4 nurlaila se ma Accounting (4)
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
Visit our website at www.macmillan.com.au
Associated companies and representatives
throughout the world.
Copyright © Neville Box 1994, 1999, 2002, 2006, 2011
The moral rights of the author have been asserted.
All rights reserved.
Except under the conditions described in the
Copyright Act 1968 of Australia (the Act) and subsequent amendments,
no part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of the copyright owner.
Educational institutions copying any part of this book
for educational purposes under the Act must be covered by a
Copyright Agency Limited (CAL) licence for educational institutions
and must have given a remuneration notice to CAL.
Licence restrictions must be adhered to. For details of the CAL licence contact:
Copyright Agency Limited, Level 15, 233 Castlereagh Street, Sydney, NSW 2000.
Telephone: (02) 9394 7600. Facsimile: (02) 9394 7601. Email: info@copyright.com.au
National Library of Australia Cataloguing-in-Publication entry
Author:
Title:
Edition:
ISBN:
Target Audience:
Dewey Number:
Box, Neville.
VCE Accounting : Units 3 & 4 / Neville Box.
5th ed.
978 1 4202 3058 1 (pbk.)
For secondary school age.
Subjects: Accounting—Problems, exercises, etc.
Accounting—Study and teaching (Secondary)—Victoria.
Victorian Certificate of Education examination—Study
guides.
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
At the time of printing, the internet addresses appearing in this book were correct. Owing to the dynamic nature of the internet,
however, we cannot guarantee that all these addresses will remain correct.
Warning: It is recommended that Aboriginal and Torres Strait Islander peoples exercise caution when viewing this publication as
it may contain images of deceased persons
iv
❯ Contents
C h a p t e r 4 The double entry recording process
4.1
Double entry accounting: an introduction
4.2
Double entry for revenues and expenses
4.3
Footing and balancing ledger accounts
4.4
The role of the trial balance
4.5
Detecting errors through a trial balance
4.6
Alternative presentation of a trial balance
4.7
Case study: from transactions to the balance sheet
4.8
Accounting for drawings
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 5 Special journals: cash transactions
5.1
The need for special journals
5.2
The role of special journals
5.3
Recording in the cash receipts journal
5.4
Recording in the cash payments journal
5.5
Recording cash discounts for debtors and creditors
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 6 Credit sales and credit purchases journals
6.1
Credit transactions
6.2
Recording in the credit sales journal
6.3
The need for control accounts
6.4
Debtors schedules
6.5
The cash receipts journal and debtors control
6.6
Recording in the credit purchases journal
6.7
The creditors control account
6.8
Creditors schedules
6.9
The cash payments journal and creditors control
6.10 Advantages and disadvantages of control accounts
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 7 The general journal
7.1
7.2
7.3
7.4
7.5
7.6
7.7
The need for a general journal
The format of the general journal
Posting a general journal entry
The general journal and subsidiary ledgers
Establishing a double entry system
Recording the contribution or withdrawal of assets by an owner
Donations of stock and business advertising
57
58
62
65
67
68
68
69
73
73
74
75
84
86
87
87
88
92
95
98
98
99
105
106
106
109
110
111
111
113
114
114
115
116
117
118
130
131
132
132
133
133
135
138
140
❯ Contents
7.8
Accounting for bad debts
7.9
Correcting recording errors through the general journal
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 8 Accounting for the goods and services tax (GST)
8.1
The GST: an introduction
8.2
GST and the sales journal
8.3
GST and the purchases journal
8.4
The GST clearing account
8.5
GST and the cash receipts journal
8.6
GST and the cash payments journal
8.7
GST and double entry accounting
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 9 The perpetual inventory system
9.1
What is inventory?
9.2
The physical stocktake
9.3
What is perpetual inventory?
9.4
The stock control account
9.5
Double entry under the perpetual method: a summary
9.6
Identifying the cost price of sales
9.7
First in, first out stock valuation
9.8
The role of stock cards
9.9
Stock cards and the general ledger
9.10 Stock losses and stock gains
9.11 Recording stock losses and gains
9.12 Donations of goods as advertising
9.13 From stock cards to journals
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 10 Closing the general ledger
10.1 The closing of the general ledger
10.2 The profit and loss summary account
10.3 Closing a ledger account
10.4 The general journal and closing entries
10.5 The general journal: transfer of net profit
10.6 Closing entries: accounting for a net loss
10.7 Case study: the closing of the ledger
Glossary of terms
Summary questions
Practical exercises
140
143
145
146
147
153
154
154
156
157
159
161
164
165
165
166
171
175
176
176
177
178
179
179
183
184
186
187
188
192
193
197
198
199
212
213
213
214
215
216
218
219
222
223
223
v
vi
❯ Contents
C h a p t e r 11 Income statements
11.1 The income statement
11.2 Preparing an income statement
11.3 The link between profit and the balance sheet
11.4 Evaluating a net profit figure
11.5 Cost of goods sold and gross profit
11.6 Reporting discounts
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 12 Cash flow statements: an introduction
12.1 The role of the cash flow statement
12.2 Classification of cash flows
12.3 The concept of cash
12.4 The format of the cash flow statement
12.5 Preparing a cash flow statement
12.6 Cash flows and decision-making
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 13 Depreciation of non-current assets
13.1 The meaning of depreciation
13.2 The meaning of cost
13.3 Straight-line method of depreciation
13.4 The adjusting entry for depreciation
13.5 Depreciation and the balance sheet
13.6 Depreciation and the income statement
Glossary of terms
Summary questions
Practical exercises
Case study
231
232
232
234
234
235
237
238
238
239
245
246
247
247
249
249
252
254
255
255
257
266
269
270
270
271
272
275
276
276
277
278
281
C h a p t e r 14 Profit determination and balance day adjustments
282
14.1 Profit determination: underlying assumptions
14.2 Accrual accounting and balance day adjustments
14.3 Prepaid expenses (the asset approach)
14.4 Accrued expenses (expenses owing)
14.5 Stock losses and gains
14.6 Case study: adjusting and closing entries
14.7 The adjusted trial balance
Glossary of terms
Summary questions
Practical exercises
Case study
283
284
284
287
290
291
297
298
299
300
308
UNIT 3 PRACTICE EXAM
310
❯ Contents
U N I T 4 Control and analysis of business performance
325
C h a p t e r 15 Accounting for sales returns and purchases returns
326
15.1 Credit notes for returns
15.2 Purchases returns
15.3 Sales returns
15.4 Recording returns in stock cards
Glossary of terms
Summary questions
Practical exercises
327
327
330
332
336
337
337
C h a p t e r 16 The reducing balance method of depreciation
16.1 The need for an alternative method of depreciation
16.2 The straight-line method of depreciation
16.3 The reducing balance method of depreciation
16.4 Depreciation methods: a comparison
16.5 Depreciation methods: which one to use?
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 17 Buying and selling non-current assets
17.1 Recording credit purchases of non-current assets
17.2 Disposal of non-current assets
17.3 Trading in non-current assets
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 18 Inventory valuation
18.1 Product costs versus period costs
18.2 Lower of cost and net realisable value
18.3 Determining the NRV of a product
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 19 Balance day adjustments: prepaid revenue and accrued revenue
19.1 What is revenue earned for a period?
19.2 Prepaid revenue (the liability approach)
19.3 Prepaid sales revenue
19.4 Accrued revenue (revenue owing)
Glossary of terms
Summary questions
Practical exercises
Case study 1
Case study 2
346
347
347
348
350
354
355
355
356
360
361
362
365
368
369
369
374
375
376
377
381
383
383
384
389
391
392
392
395
398
401
402
403
407
409
vii
viii
❯ Contents
C h a p t e r 20 Managing and controlling debtors, creditors and stock
20.1 Controlling inventory
20.2 Evaluating stock turnover
20.3 Controlling debtors
20.4 Evaluating debtors turnover
20.5 Evaluating the cash cycle
20.6 Evaluating creditors turnover
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 21 Budgeting: planning for the future
21.1 The need for budgeting
21.2 Cash budgeting
21.3 Case study: preparing a budgeted cash flow statement
21.4 Budgeted income statements
21.5 Case study: preparing a budgeted income statement
21.6 The budgeted balance sheet
21.7 Case study: preparing a budgeted balance sheet
21.8 Budget variance reports
Glossary of terms
Summary questions
Practical exercises
Case study
Internet activity
C h a p t e r 22 Analysis and interpretation of accounting reports
22.1 The role of analysis and interpretation
22.2 Distinguishing between analysis and interpretation
22.3 Analytical ratios
22.4 Ratio benchmarks
22.5 Types of analytical ratios
22.6 Profitability ratios
22.7 Operating efficiency ratios
22.8 Efficiency ratios and profitability
22.9 Liquidity analysis
22.10 Liquidity analysis and cash flows
22.11 Gearing and financial stability
22.12 Gearing and the rate of return on owner’s investment
22.13 Other analysis tools
22.14 Limitations of ratio analysis
Glossary of terms
Summary questions
Practical exercises
Case study
Internet activity
UNIT 4 PRACTICE EXAM
Index
411
412
416
419
421
423
424
427
428
429
434
435
436
437
439
444
445
447
447
450
454
455
456
468
469
470
471
471
475
476
476
477
482
485
486
489
491
492
494
498
498
499
501
510
512
513
525
Standard = measurement tool
526
❯ Index
general ledger 212–22
closing entries 214–16, 284, 286, 291–7
accounting for a net loss 218–19
coding systems for stock 180–1
common size statements 473
Companies Act 5
comparability 8, 10, 11, 354
complementary products 414
computerised accounting systems
48–50, 87
computerised coding systems 182–3
computerised inventory system 177
conservatism principle 11, 377–8
consistency principle 10, 11, 354
continuous inventory see perpetual
inventory
contribution or withdrawal of assets by
owner 138–40
control accounts 109, 115
correcting recording errors 67, 68,
143–5
cost (historical) 10, 11, 270–1, 276, 362,
498
cost centres 436
cost of goods sold and gross
profit 235–7
cost of inventory 376
cost of sales account 64, 90
cost price of sales 179
barcodes 182
computerised coding systems 182–3
fixed mark-up systems 181–2
identifying 180
manual coding systems 180–1, 182
monitoring 414
and selling price 477
CPA Australia 4, 5
credit check 419
credit entries 47
credit note for returns 327, 328
credit purchases journal 88, 111–12, 328
credit sales journal 88, 106–8, 328
credit terms 426, 485
credit transactions
business documents 41–2, 43–4, 106
recording 106–8
creditors 97–8, 111, 362
schedule of payments to 442
creditors account 64
creditors control account 113, 114–15
creditors schedule 114, 442
creditors subsidiary ledger 113–14, 115,
361
creditors turnover rate 424–7, 484–5
current asset turnover rate 483
current assets 20
current liabilities 20
current ratio 486–8
customer receipts 247
customer satisfaction surveys 494–5
daybooks see journals
‘dead stock’ 412
debit entries 47
debt ratio 492
debtors 106
age analysis 420–1, 484
as asset 141
controlling 419–21
recording cash discounts for 95–6
schedule of collections from 441
slow-payers 420
debtors control account 109–10, 111,
330
debtors schedules 110, 441
debtors subsidiary ledger 109–10
debtors turnover ratio 421–3, 483, 484
decision-making and materiality 377
deferred liabilities 20
Definition of the Reporting Entity 6–7
depreciation
accumulated 272–3, 274
accuracy 364
approximation 350
balance day 272, 275
and the balance sheet 275–6
comparing methods 350–5
diminishing balance method 348–50
and the income statement 276
of non-current assets 247–8, 270–6,
353, 364
not a valuation tool 363–4
over-depreciation 364
reducing balance method 348–50
relevance 350
straight-line method 271–2, 347–8
under-depreciation 364
depreciation expense 270
diminishing balance method of
depreciation 348–50
discount expense 95–6
discount revenue 95, 96–7, 237
discounts 9
reporting 237
disposal of asset 364, 368
loss on 362–3
disposal of asset account 362–3
donation of stock for advertising 43,
140, 192–3
double entry accounting 24
computerised vs manual 48
debit paired with credit 215
error detection 68
footing and balancing 65–7, 213
format 59
in general journal 476, 63–4, 135–8
in general ledger 47
and GST 164
information flow 47, 48
under perpetual inventory 179
recording entries 59–62, 64
for revenues and expenses 62–5
rules 58–65
trial balance 47, 67–9
double invoicing 415
drawings 73, 217
economic climate 497
efficiency ratios and profitability 485–6
employees, payments to 247
equities 18
errors
correcting 67, 68, 143–5
recording 67, 68, 143–5
evaluating reports 47
expense accounts 214
expense budgets 436, 437
expense ratios 475, 478–9
expenses 9, 270, 284
balance day adjustments 392
double entry accounting 62
and owner’s equity 23, 62
expenses owing 287–90, 297, 392
expired cost of asset 275
favourable variance 451
FIFO (First-In, First-Out) 180, 183–4,
193, 413
financial information 3–4
financial plan 436
financial reports
analysis of 471–5
interpretation of 471–5, 494–7
financing activities 248, 249
fixed instalment method of
depreciation 271–2, 347–8
fixed mark-up systems 181–2
footing an account 65
gearing 491–4
gearing ratio 492
general journal 58
bad debts 140–3
closing entries 215–16
in a computerised system 87
correcting errors 143–5
double entry 47, 63–4, 135–8
format 132–3
in a manual system 88
narration 133
need for 132
opening entry 137
posting to general ledger 133
and subsidiary ledgers 133–5
❯ Index
transfer of net profit 216–18
transferring drawings 217
general ledger 58
closing 213–22
double entry 47, 63–4
and stock cards 186–7
streamlining 115, 132
posting to from general journal 133
general purpose financial reporting 7–9
going concern principle 11, 283
goods and services tax
and business documents 38–40
and cash payments journal 161–4
and cash receipts journal 159–61
on cash transactions 92, 248
and computerised accounting 49
and double entry accounting 164
GST clearing account 60, 64, 156,
157–9, 161, 163–4, 165, 330
introduced 154
liability for 24, 154, 156, 248, 442–3
payments and receipts 154
and purchases journal 156–7
refund 24, 158–9, 248
and sales journal 154–6
tax invoice 38–40
goods sold for cash 24
government accountants 5
gross profit
adjusted gross profit 236, 296–7
and cost of goods sold 235–7
gross profit ratio 472, 475, 477–8
historical cost 10, 11, 270–1, 276, 362,
498
horizontal analysis 473, 475
income statement 9, 23, 38, 232–7, 436,
444–6
analytical ratios 475
and depreciation 276
information flows 46, 47–8
instalment loans 22–3
Institute of Chartered Accountants in
Australia 4, 5
insurance 393
interest-only loans 22
inter-firm comparisons 498
interim profit reports 177
internal transactions 43
international accounting standards 6,
10
interpretation
accounting reports 471–8
different from analysis 471–5
financial reports 471–5, 494–7
inventory
computerised systems 177
control 412–15
credit purchases 361–2
non current assets 176
physical stocktake 176, 178, 187,
290
re-evaluation 445
valuation 376–82
see also perpetual inventory; stock
investment, cash flow from 248, 249
invoice 41–2, 116
invoice statement 234
journals (day books) 87
and recording process 47
and stock cards 193–7
see also special journals
just in time ordering 412
labour budget 436
Last-In, First-Out (LIFO) 180
ledger accounts 47
closing 214–15
double entering 58
footing and balancing 65–7
parts of 58
posting to 87
see also general ledger
liabilities
current 20
definition 8, 18
non-current 20
liability approach to prepaid
revenue 392–5
liquidity 486
of assets 20
of business 475
liquidity analysis 476, 486–9
and cash flows 489–91
liquidity ratios 476, 486–9
loans 20, 22–3
loss on disposal of asset 362–3
lower of cost and net realisable
value 377–81
management skills 495–6
manual accounting systems 38, 48–50,
88
manual coding system 180–1, 182
master budget 436
materiality 7, 376–7
memorandums 43
Mind Your Own Business
(MYOB®) 49–50
monetary unit principle 11
multi-column journals 94
narrative format
balance sheet 18–20, 21
general journal 133
net assets 20
net loss, accounting for 218–19
net profit 23, 213, 216–18, 232, 233,
234–5
net profit ratio 475, 478, 485
net realisable value 377–82
net worth of business 18, 19
non current assets 20
and budgeting 437
buying and selling 176, 361–8
cash purchase of 361–2
creating expenses 270
credit purchase of 361–2
depreciation 247–8, 270–6, 353, 364
disposal of 176, 362–5
historical cost 362
reporting 203
trading in 365–8
turnover rate 483
non-current liabilities 20
Objective of General Purpose Financial
Reporting 7–8
obsolete stock 414
office expenses ratio 478–9
opening general journal entry 137
operating activities, cash flows
from 247–8, 249, 250–1
operating efficiency ratios 476, 482–5
order forms 44–5
over-depreciation 364
overdrafts 249
oversupply of stock 290
owner’s equity 8–9, 18, 23, 62, 219, 234
part-period reports 177
payments to suppliers and
employees 247
period costs 376–7
perpetual inventory 329, 330, 412,
418–19
advantages 177–8
computerised 177
disadvantages 178
double entries 179
FIFO 180, 183–4, 193, 413
identifying cost price of sales
179–83
identifying stock loss 177–8, 192
stock cards for 184–5
system 177
see also inventory; stock; stock
control account
pie charts 472–3, 474
planning for the future 47
posting to ledger accounts 87
prepaid expenses 284–6, 392
527
528
❯ Index
prepaid insurance 393
prepaid revenue (liability
approach) 392–5
prepaid sales revenue 395–7
price tags 180–1
private accountants 5
proceeds from disposal of asset 364
product cost 376–7
profit
and balance sheet 234
calculating 213
definition 47, 213, 392, 444, 477
on disposal of asset 368
evaluating 234–5
per hours worked 496–7
profit and loss summary account
213–14, 215, 218–19, 232
profit determination (underlying
assumptions) 283
profit determination account 213
profit margin 414
profitability 477
and efficiency ratios 485–6
profitability ratios 235, 476, 477–81
prudence principle 11
public accountants 4–5
Public Sector Accounting Standards
Board 5
purchase invoice 327, 376
purchase price 376
purchases budget 436
purchases journal 156–7, 361
purchases return ratio 495
purchases returns 327–8, 332, 333–4
quality assurance 495
quick asset ratio 488–9
Quickbooks® 49–50, 419
quotations 44, 45
ratio analysis 475–97, 498
ratio benchmarks 476, 483
receipts from customers 247
recording errors 67, 68, 143–5
reducing balance method of
depreciation 348–55
relevance 7, 11, 283, 377, 381
reliability principle 7–8
reporting entity 6–7
reporting frequency 498
reporting period principle 11, 233, 270,
283, 297, 347, 354
residual value of asset 276, 349
return on assets 480
return on assets ratio 235, 479–80,
485–6
return on owner’s investment ratio 235,
480–1, 292–3
return of purchases 327–8, 333–4
revenue 9
double entry accounting 62
and owner’s equity 23, 62
prepaid 392–7
revenue account closing entry 214, 216
revenue earned for a period 392
revenue owing 398–401
SACs (Statements of Accounting
Concepts) 6–9
sales budget 436, 437
sales forecast 437
sales invoice 327
sales journal 98, 154–6
sales returns 330–2, 334–6
sales return ratio 494–5
sales targets 437
schedule of collections from
debtors 441
schedule of payments to creditors 442
scrap value of asset 276, 349, 363, 364
seasonal stock 413
security of stock 415
selling price
and cost price 477
monitoring 414
shoplifting 187, 192, 415
‘shop-soiled’ stock 413
slow-moving stock 413
small business owners 496–7
source documents see business
documents
special journals
posting to general ledger 90
role 87–8
shortcomings 132, 140
uses 87–8, 108, 115, 132, 196–7
stability ratios 476
statements of account 43–4
Statements of Accounting Concepts
(SACs) 6–9
stock
coding systems 180–1
defining 176
donation of for advertising 43, 140,
192–3
oversupply 290
recording losses and gains 188–9
turnover evaluation 416–19
stock cards
adjusting for stock gain 190–2
adjusting for stock loss 188–90
and day books 193–7
details on 184, 185
and the general ledger 186–7
and inventory control 177, 186–7,
188, 192, 413
for perpetual inventory system
184–5
recording purchases returns 332–4
recording sales returns 334–6
reviewing 413
role 184–6
updating 185–6
stock control account 64, 90, 139,
178–9, 186, 189, 190, 192, 329, 412
stock gain 177–8, 187–8, 190–2, 236,
290–2, 392
stock loss 177–8, 187, 188–90, 236,
290–1, 392, 415
stock rotation 183, 412–13
stock security 415
stock sheets 176
stock turnover rate 416–17, 423, 483
stock write-down 379–81, 382
straight-line method of
depreciation 271–2, 347–8, 350–5
subsidiary ledgers 109, 116, 330
creditors 113–14, 115, 361
debtors 109–10
and general journal 133–5
sundries 92
sundry creditor 362
suppliers, payments to 247
tax invoice 38–40
technological obsolescence 414
T-form balance sheet 18–19, 21, 59
trade credit 424
trade creditor 361, 362
trading in non-current assets 365–8
transactions and balance sheets 23–8
trend analysis 475
trial balance 47, 49, 67, 143, 213,
297–8, 392
alternative presentation 68–9
under-depreciation 364
understandability principle 8, 218, 232
unexpired cost of asset 275
unfavourable variance 451
useful life of asset 276
valuation of asset 363–4
variance
budget variance report 450–3
vertical analysis 471–4, 475
wages expense ratio 478–9
weighted average cost 180
working capital 21, 486
working capital ratio 486–8
worksheets 24–5
written-down value of asset 275
yardsticks of performance 476
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
Visit our website at www.macmillan.com.au
Associated companies and representatives
throughout the world.
Copyright © Neville Box 1994, 1999, 2002, 2006, 2011
The moral rights of the author have been asserted.
All rights reserved.
Except under the conditions described in the
Copyright Act 1968 of Australia (the Act) and subsequent amendments,
no part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of the copyright owner.
Educational institutions copying any part of this book
for educational purposes under the Act must be covered by a
Copyright Agency Limited (CAL) licence for educational institutions
and must have given a remuneration notice to CAL.
Licence restrictions must be adhered to. For details of the CAL licence contact:
Copyright Agency Limited, Level 15, 233 Castlereagh Street, Sydney, NSW 2000.
Telephone: (02) 9394 7600. Facsimile: (02) 9394 7601. Email: info@copyright.com.au
National Library of Australia Cataloguing-in-Publication entry
Author:
Title:
Edition:
ISBN:
Target Audience:
Dewey Number:
Box, Neville.
VCE Accounting : Units 3 & 4 / Neville Box.
5th ed.
978 1 4202 3058 1 (pbk.)
For secondary school age.
Subjects: Accounting—Problems, exercises, etc.
Accounting—Study and teaching (Secondary)—Victoria.
Victorian Certificate of Education examination—Study
guides.
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
At the time of printing, the internet addresses appearing in this book were correct. Owing to the dynamic nature of the internet,
however, we cannot guarantee that all these addresses will remain correct.
Warning: It is recommended that Aboriginal and Torres Strait Islander peoples exercise caution when viewing this publication as
it may contain images of deceased persons
iv
❯ Contents
C h a p t e r 4 The double entry recording process
4.1
Double entry accounting: an introduction
4.2
Double entry for revenues and expenses
4.3
Footing and balancing ledger accounts
4.4
The role of the trial balance
4.5
Detecting errors through a trial balance
4.6
Alternative presentation of a trial balance
4.7
Case study: from transactions to the balance sheet
4.8
Accounting for drawings
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 5 Special journals: cash transactions
5.1
The need for special journals
5.2
The role of special journals
5.3
Recording in the cash receipts journal
5.4
Recording in the cash payments journal
5.5
Recording cash discounts for debtors and creditors
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 6 Credit sales and credit purchases journals
6.1
Credit transactions
6.2
Recording in the credit sales journal
6.3
The need for control accounts
6.4
Debtors schedules
6.5
The cash receipts journal and debtors control
6.6
Recording in the credit purchases journal
6.7
The creditors control account
6.8
Creditors schedules
6.9
The cash payments journal and creditors control
6.10 Advantages and disadvantages of control accounts
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 7 The general journal
7.1
7.2
7.3
7.4
7.5
7.6
7.7
The need for a general journal
The format of the general journal
Posting a general journal entry
The general journal and subsidiary ledgers
Establishing a double entry system
Recording the contribution or withdrawal of assets by an owner
Donations of stock and business advertising
57
58
62
65
67
68
68
69
73
73
74
75
84
86
87
87
88
92
95
98
98
99
105
106
106
109
110
111
111
113
114
114
115
116
117
118
130
131
132
132
133
133
135
138
140
❯ Contents
7.8
Accounting for bad debts
7.9
Correcting recording errors through the general journal
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 8 Accounting for the goods and services tax (GST)
8.1
The GST: an introduction
8.2
GST and the sales journal
8.3
GST and the purchases journal
8.4
The GST clearing account
8.5
GST and the cash receipts journal
8.6
GST and the cash payments journal
8.7
GST and double entry accounting
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 9 The perpetual inventory system
9.1
What is inventory?
9.2
The physical stocktake
9.3
What is perpetual inventory?
9.4
The stock control account
9.5
Double entry under the perpetual method: a summary
9.6
Identifying the cost price of sales
9.7
First in, first out stock valuation
9.8
The role of stock cards
9.9
Stock cards and the general ledger
9.10 Stock losses and stock gains
9.11 Recording stock losses and gains
9.12 Donations of goods as advertising
9.13 From stock cards to journals
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 10 Closing the general ledger
10.1 The closing of the general ledger
10.2 The profit and loss summary account
10.3 Closing a ledger account
10.4 The general journal and closing entries
10.5 The general journal: transfer of net profit
10.6 Closing entries: accounting for a net loss
10.7 Case study: the closing of the ledger
Glossary of terms
Summary questions
Practical exercises
140
143
145
146
147
153
154
154
156
157
159
161
164
165
165
166
171
175
176
176
177
178
179
179
183
184
186
187
188
192
193
197
198
199
212
213
213
214
215
216
218
219
222
223
223
v
vi
❯ Contents
C h a p t e r 11 Income statements
11.1 The income statement
11.2 Preparing an income statement
11.3 The link between profit and the balance sheet
11.4 Evaluating a net profit figure
11.5 Cost of goods sold and gross profit
11.6 Reporting discounts
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 12 Cash flow statements: an introduction
12.1 The role of the cash flow statement
12.2 Classification of cash flows
12.3 The concept of cash
12.4 The format of the cash flow statement
12.5 Preparing a cash flow statement
12.6 Cash flows and decision-making
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 13 Depreciation of non-current assets
13.1 The meaning of depreciation
13.2 The meaning of cost
13.3 Straight-line method of depreciation
13.4 The adjusting entry for depreciation
13.5 Depreciation and the balance sheet
13.6 Depreciation and the income statement
Glossary of terms
Summary questions
Practical exercises
Case study
231
232
232
234
234
235
237
238
238
239
245
246
247
247
249
249
252
254
255
255
257
266
269
270
270
271
272
275
276
276
277
278
281
C h a p t e r 14 Profit determination and balance day adjustments
282
14.1 Profit determination: underlying assumptions
14.2 Accrual accounting and balance day adjustments
14.3 Prepaid expenses (the asset approach)
14.4 Accrued expenses (expenses owing)
14.5 Stock losses and gains
14.6 Case study: adjusting and closing entries
14.7 The adjusted trial balance
Glossary of terms
Summary questions
Practical exercises
Case study
283
284
284
287
290
291
297
298
299
300
308
UNIT 3 PRACTICE EXAM
310
❯ Contents
U N I T 4 Control and analysis of business performance
325
C h a p t e r 15 Accounting for sales returns and purchases returns
326
15.1 Credit notes for returns
15.2 Purchases returns
15.3 Sales returns
15.4 Recording returns in stock cards
Glossary of terms
Summary questions
Practical exercises
327
327
330
332
336
337
337
C h a p t e r 16 The reducing balance method of depreciation
16.1 The need for an alternative method of depreciation
16.2 The straight-line method of depreciation
16.3 The reducing balance method of depreciation
16.4 Depreciation methods: a comparison
16.5 Depreciation methods: which one to use?
Glossary of terms
Summary questions
Practical exercises
C h a p t e r 17 Buying and selling non-current assets
17.1 Recording credit purchases of non-current assets
17.2 Disposal of non-current assets
17.3 Trading in non-current assets
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 18 Inventory valuation
18.1 Product costs versus period costs
18.2 Lower of cost and net realisable value
18.3 Determining the NRV of a product
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 19 Balance day adjustments: prepaid revenue and accrued revenue
19.1 What is revenue earned for a period?
19.2 Prepaid revenue (the liability approach)
19.3 Prepaid sales revenue
19.4 Accrued revenue (revenue owing)
Glossary of terms
Summary questions
Practical exercises
Case study 1
Case study 2
346
347
347
348
350
354
355
355
356
360
361
362
365
368
369
369
374
375
376
377
381
383
383
384
389
391
392
392
395
398
401
402
403
407
409
vii
viii
❯ Contents
C h a p t e r 20 Managing and controlling debtors, creditors and stock
20.1 Controlling inventory
20.2 Evaluating stock turnover
20.3 Controlling debtors
20.4 Evaluating debtors turnover
20.5 Evaluating the cash cycle
20.6 Evaluating creditors turnover
Glossary of terms
Summary questions
Practical exercises
Case study
C h a p t e r 21 Budgeting: planning for the future
21.1 The need for budgeting
21.2 Cash budgeting
21.3 Case study: preparing a budgeted cash flow statement
21.4 Budgeted income statements
21.5 Case study: preparing a budgeted income statement
21.6 The budgeted balance sheet
21.7 Case study: preparing a budgeted balance sheet
21.8 Budget variance reports
Glossary of terms
Summary questions
Practical exercises
Case study
Internet activity
C h a p t e r 22 Analysis and interpretation of accounting reports
22.1 The role of analysis and interpretation
22.2 Distinguishing between analysis and interpretation
22.3 Analytical ratios
22.4 Ratio benchmarks
22.5 Types of analytical ratios
22.6 Profitability ratios
22.7 Operating efficiency ratios
22.8 Efficiency ratios and profitability
22.9 Liquidity analysis
22.10 Liquidity analysis and cash flows
22.11 Gearing and financial stability
22.12 Gearing and the rate of return on owner’s investment
22.13 Other analysis tools
22.14 Limitations of ratio analysis
Glossary of terms
Summary questions
Practical exercises
Case study
Internet activity
UNIT 4 PRACTICE EXAM
Index
411
412
416
419
421
423
424
427
428
429
434
435
436
437
439
444
445
447
447
450
454
455
456
468
469
470
471
471
475
476
476
477
482
485
486
489
491
492
494
498
498
499
501
510
512
513
525
Standard = measurement tool
526
❯ Index
general ledger 212–22
closing entries 214–16, 284, 286, 291–7
accounting for a net loss 218–19
coding systems for stock 180–1
common size statements 473
Companies Act 5
comparability 8, 10, 11, 354
complementary products 414
computerised accounting systems
48–50, 87
computerised coding systems 182–3
computerised inventory system 177
conservatism principle 11, 377–8
consistency principle 10, 11, 354
continuous inventory see perpetual
inventory
contribution or withdrawal of assets by
owner 138–40
control accounts 109, 115
correcting recording errors 67, 68,
143–5
cost (historical) 10, 11, 270–1, 276, 362,
498
cost centres 436
cost of goods sold and gross
profit 235–7
cost of inventory 376
cost of sales account 64, 90
cost price of sales 179
barcodes 182
computerised coding systems 182–3
fixed mark-up systems 181–2
identifying 180
manual coding systems 180–1, 182
monitoring 414
and selling price 477
CPA Australia 4, 5
credit check 419
credit entries 47
credit note for returns 327, 328
credit purchases journal 88, 111–12, 328
credit sales journal 88, 106–8, 328
credit terms 426, 485
credit transactions
business documents 41–2, 43–4, 106
recording 106–8
creditors 97–8, 111, 362
schedule of payments to 442
creditors account 64
creditors control account 113, 114–15
creditors schedule 114, 442
creditors subsidiary ledger 113–14, 115,
361
creditors turnover rate 424–7, 484–5
current asset turnover rate 483
current assets 20
current liabilities 20
current ratio 486–8
customer receipts 247
customer satisfaction surveys 494–5
daybooks see journals
‘dead stock’ 412
debit entries 47
debt ratio 492
debtors 106
age analysis 420–1, 484
as asset 141
controlling 419–21
recording cash discounts for 95–6
schedule of collections from 441
slow-payers 420
debtors control account 109–10, 111,
330
debtors schedules 110, 441
debtors subsidiary ledger 109–10
debtors turnover ratio 421–3, 483, 484
decision-making and materiality 377
deferred liabilities 20
Definition of the Reporting Entity 6–7
depreciation
accumulated 272–3, 274
accuracy 364
approximation 350
balance day 272, 275
and the balance sheet 275–6
comparing methods 350–5
diminishing balance method 348–50
and the income statement 276
of non-current assets 247–8, 270–6,
353, 364
not a valuation tool 363–4
over-depreciation 364
reducing balance method 348–50
relevance 350
straight-line method 271–2, 347–8
under-depreciation 364
depreciation expense 270
diminishing balance method of
depreciation 348–50
discount expense 95–6
discount revenue 95, 96–7, 237
discounts 9
reporting 237
disposal of asset 364, 368
loss on 362–3
disposal of asset account 362–3
donation of stock for advertising 43,
140, 192–3
double entry accounting 24
computerised vs manual 48
debit paired with credit 215
error detection 68
footing and balancing 65–7, 213
format 59
in general journal 476, 63–4, 135–8
in general ledger 47
and GST 164
information flow 47, 48
under perpetual inventory 179
recording entries 59–62, 64
for revenues and expenses 62–5
rules 58–65
trial balance 47, 67–9
double invoicing 415
drawings 73, 217
economic climate 497
efficiency ratios and profitability 485–6
employees, payments to 247
equities 18
errors
correcting 67, 68, 143–5
recording 67, 68, 143–5
evaluating reports 47
expense accounts 214
expense budgets 436, 437
expense ratios 475, 478–9
expenses 9, 270, 284
balance day adjustments 392
double entry accounting 62
and owner’s equity 23, 62
expenses owing 287–90, 297, 392
expired cost of asset 275
favourable variance 451
FIFO (First-In, First-Out) 180, 183–4,
193, 413
financial information 3–4
financial plan 436
financial reports
analysis of 471–5
interpretation of 471–5, 494–7
financing activities 248, 249
fixed instalment method of
depreciation 271–2, 347–8
fixed mark-up systems 181–2
footing an account 65
gearing 491–4
gearing ratio 492
general journal 58
bad debts 140–3
closing entries 215–16
in a computerised system 87
correcting errors 143–5
double entry 47, 63–4, 135–8
format 132–3
in a manual system 88
narration 133
need for 132
opening entry 137
posting to general ledger 133
and subsidiary ledgers 133–5
❯ Index
transfer of net profit 216–18
transferring drawings 217
general ledger 58
closing 213–22
double entry 47, 63–4
and stock cards 186–7
streamlining 115, 132
posting to from general journal 133
general purpose financial reporting 7–9
going concern principle 11, 283
goods and services tax
and business documents 38–40
and cash payments journal 161–4
and cash receipts journal 159–61
on cash transactions 92, 248
and computerised accounting 49
and double entry accounting 164
GST clearing account 60, 64, 156,
157–9, 161, 163–4, 165, 330
introduced 154
liability for 24, 154, 156, 248, 442–3
payments and receipts 154
and purchases journal 156–7
refund 24, 158–9, 248
and sales journal 154–6
tax invoice 38–40
goods sold for cash 24
government accountants 5
gross profit
adjusted gross profit 236, 296–7
and cost of goods sold 235–7
gross profit ratio 472, 475, 477–8
historical cost 10, 11, 270–1, 276, 362,
498
horizontal analysis 473, 475
income statement 9, 23, 38, 232–7, 436,
444–6
analytical ratios 475
and depreciation 276
information flows 46, 47–8
instalment loans 22–3
Institute of Chartered Accountants in
Australia 4, 5
insurance 393
interest-only loans 22
inter-firm comparisons 498
interim profit reports 177
internal transactions 43
international accounting standards 6,
10
interpretation
accounting reports 471–8
different from analysis 471–5
financial reports 471–5, 494–7
inventory
computerised systems 177
control 412–15
credit purchases 361–2
non current assets 176
physical stocktake 176, 178, 187,
290
re-evaluation 445
valuation 376–82
see also perpetual inventory; stock
investment, cash flow from 248, 249
invoice 41–2, 116
invoice statement 234
journals (day books) 87
and recording process 47
and stock cards 193–7
see also special journals
just in time ordering 412
labour budget 436
Last-In, First-Out (LIFO) 180
ledger accounts 47
closing 214–15
double entering 58
footing and balancing 65–7
parts of 58
posting to 87
see also general ledger
liabilities
current 20
definition 8, 18
non-current 20
liability approach to prepaid
revenue 392–5
liquidity 486
of assets 20
of business 475
liquidity analysis 476, 486–9
and cash flows 489–91
liquidity ratios 476, 486–9
loans 20, 22–3
loss on disposal of asset 362–3
lower of cost and net realisable
value 377–81
management skills 495–6
manual accounting systems 38, 48–50,
88
manual coding system 180–1, 182
master budget 436
materiality 7, 376–7
memorandums 43
Mind Your Own Business
(MYOB®) 49–50
monetary unit principle 11
multi-column journals 94
narrative format
balance sheet 18–20, 21
general journal 133
net assets 20
net loss, accounting for 218–19
net profit 23, 213, 216–18, 232, 233,
234–5
net profit ratio 475, 478, 485
net realisable value 377–82
net worth of business 18, 19
non current assets 20
and budgeting 437
buying and selling 176, 361–8
cash purchase of 361–2
creating expenses 270
credit purchase of 361–2
depreciation 247–8, 270–6, 353, 364
disposal of 176, 362–5
historical cost 362
reporting 203
trading in 365–8
turnover rate 483
non-current liabilities 20
Objective of General Purpose Financial
Reporting 7–8
obsolete stock 414
office expenses ratio 478–9
opening general journal entry 137
operating activities, cash flows
from 247–8, 249, 250–1
operating efficiency ratios 476, 482–5
order forms 44–5
over-depreciation 364
overdrafts 249
oversupply of stock 290
owner’s equity 8–9, 18, 23, 62, 219, 234
part-period reports 177
payments to suppliers and
employees 247
period costs 376–7
perpetual inventory 329, 330, 412,
418–19
advantages 177–8
computerised 177
disadvantages 178
double entries 179
FIFO 180, 183–4, 193, 413
identifying cost price of sales
179–83
identifying stock loss 177–8, 192
stock cards for 184–5
system 177
see also inventory; stock; stock
control account
pie charts 472–3, 474
planning for the future 47
posting to ledger accounts 87
prepaid expenses 284–6, 392
527
528
❯ Index
prepaid insurance 393
prepaid revenue (liability
approach) 392–5
prepaid sales revenue 395–7
price tags 180–1
private accountants 5
proceeds from disposal of asset 364
product cost 376–7
profit
and balance sheet 234
calculating 213
definition 47, 213, 392, 444, 477
on disposal of asset 368
evaluating 234–5
per hours worked 496–7
profit and loss summary account
213–14, 215, 218–19, 232
profit determination (underlying
assumptions) 283
profit determination account 213
profit margin 414
profitability 477
and efficiency ratios 485–6
profitability ratios 235, 476, 477–81
prudence principle 11
public accountants 4–5
Public Sector Accounting Standards
Board 5
purchase invoice 327, 376
purchase price 376
purchases budget 436
purchases journal 156–7, 361
purchases return ratio 495
purchases returns 327–8, 332, 333–4
quality assurance 495
quick asset ratio 488–9
Quickbooks® 49–50, 419
quotations 44, 45
ratio analysis 475–97, 498
ratio benchmarks 476, 483
receipts from customers 247
recording errors 67, 68, 143–5
reducing balance method of
depreciation 348–55
relevance 7, 11, 283, 377, 381
reliability principle 7–8
reporting entity 6–7
reporting frequency 498
reporting period principle 11, 233, 270,
283, 297, 347, 354
residual value of asset 276, 349
return on assets 480
return on assets ratio 235, 479–80,
485–6
return on owner’s investment ratio 235,
480–1, 292–3
return of purchases 327–8, 333–4
revenue 9
double entry accounting 62
and owner’s equity 23, 62
prepaid 392–7
revenue account closing entry 214, 216
revenue earned for a period 392
revenue owing 398–401
SACs (Statements of Accounting
Concepts) 6–9
sales budget 436, 437
sales forecast 437
sales invoice 327
sales journal 98, 154–6
sales returns 330–2, 334–6
sales return ratio 494–5
sales targets 437
schedule of collections from
debtors 441
schedule of payments to creditors 442
scrap value of asset 276, 349, 363, 364
seasonal stock 413
security of stock 415
selling price
and cost price 477
monitoring 414
shoplifting 187, 192, 415
‘shop-soiled’ stock 413
slow-moving stock 413
small business owners 496–7
source documents see business
documents
special journals
posting to general ledger 90
role 87–8
shortcomings 132, 140
uses 87–8, 108, 115, 132, 196–7
stability ratios 476
statements of account 43–4
Statements of Accounting Concepts
(SACs) 6–9
stock
coding systems 180–1
defining 176
donation of for advertising 43, 140,
192–3
oversupply 290
recording losses and gains 188–9
turnover evaluation 416–19
stock cards
adjusting for stock gain 190–2
adjusting for stock loss 188–90
and day books 193–7
details on 184, 185
and the general ledger 186–7
and inventory control 177, 186–7,
188, 192, 413
for perpetual inventory system
184–5
recording purchases returns 332–4
recording sales returns 334–6
reviewing 413
role 184–6
updating 185–6
stock control account 64, 90, 139,
178–9, 186, 189, 190, 192, 329, 412
stock gain 177–8, 187–8, 190–2, 236,
290–2, 392
stock loss 177–8, 187, 188–90, 236,
290–1, 392, 415
stock rotation 183, 412–13
stock security 415
stock sheets 176
stock turnover rate 416–17, 423, 483
stock write-down 379–81, 382
straight-line method of
depreciation 271–2, 347–8, 350–5
subsidiary ledgers 109, 116, 330
creditors 113–14, 115, 361
debtors 109–10
and general journal 133–5
sundries 92
sundry creditor 362
suppliers, payments to 247
tax invoice 38–40
technological obsolescence 414
T-form balance sheet 18–19, 21, 59
trade credit 424
trade creditor 361, 362
trading in non-current assets 365–8
transactions and balance sheets 23–8
trend analysis 475
trial balance 47, 49, 67, 143, 213,
297–8, 392
alternative presentation 68–9
under-depreciation 364
understandability principle 8, 218, 232
unexpired cost of asset 275
unfavourable variance 451
useful life of asset 276
valuation of asset 363–4
variance
budget variance report 450–3
vertical analysis 471–4, 475
wages expense ratio 478–9
weighted average cost 180
working capital 21, 486
working capital ratio 486–8
worksheets 24–5
written-down value of asset 275
yardsticks of performance 476