VCE Accounting Units 3 & 4

546 Pages·2011·19.906 MB·English

by  Neville Box

Macmillan
8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4

VCE
5th edition
Accounting
Units 3 & 4
Neville Box
Edited by Keith King
Macmillan

VCE
5th edition
Accounting
Units 3 & 4
Neville Box
Edited by Keith King
First edition published 1994 (reprinted 4 times)
Second edition published 1999 (reprinted twice)
Third edition published 2002 (reprinted 5 times)
Fourth edition published 2006 (reprinted 5 times)
Fifth edition published 2011 by
macmillan education australia pty ltd
15–19 Claremont Street, South Yarra, VIC, 3141
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Copyright © Neville Box 1994, 1999, 2002, 2006, 2011
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National Library of Australia Cataloguing-in-Publication entry
Author: Box, Neville.
Title: VCE Accounting : Units 3 & 4 / Neville Box.
Edition: 5th ed.
ISBN: 978 1 4202 3058 1 (pbk.)
Target Audience: For secondary school age.
Subjects: Accounting—Problems, exercises, etc.
Accounting—Study and teaching (Secondary)—Victoria.
Victorian Certificate of Education examination—Study
guides.
Dewey Number: 657.044
Publisher: Benjamin James
Project editor: Laura Howell
Editor: Carolyn Leslie
Illustrators: Marg Jackson, Guy Holt
Cover designer: Dimitrios Frangoulis
Text designer: Polar Design
Production control: Loran McDougall
Permissions clearance: Liz Sim
Photo research: Kait Jordan
Typeset in 10.75 pt ITC Garamond by Marg Jackson, Emtype Desktop Publishing
Cover image: Getty Images/Helen Ashford
Indexer: Fay Donlevy
Printed in Malaysia
Internet addresses
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however, we cannot guarantee that all these addresses will remain correct.
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C o n t e n t s
Foreword ix
Introduction x
CPA passport program xi
Acknowledgements xii
UNIT 3 Recording and reporting for a trading business 1
Chapter 1 The nature of accounting 2
1.1 The need for financial information 3
1.2 The uses of financial information 3
1.3 The role of accountants 4
1.4 The development of accounting standards in practice 5
1.5 Statements of accounting concepts 6
1.6 International accounting standards 10
1.7 Accounting principles 10
Glossary of terms 12
Summary questions 13
Practical exercises 14
Internet activity 16
Chapter 2 Balance sheets 17
2.1 Balance sheets 18
2.2 Classification in the balance sheet 20
2.3 Classification of loans 22
2.4 Financial transactions and balance sheets 23
Glossary of terms 28
Summary questions 29
Practical exercises 29
Case study 35
Internet activity 36
Chapter 3 Analysing and designing accounting systems 37
3.1 The basic accounting process 38
3.2 The GST and business documents 38
3.3 General business documents: cash transactions 40
3.4 Business documents: credit transactions 41
3.5 Memorandums for internal transactions 43
3.6 Statements of account 43
3.7 Other business documents 44
3.8 Information flows: the use of business documents 46
3.9 Information flows: an overview of an accounting system 47
3.10 Manual versus computerised accounting systems 48
Glossary of terms 50
Summary questions 51
Practical exercises 52
Case study 56
Internet activity 56
iv  Contents
Chapter 4 The double entry recording process 57
4.1 Double entry accounting: an introduction 58
4.2 Double entry for revenues and expenses 62
4.3 Footing and balancing ledger accounts 65
4.4 The role of the trial balance 67
4.5 Detecting errors through a trial balance 68
4.6 Alternative presentation of a trial balance 68
4.7 Case study: from transactions to the balance sheet 69
4.8 Accounting for drawings 73
Glossary of terms 73
Summary questions 74
Practical exercises 75
Case study 84
Chapter 5 Special journals: cash transactions 86
5.1 The need for special journals 87
5.2 The role of special journals 87
5.3 Recording in the cash receipts journal 88
5.4 Recording in the cash payments journal 92
5.5 Recording cash discounts for debtors and creditors 95
Glossary of terms 98
Summary questions 98
Practical exercises 99
Chapter 6 Credit sales and credit purchases journals 105
6.1 Credit transactions 106
6.2 Recording in the credit sales journal 106
6.3 The need for control accounts 109
6.4 Debtors schedules 110
6.5 The cash receipts journal and debtors control 111
6.6 Recording in the credit purchases journal 111
6.7 The creditors control account 113
6.8 Creditors schedules 114
6.9 The cash payments journal and creditors control 114
6.10 Advantages and disadvantages of control accounts 115
Glossary of terms 116
Summary questions 117
Practical exercises 118
Case study 130
Chapter 7 The general journal 131
7.1 The need for a general journal 132
7.2 The format of the general journal 132
7.3 Posting a general journal entry 133
7.4 The general journal and subsidiary ledgers 133
7.5 Establishing a double entry system 135
7.6 Recording the contribution or withdrawal of assets by an owner 138
7.7 Donations of stock and business advertising 140
 Contents v
7.8 Accounting for bad debts 140
7.9 Correcting recording errors through the general journal 143
Glossary of terms 145
Summary questions 146
Practical exercises 147
Chapter 8 Accounting for the goods and services tax (GST) 153
8.1 The GST: an introduction 154
8.2 GST and the sales journal 154
8.3 GST and the purchases journal 156
8.4 The GST clearing account 157
8.5 GST and the cash receipts journal 159
8.6 GST and the cash payments journal 161
8.7 GST and double entry accounting 164
Glossary of terms 165
Summary questions 165
Practical exercises 166
Case study 171
Chapter 9 The perpetual inventory system 175
9.1 What is inventory? 176
9.2 The physical stocktake 176
9.3 What is perpetual inventory? 177
9.4 The stock control account 178
9.5 Double entry under the perpetual method: a summary 179
9.6 Identifying the cost price of sales 179
9.7 First in, first out stock valuation 183
9.8 The role of stock cards 184
9.9 Stock cards and the general ledger 186
9.10 Stock losses and stock gains 187
9.11 Recording stock losses and gains 188
9.12 Donations of goods as advertising 192
9.13 From stock cards to journals 193
Glossary of terms 197
Summary questions 198
Practical exercises 199
Chapter 10 Closing the general ledger 212
10.1 The closing of the general ledger 213
10.2 The profit and loss summary account 213
10.3 Closing a ledger account 214
10.4 The general journal and closing entries 215
10.5 The general journal: transfer of net profit 216
10.6 Closing entries: accounting for a net loss 218
10.7 Case study: the closing of the ledger 219
Glossary of terms 222
Summary questions 223
Practical exercises 223
vi  Contents
Chapter 11 Income statements 231
11.1 The income statement 232
11.2 Preparing an income statement 232
11.3 The link between profit and the balance sheet 234
11.4 Evaluating a net profit figure 234
11.5 Cost of goods sold and gross profit 235
11.6 Reporting discounts 237
Glossary of terms 238
Summary questions 238
Practical exercises 239
Case study 245
Chapter 12 Cash flow statements: an introduction 246
12.1 The role of the cash flow statement 247
12.2 Classification of cash flows 247
12.3 The concept of cash 249
12.4 The format of the cash flow statement 249
12.5 Preparing a cash flow statement 252
12.6 Cash flows and decision-making 254
Glossary of terms 255
Summary questions 255
Practical exercises 257
Case study 266
Chapter 13 Depreciation of non-current assets 269
13.1 The meaning of depreciation 270
13.2 The meaning of cost 270
13.3 Straight-line method of depreciation 271
13.4 The adjusting entry for depreciation 272
13.5 Depreciation and the balance sheet 275
13.6 Depreciation and the income statement 276
Glossary of terms 276
Summary questions 277
Practical exercises 278
Case study 281
Chapter 14 Profit determination and balance day adjustments 282
14.1 Profit determination: underlying assumptions 283
14.2 Accrual accounting and balance day adjustments 284
14.3 Prepaid expenses (the asset approach) 284
14.4 Accrued expenses (expenses owing) 287
14.5 Stock losses and gains 290
14.6 Case study: adjusting and closing entries 291
14.7 The adjusted trial balance 297
Glossary of terms 298
Summary questions 299
Practical exercises 300
Case study 308
UnIT 3 PrACTICe exAm 310
 Contents vii
UNIT 4 Control and analysis of business performance 325
Chapter 15 Accounting for sales returns and purchases returns 326
15.1 Credit notes for returns 327
15.2 Purchases returns 327
15.3 Sales returns 330
15.4 Recording returns in stock cards 332
Glossary of terms 336
Summary questions 337
Practical exercises 337
Chapter 16 The reducing balance method of depreciation 346
16.1 The need for an alternative method of depreciation 347
16.2 The straight-line method of depreciation 347
16.3 The reducing balance method of depreciation 348
16.4 Depreciation methods: a comparison 350
16.5 Depreciation methods: which one to use? 354
Glossary of terms 355
Summary questions 355
Practical exercises 356
Chapter 17 Buying and selling non-current assets 360
17.1 Recording credit purchases of non-current assets 361
17.2 Disposal of non-current assets 362
17.3 Trading in non-current assets 365
Glossary of terms 368
Summary questions 369
Practical exercises 369
Case study 374
Chapter 18 Inventory valuation 375
18.1 Product costs versus period costs 376
18.2 Lower of cost and net realisable value 377
18.3 Determining the NRV of a product 381
Glossary of terms 383
Summary questions 383
Practical exercises 384
Case study 389
Chapter 19 Balance day adjustments: prepaid revenue and accrued revenue 391
19.1 What is revenue earned for a period? 392
19.2 Prepaid revenue (the liability approach) 392
19.3 Prepaid sales revenue 395
19.4 Accrued revenue (revenue owing) 398
Glossary of terms 401
Summary questions 402
Practical exercises 403
Case study 1 407
Case study 2 409
viii  Contents
Chapter 20 managing and controlling debtors, creditors and stock 411
20.1 Controlling inventory 412
20.2 Evaluating stock turnover 416
20.3 Controlling debtors 419
20.4 Evaluating debtors turnover 421
20.5 Evaluating the cash cycle 423
20.6 Evaluating creditors turnover 424
Glossary of terms 427
Summary questions 428
Practical exercises 429
Case study 434
Chapter 21 Budgeting: planning for the future 435
21.1 The need for budgeting 436
21.2 Cash budgeting 437
21.3 Case study: preparing a budgeted cash flow statement 439
21.4 Budgeted income statements 444
21.5 Case study: preparing a budgeted income statement 445
21.6 The budgeted balance sheet 447
21.7 Case study: preparing a budgeted balance sheet 447
21.8 Budget variance reports 450
Glossary of terms 454
Summary questions 455
Practical exercises 456
Case study 468
Internet activity 469
Chapter 22 Analysis and interpretation of accounting reports 470
22.1 The role of analysis and interpretation 471
22.2 Distinguishing between analysis and interpretation 471
22.3 Analytical ratios 475
22.4 Ratio benchmarks 476
22.5 Types of analytical ratios 476
22.6 Profitability ratios 477
22.7 Operating efficiency ratios 482
22.8 Efficiency ratios and profitability 485
22.9 Liquidity analysis 486
22.10 Liquidity analysis and cash flows 489
22.11 Gearing and financial stability 491
22.12 Gearing and the rate of return on owner’s investment 492
22.13 Other analysis tools 494
22.14 Limitations of ratio analysis 498
Glossary of terms 498
Summary questions 499
Practical exercises 501
Case study 510
Internet activity 512
UnIT 4 PrACTICe exAm 513
Index 525
 Foreword ix
F o r e w o r d
You have chosen to study a subject that gives you a real opportunity for the future. I know
this because I am CEO of CPA Australia, one of the largest business and accounting bodies
recognised throughout the world.
These days, accounting is about much more than numbers. It is a pathway to a career that
gives you great opportunities and a formidable basis to branch into any career you desire.
If you go on to study accounting at tertiary level, you will have even greater potential for
earnings, job security, job satisfaction and travelling and working overseas. Many of today’s
business leaders started with an accounting degree and then moved onto a professional
designation.
Once you have a basic understanding of business principles, you can apply them to almost
anything – even accounting for sustainability. Accountants have a significant role to play in the
international financial systems of the future. One of the profession’s greatest challenges will be
to help merge an understanding of economic value with environmental and social value.
Accountants identify, measure and communicate financial and non-financial information for
business leaders to make informed judgements and decisions. Their approach is methodical,
logical and analytical, and the leadership and personal skills accountants learn give them the
tools to communicate their findings. More and more in business, accountants are relied upon to
provide advice, or to become decision-makers themselves.
A basic knowledge of accounting stands you in good stead to be anything you want to be. If
you go on to study at university level, you can branch into any other area of the business world.
With an accounting background, you can aim to be: a business leader, an entrepreneur,
an investor, a business analyst, a market analyst, a financial journalist, a chief financial officer,
a management accountant, a business adviser in corporate restructuring or insolvency, a tax
accountant, a financial planner/ superannuation adviser, a financial accountant, an auditor, a
cost accountant, a banking officer, an information systems designer, a stockbroker … the list
goes on.
Join CPA Passport to keep your options open. Details are available at cpaaustralia.com.au/
advantage
Alex Malley
Chief Executive Officer
CPA Australia