + $155 GST), which had been written off as a bad debt two years ago. You are required to: • prepare the above transaction in the cash receipts journal and general journal • post these events to the general ledger and the accounts receivable ledger.

Bills receivable accepted and met A bill receivable is a bill of exchange, which is defined in the Bills of Exchange Act 1909 (Cwlth) as: an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or pay at a fixed or determinable future time, a sum certain in funds to or to the order of a specified person, or to bearer.

A bill receivable is an asset to a business. It is a formal written document (note) stating that the business is owed a specific monetary amount on a certain date by the other party. It may be linked to an account receivable when the supplier and the customer have agreed to other than normal trade terms. A bill receivable may be sold to a third party, such as a bank or other financer, who will provide immediate funds that can be used by the business.

Acceptance of bill receivable When a bill receivable is accepted and signed by the account receivable customer, then that amount is transferred by general journal to a bills receivable control account from the accounts receivable control account. This is because the amount owed would no longer be expected to be received under the normal trading terms of the business but at a date of, say, three months or six months or more from the date of signing. It is also now a different type of current asset.

Receipt of bill receivable

Copyright © 2018. Cengage. All rights reserved.

On the due date the bill receivable amount is received (or met) through the banking system and entered in the cash receipts journal; it is allocated to the debit of bank and credit of bills receivable control.

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Example 13: An account receivable transferred to a bill receivable account and then met H Radish sold goods on credit to F Trees for $5500 ($5000 + $500) on 15 March 2022. On 31 March a bill receivable is signed for payment by F Trees of $5500 on 15 September 2022. The bill is met on the due date. Show in the books of H Radish the sales journal, general journal, cash receipts journal, general ledger accounts and the accounts receivable ledger (see figure 7.17). Extract Sales Journal of H Radish

Date

Inv Accounts Receivable and/ Ref Acc’nts Adj or Particulars Receiv 15 Mar 22 120 F Trees – Sales R1 5 500 101 [dr]

Sales

SJ 1

GST Payab 500 200 [cr]

5 000 400 [cr]

General Journal of H Radish

GJ 1

31 Mar 22 Bills Receivable Control 102 — F Trees    5 500 BR1 Accounts Receivable Control 101 R1 — F Trees    5 500 Transfer from a/c receiv to bills receivable following acceptance

5 500 5 500

Extract Cash Receipts Journal of H Radish

Date

Rmt Drawer and/or Particulars Ref Rec 15 Sep 22 890 F Trees – Bills Receivable

Bank 5 500 100 [dr]

CR 1

Bills Receiv 5 500 102 [cr]

Extract General Ledger of H Radish

Bank

100

30 Sep 22 Receipt

CR1

5 500

Accounts Receivable Control

101

31 Mar 22 Sales

SJ1

GJ1

31 Mar 22 Accounts Receivable Control

GJ1

5 500 31 Mar 22 Bills Receivable Control

Bills Receivable Control

102

5 500 30 Sep 22 Bank [receipt]

CR1

GST Payable

5 500

200

31 Mar 22 Accounts Receivable Control

Sales

SJ1

500

400

31 Mar 22 Accounts Receivable Control Copyright © 2018. Cengage. All rights reserved.

5 500

SJ1

5 000

Extract Accounts Receivable Ledger of H Radish

F Trees 15 Mar 22 Sales 31 Mar 22 Bills Receivable Control

1 SJ1 GJ1

5 500 5 500

5 500 0

Dr

FIGURE 7.17  Credit sale, transfer to bills receivable and receipt when due

QUESTION 7.29 D Michael sold goods to M Farrah for $25 905 ($23 550 + $2355 GST) on 15 April 2022. On 7 May a bill receivable is signed, maturing on 28 November 2022. The bill is met on the due date. Show in the books of D Michael the sales, general and cash receipts journals as well as the general ledger accounts and the accounts receivable ledger. Created from tafenswlib on 2020-05-30 07:37:32.

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Bills payable accepted and met A bill payable is also a bill of exchange. It is a liability to a business, as it is a present obligation and is the opposite of a bill receivable. The formal written document (note) states that the business owes a specific monetary amount to another party on a certain date. It may be linked to an account payable where the business and the supplier may have agreed to other than normal trade terms.

Acceptance of bill payable When a bill payable is accepted and signed by the business, that amount is transferred by general journal to a bills payable control account from the accounts payable control account. This is because the amount owed would no longer be payable under the normal payment terms of the suppliers but at a date of, say, three months or six months or more from the date of signing. It is also now a different type of current liability.

Payment of bill payable On the due date the bill payable amount is paid (or met) through the banking system and entered in the cash payments journal; it is allocated to the debit of bills payable control and credit of bank.

Example 14: An account payable transferred to a bill payable account and then met F Trees purchased goods from H Radish for $5500 on 15 March 2022; periodic inventory applies. On 31 March a bill payable is signed for payment by F Trees of $5500 on 15 September 2022. The bill is met on the due date. Show in the books of F Trees the purchases journal, general journal, cash payments journal, the general ledger accounts and the accounts payable ledger (see figure 7.18). Extract Purchases Journal of F Trees

Date

Inv Accounts Payable and/or Adj Particulars 15 Mar 22 120 H Radish – Purchases

Ref Acc’nts Purchases Payab 5 500 5 000 [cr]

PJ 1

GST Receiv 500

[dr]

[dr]

Copyright © 2018. Cengage. All rights reserved.

General Journal of F Trees 31 Mar 22 Accounts Payable Control — H Radish    5 500 Bills Payable Control — H Radish    5 500 Transfer from a/c payab to bills payable following acceptance

GJ 1 200 P1 201 BP1

Extract Cash Payments Journal of F Trees

Date

Rmt Payee and/or Particulars Pmt 15 Sep 22 753 H Radish – Bills Payable

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Ref

Bank 5 500 [cr]

Bills Payab 5 500 [dr]

5 500 5 500

CP 1

CHAPTER 7

Extract General Ledger of F Trees

Bank

100

30 Sep 22 Payment

CP1

GST Receivable

5 500

101

31 Mar 22 Accounts Payable Control

PJ1

500

31 Mar 22 Bills Payable Control

GJ1

30 Sep 22 Bank [payment]

CP1

5 500 31 Mar 22 Accounts Payable Control

GJ1

Purchases

500

31 Mar 22 Accounts Payable Control

PJ1

5 000

Accounts Payable Control

200

5 500 31 Mar 22 Purchases

PJ1

Bills Payable Control

5 500

201 5 500

Extract Accounts Payable Ledger of F Trees

H Radish 15 Mar 22 Purchases 31 Mar 22 Bills Payable Control

1 PJ1 GJ1

5 500 5 500

5 500 0

Cr

FIGURE 7.18  Credit purchase, transfer to bills payable and paid when due

QUESTION 7.30 M Farrah purchased goods from D Michael for $25 905 ($23 550 + $2355 GST) on 15 April 2022. On 7 May a bill payable is signed, maturing on 28 November 2022. The bill is met on the due date. Show in the books of M Farrah the general journal, the general ledger accounts and the accounts payable ledger.

Computerised accounting and special transactions

Copyright © 2018. Cengage. All rights reserved.

Although this book demonstrates the manual accounting process, special transactions can be entered into computerised accounting packages. They require a one-time entry through the relevant module or tab like the special journals used in the manual process, or through the general journal option.

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 7.31 On 1 March 2022, A Levstek commenced business with bank $10 000, GST receivable $4200, land $25 000, equipment $2000 and a motor vehicle $15 000. On 1 April 2022, A Levstek contributed further funds of $15 000 to the business. On 7 April A Levstek acquired the ongoing business of L Andy for $20 000 and obtained machinery $7000, inventory $4000 and accounts receivable control of $ . . . . . . . . . . for E Miletic $1100 and C Odisho $2200. Enter the above transactions in the general journal of A Levstek.

QUESTION 7.32 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with debit account first b if the account entry is a debit or credit c the chart of account group name, that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. The business transactions are: – purchased machinery with debit card – dishonour of a cheque previously received from a credit customer – a bill payable is met – received rental remittance. The first entry is completed as an example for this question.

Business Transaction

Account Names

Purchased machinery with debit card Machinery GST Receivable Bank

Debit or Credit

Chart of Account Group

Account Increase or Decrease

NCA CA CA

increase increase decrease

debit debit credit

FIGURE 7.19  Example of business transactions for question 7.32

QUESTION 7.33 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with debit account first

Copyright © 2018. Cengage. All rights reserved.

b if the account entry is a debit or credit c the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. The business transactions are: – purchased computer on credit – received direct deposit from customer – remitted rent.

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QUESTION 7.34 For each of the business transactions listed below, you are to enter in the Workbook: a the account name; with debit account first b if the account entry is a debit or credit c the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. The business transactions are: – paid for new office desks, chairs, shelves and cupboards – purchased on credit pens, pencils and paper for use with new office furniture and fittings – sold old desks and chairs at their book value, receiving the funds immediately.

QUESTION 7.35 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with debit account first b if the account entry is a debit or credit c the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. If appropriate, assume the periodic inventory system is used. The business transactions are: – credit sale – direct remittance from customer and discount applies – dishonour of customer’s deposited cheque, no discount applies – write-off customer’s account as a bad debt – direct deposit received from a bad debt written off in the previous accounting period.

QUESTION 7.36 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with debit account first b if the account entry is a debit or credit c the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. The business transactions are: – used bank cheque to purchase motor vehicle – owner withdrew funds from the business for private use – inventory sale on credit with perpetual inventory

Copyright © 2018. Cengage. All rights reserved.

– bill receivable accepted and then met at due date.

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QUESTION 7.37 For each of the business transactions listed below, you are to enter in the Workbook: a the account name, with debit account first b if the account entry is a debit or credit c the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E d if the entry is an increase or decrease to the account balance. If appropriate, assume the periodic inventory system is used. The business transactions are: – interest charged on overdue accounts receivable (no GST) – remitted rent – purchased inventory with a debit card – sold machinery on credit at its book value – owner introduced more funds into the business – owner took goods for personal use – purchase of a computer on credit – rental revenue deposit direct into account – sale of inventory on credit – acceptance of bill receivable and bill met at due date – bad debt written off.

QUESTION 7.38 Prepare the relevant journals for the dates in January 2022 and post to the general and subsidiary ledgers for M Bowman, who uses periodic inventory.   5

Purchased inventory for $3993 ($3630 + $363 GST) from A Harris.

  6

Sent tax invoice and goods totalling $9339 ($8490 + $849 GST) to A Fox.

16

Received cheque from A Fox for $9339.

20

Bank advised cheque deposited on 16 January from A Fox had been dishonoured.

25

Received funds from A Fox in full payment of tax invoice.

28

Paid A Harris for purchase on 5 January, less $198 ($180 + $18 GST) discount.

QUESTION 7.39 Prepare the journals for the dates in August 2022 and post to the general and subsidiary ledgers for S Ireland who operates with perpetual inventory.   2 P Dipstick purchased stock from S Ireland for a tax invoice value of $1991 ($1810 + $181 GST), with an inventory

Copyright © 2018. Cengage. All rights reserved.

cost of $1100.   4

Tax invoice sent to B McAlpine for $2321 ($2110 + $211 GST), cost of the sale was $1200.

  4

Received tax invoice $957 ($870 + $87 GST) and goods from A Chappel.

12

Received cheque for $1991 from P Dipstick.

12

B McAlpine paid $2200 in full settlement of account.

16

Cheque from P Dipstick was dishonoured.

28

Remittance sent to A Chappel for $902 in full settlement of account.

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CHAPTER 7

QUESTION 7.40 From the following information of J Patricia, prepare an accounts receivable control account for August 2022. Accounts receivable control balance 31 July 2022 Transactions for August Cash sales including GST $668 Bad debt write-off including GST $82 Remittances received from accounts receivable Remittances processed to accounts payable Sales on credit including GST $1578

22 121 7 348 902 16 687 3 124 17 358

QUESTION 7.41 From the following data of T John, prepare an accounts receivable control account for July 2022. Balance of accounts receivable listing 30 June 2022 Transactions for July Cheque received from H Alfred, an account receivable during the previous month,

59 301

dishonoured Cash sales including GST $1644 Remittances received from accounts receivable Purchases on credit including GST $2466 Write-off of B Kevin as a bad debt including GST $51 Purchases made with debit card, including GST $910 Sales on credit including GST $4344

825 18 084 45 100 27 126 561 10 010 47 784

QUESTION 7.42 Prepare for S Meredith the accounts receivable control account and accounts payable control account for February 2022. Balance as per accounts receivable control account 31 January 2022 Balance as per accounts payable control account 31 January 2022

15 004 7 997

Transactions for February Credit sales including GST $1182 Credit purchases including GST $864 Bad debts including GST $36 Remittances received from accounts receivable Remittances processed to accounts payable

13 002 9 504 396 12 397 9 801

QUESTION 7.43 Prepare the accounts receivable and accounts payable control accounts for April for K Ann.

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Balance as per accounts receivable control account 31 March 2022 Balance as per accounts payable control account 31 March 2022 Transactions for April Cash sales including GST $1686 Credit sales including GST $1143 Purchases including GST $341 paid by debit card Credit purchases including GST $672 Bad debts including GST $55 Cheque dishonoured which was deposited in March including GST $71 Funds received from accounts receivable Remittances paid to accounts payable

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7 282 3 718 18 546 12 573 3 751 7 392 605 781 13 585 7 645

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JOURNALS AND LEDGERS FOR SPECIAL TRANSACTIONS

QUESTION 7.44 From the following data regarding A Henry, prepare an accounts receivable control account and an accounts payable control account for May 2022. Accounts receivable control balance 30 April 2022 Accounts payable control balance 30 April 2022

16 599 5 753

Transactions for May Purchases with debit card including GST $1185 Purchase on credit including GST $633 Cash sales including GST $1443 Sales on credit including GST $1185 Bad debts including GST $61 Remittances to accounts payable Direct deposits from accounts receivable Accounts receivable cheque dishonoured, deposited 29 April

13 035 6 963 15 873 13 035 671 6 490 13 563 693

QUESTION 7.45 Prepare the accounts receivable and accounts payable control accounts of J Wright for November 2022. Accounts payable control balance 31 October 2022 3 025 Accounts receivable control balance 31 October 2022 4 587 Transactions for November Cheque for $407 deposited end of last month for U Len, an account receivable, was dishonoured Drawings of stock by J Wright including GST $29 319 Purchases on credit including GST $393 4 323 Cash sales including GST $1091 12 001 Remittances processed to accounts payable 4 587 Sales on credit including GST $690 7 590 Bad debts including GST $34 374 Purchases with debit card including GST $156 1 716 Received funds direct from accounts receivable 8 877

QUESTION 7.46 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

d

if the entry is an increase or decrease to the account balance. The business transactions are: – credit purchase of machinery, bill payable accepted and met

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– paid for repairs to motor vehicle – owner withdrew goods for personal use; periodic inventory applies – owner withdrew goods for personal use; perpetual inventory applies.

QUESTION 7.47 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

d

if the entry is an increase or decrease to the account balance. The business transactions are: – bad debt written off – owner withdrew funds for private use

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– purchased computer on credit – remittance processed for computer previously purchased on credit, discount was allowed – sale of goods on credit with periodic inventory – sale of goods on credit with perpetual inventory.

QUESTION 7.48 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

d

if the entry is an increase or decrease to the account balance. The business transactions are: – sold old office equipment, at book value, on credit – recovered a bad debt written off in the previous accounting period – cash sale of goods with periodic inventory – cash sale of goods with perpetual inventory – supplier charged the business interest on overdue account (no GST).

QUESTION 7.49 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

d

if the entry is an increase or decrease to the account balance. The business transactions are: – received inventory on credit from supplier; periodic inventory applies – received inventory on credit from supplier; perpetual inventory applies – sold old computer at book value and received funds – owner introduced more funds into the business – wrote off a bad debt.

QUESTION 7.50 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

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d

if the entry is an increase or decrease to the account balance. The business transactions are: – purchase of inventory with debit card; periodic inventory applies – purchase of inventory with debit card; perpetual inventory applies – stationery purchased on credit – purchase of equipment on credit, the acceptance of a bill payable and bill met – dishonour of cheque from a credit customer – bad debt recovered – cash sale of inventory, where periodic inventory applies – cash sale of inventory, where cost of the inventory is known – owner took funds for personal use – purchased office furniture on credit – sale of motor vehicle for cash at book value – interest charged on overdue account receivable.

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QUESTION 7.51 For each of the business transactions listed below, you are to enter in the Workbook: a

the account name, with debit account first

b

if the account entry is a debit or credit

c

the chart of account group name; that is CA, NCA, CL, NCL, OE, R, E

d

if the entry is an increase or decrease to the account balance. The business transactions are: – dishonour of cheque received from customer – remitted rent to landlord – interest revenue charged on customer’s overdue account – purchased motor vehicle by electronic transfer of funds – remittance received from a credit customer with discount – commenced business with bank machinery and motor vehicle – purchased computer on credit – stationery purchased by debit card – supplier charged interest on overdue account – sale of inventory on credit; periodic inventory applies – cash sale of inventory on credit; perpetual inventory applies – owner took stock for private use; periodic inventory applies – stock withdrawn by owner for personal use; perpetual inventory applies. The next two questions require you to construct a set of accounts to trial balance. If you have problems with the

components of the first question (question 7.52), revise that problem area by going back to earlier chapters. When you are confident that you are competent, then go on to question 7.53.

QUESTION 7.52 From the transactions shown below, enter the appropriate journal abbreviation next to each transaction. Then, from the information shown in figure 7.20 and the following transactions, prepare the relevant journals of L Miles for the dates in January 2022. Post the journals to the ledgers and prepare a trial balance and listings of the subsidiary ledgers. Periodic inventory applies.

L Miles Accounts Payable Listing

L Miles Accounts Receivable Listing

as at 31 December 2021

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as at 31 December 2021 S Dunda P Harris

2 585 2 739

R Dalmere S Granville

1 254 825

W Mead

1 881

W Mead

V Wentworth

2 563 9 768

1 287 3 366

FIGURE 7.20  Control account listings for L Miles

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On 31 December 2021, L Miles had the following account balances: GST payable $2442, premises $55 000, accounts receivable control $ . . . . . . . . . ., inventory $3488, bank overdraft $2190, office equipment $5900, accounts payable control $ . . . . . . . . . ., mortgage loan on premises $20 000, GST receivable $842 and capital $ . . . . . . . . . . Transactions for January 2022 were as follows: _______  2 Received remittance from P Harris less $88 discount. _______  2 S Dunda paid account in full by cheque. _______  3 Received tax invoice from G Ilford $1177 ($1070 + $107 GST) for inventory. _______  4 Electronic transfer to S Granville for $803 in full settlement of account. _______  5 Direct deposit from V Wentworth $2563. _______  5 Received adjustment credit note from R Dalmere $66 ($60 + $6 GST) for short delivery. _______  7 Bank advised S Dunda’s cheque had been dishonoured and a $55 charge made for handling the dishonoured cheque to be charged to S Dunda. _______  8 Remittance paid to R Dalmere for the balance now owing ($1188). _______  8 Owner withdrew goods from inventory with a value of $165 ($150 + $15 GST). _______  9 Sent tax invoice to V Wentworth for $2838 ($2580 + $258 GST). _______  9 Purchased stock from L Combe for $1243 ($1130 + $113 GST) and paid by debit card. _______10 Cash sale $1881 ($1710 + $171 GST). _______12 Mailed adjustment credit note to V Wentworth $55 ($50 + $5 GST) for pricing adjustment. _______13 Received $638 from S Dunda as part payment of account. _______13 Cash sale of goods to Y Nora $2585 ($2350 + $235 GST). _______15 Paid W Mead the December account of $1287. _______16 Banked receipts from sales $1804 ($1640 + $164 GST). _______18 Sold goods on credit to P Harris $3377 ($3070 + $307 GST). _______18 Received funds electronically from W Mead for $1881. _______18 Paid ATO the GST for December quarter. _______19 Purchased goods on credit from R Dalmere $1419 ($1290 + $129 GST). _______19 Drew cheque for art and music lessons for children $580. _______20 Sold goods on credit to V Wentworth for $2651 ($2410 + $241 GST). _______20 Goods purchased with debit card $1826 ($1660 + $166 GST) from R Mington. _______21 Received tax invoice from S Granville for stock purchases $1782 ($1620 + $162 GST). _______22 Sold goods to S Good for $1584 ($1440 + $144 GST), received funds electronically. _______25 O Burn purchased inventory from L Miles $1507 ($1370 + $137 GST). _______25 P Harris bought goods for $1969 ($1790 + $179 GST) on credit.

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_______27 Bought office equipment from Camellia and Co $3960 ($3600 + $360 GST). _______27 Tax invoiced W Mead for goods $3564 ($3240 + $324 GST). _______30 Banked cheque $1716 ($1560 + $156 GST) for stock sold to S Amos. _______30 Made a cash allowance to S Good for faulty stock $143 ($130 + $13 GST). _______31 Received O Burn’s direct deposit less $33 discount. _______31 Reallocated dishonour fee to bank charges for S Dunda and then wrote off the balance as bad debt and adjusted for GST.

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QUESTION 7.53 From the transactions of K Knight shown below, enter the appropriate journal abbreviation next to each transaction. Enter the transactions (periodic inventory applies) for July into the appropriate journals, and post to the general ledger and the subsidiary ledgers. Balance the accounts and extract a trial balance and subsidiary account listings at the end of July. Transactions for July 2022 were as follows: _______  1 K Knight commenced business with bank $65 000, loan from New England Bank $30 000. _______  4 K Knight acquired the ongoing business of A Johnson & Co for $58 000 and obtained the following: premises $22 000, motor vehicle $12 000, accounts receivable M Druitt $2013, P Enrith $1496, S Marys $1991 and inventory $4500. _______  6 Received $1452 from P Enrith in full settlement of account. _______  6 Purchased goods on credit from L Riverstone $1485 ($1350 + $135 GST). _______10 Sold goods to G Brook $2981 ($2710 + $271 GST). _______10 Cash sale of $1793 ($1630 + $163 GST) to M Victoria. _______10 Remitted wages $2500. _______12 M Druitt paid outstanding account $2013. _______13 Purchased stationery for $715 ($650 + $65 GST) from Lawson Stationery. _______18 Sent tax invoice to M Piddington $2915 ($2650 + $265 GST). _______20 Received tax invoice from Kanangra Boyd for advertising $1881 ($1710 + $171 GST). _______24 Remitted wages $2500. _______24 Purchased stock on credit from V Heights $946 ($860 + $86 GST). _______25 Sold stock to L McMahons $3388 ($3080 + $308 GST) who had remitted funds direct. _______25 Received tax invoice from Lawson Stationery for stationery $1441 ($1310 + $131 GST). _______28 Received rent from tenant B Mountain $836 ($760 + $76 GST). _______28 Received $594 as part payment of account from S Marys. Now enter the transactions for August into the appropriate journals, post the journals to the general and subsidiary ledgers, balance the accounts, and prepare the trial balance and subsidiary ledger listings. Transactions for August 2022 were as follows: _______  2 Received direct deposit from G Brook $2904 in full settlement of account. _______  2 M Piddington took $77 as discount and paid the balance of account. _______  4 Processed electronic transfer to L Riverstone for $1441 in full settlement of their account. _______  6 Received $397 cheque as further payment of account from S Marys. _______  7 Remitted wages $2600.

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_______  7 Paid Lawson Stationery $2156 on account. _______  7 Paid Telstra for telephone connection $704 ($640 + $64 GST). _______10 Bank advised that cheque deposited on 6th had been dishonoured. _______11 Received adjustment credit note for $33 ($30 + $3 GST) from V Heights for inventory overcharge. _______13 Sent tax invoice to G Brook $3982 ($3620 + $362 GST). _______14 Paid V Heights amount owing after allowing for the adjustment credit note on 11th of this month.

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_______15 Sold goods $2827 ($2570 + $257 GST) to Warrimoo Dairy, funds received electronically. _______15 Received commission $1936 ($1760 + $176 GST) from P Anthers & Co. _______18 Purchased stock on credit from V Heights $242 ($220 + $22 GST). _______20 Paid for telephone usage $1793 ($1630 + $163 GST) to Telstra by electronic transfer. _______21 Remitted wages $2500. _______24 Received tax invoice for $418 ($380 + $38 GST) from V Heights. _______28 Received rent $836 ($760 + $76 GST) from B Mountain. _______31 Paid A Johnson & Co for business purchased on 4 July. _______31 Wrote off S Marys as a bad debt.

Endnote

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1 Division 60 of the GST Act (A New Tax System (Goods and Services Tax) Act 1999) relates to pre-establishment costs. This special rule enables a GST-registered business to claim input tax credits (GST receivable) for acquisitions before it comes into existence. This covers pre-establishment costs such as set-up fees, business registration, purchase of trading stock and assets. There are four special rules that must all apply before a claim can be made, but these rules are beyond the scope of this book and the learning requirements of students in relation to GST.

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289

8 Management controls over cash

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Introduction

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Mention has already been made of the internal controls of the various aspects of the accounting process, and the internal control procedures that ensure agreement between internal records and those of the business supplier and the customer. It is most desirable that no single employee be responsible for ordering, receiving, processing and finalising transactions throughout the entire business. This will minimise the risk of fraud and error. It is in the owner’s best interest to prevent the establishment of a procedure that relies on one person who may, over a period of time, be tempted to take fraudulent actions to misappropriate (or steal) the assets of the business. This is especially true where cash is concerned. As cash is one of the most important assets in the successful running of any business and may easily be misused, it is essential to have well-established controls associated with all forms of cash. This chapter demonstrates important cash control measures that a business should have in place.

CHAPTER 8

Principles for internal control of cash It is important for a business to have a sound system of internal control over cash, as cash is easily misappropriated by persons with dishonest intentions. Several internal control measures over cash have been briefly discussed in earlier chapters of this book. The following is a more comprehensive discussion of the control measures that should be in place at various stages in the handling and recording of cash.

Cash received In relation to the receipt of cash (notes and coins), cheques and electronic receipt of funds, the following internal control measures should be present. • Only authorised persons should have access to and be able to handle cash receipts. • Employees who receive or handle cash should not be involved with the recording of these transactions in the accounting records. This segregation of duties (or separation of responsibilities) is designed to prevent an employee misappropriating cash receipts and disguising the fact by making false entries in the business’s accounting records. • Regular rotation of employees in cash collection and recording duties will act as a deterrent to fraudulent behaviour because it will increase the chances of irregularities being detected. Where employees take annual leave and other staff are required to perform their duties in their absence, this also acts as a deterrent to misappropriation. • Where funds are directly transferred into the business bank account (that is, via EFT), the business needs to regularly examine its bank account for these items and ensure that they are properly recorded in the accounting records of the business. Transactions in the businesses bank account can be accessed through electronic banking facilities or a hard copy of the bank statement. Bank statements are regularly prepared by the bank and are available to the business; either a hard copy is posted out or an electronic copy is made available on the bank’s internet site. Some computerised accounting packages also provide the facility for direct bank feeds to automatically update the business’s accounting records. However, the business should implement additional controls to check that the bank records are accurate.

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• Where cash is received through a cash register, the following features should be noted. – The use of a cash register is, in itself, an internal control measure as it ensures that each receipt is recorded at the time the transaction occurs, and the customer receives confirmation of the transaction in the form of a cash register receipt/tax invoice. – In many businesses each item of merchandise sold is electronically scanned at the register, ensuring that the transaction is recorded immediately and at the correct price. – At the end of each day, the totals on the cash register tape are reconciled with the balance of cash in the register drawer. For EFTPOS and credit card sales, the total daily amount as shown on the cash register tape should be reconciled to the relevant amount disclosed on the bank statement. • Where cheques are received in the mail, the following procedures should be observed. – Two persons should be present when the mail is opened, and a record of all amounts received should be made at that point. – Persons involved in opening the mail should not be involved in the recording process or have access to cash receipts. – Cheques are immediately stamped with a restrictive crossing. – Once the mail opening is completed, the cheques received should be taken to the cashier and the appropriate receipts written. – For receipts from accounts receivable, the principles of internal control discussed in chapter 6 (in the section ‘Administration of accounts receivable’) should be adhered to. Created from tafenswlib on 2020-05-30 07:52:37.

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BANKING OF CASH RECEIPTS The following internal control measures should be established for banking of daily takings of notes, coins and cheques. • Banking should occur on a daily basis, with all receipts banked intact and not utilised for other purposes. • Deposit items should be batched and reconciled to the total on the bank deposit slip. • Preparation of items for deposit should be carried out by a person who is not involved in the handling and recording of cash receipts. • Security precautions should be taken when transporting cash and other items to the bank. Many businesses, particularly those with large amounts of cash to deposit, engage the services of specialist security firms such as Armaguard, Brink’s, Brambles or Chubb to transfer the business’s takings to the bank.

Cash payments The following internal control measures should be established for remittances by cash (notes and coins), cheque or electronic remittance of funds. • Any payments by notes and coins should be through a petty cash imprest system. This is discussed later in this chapter. • For remittances to accounts payable, the principles of internal control discussed in chapter 6 (in the sections ‘Administration of accounts payable’ and ‘Reconciliations: accounts payable’) should be adhered to.

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• For payments made electronically, the following additional internal controls are suggested. – The responsibility for making electronic payments should be restricted to a limited number of individuals. – Individuals authorised to make electronic payments should be persons in authority who are not involved in the processing of accounts payable. – Electronic payments must also have at least two electronic signatures, which are accessed through the individual’s electronic password. This enables authorised access to the business bank account through the banking process. – Access codes and passwords required for the initiation of electronic payments should be kept in a secure place and only made available to those authorised to make such payments. – Before each electronic payment is processed, supporting documentation should be reviewed by someone in authority, who should authorise the payment in writing. • Where business debit and credit cards are used to pay for goods and services purchased from other businesses, additional control measures over the issue and use of such cards are required. These control measures were discussed in chapter 6 (in the section ‘Administration of accounts payable’). • Where remittances are made by cheque, the following procedures should be observed. – A cheque request should be prepared in accordance with the guidelines discussed in chapter 2. – There should be at least two cheque signatories and cheques should be crossed and marked ‘not negotiable’, as discussed in chapter 2. – The cheque signatories should be persons in authority who are not involved in the processing of recording accounts payable. – One of the cheque signatories should cancel supporting documentation to indicate, for example, that the invoices have been paid. This is usually achieved by stamping the documents as PAID and writing the cheque number and date of the cheque. – The cancelled documentation should be filed for audit purposes. – Once the cheques have been signed they should not be returned to the employee who processed the invoices.

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CHAPTER 8

QUESTION 8.1 Briefly explain how the use of a cash register provides internal control over cash receipts.

QUESTION 8.2 Briefly explain how a business verifies that its EFTPOS and credit card sales have been correctly credited by the bank to the business bank account.

QUESTION 8.3 In relation to the banking of cash receipts, briefly explain one security measure that a business can employ.

QUESTION 8.4 Briefly explain the internal control measures that should exist for electronic payments.

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Bank reconciliation Cash is one of the most important assets in the successful running of any business. An important part of the internal control of cash is to match the business’s records of payments and receipts (the entries in the cash payments and cash receipts journals) with an independent record provided by the bank (the bank statement) and identify any differences. This process is called the bank reconciliation and should be performed by a person with duties separate from the handling and recording of cash transactions. The bank reconciliation task should be undertaken at least monthly, if not more regularly. In the following section you will identify the reasons for some differences between the business cash journals and the bank statement provided by the bank. One issue that has resulted in significant differences between the bank statement and the business’s records has been the delay or time lag by banks recording deposits into accounts. Until recently, banks could take a week after the deposit of a cheque to clear funds and make them available for use. Payment systems using electronic funds transfer technology may have seemed the solution to the timing problem of clearing deposits for the receiving business. However, it has been common for delays of around two to three days before a bank has released the deposited funds. The New Payments Platform (NPP) in Australia was introduced in early 2018 and allows individuals and businesses to make low-value account-to-account funds transfers in real time, regardless of which bank a customer uses. Transfers can be made day or night, seven days a week. The remitter of funds no longer needs to know the recipient’s bank account details as a linked phone number or email address will be sufficient. The NPP also allows more detailed information to be transferred to the business receiving payment, including the invoice data. The invoice data may be able to be imported directly into compatible accounting systems. This means that bank statements and the business’s records should be more aligned and funds made available more quickly. The bank reconciliation process that follows is for a manual accounting system. Businesses that use a computerised accounting system should follow a similar process, although the software may automatically perform many parts of the reconciliation, such as matching transactions and generating relevant reports. Many systems use bank feeds to download transactions directly from the bank into the accounting system. However, it is essential that the business check these transactions, as sometimes the bank’s records may be incorrect. In principle, the bank reconciliation process is very similar to the reconciliation of a supplier’s statement with the relevant account in the accounts payable subsidiary ledger of a business. This was covered in chapter 5. Created from tafenswlib on 2020-05-30 07:52:45.

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The statement in this case is from the bank used by the business (the bank statement), and not a supplier. Also the bank account in the general ledger is the account to be reconciled and not an account in the accounts payable subsidiary ledger. Before continuing, you should understand that: • from the business’s point of view, funds in the bank are a current asset, and therefore will generally (but not always) have a debit balance • from the bank’s point of view, it is holding funds on behalf of the business. Therefore, it has a current liability, which will generally (but not always) have a credit balance.

THE BANK STATEMENT The bank statement is a summary of transactions through the business’s bank account in date (or chronological) order, from the bank’s point of view. It is an extract of the columnar ledger account of one of the bank’s accounts payable.

Process of reconciliation The process of reconciling the bank statement to the business records is as follows: • Tick the items that agree on the debit side of the bank statement with those items in the business cash payments journal (Step 1 in Examples 1, 2 and 3). • Tick the items that agree on the credit side of the bank statement and the business cash receipts journal (Step 1 in Examples 1, 2 and 3). • Remittances received in the cash receipts journal that have not been ticked should be noted as outstanding remittance receipts by writing ‘o/s’ next to the deposit amount (Step 1 in Examples 1, 2 and 3). • Remittances paid in the cash payments journal that have not been ticked should be noted as unpresented remittance payments not yet cleared by writing ‘u/p’ next to the payment amount. (Step 1 in Examples 1, 2 and 3.) • Remittances received on the bank statement (amounts in the credit column) that have not been ticked should be validated and entered into the cash receipts journal. (Step 1 in Examples 2 and 3, but it is not necessary in Example 1, as all entries are ticked.) • Remittances paid on the bank statement (amounts in the debit column) that have not been ticked should be validated and entered into the cash payments journal. (Step 1 in Examples 2 and 3, but it is not necessary in Example 1, as all entries are ticked.)

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• Reconcile, by preparing the bank reconciliation statement and the cash balance summary. (Step 2 in Examples 1, 2 and 3.) • Post the updated cash receipts journal and the cash payments journal to the general ledger. (Step 3 in Examples 1, 2 and 3.) • Check that the general ledger bank account balance and the bank reconciliation statement agree. (Step 4 in Examples 1, 2 and 3.)

THE BANK RECONCILIATION STATEMENT The bank reconciliation statement is prepared by the business after comparing the bank statement with the cash receipts journal and cash payments journals, and making any necessary additions to the business’s journals. Remember, if the business has money in the bank, then the business has a current asset which will have a debit balance. However, from the bank’s point of view, the bank has a current liability as it owes the money to the business. Therefore, the balance in the bank statement will have a credit balance.

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CHAPTER 8

The bank reconciliation statement is prepared as follows: • Start with what the bank statement shows as the balance at the end of the month. • Add any outstanding remittance receipts (o/s) from the cash receipts journal. • Subtract any unpresented remittance payments not yet cleared (u/p) from the cash payments journal, showing individual cheque or reference numbers and values. The final amount should be the balance the business has in its bank account in the general ledger. It should agree with or reconcile to the total shown as the bank account value in the cash balance summary. Bank Reconciliation Statement of … as at … [end of month] Credit balance as per bank statement [end of month] add Outstanding remittance receipts

less Unpresented remittance payments

1 600.00 700.00 2 300.00 Chq 123456 Chq 123589

Debit balance as per general ledger Bank account

600.00 900.00

1 500.00  800.00

FIGURE 8.1  Bank reconciliation statement summary format

THE CASH BALANCE SUMMARY The reconciliation between the bank’s records and the business’s records should be completed before the cash journals are posted to the general ledger. If there are any valid transactions in the bank statement that do not appear in the business’s records, these should be entered in the business’s records. Examples could include remittances for bank fees and charges at the end of the month. Once this is completed, a summary of the bank account in the general ledger (the cash balance summary) is prepared as if the journals were posted for the month. This is done before the journals are actually posted to the general ledger (see figure 8.2). The final balance should agree with the final balance in the bank reconciliation statement, as in figure 8.1. The cash balance summary is prepared as follows: • Start with the business general ledger bank account balance at the beginning of the month; this is the same as the balance at the end of the previous month. • Add all business receipts that have been deposited in the bank for the whole of the month: the total of the cash receipts journal, as amended.

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• Subtract all business payments that have been prepared for the whole month: the total of the cash payments journal, as amended. The final amount should be the balance the business has in its bank account in the general ledger. It should agree with or reconcile to the final total shown as the bank account value in the bank reconciliation statement. Cash Balance Summary as at … [end of month] Debit balance as per general ledger Bank account [beginning of month] add Receipts

less Payments Debit balance as per general ledger Bank account

1 000.00 2 000.00 3 000.00 2 200.00 800.00

FIGURE 8.2  Cash balance summary format

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Example 1: Bank reconciliation – basic From the following information of A Jerangie, prepare the bank reconciliation statement and cash balance summary, and then post the amended cash journals to the bank account in the general ledger to confirm the reconciled amount. The balance of the bank account in the general ledger as at 31 December 2021 was debit $590.00 and this dollar amount agreed to the bank statement dollar amount at the end of December. The bank statement of A Jerangie and the extract cash journals for January 2022 are shown in figure 8.3. NATURAL AUSTRALIA BANK LTD

Statement of account with

Captains Flat Ann Jerangie Whinstone Valley Way Peak View 2630

Date

Particulars

1 Jan 22 4 Jan 22 6 Jan 22 11 Jan 22 12 Jan 22 17 Jan 22 24 Jan 22 27 Jan 22

Brought forward Transfer #135321 B Asher Cash/cheques deposit Direct deposit R Rose Debit card #236710 Cash/cheques deposit BPay A Smith Direct deposit L Swaine

Debit

Extract Cash Receipts Journal A Jerangie

5 Jan 22 10 Jan 22 15 Jan 22 25 Jan 22 30 Jan 22

Cash/cheques deposit Direct deposit R Rose Cash/cheques deposit Direct deposit L Swaine Cash/cheques deposit [2 990.00]

343.00 659.00 679.00 407.00 902.00

Account No. 379105 Page No. 7 Credit

129.00 343.00 659.00 360.00 679.00 745.00 407.00

Balance 590.00 461.00 804.00 1 463.00 1 103.00 1 782.00 1 037.00 1 444.00

Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal A Jerangie

3 Jan 22 12 Jan 22 21 Jan 22 25 Jan 22 31 Jan 22

Transfer #135321 B Asher Debit card #236710 BPay A Smith Chq 321757 Transfer – Rent [2 176.00]

129.00 360.00 745.00 254.00 688.00

FIGURE 8.3  Bank statement and cash journals for January 2022

Copyright © 2018. Cengage. All rights reserved.

STEP 1: TICK AND FINALISE CASH JOURNALS The process of ticking the agreed amounts then occurs. Record ‘o/s’ against any unticked items in the cash receipts journal and ‘u/p’ against any unticked entries in the cash payments journal. Then total the cash receipts journal and the cash payments journal. Figures 8.4 and 8.5 show how the bank statement and extract cash receipts and cash payments journals should appear after the ticking process has been completed. Note, in this example all entries in the bank statement must be ticked.

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CHAPTER 8

NATURAL AUSTRALIA BANK LTD

Statement of account with Date 1 Jan 22 4 Jan 22 6 Jan 22 11 Jan 22 12 Jan 22 17 Jan 22 24 Jan 22 27 Jan 22

Captains Flat Ann Jerangie Whinstone Valley Way Peak View 2630

Particulars

Account No. 379105 Page No. 7

Debit

Brought forward Transfer #135321 B Asher Cash/cheques deposit Direct deposit R Rose Debit card #236710 Cash/cheques deposit BPay A Smith Direct deposit L Swaine

Credit

✓ 129.00 ✓ 343.00 ✓ 659.00 ✓ 360.00 ✓ 679.00 ✓ 745.00 ✓ 407.00

Balance 590.00 461.00 804.00 1 463.00 1 103.00 1 782.00 1 037.00 1 444.00

Cr Cr Cr Cr Cr Cr Cr Cr

FIGURE 8.4  Bank statement after all entries have been ticked Extract Cash Receipts Journal A Jerangie

5 Jan 22 10 Jan 22 15 Jan 22 25 Jan 22 30 Jan 22

Cash/cheques deposit Direct deposit R Rose Cash/cheques deposit Direct deposit L Swaine Cash/cheques deposit

✓ ✓ ✓ ✓ o/s

343.00 659.00 679.00 407.00 902.00 2 990.00

Extract Cash Payments Journal A Jerangie

3 Jan 22 12 Jan 22 21 Jan 22 25 Jan 22 31 Jan 22

Transfer #135321 – B Asher ✓ ✓ Debit card #236710 ✓ BPay A Smith Chq 321757 u/p Transfer – Rent u/p

129.00 360.00 745.00 254.00 688.00 2 176.00

FIGURE 8.5 Cash journals after ticking, showing outstanding remittance receipts (o/s) and unpresented remittance payments not yet cleared (u/p)

STEP 2: RECONCILE The process of reconciliation then occurs. The amounts shown as remittance receipts (or deposits) in the cash receipts journal and remittance payments in the cash payments journal are now confirmed as correct by preparing a cash balance summary and bank reconciliation statement. The final balance in each should agree (see figure 8.6). On the bank statement electronic receipts and electronic payments include names and reference numbers. These names/references indicate from whom remittance receipts were received and to whom remittance payments were paid. Bank Reconciliation Statement of A Jerangie

Copyright © 2018. Cengage. All rights reserved.

as at 31 January 2022 Credit balance as per bank statement [31 January 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 444.00 902.00 2 346.00 Chq 321757 Transfer Rent

254.00 688.00

Debit balance as per general ledger Bank account

942.00 1 404.00

Cash Balance Summary as at 31 January 2022 Debit Bank account balance [1 January 2022] add Receipts [during January]

less Payments [during January] Debit balance as per general ledger Bank account

590.00 2 990.00 3 580.00 2 176.00 1 404.00

FIGURE 8.6  Bank reconciliation statement and cash balance summary for 31 January 2022 Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

STEP 3: POST The cash receipts and cash payments journals can now be posted to the general ledger, with confidence that there are no incorrect amounts shown in the deposits or payments for those two journals.

STEP 4: AGREE The bank account in the general ledger agrees with the bank reconciliation statement and the cash balance summary. The general ledger would appear as shown in figure 8.7. Extract General Ledger of A Jerangie

Bank 1 Jan 22 Balance b/d 31 Jan 22 Receipts 1 Feb 22 Balance b/d

CR..

590.00 31 Jan 22 Payments 2 990.00 Balance c/d 3 580.00 1 404.00

100 CP..

2 176.00 1 404.00 3 580.00

FIGURE 8.7  Bank reconciliation statement and cash balance summary agree with bank account balance

QUESTION 8.5 R Dartmouth received the bank statement for November 2022, which had a credit balance of $90. The general ledger bank account balance at 1 November 2022 was $50 debit. Receipts for the month totalled $200. Payments for the month totalled $180. After reconciling, and ticking the deposits in the bank statement that agree with those in the cash receipts journal, there was an outstanding (unticked) deposit of $20 in the cash receipts journal. After reconciling, and ticking the remittance payments in the bank statement that agree with those in the cash payments journal, there were two unpresented (unticked) cheques: #437090 $15 and #437093 $25 in the cash payments journal. Prepare a bank reconciliation statement and cash balance summary that agrees with the balance of the bank account in the general ledger as at 30 November 2022.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 8.6 On 1 February 2022, the bank account in the general ledger of M Hope was $600 debit. During the month there were receipts of $850 and payments of $1300. M Hope received the bank statement for the month of February, which showed a closing balance of $400 credit. In ticking the entries in the cash receipts journal with the deposits on the bank statement, it was found that there was a deposit at the end of the month for $100, which the bank had not yet shown. In ticking the entries in the cash payments journal with the cheques in the bank statement, it was found there were one debit card payment and one cheque not presented at the bank: debit card payment for $90 and cheque #286005 $260. As at 28 February 2022, prepare a bank reconciliation statement and cash balance summary that agrees with the balance of the bank account in the general ledger.

298tafenswlib on 2020-05-30 07:52:45. Created from

CHAPTER 8

Example 2: Bank reconciliation – intermediate In this example for the business of M Colah the reconciliation process begins with the bank reconciliation statement for April, as well as the bank statement for the end of May, cash receipts and cash payments journals as in figure 8.8. The April bank reconciliation is used because it includes outstanding remittance receipts and unpresented remittance payments, which either appear in the May bank statement or may remain outstanding at the end of May. Figure 8.9 demonstrates the ticking process to reconcile like items in these documents, and finalising the cash journals. Figure 8.10 shows the resulting bank reconciliation statement and cash balance summary, and figure 8.11 shows the entries in the general ledger bank account to 1 June 2022. Bank Reconciliation Statement of M Colah as at 30 April 2022 Credit balance as per bank statement [30 April 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 387.23 551.89 1 939.12 Chq 421352 Chq 421357

647.59 486.53

Debit balance as per general ledger Bank account

1 134.12 805.00

NATURAL AUSTRALIA BANK LTD

Statement of account with

Copyright © 2018. Cengage. All rights reserved.

Date

Asquith Mike Colah Ku-Ring-Gai Chase Road Bobbin Head 2079

Particulars

1 May 22 1 May 22 4 May 22 7 May 22 8 May 22 9 May 22 14 May 22

Brought forward Cash/cheques deposit Transfer #32178 Rent Debit card #1117918 BPay H Wills Cheque #421352 Cash/cheques deposit

14 May 22 16 May 22 20 May 22 20 May 22 25 May 22 30 May 22 31 May 22

Cheque #421359 NatAus PoS 15.5 Direct deposit TCA Cheque #421361 NatAusAsq PoS 24.5 BPay Telstra Debit card #1356968

Debit

Cash/cheques deposit NatAus Point of Sale Direct deposit TCA NatAus Point of Sale Cash/cheques deposit [2 713.33]

Credit 551.89

641.80 835.37 58.25 647.59 500.20 459.43 272.79 486.53 146.76 688.29 108.63 161.59

Extract Cash Receipts Journal of M Colah

10 May 22 15 May 22 20 May 22 25 May 22 31 May 22

Account No. 895743 Page No. 4

500.20 272.79 486.53 688.29 765.52

Balance 1 387.23 1 939.12 1 297.32 461.95 403.70 243.89

Cr Cr Cr Cr Cr Dr

256.31

Cr

203.12 69.67 556.20 409.44 1 097.73 989.10 827.51

Dr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of M Colah

3 May 22 8 May 22 13 May 22 18 May 22 30 May 22

Transfer #32178 Rent Debit card #1117918 BPay H Wills Chq 421359 Chq 421360 Chq 421361 Debit card #1356968 BPay Telstra Debit card #34563661 [3 175.08]

641.80 835.37 58.25 459.43 721.39 146.76 161.59 108.63 41.86

FIGURE 8.8 Bank reconciliation statement for April, bank statement and cash journals for May before the reconciliation process Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

STEP 1: TICK AND FINALISE CASH JOURNALS Bank Reconciliation Statement of M Colah as at 30 April 2022 Credit balance as per bank statement [30 April 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 387.23 ✓   551.89 1 939.12 Chq 421352 Chq 421357

✓ 647.59 u/p 486.53

1 134.12 805.00

Debit balance as per general ledger Bank account

NATURAL AUSTRALIA BANK LTD

Asquith Mike Colah Ku-Ring-Gai Chase Road Bobbin Head 2079

Statement of account with

Date

Particulars

1 May 22 1 May 22 4 May 22 7 May 22 8 May 22 9 May 22 11 May 22 14 May 22 16 May 22 20 May 22 20 May 22 25 May 22 30 May 22 31 May 22

Debit

Brought forward Cash/cheques deposit Transfer #32178 Rent Debit card #1117918 BPay H Wills Cheque #421352 Cash/cheques deposit Cheque #421359 NatAus PoS 15.5 Direct deposit TCA Cheque #421361 NatAus PoS 24.5 BPay Telstra Debit card #1356968

Cash/cheques deposit NatAus Point of Sale Direct deposit TCA NatAus Point of Sale Cash/cheques deposit

✓ ✓ ✓ ✓ o/s

✓ 641.80 ✓ 835.37 ✓ 58.25 ✓ 647.59 ✓ 500.20 ✓ 459.43 ✓ 272.79 ✓ 486.53 ✓ 146.76 ✓ 688.29 ✓ 108.63 ✓ 161.59

500.20 272.79 486.53 688.29 765.52 2 713.33

Balance 1 387.23 1 939.12 1 297.32 461.95 403.70 243.89 256.31 203.12 69.67 556.20 409.44 1 097.73 989.10 827.51

Cr Cr Cr Cr Cr Dr Cr Dr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of M Colah

3 May 22 8 May 22 13 May 22 18 May 22 30 May 22

Copyright © 2018. Cengage. All rights reserved.

Credit ✓ 551.89

Extract Cash Receipts Journal of M Colah

10 May 22 15 May 22 20 May 22 25 May 22 31 May 22

Account No. 895743 Page No. 4

Transfer #32178 Rent Debit card #1117918 BPay H Wills Chq 421359 Chq 421360 Chq 421361 Debit card #1356968

✓ ✓ ✓ ✓ u/p ✓ ✓

641.80 835.37 58.25 459.43 721.39 146.76 161.59

BPay Telstra Debit card #34563661

✓ u/p

108.63 41.86 3 175.08

FIGURE 8.9  Bank reconciliation statement for April, bank statement and cash journals for May after ticking

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CHAPTER 8

STEP 2: RECONCILE Notice that in figure 8.10, the final figure in the bank reconciliation statement is the same as the total in the cash balance summary and also the balance at the end of the month in the general ledger bank account in figure 8.11. Bank Reconciliation Statement of M Colah as at 31 May 2022 Credit balance as per bank statement [31 May 2022] add Outstanding remittance receipts

less Unpresented remittance payments

April May May

827.51 765.52 1 593.03 Chq 421357 Chq 421360 Debit card #34563661

Debit balance as per general ledger Bank account

486.53 721.39 41.86

1 249.78 343.25

Cash Balance Summary as at 31 May 2022 Debit Bank account balance [1 May 2022] add Receipts [during May]

less Payments [during May] Debit balance as per general ledger Bank account

805.00 2 713.33 3 518.33 3 175.08 343.25

FIGURE 8.10  Bank reconciliation statement and cash balance summary for May 2022

STEPS 3 AND 4: POST AND AGREE Extract General Ledger of M Colah

1 May 22 Balance b/d 31 May 22 Receipts 1 Jun 22 Balance b/d

CR..

Bank 100

805.00 31 May 22 Payments 2 713.00 Balance c/d 3 518.00 343.25

CP..

3 175.08 343.25 3 518.33

Copyright © 2018. Cengage. All rights reserved.

FIGURE 8.11 General ledger bank account agrees with the bank reconciliation statement and to cash balance summary

Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

QUESTION 8.7 From the information of M Seaview, shown in figure 8.12, prepare the bank reconciliation statement and cash balance summary, then post the cash journals to the bank account in the general ledger to confirm the reconciliation at the end of July 2022. The balance of the bank account in the general ledger at 30 June 2022 was debit $892.00. NATURAL AUSTRALIA BANK LTD

Statement of account with Date 1 Jul 22 4 Jul 22 5 Jul 22 11 Jul 22 12 Jul 22 16 Jul 22 23 Jul 22 27 Jul 22

M Seaview

Particulars

Debit

Brought forward Transfer # 43255 S Steele Cash/cheques deposit Cash/cheques deposit BPay N Green NatAus PoS 14.7 Debit card #2065618 Direct deposit G Norman

168.00 160.00 215.00 155.00 691.00 179.00 186.00

Extract Cash Receipts Journal of M Seaview

4 Jul 22 11 Jul 22 14 Jul 22 26 Jul 22 31 Jul 22

Cash/cheques deposit Cash/cheques deposit NatAus Point of Sale Direct deposit G Norman Cash/cheques deposit

Credit

Balance 892.00 724.00 884.00 1 099.00 944.00 1 635.00 1 456.00 1 642.00

Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of M Seaview

160.00 215.00 691.00 186.00 170.00

3 Jul 22 8 Jul 22 20 Jul 22 24 Jul 22 31 Jul 22

Transfer # 43255 S Steele BPay N Green Debit card #2065618 Chq 405655 BPay NSW Electricity

168.00 155.00 179.00 622.00 126.00

FIGURE 8.12  Bank statement and cash journals of M Seaview for July

QUESTION 8.8 You have been requested by R Bega to show why the balance of the bank statement at the end of September 2022 and the bank account balance in the general ledger do not agree. There was no problem the previous month, as the bank statement at the end of the month was $581.00 credit and the bank account balance in the general ledger was $581.00 debit. The bank statement and an extract of the cash journals are shown in figure 8.13. NATURAL AUSTRALIA BANK LTD

Copyright © 2018. Cengage. All rights reserved.

Statement of account with

R Bega

Date

Particulars

1 Sep 22 4 Sep 22 4 Sep 22 9 Sep 22 19 Sep 22 20 Sep 22 23 Sep 22 30 Sep 22

Brought forward Cash/cheques deposit BPay B Burswood NatAus PoS 8.9 NatAus PoS 18.9 BPay A Alkimos Direct deposit W Wanneroo Debit card #1241138

Debit

Extract Cash Receipts Journal of R Bega

3 Sep 22 8 Sep 22 18 Sep 22 23 Sep 22 30 Sep 22

Cash/cheques deposit NatAus Point of Sale NatAus Point of Sale Direct deposit W Wanneroo Cash/cheques deposit

Credit 1 063.00

294.00 778.00 1 026.00 769.00 368.00 221.00

581.00 1 644.00 1 350.00 2 128.00 3 154.00 2 385.00 2 753.00 2 532.00

Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of R Bega

1 063.00 778.00 1 026.00 368.00 291.00

4 Sep 22 15 Sep 22 26 Sep 22 29 Sep 22 30 Sep 22

BPay B Burswood BPay A Alkimos Chq 671800 Debit card #1241138 Chq 671801

FIGURE 8.13  Bank statement and cash journals of R Bega for September

302tafenswlib on 2020-05-30 07:52:45. Created from

Balance

294.00 769.00 645.00 221.00 580.00

CHAPTER 8

QUESTION 8.9 From the information regarding M Drysdale shown in figure 8.14, prepare the bank reconciliation statement and cash balance summary, then post the cash journals to the bank account in the general ledger to confirm the reconciliation for the month of June 2022. Bank Reconciliation Statement of M Drysdale as at 31 May 2022 Credit balance as per bank statement [31 May 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 840.51 715.90 2 556.41 Chq 921347 Chq 921350 Chq 921353

365.74 994.31 724.84

Debit balance as per general ledger Bank account

2 084.89 471.52

NATURAL AUSTRALIA BANK LTD

Statement of account with Date

Copyright © 2018. Cengage. All rights reserved.

1 Jun 22 1 Jun 22 2 Jun 22 2 Jun 22 3 Jun 22 4 Jun 22 10 Jun 22 10 Jun 22 10 Jun 22 13 Jun 22 15 Jun 22 17 Jun 22 21 Jun 22 21 Jun 22 21 Jun 22 21 Jun 22 24 Jun 22 24 Jun 22 27 Jun 22 27 Jun 22 29 Jun 22 29 Jun 22

M Drysdale

Particulars

Debit

Brought forward Cheque #921350 Cash/cheques deposit Debit card #1955239 Cash/cheques deposit Cash/cheques deposit NatAus PoS 9.6 Cheque #921354 BPay A Kwinana Cash/cheques deposit Direct deposit A Melville BPay C Kalamunda Cash/cheques deposit Cheque #921347 Cheque #921355 Cheque #921357 NatAus PoS 23.6 Cheque #921353 Debit card #9087212 BPay J Armadale Cash/cheques deposit Direct Debit Loan repay

994.31 715.90 419.82 240.34 161.59 949.23 356.83 529.84 509.95 387.14 848.21 461.49 365.74 721.39 236.31 957.15 724.84 25.26 992.47 859.15 590.09

Extract Cash Receipts Journal of M Drysdale

2 Jun 22 3 Jun 22 9 Jun 22 12 Jun 22 15 Jun 22 20 Jun 22 23 Jun 22 28 Jun 22 30 Jun 22

Cash/cheques deposit Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit Direct deposit A Melville Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit Cash/cheques deposit

Credit

240.34 161.59 949.23 509.95 387.14 461.49 957.15 859.15 913.41

Balance 1 840.51 846.20 1 562.10 1 142.28 1 382.62 1 544.21 2 493.44 2 136.61 1 606.77 2 116.72 2 503.86 1 655.65 2 117.14 1 741.40 1 030.01 793.70 1 750.85 1 026.01 1 000.75 8.28 867.43 277.34

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of M Drysdale

2 Jun 22 8 Jun 22 10 Jun 22 14 Jun 22 17 Jun 22 18 Jun 22 20 Jun 22 27 Jun 22 29 Jun 22

Debit card #1955239 Chq 921354 BPay A Kwinana Chq 921355 BPay C Kalamunda Chq 921356 Chq 921357 Debit card #9087212 Chq 921358 BPay J Armadale Transfer Loan repay

419.82 356.83 529.84 721.39 848.21 192.19 236.31 25.26 540.83 992.47 590.09

FIGURE 8.14 Bank reconciliation statement of M Drysdale for May, bank statement and cash journals for June Created from tafenswlib on 2020-05-30 07:52:45.

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QUESTION 8.10 From information provided for L Omeo in figure 8.15, you are required to prepare a bank reconciliation statement and cash balance summary at the end of April, and post the cash journals to the bank account in the general ledger to confirm the reconciliation. Bank Reconciliation Statement of L Omeo as at 31 March 2022 Credit balance as per bank statement [31 March 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 089.88 985.27 2 075.15 Debit card #118934 Chq 109653 Chq 109655

140.70 935.07 118.22

Debit balance as per general ledger Bank account

1 193.99 881.16

NATURAL AUSTRALIA BANK LTD

Copyright © 2018. Cengage. All rights reserved.

Statement of account with

L Omeo

Date

Particulars

Debit

1 Apr 22 1 Apr 22 1 Apr 22 1 Apr 22 6 Apr 22 6 Apr 22 12 Apr 22 12 Apr 22 12 Apr 22 14 Apr 22 15 Apr 22 18 Apr 22 19 Apr 22 23 Apr 22 24 Apr 22 24 Apr 22 25 Apr 22 26 Apr 22 26 Apr 22 28 Apr 22 28 Apr 22 30 Apr 22 30 Apr 22

Brought forward Cash/cheques deposit Direct deposit Alf Cove Debit card #0719048 NatAus PoS 5.4 Debit card #118934 Cash/cheques deposit Cheque #109656 Debit card #1192871 Cash/cheques deposit Direct deposit W Butler Cheque #109655 NatAus PoS 18.4 Cheque #109657 Cash/cheques deposit BPay B Serpentine Cheque #109658 Direct deposit S Byford Debit card #1327475 BPay S Byford BPay M Canning NatAus PoS 30.4 Cheque #109659

Extract Cash Receipts Journal of L Omeo

1 Apr 22 5 Apr 22 11 Apr 22 14 Apr 22 15 Apr 22 18 Apr 22 23 Apr 22 25 Apr 22 29 Apr 22 30 Apr 22

Direct deposit Alf Cove NatAus Point of Sale Cash/cheques deposit Cash/cheques deposit Direct deposit W Butler NatAus Point of Sale Cash/cheques deposit Direct deposit S Byford Cash/cheques deposit NatAus Point of Sale

870.56 905.81 942.71 421.87 749.50 1 158.04 672.83 491.59 761.68 759.36

Credit 985.27 870.56

146.76 905.81 140.70 942.71 472.80 1 205.07 421.87 749.50 118.22 1 158.04 701.85 672.83 459.43 1 387.23 491.59 1 058.25 335.37 196.40 759.36 638.86

Balance 1 089.88 2 075.15 2 945.71 2 798.95 3 704.76 3 564.06 4 506.77 4 033.97 2 828.90 3 250.77 4 000.27 3 882.05 5 040.09 4 338.24 5 011.07 4 551.64 3 164.41 3 656.00 2 597.75 2 262.38 2 065.98 2 825.34 2 186.48

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of L Omeo

1 Apr 22 8 Apr 22 12 Apr 22 15 Apr 22 18 Apr 22 20 Apr 22 23 Apr 22 26 Apr 22 27 Apr 22 30 Apr 22

Debit card #0719048 Chq 109656 Debit card #1192871 Chq 109657 Chq 109658 Chq 109659 Chq 109660 BPay B Serpentine Debit card #1327475 BPay S Byford BPay M Canning Transfer #002341 T Adams

146.76 472.80 1 205.07 701.85 1 387.23 638.86 32.29 459.43 1 058.25 335.37 196.40 974.53

FIGURE 8.15  Bank reconciliation statement of L Omeo for March, bank statement and cash journals for April 304tafenswlib on 2020-05-30 07:52:45. Created from

CHAPTER 8

Reconciliation: advanced BANK RECONCILIATION STATEMENT: FORMAT It is possible for the bank statement to have either a credit balance or a debit balance (the bank has allowed the business to have an overdraft). This creates a number of possibilities for the format of the bank reconciliation statement, as shown in figure 8.16. Bank Reconciliation Statement Formats Bank statement [end of month] add Outstanding remittance receipts equals less Unpresented remittance payments Bank account in ledger [end of month]

Credit add = less Debit =

+ + + – +

Credit add = less (Credit) =

+ + + – –

(Debit) add = less (Credit) =

– + – – –

(Debit) add = less Debit =

– + + – +

FIGURE 8.16  Summary of alternative bank reconciliation statement formats

Is it an asset or a liability and from whose point of view?

Copyright © 2018. Cengage. All rights reserved.

An asset is a debit, but the cash at bank asset of the business is a liability for the bank and has a credit balance. Remember, the bank statement is prepared by the banking organisation from the bank’s point of view. A final credit balance in the statement means that the bank has an obligation (a liability) to pay back the funds to the business whenever required. However, a bank statement with a debit balance means that the account is an asset to the bank, like an account receivable. The business owes funds to the bank. This may occur when the bank has allowed the business to use more funds (to a certain limit) than it has in the bank. This is called an overdraft facility. The bank reconciliation process commences with details in the bank statement and compares it to details in the books of the business. A debit balance in the business’s general ledger bank account means the business has an asset, and a credit balance in the ledger means the business has a liability to repay the bank whenever required by the banking organisation. Banks charge interest on overdrafts; that is, on a business that has a liability (credit) balance on its general ledger bank account. On the bank’s general ledger the overdraft appears as an asset (debit). Using the various assumed values and the summary of alternative bank reconciliation statement formats, you should be able to mathematically work from the opening bank statement credit [+] or debit [–] balance to the resulting balances in the business ledger bank account. A ‘+’ balance is a debit (an asset), and a ‘–’ balance is a credit (a liability), as shown in figure 8.17. Bank Reconciliation Statement Formats Bank Statement [end of month] add Outstanding remittance receipts equals less Unpresented remittance payments Bank account in ledger [end of month]

cr 200 50 250 150 dr 100

+ + + – +

cr 100 20 120 150 cr (30)

+ + + – –

dr (200) 50 (150) 100 cr (250)

– + – – –

dr (20) 100 80 50 dr 30

– + + – +

FIGURE 8.17  Summary of alternative bank reconciliation statement formats, with assumed values

Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

The bank reconciliation statement format remains the same for the outstanding remittance receipts (add) and the unpresented remittance payments not yet cleared (subtract). However, in the opening line of the statement, if the bank statement has a • credit balance at the end of the month, treat it as a plus • debit balance at the end of the month, treat it as a minus. The result of adding the outstanding remittance receipts and taking off the unpresented remittance payments not yet cleared will tell you if the bank account is an asset (+) or a liability (–) for the business. This bank account balance should agree with the final balance of the bank reconciliation statement in figure 8.18 and the final balance of the cash balance summary in figure 8.21. Bank Reconciliation Statement of . . . as at . . . Credit = + / Debit = –, balance as per bank statement [end of month] add Outstanding remittance receipts equals less Unpresented remittance payments

xxx x xxxx aaaa aaab

x x

+ = Debit / – = Credit, balance as per general ledger Bank account [end of month]

xx xx

FIGURE 8.18  Bank reconciliation statement format variations

In summary, using this bank statement format: • outstanding remittance receipts are always ‘+’ (add) • unpresented remittance payments are always ‘–’ (subtract) • the mathematical sign for the balance of the bank statement is ‘+’ when credit and ‘–’ when debit • the format of the outstanding remittance receipts and unpresented remittance payments does not change • the closing balance is whatever it calculates to be: – if ‘+’ (positive) the general ledger bank account has a debit balance and is a current asset – if ‘–’ (negative) the general ledger bank account has a credit balance and is a current liability.

Copyright © 2018. Cengage. All rights reserved.

CASH BALANCE SUMMARY: FORMAT It is also possible for a business to have the bank account in the general ledger as a debit balance or a credit balance. This creates a number of possibilities for the format of the cash balance summary, as shown in figures 8.19 and 8.20. Cash Balance Summary Formats Bank account [start of month] add Receipts equals less Payments Bank account in ledger [end of month]

Debit add = less Debit =

+ + + – +

FIGURE 8.19  Summary of cash balance summary formats

306tafenswlib on 2020-05-30 07:52:45. Created from

Debit add = less (Credit) =

+ + + – –

(Credit) add = less (Credit) =

– + – – –

(Credit) add = less Debit =

– + + – +

CHAPTER 8

Using the various assumed values of the business general ledger, the bank account at the beginning of the month as a debit (asset) or a credit (liability) is given in figure 8.20. From the opening balance you should be able calculate, by adding receipts and deducting payments, the closing bank account balances in the general ledger where the ‘+’ is a debit (an asset) and a ‘–’ is a credit (a liability). This bank account balance should agree with the bank account balance you calculated in the bank reconciliation statement (see figure 8.21). Cash Balance Summary Formats Bank account [start of month] add Receipts equals less Payments Bank account in ledger [end of month]

dr 80 800 880 780 dr 100

+ + + – +

dr 10 850 860 890 cr (30)

+ + + – –

cr (450) 400 (50) 200 cr (250)

– + – – –

cr (70) 500 430 400 dr 30

– + + – +

FIGURE 8.20  Summary of cash balance summary formats, with assumed values Cash Balance Summary as at . . . Debit = + / Credit = –, Bank account balance [beginning of month] add Receipts equals less Payments + = Debit / – = Credit, balance as per general ledger Bank account [end of month]

xx x xxx x xx

FIGURE 8.21  Cash balance summary format variations

In summary, using this cash balance summary format: • receipts are always ‘+’ (add) • payments are always ‘–’ (subtract) • the mathematical sign for the opening balance is ‘+’ when debit and ‘–’ when credit • the format of the receipts and payments does not change • the closing balance is whatever it calculates to be: – if ‘+’ (positive) the general ledger bank account has a debit balance and is a current asset – if ‘–’ (negative) the general ledger bank account has a credit balance and is a current liability.

Copyright © 2018. Cengage. All rights reserved.

Detailed process and sequence of events The following explains the sequence of events for the reconciliation of the bank statement with the bank account in the general ledger. The bank reconciliation process occurs at least at the end of every month. It may be desirable for some businesses to perform reconciliations more frequently. • Write up the cash receipts and cash payments journals and cross-balance the totals in pencil, but do not ink in or rule off. • Obtain the bank statement and confirm that the opening balance is the same as the closing balance of the previous statement received. • Compare and tick off items that agree in both the bank statement and the cash journals. The dates for the remittance payments in the cash payments journal will usually, but not always, be earlier than the entry dates shown in the bank statement. The dates for remittance receipts shown in the cash receipts journal will often, but not always, be the same as those shown in the bank statement. Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

• Enter on the previous month’s bank reconciliation statement and the current month’s cash receipts journal ‘o/s’, indicating an outstanding remittance receipt, next to the amount of any remittance receipt that is not yet ticked as being received in the bank statement as a credit. • Enter on the previous month’s bank reconciliation statement and the current month’s cash payments journal ‘u/p’, indicating unpresented remittance payments, next to the amount of any payment that is not yet ticked as being presented in the bank statement as a debit. • Enter items in the cash journals that are correctly shown on the bank statement but do not appear in the appropriate cash journal, and then tick the bank statement amount and cash journal amount for each new entry. • Confirm and correct items in the cash journals that have been entered incorrectly. • Advise the bank of errors on the bank statement and include them as reconciliation items. • Confirm that all items on the bank statement have been ticked. • Confirm that all items in the cash journals and previous month’s bank reconciliation statement: – have been ticked, or – show as ‘o/s’ to indicate outstanding remittance receipts, or – show as ‘u/p’ to indicate unpresented remittance payments. • Finalise adding up the cash journals. Do not ink in or rule off the journals. • Prepare the bank reconciliation statement, starting with the closing balance on the bank statement and then adding outstanding remittance receipts less unpresented remittance payments. The resulting total will be the expected bank account balance. • Prepare a cash balance summary starting with the opening balance (the closing balance from the previous month), then add the receipts, less the payments. The result should be the same amount as the final bank balance in the bank reconciliation statement. • When the bank reconciliation statement agrees with the cash balance summary, rule off and finalise the cash journals. Check first that the column totals cross-balance. • Post the cash journals to the general ledger. • Confirm that the bank account in the general ledger agrees with the bank reconciliation statement. This procedure far exceeds the usual requirements of exercises in textbooks, but if you have to manually complete a bank reconciliation statement then the above should prove helpful.

WHAT IF IT DOES NOT RECONCILE?

Copyright © 2018. Cengage. All rights reserved.

If the bank reconciliation statement and the cash balance summary do not reconcile, then: • add the bank reconciliation statement again • add the cash balance summary again • calculate the difference between the bank reconciliation statement and the cash balance summary • confirm that the difference does not appear in the records. If the amount does appear, ensure that it has been processed correctly • divide the difference by 9; if it divides evenly then it may be a transposition error (e.g. 68 should be 86) • agree the cash receipts journal total to the credit entries in the bank statement for the month • agree the cash payments journal total to the debit entries in the bank statement for the month • have a break and then start again.

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CHAPTER 8

ADJUSTMENTS TO BUSINESS AND BANK RECORDS There are often items entered on the bank statement by the bank that the business only becomes aware of when it receives the bank statement. Such items can be both debit and credit entries in the bank statement. These adjustments emphasise the need for the preparation of the cash balance summary, as the cash journals should not be posted to the ledger until those adjustments are made. The cash journals are posted to the general ledger after the bank reconciliation has been completed, as this verifies the remittance and deposit values as well as the journal totals.

Direct credits The following are examples of credit entries in the bank statement that should be entered in the cash receipts journal before it is posted to the general ledger. • Funds are transferred electronically to your bank account by an account receivable (or debtor). • Receipts from debit card, credit card and other forms of payments using electronic devices processed by the business through a merchant facility are accumulated for the day and credited to the bank account either after the business has closed for the day or very early the next morning. • Recurring payments such as rent may be remitted directly to a bank account by a tenant. • Interest or dividends on investments may be deposited directly into a bank account. The business should regularly log into its account on the bank’s website throughout the month to check transactions in the bank’s records and update the business’s records where need be. These may be updated manually. As electronic transfer of funds has become the norm, it is now common to automatically update records through a direct feed from the bank into the business’s computerised accounting package. Depending on the volume of electronic transactions, this may need to be done daily.

Direct debits The following entries in the bank statement as debits need to be entered in the cash payments journal for the month before it is closed off and posted to the general ledger. Electronic remittances of funds should be known to the business and should already be entered into the cash payments journal as part of the normal course of business.

Copyright © 2018. Cengage. All rights reserved.

Debit card If the owner of the business uses a debit or credit card, the accounts department should be advised so that the remittance can be entered into the cash payments journal as soon as practicable. Direct payments The business may have arranged with the bank to make regular periodic remittances of a fixed amount to an account payable (or creditor). This is entered directly onto the bank statement, but should also be known and regularly recorded by the business; for example, rent or mortgage payments. Bank charges These are often only known when the bank statement is received, and relate to the costs the bank imposes for keeping the account for the business and other reasons.

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MANAGEMENT CONTROLS OVER CASH

Dishonoured cheque and fee The bank usually advises the customer that a cheque has been dishonoured. As well as debiting the bank statement with the value of the cheque that has been dishonoured, there is usually a charge debited by the bank as a fee for handling the dishonoured cheque. Errors Despite the internal control procedures operating in both the business and the bank, errors may occur; but they should be rare and need to be checked carefully to confirm where the error lies.

By the business The error should be confirmed by checking the source documentation held by the business. The necessary adjustment would normally be made in the cash journal in which the error arose. By the bank The business should immediately confirm the error with the bank. The necessary adjustments should be shown in the bank reconciliation statement immediately after the line ‘balance as per bank statement’, to give an ‘amended balance as per bank statement’.

Example 3: Bank reconciliation – advanced

Copyright © 2018. Cengage. All rights reserved.

This example for the business of M Kosciusko commences with the bank reconciliation statement for April 2022, as well the bank statement, cash receipts and cash payments journals for May in figure 8.22. Figure 8.23 demonstrates the ticking process to reconcile like items in these documents and the finalising of the cash journals. The resulting bank reconciliation statement and cash balance summary on 31 May are shown in figure 8.24. Figure 8.25 shows the bank statement and cash journals for June and figure 8.26 demonstrates the reconciliation of like items in these documents. The bank reconciliation statement and cash balance summary for 30 June are shown in figure 8.27, and figure 8.28 shows the entries in the general ledger bank account for the period 1 May to 30 June 2022, to confirm the reconciliation. In this example, any differing amounts are assumed to be errors by the business. It is assumed that the bank statement amounts are confirmed as correct.

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CHAPTER 8

Bank Reconciliation Statement of M Kosciusko as at 30 April 2022 Credit balance as per bank statement [30 April 2022] add Outstanding remittance receipts

less Unpresented remittance payments

517.72 1 234.91 1 752.63 Chq 976432 Chq 976440 Chq 976444 Chq 976446

746.40 601.73 21.33 793.53

Credit balance as per general ledger Bank account

2 162.99 (410.36)

NATURAL AUSTRALIA BANK LTD

Smiggin Holes Statement of account with

Date

Malina Kosciusko Chalet Summit Road Perisher Valley 2630

Particulars

1 May 22 1 May 22 2 May 22 2 May 22 3 May 22 5 May 22 5 May 22 10 May 22 10 May 22 13 May 22 15 May 22 15 May 22 16 May 22 16 May 22 20 May 22 20 May 22 25 May 22 28 May 22 28 May 22 28 May 22 28 May 22

Debit

Brought forward Cash/cheques deposit NatAus PoS 2.5 BPay S San Debit card #125341 Cash/cheques deposit Cheque #976440 Direct deposit B Willis Cheque #976447 Direct Debit #132258 Cash/cheques deposit Cheque #976446 Direct deposit M Townsend Cheque #976444 Chq dishonoured M Ramshead Fee dishonoured cheque Cheque #976449 Bank charge Bank fee NatAus PoS 27.5 BPay Amy Stationery

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Receipts Journal of M Kosciusko

2 May 22 5 May 22 11 May 22 15 May 22 28 May 22 31 May 22

NatAus Point of Sale Cash/cheques deposit Direct deposit B Willis Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit [6 107.57]

649.37 944.80 156.30 2 798.90 655.44 902.76

Account No. 405953 Page No. 6 Credit 1 234.91 649.37

33.55 563.01 944.80 601.73 156.30 647.59 174.80 2 798.90 793.53 761.68 21.33 248.18 10.00 254.96 2.90 15.00 655.44 408.76

Balance 517.72 1 752.63 2 402.00 2 368.45 1 805.44 2 750.24 2 148.51 2 304.81 1 657.22 1 482.42 4 281.32 3 487.79 4 249.47 4 228.14 3 979.96 3 969.96 3 715.00 3 712.10 3 697.10 4 352.54 3 943.78

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of M Kosciusko

1 May 22 3 May 22 8 May 22 12 May 22 18 May 22 27 May 22 28 May 22

BPay S San Chq 976447 Debit card #125341 Chq 976448 Direct Debit #132258 Chq 976449 BPay Amy Stationery Chq 976450 [3 641.52]

33.55 647.59 563.01 911.57 174.80 254.96 408.76 647.28

FIGURE 8.22  Bank reconciliation statement for April, bank statement and cash journals for May

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MANAGEMENT CONTROLS OVER CASH

STEP 1: TICK AND FINALISE CASH JOURNALS FOR MAY Bank Reconciliation Statement of M Kosciusko as at 30 April 2022 Credit balance as per bank statement [30 April 2022] add Outstanding remittance receipts

less Unpresented remittance payments

517.72 ✓ 1 234.91 1 752.63 u/p 746.40 ✓ 601.73 Chq 976444 ✓   21.33 Chq 976446 ✓ 793.53 Chq 976432

Chq 976440

Credit balance as per general ledger Bank account

2 162.99 (410.36)

NATURAL AUSTRALIA BANK LTD

Smiggin Holes Statement of account with

Particulars Brought forward Cash/cheques deposit NatAus PoS 2.5 BPay S San Debit card #125341 Cash/cheques deposit Cheque #976440 Direct deposit B Willis Cheque #976447 Direct Debit #132258 Cash/cheques deposit Cheque #976446 Direct deposit M Townsend Cheque #976444 Chq dishonoured M Ramshead Fee dishonoured cheque Cheque #976449 Bank charge Bank fee NatAus PoS 27.5 BPay Amy Stationery

Copyright © 2018. Cengage. All rights reserved.

Date 1 May 22 1 May 22 2 May 22 2 May 22 3 May 22 5 May 22 5 May 22 10 May 22 10 May 22 13 May 22 15 May 22 15 May 22 16 May 22 16 May 22 20 May 22 20 May 22 25 May 22 28 May 22 28 May 22 28 May 22 28 May 22

312tafenswlib on 2020-05-30 07:52:45. Created from

Account No. 405953 Page No. 6

Malina Kosciusko Chalet Summit Road Perisher Valley 2630 Debit

Credit ✓ 1 234.91 ✓ 649.37

✓ 33.55 ✓ 563.01 ✓ 944.80 ✓ 601.73 ✓ 156.30 ✓ 647.59 ✓ 174.80 ✓ 2 798.90 ✓ 793.53 ✓ 761.68 ✓ 21.33 ✓ 248.18 ✓ 10.00 ✓ 254.96 ✓ 2.90 ✓ 15.00 ✓ 655.44 ✓ 408.76

Balance 517.72 1 752.63 2 402.00 2 368.45 1 805.44 2 750.24 2 148.51 2 304.81 1 657.22 1 482.42 4 281.32 3 487.79 4 249.47 4 228.14 3 979.96 3 969.96 3 715.00 3 712.10 3 697.10 4 352.54 3 943.78

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr CONTINUED

CHAPTER 8

Extract Cash Receipts Journal of M Kosciusko

2 May 22 5 May 22 11 May 22 15 May 22 28 May 22 31 May 22 16 May 22

NatAus Point of Sale Cash/cheques deposit Direct deposit B Willis Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit M Townsend direct deposit

✓ 649.37 ✓ 944.80 ✓ 156.30 ✓ 2 798.90 ✓ 655.44 o/s 902.76 ✓ 761.68 6 869.25

Extract Cash Payments Journal of M Kosciusko

1 May 22

✓ BPay S San ✓ Chq 976447 ✓ Debit card #125341 Chq 976448 u/p ✓ Direct Debit #132258 ✓ Chq 976449 ✓ BPay Amy Stationery Chq 976450 u/p M Ramshead chq dishon ✓ M Ramshead chq dis fee ✓

3 May 22 8 May 22 12 May 22 18 May 22 27 May 22 28 May 22 20 May 22 28 May 22

Bank charge Bank fee

✓ ✓

33.55 647.59 563.01 911.57 174.80 254.96 408.76 647.28 248.18 10.00 2.90 15.00 3 917.60

FIGURE 8.23  Bank reconciliation statement for April, bank statement and cash journals for May after ticking

STEP 2: RECONCILE FOR MAY Bank Reconciliation Statement of M Kosciusko as at 31 May 2022 Credit balance as per bank statement [31 May 2022] add Outstanding remittance receipts

less Unpresented remittance payments

3 943.78 902.76 4 846.54 Chq 976432 Chq 976448 Chq 976450

746.40 911.57 647.28

Debit balance as per general ledger Bank account

2 305.25 2 541.29

Cash Balance Summary as at 31 May 2022 Credit Bank account balance [1 May 2022] add Receipts [during May]

less Payments [during May] Debit balance as per general ledger Bank account

(410.36) 6 869.25 6 458.89 3 917.60 2 541.29

Copyright © 2018. Cengage. All rights reserved.

FIGURE 8.24  Bank reconciliation statement and cash balance summary as at 31 May

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MANAGEMENT CONTROLS OVER CASH

NATURAL AUSTRALIA BANK LTD

Statement of account with

Smiggin Holes Malina Kosciusko Chalet Summit Road Perisher Valley 2630

Date

Particulars

1 Jun 22 2 Jun 22 4 Jun 22 6 Jun 22 7 Jun 22 7 Jun 22 10 Jun 22 10 Jun 22 10 Jun 22 12 Jun 22 12 Jun 22 16 Jun 22 20 Jun 22 20 Jun 22 24 Jun 22 24 Jun 22 25 Jun 22 28 Jun 22 28 Jun 22

Brought forward Cash/cheques deposit BPay Electricity BPay TBabs Cash/cheques deposit Cheque #976448 Cash/cheques deposit Transf to Guthega Lease Co Cheque #976432 NatAus PoS 12.6 Debit card #142258 Direct deposit M Townsend NatAus PoS 20.6 BPay Telstra Cheque #976450 Cheque #976451 Cash/cheques deposit Bank fee Overdraft interest

Debit

Extract Cash Receipts Journal of M Kosciusko

6 Jun 22 9 Jun 22 12 Jun 22 20 Jun 22 24 Jun 22 30 Jun 22

Cash/cheques deposit Cash/cheques deposit NatAus Point of Sale NatAus Point of Sale Cash/cheques deposit Cash/cheques deposit [4 187.65]

387.80 307.63 258.18 1 187.76 928.43 1 117.85

Copyright © 2018. Cengage. All rights reserved.

FIGURE 8.25  Bank statement and cash journals for June

314tafenswlib on 2020-05-30 07:52:45. Created from

Account No. 405953 Page No. 7 Credit 902.76

909.85 1 518.17 387.80 911.57 307.63 2  870.00 746.40 258.18 756.52 761.68 1 187.76 168.35 647.28 1 252.34 982.43 10.00 9.73

Balance 3 943.78 4 846.54 3 936.69 2 418.52 2 806.32 1 894.75 2 202.38 667.62 1 414.02 1 155.84 1 912.36 1 150.68 37.08 131.27 778.55 2 030.89 1 048.46 1 058.46 1 068.19

Cr Cr Cr Cr Cr Cr Cr Dr Dr Dr Dr Dr Cr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of M Kosciusko

1 Jun 22 3 Jun 22 5 Jun 22 12 Jun 22 15 Jun 22 20 Jun 22 30 Jun 22

Chq 976451 BPay Electricity BPay TBabs supplies Debit card #142258 Chq 976452 BPay Telstra Transfer #455329 Rent [6 750.36]

1 252.34 909.85 1 518.17 765.52 1 281.95 168.35 854.18

CHAPTER 8

STEP 1: TICK AND FINALISE CASH JOURNALS FOR JUNE Bank Reconciliation Statement of M Kosciusko as at 31 May 2022 Credit balance as per bank statement [31 May 2022] add Outstanding remittance receipts

less Unpresented remittance payments

3 943.78 ✓ 902.76 4 846.54 Chq 976432

✓ 746.40 ✓  911.57 Chq 976450 ✓ 647.28

Chq 976448

Debit balance as per general ledger Bank account

2 305.25 2 541.29

NATURAL AUSTRALIA BANK LTD

Smiggin Holes Malina Kosciusko Chalet Summit Road Perisher Valley 2630 Debit

Statement of account with

Date

Particulars

1 Jun 22 2 Jun 22 4 Jun 22 6 Jun 22 7 Jun 22 7 Jun 22 10 Jun 22 10 Jun 22 10 Jun 22 12 Jun 22 12 Jun 22 16 Jun 22 20 Jun 22 20 Jun 22 24 Jun 22 24 Jun 22 25 Jun 22 28 Jun 22 28 Jun 22

Brought forward Cash/cheques deposit BPay Electricity BPay TBabs Cash/cheques deposit Cheque #976448 Cash/cheques deposit Transf to Guthega Lease Co Cheque #976432 NatAus PoS 12.6 Debit card #142258 Direct deposit M Townsend NatAus PoS 20.6 BPay Telstra Cheque #976450 Cheque #976451 Cash/cheques deposit Bank fee Overdraft interest

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Receipts Journal of M Kosciusko

6 Jun 22 9 Jun 22 12 Jun 22 20 Jun 22 24 Jun 22 30 Jun 22 16 Jun 22 28 Jun 22

Cash/cheques deposit Cash/cheques deposit NatAus Point of Sale NatAus Point of Sale Cash/cheques deposit (Error refer below) Cash/cheques deposit M Townsend direct deposit Error reversal Error correction

✓ ✓ ✓ ✓ ✓

387.80 307.63 258.18 1  187.76 928.43

o/s 1 117.85 ✓ 761.68 ✓ (928.43) ✓ 982.43 5 003.33

Credit ✓ 902.76

✓ 909.85 ✓ 1 518.17 ✓ 387.80 ✓ 911.57 ✓ 307.63 ✓ 2 870.00 ✓ 746.40 ✓ 258.18 ✓ 756.52 ✓ 761.68 ✓ 1 187.76 ✓ 168.35 ✓ 647.28 ✓ 1 252.34 ✓ 982.43 ✓ 10.00 ✓ 9.73

Account No. 405953 Page No. 7 Balance 3 943.78 4 846.54 3 936.69 2 418.52 2 806.32 1 894.75 2 202.38 667.62 1 414.02 1 155.84 1 912.36 1 150.68 37.08 131.27 778.55 2 030.89 1 048.46 1 058.46 1 068.19

Cr Cr Cr Cr Cr Cr Cr Dr Dr Dr Dr Dr Cr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of M Kosciusko

1 Jun 22 3 Jun 22 5 Jun 22 12 Jun 22 15 Jun 22 20 Jun 22 30 Jun 22 8 Jun 22 10 Jun 22 28 Jun 22

Chq 976451 BPay Electricity BPay TBabs supplies Debit card #142258 (Error refer below) Chq 976452 BPay Telstra Transfer #455329 Rent Error reversal Error correction Guthega lease Bank fee Overdraft interest

✓ ✓ ✓ ✓

1 252.34 909.85 1 518.17 765.52

u/p 1 281.95 ✓ 168.35 u/p 854.18 ✓ (765.52) ✓ 756.52 ✓ 2 870.00 ✓ 10.00 ✓ 9.73 9 631.09

FIGURE 8.26 Bank reconciliation statement May, bank statement and cash journals for June, after ticking and adjustment entries Created from tafenswlib on 2020-05-30 07:52:45.

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MANAGEMENT CONTROLS OVER CASH

STEP 2: RECONCILE FOR JUNE Bank Reconciliation Statement of M Kosciusko as at 30 June 2022 Debit balance as per bank statement [30 June 2022] add Outstanding remittance receipts

less Unpresented remittance payments

(1 068.19) 1 117.85 49.66 Chq 976452

Transfer #455329 Rent

1 281.95 854.18

Credit balance as per general ledger Bank account

2 136.13 (2 086.47)

Cash Balance Summary as at 30 June 2022 Debit Bank account balance [1 June 2022] add Receipts [during June]

less Payments [during June] Credit balance as per general ledger Bank account

2 541.29 5 003.33 7 544.62 9 631.09 (2 086.47)

FIGURE 8.27  Bank reconciliation statement and cash balance summary as at 30 June

STEPS 3 AND 4: POST AND AGREE FOR MAY AND JUNE Extract General Ledger of M Kosciusko

Bank 31 May 22 Receipts

1 Jun 22 Balance b/d 30 Jun 22 Receipts Balance c/d

CR..

CR..

6 869.25

1 May 22 Balance b/d 31 May 22 Payments Balance c/d

6 869.25 2 541.29 30 Jun 22 Payments 5 003.33 2 086.47 9 631.09 1 Jul 22 Balance b/d

100 CP..

CP..

410.36 3 917.60 2 541.29 6 869.25 9 631.09

9 631.09 2 086.47

Copyright © 2018. Cengage. All rights reserved.

FIGURE 8.28 General ledger bank account agrees with the bank reconciliation statement and to cash balance summary

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CHAPTER 8

QUESTION 8.11 From the information for R Towamba given in figure 8.29: • prepare a bank reconciliation statement • prepare a cash balance summary • post the cash journals to the bank account in the general ledger in T account format. If there are any adjustments required, assume that the bank statement is correct, unless you are told that the bank has acknowledged its mistake. Bank Reconciliation Statement of R Towamba as at 31 July 2022 Credit balance as per bank statement [31 July 2022] add Outstanding remittance receipts

less Unpresented remittance payments

935.82 761.05 1 696.87 Chq 112034 Chq 112043 Chq 112060

569.74 129.73 360.81

Debit balance as per general ledger Bank account

1 060.28 636.59

NATURAL AUSTRALIA BANK LTD

Copyright © 2018. Cengage. All rights reserved.

Statement of account with Date

Particulars

1 Aug 22 1 Aug 22 1 Aug 22 3 Aug 22 3 Aug 22 9 Aug 22 9 Aug 22 11 Aug 22 11 Aug 22 12 Aug 22 12 Aug 22 15 Aug 22 15 Aug 22 22 Aug 22 22 Aug 22 23 Aug 22 30 Aug 22 31 Aug 22 31 Aug 22

Brought forward Cash/cheques deposit Debit card #459821 Cash/cheques deposit Cheque #112043 BPay B Ascot Direct deposit B Jarrahdale Cash/cheques deposit Cheque #112034 NatAus PoS 11.8 BPay B Bayswater Debit card #2011132 Transfer to M Coolangatta NatAus PoS 21.8 Transfer #1112170 Cash/cheques deposit Direct deposit L Urana Overdraft interest Bank charges

R Towamba Debit

761.05 7.45 254.39 129.73 688.29 272.79 367.32 569.74 588.68 486.53 500.20 1 328.50 999.08 728.28 637.00 250.00 2.83 6.98

Extract Cash Receipts Journal of R Towamba

2 Aug 22 9 Aug 22 10 Aug 22 11 Aug 22 21 Aug 22 23 Aug 22 31 Aug 22

Cash/cheques deposit Direct deposit B Jarrahdale Cash/cheques deposit NatAus Point of Sale NatAus Point of Sale Cash/cheques deposit Cash/cheques deposit

Credit

254.39 272.79 367.32 588.68 999.08 637.00 24.86

Balance 935.82 1 696.87 1 689.42 1 943.81 1 814.08 1 125.79 1 398.58 1 765.90 1 196.16 1 784.84 1 298.31 798.11 530.39 468.69 259.59 377.41 627.41 624.58 617.60

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Dr Cr Dr Cr Cr Cr Cr

Extract Cash Payments Journal of R Towamba

1 Aug 22 7 Aug 22 10 Aug 22 15 Aug 22 18 Aug 22 31 Aug 22

Debit card #459821 BPay B Ascot BPay B Bayswater Debit card #2011132 Chq 112063 Transfer #1112170 Transfer #211754

7.45 688.29 486.53 500.20 552.61 728.28 743.03

FIGURE 8.29  Bank reconciliation statement of R Towamba for July, bank statement and cash journals for August

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MANAGEMENT CONTROLS OVER CASH

QUESTION 8.12 Using the information for R Genoa given in figure 8.30, prepare the bank reconciliation statement and cash balance summary. If there are adjustments required, assume that the bank statement is correct unless you are told the bank has acknowledged its mistake. Bank Reconciliation Statement of R Genoa as at 30 September 2022 Debit balance as per bank statement [30 September 2022] add Outstanding remittance receipts

(628.98) 2 213.87 1 584.89

less Unpresented remittance payments

Chq 944503 Chq 944508 Transfer #342217

558.70 467.07 456.59

Debit balance as per general ledger Bank account

1 482.36 102.53

NATURAL AUSTRALIA BANK LTD

Statement of account with Date 1 Oct 22 1 Oct 22 1 Oct 22 4 Oct 22 8 Oct 22 10 Oct 22 11 Oct 22 11 Oct 22 13 Oct 22 13 Oct 22 15 Oct 22 21 Oct 22 21 Oct 22 21 Oct 22 31 Oct 22 31 Oct 22 31 Oct 22 31 Oct 22

R Genoa

Particulars

Debit

Brought forward Cash/cheques deposit Transfer #342217 Debit card #1520352 Cheque #944508 Transfer to R David NatAus PoS 10.10 Cheque #944512 Cash/cheques deposit Transfer to S Small Peter Devenish direct deposit NatAus PoS 20.10 Cheque #944503 BPay W Eglinton Cash/cheques deposit Bank charges Bank fee BPay P Ashendon

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Receipts Journal of R Genoa

10 Oct 22 12 Oct 22 20 Oct 22 30 Oct 22 31 Oct 22

NatAus Point of Sale Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit Cash/cheques deposit

418.89 168.35 281.95 909.85 1 117.85

Credit 2 213.87

456.59 854.18 467.07 458.15 418.89 551.89 169.35 765.52 187.76 281.95 558.70 252.34 909.85 4.56 25.00 928.43

Balance 628.98 1 584.89 1 128.30 274.12 192.95 651.10 232.21 784.10 614.75 1 380.27 1 192.51 910.56 1 469.26 1 721.60 811.75 816.31 841.31 1 769.74

Dr Cr Cr Cr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of R Genoa

3 Oct 22 4 Oct 22 12 Oct 22 16 Oct 22 20 Oct 22 30 Oct 22

Chq 944512 Debit card #1520352 Transfer to S Small Chq 944514 BPay W Eglinton BPay P Ashendon

551.89 854.18 765.52 518.17 252.34 928.43

FIGURE 8.30 Bank reconciliation statement of R Genoa for September, bank statement and cash journals for October

318tafenswlib on 2020-05-30 07:52:45. Created from

CHAPTER 8

QUESTION 8.13 From the information for R Snowy given in figure 8.31, you are required to prepare a bank reconciliation statement and cash balance summary and post the journals to the bank account in the general ledger. If any adjustments are required, assume that the bank statement is correct. However, the bank has advised that the credit entry on 22 February will be reversed next month, as it had been wrongly credited to the account. Bank Reconciliation Statement of R Snowy as at 31 January 2022 Debit balance as per bank statement [31 January 2022] add Outstanding remittance receipts

less Unpresented remittance payments

(466.21) 967.99 501.78 Chq 895957 Chq 895961 Chq 895964

116.45 310.41 219.60

Credit balance as per general ledger Bank account

646.46 (144.68)

NATURAL AUSTRALIA BANK LTD

Statement of account with

R Snowy

Date

Particulars

Debit

1 Feb 22 1 Feb 22 2 Feb 22 5 Feb 22 5 Feb 22 7 Feb 22 7 Feb 22 8 Feb 22 9 Feb 22 9 Feb 22 15 Feb 22 16 Feb 22 20 Feb 22 20 Feb 22 21 Feb 22 22 Feb 22 27 Feb 22 27 Feb 22 28 Feb 22

Brought forward Debit card #2115203 Cash/cheques deposit NatAus PoS 4.2 Cheque #895961 Cash/cheques deposit Transfer #025743 Direct deposit P Subiaco Cheque dishonour L Cullivel Fee cheque dishonoured M Keira direct deposit Cash/cheques deposit NatAus PoS 20.2 Cheque #895966 Transfer to M Druitt Minna Murra deposit BPay S Cardup BPay P Daglish Bank charges

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Receipts Journal of R Snowy

4 Feb 22 6 Feb 22 7 Feb 22 15 Feb 22 20 Feb 22 28 Feb 22

NatAus Point of Sale Cash/cheques deposit Direct deposit P Subiaco Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit

653.04 946.23 878.43 257.08 244.77 328.69

Credit

625.86 967.99 653.04 310.41 946.23 522.90 878.43 205.06 7.50 280.00 257.08 244.77 753.47 392.38 2 569.17 328.69 588.92 6.03

Balance 466.21 1 092.07 124.08 528.96 218.55 1 164.78 641.88 1 520.31 1 315.25 1 307.75 1 587.75 1 844.83 2 089.60 1 336.13 943.75 3 512.92 3 184.23 2 595.31 2 589.28

Dr Dr Dr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr

Extract Cash Payments Journal of R Snowy

1 Feb 22 7 Feb 22 13 Feb 22 20 Feb 22 26 Feb 22 26 Feb 22

Debit card #2115203 Transfer #025743 Chq 895966 Chq 895967 BPay S Cardup BPay P Daglish

625.86 522.90 735.47 562.42 328.69 588.92

FIGURE 8.31  Bank reconciliation statement of R Snowy for January, bank statement and cash journals for February

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MANAGEMENT CONTROLS OVER CASH

QUESTION 8.14 Using the information for R Wakool given in figure 8.32, prepare the bank reconciliation statement and the cash balance summary. If any adjustments are required assume that the bank statement is correct, unless you are told the bank has acknowledged its mistake. Bank Reconciliation Statement of R Wakool as at 30 September 2022 Debit balance as per bank statement [30 September 2022] add Outstanding remittance receipts

less Unpresented remittance payments

(818.12) 290.44 (527.68) Chq 531444 Chq 531484 Chq 531486 Chq 531488

24.79 165.30 65.68 254.24

Credit balance as per general ledger Bank account

510.01 (1 037.69)

NATURAL AUSTRALIA BANK LTD

Statement of account with Date

Copyright © 2018. Cengage. All rights reserved.

1 Oct 22 1 Oct 22 2 Oct 22 3 Oct 22 8 Oct 22 8 Oct 22 8 Oct 22 10 Oct 22 12 Oct 22 12 Oct 22 12 Oct 22 12 Oct 22 13 Oct 22 13 Oct 22 15 Oct 22 15 Oct 22 21 Oct 22 21 Oct 22 30 Oct 22 31 Oct 22 31 Oct 22 31 Oct 22

R Wakool

Particulars

Debit

Brought forward Cheque #531444 Cash/cheques deposit NatAus PoS 2.10 Cash/cheques deposit BPay K Bertram Debit card #3328795 Direct deposit M Booragoon Cash/cheques deposit Cheque #531486 Cheque #531489 Debit card #3121437 Cheque dishonour L Albacutya Fee cheque dishonoured Cash/cheques deposit Cheque #531491 NatAus PoS 20.10 BPay B Swan Cheque #531493 Bank fee Bank charge Interest on overdraft

24.79 290.44 823.22 207.09 985.27 424.57 302.77 68.29 65.68 454.06 367.64 105.79 7.50 462.53 83.96 642.36 78.39 219.44 16.50 5.40 24.80

Extract Cash Receipts Journal of R Wakool

2 Oct 22 8 Oct 22 10 Oct 22 12 Oct 22 15 Oct 22 20 Oct 22 30 Oct 22

NatAus Point of Sale Cash/cheques deposit Direct deposit M Booragoon Cash/cheques deposit Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit

Credit

Balance 818.12 842.91 552.47 270.75 477.84 507.43 932.00 629.23 560.94 626.62 1 080.68 1 448.32 1 554.11 1 561.61 1 099.08 1 183.04 540.68 619.07 838.51 855.01 860.41 885.21

Dr Dr Dr Cr Cr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of R Wakool

823.22 207.90 302.77 68.29 462.53 642.36 160.57

3 Oct 22 7 Oct 22 7 Oct 22 8 Oct 22 9 Oct 22 12 Oct 22 21 Oct 22 28 Oct 22 28 Oct 22

Chq 531489 BPay K Bertram Chq 531490 Debit card #3328795 Chq 531491 Debit card #3121437 BPay B Swan Chq 531492 Chq 531493

454.06 985.27 607.10 424.57 83.96 367.64 78.39 952.03 219.44

FIGURE 8.32 Bank reconciliation statement of R Wakool for September, bank statement and cash journals for October 320tafenswlib on 2020-05-30 07:52:45. Created from

CHAPTER 8

QUESTION 8.15 From the information for R Buchan given in figure 8.33, you are required to prepare a bank reconciliation statement and a cash balance summary. If there are any adjustments required, assume that the bank statement is correct. However, the bank has acknowledged that the entry from Hum Bugs on 27 December will be reversed next month, as it has been debited to the wrong account. Bank Reconciliation Statement of R Buchan as at 30 November 2022 Credit balance as per bank statement [30 November 2022] add Outstanding remittance receipts

less Unpresented remittance payments

1 423.31 835.87 2 259.18 Chq 335079 Chq 335083 Chq 335088

520.78 757.97 819.38

Debit balance as per general ledger Bank account

2 098.31 161.05

NATURAL AUSTRALIA BANK LTD

Statement of account with

Copyright © 2018. Cengage. All rights reserved.

Date 1 Dec 22 1 Dec 22 2 Dec 22 3 Dec 22 7 Dec 22 8 Dec 22 10 Dec 22 10 Dec 22 11 Dec 22 11 Dec 22 11 Dec 22 13 Dec 22 16 Dec 22 16 Dec 22 19 Dec 22 20 Dec 22 24 Dec 22 24 Dec 22 24 Dec 22 27 Dec 22 27 Dec 22 28 Dec 22 28 Dec 22 28 Dec 22 31 Dec 22 31 Dec 22

Particulars Brought forward Cheque #335090 Cash/cheques deposit Cash/cheques deposit Cheque #335088 Bank adjustment to account Transfer to M Fairy Cheque #335079 NatAus PoS 10.12 Cheque #335083 BPay S Brigadoon NatAus PoS 12.12 Cash/cheques deposit Cheque #335091 Debit card #1403396 Direct deposit C Stirling Cash/cheques deposit BPay S Crawley M Towrang direct deposit Transfer to Hum Bugs Reversal adjustment on 8 Dec Cash/cheques deposit Cheque #335092 Debit card #1414051 Bank charges Interest on overdraft

R Buchan Debit

Credit

511.35 835.87 958.63 819.38 28.50 1 255.67 520.78 576.83 757.97 956.52 294.14 799.71 773.31 978.10 366.01 895.91 482.36 1 431.90 3 578.95 28.50 857.62 107.44 794.43 4.00 5.00

Balance 1 423.31 911.96 1 747.83 2 706.46 1 887.08 1 858.58 602.91 82.13 658.96 99.01 1 055.53 761.39 38.32 734.99 1 713.09 1 347.08 451.17 933.53 498.37 3 080.58 3 052.08 2 194.46 2 301.90 3 096.33 3 100.33 3 105.33

Cr Cr Cr Cr Cr Cr Cr Cr Cr Dr Dr Dr Cr Dr Dr Dr Dr Dr Cr Dr Dr Dr Dr Dr Dr Dr CONTINUED

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MANAGEMENT CONTROLS OVER CASH

Extract Cash Receipts Journal of R Buchan

2 Dec 22 10 Dec 22 12 Dec 22 15 Dec 22 20 Dec 22 23 Dec 22 27 Dec 22 31 Dec 22

Cash/cheques deposit NatAus Point of Sale NatAus Point of Sale Cash/cheques deposit Direct deposit C Stirling Cash/cheques deposit Cash/cheques deposit Cash/cheques deposit

958.36 576.83 294.14 799.71 366.01 895.91 857.62 1 086.30

Extract Cash Payments Journal of R Buchan

1 Dec 22 5 Dec 22 10 Dec 22 11 Dec 22 18 Dec 22 23 Dec 22 27 Dec 22 31 Dec 22

Chq 335090 Chq 335091 BPay S Brigadoon Chq 335092 Debit card #1403396 BPay S Crawley Debit card #1414051 Chq 335093 Chq 335094

511.35 737.31 956.52 107.44 978.10 482.36 794.43 625.45 639.57

FIGURE 8.33 Bank reconciliation statement of R Buchan for November, bank statement and cash journals for December

Copyright © 2018. Cengage. All rights reserved.

Petty cash imprest system Petty cash is a minor amount of funds held by a business to pay for low-value items, such as postage, newspapers, local travel expenses, stationery and kitchen supplies. Traditionally the petty cash funds have been held in the form of notes and coins, but many businesses now use prepaid debit cards or other alternatives. Having a system for petty cash makes it easier for designated employees to pay for small expenses without going through the time-consuming formal purchase approval process. The funds do not come directly from the main bank account and the number of small individual transactions that are recorded in the business’s cash payments journal is reduced. All petty cash payment methods have the potential to be misused and abused, unless good internal controls are established. The most common way of accounting for and controlling petty cash expenditures is to use an imprest system. An initial amount of cash is transferred from the main bank account and held on the premises in the form of notes and coins or loaded onto prepaid debit cards. These funds are then drawn upon for specific purposes. When the notes and coins (or the balance available on the prepaid card) go down below a specified amount, the funds are replenished from the main bank account. At all times the funds (notes and coins or balance on the card) plus the amount of receipts or petty cash vouchers for expenses paid equal the initial amount of funds transferred to the petty cash account; that is, the amount that was imprest. With the increasing use of electronic payment systems, preloaded debit cards have become popular to use as petty cash systems. These cards can incorporate payWave/PayPass technology and the cards can be reloaded with funds when required. Different monetary limits can be set for each employee issued with a card. All purchases are itemised in online statements and can be reconciled with staff purchases, making it easier for management and control of expenditure. The following outlines the process for establishing and controlling a petty cash system that uses notes and coins. However, many of these processes and controls, including accounting entries, are equally applicable to prepaid petty cash debit cards.

Starting a petty cash imprest account Under the petty cash imprest system, a cheque is drawn and cashed for an agreed amount, such as $150.00. The money is held in a container that can be locked and may be known as the petty cash tin. Responsibility for and control of the petty cash tin is usually given to a trusted employee who does not get involved with other receipts and payments of the business. This is an example of internal control being achieved through separation of responsibilities.

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CHAPTER 8

Example 4: Petty cash imprest system A petty cash imprest system is to be established with an advance of $150.00. This is known as the petty cash float. The entry in the extract cash payments journal and general ledger would be as shown in figure 8.34. Cash Payments Journal of … Bank Cash – Petty cash advance

150.00

CP …

Petty Cash 150.00

[cr]

[dr]

Extract General Ledger of …

Bank

Petty Cash

Payment150.00

Bank [payment]150.00

FIGURE  8.34  Cash advanced for petty cash imprest system

The petty cash account is an asset and is shown in the balance sheet as a current asset.

Reduction of petty cash float If circumstances change and the petty cash float is too large, then the petty cash will be credited by the amount of the reduction. A negative petty cash voucher is raised and authorised for the amount reducing the float, and the entry is then processed through the petty cash book.

Petty cash voucher An essential part of the internal control of the petty cash system is the petty cash voucher (see figure 8.35). PETTY CASH VOUCHER A/c

Date

Amount For

Copyright © 2018. Cengage. All rights reserved.

Signatures

$ ___________ • ______

FIGURE  8.35  Petty cash voucher

The person who requires reimbursement (or repayment) for money spent on behalf of the business must complete the voucher, attach any relevant dockets and sign it. Then authorisation or approval of the amount must be obtained from a more senior authorised employee, who will check the voucher and supporting documentation as part of this process. If the claim relates to a value greater than $82.50

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(including GST), then the attached voucher or docket must be a tax invoice so that any GST receivable can be claimed. For a claim of $82.50 (including GST) or less, GST is still receivable but a formal tax invoice is not required. The person responsible for the petty cash – the petty cashier – must receive a signed and authorised petty cash voucher before the petty cash claim can be paid. At all times, the value of the cash and authorised petty cash vouchers must equal the original amount advanced. In the example given earlier, that amount is $150.00. Any shortage or surplus must be disclosed and authorised by a senior person when the petty cash is next reimbursed.

QUESTION 8.16 A petty cash imprest float of $300 is established. Prepare the journal and post to the general ledger accounts in a modified T account format.

QUESTION 8.17 Prepare as a general journal the commencement of a petty cash imprest float of $500.00. In the balance sheet, what is the classification of the accounts affected by the establishment of the petty cash float?

Petty cash book A petty cash book is often used to record the details of the petty cash imprest system. The purpose of the columns on the left-hand page of the petty cash book is illustrated in figure 8.36. The right-hand page contains additional columns for payment details such as those labelled ‘5’ in the figure. When the petty cashier has paid out most of the petty cash float on authorised petty cash vouchers, it will be necessary to draw more cash to put into the petty cash tin or box. This is known as a reimbursement of the petty cash.

Book name

Business or owner’s name

PETTY CASH BOOK OF [INSERT THE BUSINESS NAME] Receipt 1

Date

Voucher Particulars

2

3

Payment 4

Signed and authorised petty cash docket with vouchers supports every entry

Copyright © 2018. Cengage. All rights reserved.

1 Receipt

Original float and reimbursement amounts

5

5

5

5

5

5

5

Account columns extend onto right-hand page

2 Date

Day, month and year is written on the first line and after that only when it changes

5 Blank Columns Used as account columns

3 Voucher Particulars Brief description of petty cash payment

4 Payment

Amount of petty cash voucher

FIGURE 8.36 Format and headings on the left page of the petty cash book. The centre spine is visible at the right of the figure

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CHAPTER 8

Under the petty cash imprest system, the petty cashier must reconcile the reimbursement amount with the total of the petty cash vouchers submitted for payment since the last reimbursement. Assuming that there is no cash shortage or surplus in the petty cash fund, the reimbursement amount will therefore be equal to the total value of the vouchers held. This reimbursement plus the remaining cash will again equal the float. In the illustration given earlier, this sum will be $150.00.

Example 5: Petty cash transactions Prepare the petty cash book of R Tea for the month of July. Then prepare an extract of the cash payments journal and post to a modified extract general ledger. R Tea started an imprest petty cash system on 1 July 2022 with a float of $50. During the month of July the following petty cash vouchers were paid:   3  Registered letter sent through Australia Post $3.85 ($3.50 + $0.35 GST).   5  Coffee, tea and sugar for staff $19.35.   8  Newspapers $8.25 ($7.50 + $0.75 GST). 10  Stationery $17.60 ($16.00 + $1.60 GST). 11  Petty cash reimbursed. 13  Petty cash float was increased by $70 to $120. 15  Sandwich and cheese platter for meeting $30.80 ($28.00 + $2.80 GST). 18  Stationery $7.15 ($6.50 + $0.65 GST). 23  Postage supplies and express envelopes $11.00 ($10.00 + $1.00 GST). 27  Postage stamps of various values $18.00 ($16.36 + $1.64 GST). 28  Newspapers $29.70 ($27.00 + $2.70 GST). 31  Milk bill for the month $20.70. Figures 8.37 and 8.38 show how to record the reimbursement of petty cash at the end of the month. Petty Cash Book of R Tea Receipt

Copyright © 2018. Cengage. All rights reserved.

50.00

Date 1 Jul 22 3 Jul 22 5 Jul 22 8 Jul 22 10 Jul 22

11 Jul 22 50.00 0.95 49.05 70.00 13 Jul 22 15 Jul 22 18 Jul 22 23 Jul 22 27 Jul 22 28 Jul 22 31 Jul 22

Voucher Particulars Cash – petty cash chq 123456 Registered letter – Postage Coffee, tea, sugar – Staff Amenities Newspapers – Office Expense Stationery Balance c/d Balance b/d Cash – reimbursement chq 123519 Cash – petty cash chq 123525 Sandwich platter – Office Expense Stationery Express Post envelopes – Postage Stamps – Postage Newspapers – Office Expense Milk for the month Balance c/d

120.00 2.65 117.35

Payment Postage

3.85 19.35 8.25 17.60 49.05 0.95 50.00

30.80 7.15 11.00 18.00 29.70 20.70 117.35 2.65 120.00

GST Receiv

3.50

0.35

3.50

0.75 1.60 2.70

Staff Amen

Office Exp

Stationery

19.35

10.00 16.36

26.36

7.50 19.35

2.80 0.65 1.00 1.64 2.70 8.79

7.50

16.00 16.00

28.00 6.50

27.00 20.70 20.70

55.00

6.50

Balance b/d Cash – reimbursement chq 123653

FIGURE 8.37  Petty cash book for R Tea Created from tafenswlib on 2020-05-30 07:53:37.

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MANAGEMENT CONTROLS OVER CASH

Extract Cash Payments Journal of R Tea

Bank 1 Jul 22 11 Jul 22 13 Jul 22 31 Jul 22

456 519 525 653

Cash – petty cash advance Cash – petty cash reimbursement Cash – petty cash advance Cash – petty cash reimbursement

50.00 49.05 70.00 117.35 286.40

Petty Postage Cash 50.00 3.50 70.00 26.36 120.00 29.86

CP 1

GST Receiv

Staff Amen

Office Exp

Station­ ery

2.70

19.35

7.50

16.00

8.79 11.49

20.70 40.05

55.00 62.50

6.50 22.50

Extract General Ledger of R Tea

Bank

Petty Cash

Payment286.40

Bank [payment]120.00

GST Receivable

Postage

Bank [payment]11.49

Bank [payment]29.86

Staff Amenities

Office Expense

Bank [payment]40.05

Bank [payment]62.50 Stationery Bank [payment]22.50

FIGURE 8.38  Extract cash payments journal and general ledger

QUESTION 8.18

Copyright © 2018. Cengage. All rights reserved.

You are required to prepare a petty cash book and an extract of the cash payments journal, and post to the general ledger of L Baird for March 2022. The solution is used in question 8.20.   2 A petty cash float of $100 was established.   5 Taxi fares $27.50 ($25.00 + $2.50 GST).   7 Milk $2.50 and chocolate biscuits for morning tea $6.60 including GST, total of $9.10 ($8.50 + $0.60 GST). 15 Stamps of various values $13.50 ($12.27 + $1.23 GST). 21 Stationery from newsagent $19.25 ($17.50 + $1.75 GST). 25 Stationery from Stan’s Stationery Shop $8.25 ($7.50 + $0.75 GST). 31 Reimburse petty cash.

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CHAPTER 8

QUESTION 8.19 Prepare the petty cash book of B Post for February 2022, which is kept using the petty cash imprest system. Show the cash payments journal as an extract and post to the general ledger. The solution is used in question 8.21.   1 Opening balance $75.   4 Stationery $11.00 ($10.00 + $1.00 GST).   7 Platter of sandwiches for after staff meeting $19.80 ($18.00 + $1.80 GST).   8 Postage supplies and stamps $6.05 ($5.50 + $0.55 GST). 10 Staff kitchen cleaning supplies $18.70 ($17.00 + $1.70 GST). 12 Coffee and tea $19.20. 13 Reimburse the petty cash. 14 Advertising $42.35 ($38.50 + $3.85 GST). Stationery $8.80 ($8.00 + $0.80 GST). 15 Biscuits $18.15 ($16.50 + $1.65 GST). Reimburse the petty cash. 16 Increase petty cash float by $75.00 to $150.00. 17 Sandwich platter for business visitors $22.00 ($20.00 + $2.00 GST). 20 Stationery $14.85 ($13.50 + $1.35 GST). 21 Postage stamps of various values $45.00 ($40.91 + $4.09 GST). 25 Advertising $22.55 ($20.50 + $2.05 GST). 27 Newspapers $42.35 ($38.50 + $3.85 GST). Reimburse the petty cash. Australia Post express envelopes and other stamps $83.05 ($75.50 + $7.55 GST). 28 Milk for the month $40.80. Reimburse the petty cash.

No petty cash book An alternative petty cash system does not use a petty cash book at all. The petty cashier must still have the notes and coins as well as the paid petty cash vouchers, which must add up to the amount of the petty cash imprest float. However, instead of entering details in the petty cash book, the petty cashier reimburses the float by: • summarising the vouchers into account groups • calculating the value of the remaining notes and coins

Copyright © 2018. Cengage. All rights reserved.

• reconciling the total vouchers and notes and coins back to the amount of the original float. The totals shown on the summary will be the same as the totals that would have been shown if a petty cash book was used. This approach minimises the formality of the petty cash book, yet maintains control over its use. The petty cash vouchers are attached to the cheque voucher (if used) and are readily available if they ever need to be looked at. Each reimbursement becomes a mini petty cash book. Whether a petty cash book is or is not used, the entries in the cash payments journal are the same.

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Example 6: Petty cash processing without a petty cash book Using the data from the example of R Tea given earlier, prepare the reimbursement summaries required where no petty cash book is kept (see figure 8.39). Petty Cash Reimbursement on 11 July 2022 Postage

Staff Amenities

3.50

19.35 Postage Staff Amenities Office Expense Stationery GST Receivable Ref. 123519 Cash on Hand Petty Cash Float

Office Expense 7.50

Stationery

GST Receivable

16.00

0.35 0.75 1.60 2.70

3.50 19.35 7.50 16.00 2.70 49.05 0.95 50.00

Petty Cash Reimbursement on 31 July 2022 Postage

Staff Amenities

10.00 16.36 26.36

20.70

Postage Staff Amenities Office Expense Stationery GST Receivable Ref. 123591 Cash on Hand Petty Cash Float

Office Expense 28.00 27.00 55.00

Stationery

GST Receivable

6.50

2.80 1.00 1.64 2.70 8.79

26.36 20.70 55.00 6.50 8.79 117.35 2.65  120.00

FIGURE 8.39  Listing of petty cash dockets and summary where no petty cash book is kept

QUESTION 8.20 Prepare the petty cash reimbursement summaries required where no petty cash book is kept, using the data for L Baird from question 8.18.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 8.21 Prepare the petty cash reimbursement summaries required where no petty cash book is kept, using the data for B Post from question 8.19.

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CHAPTER 8

REVISION QUESTIONS Confirm your understanding of the relevant elements of competency and performance criteria by completing the following questions.

QUESTION 8.22 Using the information for R Tambo given in figure 8.40, prepare the bank reconciliation statement and cash balance summary. If any adjustments are required, assume that the bank statement is correct, unless you are told that the bank has acknowledged a mistake.

Bank Reconciliation Statement of R Tambo as at 31 March 2022 Debit balance as per bank statement [31 March 2022] add Outstanding remittance receipts

(1 746.40) 2 234.91 488.51

less Unpresented remittance payments

Chq 245481 Chq 245486

21.33 393.53

Debit balance as per general ledger Bank account

414.86 73.65

NATURAL AUSTRALIA BANK LTD

Copyright © 2018. Cengage. All rights reserved.

Statement of account with

R Tambo

Date

Particulars

1 Apr 22 1 Apr 22 2 Apr 22 5 Apr 22 5 Apr 22 6 Apr 22 6 Apr 22 10 Apr 22 10 Apr 22 12 Apr 22 18 Apr 22 18 Apr 22 20 Apr 22 20 Apr 22 30 Apr 22 30 Apr 22 30 Apr 22 30 Apr 22 30 Apr 22 30 Apr 22

Brought forward Cheque #245486 Cash/cheques deposit NatAus PoS 5.4 Debit card #142936 M Kembla cheque dishonoured Cheque dishonour fee Cash/cheques deposit Cheque #245488 Transfer to M Horeb NatAus PoS 18.4 Cheque #245487 Cash/cheques deposit Cheque #245489 Direct deposit C Atwell BPay C Kalamunda Direct Debit – Electricity Cheque book Bank charges Overdraft interest

Debit

Extract Cash Receipts Journal of R Tambo

5 Apr 22 10 Apr 22 18 Apr 22 20 Apr 22 29 Apr 22

NatAus Point of Sale Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit Direct deposit C Atwell

553.30 174.80 254.96 211.54 343.71

Credit

393.53 2 234.91 553.30 408.76 679.06 7.50 184.80 563.01 659.50 254.96 647.59 211.54 911.57 343.71 739.49 135.00 25.00 2.06 29.50

Balance 1 746.40 2 139.93 94.98 648.28 239.52 439.54 447.04 262.24 825.25 1 484.75 1 229.79 1 877.38 1 665.84 2 577.41 2 233.70 2 973.19 3 108.19 3 133.19 3 135.25 3 164.75

Dr Dr Cr Cr Cr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of R Tambo

2 Apr 22 5 Apr 22 8 Apr 22 28 Apr 22 29 Apr 22

Chq 245487 Chq 245488 Chq 245489 Debit card #142936 Chq 245490 BPay C Kalamunda Chq 245491

647.59 563.01 911.57 408.76 647.28 739.49 659.52

FIGURE 8.40 Bank reconciliation statement of R Tambo for March, bank statement and cash journals for April

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329

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QUESTION 8.23 From the information for R Broken given in figure 8.41, you are required to prepare a bank reconciliation statement and a cash balance summary. If any adjustments are required, assume that the bank statement is correct. However, after the bank statement was received the bank advised that the debit entry to F Disks should not have been to the account and would be adjusted by the bank on the next month’s statement.

Bank Reconciliation Statement of R Broken as at 31 October 2022 Debit balance as per bank statement [31 October 2022] add Outstanding remittance receipts

(240.33) 517.72 277.39

less Unpresented remittance payments

Chq 433581 Chq 433586 Chq 433589

459.39 305.86 35.85

Credit balance as per general ledger Bank account

801.10 (523.71)

NATURAL AUSTRALIA BANK LTD

Statement of account with

R Broken

Date

Particulars

1 Nov 22 1 Nov 22 2 Nov 22 3 Nov 22 5 Nov 22 5 Nov 22 8 Nov 22 9 Nov 22 11 Nov 22 11 Nov 22 11 Nov 22 20 Nov 22 20 Nov 22 21 Nov 22 27 Nov 22 27 Nov 22 27 Nov 22 30 Nov 22 30 Nov 22

Brought forward Cheque #433589 Cash/cheques deposit NatAus PoS 2.11 Transfer to M Lewis Cheque #433592 BPay S Dayton BPay B Cloverdale NatAus PoS 10.11 Cheque #433591 Debit card #204814 Direct deposit M Olive Debit card #225672 Cash/cheques deposit Direct deposit M Bailup Overdraft interest Bank charges Transfer to F Disks Cheque #433590

Debit

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Receipts Journal of R Broken

2 Nov 22 10 Nov 22 20 Nov 22 27 Nov 22 29 Nov 22

NatAus Point of Sale NatAus Point of Sale Cash/cheques deposit Direct deposit M Bailup Cash/cheques deposit

649.37 910.97 505.32 543.98 1 622.57

Credit

35.85 517.72 649.37 1 284.90 71.36 1 279.89 216.31 910.97 94.48 398.17 962.56 532.98 505.32 543.98 15.42 7.55 758.35 156.30

Balance 240.33 276.18 241.54 890.91 393.99 465.35 1 745.24 1 961.55 1 050.58 1 145.06 1 543.23 580.67 1 113.65 608.33 64.35 79.77 87.32 845.67 1 001.97

Dr Dr Cr Cr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of R Broken

1 Nov 22 2 Nov 22 3 Nov 22 4 Nov 22 5 Nov 22 6 Nov 22 10 Nov 22 20 Nov 22

Chq 433590 Chq 433591 BPay B Cloverdale Chq 433592 BPay S Dayton Chq 433593 Debit card #204814 Debit card #225672

156.30 94.48 216.31 70.36 1 279.89 82.63 398.17 532.98

FIGURE 8.41 Bank reconciliation statement of R Broken for October, bank statement and cash journals for November

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CHAPTER 8

QUESTION 8.24 From the information for R Nickolson given in figure 8.42, you are required to prepare a bank reconciliation statement and a cash balance summary. If any adjustments are required, assume that the bank statement is correct, unless you are told that the bank has acknowledged its mistake.

Bank Reconciliation Statement of R Nickolson as at 31 July 2022 Credit balance as per bank statement [31 July 2022] add Outstanding remittance receipts

1 735.33 528.05 2 263.38

less Unpresented remittance payments

Chq 335387 Chq 335392

705.02 918.88

Debit balance as per general ledger Bank account

1 623.90 639.48

NATURAL AUSTRALIA BANK LTD

Statement of account with Date

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1 Aug 22 1 Aug 22 2 Aug 22 2 Aug 22 3 Aug 22 5 Aug 22 9 Aug 22 9 Aug 22 9 Aug 22 9 Aug 22 11 Aug 22 11 Aug 22 15 Aug 22 17 Aug 22 17 Aug 22 17 Aug 22 17 Aug 22 20 Aug 22 29 Aug 22 29 Aug 22 31 Aug 22 31 Aug 22 31 Aug 22 31 Aug 22

R Nickolson

Particulars

Debit

Brought forward Cheque #335392 Cash/cheques deposit Direct deposit M Hunter NatAus PoS 2.8 Direct deposit R Edwards Cash/cheques deposit BPay M Bicton M White cheque dishonoured Fee dishonoured cheque NatAus PoS 10.8 Adjustment M Hunter 2 Aug BPay E Fremantle Cheque #335394 Cash/cheques deposit Bank fee Cheque #335393 Transfer to L Boga NatAus PoS 28.8 Cheque #335396 Bank charge Bank fees Overdraft interest Debit card #150923

Extract Cash Receipts Journal of R Nickolson

2 Aug 22 8 Aug 22 10  Aug  22 17  Aug  22 28  Aug  22 31  Aug  22

NatAus Point of Sale Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit NatAus Point of Sale Cash/cheques deposit

403.56 997.96 140.13 870.25 348.78 807.52

Credit

918.88 528.05 951.70 403.56 547.00 997.69 1 266.44 176.00 7.50 140.13 951.70 285.39 982.60 807.25 25.00 811.22 1 182.20 348.78 426.52 125.00 5.40 15.60 817.92

Balance 1 735.33 816.45 1 344.50 2 296.20 2 699.76 3 246.76 4 244.45 2 978.01 2 802.01 2 794.51 2 934.64 1 982.94 1 697.55 714.95 1 522.20 1 497.20 685.98 496.22 147.44 573.96 698.96 704.36 719.96 1 537.88

Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Cr Dr Dr Dr Dr Dr Dr Dr

Extract Cash Payments Journal of R Nickolson

2 Aug 22 7 Aug 22 14  Aug   22 15  Aug   22 19  Aug   22 24  Aug   22 31  Aug   22

Chq 335393 BPay M Bicton BPay E Fremantle Chq 335394 Chq 335395 Chq 335396 Chq 335397 Debit card #150923

811.22 1 266.44 285.39 928.60 745.35 426.52 832.93 817.92

FIGURE 8.42 Bank reconciliation statement of R Nickolson for July, bank statement and cash journals for August

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MANAGEMENT CONTROLS OVER CASH

QUESTION 8.25 Prepare the petty cash book of Win Dsor for March 2022, who has a petty cash imprest float of $210.00. Show the cash payments journal as an extract and post to the general ledger.   4 Milk bill $6.30.   6 Train fare to city $12.65 ($11.50 + $1.15 GST).   8 One packet of stamps plus other stamps $9.00 ($8.18 + $0.82 GST). 10 Sandwich platter for meeting $22.00 ($20.00 + $2.00 GST). 11 Petty cash vouchers and stickers $6.60 ($6.00 + $0.60 GST). 13 Photocopying of plans $16.50 ($15.00 + $1.50 GST). 15 Writing pads and envelopes $19.25 ($17.50 + $1.75 GST). 18 Taxi fare for staff $29.15 ($26.50 + $2.65 GST). 19 Various stamps and postage supplies $28.60 ($26.00 + $2.60 GST). 20 Milk bill $10.50. 25 Coffee, tea and sugar $21.30. 30 Newspapers for the month $27.50 ($25.00 + $2.50 GST). 31 Coins on hand at reimbursement $0.65.

QUESTION 8.26 Prepare the petty cash book for May 2022 of Dorothy Ahkoi, who started a petty cash imprest float on 1 May. Show the cash payments journal as an extract and post to the general ledger.   1 Petty cash commenced with a cash withdrawal of $100 using a debit card from the main bank account.   2 Milk, tea and coffee $27.55.   3 Detergent and sponges for staff room $9.90 ($9.00 + $0.90 GST).   5 Stamps for various letters $45.00 ($40.91 + $4.09 GST).   6 Stationery $16.50 ($15.00 + $1.50 GST).   7 Reimbursement and float increased by $150.00. 15 Taxi fares $52.25 ($47.50 + $4.75 GST). 17 Milk $5.20. 18 Newspapers $34.65 ($31.50 + $3.15 GST). 20 Travel expenses $75.90 ($69.00 + $6.90 GST). 23 Stamps and express envelopes from post office $18.70 ($17.00 + $1.70 GST). 25 Food platter for meetings $29.70 ($27.00 + $2.70 GST).

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27 Milk and coffee $8.35 and biscuits $5.50 ($5.00 + $0.50 GST), totalling $13.85 ($13.35 + $0.50 GST).

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9 The general ledger and financial reports Introduction

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How much profit was made during the accounting period? What is owned and what is owed by the business? These questions are answered as you progress through the transfer of balances of revenue, expense and some other selected accounts in the general ledger and finally transfer the net profit or net loss to the owner’s equity account, ‘Capital’. The closing of the revenue and expense accounts occurs at the end of the accounting period for the business, which usually corresponds to a financial year. However, some businesses prepare interim financial reports and the closing process may be done quarterly or even monthly.

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The balance sheet is prepared from accounts with an asset, liability and owner’s equity nature. This statement is a summary of the financial position of the business at a particular point in time. A = L + OE + P Assets = Liabilities + Owner’s Equity + Profit

The income statement is prepared from accounts with an income (or revenue) and expense nature. This statement is a summary of the financial performance of the business over a period of time. P = R – E Profit = Revenue – Expense

Profit Profit for a period is revenue less expense. The profit becomes part of the owner’s equity (the capital account, which is what the business owes the owner, or what the owner has invested in the business). At the end of the accounting period the general journal is used to transfer the balances (or close out the accounts) of all revenue and expense accounts to determine the profit or loss for the period. It also brings the balances of all revenue and expense accounts back to nil for the start of the next accounting period. In a service business, and some trading businesses, transfers are generally made to the profit and loss account in the general ledger. This is referred to later in the chapter. Trading businesses may use a two-stage approach. Revenues and expenses specifically related to sales of goods are transferred to a trading account. The balance of this new account, along with the balances of all remaining revenues and expenses, are transferred to a profit or loss account. The trading and the profit or loss accounts provide the details for the preparation of the income statement. The remaining accounts in the general ledger – the assets, liabilities and owner’s equity – provide the data for the preparation of the balance sheet. Except for transferring the net profit or loss and drawings to the capital account, the preparation of the balance sheet does not require additional general journal entries. In this way, the closing balances in the assets, liabilities and owner’s equity capital account will be the opening entries for the next accounting period.

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Trading account in the general ledger and gross profit The trading account is classified in the owner’s equity area of the chart of accounts. The trading account provides the first profit calculation, the gross profit. Gross profit arises from the difference between the revenue from sales of goods and the cost of purchasing goods and getting them into the business. The trading account provides the profit from the basic business transaction of trading for the accounting period. It is the profit made directly from the buying and selling of goods. The trading account is a clearing (or temporary) account. At the end of the period, the final balances of sales revenue and cost of sales-linked expense accounts are transferred to the trading account. The resulting balance in the trading account is the gross profit (credit balance) or the gross loss (debit balance) for the period. This balance (gross profit or loss) is then transferred to the profit or loss account. Once the gross profit/loss is transferred, the trading account should have a nil balance.

WHEN PERIODIC INVENTORY IS USED The cost of the sales includes the cost of inventory sold plus costs associated with bringing the goods into the business, such as freight inwards, import and wharfage charges, as shown in figure 9.2. As you will see later in this chapter, the cost of inventory sold is calculated by adding the value of inventory held at the

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THE GENERAL LEDGER AND FINANCIAL REPORTS

beginning of the period (opening inventory), to purchases of inventory, less the value of inventory at the end of the period (closing inventory). This is explained in more detail later in this chapter. Sales account  –  The various accounts from which the cost of the goods that have been sold is calculated  =  Gross Profit Trading Inventory [opening] Purchases Freight Inwards Import and Wharfage Costs Profit and Loss [gross profit]

Sales Inventory [closing]

**

** Calculated to close off the trading account. This amount is transferred to the profit and loss account.

FIGURE 9.2  Trading account in the general ledger – periodic inventory system

WHEN PERPETUAL INVENTORY IS USED As shown in chapter 5, the perpetual inventory system is based on continually updated inventory records for purchases and sales of goods. Additional costs such as freight inwards, import and wharfage charges are included in the cost of inventory and are already included in the inventory account. If perpetual inventory is used, a separate cost of sales account is maintained. Whenever inventory is sold, the cost of sales is updated. Therefore, at the end of the accounting period, a balance is available for the cost of sales account. This can be seen in figure 9.3, and is explained in more detail later in this chapter. Sales account  –  Cost of Sales account  =  Gross Profit Trading Cost of Sales Profit and Loss [gross profit]

Sales **

** Calculated to close off the account. This amount is transferred to the profit and loss account.

FIGURE 9.3  Trading account in the general ledger – perpetual inventory system

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Profit and loss account in the general ledger and net profit The profit and loss account is also an account classified in the owner’s equity area of the chart of accounts. The profit and loss account provides the final profit or the net profit from the operations of a service or trading business for the accounting period. Revenue account balances (other than any that may have been closed to a trading account) are transferred to the general ledger account ‘Profit and Loss’. Expense account balances (other than any that may have been closed to a trading account) are also transferred to the profit and loss account. The profit and loss account is also a clearing account. After the balances of the trading and remaining revenue and expense accounts have been transferred to the profit and loss account, the resulting balance is the net profit (credit balance) or the net loss (debit balance) for the period. This balance (net profit or loss) is then transferred to the capital account. Once the net profit/loss is transferred, the profit and loss account should have a nil balance. Gross Profit + Other revenues – Other expenses = Net Profit 336tafenswlib on 2020-05-30 07:54:09. Created from

CHAPTER 9

Profit and Loss Advertising Sales Salaries Office Salaries Rent Stationery Discount Allowed Interest Capital [net profit]

Trading [gross profit] Discount Received Interest Received Rent Received

**

** Calculated to close off the account. This amount is transferred to the capital account.

FIGURE 9.4  Profit and loss account in the general ledger

Figure 9.4 is the same for both the periodic inventory and perpetual inventory systems.

Financial reports through the trial balance In figure 9.5 you will see that the trading account and the profit and loss account are directly used to prepare the income statement. All balances in revenue and expense accounts, as shown in the trial balance, have been transferred to either the trading or the profit and loss accounts. The trading account itself was then closed out by transferring the resulting gross profit to the profit and loss account. The profit and loss account was itself then closed out by transferring the resulting net profit or net loss to the owner’s equity capital account.

General ledger accounts

Trial Balance Revenue and expense accounts

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Periodic Inventory Sales and closing Inventory accounts less opening Inventory, Purchases and specific other expense accounts to calculate the value of the Cost of Sales

Trading Account

gross profit

Income Statement

Perpetual Inventory Sales and Cost of Sales accounts

Asset, liability and owner’s equity accounts All other revenue and all remaining expense accounts closed out to Profit and Loss account

All accounts remaining open in general ledger

Profit and Loss Account

Balance Sheet

FIGURE 9.5  Financial reports from the trial balance, including both periodic and perpetual inventory Created from tafenswlib on 2020-05-30 07:54:09.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

The accounts with remaining balances in the general ledger are then either assets, liabilities or owner’s equity, (which now includes the net profit). It is these account balances that make up the balance sheet. The balances of the asset and liability accounts as well as the final owner’s equity capital account will be the only opening balances at the commencement of the next accounting period.

Income statement Over the years, this financial statement has been referred to by various names, such as the trading statement, profit and loss statement, revenue statement, statement of financial performance and income statement. The accounting standard AASB 101 Presentation of Financial Statements, which is applicable to larger businesses classified as reporting entities, specifies that it is to be referred to as a ‘statement of profit or loss and other comprehensive income’. The standard also allows an entity to use titles for financial statements other than those used in the standard. Throughout this book the title ‘income statement’ will be used.

Balance sheet In a similar way, this financial statement has been referred to as the balance sheet and, in accounting standard AASB 101, is referred to as a ‘statement of financial position’. Throughout this book the term ‘balance sheet’ will be used.

Close general ledger accounts As mentioned previously, trading businesses may use a two-stage approach, starting with Step 1 below. However, some trading businesses and service businesses may go directly to Step 3 where all revenues and expenses are closed off to the profit and loss account. To help you understand the technical process and how gross profit is calculated, we will commence with the trading account and include Steps 1 and 2.

Step 1: Close accounts to trading account REVENUE Sales – closed to trading Sales are revenue. As they contribute to owner’s equity, they are credits. The sales account balance is transferred to the trading account through the general journal (see figure 9.6). Extract General Journal of …

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Sales Trading

GJ ... xx xx

Sales account closed to trading

FIGURE 9.6  Sales account closed out to trading account

QUESTION 9.1 Indicate whether the following statements are true or false. a b c d e f

The trading and profit and loss accounts are actual general ledger accounts. The amount to close the trading account is transferred to the capital account. Net profit closes the profit and loss account. The balance sheet general ledger account is in the owner’s equity part of the chart of accounts. The balance sheet comes from the accounting equation of A = L + OE. The balance sheet shows what the business owns and owes.

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True/False True/False True/False True/False True/False True/False

CHAPTER 9

g h i j k

Current assets in the balance sheet are expected to be still in use by the business after 12 months. Non-current liabilities are deducted from the current liabilities. The owner’s equity in the balance sheet has the net profit added to it. The trading account provides the first profit, which is the sale of goods less the cost of those goods that have been sold. The profit and loss account includes the gross profit.

True/False True/False True/False True/False True/False

QUESTION 9.2 At the end of the accounting year, prepare the general journal to close out the sales account in the general ledger to the trading account (also in the general ledger). Post the journal to the accounts shown in figure 9.7 and balance them. Sales

Trading

Balance10 000

FIGURE 9.7  General ledger accounts for question 9.2

QUESTION 9.3 Prepare the general journal at the end of the accounting year to transfer sales of $25 000 to the trading account. Show the sales balance of $25 000 in a simple T account format. Post the journal and balance the T accounts, as appropriate.

COST OF SALES – PERIODIC INVENTORY SYSTEM The total inventory available for sale is the inventory the business starts with, plus what it buys. The inventory available for sale, less the inventory remaining at the end of a period, gives inventory the business actually did sell, as shown in the following diagram. Cost of inventory at the start add cost of what was bought  = cost of inventory available for sale less cost of inventory, as counted, at the end  = cost of inventory that were sold

 

 

 

 

 

 

2 8 10 4 6

 

   

 

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Inventory (opening) In the periodic inventory system stock is counted and known only at the end of the accounting period, hence the name ‘periodic inventory system’. The inventory currently shown in the general ledger is the inventory that was counted at the end of the previous accounting period. The closing inventory at the end of the previous accounting period is the opening inventory for the current accounting period. Let us assume that the accounting period is 1 July 2020 to 30 June 2021. With periodic inventory there must be a physical count and valuation of all inventory at the close of business on 30 June 2021. Assume that, as at 30 June 2021, this closing inventory was valued at $5000. At the commencement of business the next morning, the first day of the new accounting year, the opening inventory for the year 1 July 2021 to 30 June 2022 is $5000. This is the same as it was at the close of business on 30 June 2021. On 30 June 2022, for the year from 1 July 2021 to 30 June 2022, the opening inventory of $5000 is transferred to the trading account by debiting trading and crediting inventory. Trading Inventory [opening] Created from tafenswlib on 2020-05-30 07:54:20.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

The journal to close out the opening inventory is combined with the other expense accounts associated with the cost of the goods that were available for sale during the accounting period (see figure 9.8).

Purchases Purchases are goods acquired or purchased by the business to sell at a profit. The cost of the goods (or inventory) purchased during the current accounting period is then closed out to the trading account by debiting trading and crediting purchases. Trading Purchases

xx xx

The journal to close out the purchases account is combined with the other accounts that make up the cost of the goods that were available for sale during the accounting period (see figure 9.8).

Other costs of obtaining goods Other costs of obtaining or receiving possession of goods are transferred to the trading account by debiting trading and crediting the individual cost accounts. Such accounts include freight or cartage inwards, customs or import duty and wharfage or clearing charges. Trading Freight Inwards Customs Duty

xx xx xx

The above closing entries are usually combined into one general journal (see figure 9.8). Extract General Journal of …

Trading Inventory [opening] Purchases Freight Inwards Customs Duty Cost of goods available for sale closed out to trading account

GJ ... x xxx xx xx xx xx

FIGURE 9.8  Costs of goods available for sale closed to trading account

QUESTION 9.4 At the end of the financial year, prepare the general journal to close out the ledger accounts to the trading account in the general ledger. Post the journal to the T accounts shown in figure 9.9. Copyright © 2018. Cengage. All rights reserved.

Inventory

Purchases

Balance [opening] 2 000

Balance

Customs Duty Balance

Freight Inwards

600

Balance Trading

FIGURE 9.9  General ledger accounts for question 9.4

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15 000 400

CHAPTER 9

QUESTION 9.5 Prepare the general journal at the end of the financial year to transfer the balances on the following accounts to the trading account in the general ledger: inventory $4500, purchases $33 750, duty and wharfage $1350 and cartage inwards $850. Show these balances in simple T account format. Post the journal and balance the T accounts as appropriate.

Inventory (closing) At the end of the accounting period under the periodic inventory system, the inventory is physically counted and valued. The total value is the inventory figure for the close of the accounting period. The journal entry increases the value of the current asset inventory (see figure 9.10). This closing inventory entry will reduce the value of the cost of the goods available for sale to give the value of cost of goods actually sold. Extract General Journal of …

Inventory [closing] Trading Closing inventory as per physical stocktake

GJ ... xx xx

FIGURE 9.10  Periodic inventory entered into accounts following end of accounting year physical stocktake

This journal entry is necessary because the entry to remove opening inventory means that there is a nil balance in the inventory account; the inventory balance from the previous end of year (or opening inventory for the current account year) has been closed out to trading. The debit side of this journal introduces the current asset of inventory as at the balance sheet date, as a result of the physical count and valuation of the inventory on hand. The credit side of the journal entry reduces the total of the cost of goods available for sale to the cost of goods actually sold. The difference between cost of goods available for sale and cost of goods actually sold is the cost of goods that have not been sold and are physically still in the warehouse. The total cost of inventory available at the start of the accounting period, plus purchases and costs of obtaining the goods less the value of the closing inventory, gives a calculated cost of the goods that have been sold. Inventory + Purchases + opening

Cost of obtaining Inventory Cost of the – = goods closing Sales

Cost of goods available for sale – Inventory closing = Cost of the Sales

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QUESTION 9.6 Prepare the general journal for the inventory value of $2400 counted at the end of the accounting period. Post the journal to the T accounts shown in figure 9.11. Inventory Balance [opening]

2 400 Trading

Trading 2 000

Inventory [opening]

2 400

FIGURE 9.11  General ledger accounts for question 9.6

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THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.7 Prepare general journals for the end of the accounting year to close out the accounts to the trading account from figure 9.12. Journalise the closing inventory of $2300. Post the journals to the T accounts shown in figure 9.12 and then balance the T accounts, except the trading account. (The solution is used in question 9.15.) Inventory

Sales

Balance2 100

Balance25 000

Purchases

Freight Inwards Balance1 100

Balance11 000 Wharfage Charges

Trading

Balance300

FIGURE 9.12  General ledger accounts for question 9.7

QUESTION 9.8 Prepare the general journal at the end of the accounting period to transfer the balances of the following accounts to the trading account in the general ledger: sales $30 000, inventory (opening) $2500, purchases $13 200, customs duty $1200, freight inwards $500. The value of the inventory from the physical stocktake at the end of the accounting period was $2800. Show the balances in simple T account format. Post the journals and balance the accounts, except the trading account. (The solution is used in question 9.16.)

QUESTION 9.9 If inventory (opening) is $800, purchases $4000, freight inwards $100 and inventory (closing) $1000, what is the cost of sales?

COST OF SALES – PERPETUAL INVENTORY SYSTEM With perpetual inventory, the cost of the inventory is known at any particular time during the year. A physical stocktake and valuation is also required at the end of the accounting year to ensure that the inventory records agree with the physical inventory on hand. If required, the book value of inventory is corrected to agree with the physical stocktake value.

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Cost of sales account closed to trading account As inventory valuation is known perpetually, or continually, throughout the year, so is the cost of sales also known continually throughout the year. When goods are sold, the cost of the inventory sold is credited to the inventory account and debited to the cost of sales account. At the end of the accounting year the cost of sales account (which has a debit balance) is closed out to trading account (see figure 9.13). Extract General Journal of …

Trading Cost of Sales Cost of sales account closed to trading

GJ ... xxx xxx

FIGURE 9.13  Cost of sales account closed out to trading account

Accounts such as freight inwards or customs duty do not exist with perpetual inventory; this cost of getting inventory into the warehouse of the business is allocated to the inventory account and is used to calculate the cost for individual inventory items. This cost calculation aspect of perpetual inventory is well beyond the scope of this book as it is studied in more advanced accounting courses.

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CHAPTER 9

QUESTION 9.10 At the end of the financial year, prepare the general journal to close out the sales account $32 000 and cost of sales account $19 500 to trading account and post to the general ledger.

QUESTION 9.11 Prepare the general journals at the end of the accounting period to close account balances for sales $73 500 and cost of sales $44 100. Post the journals to the ledger.

Step 2: Close trading account to profit and loss account – both periodic and perpetual inventory GROSS PROFIT OR LOSS If the balancing amount in the trading account is a debit, this represents a gross profit from sales. The balance in the trading account (gross profit) is then transferred to the profit and loss account (see figure 9.14). Extract General Journal of …

Trading Profit and Loss Trading account closed and gross profit to profit and loss

GJ ... xx xx

FIGURE 9.14  Closing trading account by transferring gross profit to profit and loss account

• For the periodic inventory system: Gross profit is the profit (or surplus) from the sales account less the calculated value of the cost of the goods that have been sold. It is the profit on the trading of goods that were bought to then be sold. Sales  –  Calculated value of the cost of sales  =  Gross Profit

• For the perpetual inventory system: Gross profit is the profit (or surplus) from the sales account less the cost of sales account. It is the profit on the trading of goods that were bought and then sold. Sales – Cost of Sales = Gross Profit

If the balancing amount in the trading account is a credit, the business has a gross loss from sales. This would be a most unusual event, so double-check the accuracy of your account entries. The journal entry to transfer the balance to the profit and loss account is the reverse of the one shown in figure 9.14.

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QUESTION 9.12(a) Periodic inventory If sales account is $10 000 and the calculated value of the cost of sales is $4600, what is the gross profit where periodic inventory applies?

QUESTION 9.12(b) Perpetual inventory If sales account is $10 000 and the cost of sales account is $4600, what is the gross profit where perpetual inventory applies?

QUESTION 9.13(a) If sales account is $15 000, purchases $6000, inventory (beginning or opening) $500, cartage inwards $100 and inventory (end or closing) $700, what is the inventory system that is used, the cost of sales and the gross profit?

QUESTION 9.13(b) If sales account is $30 000 and cost of sales account is $11 600, what is the inventory system that is used and the gross profit? Created from tafenswlib on 2020-05-30 07:54:20.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.14 Prepare the general journal to transfer a gross profit of $17 000 to the profit and loss account.

QUESTION 9.15 From your solution to question 9.7, close the trading account and prepare the general journal to transfer the gross profit to the profit and loss account.

QUESTION 9.16 From your solution to question 9.8, prepare the general journal to close the trading account and post to the relevant account.

Example 1: End-of-year closing accounts to trading account – periodic inventory applies An extract of the general ledger balances of J McIver as at 30 June 2022 showed inventory 1 July 2021 $550, sales $20 000, purchases $4400, cartage inwards $250 and customs duty $200. The physical stocktake on 30 June 2022 was valued at $600. Prepare the general journals necessary to close out the accounts, including the transfer of gross profit to the profit and loss account (see figure 9.15). General Journal of J McIver 30 Jun 22 Sales Trading Balance on sales closed out to trading Trading Inventory [opening] Purchases Cartage Inwards Customs Duty Costs of goods available for sale closed to trading [periodic] Inventory [closing] Trading Closing inventory as per physical stocktake [periodic]

GJ 1 20 000 20 000 5 400 550 4 400 250 200 600 600

Copyright © 2018. Cengage. All rights reserved.

At this point the general journals could be posted to the general ledger to calculate the amount required to close the trading account; that is, the gross profit. However, there is a quicker way, using the values of the above journals. Add (+) the amounts credited to trading and subtract (–) the amounts debited to trading: 20 000 – 5400 + 600 = 15 200, which is the gross profit. The $15 200 is the value of gross profit required to close out the trading account and transfer to the profit and loss account. Trading Profit and Loss Trading closed and gross profit transferred to profit and loss

15 200 15 200

FIGURE 9.15 Closing accounts to the trading account and then closing the trading account to profit and loss for J McIver (periodic inventory system)

QUESTION 9.17 Enter the following amounts as T account general ledger balances, prepare the closing journals, post the journals to the ledger and balance the ledger accounts for sales $35 000, inventory (opening) $800, purchases $15 000 and cartage inwards $500. The closing physical stocktake was valued at $700.

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Example 2: End-of-year closing accounts to trading account – perpetual inventory applies An extract of the general ledger balances of J McIver as at 30 June 2022 showed sales $20 000 and cost of sales $4800. Prepare the general journals necessary to close out the accounts, including the transfer of gross profit to the profit and loss account (see figure 9.16). General Journal of J McIver 30 Jun 22 Sales Trading Balance on sales closed out to trading Trading Cost of Sales Cost of sales account closed to trading [perpetual]

GJ 1 20 000 20 000 4 800 4 800

At this point the general journals could be posted to the general ledger to calculate the amount required to close the trading account; that is, the gross profit. However, there is a quicker way using the values of the above journals. Add (+) the amounts credited to trading and subtract (–) the amounts debited to trading: 20 000 – 4800 = 15 200, which is the gross profit. The $15 200 is the value of gross profit required to close out the trading account and transfer to the profit and loss account. Trading 15 200 Profit and Loss 15 200 Trading closed and gross profit transferred to profit and loss

FIGURE 9.16 Closing accounts to the trading account and then closing the trading account to profit and loss for J McIver (perpetual inventory system)

QUESTION 9.18 Enter these balances for sales $35 000 and cost of sales $15 600 as T account general ledger balances. Prepare the closing journals (including gross profit), post the journals and balance the ledger accounts.

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Step 3: Close other revenue and expense accounts to profit and loss account If a business does not use a trading account (Steps 1 and 2), the closing entries will commence at Step 3. All balances in revenue and expense accounts are closed directly to the profit and loss account. When manually closing the accounts directly to the profit and loss account, the gross profit/loss will not be identified. In this case, the business should have some way of establishing gross profit, if applicable. Most computer accounting systems also automatically close off all revenue and expense accounts directly to a profit and loss account as the accounts are rolled over to the next accounting period. Gross profit can be identified and reported if the accounts have been appropriately allocated in the chart of accounts. Individual accounts can be set up under a cost of sales category.

A. OTHER REVENUES The balances on any other revenue accounts are transferred to the profit and loss account in the general ledger (see figure 9.17).

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Extract General Journal of …

Discount Received Interest Received Dividend Received Profit and Loss Other revenue accounts closed to profit and loss

GJ ... xx x xx xxx

FIGURE 9.17  Closing all remaining revenue accounts to profit and loss account

After this journal has been posted to the ledger, all revenue accounts should have a nil balance.

QUESTION 9.19 At the end of the financial year, prepare the general journal to close out the accounts. Post the journal to the T accounts shown in figure 9.18. Discount Received Balance 

Interest Received 400

Commission Received

Balance350 Dividend Received Balance800

Balance700 Profit and Loss

FIGURE 9.18  General ledger accounts for question 9.19

QUESTION 9.20 Perpetual inventory Prepare the closing journals from the extract of account balances of W Woog as at 31 December 2022: sales $42 933, discount received $367, interest received $687 and cost of sales $15 132.

B. OTHER EXPENSES The balances of all remaining expense accounts are to be transferred to the profit and loss account in the general ledger (see figure 9.19). Extract General Journal of … Copyright © 2018. Cengage. All rights reserved.

Profit and Loss Advertising Sales Salaries Electricity Office Salaries Rent Stationery Discount Allowed Interest Bad Debts Expense Remaining expense accounts closed to profit and loss

GJ ... x xxx xx xxx xx xxx xx xx xx xx xx

FIGURE 9.19  Closing all remaining expense accounts to profit and loss

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QUESTION 9.21 At the financial year’s end, prepare the general journal to close out the accounts to the profit and loss account in the general ledger and post the journal to the T accounts shown in figure 9.20. Advertising Balance500

Electricity Balance800

Wages Balance10 000

Rent Balance5 000

Interest

Profit and Loss

Balance2 000

FIGURE 9.20  General ledger accounts for question 9.21

Step 4: Close the profit and loss account to the capital account NET PROFIT The amount required to close off (or balance) the profit and loss account in the general ledger is the net profit or net loss for the accounting year. This balance is transferred to the capital account in the general ledger (see figure 9.21). Extract General Journal of …

Profit and Loss Capital Profit and loss a/c closed, net profit transferred to capital

GJ ... xxx xxx

FIGURE 9.21  Closing profit and loss account by transferring net profit to capital account

If the result is a net profit for the accounting year, then the entry is to debit the profit and loss account and credit the capital account, as shown in figure 9.21. The result will increase owner’s equity. However, if there is a net loss, then the entry is the opposite: debit the capital account and credit the profit and loss account. The result will decrease owner’s equity. Sales – Cost of Sales = Gross Profit

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(Gross Profit + Other Revenue)  – Expenses = Net Profit

QUESTION 9.22 If sales are $25 000, cost of sales $10 000 and other expenses $13 000, what is the net profit? Prepare the general journal for the transfer of net profit.

QUESTION 9.23 Prepare the general journal to transfer the net profit of $7000 to the capital account.

Example 3: Close accounts to profit and loss account at the end of the accounting year This example is applicable to both periodic inventory and perpetual inventory. Continuing the example of J McIver, a further extract of the general ledger balances of J McIver as at 30 June 2022 showed discount received $350, rent received $2900, advertising $600, cartage outwards $750, salaries $9100, office expenses $850, discount allowed $150 and interest $400.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

The journal for transfer of gross profit $15 200 from examples 1 and 2 is repeated for this example. Prepare the general journals necessary to close out the accounts including the transfer of the net profit to the capital account (see figure 9.22). General Journal of J McIver

GJ 2

30 Jun 22 Trading Profit and Loss Trading closed and gross profit transferred to profit and loss (repeated from earlier example)

15 200

Discount Received Rent Received Profit and Loss Other revenue accounts closed to profit and loss

350 2 900

15 200

3 250

Profit and Loss Advertising Cartage Outwards Salaries Office Expenses Discount Allowed Interest Expenses closed out to profit and loss

11 850 600 750 9 100 850 150 400

At this point the general journals could be posted to the general ledger to calculate the amount required to close the profit and loss account, which is the net profit. However, a quicker way is to use the values of the above journals. Add (+) the amounts credited to profit and loss and subtract (–) the amounts debited to profit and loss: 15 200 + 3250 – 11 850 = 6600, which is the net profit. The $6600 is the value of net profit required to close out the profit and loss account and transfer to the capital account. Profit and Loss 6 600 Capital 6 600 Profit and loss closed and net profit transferred to capital a/c

FIGURE 9.22 Closing other revenue and expense to profit and loss account and then closing profit and loss to capital account

Step 5: Close the drawings account to the capital account The drawings account is the value of cash and purchases or inventory taken from the business by the owner for the owner’s private use. It is a debit account, as it reduces the owner’s equity. The balance of the drawings account is transferred to the capital account in the general ledger, as shown in figure 9.23.

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Extract General Journal of …

Capital Drawings Drawings closed out to capital account

GJ ... xx xx

FIGURE 9.23  Closing drawings account to capital account

The capital account now includes the net profit as a credit entry, increasing the owner’s equity, and the drawings as a debit entry, reducing the owner’s equity on the capital account (see figure 9.24). Drawings Balance

xx Capital

Capital xx

Drawings

FIGURE 9.24  General ledger accounts for drawings and capital

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xx Balance Profit & Loss [net profit]

xxx xx

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After the journal in figure 9.23 has been posted to the general ledger, then all accounts grouped as revenue have a nil balance. Accounts grouped as expense also have a nil balance. The general ledger accounts grouped as assets have balances; liabilities have balances; owner’s equity (capital account) also has a balance.

QUESTION 9.24 Drawings totalled $2500 for the year. Prepare the general journal to close this account.

QUESTION 9.25 Periodic inventory From the account balances of R Jones in figure 9.25, prepare the necessary closing general journals. Extract Account Balances of R Jones

as at 31 December 2022 Inventory [1-1-2022] Assets – other Liabilities Capital Drawings Sales Rent Received Interest Received Purchases Freight Inwards Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Stationery Insurance Postage and Telephone Interest Bad Debts Expense Inventory as per stocktake [31-12-2022] $2 890

3 310 181 950 109 367 63 466 2 100 62 231 3 177 930 29 949 2 332 5 940 2 591 8 142 1 591 181 159 376 391 159

FIGURE 9.25  Extract of account balances of R Jones

QUESTION 9.26 Perpetual inventory

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Prepare the general journals to close the accounts of J Smith (shown in figure 9.26) for the year ended 30 June 2022. Extract Account Balances of J Smith

as at 30 June 2022 Sales Cost of Sales Discount Received Rent Received Advertising Sales Salaries Office Salaries Rent Telephone Discount Allowed Drawings

100 000 45 100 400 3 000 500 10 000 15 000 8 000 800 200 1 200

FIGURE 9.26  Extract of account balances of J Smith Created from tafenswlib on 2020-05-30 07:54:20.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

Closing general journal entries Although this book demonstrates the processes for a manual accounting system, the actual physical preparation and processing of closing general journals is rarely manually prepared these days. When a computer accounting system processes the rollover at the end of an accounting year, all revenue, all expense and the drawings accounts are automatically closed off. This ensures that these accounts start the next year with nil balances. The following questions will help you to understand the formal process that occurs each financial accounting year as required by law for incorporated businesses, particularly that the life of a business is broken into required annual periods for comparative purposes and reports to the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO) and other government bodies.

QUESTION 9.27 Periodic inventory From the trial balance of B Mac Saville shown in figure 9.27, prepare the general journals to close the accounts for the year ended 31 March 2022, post the journals to the general ledger and prepare a trial balance. The solution to this question is used for the preparation of an income statement in question 9.31.

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Trial Balance of B Mac Saville as at 31 March 2022 Bank Accounts Receivable Control Inventory [opening] GST Receivable Plant and Equipment Accounts Payable Control GST Payable Capital Drawings Sales Discount Received Bad Debts Recovered Purchases Freight Inwards Sales Salaries Freight Outwards Office Salaries Insurance Photocopying Stationery Postage Bank Charges Discount Allowed

8 358 12 386 2 349 866 20 790 4 092 1 767 22 323 3 298 70 679 423 835 35 208 757 8 194 958 5 113 576 331 294 180 95 366 100 119

100 119

Inventory [31–3–2022] $2 640

FIGURE 9.27  Trial balance of B Mac Saville

QUESTION 9.28 Perpetual inventory Using the trial balance of N Glen shown in figure 9.28, prepare the general journals to close the accounts for the year ended 31 May 2022. Post these general journals to the general ledger and prepare a trial balance. The solution to this question is used for the preparation of an income statement in question 9.32.

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Trial Balance of N Glen as at 31 May 2022 Accounts Receivable Control Inventory GST Receivable Land and Buildings Machinery Bank Overdraft Accounts Payable Control GST Payable Loan Mortgage on Land and Buildings Capital Drawings Sales Rent Received Cost of Sales Advertising Freight Outwards Sales Wages Cleaning Donations Electricity Printing and Stationery Office Wages Rates Subscriptions Office Repairs and Maintenance Telephone Interest on Loan Mortgage Interest on Overdraft Bad Debts Expense

30 591 17 480 3 010 320 000 95 100 6 568 11 649 4 665 100 000 301 195 6 568 279 896 6 829 166 500 647 1 563 30 277 764 1 074 3 286 552 21 154 745 254 688 2 727 5 002 1 912 908 710 802

710 802

FIGURE 9.28  Trial balance of N Glen

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Income statement: trading basic format The income statement for a trading business is a financial report showing the revenue, cost of sales, gross profit, expenses by category and net profit for a particular period of time. It is based on the information transferred to the trading account and profit and loss account. The income statement for a trading business is a combined trading account and profit and loss account. It is presented in a columnar or statement format and categorises (or groups) revenue and expenses to present them in a meaningful manner, in order to help with the analysis and control of the business. Towards the end of this chapter we will look at the income statement of a servicing business, which uses only the profit and loss account.

Rationale for grouping accounts in a report The expense accounts that a business uses, the headings under which accounts are grouped together, their importance, size and relevance are usually specific to a particular business. However, there are some commonalities in the account groupings and headings used. There are also some specific requirements from the Australian Accounting Standards, which require certain reports to follow specific account groupings and headings. Created from tafenswlib on 2020-05-30 07:55:33.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

The simplest accounts report a business could use to show its profit results would be: Sales Expenses Profit

100 – 75 25

If the owner/manager of a business can use this information to control expenses and optimise profit then only those two accounts may be used. However, it is unlikely that this would be adequate even in the short to medium term and more accounts would need to be used and reported on. The accounts a business uses evolve over time as the information needs required to operate and manage the business successfully also change. As the business grows, the number of general ledger and subsidiary ledger accounts will increase. The need for separate departments or sections also expands, to enable the management or owner of the business to maintain control over expenses within the business. This then evolves into ledger accounts being grouped together. For example, those accounts with periodic inventory are grouped to provide the calculated cost of the goods that have been sold. Expense accounts relating to sales are often grouped together as expanding sales is important, but it is essential to control and minimise the growth of expenses as a result of the expansion. Accounts that particularly need to be controlled include sales salaries, sales travelling expenses, warehouse expenses and delivery expenses to customers. Businesses also incur financial costs. For example, as a business expands, it often needs to borrow to fund the expansion and then must pay interest on a loan or overdraft. There are also the costs of collecting debts owed to the business, and writing off as an expense where funds cannot be collected. As the actual number of accounts in use grows, they may be assigned into groups that are relevant to the business, such as areas or departments. Revenues and expenses can then be linked and reported against sections of the business. Regular reviewing of the account groups can ensure that an area or department does not get out of control and spend more than was expected or budgeted for. The use of account groups and the names of the headings related to those groups are decided by the business. The basic revenue and expense classification structure used in this book was introduced in chapter 3 under the heading ‘Revenue and expenses’. The income statement account groupings used by some businesses may differ from those used here. However, the book continues to use these categories or groups, so you understand and can practise the logical process of allocating accounts to a particular category. The basic format of an income statement for a trading business used in this book is shown in figure 9.29.

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Income Statement of Dennis Hernandez for the period ended . . . Revenue less Cost of Sales Gross Profit add Other Revenue Total Revenue less Expenses Selling and Distribution General and Administrative Financial and Borrowing Total Expenses Net Profit

FIGURE 9.29  Income statement, basic format

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20 + 15 + 5 + =

100 45 55 5 60

+ – = + =

40 20

– =

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Revenue Revenue in the trading account is the value of sales arising from the operations of the business and contributes to the gross profit for the period. ‘Other revenue’ in the profit and loss account relates to revenue other than sales that has been received by the business and contributes to the net profit for the period. It includes accounts such as discount received, interest received, bad debts recovered and rent received.

Cost of sales – periodic inventory The cost of goods that have been sold is a calculated value consisting of several accounts that refer directly to the cost of those goods, which are shown in the sales account at their selling price. The difference between the selling price and the cost of the goods that have been sold is the gross profit. With the periodic inventory system, the cost of sales is calculated from the inventory the business had at the beginning of the accounting period, plus the purchase of more goods for resale, plus the cost of getting those goods into the business, minus the value of the inventory that the business has left at the end of the accounting period. The opening inventory account, purchases account and those accounts that relate to the cost of getting the purchases to the business are closed out to the debit of trading account at the end of the accounting year. The closing inventory is entered into the accounts by a debit to the inventory account and credit to trading.

Cost of sales – perpetual inventory When the perpetual inventory system is used, the cost of a sale is known and the cost of the inventory sold is credited against inventory and debited to cost of sales. The cost of sales account is closed out to the trading account, which is one of the ledger accounts that create the data for the income statement.

Expense SELLING AND DISTRIBUTION This is sometimes called marketing expense. This income statement expense heading includes expenses that specifically relate to the sale of the goods of the business, such as sales salaries. Also included are the costs of delivering, sending, despatching or distributing goods to the customers to whom the goods have been sold.

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GENERAL AND ADMINISTRATIVE This income statement expense heading includes expenses that cover more than one area of the business; that is, they are general expenses such as electricity. Also included are administrative expenses such as office salaries. Expenses that do not fit into the other two categories are also included here.

FINANCIAL AND BORROWING This income statement expense heading includes expenses that specifically relate to the costs of obtaining or borrowing and maintaining the supply of money or funds to the business.

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THE GENERAL LEDGER AND FINANCIAL REPORTS

Use of columns in the income statement – periodic inventory There are usually four columns used in the income statement, as shown in figure 9.30. Column 1 The headings and account names. Column 2 The values of the detailed expense accounts are shown after the gross profit. These are the expense accounts that were in the general ledger profit and loss account and are now shown in their groups of: i selling and distribution ii general and administrative iii financial and borrowing. If there is only one expense in a group then the value is shown direct into column 3. Column 3 This column has three sections:

Column 4

i the values that make up the cost of goods available for sale and the cost of sales; that is, the accounts (except sales) that are shown in the general ledger trading account. Note how the closing inventory is shown in this column if periodic inventory applies ii if there is more than one account for other revenue, then the values are shown in column 3; if there is only one other revenue account then the value is shown direct into column 4 iii the totals of the profit and loss expense account groupings of: –  selling and distribution –  general and administrative –  financial and borrowing. Value of sales is entered in this column. The rest of the values are totals for:

–  cost of sales –  gross profit –  other revenue –  total revenue –  total expenses –  net profit. If individual accounts are not categorised under headings, then: •  there are obviously no headings •  no amounts are shown in column 2 •  no totals are shown in column 3, only the individual account values Copyright © 2018. Cengage. All rights reserved.

•  the account values may not be in the same order as shown in the solution. Consider the format and columnar usage of the income statement for Joan Parsons for the year ended 30 June 2022 (see figure 9.30).

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Income Statement of Joan Parsons for the year ended 30 June 2022 Revenue  Sales less Cost of Sales  Inventory [1 July 2021]  Purchases   Freight Inwards   Cost of Goods Available for Sale   less Inventory [30 June 2022] Gross Profit add Other Revenue   Rent Received   Discount Received   Bad Debts Recovered Total Revenue less Expenses Selling and Distribution   Freight Outwards General and Administrative  Electricity 110  Salaries 2 600  Telephone 220   Office Expenses 470 Financial and Borrowing   Discount Allowed 100   Bad Debts Expense 310   Bank Charges 190  Interest 210 Total Expense Net Profit

21 500 1 000 15 000 500 16 500 1 500

250 50 200

15 000 6 500

500 7 000

790

3 400

810 5 000 2 000

FIGURE 9.30  Income statement – periodic inventory

Use of columns in the income statement – perpetual inventory

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The above explanations for the income statement where periodic inventory applies (figure 9.30) also apply for the income statement where perpetual inventory applies, with the exception of column 3 (see figure 9.31). This would appear as shown below: Column 3 This column has two sections: i If there is more than one account for other revenue then the values are shown in column 3; if there is only one other revenue account then the value is shown direct into column 4. ii The totals of the profit and loss expense account groupings of: –  selling and distribution –  general and administrative –  financial and borrowing.

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Income Statement of Joan Parsons for the year ended 30 June 2022 Revenue  Sales less Cost of Sales Gross Profit add Other Revenue   Rent Received   Discount Received   Bad Debts Recovered Total Revenue less Expenses Selling and Distribution   Freight Outwards General and Administrative  Electricity 110  Salaries 2 600  Telephone 220   Office Expenses 470 Financial and Borrowing   Discount Allowed 100   Bad Debts Expense 310   Bank Charges 190  Interest 210 Total Expense Net Profit

21 500 15 000 6 500 250 50 200

500 7 000

790

3 400

810 5 000 2 000

FIGURE 9.31  Income statement – perpetual inventory

QUESTION 9.29 Periodic inventory From the ledger accounts of S Ingleton, shown in figure 9.32, prepare an income statement for the year ended 30 June 2022. Trading

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2 138 Sales Inventory [opening] Purchases 29 016 Inventory [closing] Freight Inward 652 Profit and Loss [gross pr] 33 640 65 446

Profit and Loss 62 898 2 548

65 446

Advertising Cartage Out Commission Wages Photocopying Rates Electricity Interest Bad Debts Expense Capital [net profit]

582 Trading [gross profit] 33 640 418 Commission Received 881 196 11 785 173 2 507 652 863 279 17 066 34 521 34 521

FIGURE 9.32  General ledger accounts of S Ingleton

QUESTION 9.30 Perpetual inventory An extract of the general ledger of Cec Nock is shown in figure 9.33. You are required to prepare an income statement for the year ended 31 March 2022.

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Trading Cost of Sales Profit and Loss [gross pr]

7 636 Sales 8 894 16 530

Profit and Loss 16 530 16 530

Delivery Expense Salaries Sales Cleaning Office Expense Salaries Office Vehicle Expense Bad Debts Expense Interest on Loan Capital [net profit]

562 Trading [gross profit] 8 894 4 186 Rent Received 3 878 448 Bad Debt Recovered 236 509 4 863 117 132 985 1 206 13 008 13 008

FIGURE 9.33  General ledger accounts of Cec Nock

QUESTION 9.31 Periodic inventory Using your answer to question 9.27, prepare an income statement for B Mac Saville for the year ended 31 March 2022.

QUESTION 9.32 Perpetual inventory Using your answer to question 9.28, prepare an income statement for N Glen for the year ended 31 May 2022.

QUESTION 9.33 Periodic inventory From the extract general ledger accounts of H Mercure (see figure 9.34), prepare an income statement for the year ended 31 March 2022, where accounts are not grouped under headings. Trading Inventory [opening] 1 200 Sales Purchases 11 960 Inventory [closing] Profit and Loss [gross pr] 10 840 24 000

Profit and Loss 22 900 1 100 24 000

Wages Office Expense Vehicle Expense Capital [net profit]

5 152 Trading [gross profit] 267 Other Revenue 585 6 346 12 350

10 840 1 510

12 350

FIGURE 9.34  General ledger accounts of H Mercure

QUESTION 9.34 Perpetual inventory From the extract general ledger accounts of M Melbourne (see figure 9.35), prepare an income statement for the year ended 31 March 2022, where accounts are not grouped under headings.

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Trading Cost of Sales 20 690 Sales Profit and Loss [gross pr] 24 990 45 680

Profit and Loss 45 680 45 680

Salaries Selling Expense Other Expenses Capital [net profit]

15 200 Trading [gross profit] 4 780 Rent Received 610 4 690 25 280

24 990 290

25 280

FIGURE 9.35  General ledger accounts of M Melbourne

Balance sheet: basic format The balance sheet is a financial report showing the assets of the business less its liabilities. The result is the owner’s investment in the business or the owner’s equity. It indicates the financial position of the business at a particular date. This is different from the income statement, which reports the performance of the business for a period of time; for example, for the period 1 January 2022 to 31 December 2022, or more often written as the year ended 31 December 2022. The balance sheet may be presented in columnar or statement format and Created from tafenswlib on 2020-05-30 07:54:42.

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shows the assets and liabilities according to their current or non-current status. It is the accounting equation: Assets – Liabilities = Owner’s Equity

The Australian Accounting Standards Board requires that the headings shown in figure 9.36, which gives the basic format of the balance sheet, are used. Balance Sheet of Dennis Hernandez as at . . . Current Assets Non-current Assets Total Assets Current Liabilities Non-current Liabilities Total Liabilities Net Assets Owner’s Equity

80 + 320 + = 50 + 200 + =

400

+

250 150 150

– = =

FIGURE 9.36  Balance sheet of Dennis Hernandez, basic format

KEEP IN MIND A current asset is cash or other assets of the business that will be used or changed into cash within 12 months from the date of the balance sheet. A non-current asset is an asset that the business expects to use in the operations of the business, and to still be using it for more than 12 months after the balance sheet date. A current liability is a liability of the business that will become due and payable within 12 months from the date of the balance sheet. A non-current liability is a liability of the business that is due for payment more than 12 months from the date of the balance sheet. Owner’s equity is the worth of the business, or the investment by the owner in the business, or what the business owes to the owner. It is an internal liability.

Use of columns in the balance sheet There are usually four columns used in the balance sheet. Column 1 Shows the headings and account names. Column 2 As you progress through chapters 10, 11 and 12 you will use this second column extensively as more details are introduced, particularly with the current and non-current assets.

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Column 3

This column shows the values for the groups: – – – – –

current assets non-current assets current liabilities non-current liabilities owner’s equity; only the capital at the commencement of the accounting period and the net profit for the period. If there is only one account within one of the groups, then the value is shown direct in column 4. Column 4 This column shows the total value for the groups: – – – – –

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current assets non-current assets total assets current liabilities non-current liabilities

CHAPTER 9

– total liabilities – net assets – owner’s equity; only the addition total of the commencing capital and the net profit from column 3 less drawings giving total owner’s equity. Consider the format and columnar usage of the balance sheet for William Wilberforce as at 30 June 2022 (see figure 9.37). This format may be used for both the periodic or perpetual inventory system. Balance Sheet of William Wilberforce as at 30 June 2022 Current Assets  Bank   Accounts Receivable Control  Inventory [closing]   GST Receivable Non-current Assets  Equipment   Motor Vehicles Total Assets Current Liabilities   Accounts Payable Control   GST Payable Non-current Liabilities   Loan from D Guyz less Total Liabilities Net Assets Owner’s Equity  Capital   add Net Profit   less Drawings Total Owner’s Equity

5 500 22 000 7 000 1 500 40 000 30 000

5 500 3 500

36 000

70 000 106 000

9 000 11 000 20 000 86 000

75 000 15 500

90 500 4 500 86 000

FIGURE 9.37  Balance sheet of William Wilberforce

QUESTION 9.35 From the balances of the general ledger of M Wellbrook, shown in figure 9.38, prepare a balance sheet as at 30 June 2022.

Copyright © 2018. Cengage. All rights reserved.

Extract Account Balances of M Wellbrook

as at 30 June 2022 Bank Accounts Receivable Control Inventory [30–6–2022] GST Receivable Premises Plant and Machinery Accounts Payable Control GST Payable Loan Mortgage on Premises Capital

10 000 8 800 800 400 30 000 20 000 2 200 900 15 000 51 900

FIGURE 9.38  Extract of account balances of M Wellbrook

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359

THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.36 From the general ledger extract shown in figure 9.39, prepare a balance sheet for N Brighton as at 30 June 2022. Extract Account Balances of N Brighton

as at 30 June 2022 Bank Petty Cash Accounts Receivable Control Inventory [30–6–2022] GST Receivable Land and Buildings Machinery Motor Vehicles Computer Accounts Payable Control GST Payable Loan Mortgage on Land and Buildings Capital [1–7–2021] Drawings Net Profit from Profit and Loss Account

3 500 200 27 995 7 500 300 55 000 10 000 18 000 5 000 5 005 1 000 30 000 79 790 800 12 500

FIGURE 9.39  Extract of account balances of N Brighton

QUESTION 9.37 Prepare a balance sheet from the extract of the general ledger for O Bonalbo on 30 June 2022, shown in figure 9.40.

Copyright © 2018. Cengage. All rights reserved.

Extract Account Balances of O Bonalbo

as at 30 June 2022 Petty Cash Accounts Receivable Control Inventory [30–6–2022] GST Receivable Premises Plant Furniture and Fittings Government Bonds Motor Vehicles Computer Bank Overdraft Accounts Payable Control GST Payable Loan Mortgage on Premises Loan from D Banks [repayable in 3 years] Capital [1–7–2021] Drawings Net Profit from Profit and Loss Account

FIGURE 9.40  Extract of account balances of O Bonalbo

360tafenswlib on 2020-05-30 07:54:42. Created from

125 42 460 6 531 4 840 55 189 36 081 12 973 9 900 25 234 3 700 17 169 19 470 6 369 38 700 15 000 80 241 3 547 23 631

CHAPTER 9

Account allocation to financial statements To make preparation of the income statement and balance sheet easier, it is very helpful to write on the trial balance, to the left of the account name, the classification group to which each ledger account is to be allocated in the financial statements. All ledger accounts must be allocated to a financial statement. The two financial statements with their accounts’ nature are shown in figure 9.41, with their corresponding account or statement (A/c or Stmt) and group abbreviations.

Income statement The trading accounts are classified as ‘T’ and in groups as either: Revenue Cost of Sales

R CoS

The profit and loss accounts are classified as ‘PL’ and in groups as either: Other Revenue Selling and Distribution General and Administrative Financial and Borrowing

OR SD GA FB

Balance sheet Once revenue and expense accounts have been closed out, those accounts that are not closed out make up the balance sheet. What is the business worth for the owner? It is worth the assets less liabilities; that is, A – L = OE. The balance sheet classifies assets in groups as either: Current Assets Non-current Assets

CA NCA

The balance sheet classifies liabilities in groups as either: Current Liabilities Non-current Liabilities

CL NCL

The balance sheet classifies owner’s equity as: Owner’s Equity

OE

Copyright © 2018. Cengage. All rights reserved.

These trading, profit and loss accounts (A/c) and balance sheet (Stmt) classification groupings and abbreviations are shown in figure 9.41. Financial Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet

Account Nature

A/c or Stmt

Group

Revenue Cost of Sales Other Revenue Selling and Distribution General and Administrative Financial and Borrowing Current Assets Non-current Assets Current Liabilities Non-current Liabilities Owner’s Equity

T T PL PL PL PL BS BS BS BS BS

R CoS OR SD GA FB CA NCA CL NCL OE

FIGURE 9.41  Financial statement abbreviations for accounts or statement and group Created from tafenswlib on 2020-05-30 07:55:44.

361

THE GENERAL LEDGER AND FINANCIAL REPORTS

To income statement – periodic inventory Example 4: Trial balance, end-of-year journals, ledger and income statement, periodic inventory Use the trial balance for K Curtis where the periodic system applies (shown in figure 9.42), and the account/statement and group abbreviations are listed next to each account name. Prepare relevant general journals to close the accounts in the general ledger at the end of the financial year, then prepare an income statement (see figures 9.42–45). Trial Balance of K Curtis BS BS T BS BS BS BS BS BS BS BS BS T PL PL T T PL PL PL PL PL PL PL PL

CA CA CoS CA NCA NCA NCA CL CL NCL OE OE R OR OR CoS CoS SD SD SD GA GA FB FB FB

BS

CA

as at 30 June 2022 Bank Accounts Receivable Control Inventory [opening] GST Receivable Land and Buildings Machinery and Equipment Motor Vehicle Accounts Payable Control GST Payable Loan from D Bankz [due in 4 years] Capital Drawings Sales Discount Received Bad Debt Recovered Purchases Freight Inwards Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense (T

CoS)

Copyright © 2018. Cengage. All rights reserved.

6 000 6 699 16 700 781 39 000 6 000 8 000 3 003 1 254 27 000 44 523 1 000

23 600 3 000 1 110 4 250 1 140 4 430 2 470 1 310 1 320 500 127 310 Inventory, stocktake [30–6–22] $23 300

FIGURE 9.42  Trial balance of K Curtis – periodic inventory

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100 101 102 103 150 151 152 200 201 250 300 301 400 410 411 500 501 520 521 522 540 541 560 561 562

50 000 1 000 530

127 310

CHAPTER 9

GENERAL JOURNALS TO CLOSE ACCOUNTS – PERIODIC INVENTORY General Journal of K Curtis 30 Jun 22 Sales Trading Balance on sales closed out to trading

GJ 1 400 302

50 000

Trading Inventory [opening] Purchases Freight Inwards Cost of goods available for sale closed to trading

302 102 500 501

43 300

Inventory [closing] Trading Closing inventory, as per stocktake, entered into accounts

102 302

23 300

Trading Profit and Loss Trading closed and gross profit transferred to profit and loss

302 303

30 000

Discount Received Bad Debt Recovered Profit and Loss Other revenue accounts closed to profit and loss

410 411 303

1 000 530

Profit and Loss Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense Expenses closed out to profit and loss

303 520 521 522 540 541 560 561 562

16 530

Profit and Loss Capital Profit and loss closed, net profit transferred to capital

303 300

15 000

Capital Drawings Closing drawings to capital

300 301

1 000

50 000

16 700 23 600 3 000

23 300

30 000

1 530

1 110 4 250 1 140 4 430 2 470 1 310 1 320 500

15 000

1 000

FIGURE 9.43  Closing general journals of K Curtis at the end of the accounting year – periodic inventory

Copyright © 2018. Cengage. All rights reserved.

GENERAL LEDGER – PERIODIC INVENTORY The smaller T accounts are used to show the complete general ledger without filling up too many pages (see figure 9.44, which spans the next two pages). The larger, correctly formatted T accounts are shown to emphasise the principles under discussion.

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363

THE GENERAL LEDGER AND FINANCIAL REPORTS

General Ledger of K Curtis Balance

Bank100 6 000

Accounts Receivable Control Balance

Inventory 1 Jul 21 Balance b/d 30 Jun 22 Trading

GJ1

1 Jul 22 Balance b/d GST Receivable 781

103

Machinery and Equipment 6 000

151

Balance

Accounts Payable Control Balance

200 3 003

Balance

Balance

Loan from D Bankz Balance

102

16 700 30 Jun 22 Trading 23 300 Balance c/d 40 000 23 300

Balance

GJ1

Land and Buildings 39 000 Motor Vehicle 8 000

152

GST Payable Balance

201 1 254

250 27 000

GJ1

300

1 000 1 Jul 21 Balance b/d 58 523 30 Jun 22 Profit and Loss [net profit] 59 523 1 Jul 22 Balance b/d Drawings 1 000 Capital

Balance

GJ1

GJ1 GJ1 GJ1 GJ1

301

16 700 30 Jun 22 Sales 23 600 Inventory [closing] 3 000 30 000 73 300

302 GJ1 GJ1

Copyright © 2018. Cengage. All rights reserved.

GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1

1 110 30 Jun 22 Trading [gross profit] 4 250 Discount Received 1 140 Bad Debts Recovered 4 430 2 470 1 310 1 320 500 15 000 31 530

50 000 23 300

73 300

Profit and Loss 30 Jun 22 Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense Capital [net profit]

44 523 15 000 59 523 58 523

1 000

Trading 30 Jun 22 Inventory [opening] Purchases Freight Inwards Profit and Loss [gross profit]

16 700 23 300 40 000

150

Capital 30 Jun 22 Drawings Balance c/d

101

6 699

303 GJ1 GJ1 GJ1

30 000 1 000 530

31 530

CONTINUED

364tafenswlib on 2020-05-30 07:55:44. Created from

CHAPTER 9

Sales Trading

400

50 000 Balance b/d

50 000

Bad Debts Recovered Profit and Loss

Balance b/d

411

530 Balance b/d

530

Freight Inwards

501

3 000 Trading

3 000

Sales Salaries Balance b/d

4 250

4 430

1 310 Profit and Loss

1 310

1 000 Balance b/d Purchases

500 23 600

Advertising

520

1 110 Profit and Loss

1 110

1 140 Profit and Loss Vehicle Expenses

Balance b/d

2 470 Profit and Loss Interest

Balance b/d

410 1 000

23 600 Trading

Freight Outwards Balance b/d

560

Bad Debts Expense Balance b/d

Balance b/d

540

4 430 Profit and Loss Discount Allowed

Balance b/d

Balance b/d

521

4 250 Profit and Loss Office Salaries

Balance b/d

Discount Received Profit and Loss

1 320 Profit and Loss

522 1 140 541 2 470 561 1 320

562

500 Profit and Loss

500

FIGURE 9.44  General ledger accounts of K Curtis – periodic inventory

INCOME STATEMENT – PERIODIC INVENTORY Income Statement of K Curtis for the year ended 30 June 2022

Copyright © 2018. Cengage. All rights reserved.

Revenue  Sales less Cost of Sales  Inventory [1 July 2021]  Purchases   Freight Inwards   Cost of Goods Available for Sale   less Inventory [30 June 2022] Gross Profit add Other Revenue   Discount Received   Bad Debts Recovered Total Revenue less Expenses Selling and Distribution  Advertising   Sales Salaries   Freight Outwards General and Administrative   Office Salaries   Vehicle Expenses Financial and Borrowing   Discount Allowed  Interest   Bad Debts Expense Total Expenses Net Profit

50 000 16 700 23 600 3 000 43 300 23 300

1 000 530

1 110 4 250 1 140

6 500

4 430 2 470

6 900

1 310 1 320 500

3 130

20 000 30 000

1 530 31 530

16 530 15 000

FIGURE 9.45  Income statement of K Curtis – periodic inventory Created from tafenswlib on 2020-05-30 07:55:44.

365

THE GENERAL LEDGER AND FINANCIAL REPORTS

To income statement – perpetual inventory Example 5: Trial balance, end-of-year journals, ledger and income statement, perpetual inventory Use the trial balance for K Curtis where the perpetual system applies (shown in figure 9.46), and the account/statement and group abbreviations are listed next to each account name. Prepare relevant general journals to close the accounts in the general ledger at the end of the financial year, then prepare an income statement (see figures 9.46–49). The values in figure 9.46 have been amended so that the cost of sales account results in the same gross profit value as is shown in example 4 for periodic inventory (see figure 9.42). This then results in the net profit being the same for both systems; the income statements have some different accounts but the balance sheets are identical. Trial Balance of K Curtis

Copyright © 2018. Cengage. All rights reserved.

BS BS BS BS BS BS BS BS BS BS BS BS T PL PL T PL PL PL PL PL PL PL PL

CA CA CA CA NCA NCA NCA CL CL NCL OE OE R OR OR CoS SD SD SD GA GA FB FB FB

as at 30 June 2022 Bank Accounts Receivable Control Inventory GST Receivable Land and Buildings Machinery and Equipment Motor Vehicle Accounts Payable Control GST Payable Loan from D Bankz [due in 4 years] Capital Drawings Sales Discount Received Bad Debt Recovered Cost of Sales Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense

FIGURE 9.46  Trial balance of K Curtis – perpetual inventory

366tafenswlib on 2020-05-30 07:55:44. Created from

100 101 102 103 150 151 152 200 201 250 300 301 400 410 411 500 520 521 522 540 541 560 561 562

6 000 6 699 23 300 781 39 000 6 000 8 000 3 003 1 254 27 000 44 523 1 000 50 000 1 000 530 20 000 1 110 4 250 1 140 4 430 2 470 1 310 1 320 500 127 310

127 310

CHAPTER 9

GENERAL JOURNALS TO CLOSE ACCOUNTS – PERPETUAL INVENTORY General Journal of K Curtis

GJ 1

30 Jun 22 Sales Trading Balance on sales closed out to trading

400 302

50 000

Trading Cost of Sales Cost of sales closed to trading

302 500

20 000

Trading Profit and Loss Trading closed and gross profit transferred to profit and loss

302 303

30 000

Discount Received Bad Debt Recovered Profit and Loss Other revenue accounts closed to profit and loss

410 411 303

1 000 530

Profit and Loss Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense Expenses closed out to profit and loss

303 520 521 522 540 541 560 561 562

16 530

Profit and Loss Capital Profit and loss closed, net profit transferred to capital

303 300

15 000

Capital Drawings Closing drawings to capital

300 301

1 000

50 000

20 000

30 000

1 530

1 110 4 250 1 140 4 430 2 470 1 310 1 320 500

15 000

1 000

FIGURE 9.47  Closing general journals of K Curtis at the end of the accounting year – perpetual inventory

GENERAL LEDGER – PERPETUAL INVENTORY

Copyright © 2018. Cengage. All rights reserved.

The smaller T accounts are used to show the complete general ledger without filling up too many pages (see figure 9.48, which spans the next two pages). The larger, correctly formatted T accounts are shown to emphasise the principles under discussion. General Ledger of K Curtis Bank Balance

6 000

Balance

23 300

Inventory

Land and Buildings Balance

39 000

100

Accounts Receivable Control Balance

102

GST Receivable Balance

150

103

781 Machinery and Equipment

Balance

101

6 699

151

6 000

CONTINUED

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367

THE GENERAL LEDGER AND FINANCIAL REPORTS

Motor Vehicle Balance

152

Accounts Payable Control

8 000

200

Balance

GST Payable

201

Balance

3 003

Loan from D Bankz

1 254

250

Balance

27 000

Capital 30 Jun 22 Drawings Balance c/d

GJ1

1 000 1 Jul 21 Balance b/d 58 523 30 Jun 22 Profit and Loss [net profit] 59 523 1 Jul 22 Balance b/d Drawings

Balance

300

1 000 Capital

GJ1

301 1 000

Trading 30 Jun 22 Cost of Sales Profit and Loss [gross profit]

GJ1 GJ1

302

20 000 30 Jun 22 Sales 30 000 50 000

GJ1

GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1 GJ1

Sales Trading

50 000 Balance Bad Debts Recovered

Profit and Loss

530 Balance

Copyright © 2018. Cengage. All rights reserved.

Advertising Balance

1 110 Profit and Loss Freight Outwards

Balance

1 140 Profit and Loss Vehicle Expenses

Balance

2 470 Profit and Loss

Balance

1 320 Profit and Loss

Interest

400

411 530

Balance

4 430 Profit and Loss Discount Allowed

Balance

561 1 320

4 250 Profit and Loss Office Salaries

541 2 470

20 000 Trading Sales Salaries

Balance

522 1 140

1 000 Balance Cost of Sales

Balance

520 1 110

GJ1 GJ1 GJ1

Discount Received Profit and Loss

1 310 Profit and Loss Bad Debts Expense

Balance

FIGURE 9.48  General ledger accounts of K Curtis – perpetual inventory

368tafenswlib on 2020-05-30 07:55:44. Created from

303

1 110 30 Jun 22 Trading [gross profit] 4 250 Discount Received 1 140 Bad Debts Recovered 4 430 2 470 1 310 1 320 500 15 000 31 530

50 000

50 000 50 000

Profit and Loss 30 Jun 22 Advertising Sales Salaries Freight Outwards Office Salaries Vehicle Expenses Discount Allowed Interest Bad Debts Expense Capital [net profit]

44 523 15 000 59 523 58 523

500 Profit and Loss

30 000 1 000 530

31 530 410 1 000 500 20 000 521 4 250 540 4 430 560 1 310 562 500

CHAPTER 9

INCOME STATEMENT – PERPETUAL INVENTORY Income Statement of K Curtis for the year ended 30 June 2022 Revenue  Sales less Cost of Sales Gross Profit add Other Revenue   Discount Received   Bad Debts Recovered Total Revenue less Expenses Selling and Distribution  Advertising   Sales Salaries   Freight Outwards General and Administrative   Office Salaries   Vehicle Expenses Financial and Borrowing   Discount Allowed  Interest   Bad Debts Expense Total Expenses Net Profit

50 000 20 000 30 000 1 000 530

1 110 4 250 1 140

6 500

4 430 2 470

6 900

1 310 1 320 500

3 130

1 530 31 530

16 530 15 000

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.49  Income statement of K Curtis – perpetual inventory

Created from tafenswlib on 2020-05-30 07:55:44.

369

THE GENERAL LEDGER AND FINANCIAL REPORTS

Balance sheet – periodic and perpetual inventory Example 6: Balance sheet, applicable to both periodic inventory and perpetual inventory Continuing with the data from example 4 (periodic inventory) and example 5 (perpetual inventory) for K Curtis, prepare the balance sheet as at 30 June 2022 and, finally, a trial balance as at 1 July 2022 (see figures 9.50 and 9.51). Irrespective of whether the periodic or the perpetual inventory system operates, the balance sheet is the same. Inventory is counted and valued with both systems at the end of the financial year and it is the same value. Balance Sheet of K Curtis as at 30 June 2022 Current Assets  Bank   Accounts Receivable Control  Inventory   GST Receivable Non-current Assets   Land and Buildings   Machinery and Equipment   Motor Vehicles Total Assets Current Liabilities   Accounts Payable Control   GST Payable Non-current Liabilities   Loan from D Bankz less Total Liabilities Net Assets Owner’s Equity  Capital   add Net Profit   less Drawings Total Owner’s Equity

6 000 6 699 23 300 781 39 000 6 000 8 000

3 003 1 254

36 780

53 000 89 780

4 257 27 000 31 257 58 523

44 523 15 000

59 523 1 000 58 523

FIGURE 9.50  Balance sheet statement of K Curtis – periodic and perpetual inventory systems Trial Balance of K Curtis

Copyright © 2018. Cengage. All rights reserved.

as at 1 July 2022 Bank Accounts Receivable Control Inventory GST Receivable Land and Buildings Machinery and Equipment Motor Vehicles Accounts Payable Control GST Payable Loan from D Bankz Capital

6 000 6 699 23 300 781 39 000 6 000 8 000

89 780

3 003 1 254 27 000 58 523 89 780

FIGURE 9.51 Trial balance for K Curtis as at commencement of next accounting period – periodic and perpetual inventory systems 370tafenswlib on 2020-05-30 07:55:44. Created from

CHAPTER 9

Trial balance on commencement of new accounting period; applies to both periodic and perpetual inventory We will now look at the trial balance on commencement of the next accounting period, using figure 9.51 from example 6 (above) as an exemplar. This also demonstrates the accounting period convention, discussed in chapter 1. Whichever inventory system is used, there is no difference in the trial balance on commencement of a new accounting year. As the balance sheets are the same, the trial balance on commencement will also be the same. With the periodic inventory system, the opening balance of the inventory account in the new accounting period is retained until the next stocktake, normally at the end of the accounting year. With the perpetual inventory system, the balance of the inventory account changes as soon as either the first purchase or sale of inventory occurs in the new accounting year.

QUESTION 9.38 Periodic inventory From the trial balance of L More (shown in figure 9.52) write next to each account name the account/statement and group abbreviations. Then, using this information, you are required to prepare: • an income statement • a balance sheet • a trial balance as at the commencement of the next accounting period. Trial Balance of L More

Copyright © 2018. Cengage. All rights reserved.

as at 30 June 2022 Bank Accounts Receivable Control Inventory [1-7-2021] GST Receivable Premises Motor Vehicles Accounts Payable Control GST Payable Capital Sales Discount Received Bad Debts Recovered Purchases Advertising Freight and Cartage Outwards Light and Power Insurance Vehicle Expenses Telephone Rates Wages Donations Bank Charges Discount Allowed Interest Bad Debts Expense (

1 960 9 108 2 523 385 25 000 5 000 2 134 1 199 36 559 48 195 56 500 12 889 104 52 238 195 817 418 261 28 863 107 82 16 398 227 88  643

88 643

) Inventory [30–6–2022] $2 290

FIGURE 9.52  Trial balance of L More

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371

THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.39 Perpetual inventory From the trial balance of M Bimby shown in figure 9.53, write next to each account name the account/ statement and group abbreviations. Using this information, you are required to prepare an income statement, balance sheet and trial balance at the start of the next year. Trial Balance of M Bimby as at 30 June 2022 Accounts Receivable Control Inventory GST Receivable Machinery Office Equipment Bank Overdraft Accounts Payable Control GST Payable Capital Sales Cost of Sales Commission Freight Outwards Sales Salaries Office Cleaning Donations Rent Office Salaries Photocopying Stationery Repairs to Office Equipment Subscriptions Sundry Expenses Telephone Bad Debts Expense Interest on Overdraft Discount Allowed Debt Collection Expenses

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.53  Trial balance of M Bimby

372tafenswlib on 2020-05-30 07:55:44. Created from

24 409 2 457 1 782 12 349 9 138 10 971 8 360 3 696 29 108 147 868 56 295 1 911 156 51 135 6 262 79 4 236 21 353 645 960 331 952 195 2 843 532 1 645 154 184 200 003

200 003

THE GENERAL LEDGER AND FINANCIAL REPORTS

Preparing financial reports for a servicing business Until now we have concentrated on preparing financial reports for a trading business. In chapter 1 you were introduced to servicing businesses. You will recall that the main way of generating revenue in a service operation is through the sale of knowledge or skills. Although such businesses retain inventory, it is used with their skills to provide service activities. These goods generally are not sold or traded separately. Depending on the type of service business, size of supply holdings and methods of recording inventory (generally referred to as supplies), such items may be treated as assets or expenses when purchased. Service businesses may record movements of supplies: • through a perpetual inventory system, where purchases of supplies are immediately debited to a ‘supplies’ or ‘inventory’ account (an asset) and credited to accounts payable/bank. When the supplies are used, the entry is debit to a ‘cost of sales or supplies used’ account (an expense) and credit to the asset ‘supplies’. At any point in time the business will know the value its holdings of supplies as well as the cost of supplies used in delivering the service. Like a trading business, at the end of the period, the balance of the cost of sales/supplies used is an expense in the income statement and the balance of the ‘supplies’ account will appear in the balance sheet. Many service businesses do not record inventory movements. They may: • use a periodic inventory system like a trading business. An asset account, ‘supplies inventory’, is determined by performing a physical count of supplies at the end of the previous period. When supplies are purchased, an expense account (purchase of supplies) is debited. Another count of supplies is done at the end of the period. The expense ‘cost of sales/supplies used’ for the period is then calculated by the following formula: Opening supplies + Purchases of supplies – Closing supplies = Cost of supplies used

At the end of the period, like a trading business, the balance of the ‘cost of sales’ is shown in the income statement under the expenses listed in figure 9.55. The closing balance of the asset ‘supplies inventory’ account will appear in the balance sheet.

Copyright © 2018. Cengage. All rights reserved.

Supplies inventory – opening Add Purchases of supplies Cost of supplies available Less Supplies inventory – closing Cost of supplies used

+ + = − =

FIGURE 9.55  Cost of supplies used

• immediately record the purchase of supplies as an expense. The balance of this account will be the ‘cost of sales’ at the end of the accounting period. No asset for the supplies is recorded. Therefore, only the expense will appear in the income statement. No asset record is maintained. This method is used in example 7. The examples and questions in earlier chapters have demonstrated that the recording process for a service business is the same as for a trading businesses. However, as service businesses generally do not trade goods, they do not require a trading account to close off sales and cost of sales at the end of the accounting period. A profit and loss account is generally all that is required. Before continuing you may wish to review the section ‘Profit and loss account in the general ledger and net profit’ on page 336.

374tafenswlib on 2020-06-27 07:48:57. Created from

CHAPTER 9

Closing journals You will recall that the first step in preparing financial reports for a trading business was to close all revenue and expense accounts. The first step for a service business is to close out all revenues and expenses directly to the profit and loss account in the general ledger. The profit and loss account is then closed to the capital account. Drawings are also closed to the capital account.

Income statement Service businesses may use various ways of displaying income statements. Some may produce simplified income statements where accounts are reported under the headings ‘Revenues’ and ‘Expenses’. This is the method we will use in this book. From the information provided in each question you will need to determine how to treat supplies inventory, as discussed above. Other service businesses and those with more complex ownership structures may separate revenues and expenses into more detailed classifications. Expenses, for example, may be classified as direct costs (inventory used, servicing wages and hire of equipment) and indirect costs (marketing, general administration and financial expenses). These categories are particularly useful for internal management reports, and are explored in more advanced accounting studies.

Balance sheet The balance sheet for a service industry is prepared in exactly the same way as the balance sheet for a trading business. Assets and liabilities are classified into current and non-current categories.

Example 7: Service business – trial balance, income statement and balance sheet Bev Sparkes is an electrician. She requires an income statement and balance sheet from her trial balance as at 30 June 2022. From the trial balance, write next to each account name the account/statement and group abbreviations and then prepare the income statement and balance sheet (see figures 9.56–9.58). Trial Balance of Bev Sparkes

Copyright © 2018. Cengage. All rights reserved.

as at 30 June 2022 BS BS BS BS BS BS BS BS BS BS BS PL PL PL PL PL PL PL PL PL PL

CA CA CA NCA NCA NCA CL CL NCL OE OE R Exp Exp Exp Exp Exp Exp Exp Exp Exp

Bank Accounts Receivable Control GST Receivable Land and Buildings Motor Vehicles Office Equipment Accounts Payable Control GST Payable Mortgage on Land and Buildings Capital Drawings Electrical Installation Revenue Discount Received Cost of Electrical Supplies Wages – Electricians Wages – Office Motor Vehicle Expense Advertising Insurance Office Expense Interest Expense

3 500 5 875 600 44 000 25 000 10 000 2 875 4 500 30 000 38 000 8 700 225 000 190 54 150 130 000 7 500 2 550 2 280 3 140 1 950 1 320 300 565

300 565

FIGURE 9.56  Trial balance of Bev Sparkes as at 30 June 2022 Created from tafenswlib on 2020-06-27 07:48:57.

375

THE GENERAL LEDGER AND FINANCIAL REPORTS

Income Statement of Bev Sparkes for the year ended 30 June 2022 Revenue Electrical Installation Revenue Discount Received Total Revenue less Expense Cost of Electrical Supplies Wages – Electricians Wages – Office Motor Vehicle Expense Advertising Insurance Office Expense Interest Expense Total Expense Net Profit

225 000 190 225 190 54 150 130 000 7 500 2 550 2 280 3 140 1 950 1 320 202 890 22 300

FIGURE 9.57  Income statement of Bev Sparkes

Copyright © 2018. Cengage. All rights reserved.

Balance Sheet of Bev Sparkes as at 30 June 2022 Current Assets Bank Accounts Receivable Control GST Receivable Non-current Assets Land and Buildings Motor Vehicles Office Equipment Total Assets Current Liabilities Accounts Payable Control GST Payable Non-current Liabilities Mortgage on Land and Buildings less Total Liabilities Net Assets Owner’s Equity Capital add Net Profit less Drawings Total Owner’s Equity

3 500 5 875 600 44 000 25 000 10 000

2 875 4 500

9 975

79 000 88 975

7 375 30 000 37 375 51 600

38 000 22 300

60 300 8 700 51 600

FIGURE 9.58  Balance sheet of Bev Sparkes

QUESTION 9.41 Lita Litigiosus is a barrister of the Independent Bar. She owns chambers near the courts. The legal business is structured as a sole trader and has some employees. From the trial balance shown in figure 9.59, next to each account name write the abbreviation for the account/statement and classification. Then use this information to: • prepare general journals to close the relevant accounts • post the journals to the general ledger • prepare an income statement • prepare a balance sheet.

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CHAPTER 9

Trial Balance of L Litigiosus as at 30 June 2022 Bank Accounts Receivable Control GST Receivable Land Chambers Office Equipment Accounts Payable Control GST Payable Loan (Mortgage) Payable Capital Drawings Legal Fees Revenue Insurance Expense Salaries Expense Electricity Expense Interest Expense Telephone Expense

30 000 46 300 5 700 128 000 511 000 35 400 45 800 7 800 443 000 210 350 263 900 784 300 8 300 439 700 3 800 10 450 8 700 1 491 250

1 491 250

FIGURE 9.59  Trial balance of L Litigiosus

QUESTION 9.42 Chris Bones is a medical consultant who provides services to hospitals and private patients for fees. From the account balances shown in figure 9.60, next to each account name write the abbreviation for the account/ statement and classification. Then use this information to: • prepare general journals to close the relevant accounts • post the journals to the general ledger • prepare an income statement • prepare a balance sheet.

Copyright © 2018. Cengage. All rights reserved.

Trial Balance of Chris Bones as at 30 June 2022 Bank Accounts Receivable Control GST Receivable Office Equipment Imaging Machine Accounts Payable Control GST Payable Bank Loan Capital Drawings Private Patient Fees Hospital Fees Electricity Expense Telephone Expense Interest Expense

137 500 21 300 5 850 10 300 133 750 3 150 1 000 39 000 115 550 325 000 285 000 243 500 26 500 22 400 4 600 687 200

687 200

FIGURE 9.60  Trial balance of Chris Bones

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377

THE GENERAL LEDGER AND FINANCIAL REPORTS

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 9.43 From the account balances of B Ramourne (shown in figure 9.61), write next to each account name the account/statement and group abbreviations. Then, using this information, you are required to: • prepare an income statement • prepare a balance sheet.

Account Balances of B Ramourne as at 30 June 2022 Bank Accounts Receivable Control Inventory [1–7–2021] GST Receivable Premises Motor Vehicles Accounts Payable Control GST Payable Capital Drawings Sales Rent Received Interest Received Purchases Freight Inwards Advertising Sales Salaries Despatch Expenses Electricity Telephone Office Salaries Bad Debts Expense ( ) Inventory [30–6–2022] $1 564

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.61  Account balances of B Ramourne

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23 742 3 520 2 079 847 35 623 28 195 4 543 1 892 71 585 8 892 75 659 1 245 277 25 234 195 552 8 228 7 519 303 234 9 913 125

CHAPTER 9

QUESTION 9.44 From the account balances of W Wauk (shown in figure 9.62), write next to each account name the account/statement and group abbreviations. Then, using this information, you are required to: • prepare an income statement, and • prepare a balance sheet.

Account Balances of W Wauk as at 30 June 2022 Discount Allowed Drawings Bank Sales Bad Debts Expense Accounts Receivable Control GST Payable Capital Telephone Cost of Sales Motor Vehicles Accounts Payable Control Cartage Outwards Wages Computer Electricity GST Receivable Discount Received Advertising Inventory

116 5 207 31 041 88 628 152 7 931 2 211 70 104 765 30 607 40 876 3 102 714 37 516 3 200 915 814 47 254 3 984

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.62  Account balances of W Wauk

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379

THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.45 S W Rocks has listed his accounts (see figure 9.63). Write next to each account name the account/statement and group abbreviations. You are then required to: • prepare an income statement, and • prepare a balance sheet.

Account Balances of S W Rocks as at 31 March 2022 Loan Mortgage on Premises Accounts Payable Control Accounts Receivable Control Bank Charges Bank Overdraft Capital Commission Received Drawings Electricity Freight Inwards GST Receivable GST Payable Interest on Loan Mortgage Interest on Overdraft Inventory [1 April 2021] Motor Vehicles Office Salaries Plant and Equipment Premises Purchases Sales Sales Salaries Stationery Telephone ( ) Inventory [31–3–2022] $14 676

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.63  Account balances of S W Rocks

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30 000 14 982 25 443 631 8 784 96 526 16 159 2 139 2 363 995 4 455 6 721 3 900 2 248 11 822 28 195 47 152 49 159 50 000 172 139 268 829 38 714 1 921 725

CHAPTER 9

QUESTION 9.46 From the account balances of K Yogle (shown in figure 9.64), write next to each account name the account/statement and group abbreviations. Then K Yogle asks that you: • prepare an income statement, and • prepare a balance sheet.

Account Balances of K Yogle as at 30 June 2022 Bank Accounts Receivable Control Inventory GST Receivable Freehold Land Buildings Plant and Machinery Motor Vehicles Accounts Payable Control GST Payable Loan Mortgage on Freehold Land Capital Drawings Sales Rent Received Discount Received Cost of Sales Advertising Salaries – Sales Salaries – Office Insurance Telephone Electricity Vehicle Expenses Rates Bad Debts Expense Discount Allowed Interest on Loan Mortgage

37 428 14 069 6 507 1 375 75 000 16 200 35 683 24 034 4 730 3 135 50 000 119 752 2 187 125 439 3 600 387 48 427 769 14 676 15 804 822 652 1 822 2 719 893 261 215 7 500

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.64  Account balances of K Yogle

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381

THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.47 T Broadwater has provided the balances shown in figure 9.65. Write next to each account name the account/statement and group abbreviations. Then T Broadwater asks that you: • prepare an income statement, and • prepare a balance sheet.

Account Balances of T Broadwater

Copyright © 2018. Cengage. All rights reserved.

as at 31 December 2022 Petty Cash Accounts Receivable Control Inventories [1 January 2022] GST Receivable Premises Plant and Equipment Motor Vehicles Bank Overdraft Accounts Payable Control GST Payable Loan from P Macquarie [repayable 5 years] Capital Drawings Sales Bad Debts Recovered Purchases Customs Duty Sales Commission Delivery Expenses Salaries Council Rates Donations Light and Power Postage Motor Vehicle Expenses Photocopying Stationery Telephone Bank Charges Interest on Overdraft Bad Debts Expense Debt Collection Expenses ( ) Inventory [31–12–2022] $9 223

FIGURE 9.65  Account balances of T Broadwater

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225 17 050 11 253 1 815 69 400 60 700 21 960 24 819 4 719 3 201 7 500 142 834 700 127 868 150 65 253 1 398 1 799 493 46 253 2 746 57 1 706 282 1 584 219 374 688 303 3 657 923 253

CHAPTER 9

QUESTION 9.48 From the account balances of C Byron (shown in figure 9.66), write next to each account name the account/statement and group abbreviations. Then, using this information, you are required to: • prepare an income statement, and • prepare a balance sheet.

Account Balances of C Byron as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Advertising Bad Debts Expense Bank Overdraft Capital Cartage Outwards Cost of Sales Debt Collection Expenses

1 293 294 3 104 27 255 1 178 32 570 175

Discount Allowed

185

Discount Received

281

Electricity

1 522

GST Receivable

1 067

GST Payable

2 728

Insurance

254

Interest on Overdraft

819

Inventory

3 104

Legal Expenses

328

Office Cleaning

1 605

Office Expenses

2 181

Office Salaries

18 776

Premises

47 480

Rates and Taxes

1 653

Rent Received

2 798

Repairs and Maintenance

1 168

Sales Sales Commission Sales Salaries Travellers’ Expenses Copyright © 2018. Cengage. All rights reserved.

2 574 10 835

109 117 3 878 15 815 1 677

FIGURE 9.66  Account balances of C Byron

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383

THE GENERAL LEDGER AND FINANCIAL REPORTS

QUESTION 9.49 From the account listing of Dr R Wollondilly, whose service business operates as Riverside Medical Practice (see figure 9.67), you are required to: • write next to each account name the account/statement and group abbreviations • prepare an income statement for the year ended 30 June 2022 • prepare a balance sheet.

Account Balances of Riverside Medical Practice

PL

R

PL

Exp

as at 30 June 2022 Bank Cash in Hand Accounts Receivable Control Premises Motor Vehicle Accounts Payable Control Loan Mortgage on Premises Capital Fees from Surgery Consultations Fees from Home Visits Interest Received Purchase of Medical Supplies Salaries Motor Vehicle Expenses Telephone Stationery Bad Debts Interest on Loan Mortgage

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.67  Account balances of Dr R Wollondilly’s Riverside Medical Practice

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75 000 300 2 500 80 000 31 000 400 20 000 127 600 80 000 20 000 300 5 000 42 000 8 000 600 200 100 3 600

CHAPTER 9

QUESTION 9.50 D Talbingo operates as a landscape gardener and has provided the following account balances (see figure 9.68). For this service business you are required to: • write next to each account name the account/statement and group abbreviations • prepare an income statement for the year ended 30 June 2022 • prepare a balance sheet.

Account Balances of D Talbingo

PL

R

PL

Exp

as at 30 June 2022 Accounts Receivable Motor Vehicle Bank Overdraft Accounts Payable Capital Fees from Landscape Gardening Discount Received Purchase of Sand, Soil and Cement Purchase of Bush Rock and Plants Wages to Assistant Landscaper Depot Rent Depot Electricity Office Rent Office Electricity Office Wages Advertising Vehicle Expenses Other Office Expenses Interest on Overdraft

6 580 24 980 1 081 1 890 5 064 75 330 110 6 840 8 390 21 580 2 370 750 1 660 210 4 720 350 4 325 180 540

Copyright © 2018. Cengage. All rights reserved.

FIGURE 9.68  Account balances of D Talbingo

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385

10 Matching expense and revenue to the accounting period

Copyright © 2018. Cengage. All rights reserved.

Introduction

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In chapter 9, you closed off revenue and expense accounts to determine gross and net profit. You also prepared the income statement and the balance sheet. In this chapter, we see the need to make adjustments to some revenue and expense accounts as well as to assets and liabilities before the revenue and expense accounts are closed off at the end of the financial year. The matching of revenue for an accounting period with expenses that relate to the same period will result in a more accurate reporting of profit through the income statement and balance sheet. Some expenses may have been processed or paid on or before the end of the financial year but not incurred until the next financial year, such as insurance on the car or house. Other expenses such as telephone or electricity may be owed or incurred, but have not yet been paid. Rent income may have been received in June for the month of July. Interest may be owed on 30 June from an investment but received in the next financial year. As individuals, it is not important to align or match our revenue to expenses precisely with the financial year of July to June. It is, however, very important for most businesses to ensure that income earned and expenses incurred are matched to the correct period. In this chapter we will examine a range of adjustments, including expenses accrued, expenses prepaid, income accrued, income prepaid, bad and doubtful debts, depreciation, reconciling physical and recorded inventory, and provisions for leave.

CHAPTER 10

Balance day adjustments Adjustments are made at the end of an accounting period to match revenues and expenses to the period in which they occur. These are called balance day adjustments (or end-of-period adjustments). They are internal to the business so are therefore processed through the general journal. The Australian Accounting Standards Board AASB 101 Presentation of Financial Statements in paragraph 27 states: An entity shall prepare its financial statements except for cash flow information, using the accrual basis of accounting.

The standard AASB 101 refers to definitions and recognition criteria provided in the Conceptual Framework for the Preparation and Presentation of Financial Statements (referred to as ‘the Framework’). Events that occur in a business are to be recorded in the business and reported in the financial statements of the period to which they relate. For a business it is essential that all revenue and all expenses that relate to the accounting period are included, so that the profit is accurately and fairly matched to the accounting period for the users of the financial statements. The profit is a guide for future directions. It enables comparisons with the figures from earlier years and with budgets. These can be projected into the future and contribute to meaningful decisions by the business towards improving its worth and position in the marketplace. Matching expenses to revenues and balance day adjustments are a major part of the accounting process, regardless of whether the accounts of the business are processed manually or through a computerised accounting system.

KEEP IN MIND In chapter 5 we briefly introduced recording and reporting transactions using a cash accounting basis. On this basis, revenues are recognised and recorded when funds are received and expenses are recognised and recorded when funds are remitted. The difference between the cash received and the cash paid is the profit. There is no attempt to match the reason for receiving funds or the reason for remitting funds to an accounting period. Cash accounting contrasts with accrual accounting.

Copyright © 2018. Cengage. All rights reserved.

Accrual accounting Accrual accounting is the method of matching expenses incurred with the revenues earned in an accounting period. The resulting revenue less expense will more accurately reflect the profit or loss for the accounting period. Accrual accounting is used by many businesses and is the method that we predominantly use throughout this book. Revenues are earned when a tax invoice is issued as a result of services being provided or goods being taken by the customer. Even though the receipt of cash for the sale to the account receivable may not occur for some time, revenue is earned when the tax invoice is issued. Expenses are incurred when a good or service has been – or is due to be – received, even though payment may not occur until a time in the future. A tax invoice will be issued by the account payable or supplier.

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387

CHAPTER 10

be some difficulty in directly and accurately relating the cost of sales to those sales. Operating expenses such as stationery, vehicle expense, electricity, salaries, insurance, rent and interest are incurred each accounting period, and any timing difference between when the resource (expense or asset) is used to generate revenue and when the expense is paid may be processed through the balance day adjustment. Electricity is consumed or used by the business in its activities to earn revenue. Later the energy provider charges the business for the electricity consumed in the past. The electricity expense has already been incurred but is paid for at a later date. In contrast, insurance is paid for in advance, often up to 12 months in advance. In this case, the expense is paid for before the benefit is received.

Before and after balance day adjustments Figure 10.2 illustrates an example of the revenue less the expenses and the resulting profit from data in the accounts before the matching process had been carried out; the area of the rectangles is proportional.

Revenue before matching

less

Expense before matching

equals

Profit

equals

Profit

Balance day adjustment matching resulted in revenue being increased by

expense being increased by

revenue being decreased by

expense being decreased by

Revenue after matching revenue has decreased

less

Expense after matching expense has increased

profit has decreased

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.2  Balance day adjustments decreasing revenue and increasing expense result in decrease in profit

The matching process is performed by the balance day adjustments. In the example shown in figure 10.2, it can be seen that revenue has increased in some areas but it has also decreased twice as much in other areas. This results in a net decrease of revenue for the accounting period. The example in figure 10.2 also shows that expenses have decreased in some areas but they have also increased twice as much in other areas. This results in a net increase in expenses for the accounting period. In this example, with revenue decreased and expense increased, the profit has decreased compared with the profit before the balance day adjustments matched revenue earned and expense incurred to the accounting period. AASB 101 Presentation of Financial Statements, under the heading ‘Fair presentation and compliance with Standards’, states in paragraph 15, inter alia, that: 15 Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

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389

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

QUESTION 10.1 Find the words in the computer-shaped puzzle using the words from the word list.

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The word list is:

Copyright © 2018. Cengage. All rights reserved.

accounting cashaccounting revenues

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accrual endofperiod taxinvoice

adjustments expenses

balanceday matchingprinciple

CHAPTER 10

The balance day adjustment for electricity ($3000) is processed at the end of June through the general journal. The increased expense account is then closed out to profit and loss. This would normally be the case with all the remaining expense accounts (see figure 10.7). GJ ...

Extract General Journal of …

30 Jun 22 Electricity Expense Accrued Balance day adjustment for electricity accrued

3 000 3 000

Profit and Loss Electricity [15 000 + 3000] Electricity for the year closed out to profit and loss

18 000 18 000

FIGURE 10.7 Electricity expense accrued at the end of the accounting period; electricity for the year is closed out to profit and loss

The results of this end-of-period accrual can be shown by posting the journals to the extract general ledger and then the final account balances are included in the financial statements (see figure 10.8). Extract General Ledger of ...

to 30 June 2022

Electricity 30 Apr 22 Balance b/d 30 Jun 22 Expense Accrued [bda]

15 000 30 Jun 22 Profit and Loss 3 000 18 000

GJ

GJ

18 000 18 000

Expense Accrued 30 Jun 22 Electricity [bda]

GJ

3 000

Extract Income Statement of …

for the year ended 30 June 2022

less Expenses General and Administrative  Electricity

18 000

Extract Balance Sheet of …

as at 30 June 2022 Current Liabilities   Expense Accrued

3 000

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.8  Extract general ledger and financial statements for electricity

EFFECT OF BALANCE DAY ADJUSTMENT: EXPENSE ACCRUED The effects of balance day adjustment of expense accrued are twofold. • On the income statement, an expense is increased. • On the balance sheet, a current liability is increased.

REVERSAL OF EXPENSE ACCRUED AND ITS EFFECT ON THE EXPENSE ACCOUNT This balance day adjustment should be reversed at the commencement of the next accounting period. The effect of the reversal is to show the expense account as a credit and to close off the expense accrued account. The reversal on 1 July (see figure 10.9) is the opposite of the balance day adjustment entry on 30 June. Created from tafenswlib on 2020-06-24 18:47:46.

393

CHAPTER 10

QUESTION 10.2 The electricity account is received every three months and the last account was processed during April for February–April. For the 10 months ended 30 April 2022 the electricity account balance was $9000 and the balance day adjustment at 30 June was calculated to be an expense accrued for electricity of $1800. At the end of July the three-month electricity account is received for $2700 and processed through the purchases journal. You are required to prepare the journals on 30 June 2022 for the balance day adjustment and the closing journal. Post these journals to the electricity and expense accrued accounts. For July, prepare and post the reversal journal at the commencement of the month and post the purchases journal to the ledger, then balance the accounts.

Example 2: Expense accrued, salaries Salary is another example of expense accrued, because salaries are not paid until after the work or service has been performed or carried out by the employee. The current accounting period ended on 30 June 2022. The balance on the salaries account on 1 June was $91 400. Posting to salaries from the cash payments journal for June totalled $7000. However, the payments were only up to 27 June (see figure 10.12).

Salaries Accounting Period 1 July to 30 June

1 JULY 21 TO 31 MAY 22 $91 400 PAID

1 JUNE TO 27 JUNE $7000 PAID

WEEK 28 JUNE TO 4 JULY Tue Wed Thu Fri Mon $600 $600 $600 $600 $600 NOT PAID Accrue 3 days at $600 per day

Salaries paid Tuesday, 5 days at $600 per day

Year ends 30 June

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.12  Salaries expense incurred for $1800 not yet paid: an expense accrued

Three days at $600 per day were worked. That is, an expense was incurred but there was no payment in the current accounting period and therefore no matching. Salaries had been incurred for three days but had not been paid at 30 June; that is, three days at $600 per day, or $1800. Expenses of $91 400 were incurred and paid from the beginning of the financial year to 31 May, and the payments in June to 27 June totalled $7000. A balance day adjustment is needed to bring the expense to 30 June; that is, three extra days totalling $1800 (see figure 10.13). Extract General Journal of …

30 Jun 22 Salaries Expense Accrued Balance day adjustment for salaries accrued Profit and Loss Salaries [91 400 + 7000 + 1800] Salaries for the year closed out to profit and loss

GJ ... 1 800 1 800 100 200 100 200

FIGURE 10.13 Salaries expense accrued at the end of the accounting period; salaries for the year is closed out to profit and loss

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395

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

The results of this end-of-period accrual can be shown by posting the journals to the extract general ledger and then the final account balances are included in the financial statements (see figure 10.14). Extract General Ledger of ...

to 30 June 2022

Salaries 31 May 22 Balance b/d 30 Jun 22 Bank [payment] Expense Accrued [bda]

CP GJ

91 400 30 Jun 22 Profit and Loss 7 000 1 800 100 200

GJ

100 200

100 200

Expense Accrued 30 Jun 22 Salaries [bda]

GJ

1 800

Extract Income Statement of …

for the year ended 30 June 2022

less Expenses General and Administrative  Salaries

100 200

Extract Balance Sheet of …

as at 30 June 2022 Current Liabilities   Expense Accrued

1 800

FIGURE 10.14  Extract general ledger and financial statements for salaries

REVERSAL OF EXPENSE ACCRUED AND ITS EFFECT ON THE EXPENSE ACCOUNT The balance day adjustment is reversed at the commencement of the next accounting period (figure 10.15). The entry is the opposite of the balance day adjustment on 30 June. Remember that a reversal entry does the opposite to the original balance day adjustment entry. General Journal of … 1 Jul 22 Expense Accrued Salaries Reversal of balance day adjustment salaries accrual

GJ ... 1 800 1 800

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.15  Reversal of salaries expense at the beginning of the new accounting period

The reversal journal of $1800 is prepared on 1 July. At the end of the pay week on Tuesday 4 July the normal weekly payroll is paid for $3000 (five days at $600 per day). If the cash payments journal was posted after the $3000 salaries disbursement there would be a debit to salaries and a credit to bank (see figure 10.16).

396tafenswlib on 2020-06-24 18:47:46. Created from

CHAPTER 10

Extract General Ledger of ...

to 5 July 2022

Salaries 31 May 22 Balance b/d 30 Jun 22 Bank [payment] Expense Accrued [bda] 4 Jul 22 Bank [payment]

CP GJ CP

5 Jul 22 Balance b/d

91 400 30 Jun 22 Profit and Loss 7 000 1 800 100 200 3 000 1 Jul 22 Expense Accrued [reversal] 4 Jul 22 Balance c/d 3 000 1 200

GJ

GJ

100 200

100 200 1 800 1 200 3 000

Expense Accrued 1 Jul 22 Salaries [reversal]

GJ

1 800 30 Jun 22 Salaries [bda]

GJ

1 800

CP

3 000

Bank 4 Jul 22 Payment [salaries]

FIGURE 10.16 Extract general ledger including reversal and payment of salaries account and reversal of accrual account, to 4 July 2022

The effect of accrual accounting and the balance day adjustment of $1800 for the last three working days in June, as well as the reversal in July of the June balance day adjustment, is that there are only two days’ salary expense of $1200 ($600 for Friday 1 July and Monday 4 July) in the accounts for July salaries expense.

QUESTION 10.3 The balance on the wages account at 30 June 2022 was $20 000. Wages of $350 had been incurred but not paid. The wages paid for the first pay on 4 July totalled $1400. You are required to prepare the journals on 30 June 2022 for the balance day adjustment and the closing journal. Post these journals to the wages and expense accrued accounts. For July, prepare and post the reversal journal and post the cash payments journal after payment of the first pay in July, then balance the accounts.

QUESTION 10.4

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Salaries to the end of May 2022 totalled $63 400. Payments for salaries in June 2022 totalled $4600. However, four days at $290 per day were worked but not paid. You are required to prepare the journal for: • adjustment at 30 June 2022 • closing the account at 30 June 2022 • reversal on 1 July 2022, then • post the cash payments journal after the first fortnightly pay on 10 July 2022 for $2900 paid, and • balance the ledger accounts.

QUESTION 10.5 Prepare the adjusting journal on 30 June 2022 and reversal journal on 1 July 2022 for the following balance day adjustments: • wages incurred but not paid $750 • electricity used but no account has been received and the estimated expense is $430 • stationery to be accrued $150.

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WHAT TO DO The amount of expense in the current accounting period that relates to the next accounting period needs to be reduced, so that the expense value only is matched to this accounting period. Crediting the expense account for the amount that has not yet been consumed – that is, prepaid – does this. The debit entry is allocated to an account that can be carried forward to the next accounting period as an expense prepaid: a current asset.

HOW TO ADJUST FOR THE EXPENSE PREPAID From the accounting equation: Assets = Liabilities  + Owner’s Equity + (Revenue  – Expense) [debit] [credit] [credit] [credit] [debit]

or Assets + Expense = Liabilities  + Owner’s Equity + Revenue [debit] [debit] [credit] [credit] [credit]

To increase a current asset the entry is a debit; to reduce an expense the entry is a credit. Use the general journal, as the entry is an internal adjustment and there is no GST (see figure 10.19). Extract General Journal of …

Expense Prepaid the particular expense account Balance day adjustment for expense prepaid

GJ ... xx xx

FIGURE 10.19  Balance day adjustment for expense prepaid at the end of the accounting period

The payment made during the current accounting period will extend an economic benefit into the next accounting period. The amount of payment that relates to the next accounting period is of economic value to the business because it will not have to make a further payment until that benefit has been used (or consumed) in the future. In the current accounting period, this payment made for the future (prepayment) is of economic value and it is shown on the balance sheet as a current asset and is an expense prepaid. There are certain expense accounts that, by their nature, are processed but not used by balance day. Insurance is an account that typically produces an expense paid in advance, because insurance must be paid before the time that is covered. Rent expense is another such example.

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Example 3: Expense prepaid, insurance The current accounting period ends on 30 June 2022. The insurance expense account had a balance of $500 at 30 September 2021. The annual insurance premium (or fee, expense) for $2400 was paid on 30 September 2021 for the period October 2021–September 2022 (see figure 10.20). Before any adjustment at 30 June, the insurance expense account includes the payment of $2400 plus $500 for July to September 2021. The three months of July to September 2021, and the nine months of 1 October 2021 to 30 June 2022, relate to the current accounting period; that is, $500 + $1800 ($2400/12 months × 9 months). Three months, 1 July 2022 to 30 September 2022, relate to the next accounting period; that is, $600 ($2400/12 months × 3 months), which is the prepayment, or expense prepaid. Figure 10.20 demonstrates this, and figure 10.21 shows the journal entries for the balance day adjustment and the close off of the expense to the profit and loss account.

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EFFECT OF BALANCE DAY ADJUSTMENT: EXPENSE PREPAID The effects of balance day adjustment of expense prepaid are twofold. • On the income statement, an expense is decreased. • On the balance sheet, a current asset is increased.

REVERSAL OF EXPENSE PREPAID AND ITS EFFECT ON THE EXPENSE ACCOUNT This balance day adjustment should be reversed at the commencement of the next accounting period. The effect of the reversal is to show the insurance account as a debit and to close off the expense prepaid account (see figure 10.23). Remember that the reversal entry is the opposite of the balance day adjustment. Extract General Journal of …

1 Jul 22 Insurance Expense Prepaid Reversal of balance day adjustment insurance prepaid

GJ … 600 600

FIGURE 10.23  Reversal of insurance expense at the beginning of the new accounting period

After preparing and posting the above journal on the first day of the new accounting period, the general ledger would be as shown in figure 10.24. Extract General Ledger of ...

to 1 July 2022

Insurance 1 Jul 21 Balance b/d 30 Sep 21 Bank [payment]

CP

1 Jul 22 Expense Prepaid [bda]

500 30 Jun 22 Expense Prepaid [bda] 2 400 Profit and Loss 2 900 600

GJ GJ

600 2 300 2 900

GJ

600

Expense Prepaid 30 Jun 22 Insurance [bda]

GJ

600

1 Jul 22 Insurance [reversal]

FIGURE 10.24  Extract general ledger, including reversal of insurance and prepaid accounts, to 1 July 2022

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.6 At 30 June 2022, the balance in the rates account was $2500 and there was a prepayment of $500. You are required to prepare the journals on 30 June 2022 for the end-of-period adjustment, the closing journal and also the reversal journal on 1 July 2022. Prepare general ledger accounts for rates and expense prepaid that show the data given and the posting of the journals on the required dates.

QUESTION 10.7 There was a balance of $2000 in the insurance account before the payment of the annual insurance bill of $3600 on 28 February 2022, for the period March 2022 to February 2023. The accounting year ended on 30 June 2022. You are required to prepare the journals for: • adjustment at 30 June 2022 • closing the account at 30 June 2022, and • reversal on 1 July 2022. Also prepare: • general ledger accounts for insurance and expense prepaid that show the data given and the posting of the journals on the required dates. Created from tafenswlib on 2020-06-24 18:48:01.

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The results of this balance day adjustment can be shown by posting the journals to the extract general ledger and the final account balances are included in the financial statements (see figure 10.30). Extract General Ledger of ...

to 30 June 2022

Interest Received 30 Jun 22 Profit and Loss

GJ

2 550 28 Feb 22 Balance b/d

1 700

30 Jun 22 Revenue Accrued [bda]

GJ

2 550

850 2 550

Revenue Accrued 30 Jun 22 Interest Received [bda]

GJ

850

Extract Income Statement of …

for the year ended 30 June 2022

add Other Revenue   Interest Received

2 550 Extract Balance Sheet of …

as at 30 June 2022 Current Assets   Revenue Accrued

850

FIGURE 10.30  Extract general ledger and financial statements for interest received

EFFECT OF BALANCE DAY ADJUSTMENT: REVENUE ACCRUED The effects of balance day adjustment of revenue accrued are twofold. • On the income statement, a revenue is increased. • On the balance sheet, a current asset is increased.

REVERSAL OF REVENUE ACCRUED AND ITS EFFECT ON THE REVENUE ACCOUNT

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This balance day adjustment should be reversed at the commencement of the next accounting period. The effect of the reversal is to show the interest received account as a debit and to close off the revenue accrued account (see figure 10.31). Remember that the reversal entry is the opposite of the balance day adjustment. Extract General Journal of …

1 Jul 22 Interest Received

GJ … 850

Revenue Accrued

850

Reversal of balance day adjustment interest received accrual

FIGURE 10.31  Reversal of interest received at the beginning of the new accounting period

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405

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

After preparing and posting the above journal on the first day of the new accounting period, the general ledger would be as shown in figure 10.32. When the funds for the interest are received in the new accounting period, they would be processed through the cash receipts journal to debit bank and credit interest received. Extract General Ledger of ...

to 1 July 2022

Interest Received 30 Jun 22 Profit and Loss

1 Jul 22 Revenue Accrued [reversal]

GJ

GJ

2 550 28 Feb 22 Balance b/d 30 Jun 22 Revenue Accrued [bda] 2 550 850

GJ

1 700 850 2 550

GJ

850

Revenue Accrued 30 Jun 22 Interest Received [bda]

GJ

850

1 Jul 22 Interest Received [reversal]

FIGURE 10.32 Extract general ledger, including reversal of interest received and revenue accrued accounts, to 1 July 2022

QUESTION 10.9 Interest on a bank investment account of $375 had been earned but not received by 30 June 2022. The interest received account had a balance of $2138 before the adjustment. You are required to prepare the journals on 30 June 2022 for the end-of-period adjustment, the closing journal and also the reversal journal on 1 July 2022. Prepare general ledger accounts for interest received and revenue accrued that show the data given and the posting of the journals on the required date.

QUESTION 10.10 The six-monthly interest of $1500 on government bonds was due on 31 July. The balance on the interest received account was $1750 on 30 June. You are required to prepare the journal for: • adjustment at 30 June 2022 • closing the account at 30 June 2022, and • reversal on 1 July 2022. Also prepare: • general ledger accounts for interest received and revenue accrued that show the data given, and the posting of the journals on the required dates.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.11 Prepare adjusting and closing journal entries for the year ended 31 December 2022 and extracts of the income statement and balance sheet. Also prepare reversal journal entries on 1 January 2023. General ledger balances on 31 December 2022 were wages $76 600 and interest received $6500. The adjustments for the end of year were wages incurred but not yet paid $1200 and interest earned but not received $1700.

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The current accounting period ends 30 June 2022. The balance on the rent received account on 30 June 2022 is $11 700. Rent is received monthly in advance on premises rented to a third party. The rent received is $900 per month. This means that $900 received in June relates to July rental revenue; this is the revenue received in advance. Figure 10.36 demonstrates this, and figure 10.37 shows the journal entries processing the balance day adjustment and closing off the revenue to the profit and loss account. Extract General Journal of …

GJ ...

30 Jun 22 Rent Received Revenue Received in Advance Balance day adjustment for July rent received in June

900

Rent Received [11 700 – 900] Profit and Loss Rent received for the year closed out to profit and loss

10 800

900

10 800

FIGURE 10.37 Rent received decreased as July rent was included in June; rent received for the year is closed out to profit and loss

The results of this balance day adjustment can be shown by posting the journals to the extract general ledger and then the final account balances are included in the financial statements (see figure 10.38). Extract General Ledger of ...

to 30 June 2022

Rent Received 30 Jun 22 Revenue Rec’d in Advance [bda] Profit and Loss

GJ GJ

900 30 Jun 22 Balance b/d 10 800 11 700

11 700 11 700

Revenue Received in Advance 30 Jun 22 Rent Received [bda]

GJ

900

Extract Income Statement of …

for the year ended 30 June 2022

add Other Revenue   Rent Received

10 800 Extract Balance Sheet of …

as at 30 June 2022 Current Liability   Revenue Received in Advance

900

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.38  Extract general ledger and financial statements for rent received

EFFECT OF BALANCE DAY ADJUSTMENT: REVENUE RECEIVED IN ADVANCE The effects of balance day adjustment of revenue received in advance are twofold. • On the income statement, a revenue is decreased. • On the balance sheet, a current liability is increased.

REVERSAL OF REVENUE RECEIVED IN ADVANCE AND ITS EFFECT ON THE REVENUE ACCOUNT The balance day adjustment is reversed at the commencement of the next accounting period. Remember that it is the opposite of the balance day adjustment on 30 June. This closes off the revenue received in advance account and shows the rent received account as a credit (see figure 10.39). Created from tafenswlib on 2020-06-24 18:48:22.

409

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Extract General Journal of …

1 Jul 22 Revenue Received in Advance Rent Received Reversal of balance day adjustment rent received in advance

GJ ... 900 900

FIGURE 10.39  Reversal of rent received in advance at the beginning of the new accounting period

After preparing and posting the above journal on the first day of the new accounting period the general ledger would be as shown in figure 10.40. Extract General Ledger of ...

to 1 July 2022

Rent Received 30 Jun 22 Revenue Rec’d in Advance [bda] Profit and Loss

GJ GJ

900 30 Jun 22 Balance b/d 10 800 11 700 1 Jul 22 Revenue Rec’d in Advance [rev]

11 700

GJ

11 700 900

GJ

900

Revenue Received in Advance 1 Jul 22 Rent Received [reversal]

GJ

900 30 Jun 22 Rent Received [bda]

FIGURE 10.40 Extract general ledger, reversal of rent received and revenue received in advance accounts

QUESTION 10.12 Rent of $660 ($600 + $60 GST) was received in June for the month of July. The balance of the rent received account at 30 June before the adjustment was $7800. You are required to prepare the journals on 30 June 2022 for the balance day adjustment and the closing journal, and also the reversal journal on 1 July 2022. Prepare general ledger accounts for rent received and revenue received in advance that show the data given and the posting of the journals on the required dates.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.13 On 1 July 2021 L Bathurst had entered a 24-month contract with her tenant for rent of premises for $23 100 ($21 000 + $2100 GST) per annum to be paid monthly in advance. At the end of the financial year, 30 June 2022, the rent received account in the general ledger was $22 750. You are required to prepare the journal for: • adjustment at 30 June 2022 • closing the account at 30 June 2022, and • reversal on 1 July 2022. Also prepare: • general ledger accounts for rent received and revenue received in advance that show the data given and the posting of the journals on the required dates.

QUESTION 10.14 a b c

Prepare general journals for the following balance day adjustments at 30 June 2022: • insurance prepaid $750 • wages accrued $600 • interest receivable $350 • rent received in advance $495 ($450 + $45 GST). From the previous adjustments prepare an extract balance sheet. Prepare reversal journals on 1 July 2022.

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5. Accounts receivable: uncollectable At the end of the financial year, the business should not only ensure that its accruals and prepayments for revenue and expense are accurate. It should also ensure that it accurately records the value of its accounts receivable. If any or all of the accounts receivable are not collectable, then they cannot be classified as current assets in the balance sheet. In chapter 6, you were introduced to internal controls for accounts receivable. An accounts receivable aged listing report was one way of helping in the early identification of bad debt and doubtful debts. You may wish to review the sections on Administration of accounts receivable and Reconciliation: accounts receivable in chapter 6 before continuing.

Bad debt – direct write-off method KEEP IN MIND A bad debt is a debt or account receivable that the business knows, with certainty, will not be collectable or recoverable. The business usually has been advised that the debtor is bankrupt or insolvent and is unable to pay the debt.

In chapter 7, you learnt how to write off bad debts as part of the normal course of business. An adjusting entry is made to write off the debt of the specific account receivable against bad debts expense and GST payable (see figure 10.41). Remember, bad debts expense is classified as a financial and borrowing expense. You may wish to go back to check your understanding of questions 7.23 to 7.26. Extract General Journal of …

Bad Debts Expense [10/11 of the account receivable] GST Payable [1/11 of the account receivable] Accounts Receivable Control – specific account receivable      xxx Bad debt written off

GJ ... xx x xxx

FIGURE 10.41 Write off an account receivable as a bad debt

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At the end of the financial year, the business should do a final review of individual accounts receivable to determine if there are any further funds that it knows with certainty it will be unable to collect. Are there any more that should be written off as bad debts? The general journal entry for the write-off of additional bad debt at the end of the financial year is the same as it is for any other time of the year. Note: there is no reversal of bad debt journals. Now try question 10.15, which involves additional bad debts.

QUESTION 10.15 An extract of account balances for Enid Fisher as at 30 June 2022 showed accounts receivable $22 803, rent received $3016, interest received $1042, salaries $14 624, insurance $6573, rent $7060, bad debts $1034. The balance day adjustments required are as follows. • Insurance includes a prepayment of $2500; rent includes the payment for July $550. • Rent received includes $250 for July. • There is $1089 ($990 + $99 GST) in additional bad debts expense. • Salaries of $585 have been incurred but not paid. • Interest on an investment $957 was due on 25 June but was received on 1 July. You are required to prepare all necessary balance day, closing and reversal journal entries.

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411

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Doubtful debts – allowance (indirect) method The longer an account receivable balance remains outstanding (or unpaid), the greater the chance that the business will not receive the funds owed by the debtor. During – and especially at the end of – the accounting period, the business should check for accounts receivable that are outstanding and well beyond the business’s trading terms for payment. A business may also find that a certain percentage of accounts receivable are unlikely to be recoverable. The individual accounts receivable may not be known, but the business expects that it will be unable to collect a percentage of the total of accounts receivable. At the end of the year it is prudent (or wise) to allow for a certain value of accounts receivable that, in the next accounting period, may not pay. Remember, bad debts are written off knowing that further funds will not be recoverable from a particular accounts receivable. Doubtful debts are based on assumptions, but not certainty, that funds may not be collected from accounts receivable. At the end of the accounting year, an estimate is made of accounts receivable arising from credit sales or services during the current year that may be uncollectable in the next year. The calculation is based on the balance of the accounts receivable control account and analysis of an accounts receivable aged listing report at the end of the current year.

HOW TO ADJUST FOR DOUBTFUL DEBTS The end-of-period general journal entry to account for potentially uncollectable debts introduces two new general ledger accounts: • doubtful debts expense, which is closed out as an expense to the profit and loss account at the end of each accounting period, and • allowance for doubtful debts, which shows the cumulative amounts provided over successive accounting periods. It is a balance sheet item, but as it reduces the net balance of accounts receivable, it is referred to as a negative or contra asset. The creation or increase in the general journal is shown in figure 10.42. Extract General Journal of …

Doubtful Debts Expense Allowance for Doubtful Debts Balance day adjustment for doubtful debt allowance

GJ … xx xx

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.42  Adjustment to increase the allowance for doubtful debts

The balance day adjustment for doubtful debts does not directly reduce the individual account balances in the accounts receivable ledger; it is only an allowance (or provision) for accounts receivable that may not pay. It is not a write-off of any specific accounts receivable that cannot or will not pay, but an allowance or estimate of funds that may not be received. When it is known that an individual debtor will not be paying their account, the specific accounts receivable will be adjusted during the period. This is shown in figure 10.43. Extract General Journal of …

Allowance for Doubtful Debts [10/11 of the account receivable] GST Payable [1/11 of the account receivable] Accounts Receivable Control – specific account receivable xxx Doubtful debt allowance adjusted for debtor not paying

GJ … xx x

FIGURE 10.43  Write off an account receivable against the allowance for doubtful debts

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ALLOWANCE FOR DOUBTFUL DEBTS As the ‘allowance’ for doubtful debts is a contra to the asset accounts receivable account, it is similar in nature to a liability. The amount is not certain but is only an estimate of a future amount that may be uncollectable. It is making an allowance for events that may or may not happen. Accounting standard AASB 137 requires that an allowance is made when uncertainty exists. Here there is uncertainty that all funds owed by accounts receivable will be received.

Example 6: Allowance for doubtful debts

Initial allowance for doubtful debts Having carefully checked all the accounts in the accounts receivable ledger at 30 June 2022, the business decided to establish (or start) an allowance for doubtful debts of $1276. This was 5% of the accounts receivable control account $25 520 (see figure 10.44). Extract General Journal of …

GJ ...

30 Jun 22 Doubtful Debts Expense Allowance for Doubtful Debts Create doubtful debt allowance at 5% of accounts receivable

1 276 1 276

Profit and Loss Doubtful Debts Expense Doubtful debts expense for the year closed out to profit and loss

1 276 1 276

FIGURE 10.44 Creation of allowance for doubtful debts; doubtful debt expense for the year is closed out to profit and loss

This balance day adjustment is posted from the general journal to the extract general ledger and then the final account balances are included in the financial statements (see figure 10.45). Extract General Ledger of ...

to 30 June 2022

Accounts Receivable Control 30 Jun 22 Balance b/d

25 520

Allowance for Doubtful Debts 30 Jun 22 Doubtful Debts Exp [bda]

GJ

1 276

GJ

1 276

Doubtful Debts Expense 30 Jun 22 Allow Doubtful Debts [bda]

GJ

1 276 30 Jun 22 Profit and Loss

Extract Income Statement of …

Copyright © 2018. Cengage. All rights reserved.

for the year ended 30 June 2022

less Expenses Financial and Borrowing   Doubtful Debts Expense

1 276

Extract Balance Sheet of …

as at 30 June 2022 Current Assets   Accounts Receivable Control   less Allowance for Doubtful Debts

25 520 1 276

24 244

FIGURE 10.45 Extract general ledger and financial statements for doubtful debts expense and allowance for doubtful debts, year 1

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413

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

WRITE-OFF OF INDIVIDUAL ACCOUNT RECEIVABLE DURING THE YEAR The business has been advised that a specific account receivable has been declared bankrupt. The $550 owing (including $50 GST) is not recoverable. The entry shown in figure 10.46 would be made. Extract General Journal of …

Allowance for Doubtful Debts [10/11 of the account receivable] GST Payable [1/11 of the account receivable] Accounts Receivable Control – specific account receivable      550 Allowance for Doubtful Debts adjusted for debtor not paying

GJ … 500 50 550

FIGURE 10.46  Write off individual account receivable during the year

ADJUSTED ALLOWANCE FOR DOUBTFUL DEBTS AT THE END OF THE FOLLOWING YEAR Continuing the same example, at the end of the next financial year (30 June 2023), the accounts receivable control totalled $29 920. The business decided to increase the allowance for doubtful debts from 5% to 6% (rounded to the nearest $) of the balance of the accounts receivable control. Existing allowance for doubtful debts = $1276 – $500 = $776. New allowance for doubtful debts = $29 920 × 0.06 = $1795. Increase/(decrease) in allowance for doubtful debts = $1795 – 776 = $1019. Figure 10.47 shows how this adjustment is recorded. Extract General Journal of …

30 Jun 23 Doubtful Debts Expense Allowance for Doubtful Debts Increase doubtful debt allowance to 6% of accounts receivable Profit and Loss Doubtful Debts Expense Doubtful debts for the year closed out to profit and loss

GJ ... 1 019 1 019 1 019 1 019

FIGURE 10.47 Increase to allowance for doubtful debts at the end of the following year; doubtful debt expense for the current year is closed out to profit and loss, year 2

This balance day adjustment is posted from the general journal to the extract general ledger and then the final account balances are included in the financial statements (see figure 10.48). Extract General Ledger of ...

Copyright © 2018. Cengage. All rights reserved.

to 30 June 2023

Accounts Receivable Control 30 Jun 22 Balance b/d

25 520

30 Jun 23 Balance b/d

29 920

Allowance for Doubtful Debts 30 Jun 23 Accounts Receivable Control 30 Jun 23 Balance c/d

500 30 Jun 22 Doubtful Debts Expense [bda] 1 795 30 Jun 23 Doubtful Debts Expense [bda] 2 295 1 July 23 Balance b/d

GJ GJ

1 276 1 019 2 295 1 795

GJ GJ

1 276 1 019

Doubtful Debts Expense 30 Jun 22 Allowance Doubtful Debts [bda] 30 Jun 23 Allowance Doubtful Debts [bda]

GJ GJ

1 276 30 Jun 22 Profit and Loss 1 019 30 Jun 23 Profit and Loss

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Extract Income Statement of …

for the year ended 30 June 2023

less Expenses Financial and Borrowing   Doubtful Debts Expense

1 019

Extract Balance Sheet of …

as at 30 June 2023 Current Assets   Accounts Receivable Control   less Allowance for Doubtful Debts

29 920 1 795

28 125

FIGURE 10.48 Extract general ledger and financial statements for doubtful debts expense and allowance for doubtful debts, year 2

EFFECT OF BALANCE DAY ADJUSTMENT: DOUBTFUL DEBTS The effects of balance day adjustment of doubtful debts are twofold. • On the income statement, an expense is increased. • On the balance sheet, a contra (negative) current asset is increased, and net current assets are decreased.

REVERSAL OF ADJUSTMENT TO ALLOWANCE FOR DOUBTFUL DEBTS No reversal is required.

QUESTION 10.16 The business of R Williams decided on 30 June 2022 to create an allowance for doubtful debts of $1200. Using this data, you are required to: • prepare the journal for the adjustment at 30 June 2022 • prepare the journal for closing the account at 30 June 2022 • post the journal entries to the general ledger accounts for doubtful debts expense and allowance for doubtful debts. This solution is used in question 10.17.

Copyright © 2018. Cengage. All rights reserved.

Additional bad debts and allowance for doubtful debts Although more complex than the above, the following method more accurately reflects the matching of revenue and expense. Three accounts are now used: bad debts expense, doubtful debts expense and allowance for doubtful debts. There are four basic steps for this alternative method of bad debt write-off. 1 Write off any bad debts during the year and at the end of the year in the same way as the direct method (see figure 10.41). 2 At the end of the accounting year a balance day adjustment is required to close out the allowance for doubtful debts to the bad debts expense account. The allowance for doubtful debts account was created at the end of last year to allow for any bad debts that would arise from sales in that year; the creation of the allowance for doubtful debts was based on the balance of accounts receivable at the end of last year (see figure 10.49).

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415

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Extract General Journal of …

Allowance for Doubtful Debts Bad Debts Expense Transfer of allowance from the beginning of the year

GJ … xx xx

FIGURE 10.49  Opening balance of allowance for doubtful debts closed out to bad debts at year’s end

  The effect of the above entry is to remove from the bad debts expense account any amounts relating to doubtful debts that existed at the beginning of the accounting period. The assumption in this case is that these doubtful debts were already expensed in the previous accounting period, as they related to sales in that period. It can therefore be assumed that, after the entry to close the allowance for doubtful debts, any balance remaining in the bad debts expense account represents amounts relating to sales in the current period. 3 Calculate the new allowance for doubtful debts based on the accounts receivable balance as at the end of this accounting year. The debit to doubtful debts expense is an expense for this year, which is matched against the revenue earned, and profit made for this year (see figure 10.50). Extract General Journal of …

Doubtful Debts Expense Allowance for Doubtful Debts Doubtful debt allowance from current accounts receivable

GJ … xx xx

FIGURE 10.50  Creation of allowance for doubtful debts based on current balance of accounts receivable

4 Close out the balances in the bad debts and doubtful debts expense accounts to profit and loss. This is usually the case for any other expenses with end of year balances (see figure 10.51). Extract General Journal of …

Profit and Loss Bad Debts Expense Doubtful Debts Expense Accounts closed out to profit and loss

GJ … xx

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.51  Bad debts and doubtful debts expenses closed out to profit and loss

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Example 7: Bad debts and allowance method Balance at 1 July 2021: allowance for doubtful debts $1100. Balances at 30 June 2022: accounts receivable $34 980, GST payable $5000 and bad debts $1243. An account receivable, J Dee, was written off as an additional bad debt for $847 ($770 + $77 GST). It was estimated that 6% of the accounts receivable were doubtful and should be processed as a balance day adjustment (see figure 10.52). Extract General Journal of …

GJ ...

30 Jun 22 Bad Debts Expense 1 GST Payable Accounts Receivable Control — J Dee      847 Write off additional bad debt 2

3

4

770 77 847

Allowance for Doubtful Debts Bad Debts Expense Transfer doubtful debt allowance from the beginning of the year

1 100

Doubtful Debts Expense Allowance for Doubtful Debts New 6% Doubt D Allow from A/c Rec [34 980 – 847 = 34 133 × 6%]

2 048

Profit and Loss Bad Debts Expense [1243 + 770 – 1100] Doubtful Debts Expense Accounts closed to profit and loss at end of accounting year

2 961

1 100

2 048

913 2 048

FIGURE 10.52  Bad debt write-off using the allowance method

The results of this balance day adjustment can be shown by posting the journals to the general ledger; then the final account balances are included in the financial statements (see figure 10.53). Extract General Ledger of ...

to 30 June 2022

Accounts Receivable Control 30 Jun 22 Balance b/d

34 980 30 Jun 22 Bad Debts Expense [1] GST Payable [1] Balance c/d 34 980 34 133

1 Jul 22 Balance b/d

GJ GJ

770 77 34 133 34 980

Allowance for Doubtful Debts

Copyright © 2018. Cengage. All rights reserved.

30 Jun 22 Bad Debts Expense [2]

GJ

1 100

1 Jul 21 Balance b/d 30 Jun 22 Doubtful Debts Expense [3]

GJ

1 100 2 048

GST Payable 30 Jun 22 Acc’nts Receivable Control [1] GJ Balance c/d

77 30 Jun 22 Balance b/d 4 923 5 000 1 Jul 22 Balance b/d

5 000 5 000 4 923

Bad Debts Expense 30 Jun 22 Balance b/d Acc’nts Receivable Control [1] GJ

1 243 30 Jun 22 Allow Doubtful Debts [2] 770 Profit and Loss [4] 2 013

GJ GJ

1 100 913 2 013

GJ

2 048

Doubtful Debts Expense 30 Jun 22 Allow Doubtful Debt [3]

GJ

2 048 30 Jun 22 Profit and Loss [4]

CONTINUED Created from tafenswlib on 2020-05-30 07:58:29.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Extract Income Statement of …

for the year ended 30 June 2022

less Expenses Financial and Borrowing   Bad Debts Expense   Doubtful Debts Expense

913 2 048

2 961

Extract Balance Sheet of …

as at 30 June 2022 Current Assets   Accounts Receivable Control   less Allowance for Doubtful Debts Current Liabilities   GST Payable

34 133 2 048

32 085 4 923

FIGURE 10.53  Extract general ledger and financial statements for allowance for doubtful debts

QUESTION 10.17 On 30 June 2023 R Williams decides to increase the allowance for doubtful debts from $1200 (created in 2022) to 5% of the accounts receivable control account balance of $49 995. Bad debts expense of $3553 had already been written off during the year. Using the combined method you are required to prepare: • adjustments and closing journal entries • general ledger accounts that show the data given and the posting of the journals on the required dates • an extract of the income statement, and • an extract of the balance sheet.

QUESTION 10.18

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An extract of balances at 31 December 2022 showed accounts receivable control $60 610, allowance for doubtful debts $750, GST payable $1000 and bad debts expense $2500. Using the combined method, adjustments required at the end of December were: – an additional bad debt of $605 ($550 + $55 GST) to be written off, and – the allowance for doubtful debts to be increased to 2% of the accounts receivable control account. You are required to prepare: • adjusting journal entries • extract income statement and balance sheet, and • any necessary reversal entries.

6. Depreciation KEEP IN MIND A non-current asset is an asset that provides future economic value to a business over more than one year. It is acquired in anticipation of generating revenue over several accounting periods.

Although the cost of a non-current asset is recorded in the books of account when it is acquired, the matching principle provides the means for its cost to be allocated over its useful life. In this way, the cost of the asset is treated as an expense matched to the revenue it has generated in a particular period of time. This cost allocation for the period, known as depreciation expense, is dependent upon the full cost and the useful life of that particular non-current asset, less its residual or salvage value. Depreciation is the value of a non-current asset that is expensed by spreading the cost over the expected useful life of the asset.

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As depreciation is an expense, the depreciation account is debited and is closed to profit and loss at the end of each accounting period. Accumulated depreciation aggregates or totals the depreciation that has been closed out to depreciation expense over the useful life of the asset. It is an account that effectively reduces the noncurrent asset and is of a credit nature. The balance of the accumulated depreciation is shown with the non-current asset in the balance sheet. The balance of the non-current asset less the balance of the accumulated depreciation provides the reduced cost base of the asset. Similar to allowance for doubtful debts, accumulated depreciation reduces the asset, and may be referred to as a contra or negative asset. Depreciation, methods for calculating the expense and the effect of disposal of non-current assets will be covered in more detail in chapter 13. The following is a brief introduction to depreciation for the purposes of balance day adjustments. Figure 10.54 shows the basic balance day adjustment journal entry to record depreciation expense and accumulated depreciation. Extract General Journal of …

Depreciation – Non-current Asset Accumulated Depreciation – Non-current Asset Depreciation for the year of a non-current asset

GJ … xx xx

FIGURE 10.54  Depreciation of non-current asset and the accumulation of that depreciation

Straight line depreciation The straight line method of depreciation is perhaps the most common and sets out the accounting principles clearly. The prime cost method, which is used for taxation purposes, is calculated the same as the straight line method, but does not include residual value.

CALCULATION

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A non-current asset of $10 000 with a useful life of five years (or 20% p.a.)3 has a depreciation expense of $2000 for each of those five years (see figure 10.55). Time

Year

Asset Cost

Start of year End of year End of year End of year End of year End of year

1 1 2 3 4 5

10 000

Depreciation

Accumulated Depreciation

2 000 2 000 2 000 2 000 2 000

2 000 4 000 6 000 8 000 10 000

FIGURE 10.55  Depreciation schedule over the useful life of the non-current asset

If it is expected that at the end of the fifth year the asset will have a residual (scrap or salvage) value, then the annual depreciation is calculated by deducting the estimated residual value from the original cost to find the depreciable amount, and depreciating this lower figure over the useful life of the asset. Original cost  –  Estimated residual value  =  Depreciable amount Original cost  –  Estimated residual value Estimated useful life in years

 = Depreciation for one full year

If the asset was not purchased at the commencement of the accounting period, then the amount of depreciation will be in proportion to the length of time the business has benefited from the asset for that particular year: the matching concept applies. Created from tafenswlib on 2020-05-30 08:00:07.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Assume depreciation is calculated at $1200 for each year and the asset is purchased eight full months (that is, on the first day of the month) before the end of the accounting period. Then the depreciation for the first year (a part year) is $800 and for the second year it is $1200 (a full year). With technological improvements occurring in all areas of business, the calculation of an effective life of an asset is usually a ‘best estimate’ based on the historical usefulness of similar assets. To estimate a scrap value at the end of that estimated useful life is very difficult and discretionary. The standard AASB 116 Property, Plant and Equipment (paragraph 53) acknowledges that, in practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount.

Example 8: Depreciation, straight line method A machine is purchased on 1 July 2021 for $6050 ($5500 + $550 GST) with an estimated residual value of $550 ($500 + $50 GST) and an estimated useful life of five years (see figure 10.56). If there were any installation costs then these would be added to the purchase cost of the machinery. Cost of asset + Installation – Residual value = Depreciable amount (from the date it became useable in production) Cost of machine less residual value Depreciable amount Estimated useful life, in years Depreciation for each year

5 500 500 5 000 5 $1 000

FIGURE 10.56  Depreciation schedule with (estimated) residual value

The general journal in this example will be the same for each of the five years of the useful life of the asset because it was purchased at the commencement of the accounting period. The end-of-period adjustments and the closing general journal for the depreciation of machinery would appear as shown in figure 10.57. Extract General Journal of …

30 Jun 22 Depreciation – Machinery Accumulated Depreciation – Machinery Depreciation of machinery for the year Profit and Loss Depreciation – Machinery Depreciation – machinery closed to profit and loss at year end

GJ ... 1 000 1 000 1 000 1 000

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FIGURE 10.57  Depreciation of machinery at the end of the accounting year; closed out to profit and loss

Figure 10.58 shows an extract of the general ledger after the above journal entries have been posted and an extract of the financial statements, and figure 10.59 shows how the accumulated depreciation would appear in the balance sheet of the following year. Extract General Ledger of ...

to 30 June 2022

Machinery 1 Jul 21 Bank [payment]

CP

5 500

Accumulated Depreciation – Machinery 30 Jun 22 Depreciation – Machinery

GJ

1 000

GJ

1 000

Depreciation – Machinery 30 Jun 22 Accum Deprec – Machinery

GJ

1 000 30 Jun 22 Profit and Loss

CONTINUED 420tafenswlib on 2020-05-30 08:00:07. Created from

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Extract Income Statement of …

for the year ended 30 June 2022

less Expenses General and Administrative   Depreciation – Machinery

1 000

Extract Balance Sheet of …

as at 30 June 2022 Non-current Assets  Machinery   less Accumulated Depreciation

5  500 1 000

4 500

FIGURE 10.58 Extract of 2022 general ledger and financial statements for depreciation and accumulated depreciation of machinery Extract Balance Sheet of …

as at 30 June 2023 Non-current Assets  Machinery   less Accumulated Depreciation

5 500 2 000

3 500

FIGURE 10.59  Extract of 2023 balance sheet for accumulated depreciation of machinery

EFFECT OF BALANCE DAY ADJUSTMENT: DEPRECIATION The effects of balance day adjustment of depreciation are twofold. • On the income statement, an expense is increased. • On the balance sheet, a non-current asset is decreased.

REVERSAL OF ADJUSTMENT FOR DEPRECIATION No reversal is required.

QUESTION 10.19

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P Way purchased a motor vehicle on 1 July 2021 for $38 500 ($35 000 + $3500 GST) with an estimated residual value of $3300 ($3000 + $300 GST) and an estimated useful life of four years. Using straight line depreciation, prepare the general journal on 30 June 2022: • for the balance day adjustment, and • to close the expense to profit and loss account. Prepare an extract income statement and balance sheet.

QUESTION 10.20 Equipment is purchased on 31 December 2021 for $23 100 ($21 000 + $2100 GST). It is to be depreciated at 15% p.a. straight line depreciation and is expected to have a residual value of $1100 ($1000 + $100 GST). As at 30 June 2022, prepare: • general journals for balance day adjustments and closing the expense to the profit and loss account • an extract income statement, and • an extract balance sheet.

QUESTION 10.21 M Bromley purchased office equipment on 1 January 2021 for $19 250 ($17 500 + $1750 GST) and expected that the useful life would be five years with a nil residual value. Use straight line depreciation. For the year ended 30 June 2022, prepare the adjustment journal and an extract of the balance sheet as at the end of June 2022. Be sure you get the dates correct. Created from tafenswlib on 2020-05-30 08:00:07.

421

MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

QUESTION 10.22 On 31 December 2020 D Burrendong used a debit card to purchase machinery for $6270 ($5700 + $570 GST) to be depreciated at 20% p.a. and an estimated scrap value of $220 ($200 + $20 GST); as well as office equipment for $4400 ($4000 + $400 GST) to be depreciated at 15% p.a. Using straight line depreciation, prepare: • adjustment and closing general journals for 30 June 2021 • an extract income statement for 30 June 2021 • an extract balance sheet for 30 June 2021, and • an extract balance sheet for 30 June 2022.

7. Variance between perpetual inventory records and physical inventory The effects of using either periodic inventory or perpetual inventory are considered throughout this book. In chapter 9 you were introduced to the way the two inventory methods were treated at the end of the accounting period and their impact on the financial statements.

Review of inventory Let us review inventory and its context for the small-to-medium sole trader business. Inventory is what the business buys in bulk or large quantities and sells in smaller quantities. There is generally no change in the product description; it is taken off the pallet and out of the carton and put on the shelf ready for sale. How is this inventory controlled and how does the business know how much it has? What is the value of the inventory asset on its shelves and in storage facilities? There are two basic methods of finding the answers to the above questions: the first is through the periodic inventory method and the second is through the perpetual inventory method. The choice of method is governed by the costs and benefits of each inventory control system. It is also determined by the value of the individual inventory items, and the volumes sold. With the implementation of computerised accounting systems, perpetual inventory methods are relatively easy to use and are common.

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REVIEW OF PERIODIC INVENTORY The business only knows how much of each item is available for sale by physically inspecting and checking the quantities. The business would need to know what quantities are needed for sale at that time of the year. Is there too much or too little? Good physical facilities and controls should be in place to minimise loss through, for example, damage or theft of the goods. A physical stocktake of inventory should be performed at least once per year. The inventory is counted and valued at its cost value at the end of the accounting year. This once-a-year cost value is journalised as a debit to the inventory account and a credit to trading (see figure 10.60). Extract General Journal of …

Inventory Trading Inventory value following physical stocktake

GJ … xx xx

FIGURE 10.60  Inventory entered into ledger following the valuation of the physical stocktake at the end of the current accounting year

The inventory value from the previous end-of-year stocktake is referred to as the opening inventory for the current period. This balance remained in the inventory account throughout the current year, until transferred or closed out to the trading account, together with the purchases account and any other costs 422tafenswlib on 2020-06-24 18:49:02. Created from

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of getting inventory to the business (see figure 10.61). In chapter 9 we showed how these accounts form part of the calculation for the cost of sales subtotal. Extract General Journal of …

Trading Inventory [from previous year’s annual stocktake] Purchases [of inventory in current year] Freight Inwards and Import Costs Opening inventory, purchases and other costs closed to trading

GJ … xxx xx xxx x

FIGURE 10.61 Inventory from the previous year’s physical stocktake is closed out, together with purchases and other costs of acquiring inventory, at the end of the current accounting year

During the year when inventory is bought, the values are immediately treated as an expense and are debited to the purchases account (see figure 10.62). Extract General Journal of …

Purchases GST Receivable Accounts Payable Control or Bank Inventory purchases on credit and for cash

GJ … xx x xx

FIGURE 10.62 Purchase of inventory during the year for credit or cash (normally processed through purchase and cash payment journals)

When a sale of inventory occurs, having been sold on credit or for cash to a customer, then there is no acknowledgement in the accounts that there has been any movement of any inventory. Neither the current asset inventory nor the expense purchases are changed. The only entry in the accounts is at the selling price to accounts receivable or bank, sales and GST payable (see figure 10.63). Extract General Journal of …

Accounts Receivable Control or Bank Sales GST Payable Inventory sold on credit and for cash

GJ … xx xx x

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.63 Sale of inventory during the year on credit or for cash (normally processed through sale and cash receipt journals)

The business will make the decision to use the periodic inventory system if it considers that the benefits outweigh the costs of the perpetual inventory system.

REVIEW OF PERPETUAL INVENTORY The perpetual inventory method is a control system where movements of inventory are continually updated. The business has a record of each item of inventory, where it is located and its cost. There are various methods of maintaining and determining perpetual inventory costs. This inventory system includes the actual cost of the items as well as freight inwards and any importation costs of the particular goods. However, this type of costing is beyond the scope of this book. For our current studies, it is important to understand that the business can identify the cost of its investment in inventory at any point in time. The cost of any inventory sold can also be determined at the time of processing the tax invoice. Whether a periodic or perpetual inventory system is used, the business knows the selling price of the inventory sold. However, only with the perpetual system does it know the cost of each sale made. Created from tafenswlib on 2020-06-24 18:49:02.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Monthly as well as annual reports can be produced showing the cost of the inventory sold. The amount can be obtained from the cost of sales general ledger account. With perpetual inventory, cost of sales is an actual general ledger account and not derived from several accounts, as is necessary in the periodic inventory system. Both the sales and the cost of sales accounts will be closed to trading (see figure 10.64) and the gross profit can be determined. The gross profit is then transferred from the trading account to profit and loss. Extract General Journal of …

Trading Cost of Sales Cost of sales closed out to trading

GJ … xx xx

FIGURE 10.64  Cost of sales account closed out at the end of the current accounting period

There are additional costs in maintaining a perpetual inventory system. All inventory items must be recorded when bought as well as when sold, and the cost shown in the inventory system must be updated. The use of computer accounting systems can automate this process. Similar to a periodic system, a business using a perpetual inventory system should complete a physical stocktake of all inventory items at the end of the accounting year. The results of the stocktake are then reconciled with the items and quantities in the manual or computerised inventory records. This procedure is a major inventory control measure. Any difference between the physical count and the inventory and accounting records must be corrected. The records are adjusted to match the physical count. This will ensure the value of the inventory account is accurate in the financial statements. Remember, inventory is a current asset and is included in the balance sheet. It would also be prudent for a business to physically count certain inventory items during the year and reconcile the items and quantities against the records. The accounting entry for the correction will be discussed later in this chapter.

Periodic and perpetual inventory cycles compared COMMENCEMENT OF BUSINESS When inventory is brought into the business on commencement it is immaterial which inventory system is in use, because there is no difference to the processing of the event through the general journal (see figure 10.65). Periodic Inventory

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Inventory Capital

Perpetual Inventory

7 000 7 000

Inventory Capital

7 000 7 000

FIGURE 10.65  Inventory on commencement of business

PURCHASE OF INVENTORY ON CREDIT There is a difference between the periodic and perpetual inventory systems (see figure 10.66). What is it? Periodic Inventory Purchases GST Receivable Accounts Payable Control

Perpetual Inventory xx x

FIGURE 10.66  Purchase of inventory on credit

424tafenswlib on 2020-06-24 18:49:02. Created from

xx

Inventory GST Receivable Accounts Payable Control

xx x xx

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PURCHASE OF INVENTORY FOR CASH There is a difference between the periodic and perpetual inventory systems (see figure 10.67). What is it? Periodic Inventory Purchases GST Receivable Bank

Perpetual Inventory xx x xx

Inventory GST Receivable Bank

xx x xx

FIGURE 10.67  Purchase of inventory for cash

Posting the above journals to an extract of some of the ledger accounts highlights the differences between the inventory systems, as shown in figure 10.68. Periodic Inventory

Perpetual Inventory

Inventory Capital

Inventory

7 000

Capital Accounts Payable Bank [payment]

Purchases Accounts Payable Bank

7 000 xx xx

xx xx

FIGURE 10.68  Commencement of business and purchase of inventory

SALE OF INVENTORY ON CREDIT There is no difference to the processing of the actual sale on credit, at selling price (see figure 10.69). Periodic and Perpetual Inventory Accounts Receivable Control Sales GST Payable

xx xx x

FIGURE 10.69  Sale of inventory on credit, at selling price

However, there is a major difference in the recording of the costs with the sale of inventory on credit (see figure 10.70). What is it? Periodic Inventory

Perpetual Inventory

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Cost of Sales Inventory

xx xx

FIGURE 10.70  Costs processed following the sale of inventory on credit

Posting the above journals to an extract of some of the ledger accounts highlights the differences between the inventory systems is shown in figure 10.71. Periodic Inventory

Perpetual Inventory

Inventory Capital

7 000 Purchases

Accounts Payable Bank

Inventory Capital Accounts Payable Bank [payment]

xx xx

7 000 Cost of Sales xx xx

x

Cost of Sales Inventory [credit sale]

x

FIGURE 10.71  Cost of sales from a credit sale Created from tafenswlib on 2020-06-24 18:49:02.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

SALE OF INVENTORY FOR CASH There is no difference to the processing of the actual cash sale, at selling price (see figure 10.72). Periodic and Perpetual Inventory Bank

xx Sales GST Payable

xx x

FIGURE 10.72  Sale of inventory for cash, at selling price

However, there is a major difference in the recording of the costs with the cash sale (see figure 10.73). What is it? Periodic Inventory

Perpetual Inventory Cost of Sales Inventory

xx xx

FIGURE 10.73  Costs processed following the cash sale of inventory

Posting the above cost journal is shown in figure 10.74. Periodic Inventory

Perpetual Inventory

Inventory Capital

7 000 Purchases

Accounts Payable Bank

Inventory Capital Accounts Payable Bank [payment]

xx xx

7 000 Cost of Sales xx Cost of Sales xx

x x

Cost of Sales Inventory [credit sale] Inventory [cash sale]

x x

FIGURE 10.74  Cost of sales from a cash sale

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VARIANCE: PERPETUAL INVENTORY RECORDS AND PHYSICAL INVENTORY COUNT DURING THE YEAR You have already learned that specific inventory items should be physically counted during the year and checked against the perpetual inventory records. Assume that during the year the inventory system showed five at $100 (at inventory cost) while the physical count indicated two at $100, giving an inventory loss variance of $300 (5 – 2 = 3 × $100). Inventory needs to be credited by $300 and an inventory variance account debited, which is used to help monitor variances as inventory is counted during the year. The inventory cost reduction of $300 (credit) will now need to include GST, so the debit to inventory variance is $330 and GST receivable is credited $30 (see figure 10.75). (This procedure is similar to that used when the owner had taken inventory as drawings; that is, drawings $330 debit, inventory $300 credit and GST receivable $30 credit.) Periodic Inventory

Perpetual Inventory Inventory Variance [loss] Inventory GST Receivable

330 300 30

FIGURE 10.75  Inventory value reduced and allocated to inventory variance as a loss, and GST adjustment

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Differences between the balance of the inventory account in the perpetual system and the value of the physical inventory require adjustments to the inventory account. It must agree with the value of the physical count. The other side of the entry is to an inventory variance account, which includes a 10% GST. Therefore, the GST receivable account is also adjusted. The inventory variance (inventory account balance − value of physical inventory) can be either a loss (debit) or gain (credit). The impact of the journal in figure 10.75 is posted to the extract ledger in figure 10.76. Periodic Inventory

Perpetual Inventory

Inventory Capital

7 000 Purchases

Accounts Payable Bank

Inventory Capital Accounts Payable Bank [payment]

xx xx

7 000 Cost of Sales xx Cost of Sales xx Invent Variance [loss]

x x 300

GST Receivable Inventory Variance

30

Cost of Sales x x

Inventory [credit sale] Inventory [cash sale]

Inventory Variance Inventory [loss]

330

FIGURE 10.76  Inventory variance journal is posted to the extract general ledger

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END-OF-YEAR PHYSICAL STOCKTAKE AND INVENTORY VARIANCE Whether a perpetual inventory or periodic inventory system is used, the business conducts a physical stocktake at the end of the financial year. With the perpetual inventory system, the total value of this physical stocktake is compared to the value in the books and the accounts are adjusted to reflect the total value of the physical stocktake. Following the physical stocktake, it is essential that the value of inventory is adjusted in the records to match the value of physical inventory holdings. The GST and inventory variance accounts must also be adjusted. There is no inventory variance with the periodic inventory system, as there is only the one annual physical stocktake and there is nothing to compare to obtain a variation. The inventory count and valuation have to be assumed to be correct. With perpetual inventory, assume that the inventory valuation based on the end-of-year inventory physical count is less than the balance in the inventory account. This indicates that there has been a loss of physical inventory; it is unusual for there to be a gain or a significant gain. The inventory physical count was valued at $9500 and the inventory records showed a total cost of $9900; there is a loss of $400 ($9900 – $9500). The journal for the inventory variance, loss adjustment incorporating the GST, would be $440 ($400 + $40 GST), as shown in figure 10.77. Periodic Inventory

Perpetual Inventory Inventory Variance [loss] Inventory GST Receivable

440 400 40

FIGURE 10.77  Following annual stocktake, adjustment of inventory through the variance and GST

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

The journal in figure 10.77 is posted to the extract ledger in figure 10.78. After the inventory variance adjustment has been posted, the balance on the perpetual inventory account will be $9500.

Capital

Periodic Inventory

Perpetual Inventory

Inventory

Inventory

7 000

Capital Accounts Payable Bank [payment]

Purchases Accounts Payable Bank

7 000 Cost of Sales xx Cost of Sales xx Invent Variance [loss]

x x 300

Invent Variance [loss] Balance c/d

400 9 500 xx xxx

xx xx xx xxx 9 500

Balance b/d

GST Receivable Inventory Variance Inventory Variance

30 40

Cost of Sales Inventory [credit sale] Inventory [cash sale]

x x

Inventory Variance Inventory [loss] Inventory [loss]

330 440

FIGURE 10.78  Inventory variance journal is posted to the extract general ledger

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ACCOUNTS CLOSED TO TRADING AND PREPARATION OF THE INCOME STATEMENT The inventory has been counted at the end of the year and, with the perpetual inventory system, the inventory account now agrees with the physical count and valuation. The balance of the inventory variance, provided it was not a material or major variance, would be transferred to the cost of sales account at the end of the financial year. A large variance may be classified as a separate item in the income statement, depending on its materiality and disclosure considerations. Assuming all other balance day adjustments have been completed, the normal closing of accounts can now occur for both the periodic and perpetual inventory systems. As discussed in chapter 9, some accounting systems may bypass the trading account and close revenue and expense accounts directly to the profit and loss account. It was also indicated that, in manual recording systems, closing journals are rarely prepared. However, to assist with your understanding of the formal process, the closing journals are shown in figure 10.79 and the extract general ledger is shown in figure 10.80. Periodic Inventory Trading Inventory [opening] Purchases Accounts closed to trading Inventory [closing] Trading Inventory as per end of year stocktake

Perpetual Inventory xxx

770

7 000 xxx

Cost of Sales Inventory Variance Variance closed to cost of sales

xxx

9 500

Trading Cost of Sales Cost of sales closed to trading

9 500

FIGURE 10.79  Journals closing accounts to trading account, eventually

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770

xxx

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Periodic Inventory

Perpetual Inventory

Inventory Capital Trading [closing] Accounts Payable Bank [payment]

Inventory

7 000 Trading 9 500 Purchases

7 000

xx Trading xx xxx

xxx

Capital Accounts Payable Bank [payment]

xxx Balance b/d

Trading Inventory [open] Purchases Profit and Loss

7 000 Cost of Sales xx Cost of Sales xx Invent Variance [loss]

x x 300

Invent Variance [loss] Balance c/d

400 9 500 xx xxx

xx xxx 9 500 GST Receivable

7 000 Sales xxx Inventory [close] xxx

x xxx 9 500

x xxx

x xxx

Inventory Variance Inventory Variance

30 40 70

[gross profit]

Cost of Sales Inventory [credit sale] Inventory [cash sale] Inventory Variance

x Trading x 770 xxx

xxx

xxx

Inventory Variance Inventory [loss] Inventory [loss]

330 Cost of Sales 440 770

770 770

Trading Cost of Sales Profit and Loss

xxx Sales xxx

x xxx

[gross profit]

x xxx

x xxx

FIGURE 10.80  Ledger accounts closed and posted to trading account

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INCOME STATEMENT – COMPARISON BETWEEN PERIODIC AND PERPETUAL INVENTORY SYSTEMS The reporting differences between periodic and perpetual inventory systems are shown in an example in figure 10.81. Note that the periodic inventory system shows both inventory at the end of the previous period (opening inventory at the commencement of the current period) and the end of the current period, as these are part of the calculation of the cost of sales subtotal. A perpetual inventory does not need to show inventory in the income statement, as it includes the balance of the cost of sales account as the expense.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Periodic Inventory

Perpetual Inventory

Extract Income Statement

Extract Income Statement

for the year ended 30 June 2022 Sales less Cost of Sales 7 000 Inventory [opening] Purchases 45 000 Freight Inwards 3 500 Import Costs 2 500 Cost of Goods Available for Sale 58 000 less Inventory [closing] 9 500 Cost of Sales Gross Profit less Expenses Net Profit

90 000

for the year ended 30 June 2022 Sales less Cost of Sales Gross Profit less Expenses Net Profit

90 000 48 500 41 500 31 500 10 000

48 500 41 500 31 500 10 000

FIGURE 10.81  Income statement reporting differences between periodic and perpetual inventory systems

QUESTION 10.23 Indicate the correct option in the following statements: a b c d e f

g

h

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i j

With a perpetual inventory system, the business updates its inventory records following a sale. With a periodic inventory system, the business updates its inventory records following a sale. Which inventory system counts and values the inventory at the end of the accounting year? Which inventory system usually checks the inventory records by carrying out partial stocktakes during the year? Periodic inventory systems use a cost of sales account.

True/False

Perpetual inventory systems use an inventory variance account to allocate the differences in value from physical counts compared with the inventory records. The answer to the question of whether to use a periodic or perpetual inventory system should be assisted by a cost and benefit analysis. The periodic inventory system counts the inventory only at the end of the accounting period. The inventory variance balance, provided it is not a material amount, is usually closed out to the sales account. The perpetual inventory system allocates purchases of inventory to the purchases account.

True/False

True/False Periodic/Perpetual/Both periodic and perpetual Periodic/Perpetual/Both/Neither True/False

True/False

True/False True/False True/False

QUESTION 10.24 P Indian uses perpetual inventory and during the year carries out physical stocktakes of certain inventory items. During the year ended 30 June 2022, P Indian carries out two partial physical stocktakes of certain stock items and a full end-of-year stocktake on 30 June 2022. The results of these three separate stocktakes are shown in figure 10.82.

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Date

Inventory Account Value

Physical Count Value

31 October 2021 28 February 2022 30 June 2022

7 500 9 000 28 700

7 000 8 900 27 800

FIGURE 10.82  Partial and complete physical stocktakes undertaken during the year Part A: Prepare adjusting general journals during the year and at the end of the accounting year as if there were no 10% GST. At the end of the year, close the inventory variance account to cost of sales account. Part B: Prepare adjusting general journals during the year and at the end of the accounting year as if the 10% GST applies. At the end of the year, close the inventory variance account to cost of sales account.

QUESTION 10.25 I Pacific keeps inventory using the perpetual inventory system and carries out a rotational stock count of a specific portion of the inventory every three months, as well as the full end-of-year stocktake as at 30 June 2022. The results of the four separate stocktakes are shown in figure 10.83. Date

Inventory Account Value

Physical Count Value

30 September 2021 31 December 2021 31 March 2022 30 June 2022

40 900 53 700 45 500 180 200

40 300 54 000 45 100 179 000

FIGURE 10.83  Rotational and complete physical stocktakes undertaken during the year Part A: Prepare adjusting general journals during the year and at year’s end as if there were no 10% GST. Also at year’s end, close the inventory variance account to cost of sales account. Part B: Prepare adjusting general journals during the year and at year’s end as if the 10% GST applies. Also at year’s end, close the inventory variance account to cost of sales account.

QUESTION 10.26

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The business maintains a perpetual inventory record system. Following a mid-year stocktake, the inventory had a cost of $77 960 while the inventory records were $78 950. Prepare the journal, including narration, and remember 10% GST is added to the variance account. The end-of-year stocktake totalled $89 066 and the records were $91 476. Prepare the journal, including narration, and remember 10% GST is added to the variance account. Close out the total of the variance account by journal to cost of sales.

QUESTION 10.27 From the following transactions prepare the abbreviated general journals that apply where a business uses either the periodic inventory system or the perpetual inventory system. a The business commences with $5000 cash and $7500 inventory. b Purchase of inventory on credit for $1430 ($1300 + $130 GST). c Cash sale $825 ($750 + $75 GST), the cost was $375. d During the year a stocktake was carried out where the perpetual inventory system was in use. The physical count totalled $6790, while the inventory records were $6950; 10% GST needs to be added to the difference. e At the end of the accounting year, a physical inventory stocktake was carried out. Its value was $9852, while the inventory records showed a cost of $10 212; 10% GST needs to be added to the difference.

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8. Leave provisions: annual leave, sick and carer’s leave and long service leave Adjustments for expenses incurred but not paid at the end of the year were covered earlier in this chapter. In this topic we consider the adjustments necessary for employee leave entitlements that have been incurred but not yet paid or taken. Conditions of employment for employees, including leave entitlements, are specified in enterprise agreements or in modern awards. The Australian Government Fair Work Ombudsman website, http://www.fairwork.gov.au, also provides information about workplace rights and obligations. Under the National Employment Standards (NES), which came into effect in 2010, an employee may be entitled to various types of leave, including annual leave, personal leave and long service leave. In chapter 14, we will cover accounting for payroll and examine conditions of employment in more detail. At this stage, we will only look at recording balance day adjustments linked to leave entitlements of employees. Australian Accounting Standard AASB 119 Employee Benefits prescribes the requirements for recognition, measurement and disclosure of employee benefits including annual leave, long service leave and personal leave (which includes sick and carer’s leave). We will focus on the accounting treatment of annual leave, long service leave and sick and carer’s leave and will not get involved with the actual calculation of these leave provisions. Like all other balance day adjustments shown in this chapter, the expense in the current accounting period is matched against the revenue for that period. The ‘provision’ for various types of leave could be thought of as an allowance or as a liability. Although the exact amount of provision for leave may not be known, the standards require a provision be made, even when uncertainty exists. Therefore, an estimate is made of a future amount that may be needed. The provision is maintained until the actual event or expenditure occurs at a future date. When it does occur, the expenditure can then be offset against that provision. In this way it does not affect the profit of the accounting period when the leave is actually taken. The accounting entries for the first three points below will be introduced, but emphasis will be given to point 4. 1 Establish the leave provisions. 2 Provide for leave during the year. 3 Adjust leave when taken during the year. 4 Amend the leave provisions at year’s end.

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Mismatch: annual leave and sick and carer’s leave An employee works for a year and may be entitled to take four weeks’ annual leave as well as two weeks’ (or 10 days) sick and carer’s leave that can be carried forward.

Mismatch: long service leave An employee who works for 10 years or more may be entitled to take long service leave. The exact length of time depends on the employee’s conditions of employment, but is often around 8.67 weeks after 10 years. In some circumstances, when leaving the business, an employee who has worked between five and 10 years may receive a proportion of the 8.67 weeks’ long service leave. This is called a pro rata long service leave entitlement.

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To make a provision for long service leave after only five years have elapsed does not match the expense with the revenue for the previous years. It is more correct for a business to provide for long service leave after an employee has completed one year of service so that correct matching occurs. This is also in line with the requirements of AASB 119, which requires that long service leave entitlements be provided for from commencement of employment. As the accounting entries for long service leave are very similar to those for annual leave and sick and carer’s leave, they will now be considered together.

Match: annual leave, sick and carer’s leave and long service leave The mismatch problem is overcome by providing for the expense in this accounting period, even though the actual leave expenditure occurs in a future accounting period.

WHAT TO DO: ANNUAL LEAVE, SICK AND CARER’S LEAVE AND LONG SERVICE LEAVE Debiting the expense and crediting the provision establishes the provision.

HOW TO ESTABLISH THE LEAVE PROVISIONS DURING THE YEAR From the accounting equation: Assets = Liabilities  + Owner’s Equity  + (Revenue  – Expense) [debit] [credit] [credit] [credit] [debit]

or Assets + Expense = Liabilities  + Owner’s Equity + Revenue [debit] [debit] [credit] [credit] [credit]

To increase an expense account the entry is a debit; to increase a liability the entry is a credit. Use the general journal, as the entry is an internal adjustment (see figure 10.84). Extract General Journal of ...

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Annual Leave Expense Sick and Carer’s Leave Expense Long Service Leave Expense Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Establishment of leave provisions

GJ ... xx xx xx xx xx xx

FIGURE 10.84  Establishment of leave provisions during the accounting period

HOW TO INCREASE THE LEAVE PROVISIONS DURING THE YEAR On a monthly basis, the expense accounts are increased and the provisions are also increased; on occasions they may decrease as a result of large amounts of leave being taken. The value is calculated from the leave entitlements for each employee for the year and divided into monthly amounts (see figure 10.85).

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Extract General Journal of ...

Annual Leave Expense Sick and Carer’s Leave Expense Long Service Leave Expense Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Monthly increase in leave provisions

GJ ... xx xx xx xx xx xx

FIGURE 10.85  Increase in monthly leave expenses and leave provisions during the year

HOW TO PROCESS LEAVE TAKEN DURING THE YEAR When leave is taken and the employee is entitled to that leave the business (employer) pays the employee for the leave (see figure 10.86). Extract General Journal of ...

Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Bank Payment of leave taken during the month

GJ ... xx xx xx xxx

FIGURE 10.86  Payment of leave taken by employees during the month

Note that leave payments would normally be processed through the cash payments journal as part of the normal payroll process and would include complications such as PAYG withholding tax and other deductions and entitlements. These will be discussed in chapter 14. In this chapter, leave payments will be shown as a separate general journal entry and the abovementioned complications will be ignored.

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HOW TO ADJUST LEAVE AT THE END OF THE ACCOUNTING PERIOD At the end of the accounting period, the total amounts of employees’ entitlements to annual leave, sick and carer’s leave and long service leave are calculated. The methods used to calculate and value employee leave entitlements can be complex and are beyond the scope of this book. The total values of each type of leave are then compared to the existing balances in the relevant leave provision accounts in the ledger. The existing balances are then adjusted so that they are the same as the calculated end-of-period values. Provisions may increase or decrease, depending on any increases in wage rates and the amount of leave that employees have taken as well as the frequency with which management has adjusted the leave provisions during the year. The general journal entry for increases in leave provisions and expenses is demonstrated in figure 10.87. Any decrease in leave provisions and expenses would require the opposite entries to those in figure 10.87. Extract General Journal of ...

Annual Leave Expense Sick and Carer’s Leave Expense Long Service Leave Expense Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Increase in leave provisions at end of year

FIGURE 10.87  Increase in leave provisions as a balance day adjustment 434tafenswlib on 2020-06-28 01:37:29. Created from

GJ ... xx xx xx xx xx xx

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Example 9: Leave provisions The business of Terence John has been in existence for some time but had not included any provisions for employee leave entitlements in the accounts. From individual employee records you have established and valued, as at 31 January 2022, employees’ entitlements for annual leave $14 170, sick and carer’s leave $6632 and long service leave $5584. Prepare the general journal to establish these provisions (see figure 10.88). Extract General Journal of Terence John

31 Jan 22 Annual Leave Expense Sick and Carer’s Leave Expense Long Service Leave Expense Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Establish leave provisions at this date

GJ ... 14 170 6 632 5 584 14 170 6 632 5 584

FIGURE 10.88  Establishment of leave provisions during the current accounting period

For the period 1 February 2022 to 30 June 2022, employee leave payments were annual leave $3150 and sick and carer’s leave $423. On 30 June 2022 another listing of employees’ leave entitlements was prepared. Total entitlements were annual leave $13 520, sick and carer’s leave $7359 and long service leave $6234. The effects of these leave payments and provisions are illustrated in figures 10.89, 10.90 and 10.91. Extract General Journal of Terence John

30 Jun 22 Provision for Annual Leave Provision for Sick and Carer’s Leave Bank Leave payments for period 1 Feb to 30 June 2022

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Annual Leave Expense [13 520 – (14 170 – 3150)] Sick and Carer’s Leave Expense [7359 – (6632 – 423)] Long Service Leave Expense [6234 – 5584] Provision for Annual Leave Provision for Sick and Carer’s Leave Provision for Long Service Leave Adjustment to leave provisions at end of accounting year Profit and Loss Annual Leave Expense [14 170 + 2500] Sick and Carer’s Leave Expense [6632 + 1150] Long Service Leave Expense [5584 + 650] Leave expense accounts closed to profit and loss

GJ ... 3 150 423 3 573 2 500 1 150 650 2 500 1 150 650 30 686 16 670 7 782 6 234

FIGURE 10.89 Payments for leave taken; adjustments to leave provisions at the end of the accounting year; leave expense accounts closed to profit and loss

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Extract General Ledger of Terence John

Provision for Annual Leave 30 Jun 22 Bank Balance c/d

GJ

3 150 31 Jan 22 Annual Leave Expense 13 520 30 Jun 22 Annual Leave Expense 16 670 1 Jul 22 Balance b/d

GJ GJ

14 170 2 500 16 670 13 520

423 31 Jan 22 Sick and Carer’s Leave Expense GJ 7 359 30 Jun 22 Sick and Carer’s Leave Expense GJ 7 782 1 Jul 22 Balance b/d

6 632 1 150 7 782 7 359

Provision for Sick and Carer’s Leave 30 Jun 22 Bank Balance c/d

GJ

Provision for Long Service Leave 31 Jan 22 Long Service Leave Expense 30 Jun 22 Long Service Leave Expense

GJ GJ

5 584 650 6 234

GJ

16 670

Annual Leave Expense 31 Jan 22 Provision for Annual Leave 30 Jun 22 Provision for Annual Leave

GJ GJ

14 170 30 Jun 22 Profit and Loss 2 500 16 670

16 670

Sick and Carer’s Leave Expense 31 Jan 22 Prov for Sick & Carer Leave 30 Jun 22 Prov for Sick & Carer Leave

GJ GJ

6 632 30 Jun 22 Profit and Loss 1 150 7 782

GJ

7 782 7 782

Long Service Leave Expense 31 Jan 22 Prov’n for Long Service Leave 30 Jun 22 Prov’n for Long Service Leave

GJ GJ

5 584 30 Jun 22 Profit and Loss 650 6 234

GJ

FIGURE 10.90 Leave initiated January; leave payments recorded; leave provisions adjusted at end of accounting year in June; leave expense closed out to profit and loss

Extract Income Statement of Terence John

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for the year ended 30 June 2022 less Expenses General and Administrative   Annual Leave Expense 16 670   Sick and Carer’s Leave Expense 7 782   Long Service Leave Expense 6 234

30 686

Extract Balance Sheet of Terence John

as at 30 June 2022 Current Liabilities   Provision for Annual Leave   Provision for Sick and Carer’s Leave Non-current Liabilities   Provision for Long Service Leave

13 520 7 359

20 879 6 234

FIGURE 10.91  Leave expense and provisions in income statement and balance sheet

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6 234 6 234

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When a provision for long service leave becomes payable in the normal course of business within the next 12 months, then that amount is classified as a current liability. Otherwise, long service leave is shown as a non-current liability.

REVERSAL OF ADJUSTMENT FOR LEAVE PROVISIONS No reversals are required.

QUESTION 10.28 At 30 June 2021, the leave provision general ledger balances for the employees of Joan Patricia were annual leave $7382, sick and carer’s leave $3395 and long service leave $2569. No adjustments were made to the leave provision accounts during the year ended 30 June 2022. For the year ended 30 June 2022, leave payments were annual leave $5650 and sick and carer’s leave $2240. The leave provisions at 30 June 2022 were calculated and valued from the individual employee records as annual leave $8064, sick and carer’s leave $4775 and long service leave $4465. Prepare the necessary general journal entries for leave payments, end-of-period adjustments and closing entries, general ledger and extracts of the income statement and balance sheet.

QUESTION 10.29

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The leave provision accounts of Steven Keith at 30 June 2021 were annual leave $83 228, sick and carer’s leave $50 667 and long service leave $29 608. No adjustments were made to the leave provision accounts during the year ended 30 June 2022. For the year ended 30 June 2022, leave payments were annual leave $39 850, sick and carer’s leave $8470 and long service leave $5730. From the employee records the total leave provisions were calculated at 30 June 2022 as annual leave $60 824, sick and carer’s leave $52 528 and long service leave $42 338. Prepare the necessary general journal entries for leave payments, end-of-period adjustments and closing entries, general ledger and extracts of the income statement and balance sheet.

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Prepare adjusted trial balance In this chapter we have considered a range of adjustments on balance day to ensure that expenses incurred are matched to revenue generated. We now bring all of these adjustments together to show how they appear in an adjusted trial balance format (see figure 10.92). Extract Adjusted Trial Balance

Balance Day Adjustment and Relevant Accounts

Trial Balance Debit

Credit

Adjustments Debit

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a. Expense incurred not paid $1800 Salaries 98 400 1 800 Expense Accrued b. Expense paid not consumed $600 Insurance 2 900 Expense Prepaid 600 c. Revenue earned not received $850 Interest Received 1 700 Revenue Accrued 850 d. Revenue received early $900 Rent Received 11 700 900 Revenue Received in Advance e. Further bad debt write-offs $1100 Accounts Receivable 25 003 Bad Debts Expense 2 000 1 000 GST Payable 3 000 100 f. Doubtful debt allowance increased to $1795 Allowance for Doubtful Debts 1 276 Doubtful Debts Expense 519 g. Depreciation of machinery $1000 Machinery 5 500 Depreciation – Machinery 1 000 Accumulated Depreciation – Machinery 1 000 h. Perpetual inventory count $9200 Inventory 9 500 Inventory Variance – loss 330 GST Receivable 200 i. Calculated leave liability: annual $13 520, sick $7359, long service $6234 Provision for Annual Leave [14 170 – 3150] Provision for Sick and Carer’s Leave [6632 – 423] Provision for Long Service Leave Annual Leave Expense Sick and Carer’s Leave Expense Long Service Leave Expense

FIGURE 10.92  Adjusted trial balance extract

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11 020 6 209 5 584 14 170 6 632 5 584

Trial Bal Post Adj

Credit

Debit 100 200

1 800 600

1 800 2 300 600

850

2 550 850 10 800 900

900 1 100

23 903 3 000 2 900

519

1 795 519 5 500 1 000

1 000 300 30

2 000 9 200 330 170

2 500 1 150 650 2 500 1 150 650

Credit

13 520 7 359 6 234 16 670 7 782 6 234

CHAPTER 10

QUESTION 10.30 Complete the adjusted trial balance extract prepared on 30 June 2022 (see figure 10.93). Enter new accounts if required, as well as the amount for each adjustment, and complete the trial balance post-adjustment columns, using the summary of balance day adjustments in figure 10.94 as a guide. Assume the accounting period ends on 30 June 2022. Each part is to be treated independently from the others. Extract Adjusted Trial Balance

Balance Day Adjustment and Relevant Accounts

Trial Balance Debit

Credit

Adjustments Debit

Credit

Trial Bal Post Adj Debit

Credit

a. Expense incurred not paid $1160 Wages

68 000

Expense Accrued b. Annual insurance paid 1-3-2022 $3960 ($3600 + $360 GST) Insurance

5 600

Expense Prepaid c. 15% $20 000 investment, 6 monthly interest due 1-8-2022 Interest Received

1 750

Revenue Accrued d. Rent received for 13 months Rent Received

22 750

Revenue Received in Advance e. Further bad debt write-offs $2585 ($2350 + $235 GST) Accounts Receivable

57 838

Bad Debts Expense GST Payable

3 000

f. Doubtful debt allowance 3.6% of e. above Allowance for Doubtful Debts

1 500

Doubtful Debts Expense g. Motor vehicle $35 000 depreciated at 15% from 1-5-2021 Motor Vehicle Accumulated Depreciation – Motor Vehicle Depreciation – Motor Vehicle h. Perpetual inventory count $36 795

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Inventory

37 995

Inventory Variance – loss GST Receivable

2 000

i. Calculated leave liability: annual $86 816, sick $45 306, long service $57 510 Provision for Annual Leave

73 451

Provision for Sick and Carer’s Leave

45 894

Provision for Long Service Leave

51 812

Annual Leave Expense

10 349

Sick and Carer’s Leave Expense

17 753

Long Service Leave Expense

2 916

FIGURE 10.93  Adjusted trial balance extract

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Summary of balance day adjustments Balance Day Adjustment Entries – A Summary Expense Accrued – expense incurred not paid/processed   expense account [debit]        Expense Accrued [credit] Expense Prepaid – expense paid/processed not incurred   Expense Prepaid [debit]

expense 

Reverse commencement next accounting period

revenue 

Reverse commencement next accounting period

current liability 

Reverse commencement next accounting period

current asset 

       expense account [credit] Revenue Accrued – revenue earned not received   Revenue Accrued [debit]

current asset 

       revenue account [credit] Revenue Received in Advance – revenue received not due   revenue account [debit]

revenue 

      Revenue Received in Advance [credit] Bad Debts – further write-off of bad debts   Bad Debts Expense [debit]   GST Payable [debit]

current liability 

Reverse commencement next accounting period

expense 

expense  current liability 

       Accounts Receivable Control [credit] Allowance for Doubtful Debts – increase in allowance   Doubtful Debts Expense [debit]       Allowance for Doubtful Debts [credit] Depreciation – non-current asset expensed over its useful life  Depreciation [debit]        Accumulated Depreciation [credit] Perpetual Inventory – records compared to physical count   Inventory Variance (loss) [debit]

current asset  expense  negative current asset  expense  negative non-current asset  expense 

       Inventory [credit]

current asset 

       GST Receivable [credit]

current asset  Leave Provisions – employee entitlement for annual, sick and long service leave   Annual Leave Expense [debit] expense    Sick and Carer’s Leave Expense [debit]

expense 

  Long Service Leave Expense [debit]

expense 

      Provision for Annual Leave [credit]       Provision for Sick and Carer’s Leave [credit]       Provision for Long Service Leave [credit]

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FIGURE 10.94  Summary of balance day adjustments

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current liability  current liability  non-current liability 

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Reversals Review and effect of reversals Here we look at the bigger picture over several years and the impact of balance day adjustments on expenses and revenues shown in the accounts. The aim is to appreciate the essential aspect of reversals and the distortions that occur if they are not used. The accounting period convention, discussed in chapter 1, emphasised the importance of keeping records over equal periods of time to enable comparisons for decision-making purposes, and for meeting reporting requirements to external users, such as the Australian Taxation Office. In this chapter, we have emphasised the importance of matching revenue and expense for each accounting period. You may have noted that reversing entries have only been required for the following expense and revenue accounts: • expense accrued • expense prepaid • revenue accrued • revenue received in advance. As time passes, the salaries are paid, the insurance is incurred, the revenue is received and the revenue is now earned for the month. The reversals are necessary to present the revenue earned or expense incurred in the correct accounting period. Reversals should be entered in the general journal at the beginning of the next accounting period. However, in some of the following questions these reversals may not have been done and will need to be prepared and processed. It is essential that any necessary reversals for relevant balance day adjustments in the previous period are prepared before the current balance day adjustments are recorded. Remember, the reversal is the opposite of the balance day adjustment.

1. Reversal of expense accrued Example 10: Reversals – expense accrued The business prepares monthly accounts and at 30 June 2022 there was an expense accrual for wages $900. The pay week ended on Tuesday and payment was made on the same day (see figures 10.95 and 10.96). Payments during the month of:

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July August September

$

Accounting period ended on a:

Accrual is based on an average cost per day of:

5 000 5 900 4 800

Wednesday Thursday Monday

1 day at $300 per day 2 days at $320 per day 4 days at $300 per day

FIGURE 10.95  Wages paid and accrual data over several months: expense accrued

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

Extract General Ledger of …

Expense Accrued 1 Jul 22 Wages [reversal] 1 Aug 22 Wages [reversal] 1 Sep 22 Wages [reversal]

GJ GJ GJ

31 Jul 22 Bank [payment] Expense Accrued [bda]

CP GJ

1 Aug 22 Balance b/d 31 Aug 22 Bank [payment] Expense Accrued [bda]

CP GJ

900 30 Jun 22 300 31 Jul 22 640 31 Aug 22 30 Sep 22

202 Wages [bda] Wages [bda] Wages [bda] Wages [bda]

GJ GJ GJ GJ

Wages

1 Sep 22 Balance b/d 30 Sep 22 Bank [payment] Expense Accrued [bda]

CP GJ

1 Oct 22 Balance b/d

5 000 1 Jul 22 300 31 Jul 22 5 300 4 400 1 Aug 22 5 900 31 Aug 22 640 10 940 10 640 1 Sep 22 4 800 30 Sep 22 1 200 16 640 16 000

900 300 640 1 200

540 Expense Accrued [reversal] Balance c/d

GJ

Expense Accrued [reversal] Balance c/d

GJ

Expense Accrued [reversal] Balance c/d

GJ

900 4 400 5 300 300 10 640 10 940 640 16 000 16 640

FIGURE 10.96  Expense accrued balance day adjustments and reversals for wages over three months

The expense accrued and wages accounts in the general ledger show that the amounts brought down each month are not the same as the amounts paid through the bank account on a cumulative basis (see figure 10.97). Payments for the period: July July/August July/September

Expense balance  $

$

5 000 10 900 15 700

4 400 10 640 16 000

Difference $ < 600 < 260 > 300

FIGURE 10.97  Summary of cumulative differences between payments and balances: expense accrued

QUESTION 10.31

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R Bogan prepares monthly accounts and at 31 December 2021 there was $1500 salary prepayment due to payment of Christmas and New Year holidays during December. The salary account balance to 31 December 2021 was $75 000, and this included the prepayment. The working week is from Monday to Friday. Salaries are paid weekly on a Friday and the pay week ends on the same day (see figure 10.98). Payments During the Month of: January February March April May June

$ 11 275 13 305 10 824 13 530 11 050 12 400

Accounting Period Ended on a:

Accrual is Based on an Average Cost per Day of:

Monday Monday Thursday Friday Tuesday Thursday

… days at $564 per day … days at $665 per day … days at $541 per day … days at $676 per day … days at $553 per day … days at $620 per day

FIGURE 10.98  Salaries paid and accrual data over several months You are required to prepare the general ledger accounts for salaries, expense prepaid and expense accrued to 30 June 2022.

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2. Reversal of expense prepaid Example 11: Reversals – expense prepaid At the end of the financial year 30 June 2022 there had been a balance day adjustment for expense prepaid of insurance $800 (see figure 10.99). The annual insurance premiums are paid on 1 November each year and are: 2022: $3000 2023: $4800. Extract General Ledger of . . .

Expense Prepaid 30 Jun 22 Insurance [bda] 30 Jun 23 Insurance [bda] 30 Jun 24 Insurance [bda]

GJ GJ GJ

800 1 000 1 600

103

1 Jul 22 Insurance [reversal] 1 Jul 23 Insurance [reversal]

Insurance 1 Jul 22 Expense Prepaid [reversal] 1 Nov 22 Bank [payment]

GJ CP

1 Jul 23 Expense Prepaid [reversal] 1 Nov 23 Bank [payment]

GJ CP

800 30 Jun 23 3 000 3 800 1 000 30 Jun 24 4 800 5 800

GJ GJ

800 1 000

540 Expense Prepaid [bda] Profit and Loss

GJ GJ

Expense Prepaid [bda] Profit and Loss

GJ GJ

1 000 2 800 3 800 1 600 4 200 5 800

FIGURE 10.99  Expense prepaid balance day adjustments and reversals over two years

The prepaid and insurance expense accounts in the general ledger show that the amounts closed out to the profit and loss account each year are not the same as the amounts actually paid through the bank account on 1 November for each of those years (see figure 10.100). Difference

Payment in November

$

Expense Closed to Profit and Loss Account in June

$

$

2022 2023

3 000 4 800

2023 2024

2 800 4 200

< 200 < 600

FIGURE 10.100  Summary of differences between payment and amount expensed to profit and loss

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.32 The financial year of R Little ended on 31 December. Annual insurance premiums were paid to the insurance brokers at the end of February, for March–February. On 31 December 2020, the balance day adjustment was $500. Payments to the insurance brokers were: 2021: $4290 ($3900 + $390 GST) 2023: $5214 ($4740 + $474 GST)

2022: $4950 ($4500 + $450 GST) 2024: $5544 ($5040 + $504 GST).

Prepare the general ledger account for insurance and the relevant balance day adjustment account to 31 December 2024.

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MATCHING EXPENSE AND REVENUE TO THE ACCOUNTING PERIOD

3. Reversal of revenue accrued Example 12: Reversals – revenue accrued The business had invested $17 000 two years ago in 15% government bonds. Interest is received at the end of February and August, while the accounting period ends at the end of June. Revenue accrued at 30 June 2022 was $850. Interest received totalled $2550 for 2023 and 2024 (see figure 10.101). To simplify presentation, balancing is only shown at the end of the financial year. Extract General Ledger of . . .

Revenue Accrued 30 Jun 22 Interest Received [bda] 30 Jun 23 Interest Received [bda] 30 Jun 24 Interest Received [bda]

GJ GJ GJ

1 Jul 22 Revenue Accrued [reversal] 30 Jun 23 Profit and Loss

GJ GJ

1 Jul 23 Revenue Accrued [reversal] 30 Jun 24 Profit and Loss

GJ GJ

850 850 850

103

1 Jul 22 Interest Received [reversal] 1 Jul 23 Interest Received [reversal]

Interest Received 850 31 Aug 22 2 550 28 Feb 23 30 Jun 23 3 400 850 31 Aug 23 2 550 28 Feb 24 30 Jun 24 3 400

GJ GJ

850 850

410 Bank [receipt] Bank [receipt] Revenue Accrued [bda]

CR CR GJ

Bank [receipt] Bank [receipt] Revenue Accrued [bda]

CR CR GJ

1 275 1 275 850 3 400 1 275 1 275 850 3 400

FIGURE 10.101 Revenue accrued: balance day adjustments and reversals over two years for revenue not yet received

As the investment value and interest rate are fixed, the actual amount received during a 12-month period is the same as that closed out to profit and loss for that same period (assuming the investment was originally made at the beginning of the accounting period), as shown in figure 10.102. Difference

Received Year Ended 30 June

$

Revenue Closed to Profit and Loss in June

$

$

2023 2024

2 550 2 550

2023 2024

2 550 2 550

nil nil

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.102  Summary of differences between receipt and revenue closed to profit and loss

QUESTION 10.33 On 2 April 2021, D Cotter invested $125 000 in 4% state government bonds for five years. Interest is paid on 1 April and 1 October. The accounting year ended on 30 June. You are required to prepare the general ledger accounts for the investment, interest received account and the relevant balance day adjustment account to 30 June 2023.

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4. Reversal of revenue received in advance Example 13: Reversals – revenue received in advance At the end of the financial year 30 June 2022, the balance day adjustment for rent received in advance on commercial property was $900. The amount of rent deposited into the bank account for the year ended 30 June is shown in figures 10.103 and 10.104. Year Ended 30 June

Deposited in Bank

July Rent Received in June

2023 2024

$12 540 ($11 400 + $1140 GST) $15 180 ($13 800 + $1380 GST)

$1100 ($1000 + $100 GST) $1320 ($1200 + $120 GST)

FIGURE 10.103  Rent received and rent received in advance: data over two years Extract General Ledger of . . .

Revenue Received in Advance 1 Jul 22 Rent Received [reversal] 1 Jul 23 Rent Received [reversal]

GJ GJ

202

900 30 Jun 22 Rent Received [bda] 1 000 30 Jun 23 Rent Received [bda] 30 Jun 24 Rent Received [bda]

GJ GJ

Rent Received 30 Jun 23 Rev Received in Advance [bda] Profit and Loss

GJ GJ

30 Jun 24 Rev Received in Advance [bda] Profit and Loss

GJ GJ

900 1 000 1 200

410

1 000 1 Jul 22 11 300 30 Jun 23 12 300 1 200 1 Jul 23 13 600 30 Jun 24 14 800

Rev Received in Advance [rev] Bank [receipt 2022 & 2023]

GJ CR

Rev Received in Advance [rev] Bank [receipt 2023 & 2024]

GJ CR

900 11 400 12 300 1 000 13 800 14 800

FIGURE 10.104 Revenue received in advance: balance day adjustments and reversals over two years for rent received in advance

The revenue received in advance and rent received accounts in the general ledger show that the amounts closed out to the profit and loss account each year are not the same as the amounts actually received in the bank account during the year (see figure 10.105). Receipts During Year 2023 2024

Difference

$

Revenue Closed to Profit and Loss in June

$

$

11 400 13 800

2023 2024

11 300 13 600

< 100 < 200

Copyright © 2018. Cengage. All rights reserved.

FIGURE 10.105  Summary of differences between deposits and revenue closed to profit and loss account

QUESTION 10.34 R Lachlan closes her accounts on 30 June. In 2021, the July rent received in June is $490 (see figure 10.106). Year Ended 30 June

Deposited in Bank

July Rent Received in June

2022 2023

$6666 ($6060 + $606 GST) $8151 ($7410 + $741 GST)

$572 ($520 + $52 GST) $715 ($650 + $65 GST)

FIGURE 10.106  Rent received and rent received in advance: data over two years You are required to prepare the general ledger accounts for rent received and the relevant balance day adjustment account to 30 June 2023.

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Standing journals To date we have looked at situations where adjustments are made, on end of year balance day, to expense or income accounts and to a corresponding asset or liability account. Standing journal entries are an alternative to some types of balance day adjustments. They are general journal adjustments that are processed on a regular basis (often monthly), usually with the same accounts and amounts being debited and credited. Common standing journals include expenses prepaid, revenues received in advance and depreciation. A principal reason for using standing journals is that smaller amounts are allocated to expense or revenue accounts on a monthly basis, instead of a large amount at the time it is processed, paid or received. This ensures that expenses and revenues are regularly matched and lead to more accurate reporting throughout the year. When expenses are prepaid, they are debited directly to the asset account: expense prepaid, instead of to the expense account. Similarly, when revenues are received in advance they are credited to the liability account: revenue received in advance, instead of to the revenue account. The standing journal entry then transfers amounts from the asset to the expense account as it is consumed, or from the liability to the income account as it is earned. Any balances remaining in the asset or liability account will be the amount carried forward into the next period. Standing journals are essential for businesses that prepare monthly reports and can be processed in manual and computerised accounting systems. Most accounting software packages have the facility to generate, store and process standing journal entries. If standing journal entries are used, no balance day adjustments are required at the end of the accounting period, or reversals at the start of the next accounting period. However, the remaining balance in the expense prepaid or revenue received in advance should still be confirmed to ensure that it is correct and no incorrect entries have been made to either of these accounts during the accounting period.

Standing journals: expense prepaid The standing journal for an expense incurred or consumed would be as shown in figure 10.107. Extract General Journal of ...

the particular expense account Expense Prepaid An expense prepaid now used or consumed

GJ ... xx xx

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FIGURE 10.107  Standing journal for expense now incurred or consumed: expense prepaid

Prepaid expenses, especially those that cover an annual period, should be allocated to expenses with the same frequency with which management requires the financial reports; that is, usually monthly. Annual expenses include insurance, council rates, maintenance or service agreements on equipment and safety products such as fire alarms and extinguishers. Half-yearly or quarterly accounts will also give a more meaningful matching if they are also allocated by the months that the expenditure covers. The expense is allocated to the income statement and the particular expense prepaid is allocated to current assets in the balance sheet.

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Example 14: Standing journals – expense prepaid The annual insurance premium of $3960 ($3600 + $360 GST) is paid on 31 January 2022, for the period February–January. Standing journals are used, as monthly accounts are required, and the accounting period ends on 30 June. Prepare in general journal format the payment on 31 January, a standing journal for February (see figure 10.108) and the relevant general ledger accounts to 30 June 2022 (see figure 10.109). Then complete an extract income statement and extract balance sheet (see figure 10.110). Insurance expense for each month of the year is $300 ($3600/12). The insurance expense account balance was $1750 before the January payment. Extract General Journal of …

GJ ...

31 Jan 22 Insurance Prepaid GST Receivable Bank [payment] Annual insurance paid allocated as a prepayment, usually in CPJ 28 Feb 22 Insurance Insurance Prepaid Insurance prepaid now expensed as it is used or consumed

3 600 360 3 960 300 300

FIGURE 10.108  Payment of annual insurance premium and the first monthly standing journal

The standing journal accounts and amount will stay the same for each of the 12 months. Only the date will change. Note: For reasons of space and clarity, in this example the general ledger balancing process has only been carried out at the end of June and not each month. Extract General Ledger of …

Insurance Prepaid 31 Jan 22 Bank [payment]

CP

3 600 28 Feb 22 31 Mar 22 30 Apr 22 31 May 22 30 Jun 22

Insurance Insurance Insurance Insurance Insurance Balance c/d

GJ GJ GJ GJ GJ

300 300 300 300 300 2 100 3 600

GJ

3 250

3 600 2 100

1 Jul 22 Balance b/d

Copyright © 2018. Cengage. All rights reserved.

Insurance 1 Feb 22 28 Feb 22 31 Mar 22 30 Apr 22 31 May 22 30 Jun 22

Balance b/d Insurance Prepaid Insurance Prepaid Insurance Prepaid Insurance Prepaid Insurance Prepaid

GJ GJ GJ GJ GJ

1 750 30 Jun 22 Profit and Loss 300 300 300 300 300 3 250

3 250

FIGURE 10.109  Insurance prepaid and insurance expense using standing journals

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Extract Income Statement of …

for the year ended 30 June 2022

less Expenses General and Administrative  Insurance

3 250

Extract Balance Sheet of …

as at 30 June 2022 Current Assets   Prepaid Insurance

2 100

FIGURE 10.110  Insurance expense and insurance prepaid in income and balance sheet financial statements

QUESTION 10.35 Annual insurance of $5940 ($5400 + $540 GST) was paid at the end of February 2022 for the period March– February. Monthly accounts are prepared and standing journals are used; balance date is 30 June. The insurance expense account was $3400 before the February payment. Prepare in general journal format the payment at the end of February, a standing journal for March and the relevant general ledger accounts to 30 June 2022. Then complete an extract income statement and balance sheet.

QUESTION 10.36 Annual local government council rates of $4800 (there is no GST) were paid on 1 February 2022. The payment is allocated to a rates prepaid account, as the business uses monthly standing journals. The balance on the rates account at 31 January 2022 was $2520. Complete: • payment of the rates on 1 February in general journal format • standing journal for the end of February 2022 • extract general ledger for the prepayment and the expense accounts to 30 June 2022, and • extracts of the income statement and balance sheet for 30 June 2022.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.37 The annual maintenance agreement for fire extinguishers and sprinklers was paid on 30 November 2021, $5082 ($4620 + $462 GST). The business prepares monthly accounts and wants them to accurately reflect the matching of revenue and expenses and uses the monthly standing journal method to allocate this annual expense. It uses maintenance prepaid and the expense account maintenance, which had a balance of $1700 on 1 December 2021. You are required to prepare: • payment of the maintenance agreement on 30 November in general journal format • standing journal for the end of December 2021 • extract general ledger for the prepayment and the expense accounts to 30 June 2022, and • extracts of the income statement and balance sheet for 30 June 2022.

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Standing journals: revenue received in advance The standing journal for revenue received, which is now earned or due, would be as shown in figure 10.111. Extract General Journal of ...

Revenue Received in Advance the particular revenue account Revenue received in advance now earned or due

GJ ... xx xx

FIGURE 10.111  Standing journal for revenue now earned or due: revenue received in advance

Revenues received in advance, especially those that cover an annual period, should be allocated to revenue with the same frequency with which management requires the financial reports (that is, usually monthly), to ensure the matching of the revenue and the expense. Annual revenues received include annual contract service or maintenance fee revenue, magazine subscription revenue, annual membership fee revenue and annual rent or lease revenue received.

Example 15: Standing journals – revenue in advance Annual magazine subscription revenue of $76 560 ($69 600 + $6960 GST) is received by 31 December 2021 for the 2022 calendar year. Standing journals are used, as monthly accounts are required, and the accounting period ends on 30 June. Prepare in general journal format the receipt by 31 December, a standing journal for January 2022 (see figure 10.112) and the relevant general ledger accounts to 30 June 2022. Then complete an extract income statement and balance sheet (see figures 10.113 and 10.114). Magazine subscription revenue for each month of the year is $5800 ($69 600/12). The magazine subscription revenue account was $31 500 at the end of December 2021. Extract General Journal of …

31 Dec 21 Bank [receipt] Magazine Subscript Revenue Received in Advance GST Payable Magazine revenue as revenue received in advance, usually in CRJ 31 Jan 22 Magazine Subscription Revenue Received in Advance Magazine Subscription Revenue Magazine subscription revenue now earned

GJ ... 76 560 69 600 6 960 5 800 5 800

FIGURE 10.112 Receipt of annual magazine subscription revenue and the first monthly standing journal

Copyright © 2018. Cengage. All rights reserved.

The journal accounts and amount will stay the same for each of the 12 months; only the date will change. Note: For reasons of space and clarity, in this example the balancing process in figure 10.113 has only been carried out at the end of June and not each month. Extract General Ledger of …

Magazine Subscription Revenue Received in Advance 31 Jan 22 28 Feb 22 31 Mar 22 30 Apr 22 31 May 22 30 Jun 22

Magazine Subscript’n Revenue Magazine Subscript’n Revenue Magazine Subscript’n Revenue Magazine Subscript’n Revenue Magazine Subscript’n Revenue Magazine Subscript’n Revenue Balance c/d

GJ GJ GJ GJ GJ GJ

5 800 31 Dec 21 Bank [receipt] 5 800 5 800 5 800 5 800 5 800 34 800 69 600 1 Jul 22 Balance b/d

GJ

69 600

69 600 34 800 CONTINUED

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Magazine Subscription Revenue 30 Jun 22 Trading

GJ

66 300

1 Jan 22 31 Jan 22 28 Feb 22 31 Mar 22 30 Apr 22 31 May 22 30 Jun 22

Balance b/d Mag Subscript Rev Rec’d in Adv Mag Subscript Rev Rec’d in Adv Mag Subscript Rev Rec’d in Adv Mag Subscript Rev Rec’d in Adv Mag Subscript Rev Rec’d in Adv Mag Subscript Rev Rec’d in Adv

66 300

GJ GJ GJ GJ GJ GJ

31 500 5 800 5 800 5 800 5 800 5 800 5 800 66 300

FIGURE 10.113 Magazine subscription revenue received in advance and magazine subscription revenue using standing journals Extract Income Statement of …

for the year ended 30 June 2022 Revenue Magazine Subscriptions

66 300

Extract Balance Sheet of …

as at 30 June 2022 Current Liabilities  Magazine Subscription Revenue Received in Advance

34 800

FIGURE 10.114 Magazine subscription revenue and magazine subscription revenue received in advance in income and balance sheet financial statements

QUESTION 10.38 Annual maintenance/service revenue of $59 400 ($54 000 + $5400 GST) was received by the end of March 2022, for April 2022 to March 2023. Monthly accounts are prepared and standing journals are used; balance date is 30 June. The maintenance/service revenue account was $34 500, as at 31 March 2022. You are required to prepare: • receipt of the maintenance/service revenue received by 31 March 2022 in general journal format • standing journal for the end of April 2022 • extract general ledger for the revenue received in advance and the revenue accounts to 30 June 2022, and • extracts of the income statement and balance sheet for 30 June 2022.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 10.39 F F Kwel services fire extinguishers and sprinkler systems and has annual agreements with its customers, which must be paid for at the commencement of the annual agreement. All agreements commence on 1 February and its accounting financial year ends on 30 June. Revenue totalling $80 916 ($73 560 + $7356 GST) had been received by 31 January 2022. Fire systems revenue received in advance account is used as the source of the standing journal revenue allocated to fire systems revenue account. The balance on the revenue account on 31 January 2022 was $36 470. You are required to prepare: • receipt of the fire systems revenue received by 31 January 2022 in general journal format • standing journal for the end of February 2022 • extract general ledger for the revenue received in advance and the revenue accounts to 30 June 2022, and • extracts of the income statement and balance sheet for 30 June 2022.

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Standing journals: depreciation expense Refer back to example 8 for details on depreciation, its calculations and presentation in the accounts and financial statements. The standing journal for depreciation would be as shown in figure 10.115. Extract General Journal of …

Depreciation – type of non-current asset Accumulated Depreciation – type of non-current asset Monthly depreciation for the non-current asset

GJ … xx xx

FIGURE 10.115  Standing journal for depreciation

The depreciation on non-current assets can be calculated from the value of those assets at the commencement of the accounting year. This annual figure can be used to provide monthly standing journals for depreciation. There is no transfer from one account to another of the annual depreciation, as that amount is not entered into the accounts. Rather, the monthly standing journals accumulate to that annual depreciation amount. Any purchase or sale in the non-current assets would need to be adjusted separately by another general journal during the current financial year.

Example 16: Standing journals – depreciation expense The motor vehicle account balance at 1 July 2021 was $78 800 and the annual depreciation expense for the coming year was $11 820. The monthly standing journal would be $11 820/12 = $985 (see figure 10.116). Extract General Journal of …

31 Jul 21 Depreciation – Motor Vehicles Accumulated Depreciation – Motor Vehicles Monthly standing journal for depreciation of motor vehicles

GJ … 985 985

FIGURE 10.116 Depreciation expense, the accumulation of the depreciation for motor vehicles and the first monthly standing journal for the year

QUESTION 10.40

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The machinery account balance at 1 July 2021 was $90 720, the accumulated depreciation $27 210 and the annual depreciation expense for the coming year $10 884. Prepare: • the monthly standing journal for July 2021 • an income statement and balance sheet for the end of July 2021, and • a balance sheet as at 30 June 2022.

QUESTION 10.41 a



b

Prepare in general journal format the payment of an annual expense, receipt of annual revenue and purchase of a non-current asset. The business uses standing journals for processing annual expenses and revenue. The following three transactions occurred on 31 March 2022. –  Insurance tax invoice was paid $7392 ($6720 + $672 GST). – Office service agreements received were processed as equipment maintenance revenue and totalled $77 352 ($70 320 + $7032 GST). – A new oscilloscope probe used in the repair and maintenance of office equipment in the workshop and at customers’ premises was purchased for cash. It was included as equipment for non-current asset purposes, $18 854 ($17 140 + $1714 GST). The annual depreciation rate is 15% straight line. Prepare standing journals at the end of April for insurance, equipment maintenance revenue and depreciation of the new equipment, rounded to the nearest dollar.

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 10.42 Prepare general journal entries to record the following balance day adjustments at 30 June 2022 and indicate the effect on profit from each journal. a Prepaid advertising is $852. b Unpaid salaries earned by employees of $3500. c Insurance paid before June relates to after June $1750. d Service fee revenue banked in June relates to July $3500. e A tenant owes rent of $900 for June.

QUESTION 10.43 Balances on accounts as at 30 June 2022, before balance day adjustments, were: equipment $55 000, accumulated depreciation – equipment $21 000, insurance $5100 and wages $35 800. Balance day adjustments were: depreciation of equipment 15% p.a., insurance prepaid $910 and wages owed to employees $700. For the year ended June 2022: • prepare adjusting journals • prepare closing journals, then • enter balances and post the journals to the relevant ledger accounts, including profit and loss, and • prepare an extract income statement and balance sheet. Prepare relevant reversal journals on 1 July 2022 and post to the ledger accounts.

QUESTION 10.44 On 1 January 2021, machinery was purchased for $29 700 ($27 000 + $2700 GST) to be depreciated at 20% p.a. Insurance account was $1200 at 31 March 2021. Annual insurance premium was paid on 1 April 2021 $1980 ($1800 + $180 GST) and 1 April 2022 $2310 ($2100 + $210 GST). Prepare balance day adjustment journals and closing journal entries for June 2021 and 2022, and reversal journals for

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1 July 2021 and 2022.

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QUESTION 10.45 Complete the adjusted trial balance extract for the accounting period ending 30 June 2022 (see figure 10.117). Enter new accounts if required, as well as the amount for each adjustment, and complete the trial balance post-adjustment columns. Each part is to be treated independently from the other. Extract Adjusted Trial Balance

as at 30 June 2022

Trial Balance Debit

Credit

Adjustments Debit

Credit

Trial Bal Post Adj Debit

Credit

a. Stationery expense incurred not paid $1485 ($1350 + $135 GST) Stationery

6 760

Expense Accrued b. Annual insurance paid 1 April 2022 $4620 ($4200 + $420 GST) Insurance

8 000

Expense Prepaid c. 9.5% $20 000 investment, 6 monthly interest due 31 October 2022 Interest Received

1 583

Revenue Accrued d. Rent received for 13 months Rent Received

25 441

Revenue Received in Advance e. Further bad debt write-offs $880 ($800 + $80 GST) Accounts Receivable

65 241

Bad Debts Expense

2 310

GST Payable

2 000

f. Doubtful Debt Allowance 5% of e. above Allowance for Doubtful Debts

2 500

Doubtful Debts Expense g. Computer $16 500 ($15 000 + $1500 GST) depreciated over 3 years from 1 April 2021 Computer Accumulated Depreciation – Computer Depreciation – Computer h. Perpetual inventory count $83 040 Inventory

84 170

Inventory Variance (loss or gain?)

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GST Receivable

1 500

i. Calculated Leave Liability: annual $91 263, sick and carer’s $50 031, long service $29 561 Provision for Annual Leave

87 531

Provision for Sick and Carer’s Leave

44 320

Provision for Long Service Leave

25 578

Annual Leave Expense

9 746

Sick and Carer’s Leave Expense

7 825

Long Service Leave Expense

2 977

FIGURE 10.117  Adjusted trial balance for question 10.45

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QUESTION 10.46 Ledger balances on 30 June 2022 before adjustments were: 12% government bonds $20 000, interest received $1800, salaries $23 530, insurance $1550, plant $49 000 and accumulated depreciation – plant $17 300. Adjustments required were as follows. –  Interest was received on 12% government bonds on 31 March and 30 September. –  Salaries of $950 were owing. –  Annual insurance premium of $1200 had been paid on 1 February 2022. –  Plant was depreciated at 15% p.a.   For the year ended 30 June 2022: • prepare adjusting journals • prepare closing journals • enter balances and post journals to relevant ledger accounts including profit and loss account • prepare extract income statement and balance sheet, and • prepare relevant journals on 1 July 2022 and post to the ledger.

QUESTION 10.47 General ledger balances on 31 December 2022 were: rent received $7150, interest received $3100, insurance $2580, equipment $17 000 and accumulated depreciation – equipment $3000. The adjustments for the end of the year were as follows. • January 2023 rent $550 had been deposited in December 2022. • Interest of $800 was due but not yet received. • Insurance was prepaid by $610. • Equipment was depreciated at 17% p.a. Prepare adjusting journal entries for the year ended 31 December 2022 and extracts of income statement and balance sheet. You may wish to prepare the closing journal entries as well. Also prepare reversal journal entries on 1 January 2023.

QUESTION 10.48 Ledger balances on 30 June 2022 before adjustments were: machinery $50 700, accumulated depreciation – machinery $12 800, rates $8000, 12% government bonds $25 000, interest received $2850, salaries and wages $58 300, and rent received $16 250.

Adjustments required were as follows.

• Machinery was depreciated at 20% p.a. • Annual rates of $6700 were paid on 31 March 2022. • Six-monthly interest on bonds was last received 31 January 2022.

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• Salaries and wages accrued $1200. • Thirteen months’ rent was received for the year at $1250 per month. a Prepare for the year ended 30 June 2022:

• adjusting journals



• an extract income statement and balance sheet.



Note: The closing journal entries and postings to the general ledger accounts are also provided in the solutions.

b Prepare relevant reversal journals on 1 July 2022 and post to the ledger.

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QUESTION 10.49 D Peggy has provided the following information: – Office furniture was purchased with debit card on 1 July 2020 for $7920 ($7200 + $720 GST) with a 10% p.a. depreciation rate. – Machinery was purchased with debit card on 1 January 2021 for $52 800 ($48 000 + $4800 GST), depreciated at 15% p.a. – A motor vehicle was purchased with debit card on 1 January 2022 for $42 900 ($39 000 + $3900 GST), with a residual value estimated at $6600 ($6000 + $600 GST) and a useful life of three years. Using the above information and assuming straight line depreciation, prepare for the years ended June 2021 and June 2022: • balance day adjusting journals • extract income statement and balance sheet.

QUESTION 10.50 Figure 10.118 gives an example of calculating the amount of a prepaid expense transferred to profit and loss, based on insurance prepaid 30 June 2021 $790, payments 2021–2022 $5000 and prepaid 30 June 2022 $850. In this example, the transfer to the profit and loss account is $4940. Extract General Ledger of . . .

Insurance 1 Jul 21 Expense Prepaid [reversal] 30 Jun 22 Bank [payment 2021 & 2022]

GJ CP

790 30 Jun 22 Expense Prepaid [bda] 5 000 Profit and Loss 5 790

GJ GJ

850 4 940 5 790

GJ

790

Expense Prepaid 30 Jun 21 Insurance [bda] 30 Jun 22 Insurance [bda]

GJ GJ

790 850

1 Jul 21 Insurance [reversal]

FIGURE 10.118  Example of calculation of amount transferred to profit and loss for question 10.50 From the following data and using the above as an example, calculate the amount transferred to the profit and loss account for the year ended 30 June 2022. a Rates: prepaid $400 on 30 June 2021, bank 2021–2022 $3400, prepaid $1200 on 30 June 2022 b Salaries: accrued $850 as at 30 June 2021, bank 2021–2022 $43 800, accrued $1000 as at 30 June 2022 c Interest on government bonds: accrued $280, as at 30 June 2021, bank 2021–2022 $4500, accrued $500 as at 30 June 2022 d Rent received: received in advance $850 on 30 June 2021, bank 2021–2022 $12 000, received in advance $1150 on 30 June 2022

QUESTION 10.51 Copyright © 2018. Cengage. All rights reserved.

An extract from the general ledger of D Wyangala at 30 June 2022 showed the following account balances: – accounts receivable control $68 288 – allowance for doubtful debts $1421 – GST payable $2500 – bad debts expense $640 – doubtful debts expense $250. Following further analysis of the accounts receivable ledger, D Wyangala decided to write off a further $286 ($260 + $26 GST) to bad debts and to increase the allowance for doubtful debts to 2.5% of accounts receivable. Assume the direct method is used for bad debt write-off. You are required to prepare: • an extract of the income statement, and • an extract of the balance sheet.

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QUESTION 10.52 D Burrinjuck had written off R Krui as a bad debt for $3850 ($3500 + $350 GST) in January 2021. In June 2023, D Burrinjuck received a cheque paying 40 cents in the dollar off the original account receivable amount which had previously been written off. Prepare the relevant journals and ledgers including the subsidiary ledger to correctly process the receipt and GST.

QUESTION 10.53 From the following data calculate the amount paid or received to that account during the year ended 30 June 2022. In f and in g the rental agreement is being complied with. a Wages: reversal $2543, closed out to profit and loss $60 000, balance day adjustment $1086 b Insurance: reversal $715, closed out to profit and loss $3742, balance day adjustment $519 c Interest received: reversal $110, closed out to profit and loss $1748, balance day adjustment $169 d Electricity: reversal $1545, closed out to profit and loss $8569, balance day adjustment $1686 e Mortgage interest: reversal $285, closed out to profit and loss $3600, balance day adjustment $285 f

Rent: reversal $650, closed out to profit and loss $10 000, balance day adjustment $800

g Rent received: reversal $200, closed out to profit and loss $3000, balance day adjustment $300

QUESTION 10.54 At 30 June 2022, R Wallaroi found that the following adjustments needed to be made for the end-of-year accounts. Tax invoices had not yet been processed for the following accounts: • advertising $330 ($300 + $30 GST) • electricity $1925 ($1750 + $175 GST) • stationery $99 ($90 + $9 GST). Also, rent had been paid for July $3509 ($3190 + $319 GST), rent received in June for July $902 ($820 + $82 GST) and wages expense incurred but not paid at 30 June $587. Remember, do not accrue or prepay GST. Prepare the necessary general journals for the end of the current accounting period and those necessary at the commencement of the next accounting period.

QUESTION 10.55 The information in figure 10.119, for D Bendora, has been extracted from the accounts for the years ended 30 June.

Copyright © 2018. Cengage. All rights reserved.

Adjustments Expense Prepaid [Insurance] Revenue Accrued [Interest received] Expense Accrued [Wages] Revenue Received in Advance [Rent received] Cash transactions have occurred for: Insurance Interest Received Wages Rent Received

for 30 June 2021

2022

2023

700 200 410 650

810 850 625 790

970 850 235 875

2 370 3 400 35 683 8 700

2 910 3 400 41 982 9 750

FIGURE 10.119  Extracted information for question 10.55

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CONTINUED

CHAPTER 10

You are required to: a reverse balance day adjustments from 2021 b prepare the cash transactions as general journals for 2022 c prepare balance day adjustment and closing journals for 2022 d post 2021 and 2022 journals to the ledger accounts, except bank and profit and loss e reverse balance day adjustments from 2022 f

prepare the cash transactions as general journals for 2023

g prepare balance day adjustment and closing journals for 2023, and h post 2022 and 2023 journals to the ledger accounts, except bank and profit and loss.

QUESTION 10.56 Annual insurance of $8316 ($7560 + $756 GST) was paid at the end of November 2021. Monthly accounts are prepared and standing journals are used; balance date is 30 June. The insurance expense account was $2850 before the November payment. You are required to prepare: a payment of the insurance on 30 November 2021 in general journal format b standing journal for the end of December 2021 c extract general ledger for the prepayment and the expense accounts to 30 June 2022, and d extracts of the income statement and balance sheet for 30 June 2022.

QUESTION 10.57 Annual magazine subscription revenue of $73 788 ($67 080 + $6708 GST) was received at the end of January 2022. Monthly accounts are prepared and standing journals are used; balance date is 30 June. The magazine subscription revenue account was $36 154 at 31 January. You are required to prepare: a receipt of the magazine subscription revenue received by 31 January 2022 in general journal format b standing journal for the end of February 2022 c extract general ledger for the revenue received in advance and the revenue accounts to 30 June 2022, and d extracts of the income statement and balance sheet for 30 June 2022.

QUESTION 10.58 The plant and equipment account balance at 1 July 2021 was $89 261 and the annual depreciation expense for the coming year was $13 392. Prepare a monthly standing journal.

Copyright © 2018. Cengage. All rights reserved.

Endnotes 1 The interest account is classified as a financial expense in the income statement, but when the word ‘received’, ‘revenue’ or similar is added, it becomes ‘other revenue’ in the income statement. 2 The rent account is classified as a general and administrative expense in the income statement, but when the word ‘received’, ‘revenue’ or similar is added, it becomes ‘other revenue’ in the income statement. 3 One year of five years is a fifth; one-fifth expressed as a percentage is 20%. One divided by five multiplied by 100 gives 20% for each year, or 20% p.a. (per annum).

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457

11 Preparing final reports from a worksheet

Copyright © 2018. Cengage. All rights reserved.

Introduction

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So far we have recorded transactions in journals, posted from the journals to the general ledger and subsidiary ledgers, prepared a trial balance, produced simple financial reports and recorded internal adjustments at the end of the period. We are now about to complete the recording and reporting process by including balance day adjustments in the income statements and balance sheets. Worksheets are used to assist in the preparation of these financial reports at the end of the year. They are also useful to prepare reports for internal management at any time during the financial period. Although not part of the formal accounts of a business, worksheets are a useful tool. They are a means for tracing all general ledger accounts from the trial balance through adjusting entries to the income statement and balance sheet. The preparation of worksheets is an excellent process for checking the amount of profit after balance day adjustments.

CHAPTER 11

Steps in preparing the 2-column worksheet: trial balance To demonstrate process of building a worksheet we will start with a pre-adjustment trial balance, the 2-column worksheet. Then we will progress to an 8-column worksheet for both a trading business and for a service business. We start with three steps: A. trial balance, the 2-column worksheet with account allocation/report classification as well as account grouping B. balance day adjustment, with account allocation/report classification as well as account grouping C. trial balance, incorporating balance day adjustments, account allocation/report classification and account grouping (a post-adjustment trial balance).

Copyright © 2018. Cengage. All rights reserved.

A. Trial balance: the 2-column worksheet The trial balance pre-adjustment forms a vital part of any worksheet to ultimately prepare the correctly formatted income statement and balance sheet. The trial balance pre-adjustment is prepared after all credit and cash journals have been posted at the end of the accounting period, but before the general journal entries for the balance day adjustments and the closing journals. As the list of trial balance pre-adjustments is a list of general ledger balances, it should be prepared in the same order as the chart of accounts. However, questions may not always be given in this order. The flow chart diagrams in past chapters have shown that the trial balance is prepared from the general ledger. The income statement and balance sheet are then prepared from the trial balance (see figure 11.1). As noted in chapter 9, a business may not use a trading account and then a profit and loss account to close the general ledger accounts, but may go straight to the profit and loss account, including the trading account entries as profit and loss closing entries. This process will be used in future. Most computer accounting systems also automatically close off all revenues and expenses to a profit and loss account. After the balance day adjustments have been processed from the general journal to the ledger, the preparation and posting of the closing journals at the end of the accounting year occurs. • The profit and loss account is opened in the general ledger with all revenue and all expense accounts being transferred to the account. The resulting balance in the profit and loss account is the net profit or net loss for the period. The account is then closed off by transferring the balance to the capital account, which is the owner’s equity in the business. • The remaining accounts in the general ledger with balances are: –  current assets and non-current assets –  current liabilities and non-current liabilities, and –  owner’s equity. This is the early accounting equation you covered some time ago, namely: Assets = Liabilities + Owner’s Equity

These remaining account balances – assets, liabilities and owner’s equity – are the only balances at the commencement of the new accounting year. All revenue and expense accounts start the new accounting year with nil balances. As the new year progresses, revenues are earned, expenses are incurred and the details are entered into these accounts, and the cycle continues for another year. Created from tafenswlib on 2020-06-28 20:58:09.

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CHAPTER 11

Allocation of accounts to financial statements To make preparation of financial statements easier, it is very helpful to write on the trial balance, to the left of the account name, the classification group to which each ledger account is to be allocated on these financial statements. All ledger accounts must be allocated to a financial statement. This aspect was covered and implemented in chapter 9, and figure 9.41 is repeated here as figure 11.2. If you have any problems with this, go back and review that section of chapter 9. Financial Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet

FIGURE 11.2

Account Nature

A/c or Stmt

Group

Revenue Cost of Sales Other Revenue Selling and Distribution General and Administrative Financial and Borrowing Current Assets Non-current Assets Current Liabilities Non-current Liabilities Owner’s Equity

PL PL PL PL PL PL BS BS BS BS BS

R CoS OR SD GA FB CA NCA CL NCL OE

Financial statement abbreviations for accounts or statement and group

QUESTION 11.1 Account balances for C Tobins as at 30 June 2022 are listed in figure 11.3. You are required to: a write in the account or statement and group abbreviations b allocate the account balances to either debit or credit in the trial balance and balance it.

Copyright © 2018. Cengage. All rights reserved.

A/c or Stmt

Group

Trial Balance of C Tobins as at 30 June 2022 Bank Accounts Receivable Control Inventory [1 July 2021] GST Receivable Machinery Accumulated Depreciation – Machinery Accounts Payable Control GST Payable Capital Drawings Sales Discount Received Interest Received Purchases Advertising Telephone Salaries Discount Allowed

2 100 649 400 230 2 500 760 198 450 3 081 150 4 800 200 350 1 000 100 880 1 500 330  

FIGURE 11.3

 

Trial balance of C Tobins with account or statement and group abbreviations

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PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.2 Account balances for C Pappinbarra as at 31 March 2022 are listed in figure 11.4. You are required to: a enter the account or statement and group abbreviations, and b allocate the account balances to either debit or credit in the trial balance and balance it. A/c or Stmt

Trial Balance of C Pappinbarra as at 31 March 2022 Capital Office Furniture and Equipment Purchases Wages Loan from Natural Bank Land Accumulated Depreciation – Office Furn & Equip Bank Accounts Receivable Control Inventory [1 April 2021] GST Receivable Motor Vehicle Accounts Payable Control GST Payable Sales Share Investment Accumulated Depreciation – Motor Vehicle Freight Outward Insurance Telephone Freight Inward Bank Charges Drawings Bad Debts Expense Stationery Discount Allowed

?? 7 000 6 350 4 710 45 000 40 000 3 970 37 100 2 904 2 000 1 091 18 000 1 595 1 500 15 400 12 000 1 200 620 480 440 430 390 300 250 150 50

Trial balance C Pappinbarra with account or statement and group abbreviations

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.4

Group

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CHAPTER 11

QUESTION 11.3 The trial balance for Waugh Hope and Co has problems (figure 11.5). You are required to: a enter the account or statement and group abbreviations b allocate the account balances in the trial balance to correct the debit or credit account allocation where necessary and balance it. A/c or Stmt

Group

Waugh Hope & Co Trial Balance as at 30 April 2022 Accumulated Depreciation – Equipment Bad Debts Recovered Capital Discount Allowed Accounts Payable Control Equipment Bank Wages Bad Debts Expense Insurance GST Receivable Loan from Natural Australia Bank Accumulated Depreciation – Motor Vehicle Sales Rent Received Drawings Purchases Motor Vehicle Computer Inventory [1 May 2021] Accounts Receivable Control Allowance for Doubtful Debts GST Payable Government Bonds Advertising Doubtful Debts Expense Petty Cash

9 650 762 56 000 525 4 598 45 890 3 949 37 600 234 1 683 550 14 000 13 250 119 219

307 910

FIGURE 11.5

8 740 7 906 54 889 25 910 2 100 19 115 17 281 1 720 1 200 10 000 815 442 250 150 368

Trial balance of Waugh Hope & Co with account or statement and group abbreviations

Copyright © 2018. Cengage. All rights reserved.

B. Balance day adjustments and account allocations All trial balance accounts can only have one account or statement allocation with one account group classification. However, balance day adjustments affect two accounts and therefore require two account or statement allocations and two account group classifications. The accounts used for the balance day adjustments may or may not be already in the trial balance. The following example shows some adjustments and how they require a debit to a particular account and a credit to another account. It also shows how each of these accounts is linked to either the profit and loss account or the balance sheet, as well as its specific grouping. The questions that follow emphasise the importance of knowing the procedures for balance day adjustments from the previous chapter.

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Example 1: Balance day adjustments, account allocations and periodic inventory Figure 11.6 shows the processing of balance day adjustments for: 1 inventory at the end of the accounting period 2 additional bad debts to be written off and GST 3 increase in the allowance for doubtful debts 4 depreciation of a non-current asset; for example, plant 5 expense that has been prepaid; for example, insurance 6 expense that has to be accrued; for example, wages 7 revenue that has to be accrued; for example, interest received, and 8 revenue that has been received in advance; for example, rent received. Debit

Credit

Balance Day Adjustment

A/c or Group A/c or Group Stmt Stmt 1 2 3 4 5 6 7 8

BS PL BS PL PL BS PL BS PL

CA FB CL FB GA CA GA CA OR

FIGURE 11.6

Ledger Account Adjusted Debit

PL BS

CoS CA

Inventory [closing] Bad debt write-off and GST

BS BS PL BS PL BS

CA NCA GA CL OR CL

Doubtful debt allow incr Depreciation of plant Insurance prepaid Wages accrued Interest received accrued Rent received in advance

Inventory Bad Debts Expense GST Payable Doubtful Debts Expense Depreciation – Plant Expense Prepaid Wages Revenue Accrued Rent Received

Credit Profit and Loss Accounts Receivable Control Allowance for Doubtful Debts Accumulated Depr’n – Plant Insurance Expense Accrued Interest Received Revenue Received in Advance

Account or statement and group classifications from balance day adjustments

Copyright © 2018. Cengage. All rights reserved.

QUESTION 11.4 From the following balance day adjustments for C Parrabel, complete the table in figure 11.7 showing the general ledger accounts affected and the account or statement and group abbreviations to which each general ledger account relates. The processing of balance day adjustments is for: 1 inventory at the end of the accounting period $4645 2 wages accrued $1100 3 rent received in advance $750 4 insurance prepaid $270 5 depreciation of buildings $3500 6 depreciation of motor vehicles $4900 7 allowance for doubtful debts increased by $110 8 accrued interest on government bonds $600, and 9 accrued interest on loan mortgage $1600. Debit

Credit

Balance Day Adjustment

A/c or Group A/c or Group Stmt Stmt 1 2 3 4 5 6 7 8 9

FIGURE 11.7

Ledger Account Adjusted Debit

Inventory [closing] Wages accrual Rent received in advance Insurance prepaid Depreciation of buildings Deprec’n motor vehicles Increase allow doubtful debts Interest received accrual Interest expense accrual

Account or statement and group classifications from balance day adjustments

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Credit

CHAPTER 11

Example 2: Balance day adjustments, account allocations and perpetual inventory As indicated at the commencement of this chapter, worksheets are not part of the formal accounts of a business. As such, there is no benefit to be gained from allocating any inventory variation, following the end-of-year stocktake, to the inventory variation account, as this account would then need to be transferred to the cost of sales account. Rather, the variance from the stocktake is allocated directly to the cost of sales account. Figure 11.8 shows the processing of balance day adjustments where perpetual inventory is applied for the following actions. 1 Physical stocktake valuation revealed that the inventory account was overstated (include GST). 2 Additional bad debts to be written off and GST receivable reduced. 3 An increase is made in the allowance for doubtful debts. 4 A non-current asset such as plant is depreciated. 5 Expense has been prepaid for insurance. 6 Expense has to be accrued for wages. 7 Revenue has to be accrued for interest earned but not received. 8 Revenue has been received in advance for rent received. Debit

Credit

Balance Day Adjustment

A/c or Group A/c or Group Stmt Stmt 1

PL

CoS

2

PL BS PL PL BS PL BS PL

FB CL FB GA CA GA CA OR

3 4 5 6 7 8

FIGURE 11.8

Ledger Account Adjusted Debit

Credit

BS BS BS

CA CA CA

Inventory account overstated; incl GST

Cost of Sales

Inventory GST Receivable

Bad debt write-off including GST

A/cs Receivable Control

BS BS PL BS PL BS

CA NCA GA CL OR CL

Increase allowance for doubtful debts Depreciation plant Insurance prepaid Wages payable Interest revenue accrued Rent received in advance

Bad Debts Expense GST Payable Doubtful Debts Expense Depreciation – Plant Expense Prepaid Wages Revenue Accrued Rent Received

Allowance for Doubtful Debts Accum Deprec’n – Plant Insurance Expense Accrued Interest Received Revenue Rec’d in Advance

Account or statement and group classification for balance day adjustments

Copyright © 2018. Cengage. All rights reserved.

QUESTION 11.5 From the following balance day adjustments for B Kunderang, complete the table in figure 11.9 showing the general ledger accounts affected, and the account or statement and group to which each general ledger account relates. The following balance day adjustments are to be processed. 1 Physical inventory account valuation revealed that the inventory account was overstated by $500; $550 ($500 + $50 GST) where perpetual inventory applies 2 Salaries accrued $440 3 Prepayment of insurance $200 4 Depreciation of machinery $6500 5 Write-off of further bad debts $264 ($240 + $24 GST) 6 Increase allowance for doubtful debts by $240 7 Accrue interest on loan from a relative $480 8 Accrual for electricity $200 9 Accrual for telephone $120

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PREPARING FINAL REPORTS FROM A WORKSHEET

Debit

Credit

Balance Day Adjustment

A/c or Group A/c or Group Stmt Stmt 1

Inventory account overstated; include GST

2 3

Salaries accrued Insurance prepaid

4

Depreciation machinery

5

Bad debt write-off, including GST

6

Increase allowance for doubtful debts

7

Interest expense accrued

8

Accrue for electricity

9

Accrue for telephone

FIGURE 11.9

Ledger Account Adjusted Debit

Credit

Balance day adjustments for B Kunderang

QUESTION 11.6 From the following balance day adjustments for C Dungay, complete the table in figure 11.10, showing the general ledger accounts affected and the account or statement and group to which each general ledger account relates. The following balance day adjustments are to be processed. 1 Closing periodic inventory $2850 2 Accrued loan mortgage interest $430 3 Insurance prepaid $230 4 Sales salaries accrued $250 5 Office salaries accrued $150 6 Depreciation of motor vehicles $680 7 Write-off of further bad debts $77 ($70 + $7 GST) 8 Allowance for doubtful debts established $100 Debit

Credit

A/c or Group A/c or Group Stmt Stmt

Balance Day Adjustment

Ledger Account Adjusted Debit

1 2 3 4 5

Copyright © 2018. Cengage. All rights reserved.

6 7 8

FIGURE 11.10 Account or statement and group classifications from balance day adjustments for C Dungay

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Credit

CHAPTER 11

C. Balance day adjustments, account allocations and the trial balance Balance day adjustments occur in conjunction with the trial balance and not independently of it. It is necessary to see how the trial balance is affected by balance day adjustments when the two are brought together. If the account that requires the balance day adjustment already exists in the trial balance, use this account to make the adjustment. Do not open a duplicate account in the adjustments area. For example, the accrual for wages is: debit wages, credit expense accrued. Wages would already be in the trial balance and so there is no need to duplicate the wages account. Expense accrued would probably not be in the trial balance and so it is necessary to create that account in the adjustment area.

Example 3: Balance day adjustments, account allocations and the trial balance – periodic inventory The following general ledger balances were obtained from the accounts of Jennie Wright at the end of June 2022 (see figure 11.11). These accounts will form the basis for the process into an 8-column worksheet. Trial Balance of Jennie Wright

Copyright © 2018. Cengage. All rights reserved.

as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Premises Plant and Equipment Accum Depreciation – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Purchases Advertising Wages Insurance Bad Debts Expense

12 000 8 151 400 12 300 1 030 30 000 19 500 1 750 8 000 4 103 2 380 10 000 45 773 2 000 95 000 3 000 37 000 805 28 000 3 300 320 162 406

162 406

FIGURE 11.11 Trial balance before balance day adjustments are made – periodic inventory

The following adjustments are to be made to the accounts of Jennie Wright at the end of June 2022 (see figure 11.12). These adjustments will continue the process into an 8-column worksheet. Adjustments required as at 30 June 2022 are: a inventory at end of 12-month period $13 800 b additional bad debt to be written off $165 ($150 + $15 GST); these accounts are already in the trial balance c allowance for doubtful debts to be adjusted to 7.5% of accounts receivable, to the nearest $100 d depreciation of plant and equipment at 10% p.a. e wages accrued $550 Created from tafenswlib on 2020-06-28 20:58:09.

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PREPARING FINAL REPORTS FROM A WORKSHEET

f insurance prepaid $600 g accrue five months’ interest on the recent investment in bonds h rent received in advance $250. The business of Jennie Wright uses a periodic inventory system. Figure 11.12 shows a trial balance as at 30 June 2022 with balance day adjustments shown below. Once the trial balance is prepared from the general ledger balances, the process to complete this example is listed below. 1 If the account already exists in the trial balance, enter the amount of the balance day adjustment to this account. Take care to clearly identify whether the adjustment is a debit or a credit to the existing balance. 2 For each adjustment in the balance day adjustment area, if the account(s) are not already in the trial balance, add the account and relevant amount to the right-hand columns. Take care to identify whether the account is to be a debit or a credit entry. 3 In the trial balance, enter the abbreviation for the account or statement and group in the column to the left of the account name.

Copyright © 2018. Cengage. All rights reserved.

4 In the left-hand debit and credit columns of the balance day adjustment area, enter the abbreviation of all the accounts or statements and groups that are affected by each adjustment. Take care to indicate whether the adjustment account is a debit or credit.

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CHAPTER 11

Trial Balance of Jennie Wright as at 30 June 2022

A/c, Stmt & Group BS CA BS CA BS CA PL CoS BS CA BS NCA BS NCA BS NCA BS NCA BS CL BS CL BS NCL BS OE BS OE PL R PL OR PL CoS PL SD PL GA PL GA PL FB

Account Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1-7-2021] GST Receivable Premises Plant and Machinery Accum Depreciation – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Purchases Advertising Wages Insurance Bad Debts Expense

A/c, Stmt & Group Debit Credit BS CA

PL CoS BS CA

PL GA BS CL BS CA BS CA BS CL

Debit Adjustm’t

Debit Trial Bal

Credit Trial Bal

12 000 8 151

h250

e550 b150

a. Inventory [30-6-2022] $13 800 b. Additional bad debt $165 ($150 + $15 GST) c. Allowance for doubtful debts 7.5% to nearest $100 d. Depreciation plant and equipment at 10% p.a. e. Wages accrued $550 f. Insurance prepaid $600 g. Five months’ interest in government bonds h. Rent received in advance $250

b165 400 c 200

12 300 1 030 30 000 19 500 1 750 d1 950 8 000 4 103 2 380 10 000 45 773 2 000 95 000 3 000 37 000 805 28 000 3 300 f 320 162 406 162 406

b15

Balance Day Adjustments

Credit Adjustm’t

600

Accounts NOT Currently in Trial Balance Debit Credit Account $ Account $ Inventory

13 800

Doubt Debts Deprec P & E

200 1 950

Exp Prepaid Reven Accru

600 325

Profit & Loss

13 800

Exp Accrued

550

Interest Rec’d Rev Rec Adv

325 250

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.12 Trial balance and balance day adjustments – periodic inventory

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PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.7 The account balances for Myrtle Scrub are listed in a trial balance for the year to 30 June 2022 and the balance day adjustments are also shown (figure 11.13). Myrtle asks you to enter: a balance day adjustment amounts in the trial balance if the account already exists b the account details in the balance day adjustment area if the account is not already in the trial balance c account or statement and group abbreviations to the left of the trial balance account d account or statement and group abbreviations in the balance day adjustment area, taking care to indicate whether the adjustment is a debit or a credit. Trial Balance of Myrtle Scrub as at 30 June 2022

A/c, Stmt & Group

Account

Debit Adjustm’t

Debit Trial Bal

Bank Accounts Receivable Control Inventory [1-7-2021] GST Receivable Land and Buildings Office Equipment Accumulated Depreciation – Office Equipment Accounts Payable Control GST Payable Capital Sales Rent Received Purchases Wages Other Office Expenses Bad Debts Expense

A/c, Stmt & Group Debit Credit

1 321 2 904 937 53 151 37 501 8 141 12 694 7 982 1 357 126 103 955

Balance Day Adjustments

103 955

Accounts NOT Currently in Trial Balance Debit

Inventory [30-6-2022] $1857 Depreciation office equipment $631 Bad debt write-off $2145 ($1950 + $195 GST) Rent received in advance $785 Wages accrued $878

FIGURE 11.13 Trial balance and balance day adjustments of Myrtle Scrub Copyright © 2018. Cengage. All rights reserved.

Credit Adjustm’t

9 088 16 896 1 762 350 47 334 6 366

Account

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Credit Trial Bal

Credit $

Account

$

CHAPTER 11

Example 4: Balance day adjustments, account allocations and the trial balance – perpetual inventory The following general ledger balances were obtained from the accounts of Jennie Wright at the end of June 2022 (see figure 11.14). These accounts will form the basis for the process into an 8-column worksheet where perpetual inventory applies. Trial Balance of Jennie Wright as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Premises Plant and Equipment Accum Depreciation – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Cost of Sales Advertising Wages Insurance Bad Debts Expense

12 000 8 151 400 14 100 1 060 30 000 19 500 1 750 8 000 4 103 2 380 10 000 45 773 2 000 95 000 3 000 35 170 805 28 000 3 300 320 162 406

162 406

FIGURE 11.14 Trial balance before balance day adjustments made – perpetual inventory

The following adjustments are to be made to the accounts of Jennie Wright at the end of June 2022. These adjustments will continue the process into an 8-column worksheet as in figure 11.19. a A physical inventory stocktake valuation revealed that inventory account was overstated by $300, which resulted in adjustments to increase the cost of sales by $330, decrease the inventory by $300 and decrease GST receivable account by $30; $330 ($300 + $30 GST). Copyright © 2018. Cengage. All rights reserved.

b An additional bad debt is to be written off $165 ($150 + $15 GST). (The relevant accounts for points a and b are already in the trial balance.) c d e f g h

The allowance for doubtful debts is to be adjusted to 7.5% of accounts receivable, to the nearest $100. Plant and equipment is to be depreciated at 10% p.a. Wages are accrued $550. Insurance prepaid by $600. Five months’ interest is to be accrued on the recent investment in bonds. Rent received in advance is $250. The business of Jennie Wright uses a perpetual inventory system. Figure 11.15 shows a trial balance as at 30 June 2022. Balance day adjustments are shown beneath.

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The process to complete this example is the same as for example 3, but demonstrates a perpetual inventory system. After the trial balance was prepared from the general ledger, the process is listed below. 1 If the account already exists in the trial balance, enter the amount of the balance day adjustment, taking care to clearly identify whether the adjustment is a debit or a credit to the existing balance. 2 For each adjustment in the balance day adjustment area, if the account(s) are not already in the trial balance, add the account and relevant amount to the right-hand columns, taking care to identify whether the account is to be a debit or a credit entry. 3 In the trial balance, enter the abbreviation for the account or statement and group in the column to the left of the account name. 4 In the left-hand debit and credit columns of the balance day adjustment area, enter the abbreviation of all the accounts or statements and groups that are affected by each adjustment, taking care to indicate whether the adjustment account and value is a debit or a credit. Trial Balance of Jennie Wright as at 30 June 2022

A/c, Stmt & Group

Copyright © 2018. Cengage. All rights reserved.

BS CA BS CA BS CA PL CoS BS CA BS NCA BS NCA BS NCA BS NCA BS CL BS CL BS NCL BS OE BS OE PL R PL OR PL CoS PL SD PL GA PL GA PL FB

Account Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Premises Plant and Machinery Accum Depreciation – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Cost of Sales Advertising Wages Insurance Bad Debts Expense

A/c, Stmt & Group Debit Credit

BS CA PL GA BS CL BS CA BS CA BS CL

Debit Adjustm’t

Debit Trial Bal 12 000 8 151 14 100 1 060 30 000 19 500

Credit Adjustm’t

b 400 c a a

165 200 300 30

1 750 d

1 950

8 000 b

4 103 2 380 10 000 45 773

15

2 000 h a

250 330

e

550

b

150

Balance Day Adjustments

a. Inventory [30-6-2022] overstated $300 b. Additional bad debt $165 ($150 + $15 GST) c. Allowance for doubtful debts 7.5% to nearest $100 d. Depreciation plant and equipment at 10% p.a. e. Wages accrued $550  f. Insurance prepaid $600 g. Five months’ interest in government bonds h. Rent received in advance $250

95 000 3 000 35 170 805 28 000 3 300 320 162 406

f

600

162 406

Accounts NOT currently in Trial Balance Debit Credit Account $ Account $

Doubt Debts Deprec P & E

200 1 950

Exp Prepaid Reven Accru

600 325

FIGURE 11.15 Trial balance and balance day adjustments – perpetual inventory

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Credit Trial Bal

Exp Accrued

550

Interest Rec’d Rev Rec Adv

325 250

CHAPTER 11

QUESTION 11.8 Don Dingalong provides the following trial balance for December 2022 (figure 11.16) and asks you to enter: a balance day adjustment amounts in the trial balance if the account already exists b the account details in the balance day adjustment area if the account is not already in the trial balance c account or statement and group abbreviations to the left of the trial balance account d account or statement and group abbreviations in the balance day adjustment area, taking care to indicate whether the adjustment is a debit or a credit. Trial Balance of Don Dingalong as at 31 December 2022

A/c, Stmt & Group

Account

Debit Adjustm’t

Debit Trial Bal

Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Land Equipment Accumulated Depreciation – Equipment 10% Government Bonds Accounts Payable Control GST Payable Capital Sales Interest Received Cost of Sales Sales Salaries Insurance Office Salaries Other Office Expenses Bad Debts Expense

Copyright © 2018. Cengage. All rights reserved.

A/c, Stmt & Group Debit Credit

Balance Day Adjustments

Credit Trial Bal

Credit Adjustm’t

8 090 16 467 92 5 841 986 50 200 80 740 40 513 6 000 3 652 2 260 94 130 90 217 400 35 094 7 120 993 17 577 2 103 53 231 264

231 264

Accounts NOT Currently in Trial Balance Debit Credit Account $ Account $

Inventory overstated $60, $66 ($60 + $6 GST) Extra bad debt $2013 ($1830 + $183 GST) Adjust allowance for doubtful debts to 3% of accounts receivable (to nearest dollar) Accrue four months’ interest on bonds Insurance prepaid by $313 Sales salaries accrued $350 Office salaries accrued $1450 Depreciation on equipment 15% p.a.

FIGURE 11.16 Trial balance and balance day adjustments for Don Dingalong

Created from tafenswlib on 2020-06-28 20:58:09.

473

PREPARING FINAL REPORTS FROM A WORKSHEET

8-column worksheet: format and columns The 8-column worksheet is a listing of account names followed by four headings with two debit/credit, monetary columns. All balance day adjustments are included in the final totals which are now shown as one composite figure. The eight columns and four headings are as follows. Columns 1 and 2: Trial balance, before any balance day adjustments. The question may be given as a one-column listing that needs to be prepared as a trial balance. Make sure that the totals of the two columns in the trial balance are the same, otherwise the overall 8-column worksheet will not balance. Columns 3 and 4: Balance day adjustments. If the account for the adjustment is already shown in the trial balance then the adjustment value is entered in the debit/credit column for that account. If the account for the adjustment is not already shown in the trial balance, then the account name is written below the accounts of the trial balance and the value is entered as debit/credit. The total of the adjustment columns must be the same, so that the total of the debit column agrees with the total of the credit column; that is, the adjustment columns balance. Columns 5 and 6: Profit and loss account. All revenue and expense accounts that would be closed out to the profit and loss account in the general ledger are allocated to either the debit, column 5, or credit, column 6 in the 8-column worksheet. The profit and loss account debit and credit columns are added and the subtotals of each column are entered on the same line as the totals of the adjustments columns 3 and 4. Assuming the result is a profit, the debit column will be less than the credit column. The amount required to balance to the credit column is the net profit and is shown as a debit in the profit and loss, column 5, and a credit in the balance sheet, column 8. Write the two balancing totals for the profit and loss account in columns 5 and 6. If the result is a loss, then the credit column would be less than the debit column. The balancing amount required to balance to the debit column is the net loss and is shown as a credit, column 6, and a debit in the balance sheet, column 7.

Copyright © 2018. Cengage. All rights reserved.

Columns 7 and 8: Balance sheet. Any accounts that have a balance after all revenue and all expenses have been closed out to their appropriate accounts are shown in these two columns. However, that is after allowance for any debit/credit amounts in the balance day adjustment columns 3 and 4. The balance sheet columns are added down and a subtotal shown for both the debit and credit columns, on the same line as the adjustment column totals. The subtotals are then extended down and either the net profit (a credit) or net loss (a debit) is added to the respective subtotal value; the totals should balance. Note: With columns 5 and 6 (profit and loss) or 7 and 8 (balance sheet), care needs to be taken to ensure that the balance shown in a particular column correctly adds/subtracts across from the debit/credit in the trial balance columns 1 and 2 and/or the debit/credit in adjustment columns 3 and 4. The resulting amount needs to be correctly shown as debit/credit in either 5 and 6 (profit and loss) or 7 and 8 (balance sheet).

474tafenswlib on 2020-05-30 08:03:20. Created from

CHAPTER 11

Example 5: 8-column worksheet – periodic inventory The trial balance complete with balance day adjustments for Jennie Wright can now be prepared as an 8-column worksheet (see figure 11.17) where the periodic inventory system is used. Adjustments required as at 30 June 2022 were: a inventory at end of 12-month period $13 800 b additional bad debt to be written off $165 ($150 + $ 15 GST); all of these accounts are already in the trial balance c allowance for doubtful debts to be adjusted to 7.5% of accounts receivable, to the nearest $100 d depreciation of plant and equipment at 10% p.a. e wages accrued $550 f insurance prepaid $600 g accrue five months’ interest on the recent investment in bonds h rent received in advance $250. 8-column Worksheet of Jennie Wright for the year ended 30 June 2022

Account

Copyright © 2018. Cengage. All rights reserved.

Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Premises Plant and Equipment Accum Deprec – Plant & Equip 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Purchases Advertising Wages Insurance Bad Debts Expense

Trial Balance

Adjustments

12 000 8 151

b c

400

600 12 300 1 030 30 000 19 500

d 1 950

1 750

3 700

8 000

8 000 4 103 2 380 b 10 000 45 773

4 103 2 365 10 000 45 773

15

2 000

2 000 95 000 3 000 h

37 000 805 28 000 3 300 320 162 406

Balance Sheet 12 000 7 986

165 200

12 300 1 030 30 000 19 500

a. Inventory [30-6-2022] $13 800 a. Profit and Loss c. Doubtful Debts Expense d. Depreciation – Plant and Equipment e. Expense Accrued [wages] f. Expense Prepaid [insurance] g. Revenue Accrued [interest received] g. Interest Received h. Revenue Received in Advance [rent received]

95 000 2 750

250

e

550

b

150

f

600

37 000 805 28 550 2 700 470

162 406 a 13 800

13 800 a 13 800

c 200 d 1 950

13 800 200 1 950

e f g

550

550

600 325

600 325 g h

17 840 Net Profit

Profit & Loss

325 250 17 840

325 83 975 27 900 111 875

111 875

95 241

111 875

95 241

250 67 341 27 900 95 241

FIGURE 11.17 Balance day adjustments shown in the 8-column worksheet – periodic inventory Created from tafenswlib on 2020-05-30 08:03:20.

475

PREPARING FINAL REPORTS FROM A WORKSHEET

8-column worksheet incorporating balance day adjustments Now using the explanations and preceding example for the 8-column worksheet (figure 11.17), confirm your understanding by completing the following questions.

QUESTION 11.9 From the following pre-adjustment trial balance of Clarence Way as at 30 June 2022 (figure 11.18) and the balance day adjustment listing, prepare an 8-column worksheet. Trial Balance of Clarence Way as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Office Equipment Accumulated Depreciation – Office Equipment Accounts Payable Control GST Payable Capital Sales Purchases Advertising Salaries Insurance Bad Debts Expense

23 188 13 783 350 20 430 1 400 33 907 13 490 4 653 2 500 42 517 110 275 48 080 4  285 25 575 2 185 952 173 785

173 785

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.18 Trial balance of Clarence Way

a b c d e f g

Adjustments required as at 30 June 2022 are listed below. Closing inventory was $14 685. A further $495 ($450 + $45 GST) was written off as a bad debt. The allowance for doubtful debts was increased to $850. Depreciation of office equipment is 15% p.a. Advertising was prepaid $750. Salaries have accrued $895. Goods $380 were received and included in closing inventory value, but the supplier’s tax invoice has not yet been processed.

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CHAPTER 11

Example 6: 8-column worksheet – perpetual inventory The trial balance complete with balance day adjustments for Jennie Wright that were shown in figure 11.15 can now be prepared as an 8-column worksheet (see figure 11.19). The perpetual inventory system is used. Adjustments required as at 30 June 2022 are listed below. a  Physical inventory stocktake valuation revealed that inventory account was overstated by $300, which resulted in adjustments to increase the cost of sales by $330, decrease the inventory by $300 and decrease GST receivable account by $30; $330 ($300 + $30 GST). b  Additional bad debt is to be written off $165 ($150 + $15 GST). (The relevant accounts for points a and b are already in the adjustments columns.) c  Allowance for doubtful debts is to be adjusted to 7.5% of accounts receivable, to the nearest $100. d  Plant and equipment is to be depreciated at 10% p.a. e  Wages are accrued $550. f  Insurance is prepaid by $600. g  Five months’ interest is to be accrued on the recent investment in bonds. h  Rent received in advance is $250. 8-column Worksheet of Jennie Wright for the year ended 30 June 2022

Copyright © 2018. Cengage. All rights reserved.

Account Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Premises Plant and Equipment Accum Deprec – Plant & Equip 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Cost of Sales Advertising Wages Insurance Bad Debts Expense

Trial Balance

Profit & Loss

400

1 750

Balance Sheet 12 000 7 986

b165 c200 a300 a30

14 100 1 060 30 000 19 500

600 13 800 1 030 30 000 19 500

d1 950

3 700

8 000

8 000 4 103 2 380 b15 10 000 45 773

4 103 2 365 10 000 45 773

2 000

35 170 805 28 000 3 300 320 162 406

c. Doubtful Debts Expense d. Depreciation – Plant and Equipment e. Expense Accrued [wages] f.  Expense Prepaid [insurance] g. Revenue Accrued [interest received] g. Interest Received h. Revenue Received in Advance [rent received] Net Profit

Adjustments

12 000 8 151

2 000 95 000 3 000 h250 a330

95 000 2 750

b150

35 500 805 28 550 2 700 470

c200 d1 950

200 1 950

e550 f600 162 406

e550

550

f600 g325 g325 h250 4 370 4 370

600 325 325 70 175 27 900 98 075

98 075

95 241

98 075

95 241

250 67 341 27 900 95 241

FIGURE 11.19 Balance day adjustments shown in the 8-column worksheet – perpetual inventory Created from tafenswlib on 2020-06-28 20:58:25.

477

PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.10 From the pre-adjustment account listing of Ann Gourie, shown in figure 11.20, and the relevant balance day adjustments, prepare an 8-column worksheet for the year ended 31 March 2022. The following adjustments are required. a A stocktake values inventory at $12 160, indicating it is overstated $290; $319 ($290 + $29 GST). b Depreciation of buildings at 2.5% p.a. c Depreciation of motor vehicle at 15% p.a. d Rent received in advance $750. e Wages accrued $480. f Insurance paid in advance $1610. g Tax invoice for $265 stationery received but tax invoice not yet processed. h Interest on overdraft accrued $1050. i Additional bad debt write-off $242 ($220 + $22 GST). j Allowance for doubtful debts is adjusted to 5% of (adjusted) accounts receivable, rounded to the nearest dollar. Account Balances of Ann Gourie as at 31 March 2022 Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Land Buildings Accumulated Depreciation – Buildings Motor Vehicles Accumulated Depreciation – Motor Vehicles Bank Overdraft Accounts Payable Control GST Payable Capital Sales Rent Received Cost of Sales Stationery Wages Insurance Bad Debts Expense Interest on Overdraft

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.20 Account balances of Ann Gourie

478tafenswlib on 2020-06-28 20:58:25. Created from

37 598 1 340 12 450 2 265 67 000 45 200 2 520 20 700 9 857 16 400 23 830 4 030 38 318 211 327 3 993 91 172 1 476 28 992 2 832 1 550 380

CHAPTER 11

QUESTION 11.11 From the following pre-adjustment trial balance of R Murrumbidgee (figure 11.21) as at 30 June 2022 and balance day adjustment listing, prepare an 8-column worksheet. Trial Balance of R Murrumbidgee as at 30 June 2022 Bank Petty Cash Accounts Receivable Control Inventory [1 July 2021] GST Receivable Premises Machinery Accumulated Depreciation – Machinery 12% Debentures in ABC Ltd Accounts Payable Control GST Payable 17% Loan Mortgage on Premises Capital Drawings Sales Interest Received Purchases Advertising Salaries Bad Debts Expense Interest on Loan Mortgage

9 388 100 24 948 16 700 2 410 95 000 30 750 16 280 15 000 8 888 4 160 30 000 117 482 1 750 166 386 2 025 88 890 7 500 48 700 685 3 400 345 221

345 221

FIGURE 11.21 Trial balance of R Murrumbidgee Adjustments required are listed below. Inventory as at 30 June 2022 was $15 600. Further bad debts are written off $451 ($410 + $41 GST). Allowance for doubtful debts is created at 2% of accounts receivable. Depreciation of machinery is 20%. Accrued $675 interest receivable on debentures. Salaries have accrued $1300. Prepaid advertising is $3750. Four months’ interest has accrued on loan mortgage.

Copyright © 2018. Cengage. All rights reserved.

a b c d e f g h

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479

PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.12(a) Periodic inventory D Blowering prepared the following list from the general ledger with the required adjustments to be made for the financial year (figure 11.22). You are required to prepare an 8-column worksheet. Account Balances of D Blowering as at 30 June 2022 Petty Cash Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Land and Buildings Motor Vehicle Accumulated Depreciation – Motor Vehicle Investment in Shares Bank Overdraft Accounts Payable Control GST Payable 18% Loan Mortgage on Land and Buildings Capital Drawings Sales Rent Received Purchases Salaries Insurance Interest Bad Debts Expense Discount Allowed

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.22 Account balances of D Blowering, part (a)

a b c d e f g h i

Adjustments to be made are as follows. Inventory 30 June 2022: $9284. Bad debts $374 ($340 + $34 GST). Allowance for doubtful debts adjusted to 3% of accounts receivable. Depreciation motor vehicle $2100. Salary accrual $1070. Insurance prepayment $4480. Rent received in advance $900. Interest on overdraft $875. Interest on loan mortgage for four months.

480tafenswlib on 2020-06-28 20:58:25. Created from

250 30 272 615 7 456 1 148 75 000 28 000 8 300 3 800 15 719 16 830 2 275 45 000 38 460 2 140 90 985 6 300 38 714 24 236 7 210 2 510 908 2 840

CHAPTER 11

QUESTION 11.12(b) Perpetual inventory D Blowering prepared the following list from the general ledger with the necessary adjustments to be made for the financial year (figure 11.23). You are required to prepare an 8-column worksheet. Account Balances of D Blowering as at 30 June 2022 Petty Cash Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Land and Buildings Motor Vehicle Accumulated Depreciation – Motor Vehicle Investment in Shares Bank Overdraft Accounts Payable Control GST Payable 18% Loan Mortgage on Land and Buildings Capital Drawings Sales Rent Received Cost of Sales Salaries Insurance Interest Bad Debts Expense Discount Allowed

250 30 272 615 9 474 1 167 75 000 28 000 8 300 3 800 15 719 16 830 2 275 45 000 38 460 2 140 90 985 6 300 36 677 24 236 7 210 2 510 908 2 840

FIGURE 11.23 Account balances of D Blowering, part (b)

Copyright © 2018. Cengage. All rights reserved.

a b c d e f g h i

Adjustments to be made are listed below. A physical stocktake shows that inventory should be reduced by $190; $209 ($190 + $19 GST). Bad debts $374 ($340 + $34 GST). Allowance for doubtful debts adjusted to 3% of accounts receivable. Depreciation motor vehicle $2100. Salary accrual $1070. Insurance prepayment $4480. Rent received in advance $900. Interest on overdraft $875. Interest on loan mortgage for four months.

Created from tafenswlib on 2020-06-28 20:58:25.

481

PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.13 The general ledger account balances of B Plowman for 30 June 2022 are shown in figure 11.24, together with a list of balance day adjustments. You are required to prepare an 8-column worksheet. Account Balances of B Plowman as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Accumulated Depreciation – Motor Vehicle Accumulated Depreciation – Office Equipment Advertising Bad Debts Expense Bank Capital Discount Received Dividend Received Drawings Freight Inwards Freight Outward GST Receivable GST Payable Investment in Shares and Securities Insurance Inventory [1 July 2021] Motor Vehicle Motor Vehicle Expense Office Equipment Allowance for Doubtful Debts Purchases Rent Salaries Sales Sales Travelling Expenses Shares in BHP Limited Telephone

2 871 4 389 18 439 17 361 957 1 317 2 046 ?? 91 386 265 2 691 4 179 1 180 2 430 12 000 1 458 2 780 46 419 2 420 35 101 45 39 664 9 260 16 227 97 131 1 734 7 997 832

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.24 Account balances of B Plowman

a b c d e f g h i j

Balance day adjustments at 30 June 2022, rounded to the nearest dollar, are listed below. Inventory $1872. Additional bad debts $385 ($350 + $35 GST). Increase in allowance for doubtful debts to 3% of accounts receivable. Motor vehicle depreciated at 15% p.a. Office equipment depreciated at 10% p.a. Advertising $100 incurred but not yet paid. Repairs to motor vehicle $164 not yet processed in the accounts. Salaries owing $590. Insurance of $418 paid this year (relates to next year). Rent $720 for July 2022 already paid.

482tafenswlib on 2020-06-28 20:58:25. Created from

CHAPTER 11

From the 8-column worksheets to financial statements Income statement The 8-column worksheet is an excellent process for checking the reasonableness of the accounts. Assuming that the accounts all appear to be correct, the financial statements could then readily be prepared from the worksheet. The profit and loss columns are used to prepare the income statement, while the balance sheet columns are used to prepare the balance sheet.

Income statement – periodic inventory The actual format for presentation of these statements needs to be known. Using the example of Jennie Wright, and figure 11.17, the accounts are allocated to their appropriate account group as in figure 11.25. 8-column Worksheet of Jennie Wright for the year ended 30 June 2022

Account

Copyright © 2018. Cengage. All rights reserved.

Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1–7–2021] GST Receivable Premises Plant and Equipment Accum Deprec – Plant & Equip 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Purchases Advertising Wages Insurance Bad Debts Expense

Trial Balance

FIGURE 11.25

Profit & Loss

400

Balance Sheet 12 000 7 986

b165 c200

12 300 1 030 30 000 19 500

600 12 300 1 030 30 000 19 500

1 750

d1 950

3 700

8 000

8 000 4 103 2 380 b15 10 000 45 773

4 103 2 365 10 000 45 773

2 000

2 000 95 000 3 000 h250

37 000 805 28 000 3 300 320 162 406

a. Inventory [30-6-2022] $13 800 a. Profit and Loss c. Doubtful Debts Expense d. Depreciation – Plant and Equipment e. Expense Accrued [wages] f. Expense Prepaid [insurance] g. Revenue Accrued [interest received] g. Interest Received h. Revenue Received in Advance [rent received] Net Profit

Adjustments

12 000 8 151

95 000 2 750

e550 f600 b150

37 000 805 28 550 2 700 470

A/c Stmt & Group BS BS BS PL BS BS BS BS BS BS BS BS BS BS PL PL PL PL PL PL PL

CA CA CA CoS CA NCA NCA NCA NCA CL CL NCL OE OE R OR CoS SD GA GA FB

BS PL PL PL BS BS BS PL BS

CA CoS FB GA CL CA CA OR CL

BS

OE

162 406 a13 800

13 800 a13 800

c200 d1 950

13 800 200 1 950

e550

550

f600 g325 g325 h250 17 840 17 840

600 325 325 83 975 27 900 111 875

111 875

95 241

111 875

95 241

250 67 341 27 900 95 241

8-column worksheet with income statement and balance sheet allocations – periodic inventory

Created from tafenswlib on 2020-06-28 20:58:46.

483

PREPARING FINAL REPORTS FROM A WORKSHEET

Continuing this example, the information for the income statement (figure 11.26) is obtained from the profit and loss columns in the 8-column worksheet (figure 11.25). The net profit must agree with the values on the 8-column worksheet. In the income statement, gross profit is calculated from sales less cost of sales, which is $95 000 less $35 500 equals $59 500 in figure 11.26. Income Statement of Jennie Wright for the year ended 30 June 2022 Revenue  Sales less Cost of Sales  Inventory [1 July 2021]  Purchases   Cost of Goods Available for Sale   less Inventory [30 June 2022] Gross Profit add Other Revenue   Rent Received   Interest Received Total Revenue less Expenses Selling and Distribution  Advertising General and Administrative  Wages 28 550  Insurance 2 700   Depreciation – Plant and Equipment 1 950 Financial and Borrowing   Bad Debts Expense 470   Doubtful Debts Expense 200 Net Profit

95 000 12 300 37 000 49 300 13 800

2 750 325

Copyright © 2018. Cengage. All rights reserved.

3 075 62 575

805

33 200

670

FIGURE 11.26 Income statement from 8-column worksheet – periodic inventory

484tafenswlib on 2020-06-28 20:58:46. Created from

35 500 59 500

34 675 27 900

CHAPTER 11

Income statement – perpetual inventory The actual format for presentation of these statements needs to be known. Using the example of Jennie Wright, and figure 11.19, the accounts are allocated to their appropriate account group as in figure 11.27. 8-column Worksheet of Jennie Wright for the year ended 30 June 2022

Account Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Premises Plant and Equipment Accum Deprec – Plant & Equip 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Cost of Sales Advertising Wages Insurance Bad Debts Expense

Trial Balance

Profit & Loss

400

1 750

Balance Sheet

600 13 800 1 030 30 000 19 500

d1 950

3 700

8 000

8 000 4 103 2 380 b15 10 000 45 773

4 103 2 365 10 000 45 773

2 000

35 170 805 28 000 3 300 320 162 406

A/c Stmt & Group

12 000 7 986

b165 c200 a300 a30

14 100 1 060 30 000 19 500

c. Doubtful Debts Expense d. Depreciation – Plant and Equipment e. Expense Accrued [wages] f.   Expense Prepaid [insurance]  evenue Accrued [interest received] g. R g. Interest Received h. Revenue Received in Advance [rent received] Net Profit

Adjustments

12 000 8 151

2 000 95 000 3 000 h250 a330

95 000 2 750

b150

35 500 805 28 550 2 700 470

c200 d1 950

200 1 950

e550 f600

BS BS BS BS BS BS BS BS BS BS BS BS BS BS PL PL PL PL PL PL PL

CA CA CA CA CA NCA NCA NCA NCA CL CL NCL OE OE R OR CoS SD GA GA FB

PL PL BS BS BS PL BS

FB GA CL CA CA OR CL

BS

OE

162 406

e550

550

f600 g325 g325 h250 4 370 4 370

600 325 325 70 175 27 900 98 075

98 075

95 241

98 075

95 241

250 67 341 27 900 95 241

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.27 8-column worksheet with income statement and balance sheet allocations – perpetual inventory

Created from tafenswlib on 2020-06-28 20:58:46.

485

PREPARING FINAL REPORTS FROM A WORKSHEET

Continuing this example, the information for the income statement (figure 11.28) is obtained from the profit and loss columns in the 8-column worksheet (refer figure 11.27). The net profit must agree to the values on the 8-column worksheet. In the income statement, gross profit is calculated from sales less cost of sales, which is $95 000 less $35 500 equals $59 500 in figure 11.28. Income Statement of Jennie Wright for the year ended 30 June 2022 Revenue  Sales less Cost of Sales Gross Profit add Other Revenue   Rent Received   Interest Received Total Revenue less Expenses Selling and Distribution  Advertising General and Administrative  Wages 28 550  Insurance 2 700   Depreciation – Plant and Equipment 1 950 Financial and Borrowing   Bad Debts Expense 470   Doubtful Debts Expense 200 Net Profit

95 000 35 500 59 500 2 750 325

805

33 200

670

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.28 Income statement from 8-column worksheet – perpetual inventory

486tafenswlib on 2020-06-28 20:58:46. Created from

3 075 62 575

34 675 27 900

CHAPTER 11

Balance sheet, both periodic and perpetual inventory systems The information for the balance sheet (figure 11.29) is obtained from the balance sheet columns in either of the 8-column worksheets, as the data is the same; that is, either figure 11.25 for periodic inventory or figure 11.27 for perpetual inventory. Irrespective of the inventory system, the balance sheet is exactly the same. Balance Sheet of Jennie Wright as at 30 June 2022 Current Assets  Bank   Accounts Receivable Control   less Allowance for Doubtful Debts  Inventory   GST Receivable   Expense Prepaid   Revenue Accrued Non-current Assets  Premises   Plant and Equipment   less Accumulated Depreciation   9.75% Government Bonds Total Assets Current Liabilities   Accounts Payable Control   GST Payable   Expense Accrued   Revenue Received in Advance Non-current Liabilities   Loan from Oz Bank less Total Liabilities Net Assets Owner’s Equity  Capital   add Net Profit   less Drawings Total Owner’s Equity

12 000 7 986 600

7 386 13 800 1 030 600 325

35 141

30 000 19 500 3 700

15 800 8 000

4 103 2 365 550 250

53 800 88 941

7 268 10 000 17 268 71 673

45 773 27 900

73 673 2 000 71 673

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.29 Balance sheet from the 8-column worksheet, for both periodic and perpetual inventory

Created from tafenswlib on 2020-06-28 20:58:46.

487

PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.14 Periodic inventory From the extract 8-column worksheet of Jenny McLaughlin, shown in figure 11.30, enter the abbreviation for the account or statement and group in the columns on the right of the statement and then prepare the income statement and balance sheet in the correct format, where periodic inventory applies. Extract 8-column Worksheet of Jenny McLaughlin

for the year ended 30 June 2022

Account Petty Cash Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Land and Buildings Motor Vehicles Accum Deprec – Motor Vehicles Bank Overdraft Accounts Payable Control GST Payable Loan Mortgage on Land & Bldgs Capital Drawings Sales Rent Received Purchases Salaries Insurance Interest Bad Debts Expense Discount Allowed Inventory [30 June 2022] Profit and Loss [Inventory] Doubtful Debts Expense Depreciation – Motor Vehicles Expense Accrued Expense Prepaid Revenue Receive in Advance Net Profit

Profit & Loss

Balance Sheet

A/c Stmt & Group

250 25 410 1 000 6 337 1 048 68 000 29 800 8 480 13 360 14 311 2 288 38 000 43 996 1 800 77 337 4 600 32 910 25 806 2 330 5 085 1 048 2 114 7 982 7 982 250 1 800 3 849 3 800 77 680 12 239 89 919

89 919

138 090

89 919

138 090

567 125 851 12 239 138 090

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.30 Extract 8-column worksheet with income statement and balance sheet – periodic inventory

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CHAPTER 11

QUESTION 11.15 Perpetual inventory From the extract 8-column worksheet shown in figure 11.31 for Maureen Payne, enter the abbreviation for the account or statement and group in the columns on the right of the statements and then prepare an appropriately classified income statement and balance sheet. Extract 8-column Worksheet of Maureen Payne

for the year ended 30 June 2022

Account Bank Petty Cash Accounts Receivable Control Inventory GST Receivable Premises Machinery Accum Deprec – Machinery Investment in Debentures Accounts Payable Control GST Payable Loan Mortgage on Premises Capital Drawings Sales Interest Received Cost of Sales Advertising Salaries Bad Debts Expense Interest on Loan Mortgage Doubtful Debts Expense Allowance for Doubtful Debts Depreciation – Machinery Revenue Accrued Expense Accrued Expense Prepaid Net Profit

Profit & Loss

Balance Sheet

A/c Stmt & Group

10 796 100 28 171 17 940 2 410 95 000 36 750 25 795 18 000 10 219 4 119 35 000 117 634 2 050 192 343 3 100 100 150 4 315 57 000 1 260 5 865 565 565 7 073 780 3 400 176 228 19 215 195 443

195 443

3 950 215 947

195 443

215 947

196 732 19 215 215 947

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FIGURE 11.31 8-column worksheet with income statement and balance sheet – perpetual inventory

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PREPARING FINAL REPORTS FROM A WORKSHEET

QUESTION 11.16 Periodic inventory From the extract 8-column worksheet shown in figure 11.32 for John Spalding, enter the abbreviation for the account or statement and group in the columns on the right of the statements and then prepare a properly formatted income statement and balance sheet. Extract 8-column Worksheet of John Spalding

for the year ended 30 June 2022

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Account Accounts Payable Control Accounts Receivable Control Accum Deprec – Motor Vehicles Accum Deprec – Office Equipment Advertising Bad Debts Expense Bank Capital Discount Received Dividend Received Drawings Freight Inwards Freight Outwards GST Receivable GST Payable Investment in Shares Insurance Inventory [1 July 2021] Motor Vehicles Motor Vehicle Expense Office Equipment Allowance for Doubtful Debts Purchases Rent Salaries Sales Sales Travelling Expense Shares in Public Company Telephone Inventory [30 June 2022] Profit and Loss [Inventory] Doubtful Debts Expense Depreciation – Motor Vehicles Depreciation – Office Equipment Expense Accrued Expense Prepaid Net Profit

Profit & Loss

Balance Sheet

A/c Stmt & Group

3 476 4 840 30 706 25 274 1 257 2 017 2 446 66 914 110 487 365 3 256 5 076 1 487 2 898 14 500 1 248 3 364 56 117 3 186 42 402 450 47 993 10 343 20 843 117 531 2 100 10 766 1 037 2 272 2 272 200 8 465 4 217 1 075 114 602 5 798 120 400

120 400

1 396 136 591

120 400

136 591

130 793 5 798 136 591

FIGURE 11.32 Extract 8-column worksheet with income statement and balance sheet – periodic inventory

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CHAPTER 11

QUESTION 11.17 Perpetual inventory From the account balances in figure 11.33 and balance day adjustments for G Gardiner for 31 December 2022, prepare an 8-column worksheet, an income statement and a balance sheet. Account Balances of G Gardiner as at 31 December 2022 Stationery Sales Salaries Sales Rent Received Office Salaries Machinery and Equipment Land Inventory Interest Insurance GST Receivable GST Payable Electricity Drawings Donations Cost of Sales Capital Buildings Bank Overdraft Bank Charges Bad Debts Recovered Bad Debts Expense Advertising Accumulated Depreciation – Buildings Accumulated Depreciation – Machinery & Equipment Accounts Receivable Control Accounts Payable Control 15% Loan Mortgage on Land and Buildings

569 18 080 197 366 8 028 27 772 43 271 35 000 5 863 1 963 4 740 1 825 4 930 1 885 3 893 280 60 085 ??? 46 560 4 847 209 1 680 288 3 753 9 687 12 750 18 623 6 633 10 000

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FIGURE 11.33 Account balances of G Gardiner for Question 11.17

a b c d e f g h i j k l

Balance day adjustments for 31 December 2022 are listed below. A physical stocktake values inventory at $5713; adjustment of $165 ($150 + $15 GST). Establishment of allowance for doubtful debts to 3% of accounts receivable, rounded to the nearest dollar. Depreciation of buildings 2.5%, rounded to the nearest dollar. Depreciation of machinery and equipment 15% p.a., rounded to the nearest dollar. Accrued interest on overdraft $275. Accrued two months’ interest on loan mortgage. Rent $823 for January next year received in December 2022. Prepayment of $1230 for insurance. Accrual required for sales salaries $1638. Accrual required for office salaries $3300. Accrual required for stationery $157. Estimated electricity consumed but not paid $100.

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Worksheets for simple service industry Until now we have been preparing the worksheets and financial statements for trading businesses. The worksheet for a service industry business is the same as for a trading business, as indicated in figure 11.34. 8-column Worksheet of ... for the year ended …

Account

Trial Balance

Adjustments

Profit and Loss

Balance Sheet

FIGURE 11.34 Layout of an 8-column worksheet

QUESTION 11.18 Service industry Lita Litigiosus has provided you with the following list of account balances as at 30 June 2022 (figure 11.35) and balance day adjustments. You have been requested to prepare an 8-column worksheet, an income statement and a balance sheet for the year ended 30 June 2022. Balance day adjustments for 30 June 2022 are listed below. a Depreciation expense on chambers is $43 800. b Depreciation expense on office equipment was $10 700. c Unpaid salaries amount to $6200. d Interest on the long-term loan (mortgage) for June has not been paid. It is $1100. e The telephone account for June of $1150 has been received but not yet paid. f A client paid fees of $1200 on 26 June for work to be performed in August 2022. It was recorded as legal fees revenue. g The premium of $5000 for a one-year insurance policy was purchased and paid for on 1 April.

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Account Balances of Lita Litigiosus as at 30 June 2022 Cash at Bank Accounts Receivable Control GST Receivable Land Chambers Accumulated Depreciation – Chambers Office Equipment Accumulated Depreciation – Office Equipment Accounts Payable Control GST Payable Loan (Mortgage) Payable Capital Drawings Legal Fees Revenue Insurance Expense Salaries Expense Electricity Interest Expense Telephone Expense

FIGURE 11.35 Account balances of Lita Litigiosus for question 11.18

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30 000 46 300 5 700 128 000 730 000 219 000 67 500 32 100 45 800 7 800 443 000 210 350 263 900 784 300 8 300 439 700 3 800 10 450 8 700

CHAPTER 11

QUESTION 11.19 Service industry Dr R Queanbeyan has provided you with the following list of account balances as at 30 June 2022 (figure 11.36) and balance day adjustments. The business uses a periodic inventory method for recording surgical supplies. You have been requested to prepare an 8-column worksheet, an income statement and a balance sheet for the past six months. Balance day adjustments for the six-month period to 30 June 2022 are listed below. a Inventory of surgical supplies at 30 June 2022 was $10 868. b Surgical fittings and equipment to be depreciated at 20% p.a., rounded to the nearest dollar. c Depreciation of motor vehicle is 15% p.a., rounded to the nearest dollar. d Accrued two months’ interest on loan mortgage. e Rates are prepaid $6328. f Accrued salaries are nurse $960, receptionist $872. Account Balances of Dr R Queanbeyan as at 30 June 2022 8% Loan Mortgage on Premises Accumulated Depreciation – Surgery Fittings & Equipment Accumulated Depreciation – Motor Vehicle Bank Capital Cash on Hand Accounts Payable Control Accounts Receivable Control GST Payable GST Receivable Drawings Electricity Fees from Surgery Interest on Loan Mortgage Motor Vehicle Premises Purchase of Surgery Supplies Rates Salary – Nurse Salary – Receptionist Stationery Stock of Surgical Supplies [1 January 2022] Surgery Fittings & Equipment Telephone

184 000 38 780 11 016 19 660 211 580 1 500 2 612 7 752 1 600 5 600 19 692 6 832 475 056 7 540 146 920 442 800 36 392 9 936 75 276 64 636 1 004 9 408 66 636 3 060

Copyright © 2018. Cengage. All rights reserved.

FIGURE 11.36 Account balances of Dr R Queanbeyan for question 11.19

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REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 11.20  Periodic inventory From the list of account balances, shown in figure 11.37, as at 30 June 2022 from the general ledger of D Jounama, together with the balance day adjustments, you are required to prepare an 8-column worksheet, an income statement and a balance sheet.

Account Balances of D Jounama as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 January 2022] GST Receivable Machinery Accumulated Depreciation – Machinery Motor Vehicles Accumulated Depreciation – Motor Vehicles Accounts Payable Control GST Payable Loan from A Reservoir Capital Drawings Sales Purchases Freight Inwards Advertising Freight Outwards Salaries Electricity Telephone Insurance Bank Charges Interest on Loan Bad Debts Expense Discount Allowed Doubtful Debts Expense

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FIGURE 11.37 Account balances of D Jounama for question 11.20 Balance day adjustments are listed below. a Inventory $6254. b Salaries accrued $790. c Prepayment of insurance $350. d Depreciate machinery at 20% p.a. e Depreciate motor vehicle at 15% p.a. f

Write off bad debts $330 ($300 + $30 GST).

g Adjust allowance for doubtful debts to 3% of accounts receivable. h Accrue interest on loan $870. i

Accrue for electricity $378.

j

Accrue for telephone $215.

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22 327 11 484 420 6 057 810 59 000 15 213 22 000 6 600 4 081 1 910 24 000 ?? 3 175 76 552 28 835 776 486 859 21 889 581 234 720 61 1 080 848 367 208

CHAPTER 11

QUESTION 11.21  Perpetual inventory You are asked by Julia Kreiger to prepare an 8-column worksheet and then an income statement and balance sheet for the year ended 30 June 2022. Use the account balances in figure 11.38 and the balance day adjustments below.

Account Balances of Julia Kreiger as at 30 June 2022 Bank Petty Cash Accounts Receivable Control Allowance for Doubtful Debts Inventory Motor Vehicles Accumulated Depreciation – Motor Vehicles Office Furniture and Equipment Accumulated Deprec’n – Office Furniture & Equipment 12% Government Bonds Bad Debts Expense Bad Debts Recovered Capital Accounts Payable Control Electricity Freight Outwards GST Payable Insurance Interest Received Motor Vehicles Expenses Cost of Sales Salaries Sales Telephone GST Receivable

8 992 550 40 392 400 7 323 61 496 19 754 39 183 9 501 25 000 1 885 2 700 73 887 18 975 2 179 2 108 4 590 3 690 2 250 7 103 82 157 29 582 183 527 1 602 2 342

FIGURE 11.38 Account balances of Julia Kreiger for question 11.21 Balance day adjustments on 30 June 2022 were as follows. a Inventory should be $7103; overstated by $242 ($220 + $22 GST). b Motor vehicles were depreciated at 18% p.a., rounded to the nearest dollar. c Office furniture and equipment were depreciated at 12% p.a., rounded to the nearest dollar. d Interest on government bonds is owed for three months. e Bad debts of $253 ($230 + $23 GST) need to be written off. f

Allowance for doubtful debts was adjusted to 2% of accounts receivable (to the nearest $100).

Copyright © 2018. Cengage. All rights reserved.

g Annual insurance premium of $2820 was paid on 1 March 2022. h Accrual for salaries was $1590. i

Motor vehicle expenses accrued $823.

j

The estimated consumption of electricity not yet paid was $420.

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QUESTION 11.22  Service industry You have received from R Shoalhaven, who operates a veterinary practice, the trial balance and a number of adjustments for the year ended 30 June 2022 (shown in figure 11.39). She asks that you prepare an 8-column worksheet and then an income statement and balance sheet.

Trial Balance of R Shoalhaven as at 30 June 2022 Bank Cash on Hand Accounts Receivable Control GST Receivable Premises Surgery, Equipment and Fittings Accumulated Deprec’n – Surgery, Equip & Fittings Motor Vehicle Accumulated Depreciation – Motor Vehicle Accounts Payable Control GST Payable Capital Fees from Surgical Procedures Fees from Farm Consultations Purchase of Veterinary Supplies Motor Vehicle Expense Salaries – Veterinarian and Receptionist Stationery Telephone Computer and Web Expenses Council Rates Advertising

FIGURE 11.39 Account balances of R Shoalhaven, for question 11.22 Balance day adjustments on 30 June 2022 were as listed below. Accrual for salaries $9048. Depreciation of surgery, equipment and fittings $25 892. Depreciation of motor vehicle $16 094.

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• • •

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47 738 500 4 958 1 030 366 110 129 460 47 608 80 468 46 246 1 687 3 918 85 627 388 435 297 841 47 915 13 437 156 837 1 574 10 745 3 716 4 362 2 512 871 362

871 362

CHAPTER 11

QUESTION 11.23  Service industry L Hume operates an appliance service business for refrigerators, washing machines, clothes dryers and dishwashers. The trial balance and a number of adjustments for the year ended 30 June 2022 are shown in figure 11.40. You are required to prepare an 8-column worksheet and then use it to prepare an income statement and balance sheet.

Trial Balance of L Hume as at 30 June 2022 Accounts Receivable Control GST Receivable Equipment Accumulated Depreciation – Equipment Motor Vehicle Accumulated Depreciation – Motor Vehicle Bank Overdraft Accounts Payable Control Loan from W Denmeade Capital Drawings Fees from Repairs Purchase of Parts for Repairs Salary – Service Assistant Salary – Administration Motor Vehicle Expense Rent of Office Stationery Advertising Interest Expense GST Payable Telephone Computer and Web Expenses

1 620 1 716 29 925 11 970 94 583 24 750 4 154 11 682 17 000 21 728 14 531 407 282 206 744 63 315 17 420 32 850 10 530 2 843 3 794 2 834 2 716 3 108 15 469 501 282

501 282

FIGURE 11.40 Account balances of L Hume, for question 11.23 Balance day adjustments on 30 June 2022 were as listed below. Depreciation of equipment at 20% p.a., to nearest $ Depreciation of motor vehicle at 15% p.a., to nearest $ Accrued salary for service assistant $2000 Rent prepaid $800 Accrual of interest expense $561.

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• • • • •

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QUESTION 11.24  Service industry You have received a list of balances and balance day adjustments from Dr R Smart (figure 11.41) and have been requested to prepare an 8-column worksheet and then use it to prepare an income statement and balance sheet.

Account Balances of Dr R Smart as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Accumulated Depreciation – Motor Vehicle Accumulated Depreciation – Surgery Equip’t & Fit Bank Capital Cash on Hand Computer and Web Expenses Drawings Electricity Fees from Surgery Visits GST Receivable Insurance Interest on Mortgage Mortgage on Premises Motor Vehicle Motor Vehicle Expense Premises Purchase of Surgery Supplies Rates Salaries Stationery Surgery Equipment and Fittings Telephone

FIGURE 11.41 Account balances of Dr R Smart, for question 11.24 Balance day adjustments on 30 June 2022 were as listed below. Depreciation of surgery equipment and fittings $36 754 Accrual of salaries $2870 Depreciation of motor vehicle $14 875 Insurance prepaid $1990 Interest on mortgage accrued $2345.

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• • • • •

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1 633 4 845 36 885 24 238 110 350 314 860 300 13 486 12 307 14 870 494 410 323 25 880 6 900 50 147 92 500 15 326 276 750 42 745 6 210 142 445 2 627 150 397 3 912

12 Advanced management reports and correction of errors

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Introduction This chapter further consolidates your understanding of the preparation of management reports that have satisfied the process of matching revenue and expense to the accounting period. A method for producing the financial statements that incorporates balance day adjustments without using a worksheet is demonstrated. However, the first part of this chapter mainly deals with a review and consolidation of what you already know and understand. The correction of errors has been included towards the end of the chapter and this should further consolidate your understanding.

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

Review of end-of-period processes In chapter 9 you learnt: • the purpose of trading and profit and loss accounts, income statements (or revenue statements) and balance sheets (or statements of financial position) • how to prepare trading and profit and loss accounts in the general ledger, assuming no balance day adjustments • how to prepare classified narrative income statements (statements of financial performance) and balance sheet (statements of financial position). You may wish to check your understanding of these points by reviewing the comprehensive examples 4 (Periodic inventory), 5 (Perpetual inventory) and 6 (Balance sheet) in chapter 9 and redoing some of the revision questions. In chapter 10 you learnt the impact of balance day adjustments and covered the following internal adjustments: • expense accrued and reversal • expense prepaid and reversal • revenue accrued and reversal • revenue received in advance and reversal • write-off of further bad debts using the direct method • allowance method using doubtful debts expense and allowance for doubtful debts (creation and adjustment) • depreciation (introductory only) • leave provisions

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• variance of perpetual inventory records to physical inventory. You also learnt how standing journal entries may be more regularly used as an alternative to certain balance day adjustments. These adjustments were all made to ensure that the matching concept was used. Expenses incurred were matched to the same accounting period as the revenues they generated. The adjustments ensured consistent recording and reporting of the profit or loss and the assets, liabilities and owner’s equity over the years of operation for the business. A summary of the adjusting entries is shown in chapter 10 (see figure 10.94). The balance day adjustments were journalised and then posted to the general ledger. Balance day adjustments must be processed at the end of the financial year, but may also be processed for shorter periods of time, depending on the needs of the business. However, if the balance day adjustments relate to the expense accrued, expense prepaid, revenue accrued or revenue received in advance, they must be also reversed at the beginning of the following period. In chapter 11 you learnt how to prepare worksheets. In a manual accounting system these provide a means to check the gross and net profits as well as the balances of accounts after balance day adjustments have been made, and as they should appear in the income statement and balance sheet. The following are the key steps to be completed on balance day, before the final financial statements are produced. • Balance day adjustments must be prepared and posted to the ledgers at the end of the accounting financial year so that the financial statements satisfy the matching concept. On the first day of the new financial year, reversals should be prepared and then processed.

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CHAPTER 12

• Closing journals are prepared only at the end of the accounting financial year and not monthly. As indicated at the beginning of chapter 11, closing journals will now only use the profit and loss account in the general ledger, with the balances of all revenue and expense accounts being transferred to profit and loss. The profit and loss account is then closed out by transferring the net profit or loss to the capital account.

1. Periodic and perpetual inventory: trial balance, balance day adjustments and closing journals The example for Jennie Wright, used in Chapter 11 for examples 3 to 6 to introduce 8-column worksheets, will be used again to enhance your understanding of the processes that need to formally occur at the end of the accounting year.

Example 1: Trial balance, balance day adjustment journals, closing journals, general ledger and income statement – periodic and perpetual inventory STEP 1: TRIAL BALANCE BEFORE BALANCE DAY ADJUSTMENTS WHERE BOTH PERIODIC AND PERPETUAL INVENTORY APPLY Where periodic inventory applies, the general ledger account balances before the balance day adjustments are shown in figure 12.1. Trial Balance of Jennie Wright

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as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Premises Plant and Equipment Accumulated Depreciation – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Purchases Advertising Wages Insurance Bad Debts Expense

FIGURE 12.1

12 000 8 1 51 400 12 300 1 030 30 000 19 500 1 750 8 000 4 103 2 380 10 000 45 773 2 000 95 000 3 000 37 000 805 28 000 3 300 320 162 406

162 406

Trial balance before balance day adjustments, where periodic inventory applies

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Where perpetual inventory applies, the general ledger account balances before the balance day adjustments are shown in figure 12.2. Trial Balance of Jennie Wright as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory GST Receivable Premises Plant and Equipment Accumulated Deprec’n – Plant and Equipment 9.75% Government Bonds Accounts Payable Control GST Payable Loan from Oz Bank Capital Drawings Sales Rent Received Cost of Sales Advertising Wages Insurance Bad Debts Expense

FIGURE 12.2

12 000 8 1 51 400 14 1 00 1 060 30 000 19 500 1 750 8 000 4 103 2 380 10 000 45 773 2 000 95 000 3 000 35 1 70 805 28 000 3 300 320 162 406

162 406

Trial balance before balance day adjustments, where perpetual inventory applies

STEP 2: BALANCE DAY ADJUSTMENTS AND JOURNALS Balance day adjustments to be prepared at 30 June 2022 were as follows: • inventory at end of 12-month period $13 800; this specifically relates to periodic inventory • physical inventory count and valuation was $13 800 but the accounts showed $14 100, which means it was overstated by $300; $330 ($300 + $30 GST). This specifically relates to perpetual inventory.

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The remaining balance day adjustments all relate to both periodic and perpetual inventory applications: • additional bad debt to be written off $165 ($150 + $15 GST) • allowance for doubtful debts to be adjusted to 7.5% of accounts receivable, rounded to the nearest $100 • depreciation of plant and equipment at 10% p.a. • wages accrued $550 • insurance prepaid $600 • accrue five months’ interest on the recent investment in bonds at 9.75% p.a. • rent received in advance $250. The $13 800 periodic inventory count and valuation at the end of the accounting year will, for consistency, continue to be shown as a closing journal as it was in chapter 9, although it is also a balance day adjustment.

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CHAPTER 12

The balance day adjusting journals are then prepared, and are shown in figure 12.3. These journal entries are then posted to the general ledger, as shown in figure 12.5. General Journal of Jennie Wright

GJ 1

30 Jun 22 Periodic Inventory [closing] $13 800 is a closing journal in figure 12.4

Where Perpetual Inventory applies 30 Jun 22 Cost of Sales Inventory GST Receivable Reduction of inventory after annual stocktake

330 300 30

Where BOTH Periodic and Perpetual Inventory apply 30 Jun 22 Bad Debts Expense GST Payable Accounts Receivable Control Write off further bad debts Doubtful Debts Expense Allowance for Doubtful Debts Increase in allowance to 7.5% of accounts receivable Depreciation – Plant and Equipment Accumulated Depreciation – Plant & Equipment Depreciation at 10% on plant and equipment

FIGURE 12.3

150 15 165 200 200 1 950 1 950

Wages Expense Accrued Adjustment for wages incurred but not paid

550

Expense Prepaid Insurance Adjustment for insurance paid in advance

600

Revenue Accrued Interest Received Adjustment for revenue earned but not yet received

325

Rent Received Revenue Received in Advance Adjustment for rent received in advance

250

550

600

325

250

Balance day adjusting journals to be posted to the general ledger

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STEP 3: CLOSING JOURNALS During the year, the business transactions have been prepared and posted to the ledgers and a pre-balance day adjustment trial balance extracted as shown in figure 12.1 for periodic inventory and figure 12.2 for perpetual inventory. The balance day adjustment journals have now also been prepared, as shown in figure 12.3, and posted to the general ledger as in figure 12.5. The next step is to prepare the closing journals. The balances of all revenue and expense accounts are closed out to the profit and loss account (figure 12.4). When the profit and loss account is closed, it provides the net profit (or net loss), which is transferred to capital: the owner’s account. The balance in the drawings account is also closed to the capital account. These closing journals, shown in figure 12.4, are also posted to the general ledger in figure 12.5.

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General Journal of Jennie Wright Where BOTH Periodic and Perpetual Inventory apply 30 Jun 22 Sales Profit and Loss Balance on sales closed out to profit and loss Rent Received [3 000 – 250] Interest Received Profit and Loss Opening inventory and purchases closed to profit & loss

GJ 2 95 000 95 000 2 750 325 3 075

Where Periodic Inventory applies 30 Jun 22 Profit and Loss Inventory [opening] Purchases Advertising Wages [28 000 + 550] Insurance [3 300 – 600] Depreciation – Plant and Equipment Bad Debts Expense [320 + 150] Doubtful Debts Expense Opening inventory and expenses closed to profit & loss Inventory [closing]

83 975 12 300 37 000 805 28 550 2 700 1 950 470 200 13 800

Profit and Loss

13 800

Closing inventory valuation from physical stocktake Profit and Loss [95 000 + 3 075 + 13 800 − 83 975]

27 900

Profit and Loss

27 900

Profit & loss closed, net profit transferred to capital a/c

Where Perpetual Inventory applies 30 Jun 22 Profit and Loss Cost of Sales [35 170 + 330] Advertising Wages [28 000 + 550] Insurance [3 300 – 600] Depreciation – Plant and Equipment Bad Debts Expense [320 + 150] Doubtful Debts Expense Expenses closed profit and loss Profit and Loss [95 000 + 3 075 – 70 175] Capital Profit & loss closed, net profit transferred to capital a/c

70 175 35 500 805 28 550 2 700 1 950 470 200 27 900 27 900

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Where BOTH Periodic and Perpetual Inventory apply 30 Jun 22 Capital Drawings Closing drawings to capital

FIGURE 12.4

2 000 2 000

Closing journals, where periodic and perpetual inventory apply

This set of closing journals should not create any surprises. However, if you are uncertain, also review examples 1 and 3 in chapter 9 for J McIver, as well as for K Curtis in example 4. From chapter 9 and throughout chapter 11 you should remember that, in general, service businesses and some trading businesses close off all revenues and expenses to the profit and loss account. Most computer accounting systems at the end of the financial year automatically close off all revenues and expenses to a profit and loss account. The account balance is then transferred to the capital account, which is the owner’s equity in the business.

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CHAPTER 12

STEP 4: GENERAL LEDGER Using a modified T account format, details of the general ledger are shown in figure 12.5. The ledger details came from: • the trial balance before balance day adjustments (figure 12.1 and 12.2); they are shown as ‘Balance’ • posting of the balance day adjusting journals (figure 12.3) • posting of the closing journals to profit and loss, drawings and capital (figure 12.4). General Ledger of Jennie Wright Where BOTH Periodic and Perpetual Inventory apply Bank Balance

Accounts Receivable Control

12 000

Balance

Balance b/d

8 151 Bad Debts Exp [bda] GST Payable [bda] Balance c/d 8 151 7 986

150 15 7 986 8 151

Allowance for Doubtful Debts Balance Doubt Debt Exp [bda]

400 200 600

Where Periodic Inventory applies

Where Perpetual Inventory applies

Inventory

Inventory

Balance [open] Profit and Loss

12 300 Profit and Loss 13 800

12 300

Balance

Balance b/d GST Receivable Balance

14 100 Cost Sales [bda] Balance c/d 14 100 13 800

300 13 800 14 100

GST Receivable

1 030

Balance

Balance b/d

1 060 Cost Sales [bda] Balance c/d 1 060 1 030

30 1 030 1 060

Where BOTH Periodic and Perpetual Inventory apply Expense Prepaid Insurance [bda] Revenue Accrued

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Interest Rec [bda]

Premises

325

Balance

Plant and Equipment Balance

19 500

Balance Depr Plt Eq [bda]

15 Balance 2 365 2 380 Balance b/d

1 750 1 950 3 700 Accounts Payable Control

8 000

Balance

GST Payable A/c Receiv [bda] Balance c/d

30 000

Accumulated Deprec’n – Plant and Equipment

Government Bonds Balance

600

4 103

Expense Accrued 2 380

Wages [bda]

550

2 380 2 365 CONTINUED

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Revenue Received in Advance Rent Rec’d [bda]

Loan from Oz Bank 250

Balance

Capital Drawings [close] Balance c/d

10 000

Drawings

2 000 Balance 71 673 Profit and Loss 73 673 Balance b/d

45 773 27 900 73 673 71 673

Balance

2 000 Capital [close]

2 000

Where Periodic Inventory applies Profit and Loss 30 Jun 22 Inventory [opening] Purchases Advertising Wages Insurance Depreciation – Plant & Equipm’t Bad Debts Expense Doubtful Debts Expense Capital [net profit]

12 300 37 000 805 28 550 2 700 1 950 470 200 27 900 111 875

30 Jun 22 Sales Inventory [closing] Rent Received Interest Received

95 000 13 800 2 750 325

111 875

Where Perpetual Inventory applies Profit and Loss 30 Jun 22 Cost of Sales Advertising Wages Insurance Depreciation – Plant & Equipm’t Bad Debts Expense Doubtful Debts Expense Capital [net profit]

35 500 805 28 550 2 700 1 950 470 200 27 900 98 075

30 Jun 22 Sales Rent Received Interest Received

95 000 2 750 325

98 075

Where BOTH Periodic and Perpetual Inventory apply Sales Profit and Loss

Rent Received

95 000 Balance

95 000

Rev Rec Advance Profit and Loss

250 Balance 2 750 3 000

3 000 3 000

Interest Received

Copyright © 2018. Cengage. All rights reserved.

Profit and Loss

325 Revenu Accr’d

325

Where Periodic Inventory applies

Where Perpetual Inventory applies

Purchases Balance

37 000 Profit and Loss

Cost of Sales 37 000

Balance Inventory/GST

35 170 Profit and Loss 330 35 500

35 500 35 500

Where BOTH Periodic and Perpetual Inventory apply Advertising Balance

805 Profit and Loss

Wages 805

Balance Expense Accr’d

28 000 Profit and Loss 550 28 550

28 550 28 550

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CHAPTER 12

Insurance Balance

Depreciation – Plant and Equipment

3 300 Exp Prepaid Profit and Loss 3 300

600 2 700 3 300

Bad Debts Expense Balance A/c Receivable

320 Profit and Loss 150 470

1 950 Profit and Loss

Acc Depr P&Eq

1 950

Doubtful Debts Expense 470

Allow Doubt Debt

200 Profit and Loss

200

470

FIGURE 12.5 General ledger including balance day adjustments, closed to profit and loss for both periodic and perpetual inventory

STEP 5: INCOME STATEMENT The information for the income statement, when periodic inventory applies, is obtained from the profit and loss account in the general ledger in figure 12.5. The income statement, shown in figure 12.6, is the same as that prepared from the 8-column worksheet for Jennie Wright, using the periodic inventory method, in the previous chapter (figure 11.26).

Copyright © 2018. Cengage. All rights reserved.

Income Statement of Jennie Wright for the year ended 30 June 2022 Revenue Sales less Cost of Sales  Inventory [opening]  Purchases   Cost of Goods Available for Sale  less Inventory [closing] Gross Profit add Other Revenue   Rent Received   Interest Received Total Revenue less Expenses Selling and Distribution  Advertising General and Administrative  Wages 28 550  Insurance 2 700   Depreciation – Plant and Equipment 1 950 Financial and Borrowing   Bad Debts Expense 470   Doubtful Debts Expense 200 Net Profit

FIGURE 12.6

95 000 12 300 37 000 49 300 13 800

2 750 325

35 500 59 500

3 075 62 575

805

33 200

670

34 675 27 900

Income statement from general ledger where periodic inventory applies

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

The information for the income statement, when perpetual inventory applies, is obtained from the general ledger and profit and loss account in figure 12.5. The income statement in figure 12.7 is the same as that prepared from the 8-column worksheet for Jennie Wright, using the perpetual inventory method, in the previous chapter (figure 11.28). Income Statement of Jennie Wright for the year ended 30 June 2022 Revenue  Sales  less Cost of Sales Gross Profit add Other Revenue   Rent Received   Interest Received Total Revenue less Expenses Selling and Distribution  Advertising General and Administrative  Wages 28 550  Insurance 2 700   Depreciation – Plant and Equipment 1 950 Financial and Borrowing   Bad Debts Expense 470   Doubtful Debts Expense 200 Net Profit

FIGURE 12.7

95 000 35 500 59 500 2 750 325

3 075 62 575

805

33 200

670

34 675 27 900

Income statement from general ledger where perpetual inventory applies

Both periodic and perpetual inventory

Copyright © 2018. Cengage. All rights reserved.

STEP 6: BALANCE SHEET The information for the balance sheet is obtained from those accounts in the general ledger in example 1 (figure 12.5) that still have a balance in their account as at 30 June 2022. These should be all of the asset and liability accounts, as well as the owner’s equity capital account. However, note that the owner’s equity section of the balance sheet includes the pre-closing balances for the capital, net profit and drawing accounts. This clearly discloses how the final post-closing balance of the capital account is obtained. The account balances and the balance sheet statement shown in figure 12.8 will be the same for both the periodic and the perpetual inventory systems.

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Balance Sheet of Jennie Wright as at 30 June 2022 Current Assets  Bank   Accounts Receivable Control   less Allowance for Doubtful Debts  Inventory   GST Receivable   Expense Prepaid   Revenue Accrued Non-current Assets  Premises   Plant and Equipment   less Accumulated Depreciation   Government Bonds Total Assets Current Liabilities   Accounts Payable Control   GST Payable   Expense Accrued   Revenue Received in Advance Non-current Liabilities   Loan from Oz Bank less Total Liabilities Net Assets Owner’s Equity  Capital   add Net Profit   less Drawings Total Owner’s Equity

12 000 7 986 600

7 386 13 800 1 030 600 325

35 141

30 000 19 500 3 700

15 800 8 000

4 103 2 365 550 250

53 800 88 941

7 268 10 000 17 268 71 673

45 773 27 900

73 673 2 000 71 673

FIGURE 12.8 Balance sheet from general ledger of Jennie Wright for both periodic and perpetual inventory

Copyright © 2018. Cengage. All rights reserved.

CHECK: TRIAL BALANCE AFTER CLOSING JOURNALS HAVE BEEN POSTED The trial balance post-closing journals (figure 12.9) is not usually prepared. However, it is helpful to confirm that these are the only general ledger accounts that have balances after posting the balance day adjustments and closing journals entries. It may also be useful to confirm that these are the accounts and balances used to prepare the balance sheet except for the drawings, and profit and loss accounts. It is important to remember that the balance sheet shows the pre-closing balances of the profit and loss, drawings and capital accounts. However, the balance of capital account in the post-closing trial balance includes the transfers of the balances of the drawings, and profit and loss accounts, as this post-closing balance will be the balance of capital at the start of the next accounting period.

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

Post-closing Trial Balance of Jennie Wright as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory Expense Prepaid GST Receivable Revenue Accrued Premises Plant and Equipment Accumulated Deprec’n – Plant & Equipment Government Bonds Accounts Payable Control GST Payable Expense Accrued Revenue Received in Advance Loan from Oz Bank Capital

12 000 7 986 600 13 800 600 1 030 325 30 000 19 500 3 700 8 000

93 241

FIGURE 12.9

4 103 2 365 550 250 10 000 71 673 93 241

Trial balance after closing journals have been posted

STEP 7: REVERSALS The final process in the preparation of the accounts of Jennie Wright is the reversal of certain balance day adjustments on the first day of the next accounting period, shown in figure 12.10. Reversals, which occur on the first day of the new financial year, only apply to four types of balance day adjustments: expense accrued, expense prepaid, revenue accrued and revenue received in advance. General Journal of Jennie Wright

Copyright © 2018. Cengage. All rights reserved.

1 Jul 22 Expense Accrued Wages Reversal of wages accrued

GJ 3 550 550

Insurance Expense Prepaid Reversal of insurance prepaid

600

Interest Received Revenue Accrued Reversal of interest receivable

325

Revenue Received in Advance Rent Received Reversal of rent received in advance

250

600

325

250

FIGURE 12.10 General journal reversal on 1 July of appropriate balance day adjustment journals

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The general ledger accounts that are affected by these reversals are shown in figure 12.11. Extract General Ledger of Jennie Wright

Insurance [bda]

Expense Prepaid 600 Insurance [reversal]

600

Interest Received [bda]

Wages [reversal]

Expense Accrued 550 Wages [bda]

550

Revenue Received in Advance Rent Received [reversal] 250 Rent Received [bda]

Rev Rec’d Adv [bda] Profit and Loss

Rent Received 250 Balance 2 750 3 000 Rev Rec’d Adv [rev]

Wages Balance 28 000 Profit and Loss 550 Expense Accrued [bda] 28 550 Exp Accrued [reversal]

3 000

Profit and Loss Revenue Accrued [rev]

Revenue Accrued 325 Interest Rec’d [reversal]

325

250

Interest Received 325 Revenue Accrued [bda] 325

325

Insurance 3 300 Expense Prepaid [bda] Profit and Loss 3 300 600

600 2 700 3 300

3 000 250

28 550

Balance

28 550 550

Exp Prepaid [reversal]

FIGURE 12.11 Reversals posted to the general ledger on the first day of the next accounting period

Financial statements from an 8-column worksheet or the adjusted trial balance The example of Jennie Wright was used in the previous chapter to demonstrate the preparation of financial statements using the 8-column worksheet. The same example is also used in this chapter for the formal processing of journals, ledgers and trial balance to prepare the same income statement and balance sheet (see figure 12.12).

Copyright © 2018. Cengage. All rights reserved.

Comparison of Requirements for Financial Statement Preparation 8-column Adjusted Trial Worksheet Balance Part of the formal accounts of the business Starting point is a trial balance before balance day adjustments Adjustments are utilised and incorporated Adjustments need to be journalised and posted to the ledger Closing journals are required Can be readily and easily used on a monthly basis Reversal journals required Results in net profit information Produces values for preparation of formal financial statements

No Yes Yes No No Yes No Yes Yes

Yes Yes Yes Yes Yes No Yes Yes Yes

FIGURE 12.12 Comparison of requirements for financial statement preparation

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.1  Periodic inventory The trial balance shown in figure 12.13 has been extracted from the ledger of B Blue and you are required to write next to each account name the account, statement and group abbreviation. Using this information, prepare an income statement. Trial Balance of B Blue as at 30 June 2022 Accounts Payable Control Accounts Receivable Control

2 596 4 499

Accumulated Deprec’n – Fixtures and Fittings

1 000

Accumulated Deprec’n – Office Equipment

2 200

Advertising

400

Bad Debts Expense

200

Capital

24 863

Cartage Inwards

300

Cartage Outwards

800

Cash at Bank

3 600

Depreciation – Fixtures and Fittings

200

Depreciation – Office Equipment

620

Discount Allowed

50

Discount Received Doubtful Debts Expense

300 500

Drawings

13 700

Electricity

500

Expense Accrued Expense Prepaid Fixtures and Fittings GST Receivable

150 100 2 000 540

GST Payable

1 400

Insurance

550

Interest

1 300

Inventory [1 July 2021]

1 200

Land and Buildings

30 000

Mortgage

7 000

Office Equipment

6 600

Allowance for Doubtful Debts Purchases

100 29 000

Copyright © 2018. Cengage. All rights reserved.

Sales

86 000

Telephone

450

Wages

28 500 125 609 Inventory [30 June 2022] $1400

FIGURE 12.13 Trial balance of B Blue, for question 12.1

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QUESTION 12.2  Perpetual inventory The adjusted trial balance for the year to 30 June 2022 for E L Alamein is shown in figure 12.14. You are required to: • list the account, statement and group abbreviations next to each account name • prepare an income statement • prepare a balance sheet. Adjusted Trial Balance of E L Alamein as at 30 June 2022 Bank Petty Cash Accounts Receivable Control

8 398 150 25 399

Allowance for Doubtful Debts Inventory GST Receivable

890 15 600 2 400

Revenue Accrued

580

Expense Prepaid

2 750

Premises

59 000

Machinery

40 570

Accumulated Depreciation – Machinery Debentures

24 230 16 000

Accounts Payable Control

9 889

GST Payable

4 660

Expense Accrued

4 100

Mortgage on Premises

25 000

Capital

87 505

Drawings

1 570

Sales

186 386

Interest Received Cost of Sales Advertising Salaries

1 200 88 390 8 230 60 100

Depreciation – Machinery

6 050

Bad Debts Expense

2 853

Interest on Mortgage

5 310

Doubtful Debts Expense

510

Copyright © 2018. Cengage. All rights reserved.

343 860

343 860

FIGURE 12.14 Adjusted trial balance of E L Alamein

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.3  Periodic inventory Using the adjusted trial balance of O Lightfoot from figure 12.15 you are required to: • enter the account, statement and group abbreviation next to each account name • prepare an income statement • prepare a balance sheet. Adjusted Trial Balance of O Lightfoot as at 30 June 2022 Petty Cash

175

Accounts Receivable Control

20 185

Allowance for Doubtful Debts

600 5 033

Inventory [1 July 2021] GST Receivable

740

Expense Prepaid

3 024

Land and Buildings

54 125

Motor Vehicles

29 800

Accumulated Depreciation – Motor Vehicles

7 020

Bank Overdraft

10 610

Accounts Payable Control

11 363

GST Payable

1 530

Expense Accrued

3 081

Revenue Received in Advance

608

Mortgage Land and Buildings

30 500

Capital

37 710

Drawings

1 445

Sales

61 415

Rent Received

3 645

Purchases

26 132

Salaries

17 082

Insurance

1 843

Depreciation – Motor Vehicles

1 418

Interest

4 107

Bad Debts Expense

866

Discount Allowed

1 917

Doubtful Debts Expense

190 168 082

Copyright © 2018. Cengage. All rights reserved.

Inventory [30 June 2022] $6267

FIGURE 12.15 Adjusted trial balance of O Lightfoot

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QUESTION 12.4  Perpetual inventory The adjusted account balances are listed in the trial balance of B Montgomery for 30 June 2022 (see figure 12.16). Your are required to: • list the account, statement and group abbreviations next to each account name • prepare an income statement • prepare a balance sheet. Adjusted Trial Balance of B Montgomery as at 30 June 2022 Telephone

1 144

Shares in Companies

10 996

Sales Travelling Expenses

2 384

Sales

133 555

Salaries

23 123

Rent

11 743

Office Equipment

48 264

Motor Vehicles Expense

3 553

Motor Vehicles

63 826

Inventory

2 574

Insurance

1 430

GST Payable

3 340

GST Receivable

2 000

Investment in Debentures

13 000

Freight Outwards

5 746

Expense Prepaid

1 565

Expense Accrued

1 174

Drawings

364

Doubtful Debts Expense

100

Dividend Received

531

Discount Received

125

Depreciation – Office Equipment

4 826

Depreciation – Motor Vehicles

9 574

Cost of Sales

59 487

Capital

71 331

Bank

2 813

Bad Debts Expense

2 346

Allowance for Doubtful Debts

180

Copyright © 2018. Cengage. All rights reserved.

Advertising

1 453

Accumulated Depreciation – Motor Vehicles

34 928

Accumulated Deprec’n – Office Equipment

28 698

Accounts Receivable Control

5 500

Accounts Payable Control

3 949 277 811

277 811

FIGURE 12.16 Adjusted trial balance for B Montgomery

Preparation of financial statements It is helpful if you can prepare the income statement and balance sheet from a trial balance and apply balance day adjustments without using a columnar worksheet or obtaining the balances from the general ledger and profit and loss account. In practice, account balances are needed on a monthly basis and Created from tafenswlib on 2020-05-30 08:09:00.

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

closing entries are only prepared at year’s end. The preparation of financial statements without including balance day adjustments or closing ledger accounts is often required. The questions that follow may be in various formats. You will need to understand and analyse the various parts of each question, and apply your knowledge of balance day adjustments and other accounting principles, to prepare and present correctly formatted statements.

Preparation of financial statements from account listing with balance day adjustments The following steps may be applied to both periodic and perpetual inventory systems. Example 2 uses figures 12.17, 12.18 and 12.19 to demonstrate how these steps can be applied to a periodic inventory system, and example 3 uses figures 12.20, 12.21 and 12.22 to demonstrate how these steps can be applied to a perpetual inventory system. Figure 12.23 applies to both examples 2 and 3.

STEP 1: PREPARE A TRIAL BALANCE Look at Step 1 in figure 12.18 (periodic inventory) and 12.21 (perpetual inventory). If the question is not presented as a trial balance, then create a trial balance from the data contained in the question. See, for example, the data included in figure 12.17 (periodic inventory) and figure 12.20 (perpetual inventory). If necessary, calculate any missing account values (often capital). There are usually more debits than there are credits; therefore, treat the single list as if that was the debit column and move or create the credit column to the right. Add the debit column and add the credit column; the difference should be the value of the capital, if it was not given. If there are no unknown account balances and the debit and credit columns do not agree, then you have made a mistake and will need to find the error(s). Check the section ‘Trial balance: use, abuse and non-balance’ in chapter 4, commencing on page 99.

STEP 2: ADD BALANCE DAY ADJUSTMENT AMOUNTS TO EXISTING ACCOUNTS Look at Step 2 in figure 12.18 (periodic inventory) and figure 12.21 (perpetual inventory). Enter balance day adjustment amounts in the trial balance if the account already exists. Take care to clearly indicate whether the adjustment is a debit or a credit to the existing trial balance amount.

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STEP 3: ADD ADDITIONAL BALANCE DAY ADJUSTMENT ACCOUNTS AND AMOUNTS Look at Step 3 in figure 12.18 (periodic inventory) and figure 12.21 (perpetual inventory). Enter the account and the amount in the balance day adjustment area if the account is not already in the trial balance. Indicate the name of the account, possibly by underlining specific words in the balance day adjustments or actually writing in the account name.

STEP 4: IDENTIFY ACCOUNT, STATEMENT AND CLASSIFICATION Look at Step 4 in figure 12.18 (periodic inventory) and figure 12.21 (perpetual inventory). Enter the account or statement and group to the left of the trial balance account and in the balance day adjustment area.

STEP 5: PREPARE FINANCIAL STATEMENTS Using the final calculated balance for each account, prepare the required reports, being guided by the account or statement and group shown in Step 4. Figure 12.19 is the income statement for example 2

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(periodic inventory), figure 12.22 is the income statement for example 3 (perpetual inventory) and 12.23 is the balance sheet for both periodic and perpetual inventory systems.

Example 2: Periodic inventory – account listing, balance day adjustments and income statement The list shown in figure 12.17 has been extracted from the accounts of Fred McKay, a sole trader, for the six months to 30 June 2022. You are required to initially prepare an income statement and then a balance sheet incorporating the balance day adjustments. Note the six-month time period. Account Balances of Fred McKay

Copyright © 2018. Cengage. All rights reserved.

as at 30 June 2022 Bank Petty Cash Accounts Receivable Control Inventory [1 January 2022] GST Receivable Freehold Premises Motor Vehicles Accumulated Depreciation – Motor Vehicles Plant and Machinery Accumulated Depreciation – Plant and Machinery Investment in Shares Accounts Payable Control GST Payable Mortgage from Bank Capital Drawings Sales Discount Received Purchases Freight Inwards Freight Outwards Advertising Salaries – Sales Salaries – Office Rates Stationery Electricity Insurance Discount Allowed Interest on Mortgage

1 894 100 2 574 5 300 820 47 500 10 000 7 200 27 000 17 000 2 000 4 488 1 980 10 000 ?? 1 740 79 246 246 25 744 1 294 972 2 744 21 490 12 580 470 1 600 250 2 400 156 1 125

Balance day adjustments for the six months were: Inventory [30 June 2022] $6268 Salaries accrued for sales $560 Office salaries accrued $370 Insurance prepaid $500 Depreciate motor vehicles at 15% p.a. Depreciate plant and machinery at 10% p.a. Write off bad debts $198 ($180 + $18 GST) Allowance for doubtful debts 4% of accounts receivable Accrue two months’ mortgage interest at 13.5% p.a.

FIGURE 12.17 List of accounts and balance day adjustments for Fred McKay, periodic inventory

Using the account listings and balance day adjustments in figure 12.17, create a trial balance and record all appropriate adjustments. This is shown in figure 12.18. Created from tafenswlib on 2020-05-30 08:09:00.

517

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

Accounts and Balance Day Adjustments for Fred McKay

Step 2

as at 30 June 2022

Step 1

Step 4 A/c, Stmt & Group BS CA BS CA BS CA PL CoS BS CA BS NCA BS NCA BS NCA BS NCA BS NCA BS NCA BS CL BS CL BS NCL BS OE BS OE PL R PL OR PL CoS PL CoS PL SD PL SD PL SD PL GA PL GA PL GA PL GA PL GA PL FB PL FB

Account

Debit Adjustm’t

Bank Petty Cash Accounts Receivable Control Inventory [1 January 2022] GST Receivable Freehold Premises Motor Vehicles Accumulated Depreciation – Motor Vehicles Plant and Machinery Accumulated Depreciation – Plant and Machinery Investment in Shares Accounts Payable Control GST Payable Mortgage from Bank Capital Drawings Sales Discount Received Purchases Freight Inwards Freight Outwards Advertising Salaries – Sales Salaries – Office Rates Stationery Electricity Insurance Discount Allowed Interest on Mortgage * Debits total 169 753 – Credits 120 160 = 49 593 Capital

18

560 370

225

Copyright © 2018. Cengage. All rights reserved.

Step 3

BS CA PL CoS BS CL BS CL BS CA PL GA PL GA PL FB PL FB BS CA BS CL

Balance day adjustments for the six months were: Inventory [30 June 2022] $6268

Debit Trial Balance 1 894 100 2 574 5 300 820 47 500 10 000 7 200 27 000 17 000 2 000 4 488 1 980 10 000 ?? 1 740 79 246 246 25 744 1 294 972 2 744 21 490 12 580 470 1 600 250 2 400 156 1 125 169 753 169 753

Credit Trial Balance

Credit Adjustm’t

198

7 200

750

17 000

1 350

4 488 1 980 10 000 * 49 593 79 246 246

500

120 160 169 753

6 268 Profit and Loss Expense Accrued Expense Accrued

Salaries Accrued for Sales $560 Office Salaries Accrued $370 Insurance Prepaid $500 Expense Prepaid 500 Depreciate motor vehicles at 15% p.a. [for 6 months] 750 Depreciate plant and machinery at 10% p.a. [for 6 months] 1 350 Write off bad debts $198 ($180 + $18 GST) 180 Allowance for doubtful debts at 4% of accounts receivable 95 Allowance Doubt Debt Accrued two months’ mortgage interest at 13.5% p.a.    Expense Accrued

6 268 560 370

95 225

FIGURE 12.18 Processes for preparation of income statement and balance sheet for Fred McKay, periodic inventory 518tafenswlib on 2020-05-30 08:09:00. Created from

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The income statement in figure 12.19 is now prepared based on the trial balance and the relevant adjustments to accounts in figure 12.18. Income Statement of Fred McKay for the six months ended 30 June 2022 Revenue Sales less Cost of Sales  Inventory [1 January 2022] 5 300  Purchases 25 744   Freight Inwards 1 294   Cost of Goods Available for Sale 32 338  less Inventory [30 June 2022] 6 268 Gross Profit add Other Revenue   Discount Received Total Revenue less Expenses Selling and Distribution   Freight Outwards 972  Advertising 2 744   Salaries – Sales 22 050 25 766 General and Administrative   Salaries – Office 12 950  Rates 470  Stationery 1 600  Electricity 250  Insurance 1 900   Depreciation – Motor Vehicles 750   Depreciation – Plant and Machinery 1 350 19 270 Financial and Borrowing   Discount Allowed 156   Interest on Mortgage 1 350   Bad Debts Expense 180   Doubtful Debts Expense 95 1 781 Net Profit

79 246

26 070 53 176 246 53 422

46 817 6 605

Copyright © 2018. Cengage. All rights reserved.

FIGURE 12.19 Income statement prepared from trial balance and balance day adjustments for Fred McKay, periodic inventory

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

Example 3: Perpetual inventory – account listing, balance day adjustments and income statement The list shown in figure 12.20 has been extracted from the accounts of Fred McKay, a sole trader, for the six months to 30 June 2022. You are required to initially prepare an income statement and then a balance sheet incorporating the balance day adjustments. Note the period is for six months and not 12 months. Account Balances of Fred McKay

Copyright © 2018. Cengage. All rights reserved.

as at 30 June 2022 Bank Petty Cash Accounts Receivable Control Inventory GST Receivable Freehold Premises Motor Vehicles Accumulated Depreciation – Motor Vehicles Plant and Machinery Accumulated Depreciation – Plant and Machinery Investment in Shares Accounts Payable Control GST Payable Mortgage from Bank Capital Drawings Sales Discount Received Cost of Sales Freight Outwards Advertising Salaries – Sales Salaries – Office Rates Stationery Electricity Insurance Discount Allowed Interest on Mortgage

1 894 100 2 574 6 518 845 47 500 10 000 7 200 27 000 17 000 2 000 4 488 1 980 10 000 ?? 1 740 79 246 246 25 795 972 2 744 21 490 12 580 470 1 600 250 2 400 156 1 125

Balance day adjustments for the six months were: Inventory is overstated by $250; $275 ($250 + $25 GST) Salaries accrued for sales $560 Office salaries accrued $370 Insurance prepaid $500 Depreciate motor vehicles at 15% p.a. Depreciate plant and machinery at 10% p.a. Write off bad debts $198 ($180 + $18 GST) Allow for doubtful debts at 4% of accounts receivable Accrue two months’ mortgage interest at 13.5% p.a.

FIGURE 12.20 List of accounts and balance day adjustments for Fred McKay, perpetual inventory

Using the account listings and balance day adjustments in figure 12.20, create a trial balance and record all appropriate adjustments. This is shown in figure 12.21.

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Accounts and Balance Day Adjustments for Fred McKay

Step 2

as at 30 June 2022

Step 1

Step 4 A/c, Stmt & Group BS CA BS CA BS CA BS CA BS CA BS NCA BS NCA BS NCA BS NCA BS NCA BS NCA BS CL BS CL BS NCL BS OE BS OE PL R PL OR PL CoS PL SD PL SD PL SD PL GA PL GA PL GA PL GA PL GA PL FB PL FB

Account

Debit Adjustm’t

Bank Petty Cash Accounts Receivable Control Inventory GST Receivable Freehold Premises Motor Vehicles Accumulated Depreciation – Motor Vehicles Plant and Machinery Accumulated Depreciation – Plant and Machinery Investment in Shares Accounts Payable Control GST Payable Mortgage from Bank Capital Drawings Sales Discount Received Cost of Sales Freight Outwards Advertising Salaries – Sales Salaries – Office Rates Stationery Electricity Insurance Discount Allowed Interest on Mortgage * debits total 169 753 – credits 120 160 = 49 593 Capital

Copyright © 2018. Cengage. All rights reserved.

Step 3

BS CL BS CL BS CA PL GA PL GA PL FB PL FB BS CA BS CL

18

275

560 370

225

Debit Trial Balance 1 894 100 2 574 6 518 845 47 500 10 000 7 200 27 000 17 000 2 000 4 488 1 980 10 000 ?? 1 740 79 246 246 25 795 972 2 744 21 490 12 580 470 1 600 250 2 400 156 1 125 169 753 169 753

Balance day adjustments for the six months were: Inventory is overstated by $250; $275 ($250 + $25 GST) Salaries accrued for sales $560 Expense Accrued Office salaries accrued $370 Expense Accrued Insurance prepaid $500 Expense Prepaid 500 Depreciate motor vehicles at 15% p.a. [for 6 months] 750 Depreciate plant and machinery at 10% p.a. [for 6 months] 1 350 Write off bad debts $198 ($180 + $18 GST) 180 Allowance for doubtful debts at 4% of accounts receivable 95 Allowance Doubt Debt Accrue two months‘ mortgage interest at 13.5% p.a.       Expense Accrued

Credit Trial Balance

Credit Adjustm’t

198 250 25

7 200

750

17 000

1 350

4 488 1 980 10 000 * 49 593 79 246 246

500

120 160 169 753

560 370

95 225

FIGURE 12.21 Processes for preparation of income statement and balance sheet for Fred McKay, perpetual inventory

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

The income statement in figure 12.22 is now prepared based on the trial balance and the relevant adjustments to accounts in figure 12.21. Income Statement of Fred McKay for the six months ended 30 June 2022 Revenue Sales less Cost of Sales [25 795 + 275] Gross Profit add Other Revenue   Discount Received Total Revenue less Expenses Selling and Distribution   Freight Outwards 972  Advertising 2 744 22 050 25 766   Salaries – Sales [21 490 + 560] General and Administrative 12 950   Salaries – Office [12 580 + 370]  Rates 470  Stationery 1 600  Electricity 250 1 900  Insurance [2400 – 500]   Depreciation – Motor Vehicles 750   Depreciation – Plant and Machinery 1 350 19 270 Financial and Borrowing   Discount Allowed 156 1 350   Interest on Mortgage [1125 + 225]   Bad Debts Expense 180   Doubtful Debts Expense 95 1 781 Net Profit

79 246 26 070 53 176 246 53 422

46 817 6 605

Copyright © 2018. Cengage. All rights reserved.

FIGURE 12.22 Income statement prepared from trial balance and balance day adjustments for Fred McKay, perpetual inventory

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Balance sheet – both periodic and perpetual inventory The information for the balance sheet can be obtained from the adjusted balance day account listings in example 2 (figure 12.18) or example 3 (figure 12.21). The account balances and the balance sheet statement in figure 12.23 are the same irrespective of whether the periodic or the perpetual inventory system is used. Balance Sheet of Fred McKay as at 30 June 2022 Current Assets  Bank   Petty Cash

Copyright © 2018. Cengage. All rights reserved.

  Accounts Receivable Control   less Allowance for Doubtful Debts  Inventory [30 June 2022]   GST Receivable   Expense Prepaid Non-current Assets   Freehold Premises   Motor Vehicles   less Accumulated Depreciation   Plant and Machinery   less Accumulated Depreciation   Investment in Shares Total Assets Current Liabilities   Accounts Payable Control   GST Payable   Expense Accrued [560 + 370 + 225] Non-current Liabilities   Mortgage from Bank less Total Liabilities Net Assets Owner’s Equity  Capital   add Net Profit   less Drawings Total Owner’s Equity

1 894 100 2 376 95

2 281 6 268 820 500

11 863

47 500 10 000 7 950 27 000 18 350

2 050 8 650 2 000

4 488 1 962 1 155

60 200 72 063

7 605 10 000 17 605 54 458

49 593 6 605

56 198 1 740 54 458

FIGURE 12.23 Balance sheet prepared from trial balance and balance day adjustments for Fred McKay, both example 2 periodic inventory and example 3 perpetual inventory

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QUESTION 12.5  Periodic inventory From the list of account balances for Margaret Robertson as at 30 June 2022 (figure 12.24), you are required to write the account, statement and group abbreviations next to each account name, including the balance day adjustments. Using this information, prepare an income statement and a balance sheet that incorporates the balance day adjustments. The balance day adjustments have been completed on this first occasion and are shown as debits and credits for the account, statement and group. However, you need to know the account name to be able to complete the balance day adjustments correctly. Account Balances of Margaret Robertson as at 30 June 2022 Bank Accounts Receivable Control Allowance for Doubtful Debts Inventory [1 July 2021] GST Receivable Motor Vehicles Accumulated Depreciation – Motor Vehicles Investment in AIM Accounts Payable Control GST Payable Capital Sales Interest Received Purchases Insurance Wages Vehicle Expenses Other Office Expenses

Debit

Credit

Balance Day Adjustments

A/c Stmt & Group A/c Stmt & Group BS PL BS BS PL

CA GA CA CA GA

PL BS PL PL BS

CoS NCA OR GA CL

Inventory [30 June 2022] $1290 Depreciation of motor vehicles $4200 Interest accrued on investment $190 Insurance prepaid $517 Wages accrued $190

Copyright © 2018. Cengage. All rights reserved.

FIGURE 12.24 Account listing and balance day adjustments of Margaret Robertson

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3 367 6 578 150 1 730 540 28 276 8 600 7 770 1 133 1 100 21 435 45 250 310 15 480 1 717 8 010 1 630 2 880

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QUESTION 12.6  Perpetual inventory From the list of account balances as at 30 June 2022 of Harry Moxey (see figure 12.25), you are required to write the account, statement and group abbreviation next to each account name, including the balance day adjustments. Using this information, prepare an income statement and a balance sheet that incorporates the balance day adjustments for the year’s end. Account Balances of Harry Moxey as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Accumulated Depreciation – Machinery Accumulated Depreciation – Motor Vehicle Advertising Allowance for Doubtful Debts Bad Debts Expense Bank Bank Charges Capital Cost of Sales Discount Allowed Doubtful Debts Expense Drawings Electricity Freight Outwards GST Receivable GST Payable Insurance Interest on Loan Inventory Loan from A Reservoir Machinery Motor Vehicles Salaries and Wages Sales Stationery and Photocopying

Copyright © 2018. Cengage. All rights reserved.

A/c Stmt & Group A/c Stmt & Group

5 104 19 426 19 016 8 250 607 400 1 885 27 909 350 74 341 38 918 250 260 3 970 726 1 117 1 073 2 480 1 950 1 404 8 360 25 000 65 000 32 000 38 500 109 517 403

Balance Day Adjustments Accrue for advertising $490 Accrue for stationery and photocopying $280 Accrue interest on loan $960 Write off bad debts $473 ($430 + $43 GST) Adjust allowance for doubtful debts to 5.25% of accounts receivable, to nearest $100 Depreciation of machinery at 20% p.a. Depreciation of motor vehicle at 15% p.a. After stocktake, inventory overstated by $230; $253 ($230 + $23 GST) Pre-payment of insurance $455 Salaries and wages accrued $1100

FIGURE 12.25 Account listing and balance day adjustments of Harry Moxey

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QUESTION 12.7  Perpetual inventory You have been asked by Joe Madeley to prepare an income statement and balance sheet for the year ended 30 June 2022. So that there is a greater chance the financial statements will be correct, you are required to write the account, statement and group abbreviations next to each account name, including the balance day adjustments. Joe’s ledger account balances and balance day adjustments are shown in figure 12.26. Account Balances of Joe Madeley as at 30 June 2022 Wages Telephone Sales Cost of Sales Petty Cash Office Furniture and Equipment Motor Vehicles Expenses Motor Vehicles Inventory Interest Received Insurance GST Payable GST Receivable Government Bonds Freight Outwards Electricity Capital Bank Bad Debts Recovered Bad Debts Expense Allowance for Doubtful Debts Accumulated Deprec’n – Office Furniture and Equipment Accumulated Depreciation – Motor Vehicles Accounts Receivable Control Accounts Payable Control

Copyright © 2018. Cengage. All rights reserved.

A/c Stmt & Group A/c Stmt & Group

32 962 1 298 148 657 67 169 500 31 738 5 753 49 812 5 327 2 100 2 989 3 700 1 910 20 000 1 697 1 754 73 197 7 538 2 320 1 517 400 7 648 11 091 32 516 15 367

Balance Day Adjustments Accrue for wages $1300 Bad debts written off $451 ($410 + $41 GST) Adjust allowance for doubtful debts to 4% of accounts receivable, to nearest $100 Annual insurance premium of $1920 was paid on 31 January 2022 Depreciation of office furniture and equipment 10% p.a. Depreciation of motor vehicle 15% p.a. Estimated consumption of electricity $342 not yet paid Interest on government bonds owing for three months at 9.5% p.a. Freight outwards accrual $617

FIGURE 12.26 Account listing and balance day adjustments of Joe Madeley

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Correction of errors Whether using a manual or computerised accounting system, errors will occur and will need to be corrected. They fall broadly into four groups: 1 Errors in documentation: The wrong amount or quantity has been entered on the tax invoice. 2 Errors of omission: An entry has been omitted or left out of the journals and accounts altogether. 3 Errors in entering, posting or balancing (transcription or mathematical) 4 Errors in allocation: Entries in the ledger were posted to the wrong account; or an account is debited when it should be credited and vice versa.

1. Errors in documentation This area involves the source documentation and particularly relates to tax invoices.

ACCOUNT RECEIVABLE TAX INVOICE If a tax invoice is sent to a customer, account receivable or debtor and there is an error in pricing, extensions, additions or quantity, then the problem is corrected by issuing an adjustment credit note for the amount that the tax invoice is overstated or overcharged. If the customer is undercharged – that is, the tax invoice amount was too low – then another invoice is raised for the balance; when the two tax invoice values are added together the correct amount is charged. If there is a major problem with the tax invoice – for example, most of the prices are wrong – then a credit note would be issued to cancel the incorrect tax invoice and a new, revised tax invoice would be issued. These adjustments, whether as an adjustment credit note or another tax invoice, are processed in the normal way through the sales journal. No other correction is needed.

Example 4: Errors of documentation – account receivable tax invoice P Matta sent a tax invoice to R Hill for $330 ($300 + $30 GST). P Matta agreed with R Hill that the tax invoice should have been for $275 ($250 + $25 GST). P Matta raised an adjustment credit note for $55 ($50 + $5 GST). This adjustment credit note is also processed through the sales journal in the normal course of business.

ACCOUNT PAYABLE TAX INVOICE If a tax invoice from a supplier, account payable or creditor has an error affecting the tax invoice value then it should be corrected by the supplier issuing an adjustment credit note.

Copyright © 2018. Cengage. All rights reserved.

Example 5: Errors of documentation – account payable tax invoice R Hill received a tax invoice with goods from P Matta for $330 ($300 + $30 GST). R Hill advised P Matta that there was a problem with the goods received and it was agreed that R Hill would be sent an adjustment credit note for $55 ($50 + $5 GST). R Hill would process the original tax invoice for $330 and the adjustment credit note $55 through the purchases journal in the normal course of business.

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2. Errors of omission INTERNALLY PRODUCED SOURCE DOCUMENTS KEEP IN MIND Other than the general journal source documents, the internally produced source documents are payment remittance, receipt remittance, customer’s tax invoice and adjustment credit note for customers.

When the number sequence on internally produced documents, such as a tax invoice or adjustment credit note, is broken – that is, one or more documents in the sequence is missing – then details of the missing document need to be obtained. The reason(s) for its exclusion from the posting batch should be investigated and internal control procedures tightened and enforced to ensure all documents are available for posting. When the missing source document has been found, it is included in the appropriate journal and processed as normal.

Example 6: Errors of omission – internally produced source document Before closing off the current month’s sales journal it was found that a tax invoice number had not been processed. Investigations were made and the duplicate tax invoice was found. It is then entered in the sales journal as normal, even though the tax invoice number itself was out of number sequence. If the duplicate tax invoice was only located after the sales journal had been closed and posted at the end of the month, a general journal entry may be raised and then reversed at the commencement of the next month. This duplicate invoice would then be processed through the sales journal as normal in the next month. Management may decide that, if the amount of the invoice is materially small and does not have a major impact on the matching concept, it is appropriate to process the tax invoice in the next month’s sales journal. No adjustments will then be required in the month of actual sale. With the increasing use of computerised accounting systems and electronically issued remittance payments, receipts, tax invoices and adjustment credit notes, the problems of missing documents should be minimised.

EXTERNALLY PRODUCED SOURCE DOCUMENTS: SUPPLIERS’ TAX INVOICES

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From the perspective of the customer, tax invoices or credit notes from suppliers will not be sequentially numbered. This makes it more difficult to detect missing documents and is a common area for error of omission. Hard copies of supplier’s documentation may not have been received, or may have been lost or destroyed, especially if attached to the outside packaging of items. Electronically generated and delivered documents may reduce the frequency of this problem.

KEEP IN MIND If a difference is noted when reconciling supplier statements, it may be that a tax invoice has not been received or processed. These ‘missing’ tax invoices should be investigated to check if they should have been processed. If it is found that they should have been processed but were not, then it is necessary to treat them as an accrual for the month and then reverse the journal at the commencement of the following month.

The problem then arises when the tax invoice is not accrued for the month but the benefit – that is, the good or service – has been received by the business; then there is an error. What can be done after the monthly financial reports have been prepared and distributed to management? Basically, nothing can be done except to advise management that the error has occcured and how it has affected the results for the period. This is why it is so important that balance day adjustments are prepared and processed correctly. You need to be careful, correct and on time.

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If any balance day adjustment is not processed, or is processed in error, then there is a flow through into the trial balance at the end of the period, into the income statement, including the gross and net profit for the period, as well as the balance sheet. The effects on the gross profit and net profit in the income statement and the balances in the balance sheet are important. In practice, the doctrine of materiality discussed in chapter 1 should be considered when deciding how to deal with these types of errors.

Example 7: Errors of omission – externally produced source document Where a benefit has been received but the documentation has not been processed and a balance day adjustment or end-of-period adjustment has not been made, the error impacts on the financial reports of the business. The error can affect the gross profit, net profit, current assets, non-current assets, current liabilities, non-current liabilities and/or the owner’s equity. What would happen if goods purchased for $88 ($80 + $8 GST) were received, but neither the supplier’s tax invoice was received nor the accrual made during the month? The result would have a ripple effect (see figure 12.27). Account Details Sales Inventory [opening] Purchases Inventory [closing] Cost of Sales Gross Profit Expenses Net Profit

$80 Purchase Not Processed

$80 Purchase Is Processed

1 000 100 400 500 150

1 000 100 480 580 150

350 650 450 200

430 570 450 120

FIGURE 12.27 Comparative effect on profit of not processing an accrual and then processing it

If the purchase is not accrued, then the cost of sales is understated and both the gross and net profit are overstated. The balance sheet is also affected: • Current assets are understated by the $8 GST receivable if the tax invoice was fully processed and not just accrued. • Current liabilities are understated, as there should have been an expense accrued for $80. • Owner’s equity is overstated by $80, as net profit was overstated.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 12.8 Which of the alternatives below most correctly answers the following statement? A trial balance will reveal errors where: a transactions are duplicated in the entry from the journal to the general ledger b entries are made where the debit is entered as a credit and the credit is entered as a debit c transactions are entered to the credit side of each account d entries are made to one or two wrong accounts.

QUESTION 12.9 June 2022 tax invoices from L George $187 ($170 + $17 GST) for stationery and R Macquarie $583 ($530 + $53 GST) for vehicle expenses had not been processed through the June purchases journal. You are required to prepare: a adjustment journal for June b reversal journal and purchases journal in July c extract balance sheet as at 30 June d advice to management if these invoices were not accrued as balance day adjustments. Explain their effects on the balancing of the trial balance, the value of gross profit and net profit and disclosures in the balance sheet. Created from tafenswlib on 2020-05-30 08:12:20.

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3. Errors in entering, posting or balancing As the errors considered and corrected in this area may be subject to manipulation of the accounting data, a business should tightly control who has the authority to alter the figures even though the figures are wrong. These types of errors occur when only one side of an entry is wrong and the general journal is not appropriate. When a wrong figure has been entered in a manual system do not rub it out, or obliterate the error. Instead, neatly and clearly rule a line through the wrong amount and then write the correct amount clearly above the incorrect amount, and initial and date the correction. In a computerised accounting system, the setup should ensure that entries cannot be deleted. If errors are made they should be reversed out and then correctly entered. Controls should also be in place to ensure that only authorised persons can access and amend the records.

Example 8: Errors in entering, posting or balancing The cash payments journal does not cross-balance and it is found that one of the amounts in the detailed account allocation was entered incorrectly even though the value of the cheque was correct. Follow the procedure above and neatly cross out the amount and write in the correct amount, and initial and date the correction.

BATCHING OF DOCUMENTS Source documents entered into the credit and cash journals are often processed in batches of similar documents, as was covered in chapter 5. This total value of similar documents is agreed to the total value entered into a journal and is a check that the total values are correct. However, this checking of the batch total and the value entered into the journal may not take place and an error may occur in the value entered into the journal. In addition, there is no fool-proof check undertaken that the allocation of the value to the various accounts is correct. This aspect is covered below. What is happening here is a breakdown in the internal control procedures related to batches or single document entry.

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SHOULD HAVE BEEN, ERRONEOUSLY WAS, CORRECTION IS: ACCOUNT RECEIVABLE In the accounts of S Yamba, a tax invoice for the sale of inventory to B Azalea for $1650 ($1500 +  $150 GST) was erroneously entered into the sales journal as $550 ($500 + $50 GST). Subsidiary ledgers are used. The error was discovered after the sales journal was posted at the end of the month. Prepare the general journal to correct the error. Intuitively it may be said that the correction is to increase accounts receivable control for B Azalea $1100, increase sales $1000 and GST payable $100, and that is correct. However, it is possible to have errors that do not have an intuitive solution and a process will be followed which you may need to adopt to arrive at the journal to correct the error. The process is to determine: 1 what the correct original entry SHOULD have been, using a pro forma general journal format 2 what the erroneous entry WAS, using a pro forma general journal format 3 what the correction of the error IS, using the normal general journal format. Your skills in this area should eventually allow you to get to the third aspect quickly, perhaps by making the first two journals very roughly on surplus paper as entries in pro forma general journals (see figure 12.28). A pro forma general journal has the form or format of a general journal but is not processed as a general journal. It is the general journal you prepare when you are not preparing a general journal but need the format. In this example, a ‘cut down’ general journal format is used.

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Pro Forma General Journal of S Yamba 1

2

Accounts Receivable Control – B Azalea  1650 Sales GST Payable Entry SHOULD have been

1 650

Accounts Receivable Control – B Azalea  550 Sales GST Payable Erroneously the entry WAS

550

1 500 150

500 50

General Journal of S Yamba 3

Accounts Receivable Control [1650 – 550] – B Azalea  1100 Sales [1500 – 500] GST Payable [150 – 50] Correction of error IS

GJ ... 1 100 1 000 100

FIGURE 12.28 What the entry SHOULD have been (1), erroneously WAS (2) and the correction IS (3), for S Yamba

Remember that with general journals, debit entries are always written before credit entries.

REVERSAL OF INCORRECT ENTRY AND PROCESSING OF CORRECT ENTRY When dealing with accounts receivable and accounts payable you are dealing with other organisations outside of your business. Values on statements and payment remittances must agree with tax invoices, otherwise the outside business will want to know why their tax invoice for $1650 is made up of two values of $550 and $1100. In practical terms, the business will receive fewer queries from customers and suppliers if a wrong amount is reversed and the correct value entered than you would get from leaving a wrong value in an account and making a debit or credit entry adjusting the transaction to the correct value. It is suggested that the best process to follow when any error has occurred is to reverse the error and then record the correct entry (see figure 12.29).

Copyright © 2018. Cengage. All rights reserved.

General Journal of S Yamba Sales GST Payable Accounts Receivable Control – B Azalea  550 Reversal of error in invoicing to B Azalea Accounts Receivable Control – B Azalea  1650 Sales GST Payable Correct entry for credit sale to B Azalea

GJ ... 500 50 550

1 650 1 500 150

FIGURE 12.29 Reversal of error and recording of correct entry, S Yamba

SHOULD HAVE BEEN, ERRONEOUSLY WAS, CORRECTION IS: ACCOUNT PAYABLE In the accounts of V Woolwich, a tax invoice from M Leigh, a trade supplier, was incorrectly entered in the purchases journal as $1067 ($970 + $97 GST) when it should have been $671 ($610 + $61 GST), Created from tafenswlib on 2020-05-30 08:12:20.

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which was the correct tax invoice value. Subsidiary ledgers are used. The error was discovered after the purchases journal was posted at the end of the month. Prepare the general journal to correct the error. The process, shown in figure 12.30, is to determine: 1 what the correct original entry SHOULD have been, using a pro forma general journal format 2 what the erroneous entry WAS, using a pro forma general journal format 3 what the correction of the error IS, using the normal general journal format. Pro Forma General Journal of V Woolwich 1

2

3

Purchases GST Receivable Accounts Payable Control – M Leigh  671 Entry SHOULD have been

610 61

Purchases GST Receivable Accounts Payable Control – M Leigh  1067 Erroneously the entry WAS

970 97

Purchases [610 – 970] GST Receivable [61 – 97] Accounts Payable Control [671 – 1067] – M Leigh  (396) Correction of error IS, but debits are not first

671

1 067

360 36 396

General Journal of V Woolwich 3

Accounts Payable Control [671 – 1067] – M Leigh  396 Purchases [610 – 970] GST Receivable [61 – 97]

GJ ... 396 360 36

Correction of error IS

FIGURE 12.30 What the entry SHOULD have been (1), erroneously WAS (2) and the correction IS (3), for V Woolwich

REVERSAL OF INCORRECT ENTRY AND RECORDING OF CORRECT ENTRY The entry for the reversal of the incorrect entry and recording of the new entry is shown in figure 12.31. General Journal of V Woolwich Copyright © 2018. Cengage. All rights reserved.

Accounts Payable Control – M Leigh  1067 Purchases GST Receivable Reversal of error in invoicing from M Leigh Purchases GST Receivable Accounts Payable Control – M Leigh  671 Correct entry for credit purchase from M Leigh

FIGURE 12.31 Reversal of error and recording of correct entry, V Woolwich

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GJ ... 1 067 970 97 610 61 671

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MULTIPLE-CHOICE QUESTIONS AND CORRECTION OF ERRORS Calculating what the difference is rather than reversal and correction makes sense if a multiple-choice question is given that provides various differences as options to correct an error. To illustrate, a tax invoice for the sale of inventory to B Azalea for $1650 ($1500 + $150 GST) was erroneously entered and processed in the sales journal as $550 ($500 + $50 GST). Subsidiary ledgers are used. From the multiple-choice alternatives below, which is the most correct? a Debit sales $1000, debit GST payable $100, credit accounts receivable control – B Azalea $1100 b Debit accounts receivable control – B Azalea $1000, credit sales $1000 c Debit accounts receivable control – B Azalea $1000, debit GST payable $100, credit sales $1100 d Debit accounts receivable control – B Azalea $1100, credit sales $1000, credit GST payable $100 To check your choice, refer back to the general journal in figure 12.28.

QUESTION 12.10 In the accounts of S Urara, a tax invoice for the sale of goods to C Boronia was correctly prepared for $627 ($570 + $57 GST). However, it was erroneously entered and processed in the sales journal for C Boronia as $825 ($750 + $75 GST). Control accounts are used for the debtors’ accounts. This error was discovered after the sales journal was balanced and posted to the general and accounts receivable ledgers. You are required to correct this error in the accounts of S Urara by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

QUESTION 12.11 In the accounts of P Toona, an account payable tax invoice for office equipment from G Heath for $8415 ($7650 + $765 GST) was erroneously entered and processed in the purchases journal as $5148 ($4680 + $468 GST). Subsidiary ledgers are used for creditors. You are required to correct this error in the accounts of P Toona by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 12.12 In the accounts of T Lasiandra, inventory was purchased on credit from D Shores for $1617 ($1470 + $147 GST). However, there was an error and its entry and processing in the purchases journal was for $1716 ($1560 + $156 GST). A creditors ledger operates using control accounts. You are required to correct this error in the accounts of T Lasiandra by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

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4. Errors in allocation This is perhaps the most common error in an accounting system and quite often it is only discovered as an error because the amount ‘appears to be incorrect’. For example, an entry has been made as a credit to an asset account, but there has been no sale or disposal of an asset. Corrections are made through the general journal. Errors can occur in the following ways: • journal dissection error • ledger posting error • both the debit and the credit are posted to the wrong account. Together with these errors in allocation, there can be errors in values. In all of these cases the ledger needs correcting and this is done through the general journal.

JOURNAL DISSECTION ERROR This occurs when the amount in a journal is entered in the wrong details column or a column total is posted to the wrong account.

Example 9: Errors of allocation – journal dissection error The repair of a machine for $600 was incorrectly allocated in the purchases journal to machinery account (an asset) when it should have been allocated to repairs account (an expense). A debit has been posted to the asset, machinery, in error; it should have been a debit to the expense, repairs. To correct the error, the repairs account is debited and machinery account is credited (see figure 12.32). General Journal of ... Repairs of Machinery Machinery Account allocation now corrected to repairs of machinery

GJ ... 600 600

FIGURE 12.32 Correction of account allocation to repairs of machinery

QUESTION 12.13 Motor vehicle expenses of $1735 had been incorrectly allocated and posted from the purchases journal to the motor vehicle account. Prepare the general journal to correct this error.

LEDGER POSTING ERROR

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In this situation the journal is correct but it has been posted to the wrong ledger account.

Wrong account The sales journal correctly showed $75 as being invoiced to G Tree; however, the amount was posted to G Free in error. The two accounts receivable accounts need to be adjusted (see figure 12.33). General Journal of ... Accounts Receivable Control – G Tree   75 Accounts Receivable Control – G Free   75 Correction of error now allocated to G Tree

FIGURE 12.33 Correction of accounts receivable now allocated to G Tree

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GJ ... 75 75

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QUESTION 12.14 R Capertee, who uses control accounts, raised a tax invoice for $1342 ($1220 + $122 GST) to B Cider but it has been incorrectly allocated through the sales journal to B Spider. Prepare the general journal to correct this error.

QUESTION 12.15 In the accounts of A Bottlebrush, a tax invoice for the sale of stock $385 ($350 +$35 GST) to Glen Bawn was processed through the sales journal incorrectly as $836 ($760 + $76 GST). Control accounts are used. You are required to correct this error in the accounts of A Bottlebrush by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

QUESTION 12.16 Inventory was delivered to a customer on 30 June 2022 valued at $7579 ($6890 + $689 GST). However, there was a problem with the invoicing process and a tax invoice was not raised for the customer. Prepare an adjusting journal at the end of the year and a reversal, if necessary, on the commencement of the new financial year.

QUESTION 12.17 You have found three specific errors in the accounts of E Poinsettia and they all need correction. Control accounts are used for receivables and payables.

ERROR 1 The tax invoice from L Redman for the purchase of stationery for $2453 ($2230 + $223 GST) was incorrectly recorded in the stationery account as $2354 ($2140 + $214 GST). You are required to correct this error in the accounts of E Poinsettia by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

ERROR 2

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A receipt of $4664 from an accounts receivable, Clarence Way, has been incorrectly processed to the debtors account of Clarence Rivers. Prepare the correction in the general journal of E Poinsettia.

ERROR 3 Two amounts had been incorrectly treated as sales: the sale of surplus computers at book value of $330; and the sale of a motor vehicle $14 380, which was the personal property of the owner, E Poinsettia. The owner had specifically sold the car through the business with the intention of the money remaining in the business. Prepare the general journal to correct the accounts.

QUESTION 12.18 Having checked the monthly accounts of Honey Suckle for account allocations, three errors were found that needed correction through the general journal. Subsidiary ledgers and control accounts are used. a The tax invoice for the sale of goods to P Onion on credit for $3960 ($3600 + $360 GST) was incorrectly allocated to P Union. b Wages accrued $6355 from the previous month had not been reversed. c The standing journal allocating insurance for the month $3815 had been incorrectly posted to interest. Created from tafenswlib on 2020-05-30 08:12:20.

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QUESTION 12.19 In the accounts of R Hibiscus, four errors were found from journal postings made during the month. These require correction by general journal. Subsidiary ledgers are used.

ERROR 1 Somehow a tax invoice for the sale of office equipment, at book value, to S Queen $1705 ($1550 + $155 GST) was entered in the purchases journal as a purchase of inventory from S Queen at the same values. You are required to correct this error in the accounts of R Hibiscus by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

ERROR 2 R Hibiscus introduced more assets into the business, including a motor vehicle $7500 and machinery $6300. The general journal entry was allocated and posted incorrectly because the motor vehicle had been allocated to motor vehicle expense account and machinery to repairs and maintenance and then the total was credited to drawings.

ERROR 3 The tax invoice from Q Rudder for the purchase of inventory for $8327 ($7570 + $757 GST) was erroneously recorded in the purchases journal and allocated to stationery as $832.70 ($757.00 + $75.70 GST). At least the supplier’s name was recorded and processed correctly, as almost nothing else was. You are required to correct this error in the accounts of R Hibiscus by preparing: a pro forma general journals showing: i what the entry should have been ii what the erroneous entry was iii in general journal format, what the correction journal entry is b reversal and correcting general journals.

ERROR 4

Copyright © 2018. Cengage. All rights reserved.

Rent received $880 ($800 + $80 GST) has been posted to dividend received in error; the GST was correctly processed.

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CHAPTER 12

REVISION QUESTIONS Confirm your understanding of the relevant elements of competency and performance criteria by completing the following questions.

QUESTION 12.20 The following information is extracted from the books and records of Q Don at 30 June 2022 (figure 12.37). You are required to write next to each account name the account, statement and group abbreviations and then prepare a balance sheet. Extract Account Balances for Q Don

Revenue Received in Advance Revenue Accrued Sales Petty Cash

1 650 669 221 450

Motor Vehicles

57 500

Machinery and Equipment

69 000

Land

95 000

Investment in Government Bonds [maturing 30 April 2025]

6 000

Investment in Government Bonds [maturing 15 March 2023]

4 000

Inventory [30 June 2022] GST Payable GST Receivable Investments in Shares Expense Prepaid Expense Accrued Expenses Drawings

26 750 4 700 2 050 30 000 1 390 2 400 568 803 36 000

Capital [1 July 2021]

230 800

Buildings

120 000

Bills Receivable Control [due 31 March 2023]

5 200

Bank Overdraft

11 200

Bank Loan

45 000

Allowance for Doubtful Debts Accumulated Depreciation – Motor Vehicles

Copyright © 2018. Cengage. All rights reserved.

1 100

3 000 18 350

Accumulated Depreciation – Machinery and Equipment

29 300

Accumulated Depreciation – Buildings

23 000

Accounts Receivable Control

34 980

Accounts Payable Control

20 702

FIGURE 12.34 Extract account listing of Q Don

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537

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.21  Periodic inventory The balances from the adjusted trial balance of L Tobruk for 31 December 2022 are given in Figure 12.35. Write next to each account name the account, statement and group abbreviations as an aid to preparing: • an income statement • a balance sheet.

Adjusted Trial Balance of L Tobruk as at 31 December 2022 Accounts Payable Control Accounts Receivable Control

5 632 15 829

Accumulated Depreciation – Machinery and Equipment

16 355

Accumulated Depreciation – Buildings Advertising

9 223 3 190

Allowance for Doubtful Debts Bad Debts Expense

475 452

Bad Debts Recovered Bank Charges

1 428 178

Bank Overdraft

4 120

Buildings

39 576

Capital

22 471

Depreciation – Buildings Depreciation – Machinery and Equipment

989 5 517

Donations

240

Doubtful Debts Expense

475

Drawings

3 309

Electricity

1 687

Expense Accrued

4 862

Expense Prepaid

1 046

GST Receivable

1 470

GST Payable

4 300

Import Costs

2 439

Insurance

2 984

Interest

2 115

Inventory [1 January 2022]

4 374

Land

40 000

Machinery and Equipment

36 780

Copyright © 2018. Cengage. All rights reserved.

Mortgage on Land and Buildings

10 000

Office Salaries

26 411

Purchases

49 563

Rent Received

6 124

Revenue Received in Advance

700

Sales

167 761

Sales Salaries

14 210

Stationery

617 253 451 Inventory [31 December 2022] $4856

FIGURE 12.35 Adjusted trial balance of L Tobruk, for question 12.21

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253 451

CHAPTER 12

QUESTION 12.22  Perpetual inventory Using the adjusted account balances for H Joshua (shown in figure 12.36), you are required to prepare for the year ended 30 June 2022: • an income statement • a balance sheet.

Adjusted Account Balances for H Joshua as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Accumulated Depreciation – Motor Vehicles

4 000

Accumulated Depreciation – Office Equipment

12 830

Administrative Salaries

38 658

Advertising

1 800

Allowance for Doubtful Debts

1 100

Bad Debts Expense

1 097

Bank Overdraft

9 610

Capital Cost of Sales Debt Collection

114 786 75 889 655

Delivery Costs

3 110

Depreciation – Sales Motor Vehicles

9 227

Depreciation – Office Equipment

4 357

Discount Allowed Doubtful Debts Expense

160 350

Drawings

4 300

Expense Accrued

2 294

Expense Prepaid Government Bonds GST Receivable

2 650 28 000 2 340

GST Payable

4 650

Insurance

1 483

Interest Received Inventory Loan [repayable 2024]

Copyright © 2018. Cengage. All rights reserved.

3 685 23 870

410 5 368 18 000

Motor Vehicles

61 900

Office Equipment

36 345

Office Expenses

2 736

Overdraft and Loan Interest

3 348

Rent Rent Received Revenue Accrued Revenue Received in Advance Sales Sales Salaries

10 894 5 792 350 985 177 966 37 221

FIGURE 12.36 Adjusted account balances of H Joshua, for question 12.22

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539

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.23  Periodic inventory The following account balances in figure 12.37 are from the ledger of C Earnest at 30 June 2022. Enter the account, statement and group abbreviations for the accounts and the additional balance day adjustments. Prepare an income statement.

Account Balances for C Earnest Wharfage and Other Import Costs

18 708

Wages

32 400

Sales

278 600

Revenue Received in Advance

3 600

Revenue Accrued

2 900

Rental Revenue

10 580

Purchases

179 042

Printing and Postage

2 100

Motor Vehicles

27 500

Motor Vehicle Expense

2 870

Land

75 200

Inventory [1 July 2021]

36 950

Interest

7 250

Insurance

1 750

GST Payable

7 000

GST Receivable

4 000

Expense Prepaid

8 400

Expense Accrued

11 200

Electricity

4 900

Drawings

17 500

Doubtful Debts Expense

1 200

Depreciation – Motor Vehicles

4 125

Depreciation – Buildings

2 900

Customer Delivery

4 750

Capital

??

Buildings

100 000

Bank Overdraft

6 300

Bank Mortgage

39 200

Copyright © 2018. Cengage. All rights reserved.

Allowance for Doubtful Debts

2 200

Accumulated Depreciation – Motor Vehicles

10 310

Accumulated Depreciation – Buildings

24 000

Accounts Receivable Control

29 392

Accounts Payable Control

12 595

Balance Day Adjustments Included in insurance is $400 for next year’s premium Interest on overdraft due but not charged is $750 Rental revenue includes $850 rent received for July Inventory at annual stocktake at 30 June 2022 valued at $38 000

FIGURE 12.37 Account balances and additional balance day adjustments of C Earnest, for question 12.23

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CHAPTER 12

QUESTION 12.24  Perpetual inventory The account balances in figure 12.38 are from the ledger of Dorothy McCoy at 30 June 2022. The account, statement and group abbreviations should be entered. After incorporating the balance day adjustments, prepare an income statement and a balance sheet.

Account Balances for Dorothy McCoy as at 30 June 2022 Accountancy Fees

1 900

Accounts Payable Control

8 800

Accounts Receivable Control

19 800

Accumulated Depreciation – Computers

11 000

Accumulated Depreciation – Furniture and Fittings

18 600

Advertising

3 150

Allowance for Doubtful Debts

800

Bad Debts Expense

1 400

Capital

56 070

Cash at Bank

22 350

Computers

18 000

Cost of Sales

44 060

Depreciation – Computers

6 000

Depreciation – Furniture and Fittings

4 600

Discount Received

900

Drawings

6 000

Electricity

1 370

Furniture and Fittings

35 000

GST Receivable

1 590

GST Payable

3 000

Insurance

7 800

Inventory

9 000

Salaries and Wages

35 000

Sales

120 000

Stationery and Postage

2 150

Balance Day Adjustments Inventory overstated at 30 June 2022 by $400; $440 ($400 + $40 GST) Included in advertising is $450 prepaid for next year Salaries and wages due but not paid $2300 Commission revenue due but not received $750 Copyright © 2018. Cengage. All rights reserved.

Doubtful debts allowance should be 5% of accounts receivable, to nearest $100

FIGURE 12.38 Account balances and balance day adjustments of Dorothy McCoy, for question 12.24

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.25  Periodic inventory You are required to prepare for D Robert an income statement and balance sheet for the period ended 30 June 2022. The account, statement and group abbreviations should be entered. The account balances and adjustments for the year are given in figure 12.39.

Account Balances for D Robert Accounts Payable Control

8 217

Accounts Receivable Control

26 323

Accumulated Depreciation – Computer

8 169

Accumulated Depreciation – Equipment

2 853

Allowance for Doubtful Debts

750

Bad Debts Expense

1 274

Bank Charges

343

Bank Loan

16 000

Bank Overdraft

6 371

Capital

28 144

Computer

35 168

Doubtful Debts Expense

280

Drawings

3 200

Equipment

25 875

Freight and Cartage Outwards

2 675

GST Receivable

840

GST Payable

2 100

Insurance

1 975

Interest on Overdraft and Loan

2 792

Inventory [1 July 2021]

3 715

Inwards Freight

1 763

Office Repairs

190

Purchases

20 290

Sales

84 612

Sales Commission

2 983

Stationery and Printing

3 708

Telephone

3 052

Wages

20 770

Balance Day Adjustments Inventory [30 June 2022] $3550

Copyright © 2018. Cengage. All rights reserved.

Insurance prepaid $573 Depreciate computer $11 700 Depreciate equipment $3400 Write off additional bad debts $737 ($670 + $67 GST) Adjust allowance for doubtful debts to 5% of accounts receivable, to nearest $100 Accrue interest on overdraft and loan $786 Stationery $313.50 ($285 + $28.50 GST) received in June, invoice processed in July Wages accrued $850

FIGURE 12.39 Account balances and balance day adjustments of D Robert, for question 12.25

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CHAPTER 12

QUESTION 12.26  Perpetual inventory Using the account balances at 31 December 2022 from the general ledger of Mary Doggett shown in figure 12.40, prepare an income statement and balance sheet that incorporates the balance day adjustments. Enter the account, statement and group abbreviations.

Account Balances for Mary Doggett Mortgage on Premises

40 000

Bad Debts Expense

1 292

Bank Overdraft

11 909

Capital

11 116

Cash on Hand

400

Accounts Payable Control

8 569

Accounts Receivable Control

23 914

Cost of Sales

85 764

Discount Received

776

Doubtful Debts Expense

85

Drawings

4 510

Expense Accrued [salaries]

1 350

Expense Prepaid [insurance]

3 000

Freight Outwards

4 022

GST Receivable

2 758

GST Payable

5 500

Insurance

8 640

Interest on Overdraft

3 761

Inventory

8 404

Investment in Shares

9 900

Plant and Machinery

38 300

Accumulated Depreciation – Plant and Machinery

15 900

Postage

1 639

Premises

55 350

Allowance for Doubtful Debts

200

Rent Received

11 630

Salaries

60 165

Sales

208 841

Stationery and Photocopying

3 887

Balance Day Adjustments Reversal of expense accrued for salaries from 31 December 2021 Copyright © 2018. Cengage. All rights reserved.

Reversal of prepayment on insurance from 31 December 2021 Inventory was overstated by $580; $638 ($580 + $58 GST) Interest on overdraft not yet charged $320 Annual insurance premium $8640 paid on 31 May 2022 Salaries accrued $1600 Received rent $900 for January 2023, included in December 2022 accounts Additional bad debt written off $528 ($480 + $48 GST) Allowance for doubtful debts adjusted to 2% of accounts receivable, to nearest $100 Depreciation of premises 2% p.a. Depreciation of plant and machinery 20% p.a.

FIGURE 12.40 Account balances and balance day adjustments of Mary Doggett, for question 12.26

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543

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.27  Perpetual inventory You are required to prepare an income statement and balance sheet for the year ended 30 June 2022 from the account list and adjustments for R Abercrombie, shown in figure 12.41. The account, statement and group abbreviations should be entered.

Account Balances for R Abercrombie as at 30 June 2022 Accounts Receivable Control Allowance for Doubtful Debts Inventory Expense Prepaid [insurance] Revenue Accrued [government bonds] GST Payable Land Buildings Motor Vehicle Accumulated Depreciation – Motor Vehicle Government Bonds Bank Overdraft Accounts Payable Control Expense Accrued [wages] Revenue Received in Advance [rent received] Mortgage on Land Capital GST Receivable Drawings Sales Rent Received Interest Received Cost of Sales Freight Outwards Advertising Wages Electricity Insurance Bank Charges Bad Debts Expense Doubtful Debts Expense Discount Allowed Interest on Overdraft Interest on Mortgage

23 639 418 16 945 250 675 4 800 75 000 97 100 36 700 13 762 15 000 24 819 13 222 890 650 45 000 132 175 2 099 19 210 189 1 1 7 10 850 2 025 77 967 744 2 1 1 5 55 446 2 748 985 247 898 218 1 427 4 715 3 600

Balance Day Adjustments Copyright © 2018. Cengage. All rights reserved.

Reversal of previous year’s balance day adjustments for: – prepayment of insurance – accrual of revenue from government bonds – accrual of wages – rent received last year that related to this year Inventory is overstated by $490; $539 ($490 + $49 GST) Wages accrued $1200 Rent received in advance $850 Insurance prepaid $310 Accrue interest on mortgage at 12% p.a. for four months Depreciation of buildings 4% p.a. Depreciation of motor vehicle 15% p.a. Allowance for doubtful debts increased to 2.5%, to nearest $1

FIGURE 12.41 Account balances and balance day adjustments of R Abercrombie, for question 12.27 544tafenswlib on 2020-05-30 08:12:20. Created from

CHAPTER 12

QUESTION 12.28  Service industry You are required to prepare an income statement and balance sheet for the six months ended 30 June 2022 from the account list and adjustments of L Tuggerah, a dentist, shown in figure 12.42. The account, statement and classification abbreviations should be entered.

Account Balances L Tuggerah as at 30 June 2022 6% p.a. Telstra Bonds

108 000

Accumulated Deprec’n – Office Furniture & Equipment Accumulated Depreciation – Surgery Equipment Bank

8 612 46 920 29 416

Capital

106 572

Cash in Hand

500

Accounts Payable Control

2 436

Accounts Receivable Control

33 080

Drawings

10 000

Electricity

3 340

Fees Income

352 144

Insurance

2 872

Office Furniture and Equipment

12 304

Postage

380

Purchase of Drugs and Dressings

4 716

Purchase of Filling Materials

9 864

Rent Expense

20 400

Salary – Dental Nurse

54 472

Salary – Receptionist

50 000

Stationery

872

Inventory – Drugs and Dressings [1 January 2022]

2 344

Inventory – Filling Materials [1 January 2022]

3 396

GST Receivable

2 000

GST Payable

500

Surgery Equipment

167 556

Telephone

1 672

Balance Day Adjustments Inventory – drugs and dressings [30 June 2022] $2088 Inventory – filling materials [30 June 2022] $3792

Copyright © 2018. Cengage. All rights reserved.

Depreciation of surgery equipment $7960 Depreciation of office furniture and equipment $732 Accruals for salary – dental nurse $840 Accruals for salary – receptionist $800 Rent expense prepaid $2920 Insurance prepaid $1300 Telstra bonds 6% p.a. – purchased five months ago Adjust for bad debts $1416 ($1275 + $141 GST) Allowance for doubtful debts 1.5% (round to nearest $)

FIGURE 12.42 Account balances and balance day adjustments of L Tuggerah, for question 12.28

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545

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.29  Service industry You are required to prepare an income statement and balance sheet for the year ended 30 June 2022 from the account list and adjustments for L Eucumbene, a builder, shown in figure 12.43. The account, statement and classification abbreviations should be entered.

Account Balances for L Eucumbene as at 30 June 2022 Accounts Receivable Control Allowance for Doubtful Debts Inventory – Timber and Frames Inventory – Other Building Supplies Expense Prepaid [insurance] Plant and Equipment Accumulated Depreciation – Plant and Equipment Motor Vehicles Accumulated Depreciation – Motor Vehicle GST Receivable Bank Overdraft Accounts Payable Control Expense Accrued [Salary – Builders and Apprentices] Expense Accrued [Salary – Office] GST Payable Capital Drawings Income – Renovations and Extensions Income – New Construction Purchases of Timber and Frames Purchases of Other Building Supplies Advertising Salary – Builders and Apprentices Hire of Equipment Subcontractor Expenses Discount Received Salary – Office Insurance Electricity Telephone Stationery Interest on Overdraft Bad Debts Expense

149 800 1 696 12 284 9 160 2 460 30 392 10 636 142 732 64 228 11 400 14 340 24 188 1 600 440 12 800 156 680 5 936 691 264 172 816 195 472 107 340 10 908 260 740 11 512 93 420 2 928 77 432 10 616 6 208 3 976 980 2 100 8 748

Balance Day Adjustments Copyright © 2018. Cengage. All rights reserved.

Reversal of previous year’s balance day adjustments for: – prepayment of insurance – accrual of salary – builders and apprentices – accrual of salary – office Inventory – timber and frames at end of year $14 188 Inventory – other building supplies $4712 Depreciation on plant and equipment $3040 Depreciation on motor vehicles $21 600 Accrued salary – builders and apprentices $2000 Accrued salary – office $600 Accrued interest on overdraft $380 Additional bad debts $7372 ($6635 + $737 GST) Allowance for doubtful debts – 2% of accounts receivable

FIGURE 12.43 Account balances and balance day adjustments of L Eucumbene, for question 12.29 546tafenswlib on 2020-05-30 08:12:20. Created from

CHAPTER 12

QUESTION 12.30 During September 2022, R Cudgegong found that there were a number of errors and omissions made in the general ledger and the subsidiary ledgers. You are required to make the necessary journal adjustments as at 30 September 2022. a A supplier’s tax invoice from D Cataract $462 ($420 + $42 GST) had been incorrectly posted from the purchases journal to the account of D Cordeaux. b In the purchases journal, again, a tax invoice from L Burragorang for inventory had been entered and posted as $913 ($830 + $83 GST) when it should have been $319 ($290 + $29 GST); periodic inventory system is used. c A tax invoice from D Avon for major repairs to office equipment for $1765.50 ($1605 + $160.50 GST) had been incorrectly allocated to the non-current asset when it should have been to the expense account repairs and maintenance. d Tax invoices for stationery $220 ($200 + $20 GST), photocopying $176 ($160 + $16 GST) and advertising $627 ($570 + $57 GST) were omitted in error from the purchases journal for September.

QUESTION 12.31 a Show correcting journal entries, if appropriate, for the following errors. Subsidiary ledgers are used.

i Payment for motor vehicle $26 400 ($24 000 + $2400 GST) was processed to the office repairs account.



ii Discount of $77 ($70 + $7 GST) disallowed by Bel Kno, a supplier, as remittance arrived too late.



iii A receipt of $374 from a current credit customer, Yu Who Too, was incorrectly allocated to bad debts recovered through the cash receipts journal. GST had not been allocated.



iv J Bach’s remittance for $3300 was received in payment of the account for $3355, but the discount claimed was not allowed and was not entered in the cash receipts journal.

b The trial balance in figure 12.44 does not balance. Correct the errors and balance it.

Trial Balance of W T Pooh as at 30 June 2022 Accounts Payable Control Accounts Receivable Control Accumulated Deprec’n – Office Equipment Bad Debts Expense Bad Debts Recovered Bank Overdraft Capital

3 000 10 000 17 000 2 100 1 500 4 100 30 000

Depreciation – Office Equipment

6 000

GST Receivable

1 000

GST Payable

2 000 7 100

Inventory [1 July 2021]

Copyright © 2018. Cengage. All rights reserved.

Office Equipment Office Expenses Purchases Salaries Sales

40 000 3 400 20 000 18 000 50 000 104 000

111 200

FIGURE 12.44 Trial balance of W T Pooh, for question 12.31(b)

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547

ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.32 You have found two specific errors in the accounts of A H Coramba and they both need correction. a The tax credit note received from the account payable Vic Hair for $40.26 ($36.60 + $3.66 GST) relating to an overcharge for inventory was incorrectly processed as a credit note to the account receivable Vince Hare as $26.40 ($24.00 + $2.40 GST). You are required to prepare the correction journal entry, and reversal and correcting general journals. b Payment to account payable Terry Johnson arrived at the office too late to be allowed any discount. The payment of $870.30 was for processed tax invoices totalling $900.00.

QUESTION 12.33 Three errors have been found in the records of T O Dorrigo and require correction by general journal. a The purchases account was used in error when a new photocopier (office equipment) was purchased for $19 382 ($17 620 + $1762 GST). b Neither prepayment of rates $950 nor accrual of wages $7990 had been reversed from the previous accounting period. c The sales journal was posted as debits to sales $3070, GST payable $409, office equipment $1020 and a credit to accounts receivable control $4499.

You are required to prepare the correction journal entry, and reversal and correcting general journals.

QUESTION 12.34 Five errors have been found in the records of A V Kingfisher and require correction by general journal. a Courier charges paid through the petty cash book $55 ($50 + $5 GST) were posted in the general ledger as office expenses. It should have been freight inwards. Prepare the correction journal. b The balance day adjustment accrual for wages $7000 was erroneously put through the accounts as if it was the reversal. Correct this error with one journal. c With the monthly standing journal for insurance, the insurance account was credited $500 and insurance prepaid was debited $500 through the accounts. If there is an error, then correct the error with one journal. d The balance day adjustment for rent received in advance $2000 was processed as if it was the reversal. Correct this error with one journal. e Tax invoice from S Ocean, a supplier, for the purchase of inventory on credit was erroneously entered and processed as $836 ($760 + $76 GST) when it should have been $638 ($580 + $58 GST). The entry for S Ocean in the subsidiary ledger was correct. You are required to prepare:

i the correction journal entry, and



ii reversal and correcting general journals.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 12.35 The accounts of D R Kookaburra revealed four errors and require correction by general journal. a Rent of $869 was incorrectly allocated and posted to rates from the cash payments journal. b The tax invoice from goods obtained for resale from C King $8283 ($7530 + $753 GST) was erroneously recorded and processed through the purchases journal as $3828 ($3480 + $348 GST) to both the general and subsidiary ledgers. You are required to prepare:

i the correction journal entry, and



ii reversal and correcting general journals.

c Rent received $902 ($820 + $82 GST) was incorrectly allocated in the cash receipts journal as a cash sale. d Drawings of $220 for inventory taken by the owner and GST of $20 were correctly treated. However, the other entry was allocated to inventory when the periodic inventory system was in use.

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CHAPTER 12

QUESTION 12.36 The accounts of P L Lorikeet revealed a number of matters that require attention and correction by general journal. a Cash receipts journal totals for the month were posted to the general ledger only (not the subsidiary ledger) as debits to accounts receivable control $5000, sales $1000 and GST payable $95, and credits to bank $6045 and discount allowed $50. The correction and notation of the error should be made and authorised in the cash receipts journal. Show the impact on the accounts in general journal format of what would have been entered in the cash receipts journal. b Payment of a creditor L Lilypool for $2860 has been posted incorrectly in the accounts payable subsidiary ledger to L Liverpool. c A service/repair to the photocopier has been allocated and posted to office equipment when it should have been posted to maintenance of office equipment $693 ($630 + $63 GST). d A remittance was received for $6699 from the account receivable W Melaleuca, who owed $6908 but had deducted a discount of $209 ($190 + $19 GST). This was not allowed, as the account was already two months overdue. Show in general journal format what would have been entered in the cash receipts journal.

QUESTION 12.37 There are four errors in the records of C R Sherwood that require correction by general journal. a The cash payments journal showed a payment to the account payable L Jacaranda of $3674 after deducting a discount of $99 ($90 + $9 GST). L Jacaranda contacted C R Sherwood and explained why the original amount of $3773 was still the total amount to be paid and why the $99 discount did not apply. This was accepted. b The tax invoice for stationery received from P Peppermint was for $2585 ($2350 + $235 GST). However, it was entered and processed as $5280 ($4800 + $480 GST). You are required to prepare:

i the correction journal entry, and



ii reversal and correcting general journals.

c The tax invoice for service of the forklift truck $1804 ($1640 + $164 GST) should have been allocated and posted to vehicle expense. However, it was posted to the non-current asset account motor vehicles. Accounts payable and GST accounts were correctly treated.

Copyright © 2018. Cengage. All rights reserved.

d A receipt from accounts receivable C Darling $9097 was posted erroneously to the accounts payable C Darning $9097.

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ADVANCED MANAGEMENT REPORTS AND CORRECTION OF ERRORS

QUESTION 12.38 Select from the alternative pro forma general journals shown in figures 12.45 to 12.48 the one that most accurately corrects the errors in the accounts of C Tallawudjah. a A tax invoice selling inventory to an account receivable S River (subsidiary ledgers are used) $3663 ($3330 + $333 GST) was incorrectly posted as $6633 ($6030 + $603 GST).

Pro Forma General Journal of C Tallawudjah 1

2

3

4

Accounts Receivable Control – S Rivers   2970 Sales GST Payable Accounts Receivable Control – S Rivers   6633 Sales GST Payable Reversal Accounts Receivable Control – S Rivers   3663 Sales GST Payable Correction Sales GST Payable Accounts Receivable Control – S Rivers   2970 Accounts Receivable Control – S Rivers   2700 GST Payable Sales

2 970 2 700 270 6 633 6 030 603 3 663 3 330 333 2 700 270 2 970 2 700 270 2 970

FIGURE 12.45 Pro forma general journal alternatives to correct error for C Tallawudjah, for question 12.38(a) b The discount received closing journal at the end of the financial year was processed as debit profit and loss $250 and credit discount received $250.

Pro Forma General Journal of C Tallawudjah 1 2

Copyright © 2018. Cengage. All rights reserved.

3

4

Discount Received Profit and Loss Discount Received Profit and Loss Discount Received Discount Allowed Profit and Loss Profit and Loss Discount Received

250 250 500 500 250 250 500 500 500

FIGURE 12.46 Pro forma general journal alternatives to correct error for C Tallawudjah, for question 12.38(b)

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CHAPTER 12

c A computer system was purchased on credit for use in the business $5060 ($4600 + $460 GST). However, it was entered in the purchases journal and posted to the purchases account in error.

Pro Forma General Journal of C Tallawudjah 1

2 3 4

Purchases Computers GST Receivable Computers Purchases Computers Purchases Computers GST Receivable Purchases

5 060 4 600 460 5 060 5 060 4 600 4 600 4 600 460 5 060

FIGURE 12.47 Pro forma general journal alternatives to correct error for C Tallawudjah, for question 12.38(c) d Tax invoice from R Tweed $4972 ($4520 + $452 GST) for inventory was processed to import costs $2794 ($2540 + $254 GST) in error. The subsidiary ledger was not affected by the error; only the control accounts were affected.

Pro Forma General Journal of C Tallawudjah 1

2

3

4

Purchases GST Receivable Accounts Payable Control Import Costs Accounts Payable Control Import Costs Purchases GST Receivable Accounts Payable Control Import Costs Purchases GST Receivable Purchases GST Receivable Accounts Payable Control Import Costs

7 060 706 4 972 2 794 4 972 2 794 7 060 706 2 178 2 540 4 520 198 4 520 198 2 178 2 540

Copyright © 2018. Cengage. All rights reserved.

FIGURE 12.48 Pro forma general journal alternatives to correct error for C Tallawudjah, for question 12.38(d)

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551

13 Accounting for non-current assets Introduction By now you should be very familiar with the accounting equation:

Copyright © 2018. Cengage. All rights reserved.

A + E = L + OE + R.

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You should also understand that the purchase of a non-current asset on credit leads to an increase in asset (non-current asset) and an increase in a liability (current liability – account payable). Later, the payment of the liability is a decrease in the account payable liability and a decrease in asset (cash at bank). The business has a non-current asset that it can use to contribute towards making more revenue and incurs more expenses, in anticipation of making and more profit – provided the extra revenue is greater than the extra expenses. In chapter 10, the matching principle was introduced. You were shown how to match expenses with revenue for more accurate reporting of profit. Balance day adjusting entries for depreciation of non-current assets, and the alternative method of standing journals, were covered. Before continuing, you may wish to review chapter 10 to confirm your understanding of how to record adjustments for depreciation. In this chapter, we will further explore entries for the purchase, depreciation and derecognition (or disposal) of non-current assets, as well as some internal controls.

CHAPTER 13

Key terms Land, buildings, plant, machinery, motor vehicles, furniture and fixtures or office equipment are examples of non-current assets that are generally held for use in the supply of goods or services or for administrative purposes. These assets are expected to be used by the business for more than 12 months. According to the Australian accounting standard AASB 116, they are collectively referred to as non-current assets called property, plant and equipment. Land generally has an unlimited useful life and therefore is not depreciated. Quarries and sites for landfill are exceptions as they do have a finite useful life. • Depreciation is the allocation of the depreciable amount of a non-current asset over its useful life. • Depreciation expense is the amount allocated to each accounting period, and is included in the profit and loss at the end of the period. • Depreciable amount is the cost of a non-current asset plus import costs, freight inwards, any installation costs such as electrical connections, foundations and anything required to get the asset to do what it was purchased for (sometimes referred to as commissioning the asset) less the asset’s residual value. • Residual value is an estimate of what the asset could be sold for after selling expenses, at the end of its useful life to the business. The residual value is often insignificant and consequently immaterial in practice. Note: depreciation for tax purposes is often calculated differently from accounting purposes; for example, no residual amount is estimated by tax authorities using the prime cost method. • Useful life is either (a) the life of a non-current asset – that is, the time that it is expected to be available for use by the business – or (b) the number of units of use expected to be obtained or used from the asset by the business (refer later in the chapter to units of use depreciation). • Accumulated depreciation is the sum or total allocated to depreciation expense and closed out to the profit and loss in each accounting period after the non-current asset was originally acquired. The account is of a credit nature; it is classified as a contra or negative asset, thereby reducing the original cost of the non-current asset. Accumulated depreciation is shown in the balance sheet as a reduction to the original cost of a non-current asset, along with the resulting net value of the asset (carrying amount or book value). The balance of accumulated depreciation must not exceed the depreciable amount of an asset.

Copyright © 2018. Cengage. All rights reserved.

• Carrying amount is the total cost value of the non-current asset less its accumulated depreciation. The carrying amount must not be less than the residual value, or a negative value. The carrying amount is also sometimes referred to as the ‘written-down value’ or ‘book value’. The only external events recorded for a non-current asset are when it was originally purchased or added to, and when it is sold or traded for another asset. The regular process of recording depreciation is internal to the business. In chapter 10, you learnt that matching the revenues for an accounting period with the expenses that relate to the same period will provide more accurate reporting of profit in the financial statements. The cost of a non-current asset is to be expensed in order to match against the revenue that has been generated during a particular period. A balance day adjustment or standing journal entry was used to allocate the cost of the non-current asset to depreciation expense for a period.

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QUESTION 13.1 From the following clues relating to depreciation, complete the crossword in figure 13.1.

Across   3   4   7   8   9 10 11 12 13

The opposite of revenue. This asset is expected to be of use to the business for longer than 12 months. This spreads the expense of the non-current asset over its useful life. This is the total cost value of the non-current asset less the accumulated depreciation (2 words). The life or time that a non-current asset is expected to be available for use by a business (2 words). Depreciation expense is spread over the useful life of the asset as part of the . . . . . . . . process. This account is a negative asset deducted in the balance sheet from the non-current asset (2 words). This is an estimate of what the asset could be sold for at the end of its useful life to the business (2 words). The non-current asset, accumulated depreciation and the carrying amount are shown in this financial report (2 words).

Down   1 This is the cost of a non-current asset including any installation less its residual value, using the straight line method (2 words).   2 Expenses are written off to this account at the end of the financial accounting period (3 words).   5 The cost of getting an asset into the position required in an area and the various costs of supplying electrical, water and other services to it are all part of the . . . . . . . . cost.   6 Depreciation expense is reported in this financial report at the end of the year (2 words).

1

2

3

4

5 6

7

8

9

10

Copyright © 2018. Cengage. All rights reserved.

11

12

13

FIGURE 13.1  Crossword for question 13.1

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CHAPTER 13

Asset register Non-current assets are often a major portion of the total assets of a business. Each non-current asset account in the general ledger may include several similar, individual non-current assets. For example, a clothes manufacturer may have a number of cutting and sewing machines. The cost of each of these is included in the machinery account in the general ledger. The details of each machine are kept in the asset register under the machinery section. An asset register is a collection of detailed records or registers for every non-current asset item. These registers are maintained in categories consistent with the non-current asset accounts in the general ledger, such as machinery or motor vehicles. For every item of non-current asset, the register should include the location of the item, the supplier, cost, accumulated depreciation, depreciation expense for each financial period as well as specific details of the method of depreciation (see figure 13.2). The cost of the noncurrent asset includes the original purchase price, non-refundable taxes or duties and cost of bringing the asset to the location. It should also include any other costs incurred in making it operational, including the cost of labour or additional parts at installation as well as connections to electricity, water or similar. Once the non-current asset is in use, any costs associated with ongoing maintenance or running costs such as servicing, spare parts, electricity or water usage do not form part of its cost base. These costs are generally treated as an expense in the relevant accounting period. Terri’s Terrific Teasers Asset Register – Machinery General Ledger Account 166 Machinery Asset Type Group

Brother sewing machine – Model 3TZX

Serial No. RA-2337693

Supplier/Manufacturer

Coffs Brother Machine Supplies Pty Ltd

Residual Value $ 300

Commission Date

1 January 2022

Economic Life

Depreciation Method

Straight Line / Units of Use / Diminishing Balance (indicate)

Date

Accounts Payable and/or Ref Particulars 12 Dec 21 Coffs Brother Machine Supplies CP 25 Dec 21 Installation costs CP 30 Jun 22 Depreciation 6 months

Copyright © 2018. Cengage. All rights reserved.

Asset No. M 01

Asset Costs Cumulative Amount 6 750

6 750

338

7 098

6.7 years 15%

Rate p.a.

Depreciation and Carrying Amount Deprec for Year

Accum Deprec

Carrying Amount

510

510

6 588

30 Jun 23 Depreciation for year

1 020

1 530

5 568

30 Jun 24 Depreciation for year

1 020

2 550

4 548

FIGURE 13.2  Asset register, an example

The asset register is a type of subsidiary ledger as it is linked to several general ledger accounts. It is similar to the subsidiary accounts receivable and accounts payable ledgers that provide details of, and must reconcile with, the accounts receivable and the accounts payable control accounts in the general ledger.

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Figure 13.3 shows the link between different parts of the asset register and the relevant general ledger control account. Note, carrying amount does not have a control account in the general ledger but should agree with the balance of the non-asset account minus the balance of the specific non-current asset accumulated depreciation account. This is the net value of the non-current asset, which is included in the balance sheet. The asset register shows for each non-current asset the: • cost

The total of the individual asset details, in the asset register, agree with the: • specific non-current asset account in the general ledger • specific depreciation account in the general ledger which, at the end of the year, is closed out to the profit and loss account • specific non-current asset accumulated depreciation account in the general ledger • net value of the specific non-current asset shown in the balance sheet

• depreciation expense • accumulated depreciation • carrying amount

FIGURE 13.3  The role of the asset register

In the asset register in figure 13.2, you will note that there are several financial columns, including cumulative asset cost, depreciation for the year, accumulated depreciation and carrying amount. The last amount in each of these columns is entered into an asset register listing (see figure 13.4) for the relevant non-current asset type (e.g. machinery). The totals of this listing must reconcile with general ledger control accounts for the relevant non-current asset: the non-current asset account, accumulated depreciation and depreciation expense. It is like an accounts receivable listing that must reconcile with the accounts receivable control account. There are no debit or credit rules, only the requirement that the totals of the subsidiary ledger listing agree with the relevant general ledger account (see figures 13.4 and 13.5).

ASSET REGISTER LISTING An asset register listing can be prepared from the individual asset register records, just as an accounts receivable listing is prepared from the accounts receivable ledger. It is the totals of this listing that must agree with the general ledger accounts: the asset, accumulated depreciation of the asset and the depreciation expense. The asset listing from the asset register for machinery for Terri’s Terrific Teasers, a clothes manufacturer, would be as shown in figure 13.4. Note, the details and final numbers in some of the columns in the asset register for the machine in figure 13.2 match the item in the first line of the listing in figure 13.4.

Copyright © 2018. Cengage. All rights reserved.

Asset Register Listing – Machinery Asset Number M 01 M 02 M 03 M 04 M 05 M 06 M 07 M 08

Asset Description Brother sewing machine Brother sewing machine Kusin sewing machine Kusin sewing machine Cister overlocker machine Cister overlocker machine Cister overlocker machine Arndt cutting machine Total Machinery

as at 30 June 2022 Model Asset Cost

Deprec’n Accumulat Carrying for Year Deprec’n Amount 3TZX 7 098 1 020 2 550 4 548 7KL 7 803 1 125 2 250 5 553 KS916 9 255 1 328 4 648 4 607 KS916 9 255 1 328 4 648 4 607 Ci173 7 795 1 440 6 466 1 329 Ci173n 5 386 1 043 2 027 3 359 Rel035 9 385 2 201 2 482 6 903 25 893 1 452 145 365 1 087 57 429 9 630 25 436 31 993 [Asset Cost – Accumulated Depreciation = Carrying Amount]

FIGURE 13.4  Asset register listing for machinery will agree with the relevant general ledger accounts

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CHAPTER 13

The asset register listing totals link into the general ledger accounts and then into the balance sheet, as shown in figure 13.5. Machinery Balance

Accumulated Depreciation – Machinery

57 429

Balance Deprec’n – Machine

15 806 9 630 25 436

Depreciation Expense – Machinery Acc Deprec’n – Mach

9 630 Extract Balance Sheet of Terri’s Terrific Teasers

as at 30 June 2022 Non-current Assets  Machinery 57 429 25 436   less Accumulated Depreciation

31 993

FIGURE 13.5  General ledger machinery accounts and balance sheet from asset register listing for machinery

QUESTION 13.2 Indicate whether the following statements are true or false. a An asset register that includes motor vehicles would show the costs of servicing and running costs of each vehicle. b The asset register includes accounts receivable balances as they are also assets.

True/False

c

True/False

d e f

An asset record in the asset register shows the cost, residual value and rate of depreciation p.a. The asset listing total can differ from the general ledger value by the average of the depreciation percentages +/– 5%. The accumulated depreciation account is closed out to the profit and loss account at the end of the accounting period. The asset register can show the details and cost of site preparation, initial delivery and handling costs, installation costs and fees for architects and engineers.

True/False

True/False True/False True/False

Copyright © 2018. Cengage. All rights reserved.

Example 1: Asset register Albury Couriers has purchased an air-conditioned delivery van for cash from Albury Autos and has completed the asset register record (figure 13.6). This becomes an additional record in the subsidiary ledger. The total value of the cumulative asset costs shown in the asset register records for motor vehicles agrees with the motor vehicle account value in the general ledger. The relevant details are listed below. • Foyota 1 tonne van with factory-fitted air conditioning was delivered; registration CVR 615. • Paid cash to Albury Autos on 1 September 2022, $65 230 ($59 300 + $5930 GST). • Based on recent experience and the anticipated kilometres to be travelled, Albury Couriers estimates the useful life of the vehicle is five years with a residual value of $8360 ($7600 + $760 GST); straight line depreciation is used. • Before taking delivery of the vehicle on the afternoon of 1 September, Cargo Lift Co. installed a 1.5 tonne hydraulic ramp at the rear of the van for $9130 ($8300 + $830 GST). Payment was also made that afternoon. Show the entries in the assets register for Albury Couriers to record this acquisition. Also show depreciation details for the years ending 30 June 2023, 2024 and 2025.

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On 30 June 2025 the vehicle is sold for $30 000 cash but the carrying amount was $33 600, which resulted in a loss on disposal of $3600. If you are unclear on straight line depreciation, at this stage refer back to chapter 10. Albury Couriers Asset Register – Motor Vehicles General Ledger Account

155 Motor Vehicles

Asset No. MV 42

Asset Type Group

Foyota 1 tonne van c/w air con and ramp

Serial No. CVR 615

Supplier/Manufacturer

Albury Autos

Residual Value $7600

Commission Date

1 September 2022

Economic Life

Depreciation Method

Straight Line / Units of Use / Diminishing Balance (indicate)

Rate p.a.

Asset Costs Date

Accounts Payable and/or Particulars

1 Sep 22 Albury Autos Cargo Lift Co 30 Jun 23 Depreciation 10 months 30 Jun 24 Depreciation for year 30 Jun 25 Depreciation for year Sold for cash (Gain)/Loss on disposal

Ref CP CP GJ GJ GJ CR GJ

Month

Cumulative

59 300 8 300

5 years 20 %

Depreciation and Carrying Amount Deprec’n Accumulat Carrying for Year Deprec’n Amount

59 300 67 600 10 000 12 000 12 000

10 000 22 000 34 000

57 600 45 600 33 600 (30 000) 3 600

FIGURE 13.6  Motor vehicle asset register for Albury Couriers

QUESTION 13.3 On 11 March 2022 William Dumbrell ordered office desks, chairs and filing cabinets for the refurbished office area of the business from Stylish Office Designs costing $16 500 ($15 000 + $1500 GST). Repainting of the office area was correctly allocated to office repairs and maintenance. The order was delivered and paid for on 1 May 2022. Asset numbers allocated were 23 to 34. The tax invoice was allocated to office furniture and equipment, account 157 in the chart of accounts. Depreciation is straight line over 10 years with no residual value. Enter the information on the asset register record. Calculate and enter all depreciation values for the years ended 30 June 2022 to 2024 in the relevant columns.

Copyright © 2018. Cengage. All rights reserved.

Depreciation expense: its nature and determination A business buys and uses a non-current asset, such as a computer, but after three years it is not as efficient or is out of date. Now it is worth only a fraction of what it originally cost. How has the balance of the non-current asset account changed over time? For example, how is it that a computer, originally entered three years ago at $3300, is now recorded with a residual value of $300? How has the matching principle been applied over these years? On 1 July 2021 the business of Lorraine Bate purchased a computer for cash $3630 ($3300 + $330 GST). The useful life is three years with a residual value of $330 ($300 + $30 GST). This is shown in figure 13.7 as values that would appear in the balance sheet as at 30 June and the amount expensed in the income statement.

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CHAPTER 13

INCOME STATEMENT

BALANCE SHEET Date

Accumulated Depreciation

Computer

3 300 1 July 2021 Computer purchased

Carrying Amount

=

3 300

Depreciation Expensed

3 300 1 July 2021 to 30 June 2022

−

1 000

=

2 300

1 000

3 300 1 July 2022 to 30 June 2023

−

2 000

=

1 300

1 000

3 300 1 July 2024 to 30 June 2024

−

3000

=

300

1 000

FIGURE 13.7  Computer depreciated over its three-year useful life with a $300 residual value

Copyright © 2018. Cengage. All rights reserved.

RECORDING OF DEPRECIATION DETAILS IN THE ASSET REGISTER Depreciation calculations for property, plant and equipment are normally made and recorded on an annual basis at the end of the financial year. Depreciation can also be calculated and recorded at other times; for example, if an asset is disposed of during the year, depreciation would be calculated to the time of disposal. As depreciation calculations for each asset are completed, the business enters the details into the ‘Depreciation and carrying amount’ section of the appropriate asset register record (see figure 13.2). However, to help you understand these calculations, we will use the depreciation worksheet illustrated in figure 13.8.

DEPRECIATION WORKSHEET You will find that calculating depreciation is much easier if a depreciation worksheet is used, as it summarises details of the asset and includes the amounts for use in the asset register, accounting records and financial statements. In the following example, we will demonstrate the worksheet using the straight line depreciation method. This method was introduced in chapter 10 and will be discussed in more detail in the next section of this chapter. The data from figure 13.7 are entered in the worksheet shown in figure 13.8.

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Straight Line Depreciation Method Asset: Computer Asset cost including installation less Residual Value equals Depreciable Amount

Rate p.a. 33 13  % on Depreciable Amount Depreciation p.a. $1000

Date

1 Jul 21 30 Jun 22 30 Jun 23 30 Jun 24

Asset Cost

Deprec’n Expense Current

3 300 300 $ 3 000

Accum Deprec’n

Closing Carrying Amount

3 300 1 000 1 000 1 000

1  000 2 000 3 000

2 300 1 300 300

FIGURE 13.8  D  epreciation worksheet for computer depreciated over its three-year useful life with a $300 residual value

The use of a depreciation worksheet clearly illustrates the calculation of depreciation and the updating of balances for depreciation, accumulated depreciation and the carrying amount of each asset. These balances can then be recorded into the appropriate asset register records. The depreciation worksheet assists in developing an understanding of the correct calculation of values that will be entered in the asset register. Remember, it is the asset register that is the subsidiary ledger and provides the accounting details for the particular non-current asset.

Procedures for calculation of depreciation methods and recording in the accounts There are three main methods used to calculate depreciation for a non-current asset in Australia. The method selected for a particular asset should reflect the anticipated future benefits expected by the business when it purchased and installed the asset for its use. These methods are: 1 straight line, which results in a constant allocation of depreciation to expense over the useful life of the non-current asset 2 units of use, which results in the actual level of depreciation expense allocation being determined by the actual level of use or output, compared with its total expected use or total output level

Copyright © 2018. Cengage. All rights reserved.

3 diminishing balance, which results in an initial high allocation to depreciation expense, which then progressively becomes less over the life of the non-current asset. An organisation’s accounting manual should include criteria for the selection of the most appropriate depreciation method for each class of asset, as part of its accounting policies and procedures relating to property, plant and equipment.

Depreciation method 1: straight line depreciation Straight line depreciation, also known as fixed instalment depreciation, writes off depreciation as an expense at a constant amount over the useful life of the asset. This method was introduced in chapter 10. (Original cost + Installation)  – Residual value = Depreciable amount Depreciable amount / Useful life in years  =  Depreciation for one full year

or Depreciable amount  ×  Depreciation percentage rate for one year =  Depreciation for one full year

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CHAPTER 13

KEEP IN MIND Non-current assets are used in the business to produce revenue; the cost of the asset should be matched against the revenue as an expense. Depreciation expense is dependent on the cost and length of usefulness of that particular non-current asset less its residual value. As an expense, it is a debit and is written off to profit and loss at the end of each accounting period. Accumulated depreciation aggregates or totals the depreciation that has been closed out to depreciation expense over the useful life of the asset. It is a reduction of the non-current asset, as it is a credit, and is shown with the non-current asset in the balance sheet; it is a negative asset. If the asset was not purchased at the commencement of the accounting period, then the amount of depreciation will be in proportion to the length of time the business has benefited from the asset for that particular year: the matching concept applies.

Example 2: Straight line depreciation The information used in figures 13.7 and 13.8 provides a continuing example that should further enhance understanding of depreciation. On 1 July 2021, Lorraine Bate purchased a computer for cash $3630 ($3300 + $330 GST). The useful life is three years with a residual value of $330 ($300 + $30 GST). Using the above data, each year will be shown as an entry in the extract general ledger accounts and extract financial reports (see figures 13.9–13.20).

1 JULY 2021 TO 30 JUNE 2022 The computer is purchased for cash and there is one year’s depreciation on 30 June 2022, which is entered in the journals and posted to the general ledger; the data are used in the income statement and balance sheet.

INCOME STATEMENT

BALANCE SHEET Date

Accumulated Depreciation

Computer

Copyright © 2018. Cengage. All rights reserved.

3 300 1 July 2021 Computer purchased

3 300 1 July 2021 to 30 June 2022

−

1 000

Carrying Amount

=

3 300

=

2 300

Depreciation Expensed

1 000

FIGURE 13.9  Computer purchased on 1 July 2021, depreciation for 1st year to 30 June 2022 for Lorraine Bate

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561

ACCOUNTING FOR NON-CURRENT ASSETS

Extract General Journal of Lorraine Bate

GJ ...

1 Jul 21 Computer GST Receivable Bank [payment] Payment for computer [usually processed through CP]

3 300 330 3 630

30 Jun 22 Depreciation Expense – Computer Accumulated Depreciation – Computer 12 months’ depreciation being 1 of 3 years

1 000 1 000

Profit and Loss Depreciation Expense – Computer Other Expenses Expenses closed out to profit and loss account

xxx 1 000 xx

FIGURE 13.10  General journal for Lorraine Bate to 30 June 2022 Extract General Ledger of Lorraine Bate

Computer 1 Jul 21 Bank [payment]

3 300

Accumulated Depreciation – Computer 30 Jun 22 Depreciation Expense – Computer

1 000

Depreciation Expense – Computer 30 Jun 22 Accumulated Deprec’n – Computer

1 000 30 Jun 22 Profit and Loss

1 000

FIGURE 13.11  General ledger for Lorraine Bate to 30 June 2022 Extract Income Statement of Lorraine Bate

for the year ended 30 June 2022 less Expenses General and Administrative   Depreciation Expense – Computer 1 000 Extract Balance Sheet of Lorraine Bate

as at 30 June 2022 Non-current Assets  Computer 3 300  less Accumulated Depreciation 1 000

2 300

FIGURE 13.12  Income statement and balance sheet for Lorraine Bate to 30 June 2022

Copyright © 2018. Cengage. All rights reserved.

1 JULY 2022 TO 30 JUNE 2023 INCOME STATEMENT

BALANCE SHEET Date

Accumulated Depreciation

Computer

3 300 1 July 2022 to 30 June 2023

−

2 000

Carrying Amount

=

1 300

Depreciation Expensed

1 000

FIGURE 13.13  Depreciation of computer for the second year to 30 June 2023 for Lorraine Bate 562tafenswlib on 2020-05-30 08:15:08. Created from

CHAPTER 13

Extract General Journal of Lorraine Bate

GJ ...

30 Jun 23 Depreciation Expense – Computer Accumulated Depreciation – Computer 12 months’ depreciation being 2 of 3 years

1 000 1 000

Profit and Loss Depreciation Expense – Computer Other Expenses Expenses closed out to profit and loss account

xxx 1 000 xx

FIGURE 13.14  General journals for Lorraine Bate to 30 June 2023 Extract General Ledger of Lorraine Bate

Computer 1 Jul 21 Bank [payment]

3 300

Accumulated Depreciation – Computer 30 Jun 22 Depreciation Expense – Computer 30 Jun 23 Depreciation Expense – Computer

1 000 1 000 2 000

Depreciation Expense – Computer 30 Jun 22 Accumulated Deprec’n – Computer 30 Jun 23 Accumulated Deprec’n – Computer

1 000 30 Jun 22 Profit and Loss 1 000 30 Jun 23 Profit and Loss

1 000 1 000

FIGURE 13.15  General ledger for Lorraine Bate to 30 June 2023 Extract Income Statement of Lorraine Bate

for the year ended 30 June 2023 less Expenses General and Administrative   Depreciation Expense – Computer 1 000 Extract Balance Sheet of Lorraine Bate

as at 30 June 2023 Non-current Assets  Computer 3 300 less Accumulated Depreciation 2 000

1 300

FIGURE 13.16  Income statement and balance sheet for Lorraine Bate to 30 June 2023

Copyright © 2018. Cengage. All rights reserved.

1 JULY 2023 TO 30 JUNE 2024 INCOME STATEMENT

BALANCE SHEET Date

Accumulated Depreciation

Computer

3 300 1 July 2023 to 30 June 2024

−

3 000

Carrying Amount

=

300

Depreciation Expensed

1 000

FIGURE 13.17  Depreciation of computer for the third year to 30 June 2024, for Lorraine Bate

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ACCOUNTING FOR NON-CURRENT ASSETS

Extract General Journal of Lorraine Bate

GJ ...

30 Jun 24 Depreciation Expense – Computer Accumulated Depreciation – Computer 12 months’ depreciation being year 3 of 3 years

1 000

Profit and Loss Depreciation Expense – Computer Other Expenses Expenses closed out to profit and loss account

xxx

1 000

1 000 xx

FIGURE 13.18  General journals for Lorraine Bate, to 30 June 2024 Extract General Ledger of Lorraine Bate

Computer 1 Jul 21 Bank [payment]

3 300

Accumulated Depreciation – Computer 30 Jun 22 Depreciation Expense – Computer 30 Jun 23 Depreciation Expense – Computer 30 Jun 24 Depreciation Expense – Computer

1 000 1 000 2 000 1 000 3 000

Depreciation Expense – Computer 30 Jun 22 Accumulated Depr’n – Computer 30 Jun 23 Accumulated Depr’n – Computer 30 Jun 24 Accumulated Depr’n – Computer

1 000 30 Jun 22 Profit and Loss 1 000 30 Jun 23 Profit and Loss 1 000 30 Jun 24 Profit and Loss

1 000 1 000 1 000

FIGURE 13.19  General ledger for Lorraine Bate, to 30 June 2024 Extract Income Statement of Lorraine Bate

for the year ended 30 June 2024 less Expenses General and Administrative   Depreciation Expense – Computer 1 000 Extract Balance Sheet of Lorraine Bate

as at 30 June 2024 Non-current Assets  Computer 3 300 3 000   less Accumulated Depreciation

300

Copyright © 2018. Cengage. All rights reserved.

FIGURE 13.20  Income statement and balance sheet for Lorraine Bate, to 30 June 2024

After 30 June 2024 there will be no more depreciation on the computer, as the carrying amount is the same as the residual value. This is the case irrespective of whether or not Lorraine Bate uses the computer.

QUESTION 13.4 On 1 July 2021, equipment of $24 189 ($21 990 + $2199 GST) was purchased for cash and is to be depreciated at 15% p.a. with a residual value of $1100 ($1000 + $100 GST). Prepare: a the straight line depreciation worksheet to 30 June 2023 b general ledger extracts for the asset and appropriate depreciation accounts for 30 June 2022 and 2023.

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CHAPTER 13

QUESTION 13.5 Office furniture and fittings $4158 ($3780 + $378 GST) and motor vehicle $34 716 ($31 560 + $3156 GST) were both purchased on credit on 1 July 2021 and depreciated using the straight line method. Office furniture is to be depreciated at 15% p.a. with no residual value. Motor vehicle is depreciated at 20% p.a. with a residual value of $3300 ($3000 + $300 GST). Prepare: a the straight line depreciation worksheets to 30 June 2023 b the balance day depreciation journal for 30 June 2022 and 2023.

QUESTION 13.6 On 1 July 2021, the business purchased and had installed a computer system costing $19 030 ($17 300 + $1730 GST). It is anticipated to have a useful life of four years (25% p.a.) and the straight line depreciation method is to be used with a nil residual value. Prepare: a the straight line depreciation worksheets to 30 June 2025 b an extract general ledger for the asset and depreciation accounts to 30 June 2023 c an extract income statement and balance sheet for the year ended 30 June 2023.

Purchase of non-current assets, time lines and months of depreciation It is essential with depreciation to consider the actual date of purchase: the day, month and year.

NON-CURRENT ASSETS BECOME OPERATIONAL DURING THE YEAR The depreciation rate can be expressed either as ×% p.a. or as years of use. However, the business can only claim a depreciation expense for the period of time that it has been able to use the asset; it needs to match the expense with the revenue, or benefit. If the non-current asset was only used for three months of the accounting period, then the depreciation expense is for only three months. The depreciable amount is multiplied by the annual depreciation rate, then divided by 12 (months in a year) and multiplied by 3 (the number of months of use). To illustrate: a non-current asset was purchased for $16 500 ($15 000 + $1500 GST) on 31 March 2022, to be depreciated at 20% p.a. The depreciation for the three months ended 30 June 2022 is: ($15 000 × 20%)/12 × 3 = (15 000 × 0.2)/12 × 3 = (3000)/12 × 3 = $750

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DEPRECIATION TIME LINE It is helpful to draw a rough time line of events indicated in a question, especially when the purchase of the asset is not at the beginning or end of the financial year or there are multiple purchases and sales of assets in a question. Consider the following situation. • Computer 1 is purchased on 1 July 2021 for $1320 ($1200 + $120 GST). • Computer 2 is purchased on 30 September 2021 for $1650 ($1500 + $150 GST). • Computer 3 is purchased on 1 February 2022 for $1980 ($1800 + $180 GST). All three computers are to be depreciated over three years (33.33% p.a.) using the straight line depreciation method. As a guide, the time line may look like the example in figure 13.21.

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1 Jul 21

30 Jun 22

30 Jun 23 12 months

1 Jul 21: 12 months to 30 Jun 22 Computer 1 purchase

30 Jun 24 12 months

1 Feb 22: 5 months to 30 Jun 22 Computer 3 purchase

30 Sep 21: 9 months to 30 Jun 22 Computer 2 purchase

FIGURE 13.21  T  ime line showing months of depreciation to end of financial year for the purchase of three computers

For the year in which the computers were purchased, count the months of depreciation to be expensed (use your fingers, as you are less likely to make a mistake) from the purchase date to the end of the financial year, which in this case is 30 June 2022. The time line does not have to be to scale; it is a rough guide to help you quickly get to the correct answer. Using the cost data and time line, the depreciation for each computer to 30 June 2022 would be: Computer 1

$1200/3 years × 12/12

=

$400

Computer 2

$1500 × 33 13  % × 9/12 $1800 × 33 13  % × 5/12

=

$375

=

$250

Computer 3

$1 025 Depreciation for year ended 30 June 2023 would be: Computer 1

$1200/3

=

$400

Computer 2

$1500 × 33 13  % $1800 × 33 13  %

=

$500

=

$600

Computer 3

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$1 500 Where two or more similar assets are depreciated – in this case, computers – the depreciation expense for each is added together to give a total. This is then processed through the one account in one journal entry for computers. The income statement shows the total depreciation expense of computers in one account, not a separate account for each individual computer. A similar situation applies with the balance sheet – one non-current asset account: computers, and one contra account: accumulated depreciation – computers. Where depreciation is calculated for two or more different asset types, then they are journalised to separate accounts. For example, depreciation of a motor vehicle and depreciation of fixtures and fittings are journalised as two account entries in the general journal.

QUESTION 13.7 The business purchased on credit: a a new car for a sales representative on 1 February 2022 $36 300 ($33 000 + $3300 GST) with a depreciation rate of 20% p.a. and a residual value of $3300 ($3000 + $300 GST), and b a new truck for deliveries to customers on 31 March 2022 for $55 000 ($50 000 + $5000 GST) with nil residual value and a depreciation rate at 15% p.a. Balance date is 30 June and straight line depreciation applies to both. Prepare: i a time line for the two assets to 30 June 2024, then allocate both to the motor vehicles account ii depreciation worksheets for each motor vehicle to 30 June 2024, and iii the balance day depreciation journals for 30 June 2022 and 2023.

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CHAPTER 13

QUESTION 13.8 A new computer was purchased on 31 October 2021 for $5445 ($4950 + $495 GST) with nil residual value. It is to be depreciated at 33.33% p.a. using the straight line method, with year end being 30 June. Prepare: a a time line for the computer to 30 June 2025 b the straight line depreciation worksheet to 30 June 2025, and c general ledger extracts for the asset and appropriate depreciation accounts to 30 June 2025.

QUESTION 13.9 During the year ended 30 June 2022, three assets were purchased and are to be depreciated using the straight line method. All have nil residual values. a 1 August 2021, machinery depreciated at 15% p.a. $19 019 ($17 290 + $1729 GST). b 30 November 2021, office equipment depreciated at 10% p.a. $6127 ($5570 + $557 GST). c 1 April 2022, machinery depreciated at 15% p.a. $4158 ($3780 + $378 GST). Prepare: i a time line to 30 June 2023 ii depreciation worksheets to 30 June 2023 iii the balance day depreciation journal for 30 June 2022 iv an extract balance sheet as at 30 June 2023.

Depreciation method 2: Units of use depreciation This method of depreciation does not relate to depreciation expense over time, but rather to depreciation expense over usage. The asset is expensed over its useful life, based on its actual output or usage up to a preset or predetermined level. Similar to the straight line depreciation method, the units of use or units of production depreciation method uses the depreciable amount as part of the calculation of the depreciation expense per annum. (Original cost + Installation)  – Residual value = Depreciable amount

The units of use depreciation method takes the depreciation cost for one unit of usage or production and incorporates it into a worksheet, similar to the straight line depreciation worksheet. Depreciable amount Preset total usage in units

= Depreciation cost for 1 unit of use

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Example 3: Units of use depreciation The business of Cathy Hair purchased a machine on credit for $544 500 ($495 000 + $49 500 GST). Installation costs were $27 500 ($25 000 + $2500 GST), and the machine was commissioned (ready for use) on 1 July 2021. It is to be depreciated on the preset basis of 200 000 units of production, after which it is estimated to have a disposal value of $22 000 ($20 000 + $2000 GST). For the years ended 30 June, production units were: 2022 2023 2024 2025

70 000 units 60 000 units 50 000 units 20 000 units

Prepare: • a unit-of-use depreciation worksheet to 30 June 2025 • balance day depreciation journal entry for 30 June 2022 • extract asset and depreciation general ledger accounts to 30 June 2023 • an extract income statement for the year ended 30 June 2024, and • an extract balance sheet as at 30 June 2025. Created from tafenswlib on 2020-05-30 08:15:08.

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Units of Use Depreciation Method Asset: Machinery 520 000 Asset cost including installation less Residual value   20 000 Equals depreciable amount $ 500 000 Preset total units of use: 200 000 units of production using depreciable amount Depreciation cost for 1 unit $2.50 Date Units Used Asset Cost Deprec’n Accum Closing Expense Deprec’n Carrying Current Amount 1 Jul 21 520 000 30 Jun 22 70 000 175 000 175 000 345 000 30 Jun 23 60 000 150 000 325 000 195 000 30 Jun 24 50 000 125 000 450 000 70 000 30 Jun 25 20 000 50 000 500 000 20 000

FIGURE 13.22  Units of use depreciation worksheet, example Cathy Hair

Extract General Journal of Cathy Hair

GJ ...

30 Jun 22 Depreciation Expense – Machinery Accumulated Depreciation – Machinery Depreciation at balance date

175 000 175 000

Extract General Ledger of Cathy Hair

Machinery 1 Jul 21 Accounts Payable Control

520 000

Accumulated Depreciation – Machinery 30 Jun 22 Depreciation Expense – Machinery 30 Jun 23 Depreciation Expense – Machinery

175 000 150 000 325 000

Depreciation Expense – Machinery 30 Jun 22 Accumulated Depr’n – Machinery 30 Jun 23 Accumulated Depr’n – Machinery

175 000 30 Jun 22 Profit and Loss 150 000 30 Jun 23 Profit and Loss

Extract Income Statement of Cathy Hair

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for the year ended 30 June 2024 less Expenses General and Administrative   Depreciation Expense – Machinery 125 000 Extract Balance Sheet of Cathy Hair

as at 30 June 2025 Non-current Assets  Machinery 520 000 500 000   less Accumulated Depreciation

20 000

FIGURE 13.23  Journal, ledger, income statement and balance sheet for Cathy Hair at various dates

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175 000 150 000

CHAPTER 13

QUESTION 13.10 Electronic optical equipment was purchased and installed for $335 500 ($305 000 + $30 500 GST) on 1 July 2021. The equipment is expected to give 5000 hours of usage, after which it would be disposed of with an estimated residual value of $5500 ($5000 + $500 GST). Usage for the year ended 30 June 2022 was 2500 hours; 2023 was 2000 hours; 2024 was 500 hours. Prepare: a a units of use depreciation worksheet to 30 June 2024 b a general journal balance day adjustment for depreciation for 30 June 2022 c an extract general ledger showing equipment and depreciation accounts to 30 June 2023, and d an extract income statement for June 2023 and balance sheet for 2024.

QUESTION 13.11 The business purchased an aircraft on credit on 2 January 2022 to make it more efficient for its business and management, as it worked in the western region of New South Wales. The aircraft cost $374 000 ($340 000 + $34 000 GST) and is to be depreciated over 20 000 flying hours. It was unsure how many years this would be, but was believed to be appropriate and no residual value was estimated. By 30 June 2022, 1300 hours had been flown and by 30 June 2023 another 2800 hours had been flown. Prepare: a a units of use depreciation worksheet to 30 June 2023 b a general journal balance day adjustment for depreciation for 30 June 2022, and c an extract balance sheet for June 2023.

QUESTION 13.12 Sophisticated medical scanning equipment was purchased on credit and installed for $800 800 ($728 000 + $72 800 GST) on 16 July 2021. The residual value is only as scrap metal and is considered immaterial. Due to the components within the equipment, it is to be depreciated using units of use based on 5000 hours’ total usage. For the years ended 30 June, usage in hours is initially anticipated to be:

2022 2023 2024 2025 2026

Hours 700 1 200 800 1 400 900

Calculate the anticipated depreciation for each year using the units of use depreciation worksheet. For the year to 30 June 2022, actual usage was 625 hours; and for the year to 30 June 2023 it was 1150 hours. Prepare to 30 June 2023 a depreciation worksheet and extract general ledger accounts for equipment, accumulated depreciation and depreciation. Then prepare extracts of the income statement and balance sheet for the year ended 30 June 2023.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 13.13 A business involved with long-distance transport bought a new truck designed for haulage between all capital cities throughout the country. The motor vehicle was purchased on credit on 31 July 2021 $819 500 ($745 000 + $74 500 GST) and it was expected that it would be sold for its residual value of $49 500 ($45 000 + $4500 GST) after travelling for 2 million kilometres. For the 11 months ended 30 June 2022, the truck travelled 145 000 kilometres. For the year ended 30 June 2023, the truck travelled 185 000 kilometres. For the year ended 30 June 2024, the truck travelled 180 000 kilometres. Prepare a units of use depreciation worksheet to 30 June 2024, as well as the extract general ledger accounts for the asset and depreciation accounts to the same date.

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QUESTION 13.14 H Bilberry purchased a machine on 31 July 2021, to be depreciated by the straight line method at 15% p.a., which cost $26 312 ($23 920 + $2392 GST). Installation and commissioning was completed on 31 August 2021 at an additional cost of $8448 ($7680 + $768 GST). The estimated residual value was $1430 ($1300 + $130 GST). A second machine was purchased and installed on 1 October 2021 and was to be depreciated using the units of use method based on hours of usage totalling 17 000 hours. The cost including installation and commissioning was $192 500 ($175 000 + $17 500 GST). A residual value of $5500 ($5000 + $500 GST) was anticipated. Usage to 30 June 2022 was 1875 hours and to 30 June 2023 2800 hours. Prepare: a a time line for machine 1 and machine 2 to 30 June 2023 b depreciation worksheets for both machines to 30 June 2023, and c the extract general ledger accounts for machinery and the associated depreciation accounts to 30 June 2023.

QUESTION 13.15 G Basil, whose accounts end on 30 June, purchased a computer for cash on 30 September 2021 for $8030 ($7300 + $730 GST) with nil residual value, to be written off at 33.33% p.a. using the straight line depreciation method. On 1 April 2022 a forklift truck (motor vehicles) was purchased on credit for $75 405 ($68 550 + $6855 GST) with an estimated residual value of $3300 ($3000 + $300 GST), to be expensed at 15% p.a. straight line depreciation method. Prepare to 30 June 2023: a a time line b depreciation worksheets for both assets c an extract of the appropriate general ledger accounts, and d extracts for the income statement and balance sheet.

QUESTION 13.16

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The business of B Walnut purchased some non-current assets during the year ended 30 June 2022. A photocopier (office equipment) was purchased on 31 July 2021 for $4147 ($3770 + $377 GST) and is to be depreciated using the straight line method at 15% p.a. with a nil residual value. Machinery costing $85 437 ($77 670 + $7767 GST) was purchased on 1 September 2021 and is to be depreciated based on a total of 5000 units of use with no residual value. (The cost per unit is to be calculated to three decimal places.) Usage to 30 June 2022 was 770 units and, to 30 June 2023, 1470 units. Office furniture, consisting of desks and chairs, was purchased on 31 March 2022 for $3256 ($2960 + $296 GST) and depreciated straight line at 10% p.a. with no expected residual value. Prepare: a a time line for the purchases to 30 June 2023 b depreciation worksheets for each of the assets to 30 June 2023, and c depreciation balance day adjustment journals for 2022 and 2023.

Method 3: Diminishing balance depreciation Diminishing balance depreciation for the financial year is calculated using the carrying amount of the noncurrent asset at the beginning of the current year. Remember, the carrying amount is the balance of the non-current asset account less the balance of the accumulated depreciation account. Where there is a residual value at the end of the asset’s service potential, it is not deducted from the cost to calculate the depreciation for each year. This residual value is already included when calculating the diminishing balance annual percentage rate. The processing of journal entries, posting to ledger accounts and financial report entries are the same for all three depreciation methods. It is the method of calculating the depreciation and depreciation expense each year that are different, not the way of processing through the accounts.

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CHAPTER 13

Depreciation expense using the diminishing balance method is much higher in the early years of an asset’s useful life and reduces significantly over time. This contrasts with straight line depreciation, which is a constant depreciation amount over the useful life of the asset.

Example 4: Diminishing balance depreciation On 1 July 2021, Bill Bate purchased a machine for cash $3630 ($3300 + $330 GST). The machine is to be depreciated using the diminishing balance method at a rate of 45% p.a. The following figures illustrate the impacts of the diminishing balance depreciation method on the accumulated depreciation, carrying amount and depreciation for the machinery (shown in figure 13.25). The actual values are from figure 13.24, which uses the data of Bill Bate.

INCOME STATEMENT

BALANCE SHEET Date

Accumulated Depreciation

Machinery

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3 300 1 July 2021 Machinery purchased

Carrying Amount

=

3 300

Depreciation Expensed

3 300 1 July 2021 to 30 June 2022

−

1 485

=

1 815

1 485

3 300 1 July 2022 to 30 June 2023

−

2 302

=

998

817

3 300 1 July 2023 to 30 June 2024

−

2 751

=

549

449

3 300 1 July 2024 to 30 June 2025

−

2 998

=

302

247

FIGURE 13.24  Machinery depreciated using the diminishing balance method at a rate of 45% p.a.

The carrying amount at the beginning of the period is the basis for the calculation of the 45% depreciation rate with the diminishing balance method of depreciation, not the depreciable amount or

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asset cost. The worksheet shown in figure 13.25 for the machine needs to be understood, as it will assist you in answering diminishing balance depreciation questions. Diminishing Balance Depreciation Method Asset: Machinery Asset cost including installation 3 300 less Residual value not applicable equals Depreciable amount $   3 300 Rate p.a. 45% on opening carrying amount Date Opening Deprec’n Accum Carrying Expense Deprec’n Amount Current 1 Jul 21 3 300 30 Jun 22 3 300 1 485 1 485 30 Jun 23 1 815 817 2 302 30 Jun 24 998 449 2 751 30 Jun 25 549 247 2 998

Closing Carrying Amount 1 815 998 549 302

FIGURE 13.25 Depreciation worksheet for machinery depreciated using the diminishing balance method at a rate of 45% p.a.

The asset cost including any installation costs (the depreciable amount) less the accumulated depreciation gives the carrying amount. These amounts will all be included in the balance sheet for that particular non-current asset. Compare the extract of the balance sheet in figure 13.26 with the values in figure 13.25 as at 30 June 2023. Extract Balance Sheet of Bill Bate

as at 30 June 2023 Non-current Assets  Machinery 3 300 2 302   less Accumulated Depreciation

998

FIGURE 13.26  Balance sheet for Bill Bate as at 30 June 2023

Rework the worksheet in the example and confirm that you understand the calculations. Cover over the answers while you calculate the various amounts.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 13.17 On 1 July 2021 the business bought on credit specialised equipment at a total cost including installation of $68 981 ($62 710 + $6271 GST). It is to be depreciated using the diminishing balance method at a rate of 25% p.a. Prepare: a the diminishing balance worksheet for four years to 30 June 2025 b the depreciation balance day adjustment journal for 30 June 2023, and c an extract balance sheet as at 30 June 2023.

QUESTION 13.18 On 1 July 2021, machinery was purchased on credit for $24 398 ($22 180 + $2218 GST) with a residual value of $2200 ($2000 + $200 GST). It is to be depreciated using the diminishing balance method at a rate of 30% p.a. Prepare for three years to 30 June 2024: a a worksheet using the diminishing balance depreciation method, and b general ledger accounts for machinery and the two depreciation accounts.

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CHAPTER 13

QUESTION 13.19 On 1 July 2021, equipment costing $11 000 ($10 000 + $1000 GST) was purchased for cash. It is to be depreciated at 30% p.a. using the diminishing balance depreciation method. Prepare: a a diminishing balance depreciation worksheet for the first five years ended 30 June b the balance day adjustment journal for depreciation for 30 June 2023, and c general ledger asset and depreciation accounts to 30 June 2023.

QUESTION 13.20 The business made a credit purchase on 1 July 2021 of a large-capacity integrated compressor and generator, which is grouped as plant and machinery. It is to be depreciated using the diminishing balance method at a rate of 35% p.a. The cost was $59 026 ($53 660 + $5366 GST) and the installation was completed on 31 August 2021 at an additional cost of $21 241 ($19 310 + $1931 GST). The residual value was expected to be $5500 ($5000 + $500 GST). Prepare: a a time line to 30 June 2023 b a depreciation worksheet to 30 June 2024 c an extract general ledger for plant and machinery and the two relevant depreciation accounts, including data to 30 June 2023 d an extract balance sheet to 30 June 2023.

QUESTION 13.21 Machinery was purchased on 31 August 2021 for $81 400 ($74 000 + $7400 GST), and installed and commissioned on 30 September 2021 for $9020 ($8200 + $820 GST) with no residual value. Depreciation is to be based on the diminishing balance method at an annual depreciation rate of 30%. Prepare: a a time line to 30 June 2023 b a depreciation worksheet to 30 June 2025 c the general journal depreciation adjustment on 30 June 2023, and d an extract balance sheet as at 30 June 2024.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 13.22 As part of a major expansion, the business bought on credit equipment at a cost including installation of $77 968 ($70 880 + $7088 GST). Installation and commissioning were completed on 1 February 2022. Depreciation is at 28% p.a. using the diminishing balance method. Prepare: a a time line to 30 June 2023 b the depreciation worksheet to 30 June 2026 c relevant extract general ledger accounts to 30 June 2023, and d an extract income statement for the year ended 30 June 2024.

QUESTION 13.23 Plant and equipment was purchased on credit on 1 September 2021 for $85 415 ($77 650 + $7765 GST). Installation was finalised and commissioned on 31 October 2021 at a cost of $18 821 ($17 110 + $1711 GST). Residual value was estimated at $4400 ($4000 + $400 GST). Depreciation is to be based on the diminishing balance method at a rate of 30% p.a. Prepare: a a time line to 30 June 2023 b a depreciation worksheet to 30 June 2026 c relevant extract general ledger accounts to 30 June 2024, and d extract balance sheets for 30 June 2024 and 30 June 2025.

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QUESTION 13.24 New cupboards, desks and chairs (office furniture) were purchased and management want to see the difference between using the straight line and the diminishing balance methods of depreciation. Management is aware that usage would be constant over the life of the office furniture but still requires that you complete the two appropriate depreciation worksheets. The cost on 1 November 2021 was $16 841 ($15 310 + $1531 GST) and the residual value was expected to be $550 ($500 + $50 GST). Straight line depreciation of 10% p.a. and diminishing balance of 25% p.a. were considered appropriate. Complete a time line to 30 June 2023 to show management the impact of purchasing during the financial year. The depreciation worksheets should cover five years to 30 June 2026.

QUESTION 13.25 Two machines were purchased in the financial year to 30 June 2022. Machine 1 is depreciated using the diminishing balance method at 35% p.a. It was purchased and installed on 31 January 2022 for $44 396 ($40 360 + $4036 GST); estimated residual value is $2200 ($2000 + $200 GST). Machine 2 is depreciated using the straight line method at 15% p.a. It was purchased and installed on 1 March 2022 for $55 759 ($50 690 + $5069 GST); the residual value is estimated at $2750 ($2500 + $250 GST). You are required to prepare: a a time line to 30 June 2023, and b a depreciation worksheet for each machine to 30 June 2026.

QUESTION 13.26 Equipment costing $12 716 ($11 560 + $1156 GST) was purchased on 30 November 2021 and installed and commissioned on 31 January 2022 at an additional cost of $5148 ($4680 + $468 GST). Depreciation of 15% p.a. straight line method was to apply. The equipment has an estimated residual value of $1100 ($1000 + $100 GST). More equipment was purchased and installed on 28 February 2022 at a total cost of $18 458 ($16 780 + $1678 GST), with an estimated residual value of $2200 ($2000 + $200 GST). The diminishing balance method of depreciation is to be used at a rate of 32% p.a. Prepare: a a time line for equipment 1 and equipment 2 purchases to 30 June 2023 b depreciation worksheets to 30 June 2024 c an extract income statement for the year ended 30 June 2023 d an extract balance sheet as at 30 June 2023.

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QUESTION 13.27 Don’s business buys three motor vehicles for the business and pays by debit card between 1 July 2021 and 30 June 2022. As a result of the nature of the business, each motor vehicle is put to a special use. Motor vehicle 1 was purchased on 1 August 2021 for $47 619 ($43 290 + $4329 GST) with a residual value of $5280 ($4800 + $480 GST). It is depreciated using the straight line method of depreciation at 15% p.a. Motor vehicle 2 was purchased on 30 November 2021 for $43 780 ($39 800 + $3980 GST) with a residual value of $9790 ($8900 + $890 GST). It is depreciated using the diminishing balance method at 28% p.a. Motor vehicle 3 was purchased on 1 February 2022 for $49 060 ($44 600 + $4460 GST) with a residual value of $2860 ($2600 + $260 GST). It is depreciated using the units of use method based on 8000 hours of usage. (Depreciation cost per hour of use is calculated to two decimal places.) Usage has been:   270 hours to 30 June 2022   940 hours to 30 June 2023   750 hours to 30 June 2024 1170 hours to 30 June 2025 Prepare: a a time line for each of the three motor vehicles to 30 June 2023 b depreciation worksheets to 30 June 2025 c an extract income statement for the year ended 30 June 2023, and d an extract balance sheet as at 30 June 2024.

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CHAPTER 13

QUESTION 13.28 D Burrendong purchased the following assets for cash on 1 December 2021: i machinery for $17 270 ($15 700 + $1570 GST) to be depreciated at 30% p.a. diminishing balance method ii office equipment for $9900 ($9000 + $900 GST) to be depreciated at 10% p.a. straight line method. Prepare: a a time line to 30 June 2023 b depreciation worksheets to 30 June 2026 c the balance day adjustment journal for depreciation for 30 June 2022 d extract general ledger accounts relevant to the question to 30 June 2024 e an extract income statement for the year ended 30 June 2024 f an extract balance sheet as at 30 June 2025.

QUESTION 13.29 Peggy See acquired the following assets: i Office furniture was purchased for cash on 31 July 2021 for $7920 ($7200 + $720 GST) with a 10% p.a. straight line depreciation rate. ii Machinery was purchased for cash on 31 January 2022 for $52 800 ($48 000 + $4800 GST) with a 25% p.a. diminishing balance depreciation rate. iii Plant was purchased on credit on 1 February 2023 (not 2022) for $42 900 ($39 000 + $3900 GST) with a residual value estimated at $6600 ($6000 + $600 GST) and a 30% p.a. diminishing balance depreciation rate. Prepare: a a time line to 30 June 2024 b appropriate depreciation worksheets to 30 June 2025 c the balance day adjustment journal for depreciation for 30 June 2023 d an extract income statement for the year ended 30 June 2024 e an extract balance sheet as at 30 June 2025.

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QUESTION 13.30 The business of Marie Hend purchased on credit machine 1 on 30 November 2021, which was operational at that date. The cost including installation was $35 750 ($32 500 + $3250 GST) and there is an estimated residual value of $2200 ($2000 + $200 GST). A straight line depreciation rate of 15% p.a. is used. Machine 2 was purchased on credit on 2 December 2021 for $86 295 ($78 450 + $7845 GST). The installation and commissioning of machine 2 occurred on 31 March 2022 at an additional cost of $7480 ($6800 + $680 GST). The diminishing balance depreciation method is used at a rate of 30% p.a. and the residual value is estimated to be $3850 ($3500 + $350 GST). Prepare: a a time line to 30 June 2023 b appropriate depreciation worksheets to 30 June 2025 c the balance day adjustment journal for depreciation for 30 June 2023 d extract general ledger accounts relevant to the question to 30 June 2023 e an extract income statement for the year ended 30 June 2024 f an extract balance sheet as at 30 June 2025.

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QUESTION 13.31 On 31 July 2021 the business of Ruth Lye purchased fixtures and fittings costing $19 250 ($17 500 + $1750 GST) with an estimated residual value of $1100 ($1000 + $100 GST) at the end of the useful life of five years. Depreciation is by the straight line method. On 1 October 2021 a small truck was purchased for $49 500 ($45 000 + $4500 GST) with an estimated residual value of $3300 ($3000 + $300 GST); depreciation is 35% p.a. using the diminishing balance method. On 31 August 2022 a car was purchased for $38 500 ($35 000 + $3500 GST) with an estimated residual value of $2200 ($2000 + $200 GST); depreciation is 30% p.a. using the diminishing balance method. On 1 November 2022 office furniture was purchased for $10 450 ($9500 + $950 GST) and is to be depreciated using the straight line method over 10 years with a residual value of $220 ($200 + $20 GST). Prepare: a a time line to 30 June 2024 b appropriate depreciation worksheets to 30 June 2026 c an extract income statement for the year ended 30 June 2024, and d an extract balance sheet as at 30 June 2025.

QUESTION 13.32

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Margaret Kline’s accounts are to record the following assets: On 1 August 2021 office furniture was purchased at a cost of $13 860 ($12 600 + $1260 GST) with a residual value estimated at $660 ($600 + $60 GST) and depreciation is at 10% p.a. using the straight line method. Plant and equipment costing $28 380 ($25 800 + $2580 GST) was purchased, installed and commissioned by 1 October 2021 with an estimated residual value of $1980 ($1800 + $180 GST) and depreciation of 33% p.a. using the diminishing balance method. Additional office furniture was purchased on 31 August 2022 at a cost of $12 000 ($11 000 + $1100 GST). It is to be depreciated using straight line depreciation of 10% p.a. The furniture is not anticipated to have a residual value. Following extensive improvements in systems and internal controls a computer system was installed and commissioned on 31 January 2023 at a cost of $45 980 ($41 800 + $4180 GST). Diminishing balance method of depreciation is to be used at a rate of 45% p.a. Prepare: a a time line to 30 June 2024 b depreciation worksheets to 30 June 2025 for each of the assets purchased c an extract income statement for the year ended 30 June 2023, and d an extract balance sheet as at 30 June 2024.

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Derecognition or disposal of depreciable assets The Australian accounting standard AASB 116 Property Plant and Equipment, Derecognition (paragraphs 67 to 72) notes that when a non-current asset is sold, disposed of or derecognised then the difference between the carrying amount, as shown in the depreciation worksheets and balance sheet, and the net proceeds from disposal shall result in either a gain on disposal or loss on disposal. The gain on disposal is shown as other revenue in the income statement. The loss on disposal is shown as an expense, generally under the general and administrative heading in the income statement. A simple example, in figure 13.27, demonstrates the situation where either a gain on disposal (if sold for $110) occurs or loss on disposal (if sold for $60) occurs. Gain on Disposal Cost of machinery Installation and commissioning Total commissioned cost less Residual value Depreciable amount less Accumulated depreciation Current period depreciation to disposal date Carrying amount Received on disposal or derecognition (Gain) on disposal – Other revenue Loss on disposal – Expense

Loss on Disposal

202 50 252 2 250 150 10

160 90 110 (20)

202 50 252 2 250 150 10

160 90 60 30

FIGURE 13.27  Example of either a gain or loss on disposal of a non-current asset

Disposal process The following data of Paul Tentmaker is used to illustrate the five basic steps of the disposal process. • Installed plant cost $4400 ($4000 + $400 GST) and was in use from 1 January 2017 to 1 April 2023. • Accumulated depreciation to 30 June 2022 was $3300; annual straight line depreciation was $600. • Plant was disposed of on 1 April 2023 for $550 ($500 + $50 GST). 1 Time line is prepared covering the disposal events. This step is even more critical where the disposal of one asset is combined with the purchase of a new asset (see figure 13.28).

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1 Jul 22

30 Jun 23

9 months from 1 Jul 22 to 1 Apr 23 Plant Disposal

FIGURE 13.28  Time line covering the disposal of plant on 1 April 2023 for Paul Tentmaker

2 Depreciation is calculated for the current period. Depreciation is calculated from the date of the last balance day adjustment for depreciation to the date of the disposal. From the time line it can be seen that the plant has continued to be used from the beginning of the new financial year (1 July 2022) to the date of disposal (1 April 2023) – a period of nine months. Adjustments need to be made to depreciation expense, accumulated depreciation and the resulting carrying amount, to satisfy the matching of the expense and revenue for the business as well as to calculate the gain or loss on disposal. Created from tafenswlib on 2020-05-30 08:15:17.

577

ACCOUNTING FOR NON-CURRENT ASSETS

Annual depreciation is $600 p.a. and it has been used for nine months since the previous accounting balance day adjustment for depreciation to the date of disposal. $600 × 9/12 = $450 depreciation adjustment

An extract of relevant accounts is shown in figure 13.29. Extract General Ledger of Paul Tentmaker

Plant 1 Jan 17 Bank/Accounts Payable Control

4 000

1 Apr 23 Disposal – Plant

3.1

4 000

2

3 300 450 3 750

Accumulated Depreciation – Plant 1 Apr 23 Disposal – Plant

3.2

3 750 30 Jun 22 Balance 1 Apr 23 Depreciation Expense – Plant 3 750

Depreciation Expense – Plant 1 Apr 23 Accumulated Depreciation – Plant

2

450

FIGURE 13.29  Points 2 and 3 on the disposal process for Paul Tentmaker

3 A disposal account is created as a clearing account to calculate either a gain or a loss on disposal of the non-current asset. The account (in this case Disposal – Plant) is opened, used and then closed. The balance before closing this account is either the gain or the loss on disposal amount. This is the same principle behind the profit and loss account being opened, used and then closed to the owner’s equity capital account, where the resulting balance used to close the account is the net profit or loss. 3.1  Transfer the cost of the asset: credit the plant account, debit the disposal – plant account. 3.2 Transfer the accumulated depreciation: debit the accumulated depreciation – plant account, credit the disposal – plant account (see figure 13.30). Disposal – Plant 1 Apr 23 Plant

3.1

4 000

1 Apr 23 Accumulated Deprec’n – Plant Bank/Accounts Receivable OR OR as a trade-in: Accounts Payable Control as a sale:

3.2 4.1 OR 4.2

3 750

FIGURE 13.30  Points 3 and 4 on the disposal process for Paul Tentmaker

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4 Disposal value received: whether as a sale or a trade-in, credit the disposal account. 4.1 Disposal by a sale for cash is to debit bank/credit disposal, or a sale on credit is to debit accounts receivable control/credit disposal. 4.2 Disposal by a trade-in is to debit accounts payable control/credit disposal, as the trade-in value is being offset against the amount owing to the supplier on the purchase of a new asset. Any gain or loss on the disposal as a trade-in relates to the asset – plant in this case – that is being disposed of. The trade-in value is not a reduction of the cost shown in the accounts for the new asset being purchased.

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5 Close the disposal account and find out whether there has been a gain or a loss on disposal. Gain on disposal. If the disposal account requires a debit entry to close it off then the credit 5.1  entry is to a new account: gain on disposal – plant; it is included as other revenue in the income statement (see figure 13.31). 5.2  Loss on disposal. If the disposal account requires a credit entry to close it off then the debit entry is to a new account: loss on disposal – plant; it is included as an expense in the income statement (see figure 13.33).

GAIN ON DISPOSAL Continuing the example of Paul Tentmaker, assume that plant is disposed as a trade-in on another asset for $550 ($500 + $50 GST). Disposal – Plant 1 Apr 23 Plant Gain on Disposal – Plant

3.1 5.1

4 000 250 4 250

1 Apr 23 Accumulated Depreciation – Plant 3.2 Accounts Payable Control 4.2

3 750 500 4 250

Gain on Disposal – Plant 5.1

1 Apr 23 Disposal – Plant

250

FIGURE 13.31  Gain on disposal, process points 3, 4 and 5, for Paul Tentmaker

The depreciation worksheet can be used to confirm all the values used in the total disposal process, including whether the result is a gain or loss on disposal. Figure 13.32 shows the depreciation worksheet, using the straight line method of depreciation, and traded in for $500 with a gain on trade-in for $250. Straight Line Depreciation Method Asset: Plant Asset cost including installation less Residual value equals Depreciable amount Rate p.a. 15% on depreciable amount Depreciation p.a. $600

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Date

1 Jan 17 30 Jun 17 30 Jun 18 30 Jun 18 30 Jun 20 30 Jun 21 30 Jun 22 1 Apr 23

Asset Cost

4 000 0 $ 4 000

Deprec’n Expense Current

Accum Deprec’n

Closing Carrying Amount

4 000 300 600 600 600 600 600 450

less Trade-in value equals (Gain)/Loss on disposal

300 900 1 500 2 100 2 700 3 300 3 750

3 700 3 100 2 500 1 900 1 300 700 250 500 (250)

FIGURE 13.32  Gain on disposal and the depreciation worksheet, for Paul Tentmaker

The depreciation worksheet is completed as normal up to the date of disposal. Remember that the time line in figure 13.28 shows the actual months of depreciation up to the disposal date and this will normally be less than the usual 12 months. Subtract the trade-in value from the closing carrying amount. If the result is a negative value, then the result is a gain on disposal, as in figure 13.32. Note, the amounts in the depreciation worksheet in figure 13.32 agree with the amounts in the accounts in figure 13.31, including the gain on disposal of $250. Created from tafenswlib on 2020-05-30 08:15:17.

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ACCOUNTING FOR NON-CURRENT ASSETS

LOSS ON DISPOSAL Now assume that Paul Tentmaker's plant is disposed as a credit sale for $110 ($100 + $10 GST). Disposal – Plant 3.1

1 Apr 23 Plant

4 000

1 Apr 23 Accum Depreciation – Plant Account Receivable Control Loss on Disposal – Plant

4 000

3.2 4.1 5.2

3 750 100 150 4 000

Loss on Disposal – Plant 1 Apr 23 Disposal – Plant

5.2

150

FIGURE 13.33  Loss on disposal, process points 3, 4 and 5 for Paul Tentmaker

Figure 13.34 shows the depreciation worksheet for Paul Tentmaker, using straight line depreciation and disposed of for $100 with a loss of $150. Straight Line Depreciation Method Asset: Plant Asset cost including installation less Residual value equals Depreciable amount Rate p.a. 15% on depreciable amount Depreciation p.a. $600

Date

1 Jan 17 30 Jun 17 30 Jun 18 30 Jun 19 30 Jun 20 30 Jun 21 30 Jun 22 1 Apr 23

Asset cost

4 000 0 $ 4 000

Deprec’n Expense Current

Accum Deprec’n

Closing Carrying Amount

4 000 300 600 600 600 600 600 450

less Sale value equals (Gain)/Loss on disposal

300 900 1 500 2 100 2 700 3 300 3 750

3 700 3 100 2 500 1 900 1 300 700 250 100 150

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FIGURE 13.34  Loss on disposal and the depreciation worksheet

The depreciation worksheet is completed as normal up to the date of disposal. Remember that the time line in figure 13.28 shows the actual months of depreciation up to the disposal date and this will normally be less than the usual 12 months. Subtract the sale value (irrespective of whether it is a cash sale or a credit sale) from the closing carrying amount. If the result is a positive value, the result is a loss on disposal, as in figure 13.34. Note, the amounts in the depreciation worksheet in figure 13.34 agree with the amounts in the accounts in figure 13.33, including the loss on disposal of $150.

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QUESTION 13.33 Complete the relevant extract general ledger accounts on the disposal of machinery for each of the following independent parts. The gain on disposal or loss on disposal account is also to be shown. The balances on 30 June 2022 were machinery $15 000 and accumulated depreciation – machinery $10 000. The machinery was depreciated using the straight line method at a rate of 15% p.a. with a nil residual value. Assume all entries are processed in general journal format. a On 1 July 2022, machinery was sold on credit for $6600 ($6000 + $600 GST). b On 31 August 2022, machinery was sold for cash $3300 ($3000 + $300 GST). Prepare a time line as part of your answer. c On 31 March 2023, machinery was traded in for $8800 ($8000 + $800 GST) on the credit purchase of a new machine; include a time line as part of your answer.

QUESTION 13.34 The plant of D Nepean was depreciated using the straight line method at 15% p.a. with no residual value. On 30 June 2022, an extract of accounts showed plant $45 000 and accumulated depreciation – plant $27 000. Complete the relevant ledger accounts for each of the various autonomous events listed below, including the gain on disposal or loss on disposal. a On 1 July 2022, the plant was sold for cash $20 900 ($19 000 + $1900 GST). b On 31 October 2022, the plant was sold on credit for $17 050 ($15 500 + $1550 GST); include a time line in your solution. c On 1 February 2023, the plant was decommissioned and used as a trade-in for $18 150 ($16 500 + $1650 GST); include a time line in your solution. On 10 February, new plant was purchased on credit at a cost (excluding the trade-in) of $82 500 ($75 000 + $7500 GST). On 1 March 2023 the new plant was installed and commissioned, at an additional cost of $5500 ($5000 + $500 GST); payment was made on 31 March. Straight line depreciation method is used at 15% p.a. and there is no estimated residual value. Show relevant ledger accounts to 30 June 2023, including accounts payable, depreciation and closing entries.

Depreciation worksheet and disposal The depreciation worksheet can be used to record any methods of depreciation, to the time the asset is disposed of, and to easily calculate if there is a gain or loss on disposal.

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Example 5: Depreciation and disposal worksheet On 2 January 2022, John Hair purchased machinery (machine 1 and machine 2) on credit. Both machines were depreciated as shown in the respective worksheets in figure 13.36. On 30 September 2024, machine 2 was accepted as a trade-in of $13 200 ($12 000 + $1200 GST) on machine 3, purchased from Williams Sales. Machine 3 cost $55 000 ($50 000 + $5000 GST) before trade-in and was to be depreciated at 35% p.a. diminishing balance method. The account payable was settled on 31 October 2024. On 31 December 2024, machine 1 was sold for $13 750 ($12 500 + $1250 GST) cash. Prepare an appropriate time line from 1 July 2024 to 30 June 2025. Continue the preparation of the worksheets, transactions in the general journal format, ledgers and reports from 1 July 2024 to 30 June 2025. The completed time line, worksheets, journals, ledgers and reports are shown in figures 13.35 to 13.39.

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ACCOUNTING FOR NON-CURRENT ASSETS

1 Jul 24

30 Jun 25

3 months from 1 Jul 24 to 30 Sep 24 Machine 2 Disposal

6 months from 1 Jul 24 to 31 Dec 24 Machine 1 Disposal

30 Sep 24, 9 months to 30 Jun 25 Machine 3 Purchase

FIGURE 13.35  Time line for disposal and purchase of non-current assets for John Hair Straight Line Depreciation Method

Diminishing Balance Depreciation Method

Asset: Machinery – Machine 1 Asset cost incl. installation 22 000 less Residual value 2 000 equals Depreciable amount $  20 000 Rate p.a. 15% on depreciable amount Depreciation p.a. $3000

Date

2 Jan 22 30 Jun 22 30 Jun 23 30 Jun 24 31 Dec 24

Asset Cost

Asset: Machinery – Machine 2 Asset cost including installation 35 000 less Residual value n/a equals Depreciable amount $  35 000 Rate p.a. 35% on opening carrying amount

Deprec’n Accum Closing Expense Deprec’n Carrying Current Amount

22 000 1 500 3 000 3 000 1 500

1 500 4 500 7 500 9 000

less Sales equals (Gain)/Loss on disposal

20 500 17 500 14 500 13 000 12 500 500

Date

Opening Deprec’n Accum Closing Carrying Expense Deprec’n Carrying Amount Current Amount

2 Jan 22 30 Jun 22 30 Jun 23 30 Jun 24 30 Sep 24

35 000 35 000 6 125 6 125 28 875 10 106 16 231 18 769 6 569 22 800 12 200 1 067 23 867 less Trade-in equals (Gain)/Loss on disposal

Diminishing Balance Depreciation Method Asset: Machinery – Machine 3 Asset cost including installation 50 000 less Residual value n/a equals Depreciable amount $  50 000 Rate p.a. 35% on opening carrying amount

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Date

30 Sep 24 30 Jun 25

Opening Deprec’n Accum Closing Carrying Expense Deprec’n Carrying Amount Current Amount 50 000 50 000

13 125

13 125

36 875

FIGURE 13.36  Depreciation worksheets incorporating gain or loss on disposal, for John Hair

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28 875 18 769 12 200 11 133 12 000 (867)

CHAPTER 13

Extract General Journal of John Hair

30 Sep 24 Depreciation – Machinery Accumulated Depreciation – Machinery 3 months’ depreciation on machine 2 being traded in

1 067

Disposal – Machinery Machinery Machine 2 cost transferred to disposal

35 000

Accumulated Depreciation – Machinery Disposal – Machinery Machine 2 accum deprec transferred to disposal

23 867

Accounts Payable Control – Williams Sales    13 200 GST Payable Disposal – Machinery Machine 2 trade-in value on buying machine 3

13 200

Disposal – Machinery Gain on Disposal – Machinery Gain on disposal of machine 2 being traded in

867

Machinery GST Receivable Accounts Payable Control – Williams Sales   55 000 Cost of purchase of machine 3 [normally in PJ] 31 Oct 24 Accounts Payable Control [55 000 – 13 200] – Williams Sales    41 800 Bank [payment] Payment of account payable [normally in CP journal] 31 Dec 24 Depreciation – Machinery Accumulated Depreciation – Machinery 6 months’ depreciation on machine 1 being sold Disposal – Machinery Machinery Machine 1 cost transferred to disposal Accumulated Depreciation – Machinery Disposal – Machinery Machine 1 accum deprec transferred to disposal Bank [receipt] GST Payable Disposal – Machinery Machine 1 sold as a cash sale [normally in CR journal]

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GJ ... 1 067

Loss on Disposal – Machinery Disposal – Machinery Loss on disposal of machine 1 transferred 30 Jun 25 Depreciation – Machinery Accumulated Depreciation – Machinery Depreciation on machine 3 for 9 months Gain on Disposal – Machinery Profit and Loss Other revenue closed out to profit and loss Profit and Loss Depreciation – Machinery [1500 + 1067 + 13 125] Loss on Disposal – Machinery Expense closed out to profit and loss

35 000

23 867

1 200 12 000

867 50 000 5 000 55 000

41 800 41 800 1 500 1 500 22 000 22 000 9 000 9 000 13 750 1 250 12 500 500 500 13 125 13 125 867 867 16 192 15 692 500

FIGURE 13.37  Disposal, adjusting and closing journals to 30 June 2024 for John Hair Created from tafenswlib on 2020-05-30 08:15:17.

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ACCOUNTING FOR NON-CURRENT ASSETS

Extract General Ledger of John Hair

Machinery 2 Jan 22 Accounts Payable Control 30 Sep 24 Accounts Payable Control 1 Oct 24 Balance b/d

1 Jan 25 Balance b/d

57 000 30 Sep 24 Disposal – Machinery 50 000 Balance c/d 107 000 72 000 31 Dec 24 Disposal – Machinery Balance c/d 72 000 50 000

35 000 72 000 107 000 22 000 50 000 72 000

Accumulated Depreciation – Machinery 30 Sep 24 Disposal – Machinery Balance c/d

31 Dec 24 Disposal – Machinery

23 867 30 Jun 22 7 500 30 Jun 23 30 Jun 24 30 Sep 24 31 367 9 000 1 Oct 24 31 Dec 24 9 000 30 Jun 25

Depr'n – Machinery [1500 + 6125] Depr'n – Machinery [3000 + 10106] Depr'n – Machinery [3000 + 6569] Depr'n – Machinery [Machine 2] Balance b/d Depr'n – Machinery [Machine 1] Depr'n – Machinery [Machine 3]

7 625 13 106 9 569 1 067 31 367 7 500 1 500 9 000 13 125

Accounts Payable Control 30 Sep 24 Disposal – Machinery [trade-in] 31 Oct 24 Bank [payment]

13 200 30 Sep 24 Machinery [Machine 3] 41 800 55 000

55 000 55 000

Disposal – Machinery 30 Sep 24 Machinery [Machine 2] Gain on Disposal – Machinery 31 Dec 24 Machinery [Machine 1]

35 000 30 Sep 24 Accum Depr'n – Machinery 867 Accounts Payable Control 35 867 22 000 31 Dec 24 Accum Depr'n – Machinery Bank [receipt] Loss on Disposal – Machinery 22 000

23 867 12 000 35 867 9 000 12 500 500 22 000

Gain on Disposal – Machinery 30 Jun 25 Profit and Loss

867 30 Sep 24 Disposal – Machinery

867

Depreciation – Machinery

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30 Jun 22 30 Jun 23 30 Jun 24 30 Sep 24 31 Dec 24 30 Jun 25

Accum Depr'n – Machinery Accum Depr'n – Machinery Accum Depr'n – Machinery Accum Depr'n – Machinery Accum Depr'n – Machinery Accum Depr'n – Machinery

7 625 13 106 9 569 1 067 1 500 13 125 15 692

30 Jun 22 30 Jun 23 30 Jun 24 30 Jun 25

Profit and Loss Profit and Loss Profit and Loss Profit and Loss

7 625 13 106 9 569 15 692

15 692

Loss on Disposal – Machinery 31 Dec 24 Disposal – Machinery

500 30 Jun 25 Profit and Loss

FIGURE 13.38  Extract general ledger for John Hair

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500

CHAPTER 13

Extract Income Statement of John Hair

for the year ended 30 June 2025 add Other Revenue   Gain on Disposal – Machinery less Expenses General and Administrative   Depreciation – Machinery 15 692   Loss on Disposal – Machinery 500

867

16 192

Extract Balance Sheet of John Hair

as at 30 June 2025 Non-current Assets  Machinery 50 000 13 125   less Accumulated Depreciation

36 875

FIGURE 13.39  Extract income statement and balance sheet for John Hair

QUESTION 13.35 Machinery was purchased on credit by D Bever on 31 March 2021 for $38 500 ($35 000 + $3500 GST) with an expected useful life of five years, using straight line depreciation and no residual value. On 31 December 2022, the machine was sold for $22 000 ($20 000 + $2000 GST) cash. The financial year ends on 30 June. Prepare: a a time line from 1 July 2020 to 30 June 2023 b a worksheet for the full period the machinery was used by D Bever, and c the relevant extract general ledger accounts to 31 December 2021.

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QUESTION 13.36 On 30 November 2021, a motor vehicle was purchased for cash $45 738 ($41 580 + $4158 GST) with an estimated residual value of $5038 ($4580 + $458 GST) and was to be depreciated using the diminishing balance method at 35% p.a. On 1 May 2022, office equipment was purchased on credit for $15 510 ($14 100 + $1410 GST) with an estimated residual value of $220 ($200 + $20 GST) and is to be depreciated using the straight line method at 10% p.a. On 30 April 2024, the motor vehicle purchased on 30 November 2021 was used as a trade-in of $15 400 ($14 000 + $1400 GST) on the purchase of a larger motor vehicle, which had a cost excluding the trade-in allowance of $67 452 ($61 320 + $6132 GST) and a residual value of $14 300 ($13 000 + $1300 GST); it is to be depreciated at 40% p.a. using the diminishing balance method. Prepare: a a time line of events using 30 June as the end of the financial year b the appropriate depreciation worksheets to the year ended 30 June 2025, and c an income statement for the year ended 30 June 2024.

QUESTION 13.37 On 1 February 2022, the business purchased on credit and had installed machine 1 for $19 371 ($17 610 + $1761 GST) with a residual value $990 ($900 + $90 GST). The diminishing balance depreciation method is applied at a rate of 30% p.a. On 1 March 2022, machine 2 was purchased on credit for $22 253 ($20 230 + $2023 GST). It was installed and commissioned on 31 March 2022 at an additional cost of $14 157 ($12 870 + $1287 GST); the estimated residual value is $2200 ($2000 + $200 GST). Depreciation is 35% p.a. using the diminishing balance method. On 31 July 2022, machine 3 was purchased for $38 258 ($34 780 + $3478 GST). Installation cost $15 279 ($13 890 + $1389 GST) and was completed 1 September 2022. Depreciation is to be the diminishing balance method at a rate of 30% p.a. Created from tafenswlib on 2020-05-30 08:15:17.

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ACCOUNTING FOR NON-CURRENT ASSETS

On 31 October 2023, machine 1 was used as a trade-in of $9350 ($8500 + $850 GST) on machine 4, at a cost before trade-in and including installation and commissioning of $45 408 ($41 280 + $4128 GST). Depreciation is to be straight line at 20% p.a. and the residual value is $3850 ($3500 + $350 GST). On 1 April 2024 machine 2 was sold for cash $16 500 ($15 000 + $1500 GST). Prepare: a a time line to 30 June 2024 b the appropriate depreciation worksheets to 30 June 2025 c a depreciation balance day adjustment journal for the year ended 30 June 2024, and closing journals.

QUESTION 13.38 The business of Bernadette Williams purchased and sold a number of non-current assets. On 1 December 2021, the business purchased for cash a truck (motor vehicle) for $55 660 ($50 600 + $5060 GST) with a residual value of $5500 ($5000 + $500 GST), which is depreciated using the diminishing balance method at 35% p.a. On 31 March 2022, a computer system was finally installed and commissioned at a cost of $41 294 ($37 540 + $3754 GST). It is to be written off over three years using the straight line method of depreciation. A residual value of $1100 ($1000 + $100 GST) is estimated. On 31 August 2022, fixtures and fittings costing $13 167 ($11 970 + $1197 GST) were installed. Straight line depreciation method at 12.5% p.a. is to apply, with a nil residual value. On 1 October 2022, a truck with hydraulic loading/unloading facilities was purchased on credit at a cost of $84 788 ($77 080 + $7708 GST) and a residual value of $7700 ($7000 + $700 GST). The diminishing balance depreciation method at 35% p.a. is to be used. On 31 January 2023, the truck purchased in December 2021 was sold for cash of $31 350 ($28 500 + $2850 GST). You are required to prepare: a a time line of the events from 1 July 2021 to 30 June 2023 b depreciation worksheets to 30 June 2025 c the general ledger disposal account covering the events above d an extract balance sheet as at 30 June 2025.

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QUESTION 13.39 On 31 March 2022, L Cowal purchased a new computerised machine costing, before trade-in, $27 500 ($25 000 + $2500 GST). The old machine had cost $18 000 and the accumulated depreciation was $7800 to 30 June 2021; depreciation 1 July 2021 to 31 March 2022 was calculated as $2700. The trade-in was $9075 ($8250 + $825 GST). A remittance was made on 15 April to P V Machinery. The new machine is to be depreciated using the straight line method (the same method as the traded-in machine). It is expected to last five years and has a nil residual value. Prepare: a depreciation worksheets for the machines to 30 June 2023 b disposal and purchase of machinery in the general journal format to 15 April 2022 c an extract income statement and balance sheet for 30 June 2022.

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QUESTION 13.40 J Ingenuity purchased two machines for cash on 2 January 2021. Machine 1 cost $8800 ($8000 + $800 GST) and is depreciated at 25% p.a. diminishing balance. Machine 2 cost $11 000 ($10 000 + $1000 GST) and is depreciated at 10% straight line, with nil residual value. J Ingenuity has a 30 June balance date. On 1 September 2022, machine 1 was sold for $6050 ($5500 + $550 GST) cash and machine 3 was purchased for $13 200 ($12 000 + $1200 GST) on credit and depreciated at 35% p.a. diminishing balance. Prepare: a a time line from 2 January 2021 to 30 June 2023 b depreciation worksheets to 30 June 2023 c extract general ledger asset accounts, depreciation expense, disposal and gain or loss on disposal accounts to 30 June 2023, and d an extract income statement and balance sheet for 30 June 2023.

QUESTION 13.41

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M Tomah purchased two machines on 1 January 2022; they were both installed and commissioned on 1 February 2022. Machine 1 cost $48 700.30 ($44 273.00 + $4427.30 GST), has a residual value of $2940.30 ($2673 + $267.30) and is to be depreciated at 15% p.a. straight line. Machine 2 cost $66 871.20 ($60 792.00 + $6079.20 GST), has a scrap value of $2521.20 ($2292.00 + $229.20 GST) and is to be depreciated at 25% p.a. diminishing balance. On 1 April 2023, machine 1 was sold for $29 700 ($27 000 + $2700 GST). On 1 April 2023, machine 3 was purchased, installed and commissioned at a cost of $46 772 ($42 520 + $4252 GST). It has a residual value of $1672 ($1520 + $152 GST) and is to be depreciated at 30% p.a. diminishing balance. You are required to prepare: a a time line from 1 January 2022 to 30 June 2023 b depreciation worksheets for each machine to 30 June 2024, and c an extract income statement and balance sheet for 30 June 2023.

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587

ACCOUNTING FOR NON-CURRENT ASSETS

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

TIME LINE REMINDER You are reminded that the time line is a tool to assist you in obtaining the correct answer to depreciation questions. It is not meant to be a work of art; it is your rough working, A time line solution will be given as part of the total solution for the following questions, but there will be no requirement given in the question. The depreciation worksheet is also a tool to help in depreciation calculations and the values are actually recorded in the relevant columns of the asset register.

QUESTION 13.42 On 15 September 2021, Bendigo Fabricating purchased for cash from Battenfeld Importers a BF767 Multi-Ripple metal folding machine for $30 800 ($28 000 + $2800 GST). Delivery and installation costs were included in the price. The new machine was commissioned on 1 October 2021. It is depreciated at 15% straight line, as past experience indicated that it should be operational for seven and a half years. The residual value was nil, as the amount was immaterial. An upgraded larger feeding and extraction mechanism, BFM3.5, was obtained from Battenfeld Importers for $8800 ($8000 + $800 GST) to enhance the capability of the BF767. It was delivered and installed as part of BF767. Depreciation is to remain at the same rate. Payment was made on the commissioning date of 1 February 2023. On 31 May 2025 the entire equipment was traded in for $16 500 ($15 000 + $1500 GST) on a new digitised hydraulic multitasked folding machine from Battenfeld Importers. Prepare an asset register record for the life of the machine (assume appropriate account and serial numbers).

QUESTION 13.43 On 30 April 2022, E Shelley purchased a new Ford Falcon sedan registration KKW 443 from Steven Motors for $49 500 ($45 000 + $4500 GST). Funds were transferred electronically. The estimated life is four years with an estimated residual value of $8800 ($8000 + $800 GST). Depreciation is 22% p.a. diminishing balance method. On 1 August 2026 the car was traded in for $19 800 ($18 000 +$1800 GST) on a new motor vehicle purchased on credit. Prepare: a a depreciation worksheet for the period that the car is owned b extract general journals for 30 June 2026 and 1 August 2026 c an asset register record for the motor vehicle from its purchase to disposal (assume appropriate account and serial

Copyright © 2018. Cengage. All rights reserved.

numbers).

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QUESTION 13.44 B Marcovich pays cash for three vehicles on 2 January 2023 for $38 500 ($35 000 + $3500 GST) each. Motor vehicle 1 will be replaced after five years and has an estimated residual of $2200 ($2000 + $200 GST); straight line depreciation is to be used. Motor vehicle 2 is not expected to have any worthwhile scrap value and is to be depreciated at 40% p.a. using the diminishing balance method. Motor vehicle 3 is expected to have a residual value of $2200 ($2000 + $200 GST) and is to be depreciated at 30% p.a. using the diminishing balance method. Motor vehicle 2 is sold to Barry’s Motors for $16 500 ($15 000 + $1500 GST) on 30 September 2024 as a trade-in on motor vehicle 4. Motor vehicle 4 is purchased from Barry’s Motors for $46 200 ($42 000 + $4200 GST) (before trade-in) on 30 September 2024. It is to be depreciated at 20% p.a. using the straight line method and has an estimated residual value of $2200 ($2000 + $200 GST). Payment to Barry’s Motors is made on 31 October 2024. Prepare: a depreciation worksheets for each asset to 30 June 2025 b general journals for the balance day adjustments, disposal, purchase and closing entries for the period 1 July 2024 to 30 June 2025 c extract general ledger accounts including accounts payable and disposal accounts to 30 June 2025 d an extract income statement and balance sheet for 30 June 2025.

QUESTION 13.45 Equipment is to be depreciated using the units of use method with a preset unit total of 11 000. The equipment was in production from: 1 December 2021 to 30 November 2022, producing 2500 units 1 December 2022 to 30 November 2023, producing 4000 units 1 December 2023 to 30 November 2024, producing 4500 units. The accounting period is from 1 July to 30 June. Units were produced at a constant level throughout the year. Prepare a time line from 1 July 2021 to 30 June 2025 showing the units to be produced each accounting year to 30 June. A suggested format is included in the Workbook.

QUESTION 13.46 R Gilmour & Associates purchased and installed on credit a computer system that was commissioned on 1 April 2021 for $66 000 ($60 000 + $6000 GST). It is expected that the computer system has a useful life of four years and residual value of $6600 ($6000+ $600 GST). Gilmour uses the straight line depreciation method and the business closes its accounts on 30 June. After a time, the system proved inadequate and was sold for $16 500 ($15 000 + $1500 GST) cash on 1 October 2023. A new system, purchased on credit, was installed and operational on 1 October 2023. It cost $82 500 ($75 000 + $7500

Copyright © 2018. Cengage. All rights reserved.

GST), is to be depreciated at 33.33% p.a. using the straight line method and there is an estimated residual value of $3300 ($3000 + $300). Prepare: a depreciation worksheets from commencement until disposal occurs or the asset is fully depreciated b relevant general ledger accounts associated with the assets, depreciation and their disposal, including the result of that disposal to 30 June 2024 c an extract income statement for the year ended 30 June 2024, and d extract balance sheets as at 30 June 2023 and 2024.

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QUESTION 13.47 Kevin Hair purchased sophisticated machinery on credit costing $192 500 ($175 000 + $17 500 GST). It has a residual value of $5500 ($5000 + $500 GST) and was commissioned on 1 March 2021. The depreciation method is based on 50 000 units, using the units of use method. The annual usage from the commission date is expected to be: from 1 March 2021, 15 000 units from 1 March 2022, 25 000 units from 1 March 2023, 10 000 units. Each year’s units are produced evenly throughout the months. Prepare: a workings indicating the units used for the years ended 30 June 2021 to 2024 b a depreciation worksheet for the units of use depreciation method from 1 March 2021 to 30 June 2024 c the machinery and accumulated depreciation – machinery general ledger accounts to 30 June 2024, and d an extract balance sheet as at 30 June 2024.

QUESTION 13.48 A Kenworth truck is purchased on credit by Samuel Keith for $522 500 ($475 000 + $47 500 GST) on 1 May 2021. It is to be used for interstate long-distance haulage and is to be depreciated over 500 000 kilometres, after which it will be disposed of for an expected $82 500 ($75 000 + 7500 GST). Expected kilometres are: from 1 May 2021 to 30 April 2022, 240 000 km from 1 May 2022 to 30 April 2023, 220 000 km from 1 May 2023 to 30 June 2023, 40 000 km. Each year’s kilometres are spread evenly throughout the months. Prepare: a workings indicating the kilometres travelled for the years ended 30 June 2021, 2022 and 2023 b a depreciation worksheet for the units of use depreciation method to 30 June 2023 c the balance day adjustment journal for depreciation for 30 June 2021 d the motor vehicle and accumulated depreciation – motor vehicle general ledger accounts to 30 June 2023 e an extract income statement for the year ended 30 June 2022, and f

an extract balance sheet as at 30 June 2023.

QUESTION 13.49 Henry M Thomas purchased machinery on credit with a total installed cost of $302 500 ($275 000 + $27 500 GST). It has an estimated residual value of $5500 ($5000 + $500 GST) and was commissioned on 1 March 2022. The units of use depreciation method is used, based on a total usage of 50 000 units. The annual usage is expected to be from the year commencing: 1 March 2022, 9000 units Copyright © 2018. Cengage. All rights reserved.

1 March 2023, 14 000 units 1 March 2024, 17 000 units 1 March 2025, 10 000 units. Prepare: a workings indicating the unit usage for the years ended 30 June 2022 to 2026, assuming constant usage within each year b a depreciation worksheet for the units of use depreciation method to 30 June 2026 c the balance day depreciation adjustment journal for 30 June 2023 d an extract income statement for the year ended 30 June 2024, and e an extract balance sheet as at 30 June 2025.

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14 Payroll preparation and accounting entries

Copyright © 2018. Cengage. All rights reserved.

Introduction Many businesses employ staff and must pay for their work or labour services. For many employers, the wages, salaries and other costs associated with engaging employees are a major expense. When a business employs people it must comply with a range of Commonwealth and state workplace, taxation and other employmentrelated laws. Businesses must develop systems that ensure accurate record keeping, reporting and compliance with all regulations and legal obligations. Employee-related expenses must be paid on time and correctly. This chapter introduces the legislation and regulations associated with employment and payroll documentation. We will also learn how to construct periodic payroll records, calculate payroll and associated obligations, respond to enquiries and process payroll in manual and computerised accounting systems. In this chapter, PAYG withholding tax calculations are based on the 2017–18 weekly tax tables in figures 14.31 to 14.34: the most recently available at the time of publication. However, income tax rates and the Medicare levy may change from year to year. The Australian Taxation Office (ATO) website should be used for current weekly, fortnightly or monthly rates.1 Other rates, such as the superannuation guarantee levy contribution, may also change over time. Created from tafenswlib on 2020-05-30 08:09:50.

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Main payroll functions and processes Figure 14.1 demonstrates the functions and processes of payroll. In this chapter we will examine each step. Function 1

Employ staff

2

Record time worked (during pay period)

3

Prepare payroll (end of pay period)

4

Pay salaries, wages and other employee benefits (end of pay period) Accounting entries to record salaries, wages, other benefits and deductions (end of pay period)

5

6

Remit PAYG withholding, other deductions and other employer obligations (at required time)

7

End-of-year procedures

Documents to Prepare and Recording Process • Application for employment • Approval to employ • Tax file number declaration form • Employee personal history record • Time record (time sheet or cards – one per employee) • Employee earning history card updated (one per employee) • Payroll register for pay period (gross pay, deductions, net pay – entry per employee) • Pay slip advice (one per employee) • Journal entries (cash payments and/or general) record salaries, wages, other benefits, deductions, provisions for leave, other employee-related liabilities and remittance of these • General ledger postings • Business or Instalment Activity Statement (in total for business) and other payments for wage-related liabilities and deductions; e.g. superannuation (employer and employee), workcover insurance, payroll tax, etc. • Remittance advice • Payment summary to each employee (by 14 July) • Annual report to ATO

FIGURE 14.1  Procedures for payroll process

Employment conditions Fair Work Act and National Employment Standards

Copyright © 2018. Cengage. All rights reserved.

In Australia, employment conditions are currently legislated through the Fair Work Act 2009 (Cwlth) (the Act), various Fair Work Amendment Acts, the Fair Work Regulations 2009 and related legislation and regulations. The Act provides a safety net of minimum terms and conditions of full-time and parttime employment through the National Employment Standards (NES). The NES has 10 minimum standards of employment covering the following areas.  1 Maximum weekly hours of work – 38 hours per week, plus reasonable additional hours   2 Requests for flexible working arrangements – certain employees can ask to change their working arrangement   3 Parental leave and related entitlements – up to 12 months’ unpaid leave and the right to ask for an extra 12 months’ unpaid leave. Also includes adoption related leave  4 Annual leave – four weeks’ paid leave per year, plus an additional week for some shift workers   5 Personal/carer’s leave and compassionate leave – 10 days’ paid personal/carer’s leave, two days’ unpaid carer’s leave as required, and two days’ compassionate leave (bereavement leave) as required   6 Community service leave – unpaid leave for voluntary emergency activities and leave for jury service, with an entitlement to be paid for up to 10 days of jury service   7 Long service leave – paid leave for employees who have been with the same employer for a long time

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

Main payroll functions and processes Figure 14.1 demonstrates the functions and processes of payroll. In this chapter we will examine each step. Function 1

Employ staff

2

Record time worked (during pay period)

3

Prepare payroll (end of pay period)

4

Pay salaries, wages and other employee benefits (end of pay period) Accounting entries to record salaries, wages, other benefits and deductions (end of pay period)

5

6

Remit PAYG withholding, other deductions and other employer obligations (at required time)

7

End-of-year procedures

Documents to Prepare and Recording Process • Application for employment • Approval to employ • Tax file number declaration form • Employee personal history record • Time record (time sheet or cards – one per employee) • Employee earning history card updated (one per employee) • Payroll register for pay period (gross pay, deductions, net pay – entry per employee) • Pay slip advice (one per employee) • Journal entries (cash payments and/or general) record salaries, wages, other benefits, deductions, provisions for leave, other employee-related liabilities and remittance of these • General ledger postings • Business or Instalment Activity Statement (in total for business) and other payments for wage-related liabilities and deductions; e.g. superannuation (employer and employee), workcover insurance, payroll tax, etc. • Remittance advice • Payment summary to each employee (by 14 July) • Annual report to ATO

FIGURE 14.1  Procedures for payroll process

Employment conditions Fair Work Act and National Employment Standards

Copyright © 2018. Cengage. All rights reserved.

In Australia, employment conditions are currently legislated through the Fair Work Act 2009 (Cwlth) (the Act), various Fair Work Amendment Acts, the Fair Work Regulations 2009 and related legislation and regulations. The Act provides a safety net of minimum terms and conditions of full-time and parttime employment through the National Employment Standards (NES). The NES has 10 minimum standards of employment covering the following areas.  1 Maximum weekly hours of work – 38 hours per week, plus reasonable additional hours   2 Requests for flexible working arrangements – certain employees can ask to change their working arrangement   3 Parental leave and related entitlements – up to 12 months’ unpaid leave and the right to ask for an extra 12 months’ unpaid leave. Also includes adoption related leave  4 Annual leave – four weeks’ paid leave per year, plus an additional week for some shift workers   5 Personal/carer’s leave and compassionate leave – 10 days’ paid personal/carer’s leave, two days’ unpaid carer’s leave as required, and two days’ compassionate leave (bereavement leave) as required   6 Community service leave – unpaid leave for voluntary emergency activities and leave for jury service, with an entitlement to be paid for up to 10 days of jury service   7 Long service leave – paid leave for employees who have been with the same employer for a long time

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  8 Public holidays – a paid day off on a public holiday (unpaid for casuals), except where reasonably requested to work   9 Notice of termination and redundancy pay – up to five weeks’ notice of termination and up to 16 weeks’ redundancy pay, both based on length of service 10 Provision of a Fair Work Information Statement – must be provided by employers to all new employees Casual workers are also entitled to some of the above terms and conditions.2 The Act also requires employers to comply with modern awards (generally industry or occupation-based) and unfair and unlawful dismissal laws.

Industry or occupation awards Certain employees may also be covered by modern industry or occupation awards. These provide additional enforceable minimum terms and conditions of employment, including minimum wages, types of employment (full-time, part-time, shift-work or casual), overtime and penalty rates, rosters, hours of work, rest breaks, allowances, leave, leave loading and superannuation, as well as procedures for consultation, representation and dispute settlement. The awards may also contain industry-specific redundancy entitlements.

Enterprise agreements and other registered agreements

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Some employment situations may involve an enterprise bargaining process where an employer, employees or a representative (such as a union or other bargaining representative) negotiate an agreement for employee work practices and conditions. Once registered by the Fair Work Commission, an enterprise agreement is enforceable. There are specific rules relating to the enterprise bargaining process. These rules are about negotiation, voting, matters that can and cannot be included in an enterprise agreement, and how the agreement can be registered by the Fair Work Commission. Employers and employees have the right to be represented by a bargaining representative and must bargain in good faith when negotiating an enterprise agreement. There are also strict rules for taking industrial action. An enterprise agreement includes specific conditions for one business or a group of businesses, whereas modern awards are a safety net of minimum conditions for a whole industry or type of job. When a workplace has a registered agreement, the modern award does not apply. However, the pay rate in the enterprise agreement cannot be less than the pay rate in the modern award.

Fair Work Commission and Fair Work Ombudsman The Fair Work Commission (previously called Fair Work Australia) is the independent national workplace relations tribunal established under the Fair Work Amendment Act 2012 (Cwlth). It is responsible for maintaining a safety net of minimum wages and employment conditions, enterprise bargaining, industrial action, dispute resolution, termination of employment and other workplace matters.3 The Fair Work Ombudsman is an independent statutory authority that is separate from, but works closely with, the Fair Work Commission.4 Its role is to enforce compliance with the Fair Work Act, related legislation, awards and registered agreements. It also helps employers and employees by providing advice and education on pay rates and workplace conditions.

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Privacy legislation, standards and best practice When a business employs staff it must collect and retain personal information about employees. Commonwealth privacy laws regulate the collection, handling, use and storage of personal information through minimum privacy standards, known as the Australian Privacy Principles (APPs). These standards are applicable to a wide range of agencies and businesses. Although some small businesses are not required by law to comply with the APPs, any business that employs staff or contractors must comply with Privacy (Tax File Number) Rule 2015 (TFN Rule) issued under s. 17 of the Privacy Act 1988 (Cwlth) (Privacy Act). As businesses should obtain tax file numbers (TFNs) from employees, this rule regulates the collection, storage, use, disclosure, security and disposal of individuals’ TFN information. Some states also have privacy-related laws. Although some small businesses may not be governed by all aspects of Commonwealth or state privacy legislation, it is recommended that they comply with the privacy principles as a matter of best practice. Processes, procedures and controls should be established to ensure that employee records are kept securely and only accessed by authorised personnel. You may wish to check out the good practice guides produced by the Office of the Australian Information Commissioner for dealing with the personal information of employees.5

QUESTION 14.1 Use the websites of the Fair Work Commission and Fair Work Ombudsman to develop your understanding of how to locate and identify employment-related issues. List some of the main features of the following: a Fair Work Act 2009 and Fair Work Regulations 2009, and note any recent changes b Fair Work Commission and Fair Work Ombudsman c awards (modern and pre-modern) d enterprise agreements e National Employment Standards.

Copyright © 2018. Cengage. All rights reserved.

Employee benefits and payroll Before preparing payroll, you should be aware of the conditions of employment for each employee. Are they covered by an award or enterprise agreement? What is their pay rate, and what benefits are they entitled to? Is the business compliant with the NES? Does it keep the required records and provide employees pay slips? The term payroll is used to describe the records and processes related to payment of wages, salaries and other entitlements of employees. It is a listing of the people employed by the business, as well as details of amounts earned and deductions from those earnings over a specified period of time for work or labour services carried out by each employee. The goods and services tax (GST) is not applicable to salaries, wages and other employee benefit expenses.

Salaries and wages The payment for work done is an expense that is allocated to accounts called salaries, wages, or salaries and wages expense. The distinction between salaries and wages is not usually of significance: both are expenses in running the business in return for services given to the employer (or owner) by the employees (the people working for the business). The term wages often refers to remuneration paid to an employee for work based on an hourly rate. The wage will vary depending on the hourly rate applied, and the number of hours worked. The term salary refers to remuneration paid on a weekly, fortnightly or monthly basis but is based on a fixed annual salary.

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Other employee benefits PERFORMANCE-BASED REMUNERATION Salaries and wages are generally based on labour or work time. Other forms of remuneration may be paid to employees based on performance. • Piecework is a form of employment where workers are paid a fixed (or piece) rate for each unit produced or each task they finish. Telemarketers may be paid based on the number of calls they make, fruit pickers for each bucket of fruit they pick and clothing makers by each piece of clothing they complete. • A commission is paid when an employee receives a percentage or fee based on how much they sell. A commission may make up the employee’s entire salary or may be a performance incentive in addition to a base wage. Salespeople working for car and real estate agencies are commonly paid this way. • A bonus is a sum of money or items of value given to an employee in addition to their normal salary or wage. It is usually given as a reward for achieving targets. • Overtime or penalty rates are higher rates of pay that are used to calculate an employee’s entitlement for hours worked above the normal weekly hours.

ALLOWANCES In some employment situations, the employer may also pay the employee an allowance for certain expenses that they incur in the performance of their duties. These may include: • meal allowance, if the employee is required to work overtime or is working away from home • car allowance, for use of the employee’s private motor vehicle • travel allowance, to cover expenses such as public transport and accommodation when travel is necessary.

LEAVE Under the Fair Work Commission, the NES, employee awards and employment contracts, employees are generally entitled to leave benefits. Examples of paid leave include public holidays, annual (or recreation) leave, sick and carer’s leave, jury service leave, parental and (sometimes) paternal leave, and long service (or extended) leave. Various types of unpaid leave are also available. In some awards and agreements, employees are also entitled to a leave loading for up to four weeks of annual leave. This is commonly an additional 17.5% of ordinary gross pay for the entitled leave period.

Copyright © 2018. Cengage. All rights reserved.

Variations to payroll Employees may be entitled to additional payments, in addition to remuneration for actual work completed. Entitlements will depend upon the award or agreements under which the worker is employed, as well as their employment status (full-time, part-time or casual). These obligations generally mean that the amount paid to an employee may change from pay period to pay period. Variations to payroll occur when employees are paid bonuses, commissions or allowances, work overtime or take paid or unpaid leave. The NES include a maximum standard working week of 38 hours. Hours worked over the maximum in an employee’s award or standard is called overtime. These hours are generally paid at a higher rate per hour, called an overtime or penalty rate. Alternatively, some employment situations allow flexible working conditions, where an employee may work more than the normal hours one week and be entitled to work less in another week. This type of leave may be called time in lieu or flex leave.

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When a person’s employment with a business is terminated, the employee may also be entitled to redundancy payments.

Payroll documentation As well as compliance with the award or agreement for a particular occupation, an employer is required by various laws to maintain specific records and information for each employee. For example, under the Australian taxation legislation, some employment-related documentation must be retained for five years. The Fair Work Act 2009 and Fair Work Regulations 2009 specify the information that must be kept by an employer for each employee; and that time and wages records must also be retained for seven years. Under the Fair Work Act and recent amendments, employers may be fined up to $63 000 if they fail to meet their record-keeping and pay slip obligations, or fail to pay employees correctly. As employee information is confidential, a business must ensure that payroll records are kept securely and their access is restricted to the employer, employee, payroll staff and Fair Work Inspectors.

Copyright © 2018. Cengage. All rights reserved.

TAX FILE NUMBER DECLARATION FORM When a person commences employment with a business, a tax file number declaration form (NAT 3092) should be completed and lodged with the ATO. Paper copies of the form are available from the ATO. A printable pdf copy of the form can also be downloaded from the ATO’s website, and can be completed on screen or by hand.6 Part A of the form is to be filled in by the employee (payee) and includes details such as the employee’s TFN, Australian residency status for tax purposes and any claim to the tax-free threshold, any Higher Education Loan Program (HELP) debt or any other special tax offsets. This form provides the employer with information needed to calculate any amounts that should be withheld from the employee’s salary or wage. The employer must complete Part B of the form, lodge (either a paper copy or electronically) with the ATO within 14 days, and retain a copy in a safe, secure place. If the employee has given the employer their form, but not included a TFN, they must provide it within 28 days. Otherwise, the employer must withhold tax on the employee’s wages on salary at the top individual tax rate plus Medicare levy. At the time of reviewing this book the rate for the 2017–18 tax year was 45% plus 2% Medicare levy: a total of 47%. However, these rates will change, with any changes to the top tax rate and the Medicare levy. It is expected that the Medicare levy will increase to 2.5% from 1 July 2018. The requirements related to TFN and tax file number declaration forms, including the employer’s responsibilities for storage and disposal of this information, are available on the ATO’s website and in the instructions on the tax file number declaration form. The tax file number declaration form should also be used in other circumstances, including when payments are made to company directors or office holders, under labour hire arrangements, and when benefit and compensation payments or superannuation benefits are made to a person. Remember, there are provisions in privacy and taxation laws related to how employers obtain, use and manage TFN data, and to whom they can provide an employee’s TFN.

EMPLOYEE PERSONAL HISTORY RECORD The details for each employee are usually kept on a personnel or employee record card or computerised record. There are numerous record card designs but they all must include the employee’s: • name and address • employment commencement date • job classification and basis of employment (full-time, part-time or casual) • hours of work • rate of pay, or remuneration per hour, week, month or year

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• tax file number declaration details as well as withholding declaration particulars, if applicable • details of annual leave and leave loading, sick and carer’s and long service leave entitlements • superannuation contributions (both employer and employee contributions) including amount, dates of contribution, period over which contribution is made and the name of the fund to which a contribution was made. This includes both employer contributions under the Superannuation Guarantee (Administration) Act 1992 (Cwlth) and voluntary employee contributions.

TIME RECORDS Businesses must maintain records of actual time worked by employees. Staff may clock or log in and out using electronic tags. Alternatively, start and finish times may be imprinted by a time clock on a time card or clock card. Manual or computerised time sheets and time books are used in some businesses. Others may use an attendance book, in which the employees sign in and out. It is ultimately up to the business to decide which method for collecting times for the payroll is appropriate. These are a means of reconciling the time worked with the payroll records.

PAYROLL REGISTER A payroll register may also be referred to as a payroll sheet or a payroll system. It provides each employee’s pay details for a particular payroll period. The register should include gross and net pay as well as how these amounts were calculated.

EMPLOYEE PAY SLIP A pay slip, either a hardcopy or in electronic form, must be given to each employee on the payroll within one working day of pay day. The pay slip must include the employer’s name, Australian Business Number (ABN), employee’s name, date of payment, pay period (beginning and end dates), gross and net amount of payment, any loadings, monetary allowances, bonuses, incentive-based payments and penalty rates. If the employee is paid an hourly pay rate, the pay slip must show the ordinary hourly rate of pay and the number of hours worked. If the employee is paid a salary, the pay slip must show the rate applicable on the last day of the pay period. Deductions and details of any superannuation that the employer is required to make for the benefit of the employee must also be provided on the pay slip. All details should be the same as those shown on the payroll register and employee card.

Copyright © 2018. Cengage. All rights reserved.

PAYMENT SUMMARY At the end of each year a business must prepare a payment summary for each of its workers and other payees where withholding tax is required. The document must show what that employee was paid in total (gross wages or salary) and the total tax withheld; it must also provide other information, including the amount of allowances and fringe benefits provided to each employee. The business must provide at least one copy of the payment summary to each worker or payee by 14 July each year. If an employee leaves during the year a payment summary must also be provided to them. The original copy of each payment summary must be lodged with the ATO, along with an annual PAYG payment summary statement, which is a listing of all payment summaries issued to payees for the financial year. These forms may be submitted to the ATO in paper format or electronically. From 1 July 2018, Single Touch Payroll reporting became mandatory for all employers with over 20 employees. It is expected to be mandatory for employers with fewer than 20 employees from 1 July 2019. Payments, such as salaries and wages, PAYG withholding and superannuation, must now be electronically reported to the ATO through the business’s payroll software at the time employees are paid. This means that payment summaries are no longer prepared, as the details have already been submitted to the ATO and will be available to the employee on the ATO’s online service, through their personal myGov login.

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Payroll preparation Preparation of payroll can be very complex, as many factors influence the regular payroll calculations. For each employee it depends upon their employment award or agreement, the length of time worked, their pay rates, withholding taxes and other deductions. What the business shows as an expense for salaries or wages is not the same as the amount remitted to employees. The difference is due to deductions from the salaries or wages before the employees receive their pay. Pay-as-you-go (PAYG) withholding tax is a compulsory deduction that employers must regularly remit to the ATO. Employees may also request other deductions be made from their pay. Consider an employee whose weekly gross wage is $1000. In round dollar terms: Employee earns a gross wage less PAYG withholding Receives as net pay Employee costs employer wages of plus On-costs for employer superannuation contribution, payroll tax, workers’ compensation insurance Total cost to the employer is at least

1 000 300 $   700 1 000 200 $  1 200

The employee earns $1000 but receives $700; and it costs the employer $1200. In addition to the wages and salaries, the business incurs other employment-related costs, commonly called on-costs. These include the employer superannuation guarantee contribution (a minimum of 9.5% of normal gross wage from 1 July 2014 with no proposed increases until 2021), payroll tax and workers’ compensation insurance. On-costs will be discussed in more detail later in this chapter.

Calculating the payroll TIME OR PAY PERIODS Most awards, enterprise agreements or registered agreements will set out how regularly employees must be paid (weekly, fortnightly or monthly). If it doesn’t, employees must be paid at least monthly.

METHOD OF PAYMENT

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The method of payment of the net pay is either set out in the award or is determined by agreement and could be one of the following: • direct deposit into the employee’s nominated bank account • cheque • cash.

TIME WORKED The various methods of recording and reporting the time worked were discussed earlier in this chapter. These are used to calculate the gross pay for the hours worked and correlate to the payroll time periods. Any time taken as sick and carer’s leave, annual leave or long service leave must be accounted for. A leave application form should be completed by the employee. Sick and carer’s leave is generally accounted for after the event. Other forms of leave should be requested in advance. An appropriately authorised person must approve any leave request. Forms are not elaborate and vary between businesses.

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RATE OF PAY This is arrived at by agreement between the employer (the business) and the employee (the person employed to work). However, the rate must be equal to or greater than the minimum rate set down in the appropriate award or agreement. The rates of pay differ for each employee as the rate is generally dependent upon an employee’s age, experience and qualifications. It may also vary depending on the employment status (full-time, part-time, casual or shift work) as well as the time of the week the employee has worked. For example, working at certain times of the day or night, weekend or public holidays may incur different penalty rates. Rates of pay are generally expressed as an hourly and/or weekly amount for wage earners, and annual amounts for salaried employees. Payment of wages may be weekly, fortnightly or monthly.

OVERTIME Overtime is where the employee is required to work extra time beyond the ordinary hours normally worked. The hours beyond ordinary hours may be paid at a higher rate, depending on the employee’s award or agreement. Often it is paid at time and a half (1 12 ) or double time (2); that is, paid at one and a half times the normal hourly rate or double the normal hourly rate of pay. The actual hours worked times 1 12 or 2 are referred to as the equivalent ordinary hours. For example, if six hours of overtime is worked in one day, then overtime is paid for three hours @ 1 12 (time and a half) and three hours @ 2 (double time). The hours would be: 3 hours @1 12

= 4 12 hours

3 hours @ 2 = 6 hours Therefore, 6 hours overtime = 10 12 hours at the equivalent ordinary or normal hourly rate.

QUESTION 14.2

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A normal week is 38 hours and all hours in excess of that are paid at time and a half. What are the equivalent and total equivalent hours per week per employee (figure 14.2)? The first employee’s details have been completed. Employee

Hours Worked

Ordinary Hours

112

Equivalent Hours

Total Hours

A Hotel C Clarence C River R Country I Holmes

42 46 45 43 47

38

4

6

44

FIGURE 14.2  Equivalent and total hours, for question 14.2

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

QUESTION 14.3 If 38 hours per week are the normal hours, what is the total hours paid for each of the following? a b c d e f

Normal + 1 hour overtime @ 1

1

² 1 Normal + 5 hours overtime @ 1 ² 1 1 Normal + 4 hours overtime @ 1 ² ² 1 Normal + 3 hours overtime @ 1 + 3 hours overtime @ 2 ² 1 Normal + 4 hours overtime @ 1 + 3 hours overtime @ 2 ² 1 1 Normal + 3 hours overtime @ 1 + 2 hours overtime @ 2 ² ²

Gross pay calculations Gross pay (or gross earnings) is the amount the employee earns before pay-as-you-go (PAYG) withholding tax and any other deductions are subtracted. It includes ordinary pay for the normal hours worked, overtime pay, allowances, commissions and bonuses. Employees are entitled to be paid for certain types of leave such as sick and carer’s leave, annual leave or long service leave and in some cases not being at work when it is a public holiday. If they take leave in excess of their entitlement then they will not usually be paid for the time away from their employment. An example of a payroll register, showing ordinary hours, annual leave plus 17.5% leave loading, sick and carer’s leave and long service leave taken as well as overtime worked and the resulting total gross for each employee, is provided in figure 14.3. Payroll Register for week ended 10 June 2022

Employee U Wilma D Murray A Small C Maxwell G Victoria D Alden P Saunders

Hourly Rate 23.20 17.50 25.50 21.00 18.50 19.50 20.50

Ordinary Hours Norm

AL

LL

38 30

SL

LSL

 8 38

38  6 14 38

32

5.6 24

Total Hours

Total Ordinary

38.0 38.0 38.0 38.0 43.6 38.0 38.0

881.60 665.00 969.00 798.00 806.60 741.00 779.00 5 640.20

Overtime 1 12

2

2 2

4 3

11.0 9.0

255.20 157.50

6

1.5 4.5 16.5

27.75 87.75 338.25 866.45

1 3 3

Total Gross

Equiv Amount

1 136.80 822.50 969.00 798.00 834.35 828.75 1 117.25 6 506.65

FIGURE 14.3  Payroll register showing ordinary, leave and overtime hours giving gross pay

Copyright © 2018. Cengage. All rights reserved.

QUESTION 14.4 Complete the payroll register of T Rocks showing the total gross for the week ended 19 February 2022. Use the information shown in figure 14.4. Payroll Summary of T Rocks for week ended 19 February 2022

Employee B Pandanus Y Seasie V Coldstream C Modat

Hourly Ordinary Rate Hours 20.00 23.50 19.00 21.50

38 38 38 38

FIGURE 14.4  Payroll summary of T Rocks, for question 14.4

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Overtime 1 12

3 2 6 4

2

CHAPTER 14

QUESTION 14.5 Complete the payroll register of L Palmers showing the total gross for the week ended 5 August 2022. Use the information shown in figure 14.5. Payroll Summary of L Palmers for week ended 5 August 2022

Employee

Ordinary

Overtime

Hours

Pay

1 12

38 38 38 38

716.30 893.00 807.50 959.50

3 1 5 4

C O’Keefe U Ditors H Ramsey G Skinner

2 1 5 2

FIGURE 14.5  Payroll summary of L Palmers, for question 14.5

QUESTION 14.6 Complete the payroll register of C Stream for the week ended 16 September 2022 from figure 14.6. All employees ordinarily work 38 hours per week, and have had their hours approved and have sufficient leave accumulated. Leave loading of 17.5% is to be added to any employee’s annual leave. In your answer, calculations are to be correct to two decimal places. Ensure dollar values are totalled and cross-balanced. Payroll Summary of C Stream for the week ended 16 September 2022

Employee

Ordinary Hours Norm

K Baker P Waters G Park C Golding

AL

38.0 30.4 18.0 38.0

LL

Total Ordinary LSL

SL

760.00 864.50 813.40 714.40

7.6 20.0

?

Overtime 1

12

2

3 2 3

2

FIGURE 14.6  Payroll summary of C Stream, for question 14.6

QUESTION 14.7

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Complete the payroll register of B Hunter (figure 14.7). Employees normally work 35 hours per week, have had their hours approved and have sufficient leave accumulated. Add a leave loading of 17.5% to annual leave. Overtime is paid at time and a half. Your calculations must be correct to two decimal places. Ensure dollar values are totalled and cross-balanced. Payroll Summary of B Hunter for the week ended 9 December 2022

Employee M Brown S Darrell B Ciates D Stanley

Hourly Rate 19.10 24.00 21.20 21.20

Ordinary Hours Norm

AL

LL

35 28

SL 7

35

Overtime LSL

1

12

2

3 1

?

35

3

FIGURE 14.7  Payroll summary of B Hunter, for question 14.7

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

Deductions Under the Fair Work Act 2009, an employer may make deductions from an employee’s pay if authorised by a law (PAYG tax including Medicare levy and HELP debt), an order of a court (garnishee), authorised under a modern award, an enterprise agreeement, other industrial agreement or an order of the Fair Work Commission. PAYG withholding tax is the main deduction that must be made from gross pay. Later you will see how to determine the correct PAYG withholding for each employee. Other deductions can only be made by the employer if an employee authorises it in writing. Details of all deductions must be shown on the employee’s pay slip and in the employer’s time and wages records. Examples may include: • employee superannuation contributions • credit union • hospital/medical insurance

• social club

• union fees

• motor vehicle lease payments.

Deductions are generally current liabilities to the employer as they are deducted from gross pay on behalf of the employee. They must be remitted by the employer at an agreed time, such as each month or quarter, to the appropriate person, business or government department. Note: employee contributions to superannuation are generally voluntary and are a deduction from gross pay. In some employment situations, employees may elect to have these superannuation contributions made before PAYG tax (referred to as salary sacrifice) or after PAYG tax is deducted. For simplicity in this chapter, we will assume all employee superannuation contributions are after tax. These employee superannuation contributions should not be confused with the employer superannuation contributions that are additional to gross pay and increase the cost of employing staff. Employer superannuation is discussed later in this chapter.

Net pay Net pay is the amount the employee receives after all deductions have been made from the gross pay. This is sometimes called take-home pay.

Copyright © 2018. Cengage. All rights reserved.

Example 1: Payroll register – Belinda Way From the payroll data shown in figure 14.8, prepare the payroll register of Belinda Way (figure 14.9) for the week ended 7 April 2022. All employees normally work 38 hours a week and have voluntary superannuation deducted as a percentage of their ordinary gross pay. Some employees have private health cover payments deducted from their pay and some also have credit union savings deducted. The net amount is electronically transferred from Belinda Way’s bank account directly to the employee’s bank account. The employer records all deductions and the appropriate payments are made to the ATO and the other organisations on behalf of the employees. Payroll Summary of Belinda Way for the week ended 7 April 2022

Employee M Wilson C Billabong R Moruya L Tyrrell

Hourly Ordinary Rate Hours 26.50 19.50 25.00 18.50

38 38 38 38

Overtime 1

12 2 3 5

2

1 2

PAYG W’hold 185.00 113.00 222.00 153.00

Super %

Medic Hosp

5 5 5 5

FIGURE 14.8  Payroll summary data of Belinda Way for week ended 7 April 2022

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50.00

Credit Union 40.00 50.00

75.00 25.00

CHAPTER 14

As the net pay is deposited directly into the employee’s bank account it is not necessary to ensure that the net pay is legal tender; that is, the last digit of the pay is either a 5 or 0. It is essential that the payroll amounts are totalled and cross-balanced as part of internal control. Payroll Register of Belinda Way for week ended 7 April 2022

Employee Hourly Ordinary Rate Hours Amount $ $ M Wilson C Billabong R Moruya L Tyrrell

26.50 19.50 25.00 18.50

38 38 38 38

1 007.00 741.00 950.00 703.00 3 401.00

Overtime 1 12

2

  2 3 5  

    1 2  

Equiv Amount Hours $   3.0 6.5 11.5  

Total Gross $

Deductions PAYG Super Medic Credit Total W’hold Hosp Union Ded’ns

  1 007.00 58.50 799.50 162.50 1 112.50 212.75 915.75 433.75 3 834.75

Net Pay $

185.00 50.35 50.00 40.00 325.35 681.65 113.00 37.05   50.00 200.05 599.45 222.00 47.50 75.00   344.50 768.00 153.00 35.15   25.00 213.15 702.60 673.00 170.05 125.00 115.00 1 083.05 2 751.70

FIGURE 14.9  Payroll register of Belinda Way for week ended 7 April 2022

QUESTION 14.8 A summary of payroll time sheets and approved overtime details of R Saunders has been prepared for the week ended 29 January 2022 in figure 14.10. Payroll Summary of R Saunders for the week ended 29 January 2022

Employee Ordinary Pay S McLean D Charles Q Iluka S Clinton

855.00 779.00 1 026.00 703.00

Actual Hours 41 43 38 44

PAYG W’hold 167.00 159.00 192.00 137.00

Super %

Medic Hosp

7 7 7 7

Union Fees

25.00 20.00 25.00  

6.00 6.00 7.00 6.00

FIGURE 14.10  Payroll summary data of R Saunders for week ended 29 January 2022, for question 14.8 Employees’ overtime is at 1½ in excess of 38 hours per week. Superannuation is calculated on the ordinary hours per week (38 hours), which excludes any overtime. Calculations are to be correct to two decimal places. Payroll is transferred electronically to employee financial institutions so disregard the requirement to round cents to either 5 or 0. Prepare the payroll register for the week ended 29 January 2022.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 14.9 Use figure 14.11 to prepare the payroll register of P Kennedy for the week ended 29 July 2022. All employees contribute superannuation at 7% of their ordinary gross pay. Calculations must be correct to two decimal places. The ordinary week is 38 hours. Payroll is transferred electronically to employee financial institutions. Payroll Summary of P Kennedy for the week ended 29 July 2022

Employee Ordinary Pay R Stefan D John G Jeffs B Ferns

741.00 798.00 627.00 921.50

Overtime 1 12

2

4 3 5 4

2   1  

PAYG W’hold 160.00 145.00 107.00 206.00

Credit Union 90.00 95.00 80.00 25.00

Union Fees 8.00 8.00 8.00 8.00

FIGURE 14.11  Payroll summary data of P Kennedy for week ended 29 July 2022, for question 14.9 Created from tafenswlib on 2020-05-30 08:13:34.

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

QUESTION 14.10 Use figure 14.12 to prepare the payroll register of G Fitzroy for the week ended 14 October 2022. Payroll Summary of G Fitzroy for the week ended 14 October 2022

Employee D Brown G Helens A Ramsey S Skinner

Hourly Rate 18.40 21.20 19.20 22.40

Overtime 1 12

2

1 5 3

PAYG W’hold

Medical Insur

87.00 170.00 119.00 131.00

Credit Union

17.80

23.50

150.00 40.00 200.00

FIGURE 14.12  Payroll summary data of G Fitzroy for week ended 14 October 2022, for question 14.10 The ordinary week is 38 hours; overtime is paid at time and a half; 6% superannuation is deducted from employees’ ordinary gross earnings. Calculations must be correct to two decimal places. Payroll is transferred electronically to employee financial institutions.

QUESTION 14.11 Use figure 14.13 to prepare the payroll register of M Anthony for the week ended 15 April 2022. Payroll Summary of M Anthony for the week ended 15 April 2022

Employee P Hudson S Partner R Herd I Victoria

Hourly Rate 29.30 25.20 19.90 27.50

Overtime 1 12

3 4 4 2

2 1 4

PAYG W’hold

Medical Insur

237.00 211.00 174.00 198.00

20.00 35.00 20.00

Credit Union 125.00 130.00 200.00

FIGURE 14.13  Payroll summary data of M Anthony for week ended 15 April 2022, for question 14.11 The ordinary week is 35 hours and all employees contribute 7% on their ordinary gross earnings to superannuation. Calculations must be correct to two decimal places. Payroll is transferred electronically to employee financial institutions.

Copyright © 2018. Cengage. All rights reserved.

QUESTION 14.12 You are required to prepare the payroll register of Belinda Way for the weeks ended:   5 May 2022 (see figure 14.14) 19 May 2022 (see figure 14.16) 12 May 2022 (see figure 14.15) 26 May 2022 (see figure 14.17). All employees normally work 38 hours a week and have voluntary superannuation deducted as a percentage of their ordinary gross pay. Payroll Summary of Belinda Way for the week ended 5 May 2022

Employee M Wilson I Billabong R Moruya L Tyrrell

Hourly Ordinary Rate Hours 26.50 19.50 25.00 18.50

38 38 38 38

Overtime 1 12

2 1 2 3

2

2

PAYG W’hold 213.00 103.00 191.00 134.00

Super % 5 5 5 5

Medic Hosp 50.00

Credit Union 40.00 50.00

75.00 25.00

FIGURE 14.14  Payroll summary data of Belinda Way, week ended 5 May 2022, for question 14.12

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CHAPTER 14

Payroll Summary of Belinda Way for the week ended 12 May 2022

Employee M Wilson I Billabong R Moruya L Tyrrell

Hourly Ordinary Rate Hours 26.50 19.50 25.00 18.50

38 38 38 38

Overtime 1 12

2

3 1 2

2

PAYG W’hold

Super %

185.00 150.00 178.00 98.00

5 5 5 5

Medic Hosp 50.00

Credit Union 40.00 50.00

75.00 25.00

FIGURE 14.15  Payroll summary data of Belinda Way, week ended 12 May 2022, for question 14.12 Payroll Summary of Belinda Way for the week ended 19 May 2022

Employee M Wilson I Billabong R Moruya L Tyrrell

Hourly Ordinary Rate Hours 26.50 19.50 25.00 18.50

38 38 38 38

Overtime 1 12

2

3 3 2 1

PAYG W’hold

Super %

226.00 123.00 191.00 89.00

5 5 5 5

Medic Hosp 50.00

Credit Union 40.00 50.00

75.00 25.00

FIGURE 14.16  Payroll summary data of Belinda Way, week ended 19 May 2022, for question 14.12 Payroll Summary of Belinda Way for the week ended 26 May 2022

Employee M Wilson I Billabong R Moruya L Tyrrell

Hourly Ordinary Rate Hours 26.50 19.50 25.00 18.50

38 38 38 38

Overtime 1 12

1 1 3 2

2

1

PAYG W’hold 199.00 103.00 222.00 98.00

Super % 5 5 5 5

Medic Hosp 50.00

Credit Union 40.00 50.00

75.00 25.00

FIGURE 14.17  Payroll summary data of Belinda Way, week ended 26 May 2022, for question 14.12

Copyright © 2018. Cengage. All rights reserved.

Accounting for payroll There are several methods that may be used in accounting for payroll, depending on the number of employees as well as the types of reports required. Do employee-related expenses have to be allocated to different departments? How are liabilities arising from payroll deductions and their periodic payment treated? Are provisions for annual, sick and carer’s, and long service leave accounts used? We will demonstrate three different methods of processing and recording the relevant financial information for payroll in the accounts: 1 direct method – typically used for a small number of employees 2 indirect method – typically used for a small to medium number of employees 3 clearing account method – typically used for a medium number of employees. To demonstrate the different methods for recording payroll, examples and questions in this chapter are limited to four employees. If, however, there were 40 or 400 employees, the rationale for choosing a simple or complex payroll system would become apparent.

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

Example 2: Recording payroll – Belinda Way The payroll register of Belinda Way’s business for the month of April 2022 is as shown in figure 14.18 and will be used to illustrate the three methods of accounting for monthly payroll. Summary of Payroll Register of Belinda Way for the month ended 28 April 2022

Week Ended 7 April 14 April 21 April 28 April

Gross Pay

PAYG Withholding

3 834.75 3 935.80 3 794.05 3 647.88 15 212.48

Super­annuation

673.00 690.00 665.00 640.00 2 668.00

Medical & Hospital

170.05 170.05 170.05 170.05 680.20

125.00 125.00 125.00 125.00 500.00

Credit Union

Net Pay

115.00 115.00 115.00 115.00 460.00

2 751.70 2 835.75 2 719.00 2 597.83 10 904.28

FIGURE 14.18  Payroll register summary of Belinda Way for the month of April 2022

1. Direct method: cash payments journal only This method uses only the cash payments journal to record and allocate the gross pay, net pay and deductions to the relevant accounts. Red or minus entries are used for the deductions. In this way, the journal will cross-balance. At the end of the month, the deductions are totalled from the payroll sheets, recorded in the cash payments journal as normal, and remitted to the relevant businesses. There is an inbuilt internal control: the totals of each of the deductions columns should now have a nil balance. Data from figure 14.18 is used to illustrate this method. Note, no general journal entries are required (figure 14.19).

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Payments Journal of Belinda Way

Date

Particulars

Bank

Wages

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22 30 Apr 22

Wages Wages Wages Wages ATO – PAYG withholding Natural Super – Superannuation Nob – Medical and Hospital Students Credit Union

2 751.70 2 835.75 2 719.00 2 597.83 2 668.00 680.20 500.00 460.00 15 212.48 [cr]

3 834.75 3 935.80 3 794.05 3 647.88         15 212.48 [dr]

FIGURE 14.19  Direct method cash payments journal, for Belinda Way

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CP ..

PAYG SuperW’hold annuation (673.00) (170.05) (690.00) (170.05) (665.00) (170.05) (640.00) (170.05) 2 668.00 680.20

Medic Hosp (125.00) (125.00) (125.00) (125.00)

Credit Union (115.00) (115.00) (115.00) (115.00)

500.00 0.00

0.00

0.00

460.00 0.00

CHAPTER 14

The extract cash payments journal posted to the general ledger appears as in figure 14.20. Extract General Ledger of Belinda Way

Bank 30 Apr 22 Payments

CP

15 212.48

Wages 30 Apr 22 Bank [payment]

CP

15 212.48

PAYG Withholding

Superannuation Payable

Medical and Hospital Payable

Credit Union Payable

FIGURE 14.20  Direct method general ledger, for Belinda Way

QUESTION 14.13 From the summary of payroll register of Errol McCooey for the month ended 26 February 2022 (figure 14.21), use the direct method of processing the payroll through the cash payments journal. Then post the cash payments journal to the general ledger at the end of the month. Summary of Payroll Register of Errol McCooey for the month ended 26 February 2022

Week Ended 5 Feb 22 12 Feb 22 19 Feb 22 26 Feb 22

Gross Pay 3 228.00 2 760.00 3 086.00 2 944.00 12 018.00

PAYG SuperWithholding annuation 581.00 496.00 555.00 529.00 2 161.00

160.00 160.00 160.00 160.00 640.00

Medical & Hospital 60.00 60.00 60.00 60.00 240.00

Credit Union 50.00 50.00 50.00 50.00 200.00

Total Deductions 851.00 766.00 825.00 799.00 3 241.00

Net Pay 2 377.00 1 994.00 2 261.00 2 145.00 8 777.00

FIGURE 14.21  Payroll register summary of Errol McCooey, for question 14.13

Copyright © 2018. Cengage. All rights reserved.

2. Indirect method: general journal and cash payments journal This method uses a general journal and cash payments journal. It is often used when there are a small to medium number of employees on the total payroll. At the end of each payroll week, a general journal is prepared for the deductions from the payroll register by debiting wages and crediting the various deductions. This could be prepared either by the pay office or human resources, or by the accounts department from data supplied by either of those two areas (see figure 14.22).

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

Extract General Journal of Belinda Way

GJ . .

7 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Deductions from payroll register for w/e 7 April

1 083.05

14 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Deductions from payroll register for w/e 14 April

1 100.05

21 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Deductions from payroll register for w/e 21 April

1 075.05

28 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Deductions from payroll register for w/e 28 April

1 050.05

673.00 170.05 125.00 115.00

690.00 170.05 125.00 115.00

665.00 170.05 125.00 115.00

640.00 170.05 125.00 115.00

FIGURE 14.22  Indirect method general journal, for Belinda Way

At the end of each payroll week, the net amount to be paid to the employees is entered in the cash payments journal and allocated to wages (see figure 14.23). At the end of the month, or at the beginning of the next month, the deductions are remitted to the relevant business or the ATO. The deduction remittances are allocated to the relevant deduction payable accounts in the general ledger (see figure 14.24).

Copyright © 2018. Cengage. All rights reserved.

Extract Cash Payments Journal of Belinda Way

Date

Particulars

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22 30 Apr 22

Wages Wages Wages Wages ATO – PAYG Withholding Natural Super – Superannuation Nob – Medical and Hospital Students Credit Union

Bank

Wages

CP ..

PAYG SuperW’hold annuation

2 751.70 2 751.70 2 835.75 2 835.75 2 719.00 2 719.00 2 597.83 2 597.83 2 668.00 2 668.00 680.20 500.00 460.00 15 212.48 10 904.28 2 668.00 [cr] [dr] [dr]

Medic Hosp

Credit Union

680.20 500.00 680.20 [dr]

500.00 [dr]

460.00 460.00 [dr]

FIGURE 14.23  Indirect method cash payments journal, for Belinda Way

At the end of the month the general journal and cash payments journal are posted to the general ledger as shown in figure 14.24.

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CHAPTER 14

Extract General Ledger of Belinda Way

Bank 30 Apr 22 Payments

CP

15 212.48

GJ GJ GJ GJ

673.00 690.00 665.00 640.00 2 668.00

GJ GJ GJ GJ

170.05 170.05 170.05 170.05 680.20

Wages Wages Wages Wages

GJ GJ GJ GJ

125.00 125.00 125.00 125.00 500.00

Wages Wages Wages Wages

GJ GJ GJ GJ

115.00 115.00 115.00 115.00 460.00

PAYG Withholding 30 Apr 22 Bank [payment]

CP

2 668.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Wages Wages Wages Wages

2 668.00

Superannuation Payable 30 Apr 22 Bank [payment]

CP

680.20

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Wages Wages Wages Wages

680.20

Medical and Hospital Payable 30 Apr 22 Bank [payment]

CP

500.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

500.00

Credit Union Payable 30 Apr 22 Bank [payment]

CP

460.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

460.00

Wages 7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22 30 Apr 22

Deductions Deductions Deductions Deductions Bank [payment]

GJ GJ GJ GJ CP

1 083.05 1 100.05 1 075.05 1 050.05 10 904.28 15 212.48

FIGURE 14.24  Indirect method general ledger, for Belinda Way

Copyright © 2018. Cengage. All rights reserved.

QUESTION 14.14 From the summary of payroll register of John Wood for the month ended 25 November 2022 shown in figure 14.25, you are required to use the indirect method of processing the payroll into the general journal and cash payments journal. Then post the general journal and cash payments journal to the general ledger at the end of the month. Summary of Payroll Register of John Wood for the month ended 25 November 2022

Week Ended

Gross Pay

4 Nov 22 11 Nov 22 18 Nov 22 25 Nov 22

2 923.00 2 972.00 2 952.00 3 102.00 11 949.00

PAYG SuperWithholding annuation 526.00 534.00 531.00 558.00 2 149.00

200.00 200.00 200.00 200.00 800.00

Medical & Hospital 81.00 81.00 81.00 81.00 324.00

Credit Union 93.00 93.00 93.00 93.00 372.00

Total Deductions 900.00 908.00 905.00 932.00 3 645.00

Net Pay 2 023.00 2 064.00 2 047.00 2 170.00 8 304.00

FIGURE 14.25  Payroll register summary of John Wood, for question 14.14 Created from tafenswlib on 2020-05-30 08:17:06.

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

3. C  learing account method: general journal linked to cash payments journal by a payroll clearing account This method would be the most appropriate to use for a medium number of employees on the total payroll. This method has similarities to the indirect method; however, there is a small but significant difference. A ‘Payroll Clearing’ account is used to link the general journal and the cash payments journal in the processing of the weekly payroll. The payroll clearing account is also known as payroll suspense, payroll payable or wages clearing; we will use ‘payroll clearing’ as it clears the value allocated from the general journal by processing the payment of the net pay through the cash payments journal. Again, this method lends itself to the situation where payroll is prepared by a payroll or human resource department that is separate from the accounts department. In this way, confidentiality is maintained by the pay office or human resources. The accounts department is only responsible for the preparation of monthly accounts. The gross wages are entered in the general journal together with all the deductions, and the net payroll is entered as payroll clearing. All information for the relevant payroll is shown in this journal and the payment of the net wages is recorded through the cash payments journal. These can be seen in figures 14.26, 14.27 and 14.28. Extract General Journal of Belinda Way

7 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Payroll Clearing

GJ . . 3 834.75 673.00 170.05 125.00 115.00 2 751.70

Deductions and payroll clearing for week ended 7 April

14 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Payroll Clearing

3 935.80 690.00 170.05 125.00 115.00 2 835.75

Deductions and payroll clearing for week ended 14 April

21 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Payroll Clearing

3 794.05 665.00 170.05 125.00 115.00 2 719.00

Copyright © 2018. Cengage. All rights reserved.

Deductions and payroll clearing for week ended 21 April

28 Apr 22 Wages PAYG Withholding Superannuation Payable Medical and Hospital Payable Credit Union Payable Payroll Clearing Deductions and payroll clearing for week ended 28 April

FIGURE 14.26  Clearing account method general journal, for Belinda Way

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3 647.88 640.00 170.05 125.00 115.00 2 597.83

CHAPTER 14

The payment of the net wages is debited through the cash payments journal using the payroll clearing account. Extract Cash Payments Journal of Belinda Way

Date

Particulars

Bank

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22 30 Apr 22

Payroll Clearing Payroll Clearing Payroll Clearing Payroll Clearing ATO – PAYG withholding Natural Super – Superannuation Nob – Medical and Hospital Students Credit Union

2 751.70 2 835.75 2 719.00 2 597.83 2 668.00 680.20 500.00 460.00 15 212.48 [cr]

Payroll PAYG SuperClearing W’hold annuation 2 751.70     2 835.75     2 719.00     2 597.83       2 668.00       680.20             10 904.28 2 668.00 680.20 [dr] [dr] [dr]

CP .. Medic Hosp

Credit Union

            500.00   500.00 [dr]

              460.00 460.00 [dr]

FIGURE 14.27  Clearing account method cash payments journal, for Belinda Way

A new account is opened for the payroll clearing and it also will – or should – end up with a nil balance at the end of the month. Extract General Ledger of Belinda Way

Bank 30 Apr 22 Payments

CP

15 212.48

Wages Wages Wages Wages

GJ GJ GJ GJ

2 751.70 2 835.75 2 719.00 2 597.83 10 904.28

Wages Wages Wages Wages

GJ GJ GJ GJ

673.00 690.00 665.00 640.00 2 668.00

GJ GJ GJ GJ

170.05 170.05 170.05 170.05 680.20

GJ GJ GJ GJ

125.00 125.00 125.00 125.00 500.00

Payroll Clearing 30 Apr 22 Bank [payment]

CP

10 904.28

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

10 904.28

PAYG Withholding 30 Apr 22 Bank [payment]

CP

2 668.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

2 668.00

Superannuation Payable

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30 Apr 22 Bank [payment]

CP

680.20

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Wages Wages Wages Wages

680.20

Medical and Hospital Payable 30 Apr 22 Bank [payment]

CP

500.00

500.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Wages Wages Wages Wages

CONTINUED

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Credit Union Payable 30 Apr 22 Bank [payment]

CP

460.00

7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Wages Wages Wages Wages

GJ GJ GJ GJ

460.00

115.00 115.00 115.00 115.00 460.00

Wages 7 Apr 22 14 Apr 22 21 Apr 22 28 Apr 22

Deductions/Clearing Deductions/Clearing Deductions/Clearing Deductions/Clearing

GJ GJ GJ GJ

3 834.75 3 935.80 3 794.05 3 647.88 15 212.48

FIGURE 14.28  Clearing account method general ledger, for Belinda Way

Provisions for leave KEEP IN MIND Provisions are periodically made to ensure that the expense of future leave entitlements of employees is matched to the revenue for that period. AASB119 Employee Benefits requires that the provisions for leave are treated as a liability of the business.

In chapter 9 you gained an understanding of how to process the accounting entries for provisions for annual leave, sick and carer’s leave and long service leave. Revisit the relevant section and also some of the questions to refresh your memory on how to: • establish and record provisions for leave, and • process leave taken during the year. It is the payroll area and records that provide the data used to calculate and record the adjustments for provisions and leave taken. When an employee applies for leave and it is approved, it is processed through the payroll, and instead of the expense going to wages or salaries it is debited against the type of leave taken.

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QUESTION 14.15 From the summary of payroll register of I M Shepherd for the month ended 25 November 2022 shown in figure 14.29, you are required to use the clearing account method of processing the payroll into the general journal and cash payments journal. Then post the general journal and cash payments journal to the general ledger at the end of the month. Summary of Payroll Register of I M Shepherd for the month ended 25 November 2022

Week Ended 4 Nov 22 11 Nov 22 18 Nov 22 25 Nov 22

Gross Pay 2 701.00 2 305.00 2 290.00 2 492.00 9 788.00

PAYG SuperWithholding annuation 486.00 414.00 412.00 448.00 1 760.00

140.00 140.00 140.00 140.00 560.00

Medical & Hospital 75.00 75.00 75.00 75.00 300.00

Credit Union 85.00 85.00 85.00 85.00 340.00

FIGURE 14.29  Payroll register summary of I M Shepherd, for question 14.15

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Total Deductions 786.00 714.00 712.00 748.00 2 960.00

Net Pay 1 915.00 1 591.00 1 578.00 1 744.00 6 828.00

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QUESTION 14.16 From the summary of payroll register of Maxwell Small for the month ended 28 January 2022 shown in figure 14.30, you are required to prepare: a using the direct method, the cash payments journal for the month ended 31 January 2022 b using the indirect method, the necessary general journals using data from the weeks ended 7 January and 14 January; plus the cash payments journal for the month ended 31 January 2022 c using the clearing account method, the necessary general journals using data from the weeks ended 21 January and 28 January; plus the cash payments journal for the month ended 31 January 2022. What will be the balances of the wages expense account as at 31 January 2022 using the direct method, the indirect method and the clearing account method? Summary of Payroll Register of Maxwell Small for the month ended 28 January 2022

Week Ended 7 Jan 22 14 Jan 22 21 Jan 22 28 Jan 22

Gross Pay 3 582.00 3 416.00 3 664.00 3 196.00 13 858.00

PAYG SuperWithholding annuation 644.00 614.00 659.00 575.00 2 492.00

245.00 245.00 245.00 245.00 980.00

Medical & Hospital 80.00 80.00 80.00 80.00 320.00

Credit Union 90.00 90.00 90.00 90.00 360.00

Total Deductions 1 059.00 1 029.00 1 074.00 990.00 4 152.00

Net Pay 2 523.00 2 387.00 2 590.00 2 206.00 9 706.00

FIGURE 14.30  Payroll register summary of Maxwell Small, for question 14.16

Pay-as-you-go – PAYG withholding Pay-as-you-go withholding is a legal requirement for a business (payer) to deduct amounts from payments made to various people and businesses (payees). These amounts must be remitted to the ATO and assist in meeting the payees’ end-of-year tax liabilities. For example, when a business employs people and pays salaries or wages, allowances, bonuses or commissions, a certain amount (income tax) must be withheld. PAYG withholding may also be deducted from payments to: • contractors • suppliers or accounts payable who have not provided their ABN • contractors who have a voluntary agreement with the business • individuals under a labour hire contract

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• employees on termination of their employment. In these circumstances, the business must: 1 register for PAYG withholding 2 determine the status of their workers (Are they employees or contractors? If they are contractors, have they provided their ABN?) 3 identify the payments from which withholding is required 4 calculate the amount to withhold 5 report and pay withheld amounts 6 provide payment summaries to payees and lodge an annual report, or when using the Single Touch Payroll system, electronically report payroll information to the ATO through the business’s payroll software whenever employees are paid.

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The tax deducted from an employee’s wage or salary must be in agreement with the tax tables published by the ATO and in accordance with the employee’s tax file number declaration. If the employee does not provide the employer with a tax file number declaration form then the business must deduct 47% (current for 2017–18 tax year) from the amount paid to the employee. Similarly, if a contractor or supplier has not provided their ABN, then 47% (current for 2017–18 tax year) of the amount owed must be withheld and remitted to the ATO. If the owner of a sole trader or partnership business draws funds from the business, this is not a wage and is not subject to withholding tax. Instead the owner must pay their personal income tax liability through PAYG instalments. This will not be discussed further as it is the subject of more advanced studies in accounting and taxation.

Remittance of PAYG withholding to the ATO A business must lodge forms and remit any amounts withheld on behalf of payees to the ATO within a certain period of time. The frequency of remittance depends on the size of the total annual withholding for the business. • Small withholders are those with an annual withholding up to and including $25 000. Remittances to the ATO are made quarterly; usually by the 21st of the month following the end of the quarter; quarters end September, December, March and June. Alternatively, small withholders may elect to pay monthly. • Medium withholders are those with annual withholding of $25 001 to $1 million. Remittances to the ATO are made monthly; usually by the 21st of the following month. • Large withholders are those that withheld amounts greater than $1 million in a previous financial year. Remittances to the ATO must be made electronically twice weekly.

Business and instalment activity statements As well as remitting PAYG withholding taxes, businesses must also complete and lodge an activity statement with the ATO. It depends on the business circumstances whether the remittances are reported on a Business Activity Statement (BAS) or an Instalment Activity Statement.

PAYG withholding records that must be kept A business must keep PAYG withholding records, including the following: • wages records, including payment records

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• voluntary agreements • employment declarations, tax file number declarations and withholding declarations, copies of payment summaries and payment summary statements (manual or electronic copies) • employment termination payment records • statements of a supplier where no ABN was quoted, records of amounts withheld and annual reports • records of amounts withheld where no ABN was quoted • annual reports of PAYG withholding where no ABN was quoted.

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CHAPTER 14

Calculate PAYG withholding amounts How much PAYG withholding tax must the employer take out of the employee’s pay? This depends on how much was earned and details the employee has provided on the ATO tax file number declaration form. The amount of tax deducted also depends upon the period being paid: weekly, fortnightly or monthly. Different tables are available for weekly, fortnightly and monthly pay periods. Earlier in this chapter you were introduced to the tax file number declaration. When the business receives the completed tax file number declaration it completes the payer section and forwards it to the ATO. Payments made to the employee must then have tax withheld according to the PAYG withholding tax tables (see figures 14.34 to 14.37). If the business does not receive a completed tax file number declaration it must withhold tax at the top marginal rate, currently at 45% plus 2% Medicare levy (47%). The Medicare levy is a charge that the Commonwealth government applies on most individuals’ taxable income. It is generally applied at a flat rate of 2% and is deducted from employees’ gross pay as part of the PAYG withholding tax system.

PAYG WITHHOLDING TAX TABLES: WEEKLY RATES INCORPORATING MEDICARE LEVY The ATO publishes weekly and fortnightly PAYG withholding tables that show the amount of tax to be withheld by the employer from each employee’s gross pay. The tables include the Medicare levy, which at time of preparing this book was 2%. However, it is anticipated to rise to 2.5% from 1 July 2019. These tables are available as pdf downloads on the ATO website.6 A Withholding tax look-up tool is also available from the same website, as well as a Tax withheld calculator. For your convenience, extracts from the 2017–18 weekly tax tables are included on pages 617 to 620. In figures 14.34 to 14.37: • Column 1 is the gross weekly pay or earnings to be taxed. Use whole dollars (ignore any cents). • Column 2 is the amount to be withheld for employees who, at question 8 on their tax file number declaration form, have ticked ‘Yes’ – they wish to claim the tax-free threshold. • Column 3 is the amount to be withheld for employees who, at question 8 on their tax file number declaration form, have ticked the ‘No’ box – they do not wish to claim the tax-free threshold.

AMOUNT OF TAX WITHHELD The procedure for calculating the tax to withhold can be shown in the following steps. 1 Calculate the gross pay for the week.

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2 Use the tax tables to find the amount in the weekly earnings in column 1; round down to the nearest dollar in the gross pay. 3 From the tax file number declaration, decide whether column 2 or 3 applies. 4 The amount in the appropriate column for the weekly earnings is the basic tax withheld.

Example 3: With tax-free threshold – column 2 If the wage (or salary) for the week is $800, a tax file number declaration has been completed and the taxfree threshold has been claimed, what is the net wage before other deductions? (See figure 14.31.) Weekly earnings From tax tables, column 2

Gross wage less tax Net wage

800.00 113.00 687.00

FIGURE 14.31  With tax-free threshold, tax withheld and the net wage

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Example 4: No tax-free threshold – column 3 If the wage (or salary) for the week is $800, and a tax file number declaration has been completed but the tax-free threshold has not been claimed, what is the net wage? (See figure 14.32.) This is generally the case when it is not the employee’s first or main employment. Weekly earnings From tax tables, column 3

Gross wage less tax Net wage

800.00 234.00 566.00

FIGURE 14.32  No tax-free threshold, tax withheld and the net wage

Example 5: No tax file number If the wage (or salary) for the week is $800, and no tax file number declaration has been completed or the tax file number is not shown, what is the net wage? The employer is required to withhold 47% of the wage as PAYG withholding. (See figure 14.33.) Weekly earnings 800 × 47%

Gross wage less tax Net wage

800.00 376.00 424.00

FIGURE 14.33  No tax file number provided, tax withheld and the net wage

QUESTION 14.17

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Using the PAYG Withholding tax tables weekly rates, what is the PAYG withholding and net pay for the following weekly wages? a $300 with no tax file number declaration b $202 with tax-free threshold c $540 with tax-free threshold d $876 with tax-free threshold e $95 with no tax-free threshold f $115 with no tax file number declaration g $1003 with no tax-free threshold h $427 with tax-free threshold i $54 with no tax-free threshold j $756 with no tax file number declaration

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CHAPTER 14

FIGURE 14.34  Pay As You Go (PAYG) Withholding Tax Tables page 1 © Australian Taxation Office for the Commonwealth of Australia, 2017

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617

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

FIGURE 14.35  Pay As You Go (PAYG) Withholding Tax Tables page 2 © Australian Taxation Office for the Commonwealth of Australia, 2017

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CHAPTER 14

FIGURE 14.36  Pay As You Go (PAYG) Withholding Tax Tables page 3 Created from tafenswlib on 2020-05-30 08:17:24.

© Australian Taxation Office for the Commonwealth of Australia, 2017

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PAYROLL PREPARATION AND ACCOUNTING ENTRIES

FIGURE 14.37  Pay As You Go (PAYG) Withholding Tax Tables page 4 © Australian Taxation Office for the Commonwealth of Australia, 2017

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CHAPTER 14

Other employer obligations A business that employs workers will incur several employee-related expenses other than wages or salaries. Some may be compulsory, such as payroll tax, superannuation guarantee and workers’ compensation insurance, or based on the conditions of employment such as fringe benefits. These employer obligations also require additional reporting requirements for the business. Some fringe benefits must, for example, be reported on the end-of-year employee payment summaries and may impact on the employee’s income tax obligations. For accounting recording purposes, these expenses are treated in the same way as any other expenses. The expense is recorded and matched to the correct accounting period.

Employer superannuation contributions Under the superannuation guarantee law a business must pay super contributions for all eligible employees at a minimum percentage of their ordinary-time earnings, bonuses and loadings other than overtime, into a complying superannuation fund. From 1 July 2014 the rate is 9.5% with no proposed changes before 2021. Employer superannuation contributions must be made for all eligible employees up to a quarterly maximum earnings or contribution base for each individual employee. In 2017–18 the maximum earnings base was $52 760 per quarter. This limit is indexed each financial year in line with average weekly ordinary-time earnings (AWOTE). Eligible employees are those over 18 years of age who receive a gross salary or wage of $450 or more in a month. Employees under 18 must work 30 hours or more and earn more than $450 in a month to be eligible for superannuation. Certain contractors are also eligible. Employees may be entitled to choose which super fund they elect to have their contributions paid into. Contributions should be remitted at least four times per year, within 28 days of the end of each quarter. If a business does not pay the minimum for each employee, they must pay a super guarantee charge (the shortfall, interest on that amount and an administration fee). Legislation states that specific records related to superannuation contributions must be kept for five years. More details on superannuation are available on the ATO website http://www.ato.gov.au/Business/Super-for-employers.

Payroll tax

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Payroll tax is a tax imposed by all Australian states and territories on businesses. It is calculated on wages paid or payable, including salaries, allowances, directors’ fees, superannuation and the ‘grossed-up’ value of fringe benefits. The minimum payroll before the tax is applicable and the rate of tax varies from state to state. The websites of the Office of State Revenue in each state provide more information on payroll tax.7 This tax is explored further in more advanced accounting and taxation studies.

Workers’ compensation insurance Workers’ compensation insurance is another obligation or expense associated with employment of workers. Each state has a Workers Compensation Act. Under this legislation a business must have some form of workers’ compensation insurance to cover employees who are injured at work, during work breaks or at places they are required to attend for work-related reasons. More details about workers’ compensation are available on the WorkCover or WorkSafe website in each state or territory.8

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Fringe benefits If a business provides a benefit other than a wage or salary to an employee or their associate, it may be classified as a fringe benefit and the business may be liable for fringe benefits tax. Examples of fringe benefits may include the use of a work car for private purposes, payment of an employee’s private health insurance costs or provision of parking facilities.9 Fringe benefits tax is explored in detail in advanced accounting and taxation studies.

Payroll controls In this chapter you have seen that the employment of staff is a major expense to a business. It is also subject to a range of legislative requirements and regulations that include recording and reporting procedures and processes. While wages and salaries are often the largest single expense item for a business, there are also a number of other employee-related expenses and obligations. It is therefore essential that payroll systems should have inbuilt internal controls wherever possible. Listed below are some important control procedures. • Control over hours worked such as sign-in and sign-out books should be monitored to ensure records do not become unreliable. • All overtime should be approved by an authorised person before it is worked. • Payroll recording, reporting and distribution functions should be separated and responsibilities allocated to different staff, where possible. • Procedures for delegation and authorisation of the different payroll duties should be clearly documented and followed. • Employee records for leave entitlements should be regularly maintained and checked periodically by an authorised person. • Employees should sign for their pay if it is received in cash. • If pays are distributed in cash, the distribution should be carried out by more than one person. • If any pays are not collected due to absence of the employee, they should be held by another responsible person. On return to work, the employee must sign for the pay in an unclaimed wages record. Additional controls should include: • month-end and year-end checklists, which should be produced and reconciled to ensure compliance with relevant legislation and management deadlines

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• records and systems, which should be updated in line with salary reviews and other changes in employment status • backup and disaster recovery systems, which should be in place to ensure that records are not lost.

Payroll enquiries From time to time employees may request further details regarding their pay. Any enquiries from employees, and information provided in response, should be in accordance with organisational and legislative requirements. Any enquiries that are outside of the delegation or beyond the knowledge of the person providing responses should be referred to the designated person.

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CHAPTER 14

REVISION QUESTIONS Confirm your understanding of this chapter by completing the following questions.

QUESTION 14.18 a What are the differences between the following employment-related terms?

– Awards and enterprise or other registered agreements



– Employer superannuation contributions and employee superannuation contributions



– Gross pay and net pay

b The following terms are commonly used in employment situations. Explain each term and, where relevant, give an example of an employment situation where each occurs. You may need to use the ATO or Fair Work Australia websites. Salary

Wage

Piecework

Fringe benefits

Leave loading

Payment summary

PAYG withholding

Payroll tax

Tax-free threshold

Deductions

Medicare levy

Pay slip

Workers’ compensation

Long service leave

Employee on-costs

Payroll register

QUESTION 14.19 Payroll register totals of Dennis Dadios, for the week ended 19 February 2022 showed:

Payroll Register of Dennis Dadios for the week ended 19 February 2022

Gross Pay

PAYG SuperWithholding annuation

5440.00

816.00

Medical

150.00

Credit Union

110.00

Total Deductions

200.00

Net Pay

1276.00

4164.00

FIGURE 14.38  Payroll register weekly total In general journal format only, prepare all the necessary entries needed to process the weekly payroll in the accounts using the direct method, indirect method and clearing account method.

QUESTION 14.20 Using the data below, calculate the PAYG withholding for each employee assuming all have provided taxation number declaration forms and claim the tax-free threshold. Then prepare the weekly payroll register of Y Rutherford for the week ended 25 March 2022. The employee superannuation contribution is calculated on ordinary gross pay.

Payroll Summary of Y Rutherford for the week ended 25 March 2022

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Employee A Trimble B Ensbey C Fitzroy D Victoria

Hourly Rate

Ordinary Hours

30.00 24.00 23.25 20.00

35 35 35 35

Overtime 112

2

2 4

2

PAYG W’hold

Super %

? ? ? ?

6 6 6 6

Medical 35.00

Credit Union 40.00 70.00

28.00 100.00

FIGURE 14.39  Payroll summary of Y Rutherford From the cross-balanced payroll register prepare necessary accounting entries in general journal format using the clearing account method. Calculations are to be correct to two decimal places. Payroll is transferred electronically to employee financial institutions so disregard the requirement to round cents to either 5 or 0.

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QUESTION 14.21 Using the data below, prepare the payroll register for the week ended 15 April 2022 for R Donovan. All employees have provided a tax file number declaration form and claim the tax-free threshold.

Payroll Summary of R Donovan for the week ended 15 April 2022 Employee

E Turns F Wilma G Murray H Woods

Hourly Rate

Actual Hours

PAYG W’hold

Super %

28.00 21.50 24.75 20.50

40 44 42 38

? ? ? ?

7 7 7 7

Employee Saving

50.00 80.00

Union Fees

8.00 8.00 8.00 8.00

140.00

FIGURE 14.40  Payroll summary of R Donovan Ordinary hours per week are 38 and overtime is paid at 1½ for hours in excess of ordinary. All employees contribute to voluntary superannuation at 7% of ordinary gross pay. Calculations are to be correct to two decimal places. Payroll is transferred electronically to employee financial institutions so disregard the requirement to round cents to either 5 or 0. Then prepare in general journal format the processing and payment of the payroll in the accounts using the indirect method.

QUESTION 14.22 Complete the payroll register of V Dougherty for the week ended 6 May 2022 using the data below. Ordinarily 35 hours per week are worked. Annual leave hours attract an additional 17.5% leave loading. Any leave taken is to be allocated against the appropriate leave provision account and not to expense. In your answer, calculations are to be correct to two decimal places and rounding to 5 or 0 cents is not necessary. PAYG withholding totalled $555.00 and employee superannuation totalled $195.00.

Payroll Summary of V Dougherty for the week ended 6 May 2022

Employee I Holmes J Argyle K Palm L Rivers

Hourly Rate 22.00 19.60 21.00 23.20

Ordinary Hours Norm

AL

LL

35 28

SL

Overtime LSL

7

12

1

2

3 3

4 1

35 21

14

2.45

1

FIGURE 14.41  Payroll summary of V Dougherty Prepare an extract payroll register calculating the total gross pay for each employee then prepare in general journal format

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using the clearing account method the necessary entries, including the leave provisions, to allocate the payroll into the accounts.

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CHAPTER 14

QUESTION 14.23 Prepare a payroll register for Ralph Edwards for the week ended 9 June 2022 using the data that follows.

Payroll Summary of Ralph Edwards for the week ended 9 June 2022

Employee Ordinary Hourly Hours Rate M Coutts Nym Boida O Cross P Office

38 38 38 38

Ordinary Hours

Overtime 1

Norm

SL

12

2

30 38 22 38

8

2 4

3

19.15 21.85 21.40 26.80

16 3

FIGURE 14.42  Payroll summary of Ralph Edwards Leave taken is allocated to the relevant provision account. Deductions totalled:

• • •

PAYG withholding $672 superannuation $238 employee savings $275. Process the payroll register in the accounts, using the direct method and using general journal format only. Deductions from payroll register of Ralph Edwards for the month ended 27 June 2022 totalled:

• • •

PAYG withholding $2 452 superannuation $952 employee savings $1 100. Prepare in general journal format the payment of these deductions at the end of June 2022.

QUESTION 14.24 Prepare the payroll register of Allan Jones for the week ended 16 July 2022. An ordinary week consists of 38 hours. Overtime is paid at 1½. Each employee contributes 8% of their ordinary gross as their contribution to superannuation; use whole dollars only and disregard any cents from calculations. Sick and carer’s leave taken is allocated to the appropriate provision account. From the completed payroll register prepare in general journal format the entry to process the payroll including payment, using the clearing account method.

Payroll Summary of Allan Jones for the week ended 16 July 2022

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Employee Q Ideal R Scahill S Dorp T Van

Hourly Rate

Actual Hours Worked

21.00 27.50 25.50 27.00

38.0 21.5 40.0 39.0

SL 16.5

PAYG W’hold ? ? ? ?

FIGURE 14.43  Payroll summary of Allan Jones

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QUESTION 14.25 The fortnightly payroll register of Vic Hair for the four weeks ended 26 August 2022 is as shown in figure 14.44:

Payroll Register of Vic Hair for the 4 weeks ended 26 August 2022

Gross Pay 12 Aug 22 26 Aug 22

6 434.00 6 514.00

PAYG 4 U Super Withholding -annuation 1 158.00 1 172.00

NOB Medical

450.00 450.00

Yore Credit R&P Union Union Fees

135.00 135.00

375.00 375.00

60.00 60.00

FIGURE 14.44  Payroll summary of Vic Hair Using the direct method, prepare an extract of the cash payments journal for each of the fortnightly payrolls and then enter the payments made for deductions and balance the journal.

QUESTION 14.26 For the week ended 23 September 2022, prepare the payroll register of Marek Bowman using the information provided (see figure 14.45). An ordinary week is 35 hours. Assume all employees have completed tax file number declaration forms and claim the tax-free threshold. All employees contribute to superannuation at 7% of their ordinary gross earnings with cents eliminated from the final calculation.

Payroll Summary of Marek Bowman for the week ended 23 September 2022

Employee U Schulz V Enna W Witzig X Perts

Hourly Rate 25.75 24.10 20.00 28.20

Overtime 1 12

2

3 4 2 4

1 4

PAYG W’hold

Medical

? ? ? ?

35.00 20.00 25.00 27.00

Credit Union 30.00 25.00 90.00 150.00

FIGURE 14.45  Payroll summary of Marek Bowman From the payroll register enter in the cash payments journal and general journal the necessary entries to process the payroll and its payment into the accounts of Marek Bowman using the direct method, indirect method and clearing account method.

QUESTION 14.27 From the payroll summary of Henry M Thomas for the week ended 7 October 2022, prepare a payroll register. Ordinary hours are 35 hours per week. Assume all employees have provided a tax file number declaration and claim the tax-free

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threshold.

Henry M Thomas Payroll Summary for the week ended 7 October 2022

Employee Y Soul Z Schmit A Ferry B Ford

Hourly Rate 23.25 22.85 24.10 18.85

Overtime 12

1

2

5 6 4

2 3 1

FIGURE 14.46  Payroll summary of Henry M Thomas From the payroll register enter in the cash payments journal and general journal the necessary entries to process the payroll and its payment into the accounts of Henry M Thomas using the direct method, indirect method and clearing account method.

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CHAPTER 14

QUESTION 14.28 From the summary for Max Major of gross pay and deductions for the four weeks ended 28 November 2022 (see figure 14.47), you are required to prepare general journals and cash payment journals demonstrating the processing of payroll data into the accounts, including payment of deductions, using the direct method, indirect method and clearing account method. All employees have elected Rheem Super Fund for voluntary superannuation contributions; medical and hospital is Lysaght Health and employee savings is NAB Savings.

Summary of Payroll Register of Max Major for the 4 weeks ended 28 November 2022

Gross Pay 7 Nov 22 14 Nov 22 21 Nov 22 28 Nov 22

PAYG SuperWithholding annuation

6 385.00 6 266.00 6 470.00 6 027.00 25 148.00

1 149.00 1 127.00 1 164.00 1 084.00 4 524.00

Medical & Hospital

235.00 235.00 235.00 235.00 940.00

Employee Total Savings Deductions

85.00 85.00 85.00 85.00 340.00

225.00 225.00 225.00 225.00 900.00

1 694.00 1 672.00 1 709.00 1 629.00 6 704.00

Net Pay 4 691.00 4 594.00 4 761.00 4 398.00 18 444.00

FIGURE 14.47  Payroll register summary extract of Max Major

QUESTION 14.29 From the payroll data for Felicity Anna you are required to prepare payroll registers for each of the four weeks of November 2022. All employees have submitted tax file number declaration forms and claim the tax-free threshold. All employees ordinarily work a 38-hour week, have superannuation deducted as a percentage of their ordinary gross pay and their net pay is electronically transferred to their bank account.

Payroll Summary of Felicity Anna for the week ended 4 November 2022

Employee G Mitchel A Mason B Mathew R Josh

Hourly Ordinary Rate Hours 24.30 22.80 25.00 23.90

38 38 38 38

Overtime 1 12

2

1 2 3

1

PAYG W’hold

Super %

? ? ? ?

6 6 6 6

Medic Hosp 22.00

Credit Union 15.00 20.00

35.00 30.00

Payroll Summary of Felicity Anna for the week ended 11 November 2022

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Employee G Mitchel A Mason B Mathew R Josh

Hourly Ordinary Rate Hours 24.30 22.80 25.00 23.90

38 38 38 38

Overtime 1 12

2

3 1

2

3

PAYG W’hold

Super %

? ? ? ?

6 6 6 6

Medic Hosp 22.00

Credit Union 15.00 20.00

35.00 30.00

Payroll Summary of Felicity Anna for the week ended 18 November 2022

Employee G Mitchel A Mason B Mathew R Josh

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Hourly Ordinary Rate Hours 24.30 22.80 25.00 23.90

38 38 38 38

Overtime 1 12

2

3

1

2

PAYG W’hold

Super %

? ? ? ?

6 6 6 6

Medic Hosp 22.00

Credit Union 15.00 20.00

35.00 30.00

627

PAYROLL PREPARATION AND ACCOUNTING ENTRIES

Payroll Summary of Felicity Anna for the week ended 25 November 2022

Employee G Mitchel A Mason B Mathew R Josh

Hourly Ordinary Rate Hours 24.30 22.80 25.00 23.90

38 38 38 38

Overtime 1 12

2

3 2 2 1

2

PAYG W’hold

Super %

? ? ? ?

6 6 6 6

Medic Hosp 22.00

Credit Union 15.00 20.00

35.00 30.00

FIGURE 14.48  Payroll summaries of Felicity Anna From the four balanced payroll registers you are required to prepare the appropriate cash payments journal and general journals to enable processing in the accounts using the direct method, indirect method and clearing account method. The payroll-related organisation that Felicity Anna deals with for superannuation is MRFS Superannuation Fund; medical and hospital is Tweed Health and employee savings is BCC Union.

Endnotes 1 All tables are available as pdf downloads or individual rates may be determined through the Withholding tax look-up tool. These are available at https://www.ato.gov.au/Rates/Weekly-tax-table. The ATO tax withheld calculator is also a very useful tool (https://www.ato.gov.au/calculators-and-tools/tax-withheld-calculator). 2 For more detailed information about the NES go to: http://www.fairwork.gov.au/employee-entitlements/nationalemployment-standards. 3 http://www.fwc.gov.au

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4 http://www.fairwork.gov.au 5 https://www.oaic.gov.au 6 http://www.ato.gov.au/Forms/TFN-declaration/ 7 http://www.business.gov.au/Info/Run/Tax/Payroll-Tax 8 List of WorkCover or WorkSafe websites by state: http://www.business.gov.au/Info/Run/Insurance-and-workers-­ compensation/Insurance-in-your-state-or-territory 9 The following website provides more information on fringe benefits taxes: http://www.business.gov.au/info/run/tax/ fringe-benefits-tax

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G LOS SA RY

accounting The process of identifying, measuring, recording and reporting information about a business to assist in decision making by stakeholders accounting entity convention The basic principle whereby the business entity is separate and distinct from its owners; transactions are recorded from the business’s point of view accounting equation ‘Assets = Liabilities + Owner’s Equity’ or extended to ‘Assets + Expenses = Liabilities + Owner’s Equity + Revenues’ accounting information system The manual or computerised process and policies in a business for collecting data, recording and reporting accounting information accounting period convention The basic principle whereby the life of a business is divided into periods of equal lengths for recording and reporting purposes accounting standards Accounting standards are technical pronouncements (or rules) that set out how to record and report particular types of transactions and events in financial statements that users depend upon for information; the Australian Accounting Standards Board is an Australian Government agency that issues the standards for entities that operate in the public, private and not for profit sectors

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accounts payable Amounts owed by the business to suppliers of goods and services purchased on credit; classified as current liabilities (also commonly referred to as creditors) accounts payable control An account in the general ledger that summarises all transactions related to accounts payable accounts accounts payable ledger A subsidiary ledger that individually records all transactions by each account payable accounts payable listing A listing of all accounts payable and relevant balances on a particular day; the total should agree with the balance, on the same day, in the accounts payable in the general ledger accounts receivable Amounts owing by customers to the business for goods and services previously sold on credit; classified as current assets (also commonly referred to as debtors) Created from tafenswlib on 2020-05-30 06:08:46.

accounts receivable control An account in the general ledger that summarises all transactions related to accounts receivable accounts accounts receivable ledger A subsidiary ledger that individually records all transactions by each account receivable accounts receivable listing A listing of all accounts receivable and relevant balances on a particular day; the total should agree with the balance, on the same day, in the accounts receivable in the general ledger accrual accounting An accounting method by which transactions and events are recognised when they occur, and not when cash is received or remitted; revenues and expenses are matched to the period in which they occur accumulated depreciation The accumulation of all depreciation expenses that have been recorded for an asset since it was acquired allowance for doubtful debts An estimated amount of accounts receivable that are uncollectable annual leave Employee entitlement to paid leave under an award or enterprise agreement asset A resource controlled by a business from which future economic benefits are expected; an item of value that a business can use in its operations and which can generally be expressed as a monetary amount asset register Used for listing the non-current assets of a business that are of sufficient value to justify the cost of maintaining the list bad debt recovered An account payable pays in part or in full an amount that previously was written off as a bad debt expense bad debts The expense recognised when accounts receivable do not pay balance day adjustments Adjustments that are recorded at the end of a period to match expenses to the revenues that they have generated balance sheet A financial statement listing assets, liabilities and owner’s equity in a business at a specific date

bank reconciliation A check of transactions listed in a business’s records of its bank account against the entries listed on the bank’s statement of the business’s account; if differences are identified, then adjustments may be required in either the business’s or bank’s records bank statement A statement prepared by the bank that provides details of all transactions that have occurred in the business’s account over a specific period of time BAS Business Activity Statement: a report that businesses in Australia must regularly submit to the Australian Taxation Office bill payable A liability with a bill of exchange or form of promissory note bill receivable An asset with a bill of exchange or form of promissory note bonus Additional payment due to meeting key performance indicators or other benchmarks book value The value of a non-current asset in the balance sheet, usually at cost or a revalued amount less accumulated depreciation capital The owner’s contribution to the business for a sole trader; A = L + OE where OE records capital carer’s leave Leave for the purpose of caring for a family member; the National Employment Standards allow non-casual employees paid personal/ carer’s leave carrying amount The net value of a non-current asset in the balance sheet, usually at cost or a revalued amount less accumulated depreciation cash accounting An accounting method where revenue is recorded when cash is received and expenses recorded when cash is remitted cash at bank The bookkeeping record of all deposits and withdrawals from the business’s bank account cash balance summary A summary of what the bank account would be in the general ledger if all the journals are updated and posted, or the cash book totalled, balanced and ruled off for the period 629

GLOSSARY cash flows The bank account receipts and disbursements for the business; the net flows for some businesses are shown in the statement of cash flows cash payments journal All transactions involving bank account disbursements by cheque or electronic transfer cash receipts journal All transactions involving bank account deposits by cash, cheque or electronic transfer cash transactions The economic activities of a business involving bank deposits and disbursements chart of accounts A schedule that lists all accounts in the general ledger, categorised into the five types of account groups, together with a consistent numbering cheque A written order by a business (the drawer) upon a bank to pay funds to a person or business (the drawee) cheque butt The record in the cheque book of date, the payee, the purpose and amount of each payment closing entries Journal entries at the end of an accounting period to transfer balances in income, expense and drawings accounts to capital commission Payment to an agent or employee for services; e.g. selling insurance policies or real estate community service leave Leave entitlement for employees, including casual employees, who carry out certain community service activities such as jury service and certain ‘voluntary emergency management activity’ as defined by the National Employment Standards (NES)

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company Incorporated business structure under the Corporations Act 2001 (Cwlth) compassionate leave (bereavement leave) A type of leave prescribed in the National Employment Standards. Employees are entitled to take paid or unpaid leave when a member of an employee’s immediate family or household dies or develops a life-threatening illness or injury contra asset An offset account attached to another; e.g. accumulated depreciation of a non-current asset such as a building control account A summary account of subsidiary ledger accounts such as accounts receivable control document A document supporting a transaction by providing information that verifies the accuracy and validity of the relevant source document 630tafenswlib on 2020-05-30 06:08:46. Created from

conventions Generally accepted principles; e.g. accounting period, entity, etc.

current liability An obligation that the business is required to satisfy or pay within the next 12 months

corporation Incorporated business structure under the Corporations Act 2001 (Cwlth)

debit card A plastic payment card that provides the cardholder electronic access (EFTPOS) to their bank account(s) at a financial institution

cost of sales (CoS) account General ledger account, when a perpetual inventory system is used, that records all costs associated with inventory sales cost of sales or the goods sold A calculation when a businesses uses a periodic inventory system where purchases are added to the beginning cost of inventory and the closing inventory cost is deducted to reveal CoS. In a perpetual inventory system, the cost of sales is obtained by continuously updating in a separate account credit The supply of goods or services in the expectation that they will be paid for at a future date; also an amount entered on the right-hand side or credit column of an account credit card A facility with a provider such as MasterCard or Visa to allow purchases of goods and services on credit, up to a set limit; recorded as cash sales by businesses, as the credit card company deposits the net proceeds into the business’s bank account credit limit The maximum amount of credit that a supplier or a financial institution will extend to a customer credit note A document that is issued generally by the supplier to the buyer, to evidence the return of goods or to make a downward adjustment of an invoice for incorrect pricing credit policy Guidelines developed by a business on how to extend credit and to which customers; who can be granted credit, the upper limit, payment terms, and how to deal with customers who do not pay within the allowable time period credit terms Specific details of the length of time for payment, any discounts given for early payment, and late payment penalties for each account receivable credit transactions The provision of goods or services by a supplier to a customer with an arrangement that they will be paid for at a future date creditors see accounts payable current asset Cash or other assets of the business that are expected to be used, consumed or converted into cash within the next 12 months

debtors see accounts receivable deductions Part of an employee’s earnings that are withheld by the employer for payment to other bodies, e.g. the Australian Taxation Office, union fees, etc. delivery docket A docket provided by the seller to the buyer at the time of delivery, stating that the goods have been delivered depreciation The allocation from a depreciable asset’s future economic value to current expenses based upon the estimated life or use of the asset depreciation expense see depreciation. The debiting of the depreciation charge to the income statement matching the credit amount charged to the accumulated depreciation account for the asset doctrines Fundamental or general truths or principles upon which other truths depend; e.g. materiality depends upon the importance of an item and its relative size to the business, so that loss of inventory of a certain dollar amount may or may not be material based upon the size of the business doubtful debts expense An estimated amount of accounts receivable that are uncollectable drawer The business paying the cheque drawings Assets taken from the business by the owner during the year earnings see gross pay electronic funds transfer (EFT) The electronic transfer of funds between the bank accounts of individual parties electronic funds transfer at point of sale (EFTPOS) Payment at time of purchase made by scanning a debit or credit card through a reader; smart phones or cards may also be passed near a payWave or PayPass input device employee record card The record kept of personal as well as job details of each employee

GLOSSARY expense accrued Also called accrued expenses; expenses that have been incurred by a business during an accounting period but have not yet been recorded or paid expense prepaid A deferred expense (asset) that has been paid in advance, such as insurance expenses The outflow or depletion of assets or the incurring of liabilities during an accounting period external users Businesses or individuals outside of the business who use the financial information from the business to make decisions; e.g. government departments, suppliers and lenders of funds financial reports Statements detailing a business’s financial position, performance and cash flows financial year A period used for calculating yearly financial statements (in Australia usually 1 July to 30 June of the next year); laws regulating accounting and taxation require such reports once per year flex leave Usually accumulated overtime hours that an employee can accrue and use later for the equivalent amount of time off fringe benefits Benefits provided to employees or their associates as part of a wage or salary package (e.g. car, personal electronic devices); certain fringe benefits are subject to tax funds General term that includes money and other financial securities general journal

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A book of original entry used to record any type of transaction and adjustments to the accounts of a business; has two separate value columns for debit and credit entries

gross pay The employee’s total pay before deductions for items such as income tax, union fees etc. gross profit The balance remaining when all revenues less all expenses is a positive amount; i.e. the amount of revenues is greater than expenses GST Goods and services tax; a Commonwealth government tax (currently 10% of value) that must be added to the price of most goods and services by GST-registered businesses GST payable Liability due to the ATO by a GST-registered business from its sales; offset against GST receivable (an asset) on its inputs GST receivable Asset due from the ATO by a GST-registered business from its inputs and purchases; offset against GST payable (a liability) on its sales GST supplies Goods and services that are subject to GST and are sold with GST included in their price GST-free supplies Non-taxable supplies that are not subject to GST and have no GST payable. Most health and medical care services, most educational services and most non-prepared food for human consumption are GST-free supplies (also referred to as GST-free sales) historical cost convention The accounting principle where all transactions are recorded at their original (or historical) value; adjustments are not made to recorded values for inflation or changes in the value of money income statement A financial statement listing income and deducting expenses for a business over a period of time, which gives a profit or loss to be transferred to the balance sheet

The accounting principle whereby the financial reports are prepared on the basis that the business will continue for an indefinite period of time

input-taxed supplies Goods and services sold without GST in their price, even though GST was included in the price of the inputs used to make or supply them. If a business makes an input-taxed sale it cannot claim a credit for GST on inputs (the goods and services used to make the sale). Examples include financial supplies and supplies of rental premises by way of rent or sale; also referred to as ­inputtaxed sales

goodwill Unidentifiable asset resulting from paying more for buying a business than the fair value of its assets

internal users The owners and authorised employees within a specific business who use the business’s information from its activities

gross loss The balance remaining when all revenues less all expenses is a negative amount; i.e. the amount of revenues is less than expenses

inventory Items that are held by a business for sale, resale or for use in producing other goods and services; also referred to as stock. See also supplies

general ledger All the individual accounts from the chart of accounts organised into the five general classifications: ALOERE (asset, liability, owner’s equity, revenue and expense) going concern

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invoice A document that is generally issued by a supplier itemising the goods or services supplied and the price of the transaction journal A book where a transaction is originally recorded leave loading An additional payment employees receive when taking paid annual leave liability A present obligation of the business, which is expected to result in an outflow of resources; what the business owes to others long service leave A period of paid leave for employees who have been working for the same business for generally 10 years matching principle Expenses incurred are offset against the revenues they have generated during the accounting period monetary convention The accounting principle where all financial business transactions or events are recorded in monetary terms (Australian dollars in Australia) net loss The resulting debit balance in the profit and loss account transferred to the capital account in the balance sheet net pay The amount an employee receives after all deductions have been made from gross pay net profit Gross profit plus other revenue less other expenses, which is then transferred to the capital account in the balance sheet non-current assets Assets the business expects to hold for more than 12 months non-current liabilities Obligations that the business is required to satisfy or pay beyond 12 months not negotiable When written on a cheque between two lines, it means that the cheque must be processed through the payee’s bank account on-costs Costs or expenses in addition to the wage or salary that the business pays to employees. These include compulsory superannuation guarantee contribution, payroll tax, workers’ compensation insurance, fringe benefits and long service leave overtime Any work in excess of agreed hours in a week, or outside the ordinary hours listed in the award or agreement; usually paid at a higher rate per hour 631

GLOSSARY owner’s equity The owner’s investment in the business; owner’s equity = assets less liabilities parental leave Unpaid leave granted to employees when a new child is born or adopted; includes maternity leave (for mums), paternity leave (for dads and partners) and adoption leave as well as other types of special leave partnership A business structure owned by two or more people who share profits and losses; each person can be held personally liable for the debts of the business pay slip A record provided to employees with full details of the period for which wages or salary have been paid and the amount of any deductions payee The person or business to whom the funds are being remitted payer The person or business that is remitting the funds pay-as-you-go (PAYG) withholding tax A system for withholding amounts from payments made to employees and businesses so they can meet their end-of-year tax liabilities PAYG payment summary statement A summary statement given to employees, workers and other payees showing the payments made to them and the amounts withheld from those payments during a financial year payment summary A summary showing the payments made to employees and the amounts withheld from those payments during a financial year

Copyright © 2018. Cengage. All rights reserved.

payroll The sum of all financial records for employees, showing salaries, wages, bonuses and deductions; also refers to the amount paid to employees for services they provided during a certain period of time payroll clearing account An account to which net payroll is cleared, after gross wages have been entered in the general journal together with all deductions payroll register A list compiled for each pay period of gross pay, deductions and net pay for each employee payroll tax A state and territory tax that is paid from the employer’s own funds and that is directly related to the wage bill of employing workers penalty rate A higher rate of pay for work late nights, early mornings, weekends or public holidays; established in agreements and awards

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periodic inventory A system for recording inventory where adjustments to the inventory account are made periodically, and based on a physical count of the items perpetual inventory A system for recording inventory where records, including the inventory account, are updated as changes are made (when goods are purchased and are sold); a physical count is periodically made and records adjusted if required personal identification number (PIN) A code that gives the user secure access to debit and credit cards, mobile phones and other devices personal leave Leave for personal and compassionate reasons to which all employees except casuals are entitled under the NES petty cash float The maximum amount of money that is held in the petty cash box or tin petty cash imprest system A system used to control the remittances for very small items in notes and coins rather than through cheque, debit or credit card and other electronic transfers physical stocktake A physical count of inventory or stock piecework Work that is paid on the basis of results achieved or components produced (e.g. a fruit picker paid on a rate per bucket of fruit picked) POS Point of sale profit The remaining balance after expenses have been deducted from revenues profit and loss account A clearing account that provides the net profit from the operations of a service or trading business provision for long service leave The liability created in the balance sheet recognising the long service leave expense that should be paid in the future for current employees purchases journal A journal where the details of credit purchases of goods and services are recorded; returns of goods previously purchased on credit may also be recorded in this journal receipt A document that is generally issued to the payer by the receiver of funds redundancy Pay and benefits an employee receives when leaving a company under either a voluntary or forced redundancy due to lack of work

remittance Transfer of funds to the payee by a payer residual value The estimated recoverable value of a non-current asset after its assumed useful life revenue The earnings, proceeds or takings from the operations of a business, such as sales or fees received revenue accrued Also called income accrued, accrued income/ revenue or revenue receivable; income that has been earned by a business during an accounting period but has not yet been recorded or received revenue prepaid Also called income prepaid, prepaid revenue or prepaid income; revenue that has been received and recorded in one accounting period for goods or services to be supplied in a future period revenue received in advance see revenue prepaid reversal journal The general journal where entries are made to reverse the effects of certain balance day adjustments such as accrued wages salary Usually a fixed amount paid to an employee on a regular basis irrespective of actual hours worked salary sacrifice A term referring to the inclusion of employee benefits (also called fringe benefits) in an employee remuneration package in exchange for giving up part of monetary salary; there is usually a tax benefit to the employee, as with voluntary payment of additional superannuation sales journal A journal where the details of credit sales of goods and services are recorded; returns of goods previously sold on credit may also be recorded in this journal salvage value The estimated recoverable (salvage) value of a non-current asset after its assumed useful life segregation of duties The separation of responsibilities designed to prevent an employee from misappropriating cash receipts by making false entries in the accounting records servicing business A business that sells the knowledge and skills of the owner and employees to make a profit sole trader A form of business structure where there is only one owner source document Principal document that provides details of transactions recorded in the journals

GLOSSARY specialised journals Books of original entry or journals that are used to record transactions that are repetitive or of the same type, such as sales, purchases, cash payments and cash receipts

subsidiary ledger A subset of the general ledger used in accounting. The sub-ledger shows detail for part of the accounting records such as accounts receivable, property and equipment, prepaid expenses, etc.

trading account Provides the first profit calculation, the gross profit; the difference between revenue from sales of goods and the cost of purchasing goods and bringing them into the business

statement of account A summary of all invoices, credit notes and remittances received during the period, together with the total amount owing

superannuation Includes both employer contributions under the Superannuation Guarantee Act and voluntary employee contributions in a preserved fund of future benefits for the employee

trading business A business that mainly buys goods in large quantities and sells them in smaller quantities

statement of cash flows A financial report classifying cash inflows and cash outflows into operating, investing and financing headings statement of changes in equity A financial report that links the income statement and the balance sheet. It shows the movements in owner’s equity between two accounting periods statement of financial performance Also known as an income statement, it shows the account balances of all revenues and expenses that determine the profit or loss made for the period statement of financial position see balance sheet statement of profit and loss and comprehensive income Includes profit or loss (net income) and other comprehensive income recognised in the same period, such as certain gains and losses on assets

tax file number declaration form A form signed by the employee and given to their employer at the start of employment; used to determine the appropriate tax to withhold tax invoice A document generally issued to customers by a GST-registered supplier, evidencing the sale of taxable supplies; the details must comply with the requirements of GST legislation taxable supplies Goods and services that are subject to GST and are sold with GST included in their price; also referred to as taxable sales termination The involuntary departure of an employee initiated by the employer; may be by being fired (at fault) or a forced redundancy (non-fault) time in lieu A type of work schedule arrangement that allows (or requires) workers to take time off instead of, or in addition to, receiving overtime pay

trial balance A statement listing all the accounts in the general ledger and their credit or debit balances at a particular point in time unlimited liability The legal obligation upon a business owner for all the debts of the business if it cannot pay its liabilities useful life The estimated period over which the future economic benefit of an asset is to be gained (i.e. by earning revenue) wages Remuneration paid to employees based on an hourly rate workers’ compensation insurance A form of insurance providing wage replacement and medical benefits to employees injured in the course of employment

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straight line method of depreciation A depreciation method that allocates an equal amount of depreciation to each period over the useful life of the asset

supplies Materials held by businesses for use in providing services. This term is often used instead of ‘inventory’ or ‘stock’ or ‘stock on hand’

transactions Events that are identified as making up the economic activity of a business; generally when a good or service is exchanged

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633

INDEX

Copyright © 2018. Cengage. All rights reserved.

A AASB 101 Presentation of Financial Statements  18, 387 ‘Fair presentation and compliance with Standards’ 389 ‘statement of financial position’ see balance sheet ‘statement of profit or loss and other comprehensive income’ see income statement AASB 102 Inventories  18 AASB 107 Statement of Cash Flows  18 AASB 112 Income Taxes  18 AASB 116 Property, Plant and Equipment  18, 420, 553, 577 AASB 118 Revenue  18 AASB 119 Employee Benefits  18, 432–3, 612 AASB 137 Provisions, Contingent Liabilities and Contingent Assets  18, 413 AASB 138 Intangible Assets  18 AASB 1031 Materiality  18 account allocations  61, 118–21, 141 balance day adjustments and  463–73 errors in  534–6 to financial statements  361–73, 461–3 to income statement – periodic inventory  362–5 to income statement – perpetual inventory  366–9 small amounts see standing journals account listing  185–6, 214, 222–3, 523, 556–8 financial statements with balance day adjustments 516–22 missing account values  516 periodic inventory  517–19 periodic inventory example 517–19 perpetual inventory example 520–2 account payable, tax invoice  527 account payable control account  133, 260, 263–4 account receivable tax invoice  527 write-off of individual during the year  414 account receivable control account  260, 264–5 accounting 2–4 basic terms  5–7 defined 3 ethics application  21 foundations 2–21 general agreements in  13 for GST using cash accounting system  174–7 for non-current assets  553–87 for payroll  605–12 accounting assumptions, conventions and doctrines 13–15 accounting entity convention  13, 56 accounting entries errors in entering  530–3 for payroll preparation  592–622 reversal of incorrect entry, processing of correct entry 531–2 accounting equation  56–68, 112, 124, 259, 261, 335, 358, 403, 408, 459 debits and credits and example 60–1 example 57–60 expanded 65–9

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leave provisions establishment  433 principles 80–105 satisfying  58–9, 84, 128, 132–3, 136, 141, 148 showing current and non-current assets, liabilities and owner’s equity  61–2 accounting information system/users  4 accounting period  3, 388 matching expense and revenue to  387–451 reversals to present revenue/expense in correct period 441 trial balance on commencement; both periodic and perpetual inventory  370–3 trial balance –  both periodic and perpetual inventory application  370–3 accounting period convention  13–14, 370–3, 441 accounting process  80 Accounting Professional and Ethical Standards Board (APESB) 21 accounting standards  17–20 accounting systems  4 accounts 139 add balance day adjustment amounts to existing 516 alternative account names, separated by a solidus (/) 71 with balance day adjustments  516–22 in cash payments journals  147 in cash receipts journals  139 closed to trading  428–9 combinations 142–4 differing with inventory system used  262–3 grouping accounts in a report, rationale for  351–2 half-yearly/quarterly accounts  446 identify account, statement and classification  516 increases/decreases, debits/credits of account groups 66 overdue or disputed  213–14 in purchases journals  131 reversing or cancelling entry following cheque dishonour 267 review of groups  352 in sales journals  123 wrong account  534–6 accounts payable  4, 6, 39, 115, 131, 260, 278–9 account payable three months overdue example 266–7 administration of  215–20, 292 age analysis report  218 cash payments journals with  155–63 in computerised accounting  210 monitoring of  218 payment  58–9, 66 policies and procedures development  216 possible links of bill payable to  278 reconciliations 233–41 recording/processing of transactions  217 relevance of inventory system to  187–8 separate ledgers for  185–241 should have been, erroneously was, correction is 531–2 subsidiary ledger  186–7 Accounts Payable Control  133, 155

accounts payable control account  85, 116, 186 column 132 subsidiary ledger and  196–210 accounts payable ledger  186, 197–9 example  199–210 accounts payable listing  186 accounts payable reconciliations  45 accounts payable statement chronological order  233 reconciliation procedure  234–41 accounts payable subsidiary ledger  186 accounts receivable  5, 43, 115, 123, 260 an account receivable transferred to bill receivable account and then met example 276–7 account receivable two months overdue example 265–6 accounts receivable control account column  124 administration of  210–15 age analysis report  213–15 cash receipts journals with  155 cheque deposited from account receivable but cheque is dishonoured example 269–72 in computerised accounting  196 direct method of writing off  272, 276–7 monitoring of  213–14 possible links of bill receivable to  276 reconciliation reality  224 reconciliation to remittance advice, procedure  222–33 reconciliations 220–33 recording/processing of transactions  212–13 recreation (bad debt payment)  275–6 relevance of inventory system to  187–8 remittance advice ticked against listing  222–3 secure record storage  213 separate ledgers for  185–241 should have been, erroneously was, correction is 530–1 statements in duplicate  222 subsidiary ledger  185–6 uncollectable 411–18 Accounts Receivable Control  155 accounts receivable control account  86, 185, 276 linked to accounts receivable subsidiary ledger  212 subsidiary ledger and  188–96 accounts receivable ledger  185, 188–90 example  190–6 accounts receivable listing  185, 214 accounts receivable officers  223, 226 accounts receivable subsidiary ledger  185 linked to accounts receivable control account  212 accrual accounting  387 accrual accounting system  3, 173 accrual of expenses see expense accrued accruals see expense accrued accrued expense see expense accrued accrued revenue see revenue accrued accumulated depreciation  419, 553, 561 transfer costs of  578 adjusted trial balance financial statements from  511–15 preparing 438–9

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INDEX adjustment credit notes  122, 128, 130, 223, 234, 527 daily basis processing  185–6, 220 adjustments  185, 210, 217 balance day  387–437 to business and bank records  309–10 other adjustments see other internal adjustments receipt and adjustment for bad debt recovered example 275–6 administrative expenses  69, 73, 353 administrative procedures and controls  210–15 advanced management reports, error correction 527–36 age analysis report  213–15, 218 aggregates 561 agreement(s)  185–6, 222, 342, 427, 516, 593 regarding pay rate  599 ticking  294, 296–7, 300, 312–13, 315 see also reconciliations allocations see account allocations allowance  48, 595 for inventory or goods, expense items or non-current assets previously purchased on credit  48 for inventory or goods, other expense items or non-current expense items previously sold on credit 48–9 allowance (indirect) method (doubtful debt)  412–15 additional 415–18 example 413 allowance for doubtful debts  412, 415 that may or may not happen 413 ALOERE (asset, liability, owner’s equity, revenue and expense)  70, 92 alphabetic codes  118 alphabetical order (filing)  174 annual leave  592 balance day adjustments  432–7 APES 110 Code of Ethics for Professional Accountants 21 asset register  555–8 agreement with general ledger accounts  556–7 example 557–8 listing 556–8 recording of depreciation details in  559 role 556 assets  5, 18, 56–61, 63–4, 66–70, 141, 148 balance sheet classification  361 as balance sheet component  338 bill receivables  276 current see current assets debit nature  71–2 non-current see non-current assets personal 13 see also accounting equation assets acquisition  57–8, 87, 259 audit 213 Australian Accounting Standards fair presentation  389 groupings and headings requirements  351 also under specific AASB standard Australian Accounting Standards Board (AASB)  14, 17–18 headings use  358 Australian Business Number (ABN)  33, 597 Australian Privacy Principles (APPs)  594 Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)  17 Australian Securities and Investments Commission (ASIC)  10–11, 350

Created from tafenswlib on 2020-05-30 08:18:41.

Australian Securities Commission Act 1989 (Cth)  17 Australian Securities Exchange (ASX)  11, 17 Australian taxation legislation  173 Australian Taxation Office (ATO)  4, 13, 50, 82, 124, 350 GST payable to  82–3 GST receivable from  83 remittance of PAYG withholding to  614 weekly tax tables  617–20 average weekly ordinary-time earnings (AWOTE)  621 awards 593

B bad debt additional 415–18 allowance method example 416–18 identification of  214–15 recovered 275–6 bad debt write-offs  272–4, 411 bad debts expense  415 balance day adjustments  387–437, 500 account allocations and  463–73 add amounts to existing accounts  516 before and after  389 in conjunction with the trial balance  467 effect of depreciation  421 effect of doubtful debts  415 effect of expense accrued  393 effect of expense prepaid  401 effect of revenue accrued  405 effect of revenue received in advance  409 financial statements from account listing with  516–22 incorporating – 8-column worksheet  476–82 journals and  502–3 leave provisions – annual leave, sick and carer’s leave, long service leave  432–7 matches 433–4 mismatches 432–3 periodic and perpetual inventory  501–8 periodic inventory examples  464, 467–70, 517–19 perpetual inventory examples  465–6, 470–3, 520–2 prepared and processed correctly  528 reversals prior to  441 summary 440 trial balance and  467–73 trial balance before, both periodic/perpetual inventories application  501–2 two account or statement allocations and two account group classifications  463 balance sheet  7, 18, 62–4, 335, 361, 375–7 applicable to both periodic inventory and perpetual inventory example 369–70 assets, liabilities, owner’s equity example 63–4 basic format  357–60 both periodic and perpetual inventory  487–91, 508–9, 523–6 composition 338 information from adjusted balance day account  523 information from columns in 8-column worksheet 487 periodic inventory  369–70 perpetual inventory  369–70 pre-closing balances  7 servicing business example  375–7 use of columns in  358–60 balance sheets  338 balancing process

errors in balancing  530–3 principles 93 balancing process principles, double line ruling indicating total  93–4 bank accounts, chronological order  294 bank charges  309 bank deposits  139–40 deposit and banking process  47 identification numbers  43 preparation 46–7 bank loans  58–9 bank reconciliation  293–322 advanced 305–7 advanced example 310–22 asset or liability and from whose viewpoint? 305–6 basic example 296–8 detailed process and sequence of events  307–22 if unreconciled  308 intermediate example 299–304 process 294–304 bank reconciliation statement  294–5 format 305–6 general ledger bank account balance agreement  294, 296–8, 300–1, 312–16 bank statements  291, 294 credit balance at end of month, treat it as plus 305–7 debit balance at end of month, treat it as minus 305–7 banks, delay or time lag recording deposits into accounts by  293 batching  118, 139, 530 best practice  594 bills of exchange  276–9 Bills of Exchange Act 1909 (Cth)  276 bills payable, accepted and met  278–9 bills payable control  278–9 bills receivable, accepted and met  276–7 bills receivable control  276 board of directors  11 bonus 595 book value  342, 553 sale of non-current assets at  264–5 borrowing expenses  69, 73, 352–3 brackets 148 see also parentheses buildings 5 business analysis and control of  351 buying another  260 commencement  57, 259–60 control of resources  5 departments or functions within  2–3 growth and number of accounts required  352 internal operations  113 inventory systems used by  125–30, 133–8, 141–6, 148–54 owner withdrawal of funds example 261–2 point of view  81–2, 113, 163, 220, 294 see also servicing business; trading business Business Activity Statement (BAS)  13, 82–3 ATO lodgement  614 business name registration  10 business operations  2–4 business ownership see ownership/owners business transactions  28–30 buy inventory (or goods) and all other items on credit  30–5, 81

635

INDEX

Copyright © 2018. Cengage. All rights reserved.

C capital  6, 10 additional introduction of  261 capital account close drawings account to  348–9 closing off profit and loss account to  347–8 credit to  261 post-closing balance of  508–10 pre-closing balances for  508–10 car allowance  595 carer’s leave  592 carrying amount  553, 570–2 cash 70 into business  87 management controls over  291–328 process transactions by preparation of journals, ledger, trial balance where periodic inventory applies example  155–7 process transactions by preparation of journals, ledger, trial balance where perpetual inventory applies example  158–61 purchase for  28 receive funds (money)  43 sale for  28, 578 cash accounting  3, 173–7 recording GST using cash accounting example  174–7 cash at bank  5 cash balance summary  294–5, 297, 301, 313–14, 316 format 306–7 cash books combined receipts and payments of funds  117 prefixes and transaction types  113 cash control, principles  212, 291–3 cash discount  170 cash flows  18, 212 cash journals combined see cash books cash on delivery  31 cash payments  292–3 cash payments journal  81, 147–54, 186, 263–4, 278–9, 296–7, 300, 312–13, 315, 434 account columns with perpetual inventory  151–4 with accounts payable  155–63 debit purchases/expense/inventory/asset and GST receivable, and credit bank  174 ‘Drawings’ 261–2 end-of-month processing  148, 198 entry following cheque dishonour  267 example 199–210 format – discount received  172–3 goodwill payments  260 headings in  147–8, 261 for indirect payroll method  607–9 linked to general journal by payroll clearing account 610–12 nominal (name) column headings  149 for one business is cash receipts journal for other business 166–70 only for direct payroll method  606–7 periodic inventory application example 149–51 perpetual inventory application example  152–4 posting 198–210 posting with general ledger and accounts payable ledger 198–9 posting with general ledger only  198 prefixes and transaction types  113 remit funds  116–17 as summary for cheques paying for inventory  147

636tafenswlib on 2020-05-30 08:18:41. Created from

cash receipts journal  81, 138–46, 185, 264–5, 296–7, 300, 312–13, 315 account allocations with cost details  141 account columns at cost price with perpetual inventory 144–5 with accounts receivable  155 bank deposit–bank account total column–duplicate receipt–other account columns relationship  139–40 end-of-month processing  140–1, 189 example  190–6 format 144 format – discount allowed  171–2 headings in  138–41 for one business is cash payments journal for other business 165–6 periodic inventory application example  142–4 perpetual inventory application example 145–6 posting 189–96 posting with general ledger and accounts receivable ledger 189–90 posting with general ledger only  189 prefixes and transaction types  113 receive funds  116 reversing or cancelling entry following cheque dishonour  267, 276–7 as summary for duplicate receipts  138–9 cash receipts journals  293 cash received  291–2 banking of cash receipts  292 cash registers  291 totals entered into cash receipts journal  116 cash sales  142 cash sale but cheque dishonoured example 267–8 little documentation  51 cash transactions  28 chart of accounts  70–4, 95, 185 detailed example  71–4 number at page top  92 owner’s equity classification of trading account  335 servicing business  71 cheque butts  40–1, 117 cheques  39–41, 147 banking of daily takings  292 banking process  42 crossed cheques  41–2 daily deposits  139, 292 dishonoured (bounced, not met or not paid)  267–72, 310 do’s and don’ts  42 information on  41–2 for petty cash  322–3 receipt of  43 via mail  291 Cheques Act 1986 (Cth)  41 Cheques and Payment Orders Amendment Act 1998 (Cth) 41 chronological order (filing)  174 clearing account  335–6 disposal account as  578 clearing account payroll method  578 general journal linked to cash payments journal by a payroll clearing account  610–12 closing accounts general journal to close accounts – periodic inventory 363 general journal to close accounts – perpetual inventory 367 to trading account – periodic inventory applies example 344

to trading account – perpetual inventory applies example 345 closing balances  58 as opening entries for next accounting period  335 closing journals  374, 428, 501, 503–4 periodic and perpetual inventory  501–8 for servicing business  374 trial balance check after posting  509–10 coding  113, 118–21, 196 coins  322, 327 banking of daily takings  292 daily deposits  139, 292 remittances 292–3 columnar format  95, 185 combined service/trading business  2 commencement of business  57, 87, 259–60, 424 commission 595 commission received  6 Commonwealth legislation  594 communication 214 community service leave  592 companies 11 comparability 56 comparison  14, 56, 161–3 financial statements requirements comparison  511 periodic–perpetual inventory systems comparison  89, 429–31 perpetual and periodic inventories cycles comparison 424–31 compassionate leave  592 compliance  18, 177, 389 with awards  593 computerised accounting systems  4, 41, 81, 92, 113, 210, 218, 291, 293, 422, 528 accounts payable in  210 accounts receivable in  196 closing off revenue/expenses  345, 350, 459, 504 columnar format of  100 no entry deletions  530 special transactions and  279 computers/computer systems  5, 32 Conceptual Framework (CF)  17, 387 concurrent funds, transactions for cash payments–cash receipts journals combinations  165–70 confidentiality  21, 594, 596, 610 conservatism doctrine  15 consistency doctrine  15 consultation 593 contra assets  412, 415, 419 control accounts  185–7 other 241 see also internal controls control documents  33–5, 38, 42, 46–7 internal memorandum  49 verify/check accuracy and validity of source document 27 control systems  423 conventions 13–14 Corporate Law Economic Reform Program Act 1999 (Cth) 11 corporations 11 Corporations Act 2001 (Cth)  11, 14 s. 334(1) statutory powers  18 Corporations Law Economic Reform Program Act 1999 (Cth) 17 cost of goods actually sold  341 cost of goods available for sale  341 cost of goods sold account  88 cost of goods that have not been sold  341 cost of sales

Copyright © 2018. Cengage. All rights reserved.

INDEX closed to trading  342–3 periodic inventory  335–6, 339–42, 353 perpetual inventory  336, 342–3, 353 cost of sales account  7, 69, 73, 88 variance from stocktake allocated directly to  465 see also perpetual inventory costs  14, 598 pre-establishment costs  259 treatment of  71 credit  60–1, 148, 259, 263–4, 294, 296–7, 300, 312–13, 315, 433 accounting equation  60–1 buy goods, services and other items on  30–5 buy goods, services, other items on credit–purchases journal 115 expanded accounting equation  65–9 in general ledger  92 items purchased on  130 items sold on  122 process transactions by preparation of journals, ledger, trial balance, periodic inventory applies example  155–7 process transactions by preparation of journals, ledger, trial balance, perpetual inventory applies example  158–61 purchase on  28–30 right-hand side (L + OE)  60, 92 sale on credit  28–30, 578 sale on credit later written off as bad debt example 273–4 sell goods and services on  35–8 sell goods, services, other items on credit–sales journal 115 specifying 516 T account entries  93–4 transactions for cash payments–cash receipts journals combinations 165–6 credit approval  211 credit cards  27 inflows 116 issue of and control over business credit cards  219–20 credit limits  213 credit note  29, 217 issued to customer for goods previously sold on credit 29 issued to customer upon return of goods purchased 48–9 printed in red ink  49 received from supplier upon return of goods purchased 48 sequentially numbered  212 credit notes  212 credit officers  36–7, 211, 223, 226 credit policy  212, 214 development 211 credit purchases  33, 38, 210 credit sales  33, 38, 43 credit terms  211, 265–6 credit transactions  28, 170–3 creditors  4, 6, 131 creditworthiness 211 cross-balancing  125, 133, 141, 148, 171–2, 188–9, 197, 307, 603 cross-referencing entries  95, 113, 122 current asset GST receivable account  263–4 current asset of inventory  341 current assets  5, 61, 70–1, 276, 294, 358, 446 accounting equation showing  61–2 current liabilities  6, 61, 70, 72, 83, 278, 294, 358 Created from tafenswlib on 2020-05-30 08:18:41.

current liability GST payable account  264–5 customer enquiries answering 215 resolving by direct and immediate contact  223 customer invoices  115 customer orders see sales orders customer quotes, filing of  51 customer relations  214 customer remittances  212–13 matched against invoices/credit note  212 customers advised of account balance position  213 GST collected from  83 identifying amounts owed by  185–241 part-delivery only of order see revenue accrued customised accounting software packages  4

D data accuracy 122 correct 71 errors in entering  530–3 filing of  51 invoice data  293 one-time data entry  210 debit  60–1, 141, 259, 261, 263–4, 294, 296–7, 300, 312–13, 315, 433 accounting equation  60–1 expanded accounting equation  65–9 in general ledger  92 left-hand side (A)  60, 92 offsetting 139 specifying  468, 516 T account entries  93–4 debit cards  27, 39, 309 inflows 116 issue of and control over business debit cards  219–20 debtors  123, 212 extract accounts receivable listing  214 decimal places  603–4 decision making  3, 122 deductions 602 deduction remittances to business/ATO  608 delivery dockets  34 depreciable amount  553 depreciable assets, derecognition or disposal of  577–87 depreciation  418–22, 446, 553 actual date of purchase–day, month and year considerations 565 calculated for current period  577 diminishing balance  570–6 example  581–7 method 1: straight line depreciation  560–5 method 2: units of use depreciation  567–70 method 3: diminishing balance depreciation  570–6 procedures for calculation of depreciation methods/ recording in the accounts  560–76 purchases of months of  565–7 recording of details in asset register  559 reversal of adjustment for  421–2 time line  565–7 units of use  567–70 worksheet  559–60, 578, 581–7 depreciation expense  418, 553, 561 nature and determination  558–60 over usage  567 standing journals example 451

derecognition process (asset)  577 despatch  2–3, 212 despatch docket  38 diminishing balance depreciation  570–6 example  571–6 direct credits  309 direct debits  309–10 direct payments  309 direct payroll method, cash payments journal only 606–7 disclosure doctrine  14–15, 428 discount allowed  171–2, 189–92, 223 credit sale and cash receipt with discount allowed example 171–2 daily basis processing  185–6, 220 discount received  172–3, 198 credit purchase and cash payment with discount received example 172–3 discounts not allowed  235 result of credit transactions  170–3 taken but not allowed or applicable  224 dishonoured (bounced, not met or not paid) cheques 267–72 fee and  310 disposal account  578 disposal process (asset)  577–87 disposal value received  578 example  581–7 gain on  577–9 loss on  577–8, 580–1 dispute settlement  593 disputed accounts  214 distortions  15, 441 distribution expenses  69, 73, 353 dividends received  69, 402 doctrines 15 also under specific doctrine document tracking  31 documentation  27, 30–49 batching of documents  530 correctly authorised and accurate  80, 213 errors in  527 filing of  50–1 of financial transactions  27–51 held securely for minimum five years  50 missing 528 for payroll  596–7 supporting  33, 123, 131, 217 types 27 double-entry accrual accounting system  3 one transaction resulting in at least two entries  60 double-entry based computerised accounting systems 113 double-entry processing  80–105, 112–77 doubtful debt  224 adjusted allowance at end of following year  414–15 adjustment method  412 allowance (indirect) method  412–15 assumptions regarding  412 identification of  214–15 initial allowance for  413 reversal of adjustment for  409, 415 doubtful debts expense  412, 415 drawers 41–2 drawings  6, 10 close drawings account to capital account  348–9 of funds and goods  261–2 pre-closing balances for  508–10 due care  21

637

INDEX

Copyright © 2018. Cengage. All rights reserved.

E earnings  69, 600 economic value  56, 61, 399, 418 8-column worksheet to financial statements  483–91 financial statements from  511–15 formats and columns  474–5 incorporating balance day adjustments  476–82 periodic inventory example 474–5 perpetual inventory example 477–82 electricity, expense accrued example 392–3 electronic data interchange (EDI)  32, 196 electronic funds transfer at point of sale (EFTPOS)  39–40, 43–5, 291 electronic tags  597 employee pay slips  597 employee personal history record  596–7 employee record card  596 employee-related expenses  605 employees  4, 10 regular rotation of  291 employees benefits other 595 payroll and  594–7 employer superannuation contributions  621 employers obligations 621–2 see also employee benefits; leave provisions; payroll employment commencement of  433 terms and conditions  592–4 employment status  599 employment-related costs  598 end of year balance day  446 end-of-month processing  124–5, 128, 132–3, 136, 140–1, 144, 148, 151 end-of-period processing  420, 500–1 values 434 end-of-year closing accounts close accounts to profit and loss account example  347–8 to trading account – periodic inventory applies example 344 to trading account – perpetual inventory applies example 345 end-of-year stocktake  422, 424, 427–9 end-of-year tax liabilities  613 enterprise agreements  593 enterprise bargaining  593 entities see business equity 18 error correction  527–36 multiple-choice questions and  533 errors  33, 38 in allocation  534–6 almost right or mostly right  122 by the business/by the bank  310 in documentation  527 in entering, posting or balancing  530–3 in journals/journal preparation  122 ledger posting error  534–6 minimised 213 of omission  122, 527–9 tax invoices, error in amount  234 ethics, accounting application  21 expanded accounting equation  65–9 assets, liabilities, owner’s equity, revenue and expense example 66–9 debits and credits  65–9

638tafenswlib on 2020-05-30 08:18:41. Created from

revenues and expenses  69 expense  7, 18, 65–70, 173–4, 353, 387 closing off to profit and loss account  345–7, 459, 504 control of  352 debit nature  73–4 expanded accounting equation  69 immediately record the purchase of supplies as  374 items previously purchased on credit  48 matching 387–451 expense accounts  399 reversal of expense accrued, effect on  393–4, 396–7 reversal of expense prepaid, effect on  401–2 expense accrued  388, 528 adjustment method example 392–3 expense incurred not yet processed  391–7 reversal example 441–2 reversal of  393–4, 396–7 expense incurred not yet processed  391–7 expense prepaid  388, 446 adjustment method example 399–400 alternative terms  398 expense processed but not yet incurred  398–402 reversal example 443 reversal of  401–2 standing journals example 446–8 expense processed but not yet incurred  398–402 expenses payable see expense accrued external users  4 externally produced source documents see supplier invoices extract accounts receivable listing  214

F fair value  14, 260 Fair Work Act 2009 (Cth)  592–3, 596, 602 Fair Work Amendment Act 2012 (Cth)  593, 596 Fair Work Commission  593 Fair Work Information Statement (provision)  593 Fair Work Ombudsman  593 Fair Work Regulations  596 faithful representation  56 fees 6 filing (documentation)  50–1 financial expenses  69, 73, 353 financial performance  18 over a period of time  335, 357 financial position  18 at a particular point in time  335, 357 financial reports  13, 56, 334–77, 459–93 comparable, timely, verifiable and understandable 56 general ledger links to  334–8 general ledgers and  334–77 impact of errors on  528–9 preparing from worksheet  459–93 for servicing business  373–7 through trial balance  337–8 financial statements  7 from 8-column worksheet or adjusted trial balance 511–15 from 8-column worksheet to  483–91 abbreviations for accounts or statement and group  361, 461 account allocation to  361–73, 461–3 from account listing with balance day adjustments 516–22 complete set  18–19 fair presentation of  389

identify account, statement and classification  361, 516 preparation 515–17 requirements comparison  511 financial transactions  27 documentation of  27–51 financial year (or fiscal year)  13 reversals occurrence  510–11 fines imposition  50 flex leave  595 formal written document (note)  276–9 fraud  219, 291 fringe benefits  621–2 full disclosure  14 funds  5, 29, 81 acceptable methods for receiving  44 combined receipts and payments of funds–cash book 117 daily basis processing  185–6, 220 drawings of  261–2 immediate provision on sale of bill receivable  276 paying see pay funds purchase of non-current assets and remittance of funds example 263–4 received from credit customer  222 receiving see receive funds  44, 116 remit–cash payments journals  116–17 see also payments

G gain 18 general expenses  69, 73, 353 general journal  80–105, 260, 273–4, 276–9, 447 to close accounts – periodic inventory  363 to close accounts – perpetual inventory  367 closing entries  350–1 ‘cut down’  530 debit entries always written before credit entries  531 every transaction requiring one entry  112 example  100–5 format  133, 148 headings in  81 for indirect payroll method  607–9 introduction of additional capital  261 leave payments (complications ignored)  434 linked to cash payments journal by payroll clearing account 610–12 one-off internal entry for business commencement 259 posting to general ledger  92–8 posting to general ledger, summary  95–8 prefixes and transaction types  113 pro forma  530, 532 profit determination  334 transactions entered in  84–92 general ledger  188–9, 197–8, 265–6, 273–4, 276–9, 294, 334–77, 443, 505–7 account numbering summary  70 chart of accounts as structural guide  334 close accounts  338–49 correct date sequence  161 debit and credit in  92 examples  100–5, 190–6, 199–210 extract examples  125–30, 133–5, 142–6, 149–54 financial reports and  334–77 formats  92–5, 100–5 general journals posted to  92–8, 185 linking to financial reports  334–8 monthly totals  141, 148

Copyright © 2018. Cengage. All rights reserved.

INDEX one transaction resulting in at least two entries  112 periodic inventory  363–5 perpetual inventory  367–8 posting sequence to  161–3 posting to  294, 298, 301, 316 profit and loss account in  335 purchases journal, end-of-month totals posted to 132 recorded from point of view of business  163 reference number and  92 sales journal, end-of-month totals posted to  124–5 summary of balances see trial balance general ledger bank account balance, bank reconciliation statement agreement  294 general purpose financial statements (GPFSs)  17 general truths  13 going concern (or continuity of activity) convention 13–14 good faith  593 goods  3, 7 bought in bulk  2 drawings of  261–2 faulty goods kept, recycled or dumped  48 GST-free or include GST  34 previously sold on credit  48–9 purchases  48–9, 58–9, 115 receipt from suppliers  216 sales  65, 115, 122 transactions for cash payments–cash receipts journals combinations 165–7 goods and services tax (GST)  13, 82–4, 125, 132, 190, 259, 427, 594 accounting for using cash accounting system  174–7 example  82–3 legislation 33 recording using cash accounting system example  174–7 two accounts  83 goodwill 260 government bonds  402 government departments  4 gross earnings  600 gross loss  335, 343–5 gross pay calculations  597, 600–1 gross profit  335–6, 343–5, 353, 424 grouping 118 GST credit  83 GST payable (GST collected)  174, 189, 274, 411 to ATO  82–3 GST receivable  324 GST receivable (GST paid)  198, 259, 427 from ATO  83 GST supplies  83–4 GST-free supplies  83–4

H Higher Education Loan Program (HELP) debt  596, 602 historical cost (or historical record) convention  14 human resources (personnel)  610 payroll and  2–3

I imprest system see petty cash imprest system income ‘income’ substitution see revenue income statement  7, 18, 335, 338, 361, 374–5, 446, 483, 507–8 Created from tafenswlib on 2020-05-30 08:18:41.

allocation via periodic inventory  362–5 allocation via perpetual inventory  366–9 periodic inventory  365, 483–4 periodic inventory example  517–19 periodic–perpetual inventory systems comparison 429–31 perpetual inventory  369, 485–6 perpetual inventory example  520–2 preparation 428–9 for servicing business  374–5 trading basic format  351–7 use of columns – periodic inventory  354–5 use of columns – perpetual inventory  355–7 indirect cost  71 indirect payroll method, general journal and cash payments journal  607–9 industrial action  593 industry awards  593 inflation 14 information 594 accurate 123 provided by journals  122 input-taxed supplies  83–4, 265 insolvency 411 Instalment Activity Statement (IAS), ATO lodgement 614 insurance, expense prepaid example  399–400 integrity 21 interest payable  402 on overdue accounts  266–7 interest receivable, on overdue accounts  265–6 interest received  6, 65, 69 revenue accrued, interest received example  403–5 internal adjustments, other–cash books  118 internal controls  35, 38, 122, 211, 528, 530, 622 account payable statement–supplier’s account receivable statement reconciliation  233–4 for accounts receivable  411 for cash payments journals  147 for cash receipts journals  138 documented measures  212 journal preparation  80 over accounts payable transactions  215–17 over receipts  212 for petty cash  322 principles for cash control  212, 291–3 for purchases journals  130–1 for sales journals  123 statements of account regular issue  213 what is owed–customer’s records reconciliation 222 see also control documents internal memorandum  49 authorised 49 internal users  4 internally produced source documents  527–8 International Accounting Standards Board (IASB) Framework 17 International Financial Reporting Standards (IFRSs) 19 inventory 5 closing 341–2 movement within  423 opening  339–40, 422–3 physical count during year  426–7 previously purchased on credit  48 previously sold on credit  48–9 purchases  48, 58–9, 66, 259, 424–6 review 422–4 sales  48–9, 122, 425–6

transactions for cash payments–cash receipts journals combinations  165, 167–70 inventory price list  38 inventory systems  125–30, 133–8, 141–6, 148–54 drawing of goods for both systems example  262–3 impact of system used  262–3, 267–74 relevance to receivables and payables  187–8 investment 5 cost of inventory investment (at any time)  423 items not for resale given nominal name  149 not received  223, 234 purchases 115 sales 115

J journals  161–3, 185 balance day adjustments and  502–3 buying another business example  260 cash payments  116–17, 147–63 cash receipts  116, 138–46, 155 closing  374, 501, 503–4, 509–10 daily basis and preparation order  161 daily writing up  118 dissection error  534 filing of preparation data support  51 format 122 general see general journal information in chronological order  51 opening for commencement of business example  259–60 prefixes 113 preparation  122, 161–3 purchases  115, 130–8 sales  115, 122–30 source documents entered in  114–21 for special transactions  259–79 specialised see specialised journals standing see standing journals

L land 5 law  18, 28 privacy-related laws  594 leave 595 leave loading  593 leave provisions  4, 612–13 amend at year’s end  434 balance day adjustments  432–7 establishing 433 example  435–6 no reversal of adjustment  437 provide for and adjust during the year  433–4 ledgers general see general ledger ledger posting error  534–6 separate ledgers for accounts payable and accounts receivable 185–241 for special transactions  259–79 subsidiary see subsidiary ledger legal tender  603 legislation 594 GST legislation  33 privacy legislation  594 statutory requirements for storage/filing of records 213 also under specific Acts lenders 4

639

INDEX liabilities  5–6, 18, 56–61, 63–4, 66–70, 131–2, 260, 263–4, 612 accounting equation showing  61–2 allocating 61 balance sheet classification  361 as balance sheet component  338 credit nature  72 current see current liabilities non-current see non-current liabilities see also accounting equation ‘Limited’ (‘Ltd’)  11 limited liability  11 loans  6, 352 long service leave  592 balance day adjustments  432–7 loss  7, 18, 343–5 allocation in partnerships  10

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M machinery/machines 5 management 3 management controls, over cash  291–328 management information systems (MIS)  3 management reports, advanced  500–36 manipulation  99, 530 manual accounting system  4, 81, 92, 113, 293 marketing expenses  69, 73, 353 markets 3 matching principle  173, 212, 217, 388–9, 391, 398, 402–3, 407–10, 418, 427, 433–4, 446, 449, 528, 558, 612 materiality doctrine  15, 428, 528 meal allowance  595 Medicare levy  596, 602, 615 weekly PAYG rates incorporating  615 memos 118 misappropriation 291 mismatches  391, 398, 402, 407, 432–3 monetary convention  14 money 39–43 receive funds (money)  42–7 reconciling money amounts  31 monitoring of accounts payable  218 of accounts receivable  213–14 of accounts receivable and debt collection procedures 211 of credit department activities  214 levels of inventory for customers  196 monthly accounts, filing of preparation data support 51 mortgages 6 motor vehicles  5

N National Employment Standards (NES)  432 terms and conditions  592–3 negative assets  412, 415, 419 net loss  336 net pay  597 example  602–5 payment method  598 net profit  336–7 pre-closing balances for  508 New Payments Platform (NPP)  293 New Tax System, A (Goods and Services Tax) Act 1999 (Cth) 259 no petty cash book  327–8 example  328

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no tax-free threshold  615–16 non-current assets  5, 61, 70, 72, 263–5, 358, 418, 553–87 accounting equation showing  61–2 accounting for  553–87 become operational during the year  565 key terms  553–4 previously purchased on credit  48 purchase of  263–4 purchases  48, 565–7 sale of at book value  264–5 transfer costs of  578 valuation 451 non-current expense items, previously sold on credit 48–9 non-current liabilities  6, 61, 70, 72, 358 ‘Not negotiable’  41 notes  322, 327 banking of daily takings  292 daily deposits  139, 292 remittances 292–3 notice of termination  593 NSF (not sufficient funds)  267 numeric codes  118

O objectivity 21 occupation awards  593 office equipment  5 off-the-shelf accounting packages  4, 241 omission errors of  122, 527–9 in journals/journal preparation  122 on-costs 598 operating expense  73–4, 389 operating revenue  69, 72 organisational standards and procedures  177 other control accounts  241 other costs of obtaining goods  340–1 other expense items, previously sold on credit  48–9 other internal adjustments  30, 81, 118 other operating revenue  69, 72 other subsidiary ledger  241 outstanding (‘o/s’)  294, 296–7, 300, 312–13, 315 overdraft  305, 352 overdue accounts  213–14 interest receivable and payable on  265–7 overtime  595, 599–600 owner’s equity  6–7, 56–70, 259, 261, 358 accounting equation showing  61–2 balance sheet classification  361 as balance sheet component  338 credit nature  72 drawing down or taking  262 pre-closing balances  508 see also accounting equation ownership/owners contributions by and distributions to  18 owner withdrawal of funds example  261–2 types, advantages and disadvantages  10–11

P parental leave  592 parentheses  130, 198 Partnership Acts (state/territory)  10 partnership agreements  10 partnerships 10 jointly and severally liable partners  10

pay funds (money)  39–42, 81 pay periods  598 pay slips  597 fines imposition on neglect of duty  596 pay-as-you-go (PAYG withholding)  598, 613–16 amount of tax withheld  615 calculating amounts  615–16 records, compulsory retention  614 remittance to ATO  614 tax-free threshold/no tax-free threshold examples 615–16 weekly tax tables  617–20 payees 41 PAYG payment summary statement  597 payment request  42 payment summary  597 payments  39–42, 117, 210 daily basis processing of details  185–6, 220 filing of  50 lesser than originally invoiced  170 part payment, underpayment or overpayment  212 to suppliers  217 PayPass  27, 40, 322 payroll 2–3 accounting for  605–12 calculating 598–600 clearing account method – general journal linked to cash payments journal by payroll clearing account 610–12 direct method – cash payments journal only  606–7 documentation for  596–7 employees benefits and  594–7 functions and processes  592 indirect method: general journal and cash payments journal 607–9 recording example  606 variations 595–6 payroll clearing account general journal linked to cash payments journal by 610–12 journal links via  610–12 payroll controls  622 payroll enquiries  622 payroll preparation  598–605 accounting entries  592–622 leave payments  434 payroll register  597 example  602–5 payroll tax  621 payWave  27, 40, 322 penalty rates  595 performance-based remuneration  595 periodic inventory  124–5, 133, 141, 148, 262–3, 267–70, 273, 335–6, 374 account listing, balance day adjustments and income statement 517–19 allocation to income statement  362–4 balance day adjustments and account allocations examples 464, 467–70 balance sheet  369–70, 487–91 both periodic and perpetual inventory  508–11 cash/credit transactions processing example 155–7 cost of sales  335–6, 339–42, 353 cycles comparison  424–31 general journal entries  88 general journal entries example 90–2 general journal to close accounts  363 general ledger  363–5

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INDEX income statement  365, 483–4 income statement, columns use  354–5 periodic–perpetual account headings comparison 161–3 perpetual cycle–physical cycle comparison  424–31 perpetual inventory records–physical inventory variance 422–31 review 422–3 source documents, cash payments journal where periodic inventory applies, extract general ledger, trial balance example 149–51 source documents, purchases journal where periodic inventory applies, extract general ledger, trial balance example 142–4 source documents, sales journal, extract general ledger, trial balance example 125–7 trial balance, balance day adjustments and closing journals 501–8 trial balance – new accounting period  370–3 perpetual inventory  66, 124–5, 133, 141, 149, 262–3, 267–71, 273–4, 336, 374 account columns at cost price in cash receipts journals with  144–5 account columns in cash payments journals with 151–4 account columns in purchases journals with  136–8 account columns in sales journals with  128–30 account listing, balance day adjustments and income statement 520–2 allocation to income statement  366–9 balance day adjustments and account allocations examples  465–6, 470–3 balance sheet  369–70, 487–91 both periodic and perpetual inventory  508–11 cash/credit transactions processing example 158–61 cost of sale knowledge  423 cost of sales  336, 342–3, 353 cycles comparison  424–31 general journal entries  88 general journal entries example 90–2 general journal to close accounts  367 general ledger  367–8 income statement  369, 485–6 income statement, columns use  355–7 periodic–perpetual account headings comparison 161–3 perpetual cycle–physical cycle comparison  424–31 perpetual inventory records–physical inventory variance 422–31 physical count  426–7 review 423–4 source documents, cash payments journal where perpetual inventory applies, extract general ledger, trial balance example 152–4 source documents, cash receipts journal where perpetual inventory applies, extract general ledger, trial balance example 145–6 source documents, purchases journal where perpetual inventory applies, extract general ledger, trial balance example 133–5 source documents, sales journal, extract general ledger, trial balance example 128–30 trial balance, balance day adjustments and closing journals 501–8 trial balance – new accounting period  370–3 variance 426–7 personal assets  13 personal identification number (PIN)  40 personal income tax liability  614 personal transactions  27–8 Created from tafenswlib on 2020-05-30 08:18:41.

personal/carer’s leave  592 petty cash book  324–7 petty cash float  323 petty cash imprest system  46, 322–8 example 323 petty cash float reduction  323 starting 322–3 transactions example 325–7 petty cash reimbursement  324–5 petty cash voucher  323–4 petty cashier  324 physical stocktake  422, 424, 427–8 value  342, 344 picking slip  38, 212 piecework 595 point-of-sale (POS) input terminal  44 point-of-sale terminal reader  27 policy, procedure, protocol accounting policies and procedures  28 accounts payable, policies and procedures  216, 219–20 authorisation procedures  40 credit policy and procedures  211–12, 214 debit and credit card policy/procedure  40 organisational standards/procedures  40, 177 significant accounting policies  19 postage expense  7 posting  all documents available for  528 errors in  530–3 ledger posting error  534–6 also under specific posting procedure prepaid expenses see expense prepaid prepaid revenue/income see revenue received in advance prepayments see expense prepaid present obligations  5 relationship to resources  73 Privacy Act 1988 (Cth) (Privacy Act)  594 privacy-related laws/legislation  594 private sector  17 pro rata long service leave entitlement  432 professional behaviour  21 professional competence  21 profit  2–3, 7, 10, 14, 65, 335 allocation in partnerships  10 fairly and accurately matched to accounting period 387 goods purchased in bulk, sales at profit see trading business sales of knowledge or skills at profit see servicing business see also expanded accounting equation profit and loss account  374 both periodic and perpetual inventory  343–5 classification 361 close trading account to  343–5 closing off revenue/expenses to  345–7, 459, 504 closing off to capital account example 347–8 in general ledger  335–7 information for income statement  507–8 pre-closing balances  508–10 ‘Proprietary’ (‘Pty’)  11 proprietary companies  11 provision for long service leave  433 payability – current liability or non-current liability 437 provisions for leave see leave provisions public companies  11 public holidays  593 public sector  17

purchase for cash  28, 425 purchase on credit  28–30, 424 purchase order requisition  33–4 purchase orders  34–5, 38 issue of  216 purchases  2–3, 58–9, 66, 174, 340 of assets  259 buys in bulk, sells in small quantities  422 of inventory  259, 424–5 of months of depreciation  565–7 of non-current assets  263–4, 565–7 process flow  31 of time lines  565–7 purchases journal  81, 186, 263–4, 278–9 account columns with perpetual inventory  136–8 buy now, pay later  115, 130–8 end-of-month processing  132–3, 197 example 199–210 headings in  131–3 multi-column format  130 for one business is sales journal for other business 164 perpetual inventory application example 133–5 posting with general ledger and accounts payable ledger 197 posting with general ledger only  197 prefixes and transaction types  113 purchase of non-current assets and remittance of funds example 263–4 supplier invoices–columns relationship  132

Q qualitative characteristics  56

R rate of pay  599 reasonableness checks  215, 219, 483 receipts  28, 45, 117 detailed so as to be tax invoices  40, 116 duplicates  45, 117, 138–40 electronically generated  45–6 filing of  50–1 receipt and adjustment for bad debt recovered example 275–6 receive funds (money)  42–7, 81 cash receipts journals  116 see also receipts receiving 2–3 receiving report (‘goods received advice’)  35, 216 recognition of law convention  14 reconciliations 216 accounts payable  45, 233–41 accounts receivable  220–33 examples  224–33, 235–41 general 220 reasons for reconciling items  223–4, 234–5 records/recording 177 accurate  212, 220, 291 adjustments to business and bank records  309–10 falsifying 47 PAYG withholding records, compulsory retention 614 recording/processing of account payables  217 recording/processing of account receivables  212–13 stored securely  213 wages records, compulsory retention  596 recovery, of bad debt  275–6 redundancy pay  593, 596

641

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INDEX industry-specific entitlements  593 registered agreements  593 regulations 28 remit funds to a credit supplier  39 at time of purchase  39 remit or pay funds (money)  39–42 remittance  28, 116–17, 173–4 authorisation 40 of bad debt payment  275 from customers  212–13 electronically  116, 139 remittance of funds on non-current asset purchase example 263–4 remittance advice  45, 233 received from credit customer  222 reconciliation of accounts receivable to, procedure 222–33 ticked against accounts receivable listing  222–3 remittance paid, validated and entered  294 remittance received  66 validated and entered  294 rent expense  7, 399, 406, 408 rent received  6, 65, 69 reports/reporting  177, 350 accurate  122, 446 accurate and verified  122 advanced management reports  500–36 age analysis report  213–15, 218 automatically generated  210, 218 financial see financial reports GST collected and GST paid must be reported separately 83 monthly 446 monthly and annual  424 rationale for grouping accounts in a report  351–2 receiving report  216 Single Touch Payroll reporting  597 representation 593 resale see inventory residual value  418, 420, 553 resources outflow of  5 present obligations relationship to  73 stewardship of  18 retailers see trading business return 48 return/allowance for inventory or goods, expense items or non-current assets previously purchased on credit 48 return/allowance for inventory or goods, other expense items or non-current expense items previously sold on credit 48–9 revenue  6–7, 18, 66–70, 173, 338–9, 353, 387 closing off to profit and loss account  345–7, 459, 504 credit nature  72 expanded accounting equation  69 matching 387–451 received not earned see revenue received in advance reversal of revenue accrued, effect on  405–6 reversal of revenue received in advance, effect on 409–10 to trading account – perpetual inventory applies example 345 revenue accrued  388 adjustment method example 403–5 alternative terms  402 reversal of  405–6 revenue accrued, reversal example 444

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revenue not yet received  402–6 revenue prepaid see revenue received in advance revenue receivable see revenue accrued revenue received in advance  388, 446 adjustment method example 408–9 alternative terms  407 revenue received not earned  406–10 reversal example 445 standing journals example 449–50 reversal journal  394 reversals 441–5 both periodic and perpetual inventory  510–11 of expense accrued and effect on expense account  393–4, 396–7 of expense prepaid and effect on expense account 401–2 of incorrect accounting entry, processing of correct entry 531–2 no reversal of adjustment for depreciation  421–2 no reversal of adjustment for doubtful debt  415 no reversal of bad debt journals  411 of revenue accrued and effect on revenue account 405–6 of revenue received in advance and effect on revenue account 409–10 review and effect of  441 ripple effect  528–9 running or continuous balance format see columnar format 95

S SAC1 Definition of the Reporting Entity  17 salaries  71, 594 expense accrued, salaries example 395–6 salary sacrifice  602 sale for cash  28, 426, 578 sale on credit  28–30, 425, 578 sales  2–3, 6, 65, 173–4 closed to trading  338–9 cost of sales  69, 73 discount below selling price at net amount  170 of non-current assets at book value  264–5 sales dockets, electronically generated  45–6 sales invoices  212 automatically generated  196 prompt invoicing  212 sequentially numbered  212 sales journal  81, 185, 264–5, 273–4, 276–7, 527 account columns with perpetual inventory  128–30 end-of-month processing  124–5, 188 examples  125–30, 190–6 format  122, 128 headings in  123–5 multi-column format  122 for one business is purchases journal for other business 164 posting 188–9 posting with general ledger and accounts receivable ledger 188–9 posting with general ledger only  188 prefixes and transaction types  113 sale of non-current assets and receipt of funds example 264–5 sell now, be paid later  115, 122–30 tax invoices–columns relationship  124 sales orders  212 filing of  51 salvage value  418 scrap value  419–20

security precautions  292 segregation of duties  291 sell goods and services on credit, process flow  36 sell inventory (or goods) and all other items on credit  35–8, 81 selling expenses  69, 73, 353 services  2–3, 7 purchases 115 receipt from suppliers  216 sales  65, 115 servicing business  2 chart of accounts  71 closing off revenue/expenses to profit and loss account  492–3, 504 general journal entries examples 84–5 no or minimal inventory/supplies  89–90 preparing financial reports  373–7 worksheets for  492–3 settlement 170 full settlement  171–2 shareholders 11 shares 402 limited by  11 sick and carer’s leave, balance day adjustments  432–7 silent partners  10 Single Touch Payroll reporting  597, 613 single-entry record keeping system  3 sole proprietors  2 sole traders  10 source documents  27, 33, 38–41, 44–6 examples  125–30, 133–5, 142–6, 149–54 grouping similar  118 internal memorandum  49 internally produced  527–8 monetary value  118 recorded from point of view of business  81–2, 113 tax invoice error  527 transferred into ‘book’ of original (or first) entry see journals special transactions additional capital introduction  261 bad debt recovered  275–6 bad debt write-offs  272–4 bills payable and met  278–9 bills receivable accepted and met  276–7 buying another business  260 commencement of business  259–60 computerised accounting and  279 dishonour of cheque  267–72 drawings of funds and goods  261–2 interest receivable and payable on overdue accounts  265–7 journals and ledgers for  259–79 purchase of non-current assets  263–4 sale of non-current assets at book value  264–5 specialised journals  113–14 changes occurring with use of  114 preparation 121–2 summarising 124 standards  594 accounting standards  17–19 Australian Accounting Standards under specific AASB standard compliance with  389 financial statements titles other than those used in 338 legal enforceability  18 legal recognition of  18 NES employment standards  592–3 organisational standards/procedures  177

INDEX

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purpose or objective  18–19 standing journals  446–51 as balance day adjustment alternative  446 monthly accumulation  451 statement of account  49 statement of cash flows  19 statement of changes in equity  19 statement of financial position see balance sheets statement of profit or loss and other comprehensive income see income statement statements of account  213 example 221–2 reconciliation of  218 Statements of Accounting Concepts (SACs)  17 states legislation 10 payroll tax  621 privacy-related laws  594 see also territories stationery expense  7 stock, sales  122 stocktake  422, 427–8 variance allocated directly to cost of sales account 465 straight line depreciation  419–22, 558–65, 578–9 calculation 419–21 example 420–1 example over three years  561–5 subsidiary ledger  185–7, 265–6, 273–4, 555 accounts payable control account and  196–210 accounts receivable control account and  188–96 of acquiring business  260 chronological order  191, 200 other 241 superannuation 593 employer contributions  621 voluntary employee contributions  597 Superannuation Guarantee (Administration) Act 1992 (Cth) 597 supplier credit notes  48, 217 supplier enquiries, answering  219 supplier invoices  33, 37, 115, 132, 217, 528–9 credit terms clearly stated  265–6 suppliers GST paid to  83 identifying amounts owed by  185–241 payments to  217 receipt of goods or services from  216 statements of account reconciliation  218 supplies 89 see also inventory

T T account format  92–3, 100–5, 125, 185, 188–9, 363–5, 367–8 balancing general ledger accounts in  93–4 debit and credit entries that do not total the same amount 94 debit and credit entries that total the same amount 94 more than one entry, either debit or credit, not both 93 one entry debit, and credit, for same amount  93–4 one entry, debit or credit  93 tax file number declaration form  596, 615 tax file numbers (TFNs)  594 tax invoices  29, 41, 82, 124, 128, 130, 173, 387 account payable error example 527 account receivable error example 527 Created from tafenswlib on 2020-05-30 08:18:41.

daily basis processing  185–6, 220 duplicates  122, 528 electronically generated  45–6 monetary value  124 options 170 tracking system to follow up  174 viewing  33, 38 taxable supplies  83–4 taxation laws  28 taxes 621 tax-free threshold  615–16 territories legislation 10 payroll tax  621 see also states time in lieu  595 time line  565–7 covering the disposal events  577 time lines, purchases  565–7 time periods (payroll)  598 time records  597 time worked  598 timeliness 56 trade discount  170 trade-in 578 trading account  335, 342 classification  335, 361 close accounts to  338–45 close to profit and loss account – both periodic and perpetual inventory  343–5 in general ledger  335–6 trading business  2 accounting equation for  57–60 closed to trading  428–9 closing off revenue/expenses to profit and loss account  459–91, 504 general journal entries examples  85–7, 90–2 perpetual–periodic inventories comparison  89 posting to general ledger example 96–8 two-stage approach  338–45 trading terms  186, 213, 265–6, 276, 278 transactions  80–105, 112–70 cash payments journals–cash receipts journal combinations 165–70 cash purchases  28 cash sales  28 credit 170–3 credit note issued to customer upon return of goods purchased 48–9 credit note received from supplier upon return of goods purchased  48 entered in general journal  84–92 financial 27–51 internal memorandum  49 minimised errors  213 one transaction resulting in at least two entries  60 petty cash  325–7 processing 177 purchase on credit  29 purchases journals–sales journal combination  164 receive funds at time of sale  42–3 recording/processing of account payables  217 recording/processing of account receivables  212–13 remit funds  39 sales on credit  29–30, 35–7 special 259–79 tax invoices  32 ‘written’ versions  164–6 travel allowance  595 trial balance  112, 185

adjusted 438–9 balance day adjustments and  467–73 before balance day adjustments – both periodic and perpetual inventory apply  501–2 both periodic and perpetual inventory  509–10 on commencement of new accounting period  370–3 on commencement of new accounting period; applies to both periodic and perpetual inventory  370–3 examples  98–105, 125–30, 133–5, 142–6, 149–54, 362–9 non-balance 99–100 one account or statement allocation with one account group classification  463 ‘as at’ a particular date  98–9 periodic and perpetual inventory  501–8 post-closing journals posting check  509–10 preparation 516 summary of general ledger balances  98–105 use and abuse  99 2-column worksheet, trial balance  459–60

U uncertainty  412–13, 432 understandability 56 unearned revenue/income see revenue received in advance units of use depreciation  567–70 example 567–70 unlimited liability  10 unpaid leave  592 unpresented (‘u/p’)  294, 296–7, 300, 312–13, 315 useful life  418, 553, 571 ‘best estimate’  420

V valuation 14–15 as closing journal  pls c9, 502 value discount taken off value  170 dollar value of assets  5 end-of-period values  434 future economic value  418 verifiability 56

W wages  7, 594 warehouse 2–3 weekly hours of work, maximum  592 weekly tax tables  617–20 weekly rates incorporating Medicare levy  615 WorkCover 621 workers’ compensation insurance  621 working arrangements, flexible  592 working papers  122 workplace conditions  593 workplace relations tribunal see Fair Work Commission worksheets  559–60, 581–7 8-column see 8-column worksheet preparing financial reports from  459–93 preparing financial statements from  511–15 for simple service industry  492–3 2-column see 2-column worksheet write-offs (of bad debt)  214–15, 272–4, 411 written-down value  553

643

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