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Unit 3 AOS 1 (Ledger accounts (An accounting record showing all the…
Unit 3 AOS 1
Ledger accounts
An accounting record showing all the transactions that affect a particular item in the balance sheet
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Increase on the credit - liabilities, owner's equity, revenues
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Footing ledger accounts - informal process of calculating the balance of an account and can be done at any time in the period
- Add up totals of both sides
- larger side - smaller side
- Pencil on the larger side and circle
Trial balance - list of all accounts in the general ledger and their balances to determine if debits = credits
Errors it will reveal = two entries on the same side, only one side has been recorded, differing amounts on both sides
Errors it won't reveal = transaction has been omitted, debit and credits are reversed, incorrect amount on both sides
Balancing - ruling off an A,L or OE account to determine its balance at the end of the current reporting period, transferring that balance to the next period
- Total both sides
- Write the larger total at the bottom of both sides
- Larger - smaller side
- Write this balance at the bottom of the smaller side and as the balance at the beginning of the next period on the larger side
Accounts payable
AAs and QCs links
Going concern - when a business records a credit purchase, this amount still needs to be recorded as a liability as we assume the life of the business is continuous and thus it will still be operating when it is due
Accrual basis - credit transactions are recorded when goods are exchanged not when cash is received or paid for the goods
Relevance - by recognising credit purchases at the time of the goods being exchanged ensures all information and profit is accurate for decision making
Ethical considerations
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Returning inventory that was delivered in a good condition and only damaged by the business could jeopardise relationships with suppliers
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Purchase returns
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Reasons for returns - faulty, wrong size, too many were purchased
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Discount revenue
Revenue in the form of a decrease in liabilities and an increase in owner's equity earned when an account payable is paid within discount terms
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Advantages - less cash is paid to accounts payable and thus more is retained to make other payments, net profit is increased
Disadvantages - cash is paid faster and this there is less time to generate cash from selling inventory, cash is unavailable in the short term to make other payments
APTO
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Strategies to manage - paying within credit terms or paying early to earn discount revenue, checking each statement of account against the accounts payable ledger for errors, developing a strong relationship with suppliers
Statement of account - a summary of the transactions a business has had with a particular account payable, can be compared to the account payable ledger for errors
Accounting elements
Assets
A present economic resource controlled by an entity, as a result of past events, that has potential to produce future economic benefit
Current - reasonably expected to the be converted to cash, sold or consumed by the entity within the next 12 months
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Liabilities
A present obligation of an entity, as a result of past events, to transfer an economic resource
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Revenues
Transactions that increase assets, or decrease liabilities, that result in an increase in owners equity other than those relation to contributions by the owner
Expenses
Transactions that decrease assets, or increase liabilities, that result in a decrease in owner's equity, other than those relating to distributions to the owner
Accounts receivable
Ethical considerations
Must consider the nature of the goods (safety, quality, environmentally friendly, socially responsible)
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Sales returns
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Reasons - faulty, wrong size/colour, change of mind, too many were purchased
Discount expense
Expense in the form of a decrease in assets and owners equity incurred in return for an early payment by accounts receivable
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Advantages - cash is received faster from accounts receivable making this cash available for other uses, sales may increase as customers may be more willing to buy from a business that offers discounts
Disadvantages - less cash is received from accounts receivable, net profit is decreased
ARTO
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Strategies to manage - offer discounts for early settlements, send reminder notes, conduct credit checks
Other transactions
Memos
Verifies transactions which do not relate to the sale, purchase or return of inventory of the movement of cash
Evidences non-cash contributions and drawings, establishment of a double entry system, correction of errors, use of inventory for advertising purposes, losses and gains, write downs, BDAs
Non-cash contributions
Must be valued at fair value (price that would be received if the asset was sold at the time it was acquired by the business)
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Correcting entries
A general journal entry to correct an error in the way a transaction is recorded in the general ledger/journal
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Other source documents
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Shipping confirmation - document issued by the supplier confirming that inventory has been dispatched and is being shipped
Delivery docket - document issued by the supplier to accompany a delivery listing the type and quantity of all items delivered
Recording inventory
Inventory cards
Records each individual transaction involving the movement of a particular line of inventory in and out of the business
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Valuing methods - FIFO and identified cost, regardless of which is chosen comparability requires that the method is consistent from one period to another
Identified cost method
A method of valuing inventory by physically marking each item in some way so that its individual cost price can be identified at the point of sale
Benefits - accurate and neutral providing faithful representation of the value of inventory
Costs - it is not always possible or practical to mark every individual item of inventory as this can be costly and time wasting
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IC vs FIFO
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FIFO means that when cost prices are rising the older and thus cheaper items are assumed to be sold first, reducing costs of sales and increasing net profit in comparison to IC
FIFO assumes that newer, more expensive units remain on hand leading to a higher valuation of inventory on hand and assets in comparison to IC
Inventory cost
AAs and QCs
Should be valued by its original purchase price as this is verifiable and provides a faithful representation of its value
Under going concern the business is not intending to liquidate all its inventory so it does not need to be valued at what it would realise if sold today
Costs of inventory
Product costs
A cost incurred in order to bring inventory into a condition and location ready for sale that can be allocated to individual units of inventory on a logical basis
Recorded as an increase in the unit cost of inventory in the cards and in the entry for inventory purchase
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Recognised as being incurred only in the period in which inventory is sold, when sold it is a costs of sales and when unsold it remains as a current asset
Period costs
A cost incurred in order to bring inventory into a condition and location ready for sale that cannot be allocated to individual units of inventory on a logical basis
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Recognised as being incurred in the period in which inventory is purchased under costs of goods sold
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Cost vs NRV
NRV is the estimated selling price of inventory less an costs involved in its selling, marketing and distribution
Cost < NRV = inventory is expected to be sold for a profit, cost price is still a faithful representation of the value of inventory, cost price is used
Cost > NRV = inventory is not expected to be sold for a profit, cost priced no longer provides a faithful representation of the value of inventory, NRV is used
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Inventory write-down - if the NRV is the lower value then inventory must be written down, cost - NRV, narration - write down of... to NRV due to ..., reported under adjusted gross profit
ITO
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Fast turnover - more cash on hand to meet short term debts and increased sales however selling price is possibly too low or business may be holding too little inventory
Slow turnover - consider nature of goods but is a negative impact on cash flow and profitability and liquidity and makes inventory susceptible to write downs and losses which reduces net profit
Managing ITO - promote sale of complementary goods, rotate inventory, appoint inventory manager, consider inventory mix
Cash transactions
Cash sales can be evidenced by an EFT receipt, credit card receipt, bank statement
Cash payments can be evidenced by cheque butts, EFT receipts, ATM documents, bank statement
All cash sales must also be verified by a tax invoice which must have the following characteristics - 'tax invoice' stated clearly, name and ABN of the seller, date, description of the g/s, price and GST
General journal
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Narrations include a brief description of the transactions and a reference to the source document (upholds verifiability)
Purpose of accounting
Includes both financial information (information that can be sourced from financial reports) and non-financial information (information that cannot be sourced from financial reports)
Must also consult ethical considerations being the social and environmental impacts of financial decisions
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GST
GST liability
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Creates a GST liability as selling prices are higher than cost prices meaning GST on sales is larger than that of purchases
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