Category Archives: Accounting

Double Entry Accounting Song

Posted on November 26, 2011 | Leave a comment

A very funny clip about double entry accounting. You can’t help singing and dancing along with it…. ‘debits on the left, credits on the right’.

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Inventory Valuation: Lower of Cost and Net Realisable Value

Posted on June 22, 2011 | Leave a comment

The Australian Accounting Standards Board (AASB 102) requires stock to be valued at the lower of cost and net realisable value on an item by item basis.

The cost price of stock is the total cost involved in bringing stock to its present location and condition ready for sale. The cost price of stock can be determined either using product costing or period costing (see previous post).

Net realisable value is the estimated amount the business expects to gain from the sale of the stock in the ordinary course of business.

Once measured, the lower of cost and net realisable value is the carrying amount the business recognises as an asset in the Balance Sheet. The accounting treatment prescribed by AASB 102 is shown below.


Information in this post is based on the attached CPA Australia fact sheet.

For a more detailed overview have a look at my PowerPoint presentation for Year 12 Accounting on Stock Valuation.

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Inventory Valuation: Product Costs vs Period Costs

Posted on June 22, 2011 | 1 Comment

Stock (or inventory) is often the most significant asset a trading business holds. For a trading business it is their main source of earning revenue. In most cases stock on hand is valued at historical cost in the Balance Sheet, but how do we determine that cost? In many cases this is just the invoice price charged by the supplier. But in some cases there are other cost associated with the purchase of stock that need accounting for.

The value of stock in the Balance Sheet includes all costs incurred in order to bring stock into a condition and location ready for sale. However, in order to calculate the cost per item of stock, it is necessary to allocate these costs to individual units of stock.

Product costs

All costs incurred in getting stock to saleable condition which can be allocated to individual units of stock on a logical basis. Three main elements include raw materials, labour, factory overheads.

Period costs

All costs incurred for a period of time in getting stock to a saleable condition that can not be allocated to individual units of stock because there is no logical basis to do so. Sometimes classified into, marketing expenses, general (administrative) expenses and financial expenses.

For a more detailed overview have a look at my PowerPoint presentation for Year 12 Accounting on Stock Valuation.

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Returns of Stock: Sales Returns

Posted on June 20, 2011 | Leave a comment

SALES RETURNS

On 24 July, 2010 a customer returned another faulty toaster to Wantirna Electrical. The customer B. Brown, purchased the item on account and was charged $99 including GST for the toaster and wanted a full refund.

Use the stock card from the previous example to complete this transaction. 

Stock Card

Stock Item: Toaster                                        Location:

Stock Code:                                                     Supplier: Burnt Bread Manufacturing

Date Details

IN

OUT

BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jun 1 Balance 54 50 2700

General Journal

Date Details General Ledger Subsidiary Ledger

Wantirna Electrical – General Ledger

Stock Control (A)

Date

Cross Reference

$

Date

Cross Reference

$
Jul 1 Balance 24,000
  

Debtors Control (A)

Date

Cross Reference

$

Date

Cross Reference

$
Jul 1 Balance 8,560
    

GST Clearing (A/L)

Date

Cross Reference

$

Date

Cross Reference

$
  

Sales Returns (-R)

Date

Cross Reference

$

Date

Cross Reference

$

Wantirna Electrical – Debtors Subsidiary Ledger 

Debtor – B Brown

Date

Cross Reference

$

Date

Cross Reference

$
Jul 1 Balance 1,200

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Returns of Stock: Purchase Returns

Posted on June 20, 2011 | 1 Comment

On occasions customers will return goods they have purchased. Perhaps the goods were faulty or in some way unsuitable. Similarly, businesses may need to return goods to suppliers.

Questions

Why might stock be returned?

What is the source document used for returns? List the contents of this document?

PURCHASE RETURNS

On 20 June, 2010 Wantirna Electrical returned 4 faulty toasters to Burnt Bread Manufacturing. The toasters were purchased for $50 each plus GST. (Credit Note 21).

Record this transaction in the stock card of Wantirna Electrical.

Stock Card

Stock Item: Toaster                                        Location:

Stock Code:                                                     Supplier: Burnt Bread Manufacturing

Date Details

IN

OUT

BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jun 1 Balance 54 50 2700
         

Now record the transaction in the General Journal of Wantirna Electrical and post to the General Ledger and Creditors Subsidiary Ledger.

General Journal

Date Details General Ledger Subsidiary Ledger

Wantirna Electrical – General Ledger

Stock Control (A)

Date

Cross Reference

$

Date

Cross Reference

$
Jun 1 Balance 20,000
  

Creditors Control (L)

Date

Cross Reference

$

Date

Cross Reference

$
Jun 1 Balance 3,970

GST Clearing (A/L)

Date

Cross Reference

$

Date

Cross Reference

$
  

Wantirna Electrical – Creditors Subsidiary Ledger

Creditor – Burnt Bread Manufacturing (L)

Date

Cross Reference

$

Date

Cross Reference

$
Jun 1 Balance 580
  

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Unit 3 Accounting Exam 2011 Review

Posted on June 15, 2011 | Leave a comment

Congratulations on finishing the Unit 3 VCE Accounting exam for 2011. What did you think of the paper? What was hard? What was easy? How do you think you went? Let me know your thoughts and comments below.

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Why are cash and profit not the same?

Posted on May 29, 2011 | Leave a comment

There are many reasons why a businesses cash or bank balance are not the same as profit made by the business. Cash balance is calculated using cash received minus cash paid and added to any opening cash balance. Profit is calculated as revenue earned minus expenses incurred. In an accrual accounting system revenue is not the same as cash received and expenses are not the same as cash paid. These differences are further explained below.

Revenues that are not receipts
  • Credit sales
  • Discount revenue
  • Stock gain
  • Accrued revenue
Receipts that are not revenues
  • Receipts from debtors
  • GST received
  • Prepaid revenue
  • Capital cash contribution
  • Loan received
  • Sale of non-current asset
Expenses that are not payments
  • Cost of sales
  • Depreciation
  • Stock loss
  • Accrued expenses
Payments that are not expenses
  • Payments to creditors
  • GST Paid
  • Prepaid expenses
  • Cash drawings
  • Loan repayment
  • Purchase of non-current asset

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Cash Flow Statements

Posted on May 24, 2011 | Leave a comment

A Cash Flow Statement is a financial report that reports on cash inflows (cash recieved) and cash outflows (cash paid). It is different from a Statement of Receipts and Payments in that a Cash Flow Statement classifies cash flows into Operating, Investing and Financing activities.

Operating activities include all cash flows related to day-to-day trading activities. This includes cash sales, receipts from debtors, GST received, payments to creditors, GST paid and any payments for prepaid or accrued expenses.

Investing activities include all cash flows related to the purchase and sale of non-current assets.

Finanacing activities include all cash flows related to changes in the financial structure of the business. This means transactions that change loans and owners equity, for example paying or recieving loan principle or cash contributions or drawings by the owner.

Uses of the Cash Flow Statement

The Cash Flow Statement can be used:

  1. To aid decision-making about the busineses’ cash activities
  2. To identify whether the business is generating enough cash from its Operating activities
  3. To assess whether the business is meeting its budgeted cash requirements
  4. To assist in planing for future cash activities

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Recording Depreciation

Posted on May 18, 2011 | 1 Comment

Using the example from the previous post on calculating depreciation, let’s look at how to record a depreciation expense.

Example
Maxwell Smart owns and operates Smarties Trading. On 1 July 2010 Smart purchased  a motor vehicle for $28,000. The vehicle will be traded in after three years, at which time it is estimated to have a residual value of $10,000.
Using the formula for calculating as outlined in the previous post, the depreciation expense for the vehicle is $6000 pa.
 

To record this in the General Journal

Date
Details
Debit
Credit
Jun 30
Depreciation of Motor Vehicle
6,000
Accumulated depreciation of Motor Vehicle
6,000
One year’s depreciation on Motor Vehicle

The impact of this transaction on the reports of Smarties Trading would be to increase expenses by $6000, thus reducing profit by $6000.

In the Balance Sheet, Accumulated Depreciation is reported as a negative asset and is subtracted from the Motor Vehicle as shown below.

Balance Sheet (extract)
Non-current Assets
Motor Vehicle                                                                         28,000
less Accumulated depreciation of Motor Vehicle      6,000       22,000
 

On the other side of the Balance Sheet, Owner’s Equity is reduced by $6000 because of the $6000 reduction in profit.

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Calculating Depreciation

Posted on May 17, 2011 | 2 Comments

Depreciation is the cost of allocating a non-current asset over its useful life. The purpose of depreciation is to make sure that profit is calclated accurately for the reporting period by calculating all of the expenses incurred in the current reporting period. This includes the cost of non-current assets that are used to earn revenue.

It is important to note that depreciation does not affect cash, because it is the allocation of a cost over a period of time. Depreciation only affects the Profit and Loss Statement and the Balance Sheet.

Straight-line depreciation

In VCE Unit 3 Accounting, you are only required to know the straight-line method of calculating depreciation. To calculate depreciation using this method we need to know three things:

Historical Cost (HC) - the original purchase price of the non-current asset

Useful Life (L) - the estimated period of time for which the non-current asset will be used by the business to earn revenue

Residual Value (RV) - the estimated value of the non-current asset at the end of its useful life

To calculate depreciation we use the following formula:

Depreciation expense = (HC – RV) / Life

Example

Maxwell Smart owns and operates Smarties Trading. On 1 July 2010 Smart purchased  a motor vehicle for $28,000. The vehicle will be traded in after three years, at which time it is estimated to have a residual value of $10,000.

  1. Calculate the depreciation expense for the year ended 3o June 2011 on the vehicle.
  2. How would you record this expense in the General Journal and the General Ledger of Smarties Trading?

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