Financial Information Systems Summary Notes

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Financial information systems summary notes
Financial Information Systems (Swinburne University of Technology)
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Financial Information Systems Summary Notes
Financial Information Systems (Swinburne University of Technology)
StuDocu is not sponsored or endorsed by any college or university

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Accounting
Topic 1 Decision making and recording business transactions

 Steps in decision making
 Establish Goals – What are we trying to achieve?
 Gather Available Information – What information is needed?
 Determine Consequences – What are the consequences for alternatives?
 Choose a course of action – Which course of action will we choose?
 Accounting: The process of identifying, measuring, recording and communicating
economic information for decision making.
 Accounting Process
 Identification – Observing economic events or transactions
 Internal Transactions – Economic events within the entity, eg. use of
office supplies
 External Transactions – Economic events between one entity and
another, eg. sale of inventory or purchase of supplies
 Non-transactional Events – Not usually recorded but may in the
future, eg. receiving an order from a customer
 Measurement – Accounting Transactions are measured and recorded in
monetary units, eg. the dollar
 Recording – History of the economic activities of an entity
 Recorded data is then classified into meaningful groups
 Summarised in reports and financial statements
 Communication – Preparing and distributing reports to potential users of the
information
 Accounting Cycle
1. Recognise & Record Transactions Source Documents

2. Journalise Transaction General Journal
3. Post to Ledger Accounts General Ledger
4. Prepare Trial Balance of GL Trial Balance
5. Prepare Financial Statements Financial Statements
 Basic Financial Statements
 BaLancE Sheet – Financial Position
 Income Statement – Profit or Loss
 Statement of Changes in Equity – Link between balance sheet and income
statement
 Beginning Balance Sheet + Income – Drawings = End Balance Sheet
 Statement of Cash Flows
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 Chart of Accounts – Complete listing of ledger account titles and identification

numbers
 Double Entry Accounting

 Each Transaction must have at least one debit and one credit entry
 Must always balance
 Type of account affected must be analysed
 Application of DR/CR Rules

1. Understand the transaction
2. Identify the accounts
3. For each account: Increase or decrease
4. Classify each account as A L O R E
5. Select relevant rule
 General Journal
 Complete record of all transactions
 Presented in chronological order
 Two or more accounts are affected by each transaction
 The accounting equation remains in balance
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 General Ledger
 Collection of all individual accounts
 Organised in the order they appear in the balance sheet and income
statement
 Trial Balance
 Statement Listing all the accounts in a ledger and their balances
 Proves total debits = total credits
 Does not detect
o Omitted Transactions
o Amounts recorded in incorrect accounts
o Amounts recorded incorrectly
 Correcting errors
o Before posting – Cross out and insert correct amount
o After posting – Correct with another entry
o Never erase – May give impression of concealment or fraud
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Topic 2 Goods & Services Tax

 Introduction to GST
 Value added tax
 Added at each stage of production and distribution chain
 Taxable supplies are goods and services subject to GST
 GST rate is 10%
 GST Paid can be claimed back
 GST Collected is sent to the ATO
 GST Formula
 Inclusive Price /11 = Amount of GST
 Inclusive Price/11 x 10 = Exclusive Price
 Exclusive Price + 10% = Inclusive Price
 Liability to GST
 Applies to enterprises who have an annual turnover over $75,000 must
register
 GST Collected is sent to the Australian Tax Office at the end of the financial
year
 GST Free Supplies
 Goods and services that would normally attract GST but are exempted under
the legislation, eg. fresh food, educational courses, wages, capital
contributions, withdrawals
 Supplier will not charge GST to supplier but will claim GST back from
purchasing supplies
 Tax Invoices
 Required for taxable sales of more than $75 (excluding GST)
 Must be provided within 28 days if requested
 Recording GST
 Recorded on a separate line in general journal
 When purchasing: Value of purchase + GST Paid = Amount Spent (CAB/AP)
 Inclusive amount comes from CAB/AP
 When selling: Revenue + GST Collected = Amount Received (CAB/AR)
 Receive inclusive amount, account for exclusive amount as revenue
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Topic 3 Adjusting Entries, closing entries, preparation of financial statements

 Types of adjustments
 Prepayments
 Recorded expenses and revenues
 Inventory
 Accruals
 Cash vs Accrual Accounting
 Cash basis – Recorded in period where cash is received or paid
 Accrual basis – When transaction is incurred and is measurable
 Income
 Increase in economic benefits in the form of
o Enhancements of assets
o Decreases in liabilities
 Expenses
 Decrease in economic benefits in the form of
o Depletion of assets
o Incurrences of liabilities
 Expanding the Accounting Cycle for Adjustments
1. Recognise & Record Transactions Source Documents

2. Journalise Transaction General Journal
3. Post to Ledger Accounts General Ledger
4. Prepare Unadjusted Trial Balance Trial Balance (Unadjusted)
5. Determine adjusting entries General Journal
6. Post adjusting entries to gen ledger General Ledger
7. Prepare Adjusted Trial Balance Trial Balance (Adjusted)
8. Prepare Financial Statements Financial Statements
 Balance Day
 Last day of accounting period
 Time to adjust to accrual accounting
 Match all revenues and expenses incurred in the period
 Adjust assets and liabilities to correct balance
 Record adjustments
 Temporary & Permanent Accounts
 Temporary Accounts
 Income, expenses
 Closed at end of each accounting period to Profit or Loss Summary
 Note: Profit or Loss Summary is then closed to capital account
 Permanent Accounts
 Assets, liabilities, owner’s equity
 Ending balances carried forward to next accounting period
 The Need for Adjusting Entries
 In some cases, the period where cash is paid or received does not match the
period where expense and income are recognised
 Adjustments are made on the last day of the accounting period to correctly
recognise income and expenses not reflected in cash receipts or payments
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 Classification of Adjusting Entries

 Deferrals (Prepayments)
 Prepaid Expenses (Costs/expense paid before they are consumed)
 Unearned Revenue (revenues that are collected or received but are
not yet earned)
 Accruals (Unrecorded)
 Accrued Expense (Incurred but not paid, eg. Wages Payable)
 Accrued Revenue (Revenue earned but not yet received)
 Rules of Adjusting Entries
 One side of the entry affects an income statement account (revenue or
expense)
 The other side of the entry affects asset or liability
 Cash is never adjusted
 Prepayments
 Prepaid Expenses
 Originally recorded as an expense
 Adjustment to the expense, credit the expense account the amount
that is prepaid and debit ‘Prepaid Asset’ account
 Originally recorded as an asset
 Credit the asset by amount expensed that period
 Depreciation
 Cost – Residual Value/Useful Life
 Example
 $34,000-$4000/4 = $7,500
 Depreciation Expense debited $7,500
 Accumulated Depreciation credited $7,500
o Accumulated Depreciation: Running total of depreciation
 More in Topic 10
 Unearned/Precollected Revenue
 Originally recorded as revenue
 Adjusted to ‘Unearned Revenue’ liability account
 Originally recorded as a liability
 In period when revenue is earned debit ‘Unearned Revenue’ by the
amount and credit ‘Revenue’
 Accruals
 Accrued Expense
 Originally recorded as liability and expense (as the work has been completed)
 Upon the payment date payables and current periods expenses are
debited and CAB is credited
 Accrued Revenue
 Agreement made to provide service, no payment received
 DR AR, CR Revenue (If no invoice is issued GST is collected at a later
date, when payment is made)
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 Adjusted Trial Balance

 Adjusting entries posted to general journal
 An adjusted trial balance can then be prepared
 Preparation of financial statements
 Income Statement
 Prepared first to determine profit or loss
 Reflects entity’s performance for the period
 Statement of changes in equity
 Profit or Loss must be added or subtracted from equity
 Account Balances after Closing Process
 All income accounts have no balance
 All expense accounts have no balance
 Drawings account has no balance
 Capital account has been increased/decreased by the profit or loss and
decreased by the drawings
 Reversing Entries
 Dated first day of next accounting period, reversing the effects of the last day
of the previous accounting period in order to simplify recordings of
transactions in the next period
 Example
 Adjusting for salaries payable (Expense DR, Payable CR)
 Reversing entry (Expense CR, Payable DR)
 Subsequent entry involves one account being debited and CAB
being credited (rather than two different accounts being debited)
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Topic 4 Accounting for Retailing

 Inventory: Assets held for sale, in the process of production for a sale or in the form
of materials or assets in the production process or rending of services
 Does not include assets acquired to operate the business (eg. equipment)
 Cost of sales is often a retailer’s largest expense
 Sales Returns and Allowances
 Goods sold are returned as unsuitable
 ‘Sales Returns & Allowances’ and ‘GST Collected’ accounts are
debited
 ‘Accounts Receivable’ is credited
 Cash Settlement Discounts
 Discount given when buyer pays within settlement period
 Example
 Goods sold for $1000 plus GST of $100 2/10 (2% discount if within
10 days), n/30 (otherwise within 30 days)
Cash at Bank ($1100 x 98%) 1078

Discount Allowed ($1000 x 2%) 20
GST Collected ($100 x 2%) 2
Accounts Receivable 1100
 Trade Discounts
 Percentage reduction granted from the normal list price
 Used to determine actual sale price – No discount expense or anything
 Example
 $2000 (GST exclusive), 30% trade discount given

Sales ($2000 x 70%) 1400
GST Collected 140
 Freight
 Costs incurred in moving goods from the seller to the buyer
 Freight Outwards
 DDP: Delivered Duty Paid – Seller pays shipping
o Sold and delivered products
Freight Outwards 200

GST Paid 20
Cash at Bank 220
o Selling and distribution cost reported as an expense on
income statement
 Freight Inwards
 EXW: Ex Works – Buyer pays shipping
o Purchased furniture
Freight Inwards 500

GST Paid 50
Cash at Bank 550
 Added to Purchases in Cost of Sales section of Income Statement,
included in Cost of Sales figure for perpetual
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 Perpetual Inventory System – Keeping current and continuous records or all

inventory transactions
 Separate record for each inventory item
 Quantity and unit cost
 Running balance
 Single inventory general ledger account for all inventory transactions
 No ‘Purchases’ account
 Two parts to the entry, Sale and COGS
 Stock take only performed to verify accuracy recorded ending inventory
 If stock levels differ, stock loss/gain entry must be made

Sales 3150
GST Collected 315
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Cost of Goods Sold 1950
Inventory 1950
 Periodic Inventory System – Balance of inventory not changed until the end of the
period
 Additional inventory purchases recorded in ‘Purchases’ account
 Ending balance determined by stock count
Purchases 6500
GST Paid 650
Accounts Payable 7150
 Contrasting the Two Systems
 Perpetual = more work, more detail, more control
 Periodic = less work, less detail, less control
Topic 5 Special Journals

 Not on exam
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Topic 6 Inventories
 Cost of Inventory
 Cost includes cost of purchase, cost of conversion and other costs to bring
inventory to present location
 Determining the Cost of Inventory on Hand
 Stocktakes
 Periodic System - Necessary to determine ending inventory and cost
of sales
 Perpetual System - Used to verify accounting records and identify
loss, theft or deterioration
 Transfer of Ownership
 EXW
 DDP
 Goods on Consignment – Agreement where third party sells goods on behalf
of the owner for a commission
 Shipments of consigned goods are not counted as a sales or
purchase transaction and under control of the owner
 Cost of Inventory
 Includes all direct and indirect costs
o Purchase costs
o Conversion costs
o Other costs
 Excludes wastage, storage, administration
 Recording Inventory
 Periodic
 Beginning balance unchanged until end of the period
 Additional purchases recorded in ‘Purchases’ account
 Only one entry made for sales
 Ending balance determined by stock take
 Perpetual
 Separate record for each inventory item
o Quantity and unit cost
o Running balance
 Single inventory general ledger account for all inventory
transactions
 No ‘Purchases’ account
 Two parts to the entry, Sale and COGS
 Stock take only performed to verify accuracy recorded ending
inventory
 If stock levels differ, stock loss/gain entry must be made
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 Inventory Cost Assumptions

 Specific identification
 Each item of stock is identifiable to a specific invoice
 Gross profit on each item is known
18 Units Sold
1 unit from beginning inventory ($10) $10
12 units from 15 Sept Purchase ($11) $132
5 units from 7 Dec Purchase ($12) $202
Ending Inventory
9 units from 1 July ($10) $90
10 units from 7 Dec ($12) $210
 First in First Out
 First item acquired = first items sold
 Ending inventory is most recently acquired items
18 Units Sold
10 units from beginning inventory ($10) $100
Total Cost of Goods Sold $188
Ending Inventory
Total $224
 Last in First Out
 Last items acquired = first items sold
 Ending inventory is earliest acquired items
18 Units Sold
Total Cost of Goods Sold $213
Ending Inventory
10 units from beginning inventory ($10) $100
9 units from 15 September ($11) $99
Total $199
 Weight Average Cost
Total Value of Goods Available for Sale
 =Unit Cost
Number of Goods Available for Sale
$ 412
o =$ 11.14 Per Unit
37 Units
 Ending Inventory = Number of Items at End x Calculated Unit Cost
 Cost of Goods Sold = Total Value of Goods Available – Ending
Inventory
 Moving Average
 Same as ‘Weighted Average Cost’, but a new average cost per unit
is calculated after each purchase
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 Comparison of Costing Methods

 Variations in profits are short term
 Eventually all assets will be consumed with total costs being equal, therefore
profit will end up the same
 Ideally specific identification is used
 LIFO not allowed under accounting standards
 Must use same accounting methods and procedures from period to period
 Inventory Valuation
 Net Realisable Value: Estimated selling price in the normal course of business
less the estimated costs of sale
 At the end of the period cost of inventory on hand is compared with its net
realisable value
 Declines in value can be caused by obsolescence, damage, deterioration or
decline in demand
 If net realisable value of inventory is less than its cost, the inventory is written
down to net realisable value and expense is recognised in the period write
down occurs
 Returns
 FIFO
 Purchase returns recorded at price negotiated initially
 Sales returns are costed back into the inventory at the most recent
cost price
 Moving Average
 Purchase returns recorded at price negotiated initially
 A new average cost per unit is calculated after a return
 Inventory Errors
 Perpetual
 Stock take used to confirm records
 Difference may be due to theft, damage or inaccurate recording
o Failure to record goods in transit which are owned by the
entity
o Sales recorded in the wrong period as it occurred near the
cut-off
 Periodic
 Counting and pricing errors
 Cut-off error as above
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 Estimating Inventories – for periodic systems without the need for a stock take
 Retail Inventory Method
 Cost of Goods Available for Sale at Cost / Cost of Goods Available for
Sale at Retail = Cost Ratio
 Beginning Inventory + Purchases – Net Sales = Estimate of Ending
Inventory at Retail
 Estimate of Ending Inventory at Retail x Cost Ratio
 Gross Method – Assumes that the gross profit percentage remains the same
from period to period
 Gross profit = Net Sales – Cost of Sales (from last period)
 Deduct Cost of Sales from Cost of Goods Available for Sale to
determine estimate of ending inventory
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Topic 7 Cash and Control of Cash

 Internal Control System of Cash
 3 Important Principles
 Separation of responsibility for recording cash and custodianship of
cash
o Prevents misappropriation of cash and falsification of
records
 Banking daily takings daily
 All payments made by electronic transfer or cash are authorised by
designated personnel
 Cash Received through the mail
 Opened by two people, one prepares a list of the amounts received
 Cash receipts from cash sales
 Use of cash register
 Cash Short and Over
 Can occur if operators or customers are given the wrong change
 Cash shortage is recorded as an expense when daily sales are
recorded
 Bank Accounts
 Cheque Accounts
 Strengthens internal control
 Bank records allows entity to cross check deposits received and
cheques paid with internal cash records
 Use of Electronic Funds Transfer
 Often replacing cheques
o High cost of processing cheques
o Considerable delays of up to 5 working days
 Bank Statement: Each month the bank sends the entity a bank statement
detailing activity that has taken place in the account during the month from
banks point of view
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 Bank Reconciliation
 Purpose is to ensure records are complete, reliable, up to date, free from
fraud and error
 Bank Reconciliation Process
 Identify difference between cash book and bank statement
 Tick cash book entries which are on the bank statement
 Adjust cash book with items which are on the bank statement, but
not in cash book
 Prepare bank reconciliation, indicating remaining differences
 Items recorded in cash journals but not by the bank statement
 Outstanding, Late Deposits or Deposits in Transit
o Internal records may show cash receipts on last day of the
month, but deposit may have been held over to the next
day by the bank, but recorded in CRJ
o Inflow of cash not recorded by bank
 Unpresented or Outstanding Cheques
o Cheques not presented to the bank by the date the bank
statement is completed, but recorded in CPJ
o Outflow of cash not recorded by bank
 Items that originate in the bank statement
 Bank fees, charges, interest dishonoured cheques and bills of
exchange
o First indication of these items is in the bank statement
 Errors made by the entity or the bank
 Eg. a cheque for $89 rather than $98
 Reconciliation Procedure
 Check last bank reconciliation
o Note outstanding cheques and receipts not banked
 Compare
o CRJ and CPJ with Bank Statement, mark off common items
and identify differences
 Update cash journals
o Record unmarked DR items in CPJ
o Record unmarked CR items in CRJ
o Mark off these items
 Errors
o Adjust cash journals for any recording errors revealed by
bank statement
o Notify bank of any errors in their statement
 Total cash journals and post to ledgers
 Prepare bank reconciliation statement
o Balance as according to bank
o Add: Deposits bank has not yet recorded
o Less: Unpresented cheques that were paid but not recorded
by the bank
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 Petty Cash Fund

 A current asset containing a specified amount of cash, placed under the
control of a specific employee
 Establishing the Fund
Petty Cash 100

Cash at Bank 100
 Making payments from the fund
 Recipient signs a petty cash voucher which shows
o Amount
o Purpose
o Date
 Total of the vouchers + cash in the fund should = original amount in
fund
 Reimbursing the Fund
 Petty cash vouchers are supplementary records, so expenses need
to be properly recorded and posted to general ledger accounts
Stationary Expense 15.22

Office Supplies Expense 12.30
Postage Expense 56.47
GST Receivable 8.40
Cash at Bank 92.39
 Cash Budgeting – Ensuring excessive cash funds lying idle are avoided
 Projecting of expected future cash receipts and cash payments
 Non-cash items excluded (eg. depreciation)
 Ensures that
 Entity is able to meet commitments as they fall due
 Proposed expenditures are carefully assessed and wasteful cash
outlays are discouraged
 Use of borrowed funds are minimised
 Cash funds not left idle earning no interest or dividends
 Cash Management
 Basic principles to ensure good management of cash
 Reduce collection time for accounts receivable (get the cash from
customers faster)
 Postpone payments to accounts payable to their due dates
(retaining access to the cash that would have been unavailable)
 Keep inventory levels to a minimum (minimise storage costs)
 Invest surplus cash
 Plan for capital expenditures (acquisition of non-current assets)
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Topic 8 Receivables
 Accounts Receivable
 Most significant receivable for most entities
 Two issues associated with AR
 Recognition (when to record)
o Usually at time of sale
o Consider discounts and allowances
 Valuation (what amount to record)
o Not all amounts owing will be collected
o Need to account for amounts that will become bad
 Bad and Doubtful Debts
 Risk of doing business on credit
 Harm minimised through credit checks
 Unpaid amounts represent an expense
 Written off periodically
 Methods for account for bad debts
 Allowance Method
o At the end of the accounting period before accounting
records are closed and reports are prepared an estimate of
doubtful debts is made
Bad Debts Expense 6000

Allowance for Doubtful Debts 6000
o The ‘Bad Debts Expense’ account is debited and the
‘Allowance for Doubtful Debts’ account is credited
(increased)
o GST component will be recoverable from the ATO if/when
an account becomes bad
o Writing off Bad Debts
i. When an account receivable is determined to be
bad they are written off by debiting ‘Allowance for
Doubtful Debts’ and crediting ‘Accounts Receivable’
ii. Associated GST is also removed

GST Collected 62
 Direct write-off method
o No allowances are made, bad debts are charged to expense
at the time it was deemed bad

GST Collected 62
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 Estimating Doubtful Debts

 Generally based on past experience and forecasts of future
economic and business conditions
 Involves a considerable degree of judgement
 The goal is to estimate a reasonable amount of AR that will be
receivable as cash
 Two common methods
o Percentage of Credit Sales
i. Analyses of past accounting data usually establishes
a percentage relationship between bad debts and
credit sales

Eg. 1% of $847,000 of credit sales
o Ageing of Accounts Receivable
i. The older the account the more likely to be bad
ii. Past accounting records are analysed to determine
approximate percentages for each age group
Age Category Percentage

Not yet due 1%
1-30 days overdue 5%
Over 180 days overdue 60%
iii. Estimated value for each group is then calculated

Eg. 1% of $847,000 of credit sales
 Top-ups may be needed in the allowance account if bad debts are
underestimated
 Recovery of an Account Written Off
 In some cases, an account that has been written off is collected at a
later date

GST Collected 25
Bad Debts Recovered 250
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Cash at Bank 275
o Recovery is treated as a revenue
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 Management and Control of Accounts Receivable

 Credit Policies
 The credit department investigates credit history and debt paying
ability of customers who apply for credit
 If approved customers are not deemed worthy, credit could be
withdrawn, and all future sales are made only on cash
 Monitoring Credit Policies
 Ageing analysis of receivables
o The longer the account is overdue, the more likely it will
become bad
o This method is used to gauge the age of individual
customer’s balances, and identify whose accounts require
the attention of the credit department
o Can also be used to predict future cash inflow for planning
purposes
 Calculating and analysing ratios
o Compare ratios with industry averages
Net Credit Sales
o Receivables Turnover=
Average Receivables
365
o Avg Collection Period=
Receivables Turnover
 Internal Control of Accounts Receivable
 As with internal control of cash safeguards must be established
 It is important that the people who maintain AR records do not have access to
cash receipts
 Disposal of Accounts Receivable
 Sale of accounts receivable
o Realise cash to finance activities
o Provide source of cash for other reasons
o Minimise credit control, collection expenses and bad debts
Cash at Bank 490,000

Service Charge Expense 10,000
Accounts Receivable 500,000
 Use of credit cards
o Transfers detailed accounting and collection to issuer of
card
Cash at Bank 2200

GST Collected 200
Sales 2000
At the end of the month
Merchant’s Fees Expense 462
Cash at Bank 462
 Use of Debit Cards
o Immediate transfer from customer account to business
account
o Effectively a cash sale
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 Bills Receivable
 Used for extending credit beyond normal trading transactions, where they are
called trade bills
 Trade Bills
 Basically a loan, on ‘maturity’ the full amount is received + interest
 Has three parties
o Party issuing the order
o Person the bill is addressed to
o Person who is to be paid
Bills Receivable 1,555.48

Accounts Receivable 1,500
Unearned Interest Income 55.48
o 90-day bill at 15% interest, interest is earned at maturity
date
Cash at Bank 1,555.48

Bills Receivable 1,555.48
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Unearned Interest Income 55.48
Interest Income 55.48
 Promissory Notes
o An unconditional promise in writing between the maker of
the promise and the payee
o Two parties otherwise the some as a trade bill
 Discounting Bills Receivable
o Can be sold to the bank for cash
o Bank will deduct in advance an interest charge called a
discount
i. Discount is based on maturity value remaining and
discount rate used by the bank
Amount of Debt $2000

Interest on note at 8% ($2000 x 8% x 90/365) $39.45
Maturity Value of the note $2039.45
Less: Discount at 10% for 60 days $35.53
($2039.45 x 10% x 60/365)
Proceeds $2003.92
ii. Proceeds = amount received by seller of the bill
Cash at Bank 2003.92

Unearned Interest 35.53
Bills Receivable 2039.45
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Unearned Interest 3.92
Interest Revenue 3.92
o Interest revenue above is the balance remaining of the
unearned revenue after the discount of the bill
 End-of-period Adjustments for Interest Revenue
o Interest is earned as time passes, but only after the note
expires does it become interest revenue
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Topic 9 Liabilities
 Three Essential Characteristics
 Present obligation to a third party
 Obligation must have resulted from past events
 Must have future outflow of resources representing economic benefits
 Recognition of Liabilities
 Avoids
 Understatement of liabilities
 Overstatement of equity
 Criteria for recognition – Liabilities should be recognised only when
 It is probable that an outflow of economics benefits will result from
the settlement of the obligation
o The outflow of resources can be paid
i. On demand
ii. On a specified date
iii. On the occurrence of a specified event
 The amount of the settlement can be measured reliably
o May require estimates or discounts back to present value
o Based off source documents
 Provisions and Contingent Liabilities
 Provisions: Liabilities of uncertain timing or amounts
 Eg. provisions for long-service leave and warranties, these are
expensed in the period of consumption or loss of economic benefits
 Does not include accumulated depreciation or allowance for
doubtful debts
 Excludes self-insurance and future expected outlays (with no
present obligation)
 Contingent Liabilities: Possible obligation arising from a past event that will
be confirmed by the occurrence of a future event beyond the entity’s control
 Accounts Payable: Amounts owed for purchase of inventory, supplies and services
as part of the business operating cycle
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 Bills Payable
 Differs from accounts payable in that the liability is evidenced by a bill of
exchange or promissory note
 Bills payable can be classified as either
 Trade Bills
o Arisen from transactions in the normal course of business
used for settlement of business transactions
Accounts Payable 4000

Unexpired Interest 98.63
($4000 x 10% x 90/365)
Bills Payable 4098.63
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Bills Payable 4098.63
Cash at Bank 4098.63
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Interest Expense 98.63
Unexpired Interest 98.63
o Unexpired interest is a ‘Contra-liability’ account and is
debited to represent the interest expense yet to be incurred
 Commercial Bills
o Bills used in order to obtain financing from banks
o Bought and sold on a bills market, similar to stock exchange
 Employee Benefits
 All forms of consideration given by an entity in exchange for services rendered
by employees
 Two Measurement Methods
 Short Term Liabilities (expected to be settled within 12 months)
o Recorded at their undiscounted nominal amounts
o Eg. wages, salaries, annual leave and sick leave
 Long Term Liabilities
o Measured at present value, future cash flows discounted
back to present time using a suitable discount rate
 Gross Pay: Amount paid to particular employee during a given period
 Take home pay is less than gross pay due to certain deductions
Wages and Salaries Expense 3650

Taxation Office 748
Superannuation Fund 191
Insurance 90
Medical Fund 178
Wages and Salaries Payable 2443
o Amounts deducted from an employee’s gross pay are
liabilities of the employer
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 Warranties
 Establishment of a provision for any warranty given on the sale of inventory
 Example
 Average cost of repairs is $350, with 10% of products requiring
warranty repairs and 2000 were sold in that period.
 2000 x $350 x 10% = $70000
Warranty Expense 70000

Provision for Warranties 70000
Faulty Computer Requiring Repairs
Provision for Warranties 350
Cash at Bank 350
 Onerous Contracts
 Contract where the unavoidable costs of meeting an obligation exceed the
economic benefits expected to be received
 Eg. still having to pay rent on a lease that is yet to run out after moving
 Payment of GST
GST Collected 130000

GST Paid 110000
Net GST Payable 20000
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Net GST Payable 20000
Cash at Bank 20000

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 Non-current Liabilities
 Amounts due for payment more than 1 year from reporting date
 Types of non-current liabilities
 Term loans – liability which arises by borrowing from banks, for
periods up to 10 years
 Mortgage payable – a liability in which specific property of the
borrower serves as collateral for the loan
o Collateral: Something of value the lender accepts in case the
borrower defaults
 Debentures or bonds
o Long term liability borrowed from many lenders, who
receive regular interest payments for the funds provided
often secured against the entity’s asset(s)
o A trust deed is the equivalent to a bill of exchange
o Types of debentures
i. Mortgage Debentures – where no more than 60% of
the value of land controlled by the company is
mortgaged as security for the debenture
ii. Debentures – holders are secured by a charge over
the whole or part of tangible property of the
company
iii. Unsecured notes – If the loan cannot be described
as either of the types above, and are borrowings
with no claim over any of the company’s assets
o Example
i. Issue of 1000 $100 8% debentures for 5 years
Cash Trust 100000

Application – Debentures 100000
Money received from applicants for debentures
Application – Debentures 100000
Debentures 10000
Applicants are allotted debentures
Cash at Bank 100000
Cash Trust 100000
Only after allotment is the money transferred to CAB
Debenture Interest Expense 4000
Cash at Bank 4000
First half yearly interest payment (half the 8%)
o Redemption on Debentures
i. The entity is released from its obligations and the
charge of its assets by redemption
Debentures 100000
Debenture Holders 100000
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Debenture Holders 100000
Cash at Bank 100000
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Topic 10 Non-current Assets

 Property, plant and equipment are used to describe those non-current assets with
physical substance acquired by an entity for use in production
 Expected to be used over more than 1 year
 Future economic benefit will be received over 2 or more accounting periods
 Depreciable amount must be allocated in a systematic manner over useful life
 Determining Cost
 Assets acquired are initially recorded at their purchase cost, amount of cash
or fair value given for acquisition
 Cost includes
 Purchase price (excluding GST)
 Any directly attributable to bringing the asset to its location to be
used as intended (installation, freight, insurance in transit and
repairs in transit costs)
 Estimate of cost of dismantling, removing and restoring if needed
 Other issues
 Cost recognise should only include reasonable and necessary
expenditures
 Deferred payment may require interest component
 Land and land improvements
 Borrowing costs
 Qualifying asset (requires longer than 1 year to get ready for use)
 Equipment acquired for safety and environment reasons
 Fair Value: Amount for which an asset can be exchanged between a
knowledgeable, willing seller and buyer
Listing Price of Machine $22000

Less: Trade Discount (10%) 2200
Less: GST 1800
Purchase Price 18000
Freight Inwards 820
Installation Costs 675
Cost of Acquisition 19495
 Lump-sum Acquisition – Purchase of many assets at once
 Each asset recorded at individual cost
Asset Estimated Fair % Allocated Cost

Value
Building $595,000 70 $560,000
Land $170,000 20 $160,000
Equipment $85,000 10 $80,000
Total $850,000 100 $800,000
 Fair Value of Specific Asset / Total Fair Value x Total Cost = Allocated Cost
Buildings 560,000
Land 160,000
Equipment 80,000
GST Paid 80,000
Cash at Bank 880,000
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 Asset Depreciation
 Four factors which to cause a non0current asset to have a limited useful life
 Expected usage
 Expected wear and tear (through physical use)
 Technical and commercial obsolescence
 Legal or similar limits
 Determining Depreciation
 Depreciable/carrying amount = Cost – Residual Value
 Useful life must be estimated
o The period over which an asset is expected to be available
for use
o The number of production or similar units expected to be
obtained
 Residual value is the estimated amount that an entity could obtain
from disposal of the asset after deducting cost of disposal
 Depreciation methods
 Straight-line Method
o Equal amount of depreciation to each full accounting period
of the asset’s useful life
o
Depreciable Value $ 33,000−$ 3000
= =$ 7,500 Annual Depreciation
Useful Life 4 years
Depreciation Expense 7500
Accumulated Depreciation 7500
o Accumulated depreciation is a running total of depreciation
 Diminishing Balance Method
o Decreasing depreciation charge over asset’s useful life
o Not required to be calculated
Yea Carrying Rate Annual Depn Carrying
r Amount BEG Expense Amount END
1 $33,000 45% $14,850 $18,150
2 $18,150 45% $8,168 $9,982
3 $9,982 45% $4,492 $5,490
4 $5,490 45% $2,470 $3,000
 Sum-of-years Digits
o Different way of applying diminishing balance method
o Depreciation for each period determine by multiplying
residual amount by successively smaller fractions
o 4-year useful life = 1+2+3+4 = 10
Yea Depreciable Fraction Annual Depn Carrying

r Amount Expense Amount
1 $33,000 4/10 $12,000 $21,000
2 $33,000 3/10 $9,000 $12,000
3 $33,000 2/10 $6,000 $6,000
4 $33,000 1/10 $3,000 $3,000
 Units-of-production Method
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o
Depreciable Value $ 33,000−$ 3000
= =$ 2 Per Operating Hour
Total Units of Production 15,000 Hours
 Depreciation is an estimate and is rarely precise
 Accumulated Depreciation is a running total
 Subsequent Costs
 Additional costs after acquisition
 Repairs
 Maintenance
 Improvements
 Modifications
 Impact on future economic benefit must be considered
 Day-to-day costs
 No change to useful life
 Treated as an expense
Repairs and Maintenance Expense 670

GST Paid 67
Cash at Bank 737
 Overhauls and replacement of major parts
 These extend an asset’s expected future benefits
Accumulated Depreciation 24000

Delivery Van 24000
-----------------------------------------------------------------------------
Delivery Van (New Engine) 4500
GST Paid 450
Cash at Bank 4950
-----------------------------------------------------------------------------
Expense on Disposal 500
Delivery Van 500
Disposal of Old Engine
o New Depreciation Expense is Calculated
Delivery Van Carrying Amount $14,000

($10,000 + $4,500 - $500)
Less: Residual Value $2,000
New Depreciable Amount $12,000
Annual Depn Expense ($12,000/3 years) $4,000
o Original useful life was 5 years
o 4 years were used up
o New engine added 2 years
 Leasehold Improvements
 If leasing an asset, the entity may incur additional costs to ensure
the asset is suitable for its intended use
o For example, fixtures installed in leased building lasting 5
years
Leasehold Improvements 10,000

GST Paid 1,000
Cash at Bank 11,000
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Payment for improvements

Depreciation Expense 2,000
Accumulated Depreciation 2,000
Depreciation of leasehold improvements
 Property and Plant Records

 Divided into functional groups with separate accounts for each group
 Subsidiary ledger for each individual asset
 Disclosure of Property, Plant and Equipment
Non-current Assets
Property, Plant and Equipment
Land (at cost) $164,000
Buildings (at cost) $849,000
Less: Accumulated Depreciation $231,500 $617,500
Plant and Equipment (at cost) $236,400
$845,300
Last columns are totals not credits
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 Revaluation
 After acquisition an entity must choose between the cost or revaluation
model
 Cost Model – Previously mentioned (Cost – Accumulated Depn)
 Revaluation Model (either increase or decrease)
o Initial revaluation increases
i. Recognised in ‘Other Comprehensive Income’
account (not included in profit for the period)
ii. Revaluation increase shall be accumulated in equity
under ‘Revaluation Surplus’
Property Plant and Equipment

Motor Vehicle (at cost) $65,000
Revaluation model fair value of $170,000 for the land and $45,000 for the vehicle
iii. Journal entries as follows
Land 20,000
Gain on Revaluation - Land 20,000
Revaluation increases on land
Accumulated Depreciation 25,000
Vehicle 25,000
Write off accumulated depreciation
Vehicle 5,000
Gain on Revaluation - Vehicle 5,000
Revaluation increases on vehicle
Gain on Revaluation - Land 20,000
Gain on Revaluation – Vehicle 5,000
Other Comprehensive Income Summary 25,000
Accumulate increases in Revaluation Surplus
Other Comprehensive Income Summary 25,000
Revaluation Surplus 25,000
iv. Future depreciation charges based on revalued
carrying amounts
o Initial revaluation decreases
i. Recognised as an expense which reduces profit
Property Plant and Equipment

Revaluation model fair value of $140,000 for the land and $34,000 for the vehicle
ii. Journal entries as follows
Expense on Revaluation of Land 10,000

Land 10,000
Revaluation decrease on land
Accumulated Depreciation - Vehicle 25,000
Expense on Revaluation of Vehicle 6,000
Vehicle 31,000
Revaluation decrease on vehicle
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 Reversals of Increases and Decreases

 In future periods, initial revaluation adjustments may reverse
 If so, revaluation should be offset against previous revaluation for
that asset
 Reversal of initial increase
Revaluation model fair value of $25,000 for the vehicle
o Journal entries as follows

Loss on Revaluation of Vehicle (OCI) 5,000
Expense on Revaluation (P/L) 1,000
Motor Vehicle 20,000
Revaluation surplus decrease by $5,000, expense on revaluation increase by $1000
= $6,000 total revaluation decrease
 Reversal of initial decrease
o Journal entries as follows
Depreciation Expense - Vehicle 10,333

Depreciation of vehicle $34,000 - $3000 x 1/3
Gain on Revaluation – Vehicle (P/L) 6,000
Gain on Revaluation – Vehicle (OCI) 333
Motor Vehicle 4,000
Expense on revaluation of vehicle decreases by $6,000, gain on revaluation of
vehicle increase by $333 = $6,333 total revaluation increase
 Impairment Test
 Applied where the carrying amount exceeds recoverable amount
 Assets accounted for under cost model
o Impairment Loss
 Assets accounted for under revaluation model
o Revaluation Decrease
Motor Vehicle $65,000

Accumulated Depreciation $25,000 $40,000
 Estimate of recoverable amount is $35,000 (carrying exceeds
recoverable)
Impairment Loss on Vehicle (as cost method was used) 5,000

Accumulated Depreciation & Impairment Losses 5,000
Impairment of vehicle to recoverable amount
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 Derecognition of Non-current Assets

 When a non-current asset is no longer useful and has no sales value, it is
discarded or scrapped and must be recognised
 Scrapped fully depreciated machine
Accumulated Depreciation - Machinery 7,000

Machinery 7,000
 Scrapped partially depreciated machine

Expense on Disposal of Machinery 500
Machinery 7,000
 Scrapped partially depreciated machine + disposal cost of $400

Expense on Disposal of Machinery ($500 + $400) 900
GST Paid 40
Machinery 7,000
Cash at Bank 440
 Scrapped part way through the year
Depreciation Expense 200

Accumulated Depreciation - Machinery 200
Depreciation of scrapped machine to date of disposal
Expense on Disposal of Machinery) 300
Machinery 7,000
 Sale of Non-current Assets
 Carrying value represents expense for the period
 Difference represents net gain or loss on sale
o Gains recognised as other income (not revenue)
o Losses recognised as expense
 Machine with carrying amount of $8,600 sold for $9,300
Cash at Bank 10,230

Proceeds from Sale of Machinery 9,300
GST Collected 930
Gross proceeds from sale
Carrying Amount of Machine Sold 8,600
Accumulated Depreciation – Machinery 13,400
Machinery 22,000
Recognition of expense machine sold (net gain $700)
 Machine with carrying amount of $8,600 sold for $8,200
Cash at Bank 9,020

Proceeds from Sale of Machinery 8,200
GST Collected 820
Gross proceeds from sale
Carrying Amount of Machine Sold 8,600
Accumulated Depreciation – Machinery 13,400
Machinery 22,000
Recognition of expense machine sold (net loss $400)
 Derecognition of Revalued Assets
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 Sale treated as previous

 Revaluation surplus remains in accounts
 Cannot be transferred to profit
 May be transferred to retained earnings
 Exchanging of Non-current Assets
 Record disposal of old asset
 Record acquisition of new asset
 Trade-in amount is treated as income
 Difference between income and expense components represents net gain or
loss
Machinery (new) 30,000

GST Paid 3,000
Cash at Bank 29,000
Proceeds from Sale of Machinery (old)
Exchange of new machine for trade-in of $4,000 and payment of $29,000
Carrying Amount of Machine Sold (old) 7,000
Accumulated Depreciation – Machinery (old) 15,000
Machinery (old) 22,000
Recognition of expense of machine sold
 Intangible Assets
 Non-monetary asset without physical substance, but derive value from future
economic benefits
 Two types of intangibles
 Identifiable (separable from the entity)
o Patents, trademarks, brand names etc.
 Unidentifiable (cannot be separated from the entity)
o Goodwill: Favourable reputation of an entity among its
customers, future benefits from unidentifiable assets
i. Non-current asset
o Purchased vs generated goodwill
i. Only purchased can be recognised (giving free stuff)
ii. Recorded at Cost – Accumulated Impairment
Purchases paid for Harry’s Business $750,000

Assets at Market Value $900,000
Less: Liabilities $250,000
$650,000
Goodwill $100,000
Goodwill in this example is the difference between market value and purchase
amount paid

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Topic 1 Decision making and recording business transactions

1. Recognise & Record Transactions Source Documents

 Statement of Cash Flows

 Chart of Accounts – Complete listing of ledger account titles and identification

 Double Entry Accounting

 Application of DR/CR Rules

Topic 2 Goods & Services Tax

Topic 3 Adjusting Entries, closing entries, preparation of financial statements

1. Recognise & Record Transactions Source Documents

 Classification of Adjusting Entries

 Adjusted Trial Balance

Topic 4 Accounting for Retailing

Cash at Bank ($1100 x 98%) 1078

Accounts Receivable 1540

Freight Outwards 200

Freight Inwards 500

 Perpetual Inventory System – Keeping current and continuous records or all

Accounts Receivable 3465

Topic 5 Special Journals

 Inventory Cost Assumptions

 Comparison of Costing Methods

Topic 7 Cash and Control of Cash

 Petty Cash Fund

Petty Cash 100

Stationary Expense 15.22

Bad Debts Expense 6000

Allowance for Doubtful Debts 620

Bad Debts Expense 620

 Estimating Doubtful Debts

Bad Debts Expense 8470

Age Category Percentage

Bad Debts Expense 3630

Accounts Receivable 275

 Management and Control of Accounts Receivable

Cash at Bank 490,000

Cash at Bank 2200

Bills Receivable 1,555.48

Cash at Bank 1,555.48

Amount of Debt $2000

Cash at Bank 2003.92

Accounts Payable 4000

Wages and Salaries Expense 3650

Warranty Expense 70000

GST Collected 130000

Cash Trust 100000

Topic 10 Non-current Assets

Listing Price of Machine $22000

Asset Estimated Fair % Allocated Cost

Yea Depreciable Fraction Annual Depn Carrying

Repairs and Maintenance Expense 670

Accumulated Depreciation 24000