Accounting Sac 2 Unit 3
The withdrawal of stock made by the owner will cause:
* a decrease in the assets 'Stock Control' (CR) * an increase in 'Drawings' which is a debt (DR)
Describe the function and content of the Profit and Loss Summary Account:
To facilitate and allow expenses and revenue and as a result is able to be used to determine profit or loss. The summary total of all of them.
When a business commences with Assets of $420,000 and Liabilities of $140,000, the opening balance of capital will be:
$280,000
suggest two possible reasons for stock loss, other than theft:
* Damage * Oversupply to customer or undersupply from supplier.
Benefits of the perpetual system of recording:
* Reordering of stock is assisted by maintaining a continuous record of the number of units of stock on hand. * Stock losses and gains can be detected by comparing the balances of the stock cards against the physical stocktake. * Fast and slow moving lines of stock can be identified so that stock can be rotated or the stock mix adjusted.
The donation of stock to the school will cause:
* a decrease in 'stock control' (CR) * As the business will receive advertising in return for this donation this can be treated as a business expense (DR in advertising)
Steps in an Income Statement:
1. Record the Revenue 2. Less Cost of Good sold 3. Gross Profit 4. Adjusted Gross Profit 5. Less other expenses
If a business receives notice that a Debtor who owes $1000 will only be able to pay 25c in the dollar, the amount will be written off as a Bad Debt is:
1000 x .25 = 250 1000 - 250 = 750
What's a stock gain?
A revenue earned when the stocktake shows a figure for stock on hand that is more than the balance shown in the stock card.
What's a stock card?
A subsidiary accounting record that records each individual transaction involving the movement in and out of the business of a particular line of stock.
Referring to one qualitative characteristic, explain the role of a physical stocktake.
According to reliability, The stocktake ensures that the figure for Stock Control reported in the Balance Sheet is accurate and free from bias, by verifying the balances in the stock cards and in the process detecting any stock loss or gain.
Referring to one qualitative characteristic, explain why the computer must be valued at $1,100 (even if she purchased it for $2000 a year ago) in the business' records?
According to the qualitative characteristic Relevance, The new value of $1 100 is more useful for decision-making as it is the agreed value at the time the computer is contributed to the business.
Referring to one qualitative characteristic, explain why bad debts must be reported in the Income Statement:
According to the qualitative characteristic of Relevance, It is to ensure the owner has all the information that may be useful for decision-making about the firm's profit, bad debts must be included in the Income Statement as an expense.
Explain why the vehicle contributed by the owner was valued at its agreed value:
Although the owner and the business are assumed to be separate entities, there is no 'sale' document (and no cash exchanged) when the asset is contributed. Therefore, the agreed value must be used as the Historical Cost in the business' records.
What's a General Journal?
An accounting record used to record infrequent, non-cash transactions, which cannot be recorded in the special journals.
What's a bad debt?
An expense incurred when a debt is written off because it is deemed to be irrecoverable.
What's a stock loss?
An expense incurred when the stocktake shows a figure for stock on hand that is less than the balance shown in the stock card.
Explain why a 'bad debt' is reported as an expense:
As it is a reduction in an inflow of economic benefits (less cash will be received from debtors) in the form of a decrease in assets (Debtors Control), which will lead to a decrease in owner's equity.
Explain the role of a narration in a General Journal entry:
Because the General Journal records a variety of transactions, the narration is necessary to describe or explain the transaction, and identify the source document.
Explain why commencing entries must be recorded in the General Journal:
Because they are infrequent, non-cash entries that cannot be recorded in any of the special journals.
When the owner of a business takes home stock for personal use the General Journal entry will be:
Debit in Drawings and Credit in Stock Control
If a payment of Wages was incorrectly recorded in the cash payments journal as Drawings, the entry to fix the error would need to be:
Debit in wages and a Credit in Drawings
Explain how the FIFO method of stock valuation can overstate the value of stock on hand:
FIFO assumes that the older stock is sold first, and that the newer stock is still on hand: when prices are rising, this newer stock will be more expensive, overstating stock on hand. (It is possible some of the stock on hand is actually the older, cheaper stock.)
Explain why stock loss is considered as an expense:
It is a loss of an economic benefit (stock) in the form of a decrease in assets (Stock Control) which leads to a decrease in Owner's Equity.
Explain why stock gain is considered as a revenue:
It is an inflow of an economic benefit (extra stock) in the form of an increase in assets (Stock Control) which leads to an increase in Owner's Equity.
What's the reason for a narration in the General Journal, what qualitative characteristic does it satisfy?
It must include details of the source document for the transaction, this is done in order to satisfy Reliability.
When writing off a bad debt what accounting principle is satisfied?
It satisfy's the conservatism accounting principle. As this principle states that the losses be recognised as soon as they are probable so that the asset (Debtors Control) is not overstated in the reports of the business.
What is a trial balance?
List of all the accounts in the general ledger, and their balances, to determine if total debits equals total credits
Explain the role of stock cards in an accounting system:
Stock cards are subsidiary accounting records used to maintain a continuous/ perpetual record of all movements of stock in and out of the business premises.
What's the perpetual system of stock recording:
Recording stock transactions in stock cards, then conducting a physical stocktake at the end of the Reporting Period to verify the balances of those stock cards.
What's FIFO?
The assumption that the stock that is purchased first will be sold first.
What qualitative characteristic is satisfied when writing off a bad debt?
Relevance as it ensures that reports contain all information that affects decision making and therefore making them relevant.
Mark-up of 75%, if the selling price is 140 and they sold 4 pieces of stock:
SP = 140 divided by 1.75 CP = 80 x 4 =320
How to calculate Gross Profit:
Sales Revenue less Cost of Sales
Why are revenue and expense accounts closed off at the end of an accounting period? Which accounting principle and qualitative characteristic are being adhered to?
So profit and loss can be calculated for an accounting period thus adhering to the reporting period. It also allows the characteristic of relevance to be followed as only the Revenue and Expense accounts related to the accounting period are used for profit calculation, the other reason why Revenue and Expense accounts are returned to zero in preparation for the next accounting period.
What transactions are recorded in the general journal?
The owner withdraws stock
Stock cards are the:
The subsidiary records for the Stock Control account.
Discuss what two qualitative characteristics are in conflict when using the agreed value for an asset being donated by the owner to the business:
The two qualitative characteristics which are in conflict with each other are Relevance and Reliability. Relevance states that all accounting reports should include all information useful for decision making and Reliability states that accounting records should contain information that is accurate, free from bias and is able to be verified via the use of a source document. Although the computer must be valued at its agreed value, but the agreed value is an estimated guess on what the asset is worth and therefore satisfies the characteristic of relevance but doesn't satisfy reliability as it isn't free from bias and has so source document for it to be verified upon. A positive to doing so is that it helps with business decisions but a negative is that it is unverifiable and therefore not an accurate accounting record.
Purpose of a trial balance:
To determine whether the financial transactions have been correctly recorded in a double entry system.
Explain why the owner would use the FIFO cost assignment method.
When stock is not labelled (due to effort and being deemed as impractical by the owner), cost price cannot be identified. Therefore, the owner would benefit from implementing the FIFO method for it helps the firm make an assumption of the cost price that the stock that was purchased first will be sold first.
How to calculate adjusted gross profit:
sales revenue less cost of sales = Gross Profit gross profit less stock loss = Adjusted GP
