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- Accounting Unit 4Unit 4 Summary

Wilbur

Accounting Principles Historical Cost Entity Reporting Period Monetary Unit Conservatism Cost of stock; Cost of NCA Prepaid and Accrued Revenue; BDA Purchase of stock from overseas suppliers always record in AUD LC/NRV the selling price should not be used as gains should be recognised until certain and there is no guarantee that the stock can be sold at the selling price; prevent overstating Assets (stock control) and Owners Equity Treatment of product and period costs from one period to the next Prepaid and Accrued Revenue

Consistency Going Concern

Qualitative Characteristics Comparability Understandability Relevance Treatment of product and period costs from one period to the next Headings/titles and formatting used in reports Product costing it is important to calculate an accurate value for stock as the mark-up is often applied to the cost price to calculate the selling price, too prevent selling prices to be too high/low Historical cost is used because it can be verified by a source document

Reliability

Effect of transactions on the Accounting Equation Transaction Sales Return SP 2000+200 GST CP 1200+120 GST Purchase Return 1200+120 GST Disposal of NCA HC 4000, CV 1200, Bank 1000 Stock Write Down 400 Loss on Disposal of Asset 600 Profit on Disposal of Asset 200 Product Costing on Units of Stock Assets Liabilities Owners Equity

2|P ag e Purchase NCA on Credit 50000+5000 GST Trade-in NCA 4000 Adjusting entry for Prepaid Revenue 2000 has now been earned Adjusting entry for Accrued Revenue Interest of 50 is owed on the Term Deposit

- Accounting Unit 4-

Wilbur

Extension to recording Credit Notes A source document that verifies the return of stock by either a trade creditor or by a trade debtor (Reliability) It provides evidence that a debt owed to a creditor (Purchase Return) or by a debtor (Sales Return) has been reduced by the amount of the return

How to Distinguish : The suppliers name is always at the TOP A purchase returns credit note has our name in the body (middle) of the credit note, we are returning stock to the supplier. A sales return has our business name at the top of the credit note- we are receiving the being stock in return.

Reporting Sales Returns separately Relevance Provides information useful for decision making Provides additional information for management in relation to customer satisfaction Indicator of the quality and suitability of the stock that is being traded

Recording Sales Returns Reverse FIFO or LOFI (last transaction regardless if it was drawings, advertising, etc.)

Purchases Returns Identified cost method

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- Accounting Unit 4-

Wilbur

Recording Product costs from same supplier

Recording Product costs from different suppliers

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Recording a Period Cost Stock card unit cost of stock without period cost

Hence, product costing includes ALL stock-related expenses (such as cartage in) recorded as Stock Control in the CPJ, while period costing recognises individual expense accounts Returns of stock Reasons for returns Poor quality or faulty Damaged Wrong colour, size or model Addressing Sales Returns Changing products or supplier Improve product packaging or change to a more reliable delivery company Improve sales staff training to be more responsive to customers needs and improve checking mechanisms when orders are being completed Changing to a more reliable delivery company

Goods were delivered late and no longer required

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Product and Period Costing


Product costs Costs associated with getting the goods into a location and condition ready for sale Costs can be allocated to individual items of stock on a logical basis Period costs Costs associated with getting the goods into a location and condition ready for sale Costs cannot be allocated to individual items of stock on a logical basis (as they relate to more than one item of stock) e.g. shipment for ALL stock Period costs written off as buying expense for the reporting period under Cost of Goods Sold If not all goods are sold this reporting period Cost of Goods Sold will be higher and Gross Profit and Net Profit will be lower as the additional costs are treated as expenses in the period in which they were incurred regardless of the number of units sold Effect on Stock Control in the Balance sheet Lower (understated)

Included in the calculation of cost of sales allocated per item of stock sold If not all goods are sold in this Reporting Period Costs of Goods Sold will be lower and Gross Profit and Net profit will be higher as the additional costs are allocated only to the units of stock sold Effect on Stock Control in the Balance sheet Higher (accurate)

IF ALL STOCK IS SOLD IN THE ONE REPORTING PERIODN THE EFFECT ON NET PROFIT WILL BE EXACTLY THE SAME Relevance when a cost is significant that it affects financial decision-making then it should be considered material and should be reported Issues : Product costs There is no 10% rule to materiality and therefore relevance Items to be allocated as product costs must be incurred in the purchase of stock items That is they must be logically traceable to stock items and be able to be allocated on a logical basis They must also be materially significant in terms of their dollar value The question of materiality is whether the omission of an item would affect management decision making Potential Discuss Question

Insurance of Stock Would usually be classified as a period cost as it does not usually relate to a specific number of goods However, if it is related to a particular delivery in transit it may well be treated as a product cost Classification on the income statement o If incurred in purchasing the stock or in the delivery of stock to the shop it should be treated as a cost of goods sold item (product/period cost)

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If the insurance relates to the goods on the shelves in the shop then it could be argued that this is incurred in selling the stock and should be reported as other expenses

Stock valuation
Cost The original purchase price of the stock PLUS all costs associated with getting the stock into a position and condition ready for sale PLUS includes all product costs Net Realisable Value (NRV) Expected selling price of the stock less any expected costs of marketing, selling and distribution of goods LESS includes all costs associated with selling the stock

Reasons for NRV to be below cost price: A decrease in demand Physical deterioration of stock Product has become obsolete Purposeful decrease in selling price below cost price as a deliberate marketing ploy

LC/NRV rule is applied to individual items or batches of stock

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- Accounting Unit 4-

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Balance Day Adjustments


U3 Prepaid Expenses Accrued Expenses Stock loss/gains Depreciation straight line method U4 Prepaid Revenues Accrued Revenues Stock Write Down Depreciation Reducing Balance Method

Prepaid Revenue This is revenue received in advance or revenue received but not yet earned. The business must determine what part of the revenue received has been earned and therefore must be reported in the current reporting period. Two possible scenarios: 1) Customer orders stock to be delivered at some time in the future. Customer may pay a deposit at the time of ordering or pay in full. Some or all stock is delivered before the end of the reporting period 2) The business earns revenue from a secondary source, such as Rent, and this revenue is paid in advance DR Prepaid sales revenue CR Sales Revenue

Accrued Revenue Revenue that the business has earned but not yet received. As a result, there is an Asset created because there is an expected inflow of economic benefit at some point in the future. It excludes credit sales and involves a secondary revenue source, usually interest. DR Accrued Interest Revenue CR Interest Revenue

Disposal of non-current assets Recording this type of transaction can be quite complex. You may be asked to: 1) Record the depreciation allocated to this asset for the period prior to the sale DR Depreciation of Shop Equipment CR Accumulated Depreciation of Shop Equipment 2) The next step is to remove the asset from the business DR Disposal of Shop Equipment CR Shop Equipment 3) The accumulated depreciation associated with the asset must now be removed (must remember step no.1) DR Accumulated Depreciation of Shop Equipment CR Disposal of Shop Equipment

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- Accounting Unit 4-

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4) Record the purchase of the new asset DR Shop Equipment DR GST Clearing CR Sundry Creditor Ace Supplies 5) Record the trade-in of the old asset. This entry will reduce the amount owed to the Sundry Creditor DR Sundry Creditor Ace Supplies CR Disposal of Shop Equipment 6) Calculate and record the Profit or Loss on Disposal of the Asset DR Loss on Disposal of Equipment CR Disposal of Equipment 7) Pay Sundry Creditor is there discount? CPJ Sundry Creditor Ace Supplies; chq 34; bank 11270; sundries 11500; GST 0 8) Calculate and record Deprecation at the end of the Reporting Period Profit or loss on sale of asset Will occur because the amount received from the sale is different from the carrying value Means the asset has been over or under-depreciated

Over-depreciation occurs when: A profit on disposal occurs Useful life was underestimated Residual value was underestimated

Under-depreciation occurs when: A loss on disposal occurs Useful life was overestimated Residual value was overestimated

Depreciation is based on estimates and so is generally inaccurate and a profit or loss will eventuate Depreciation Historical cost the cost of the asset to get into a revenue earning position/location condition ready for use Useful life the length of time the business will keep the asset Residual Value The estimated value of the asset at the end of its useful life Depreciable value HC-RV Carrying Value HC AD

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Depreciation Expense The amount of the cost allocated this period Accumulated Depreciation The total amount of depreciation charged to date Reducing Balance Method Calculation : Carrying value x Depreciation Rate Recording and Reporting: No change Reducing balance method is used for assets that: Contribute more the revenue earning in their early years than in their later years Less likely to break down in the early years than the later years The key is the type of asset

Issues: Changing Depreciation methods - Consistency - Comparability Profit lower in early years as depreciation expense is higher No overall effect on Net Profit over the life of the asset

Documents Records Reports


How did our business perform this reporting Period?
Budgets How will our business perform in future periods?

Analysis

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- Accounting Unit 4-

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Budgeting
Budgeting is the process of predicting the financial consequences of future events, a budget is the REPORT that predicts such things

Budgeted Reports Budgeted Cash Flow statement shows all expected future cash inflows and outflows, and the expected bank balance at the end of the period Budgeted Income Statement shows all expected future revenues and expenses, and the expected Gross Profit, Adjusted Gross Profit and Net profit Budged Balance Sheet 0 shows all expected assets, liabilities and owners equity at some point in the future

Budgets vs actual reports Budgets report future events rather than historical events. Budgets use estimates; no verifiable data

Importance of Budgeted Sales Main revenue item in Budgeted Income Statement and significant cash Inflow (either as cash sales or receipts from debtors) Level of sales crucial in estimating expenses that vary with number of units sold such as cost of sales, wages Affect how much stock is purchases, payments to creditors Balance sheet- Bank balance and Net Profit figure

Purpose of budgeting Aid planning o Budgeting assists planning by predicting what is likely to occur in the future. This allows the owner to prepare so that possible problems may be managed and possible opportunities may be taken Aids decision making o Budgeting can aid decision-making by providing a standard against which actual performance can be measured against. This allows the owner to identify problem areas and remedial action can be taken. Includes budgeted ratios.

Budgeted Cash Flow Statement Planning for CFS If predicted surplus: Purchase of NCA Expand operations by employing more staff; increasing advertising Increase loan repayments Increase level of drawings

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Organise/extend overdraft facility Reduce drawings Defer loan repayment Defer purchases of NCA Capital contribution

Decision-making for CFS Effectiveness of Advertising in generating cash sales Debtor collection procedures Creditor payment policies Level of cash payments for expenses Level of cash drawings Adequacy of finance for purchase of NCA

Budgeted Income Statement Planning Indicates future requirements of firm in staffing Stock levels Advertising campaigns

Decision-making Level of sales and effectiveness of advertising Mark-up achieved Level of stock loss to assess stock management procedures Expense control Staff performance

Budgeted Balance Sheet Planning Helps prepare for replacement of NCA as it details carrying value of NCA in future periods

Decision-making Setting a benchmark for indicators that assess liquidity and stability (e.g. WCR, Debt Ratio)

Consecutive budgets (frequent budgeting) Enables: Identify monthly/seasonal trends

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- Accounting Unit 4-

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Identify when to undertake a particular cash activity e.g purchase of NCA More accurate, therefore more useful benchmark for comparison Allow earlier detection of problem areas so corrective action can be taken in a timely manner

Variance Reports Accounting report that compares budgeted figures against actual figures, highlighting variances so problem areas can be identified and corrective action can be taken F Favourable variance(i.e. better cash position, higher net profit than budgeted) U Unfavourable variance(worse off than budgeted)

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- Accounting Unit 4-

Wilbur

Analysis
Analysing the performance of a business is more than looking at the final bank figure or the $ amount of Profit or Loss made by the business. A raw number does not mean a lot unless we can use that number for analysis or comparison. In Unit 4, financial reports are analysed using a number of performance indicators or financial ratios. These ratios assess the business performance in terms of: 1) Profitability the ability of the business to earn profit, measured by comparing its profit against a base such as sales, assets or owners equity 2) Efficiency the ability of the business to manage its assets and liabilities 3) Stability the ability of the business to meet its debts and continue its operations in the long term 4) Liquidity the ability of the business to meet its short-term debts as they fall due

Profitability Profitability is a measure of how the business has performed in terms of returning a profit compared to a base such as assets, sales and owners equity. There are four financial ratios associated with Profitability. Return on Owners investment (ROI) %

Return on Owners investment measures the return or money back the owner has received on his/her investment in the business. In the real world a person has many alternative investments available to them invest in shares, deposit their money in a high interest account, purchase property. All of these investments provide a return dividend, interest or rent. Each investment has its rewards and risks. An owner of a business hopes to be rewarded for their investment of time (working hours), money (capital), expertise and what they have given up to operate the business (previous job, savings). A profitability indicator that measures how effectively a business has used the owners capital to earn profit Profit earned per dollar of capital invested Used to decide between alternative investments Benchmarks: past performance, budgeted goals, industry average Assesses profitability from an investors point of view Linked to Debt Ratio

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Return on Assets (ROA)

Return on Assets is designed to measure how well the assets of the business are generating revenue and hence, profit. The Equipment, Stock, Office Furniture, Vehicle, etc. all contribute to the business earning revenue. As the assets age they become more inefficient, breaking down more and hence earn less revenue for the business. This ratio helps an owner determine if the assets of the business are getting to the point where they may need replacing. A profitability indicator that measures how effectively a business has used its assets to earn profit Net Profit per dollar of assets controlled by the business Assesses profitability from a managers point of view Will always be lower than ROI because Total assets are greater than Owners equity, unless it has 0 liabilities Depends heavily on firms ability to earn revenue and control its expenses (Net Profit)

Net Profit Margin (NPR)

When an owner determines selling price for their product they must consider: What did the product cost the business? What price are my competitors charging? Will my selling price allow me to make a profit?

This ratio determines how much (in % or $ terms) profit is made for each $ of sales Good indicator of expense control %

Gross Profit Margin (GPR)

In the same manner, Gross Profit examines the profit made on just the buying and selling of stock the mark-up. A business can use this ratio to determine if stock expenses Freight, Insurance, Cartage, etc are costing the business too much and affecting the ability of the business to make an overall Net Profit Assess mark-up Increasing selling price may decrease sales, therefore GPM may increase but $GP decrease due to less sales Cheaper supplier may decrease sales due to poor quality or increase in sales returns

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- Accounting Unit 4-

Wilbur

Efficiency measures examine how well a business is managing key items such as Debtors, Creditors, Stock and Assets. Key questions about each of these items need to be answered: 1) How quickly do our Debtors pay? 2) Is our stock staying on the shelves too long? 3) Are we paying our Creditors too quickly? There are 4 primary measures of efficiency:

Debtors Turnover (DTO)

number of days

It is important for a business to know how long it takes for Debtors to pay. Debtors are a major source of cash and the cash received is used to pay Creditors and purchase stock. All Debtors are offered terms so it is important to know if our Debtors are meeting those terms and if not, what corrective action needs to be taken by the business. Average number of days it takes a business to collect cash from its Debtors If cash is collected quickly, it can be used to meet other debts as they fall due Look at credit terms times per period

Asset Turnover (ATO)

Asset Turnover is more complex it examines whether the business is using its assets efficiently to generate sales. It also allows the owner to evaluate whether the purchase of a new asset has improved performance. An efficiency indicator that measures how productively a business has used its assets to earn revenue Measures number of times in a period the value of assets is earned as Sales Revenue; the higher the Asset Turnover, the more capable the firm is of using its assets to earn revenue ATO vs ROA; higher ATO does not equal higher ROA, think expenses number of days

Stock Turnover (STO)

The selling of stock is the major source of revenue for a business. It is also a cost to the business. Therefore careful management of stock is important. A business cant hold too little or too much stock. Each situation can cause problems for the business: *Too much stock can mean stock becomes out-dated, obsolete, and increases storage and insurance costs *Too little stock may see the business run out and miss sales; the business is continually ordering stock leading to an increase in expenses such as Delivery and Customs Duty; missing out on discount revenue from bulk purchases

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Optimal Stock Turnover rates will differ according to the type of stock sold cars should be sold within a year (before new models are introduced) whereas milk should be turned over every 3-5 days. The average number of days it takes for a business to convert its stock to sales To fix high STO (too slow): o Increase sales (i.e. advertising, better stock mix) o Decrease level of stock held (order less, just in time ordering, replace slow moving lines) Low STO (too fast): o Selling price too low leading to loss of potential revenue o Holding too little stock: Increase in delivery costs; missing out on discount revenue for bulk purchases number of days

Creditors Turnover (CTO)

As with Debtors Turnover, it is important to know how regularly a business is paying its Creditors. The money to pay Creditors generally comes from Debtors and Sales of stock. It is important for a business to manage its cash flow efficiently so Creditors are: *Paid early enough to earn discounts *Not threatening to cut off supply *Not requiring the business to regularly go into overdraft to make payments The average number of days it takes for a business to pay its creditors Effectiveness of managing creditors If discounts are offered, and cash is available, then it is beneficial If no discount, pay close to credit terms (pay as late as possible) retaining cash in the business for longer so it can be used for other purposes Should not exceed Credit Terms because: o Interest charges on late accounts o Removal of Credit Facilities o Reduction in Credit Rating

Liquidity Liquidity ratios examine the ability of the business to generate cash flow and pay debts. The ability of the business to meet its short term financial commitments as they fall due. This measure relies on the ability of the business to generate sufficient cash flow to meet all urgent, current and long term debts. There are 4 main liquidity ratios in Unit 4:

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Working Capital Ratio (WCR)

Ratio

Are we able to repay our short term debts? Our short term debts are our Current Liabilities they must be repaid within the current reporting period (12 months). To pay these debts we need to use our Current Assets. Consequently, our Current Assets must cover our Current Liabilities. However, as with many ratios it is a balancing act. Too many CA may mean we have too much tied up in Stock, Bank or Debtors. A liquidity indicator that measures the ratio of current assets to current liabilities, to assess the firms ability to meet its short term debts More than 1:1 satisfactory 1:1 no margin for error if any current assets are not converted to cash, the business will face liquidity problems Less than 1:1 the owner needs to seek additional finance through: o Cash contribution o Extending Overdraft facility o Loan Much greater than 1:1 suggests there are idle current assets: o Bank expand operations, term deposit/other investments o Stock control additional storage costs , obsolescence, out of fashion o Debtors Control too many ageing debtors, bad debts Corrective action: o Taking extra drawings, purchase NCA o Lower stock levels and reorder later o Contact debtors and collect funds

Quick Asset Ratio Some of our debts are more immediate. Creditors and Accrued Expenses must be paid quickly (usually within 30 days). We measure our ability to pay these immediate debts by examining our Quick Assets those assets that can be turned into cash quickly without a great loss in value. Some CA cannot be turned into cash quickly. Stock and Prepaid Expenses are difficult to turn into cash quickly (and for their Historical Cost) so we exclude them from the calculation. As with WC, we dont want too many Quick Assets as it may mean we have idle cash or too many Debtors. Liquidity indicator that measures the ratio of quick assets to quick liabilities to assess the firms ability to meet its immediate debts Assesses firms ability to meet its immediate debts with its immediate assets High WCR, Low QAR will it survive? o Depends on whether the business can sell its stock on time (speed of its trading cycle) To fix low QAR:

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- Accounting Unit 4Positive bank balance Improving debtors Reduce level of creditors and accrued expenses times per period

Wilbur

Cash Flow Cover (CFC)

As mentioned in June, cash is one of the most important assets for a business. The ability to generate cash to pay Creditors is important because, as mentioned above, we need a constant supply of stock from Creditors in order to serve our customers. A liquidity indicator that measures the number of times Net Cash Flows from Operating Activities is able to cover average Current Liabilities No set benchmark; the longer the period examined, the more times CL will be covered

Stability Debt Ratio %

What % of the business assets are financed by external sources (liabilities)? The higher the Debt Ratio the greater the risk for the business, the more interest will be incurred in the future and future cash flows are tied up in cash repayments. Measures % of assets financed by liabilities therefore indicates reliance on borrowed funds Measures Long term stability of the firm Assessed with ROI Balance is required high enough to maximise ROI, but low enough to maintain stability Higher Debt Ratio susceptible to interest rate hikes, decreasing cash flow and Net Profit

Limitations of financial information Use of historical data cannot guarantee what will happen in the future Many indicators rely on averages, concealing details about individual items Firms use different accounting methods, undermine comparability

Relationship between ratios ROI and Debt ratio ROI and ROA ROA and ATO NPM, ATO and ROA

Other measures Trends variances in ratios/indicators over a number of reporting periods Benchmarks standards within an industry that every business in that industry measure themselves against. E.g. Industry Average; Budgeted goals; Past performance

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Non financial indicators data gathered from sources that arent strictly $ related. Aspects: Firms relationship with customers Repeat sales Sales Returns Customer complaints Customer satisfaction surveys

Suitability of stock Number of sales returns, why did they return it? Number of purchase returns Number of customer complaints

Firms relationship with employees Performance appraisal of employees Average length of staff employment, staff turnover Industrial action; sick leaves

State of the economy Interest Rates Unemployment Rate Competition

Strategies to improve performance: Earning Revenue: Selling price Advertising Stock mix More efficient NCA Customer Service

Controlling Expenses: Management of stock (cheaper/reduce storage costs/better quality products) Management of staff (training/incentives) to improve productivity Management of NCA inefficient assets should be removed

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- Accounting Unit 4-

Wilbur

Possible Narrations The 3 key areas: Units, stock item, Document number Purchases Return: 20 Tyres returned to suppler wrong type (Cr. Note 11) Sales Return: 3 books returned by customer too many supplied (Cr. Note 21) Stock Write down: Write down of 6 dishwashers to NRV release of new model (Memo 31) Depreciation: Depreciation of Asset straight-line/reducing balance Method (Memo 1) Loss(profit) on disposal of asset Disposal of equipment at a loss/profit (Rec. 17) Credit Purchase of NCA Credit purchase of Van (Inv. 12) Prepaid Revenue Adjusting entry to record one months rent revenue earned (Memo 12); Prepaid sales earned (Inv.12) Accrued Revenue Adjusting entry to record one months interest earned but not yet received (Memo 12) Stock loss/gain Physical Stocktake has detected a stock loss/gain of 3 units of Dishwashers (Memo 12) Bad Debts Ace Supplies deemed irrecoverable, written off as Bad Debt (Memo 40) Correcting entry Correcting entry drawings recorded as advertising (Memo 50) Donation 3 wheelbarrows donated to school (Memo 10) Closing expense and revenue a/c to Profit and Loss summary a/c - Closing expense/revenue accounts to Profit and Loss Summary account Transfer of Profit/Loss to Profit and Loss Summary a/c - Transfer of Net Profit from Profit and Loss summary account to Capital Account Accrued Expense Adjusting entry to record electricity consumed but not yet paid (Memo 15) Prepaid Expense Adjusting entry to record one month insurance incurred (Memo 9) Drawings of stock Drawings of 2 cabinets by owner (Memo 12)

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- Accounting Unit 4-

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Templates
Purchase Returns
General Journal General Ledger Date March 31 Details Creditors Control Creditor-X Stock Control GST Clearing Return of 20 tyres to supplier due to wrong size (Cr. Note 11) 1600 160 Debit 1760 1760 Credit Debit Subsidiary Ledger Credit

Sales Returns
General Journal General Ledger Date May 23 Details Sales Return GST Clearing Debtors Control Debtor-X Stock Control Cost of Sales 3 books returned by customer too many supplied (Cr. Note 21) Debit 90 9 Credit Debit Subsidiary Ledger Credit

99 99 40 40

Stock Writedown
General Journal Date 2012 Dec 31 Particulars Debit 300 General Ledger Credit Subsidiary Ledger Debit Credit

Stock Writedown Stock Control Adjusting entry for Write down of 6 dishwashers to NRV release of new model (Memo 31)

300

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Depreciation

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Wilbur

General Journal General Ledger Date June 30 Details Depreciation of Van Accumulated Depreciation of Van Depreciation of van 20% reducing balance method or Straight line method 20% (Memo 12) Debit $ 6 400 Credit $ 6 400 Subsidiary Ledger Debit Credit $ $

Disposal of NCA
General Journal General Ledger Date May 1 Details Disposal of Van Van Accumulated Depreciation of Van Disposal of Van Sundry Creditor Dodge Motors Disposal of Van Loss on Disposal of Van Disposal of Van Van GST Clearing Sundry creditor Dodge Motors Trade-in of old van on new van from Dodge Motors (Inv. 19) Debit $ 30 000 20 000 20 000 7 000 7 000 3 000 3 000 40 000 4 000 44 000 Credit $ 30 000 Subsidiary Ledger Debit Credit $ $

Credit Purchase of NCA


General Journal General Ledger Date April 1 Details Delivery Van Prepaid Service Contract GST Clearing Sundry Creditor Jane Motors Credit purchase of Delivery Van (Inv. 36) Debit $ 22 500 1 200 2 370 Credit $ Subsidiary Ledger Debit Credit $ $

26 070

Prepaid Revenue
General Journal General Ledger Date June 30 Details Prepaid Rent Revenue Rent Revenue 4 months rent earned (Memo 44) Debit $ 6 000 6 000 Credit $ Subsidiary Ledger Debit $ Credit $

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Receipt of Prepaid Sales received in full, but stock yet to be supplied


General Journal General Ledger Date Details Prepaid Sales Revenue Sales Revenue Cost of Sales Stock Control Prepaid sales revenue earned stock delivered to customer (Inv. 44) Debit $ Credit $ Subsidiary Ledger Debit Credit $ $

Accrued Revenue
General Journal General Ledger Date Aug. 31 Details Accrued Interest Revenue Interest Revenue Interest revenue earned but not yet received (Memo 95) Debit $ 700 Credit $ 700 Subsidiary Ledger Debit Credit $ $

Bad Debts General Journal General Ledger Date Mar. 25 Details Bad Debts Debtors Control Debtor I. Solvent Debt written off as irrecoverable (Memo 52) Debit $ 1 600 Credit $ 1 600 1 600 Subsidiary Ledger Debit Credit $ $

Correcting Entry General Ledger Date June 30 Details Telephone Expense Insurance Correcting entry telephone charges were incorrectly debited to insurance (Memo 16) Debit $ 50 50 Credit $ Subsidiary Ledger Debit Credit $ $

Advertising (Donation) of stock General Journal General Ledger Date Jan. 16 Details Advertising Stock Control 10 frames taken for advertising use (Memo 14)/ 3 wheel barrows donated to school (Memo 14) Debit $ 500 Credit $ 500 Subsidiary Ledger Debit Credit $ $

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- Accounting Unit 4-

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Closing Revenue/Expense accounts and transferring Profit(Loss) to Capital General Journal General Ledger Date Aug. 31 Details Sales Interest Revenue Profit and Loss Summary Closing revenue accounts to P&L Summary (Memo 41) Profit and Loss Summary Cost of Sales Wages Rent Expense Advertising Stock Loss Closing expense accounts to P&L Summary (Memo 41) Profit and Loss Summary Capital Transfer of Net Profit to Capital account (Memo 41) Debit $ 62 000 1500 Credit $ Subsidiary Ledger Debit Credit $ $

63 500 61 900 32 000 12 000 9 000 8 400 500 1 600 1 600

Aug. 31

Aug.31

Drawings of stock General Journal General Ledger Date May 7 Details Drawings Stock Control Drawings of 2 cabinets by owner (Memo 34) Debit $ 480 Credit $ 480 Subsidiary Ledger Debit Credit $ $

Prepaid Expense General Journal General Ledger Date Feb. 28 Details Rent Expense Prepaid Rent Expense Balance day adjustment to record one months Rent incurred (Memo 84) Debit $ 240 Credit $ 240 Subsidiary Ledger Debit Credit $ $

Accrued Expense General Journal

Date Dec. 31 Advertising Expense

Details

General Ledger Debit Credit $ $ 3 000 3 000

Subsidiary Ledger Debit Credit $ $

Accrued Advertising