Double Entry Accounting Song

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

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.

Inventory Valuation: Product Costs vs Period Costs

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.

Returns of Stock: Sales Returns

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

Returns of Stock: Purchase Returns

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
  

Why are cash and profit not the same?

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