Accounting Process

Source docs: aka, “input stage”, business collects source documents,relating to their transactions. paper or electronic
documents that provide both the evidence that a transaction has occurred and the details of the transaction itself
● cash receipts- cash received
● cheque butt- cash paid
● sales invoice - credit received
● purchase invoice - credit paid
● memo - internal transcations
● credit note

Recording: sorting, classifying and summarising the data contained in the source documents so that it is more
useable.
● CRJ
● CPJ
● SJ
● PJ
● GJ(general journal)
● stock cards
● ledger accounts-general ledger

Reporting: the preparation of financial statements that communicate financial information to the owner
● Trial balance
● Cash flow statement-relates to cash
● Income statement-relates to performance
● Balance sheet-relates to position of firm

Advice: the provision to the owners of a range of options appropriate to their aims/objectives, together with
recommendations as to the suitability of those aims/objectives.

Principles: CHERMCG
● Conservatism: Gains should be recorded when certain, but losses recorded when probable. This ensures that
assets and revenue is not understated and liabilities and expenses are not overstated.
● Historical cost: all transactions should be recorded and reported at its original purchase price as this is
verifiable with source doc evidence.
● Entity: the business and owner are assumed to be separate, and records should be kept on this basis.
● Reporting period: the life of a business is divided into intervals of time to allow for reports to be made; these
reports should reflect the Reporting Period in which the transaction occurs.
● Monetary unit: reports and records of the firm should be written in a common unit of measurement.
● Consistency: the same accounting methods should be used from one reporting period to the next, to allow of
comparison of reports.
● Going concern: the life of the business is assumed to be continuous and records should be kept on this basis.

Characteristics: CURR
● Comparability: reports should be able to be compared over time.
● Understandability: the reports should be made in a way that it is easy for the user to comprehend its meaning
● Reliability: reports should only include information that is accurate and free from bias or error, and verifiable
by source doc evidence.
● Relevance: reports should include all information that is useful in decision-making.

Elements
Assets: a resource controlled by the entity from which an inflow of future economic benefits are expected (within 12
months-CA/for more than 12 months-NCA)

Liabilities: a present obligation of the entity from which an outflow of economic benefit is expected(within the 12
months-CL/in more than 12 months-NCL)

Owners’ Equity: the residual interest in assets of the entity after liabilities are deducted
Revenue: an inflow of economic benefit(or saving in an outflow) which increases assets (or decreases Liabilities) and
increases owners’ equity.

Expense: an outflow of economic benefit(of reduction in an inflow) which decreases Assets (or increases Liabilities)
and decreases owners’ equity.

Chapter 2 & 3

A = L + OE
OE = A - L

Balance sheet indicates the current position of the firm(i.e. liquidity(WCR), stability(Debt Ratio))
Income statement indicates performance

Equities: claims on the assets of the business, consisting of both liabilities and owner’s equity.

Assets and liabilities are written in the order or what is most liquid/urgent/replacable (e.g bank - debtors -
stock)

Two-fold effect: when a firm exchanges goods/services with another entity, at least two items will change
in the accounting equation, and at least two items wil change in its ledger accounts.

Rules of double entry accounting:

1. Every transaction will affect at least 2 items, double entry
2. After recording these changes, the accounting equation must still balance
3. The total debits should = total credits. If one credit account affected, one debit account must be
affected.

80% = high debt ratio

● Debits on the left, Credits on the right

Trial Balance
Errors shown by trial balance
● two entries on same side(e.g. cost of sales and stock control on debit side)
● different amounts on each side (e.g 150 and 1500)
● only one entry made

Errors not shown by trial balance

● incorrect(but the same) amount on both sides
● transaction omitted
● wrong accounts
● debit and credit reversed

A = L + OE

Chapter 4
 ● Because of GST, source docs must include
○ ‘tax invoice’
○ ABN
○ name of seller
○ date of transaction
○ GST amount
○ total amount
○ description of goods/services provided
● There is no GST to account for when cash is received from a debtor, as GST is recognised and
reported at the time when sales are made.
● If GST received > GST paid = GST payable (liability) = GST Settlement (credit)
● If GST received < GST paid = GST receivable (asset) = GST refund (debit)
● 5/7 n/30 means 5% discount if debtor pays within 7 days, but payment is due in 30 days.
● The role of the GST clearing account to keep track on how much is owed to the ATO or how much
the ATO owes to the business.

Statement of account: a summary of the transactions a firm has had with a particular debtor/ creditor over
a certain period of time (usually a month).
● not evidence of a single transaction, but rather a summary of a number of transactions
● helps ensure Reliability, as statement of accounts can be compared with the firm’s records to
ensure the recorded balance owed to creditors is free from bias and error.
● supplier name at the top, customer on the bottom/middle

Chapter 5

Special journals:
● sales
● purchases
● cash payments: discount revenue
● cash receipts: discount expense

Source docs must inc:

● date-indiv
● account name
● doc numer
● relevant column headings(account names)

DR DR CR
PJ = SC + GSTc = CC
CR CR DR
SJ = S + GSTc = DC
DR CR
COS = SC

Chatper 5-8

Chapter 5
The role of special journals
To summarise similar transactions before posting the journals to the general ledger
Advantages:
● provide a link between the ledger entries and the source docs that provide the evidence and details of the
transactions themselves
● reduce the number of ledger entries required, improving the efficiency of the recording system

Special journals
● Sales Journal: credit sales of stock
● Purchases journal: credit purchases of stock
● Cash receipts journal: cash sales, payments from debtors, etc
● Cash payments journal: payments to creditors, expenses, cash purchases of assets(NCA and CA) etc

Relationship between control accounts and subsidiary accounts

Control accounts(creditors control, stock control, debtors control) go into the General ledger and provide of a
summary of the transactions in that ledger.
The details of the control accounts are contained in the subsidiary ledgers, kept outside the general ledger(creditors
ledger, debtors ledger)
Advantages:
● Allows for detection of recording errors, by comparing the figure in the control accounts with the balances
of the subsidiary ledgers (through the debtor’s/creditor’s schedule), allowing for reliability in the balance sheet.
● Ease of reporting as it decreases the number of entries in the balance sheet(because only the control
balance will be included, not individual debtors/creditors), upholding reliability of balance sheet.
● Allocation of responsibility, e.g. management of debtors can be specifically assigned to one member of
staff, and management of creditors to another staff member, increasing efficiency(as the more senior people
can focus on the general ledger itself).

GST and credit transactions

● Credit purchases decreases the GST liability, and increase creditors control. Does not affect valuation of
stock.
● Credit sales increase GST liability, and increase debtors control. Does not affect revenue.
● Creditors control = stock control/GST clearing; Debtors control = sales/GST clearing

Chapter 6
Discount Expense
Advantages:
● Encourage debtors to pay early
○ Allows firm to pay creditors earlier(and get discount revenue)
○ Allows firm to pay for other expenses sooner(e.g wages).
● Chance of bad debts reduced
● Encourage more sales

Disadvantages:
● Less cash from debtors
● Less net profit

Discounts on the account equation

Discount Expense
● Decrease in assets(debtors control, bank increases by less)
● Decreases owners equity(expense decreases net profit)

Discount Revenue
● Decrease in liabilities(creditors control)
● Increase in owners equity(revenue increases net profit)

GST and cash transactions

● Cash purchases decrease GST liability
● Cash sales increase GST liability
Chapter 7
The role of the general journal
● To record infrequent, non-cash transactions which cannot be recorded in the special journals

*ALWAYS REMEMBER THE SOURCE DOC NUMBER IN THE NARRATION*

Bad debts: an expense incurred when a debt is written off because it is deemed irrecoverable.
According to the Conservatism principle, bad debts should be recognised as an expense when the loss is probable, so
that assets(debtors control) are not overstated. Recognising bad debts ensures that reports contain all information that
is useful for decision making, ensuring Relevance.

Bad debts on the accounting equation:

● Decrease in assets(debtors control)
● Decrease in owners equity(expenses decrease net profit)

Chapter 8
Stock: goods purchased by a trading firm for the purpose of resale at a profit.
● Stock is important as it is the firm’s primary source of profit
● It is one of the firm’s largest and most important assets
● It is also the most vulnerable asset, as it is succept to damage, changes in value, theft, etc.

The role of stock cards

● To record each individual transaction involving the movement of stock in and out of the business of a
particular line of stock.
● A stock control account summarises all stock transactions, whereas stock cards look at the details of each
individual line of stock.

FIFO: the assumption that stock that is purchased first is sold first.
● It is a cost accounting method to determine value of stock and value of cost of sales. Values the stock
conservatively low. FIFO is used when the cost price is assumed to rise.

Stock cards and journals

Sales Journal and Cash Receipts Journal should include both selling price and cost price.
Cost price is determined by the stock card, so the stock plays an important role.

The role of a physical stocktake

To verify the accuracy of the stock cards and, in the process, detect any stock losses or stock gains.

Reason for stock gain:

● Oversupply from suppliers
● Undersupply to customers

Reason for stock loss:

● Theft
● Damage
● Oversupply to customers
● Undersupply from suppliers
● Drawings not recorded
● Advertising not recorded(samples/donation)

Chapter 9
Reasons for closing the ledger for Revenue and Expense accounts
● To transfer revenue and expense accounts into the Prof & Loss Summ account in order to calculate profit for
the current Reporting Period
 ● To reset the revenue and expense accounts to zero in readiness for the next Reporting Period

Net Profit =
Revenues - COGS = Gross Profit
+/- stock gain/loss = Adjusted Gross Profit
+ Other Revenue = total revenue
Less other expenses

Determining profit is Relevant as it assists in decision-making by detailing revenues earned and expenses incurred
during the Reporting Period, and in the process showing both Gross Profit and Net Profit.

Income Statement and Prof & Loss Summ should have the same Net Profit figure.

Chapter 10

Profit = Revenue earned - Expenses incurred/consumed.

Revenue: an inflow of economic benefit(or savings in an outflow) in the form of an increase in assets(or decrease in
liabilities) which increases owner’s equity.
Expenses: an outflow of economic benefit(or reduction in an inflow) which decrease in assets(or increases liabilities)
and decreases owner’s equity.

Balance day adjustment: a change made to the revenue or expense account on balance day so that revenue
accounts show revenues earned and expense accounts show expenses incurred in the particular Reporting Period.

Purpose of Balance Day Adjustments

Ensure profit figure is an accurate measure of performance in the Reporting Period by matching revenue earned
against expenses incurred to ensure Relevance in the reports, by including all information that is useful for decision
making. To achieve this, balance day adjustments are completed before the ledger is closed. These entries adjust the
revenue and expense accounts so that the Relevant amount is closed and consequently shown in the reports.

Types of balance day adjustments

● Accrued expenses
● Prepaid expenses
● Stock gain/stock loss
● Depreciation

Balance Day Adjustments on the accounting equation

● Current Assets(e.g prepaid rent) decrease OR Current Liabilities(e.g Accrued Wages) increase
● Owners equity(Net profit/capital) decrease, because expenses increase

Accrued Expense vs Sundry Creditor

● Accrued expenses verified by a memo and not an invoice

Purpose of post-adjustment trial balance

● To check that even after balance day adjustments, that total debits = total credits

Chapter 11
Depreciation: allocation of cost of a non-current asset over its useful life(period of time the asset can provide an
economic benefit).
● It is an estimate
● It helps minimise tax
● Makes profit as accurate as possible

Depreciable assets are

● Consumed over time.
○ Consumption in economic benefit = expense
 ● Have a finite life

Depreciation expense: the part of the cost of a NCA that has been consumed in the current Reporting Period

Straight line method

Depreciation expense(p.a) = (HC - RV)/Life

Depreciable value: the total value of the asset that will be consumed by the current entity, and so must be allocated
over its useful life. (HC - RV)

Accumulated Depreciation: the value of the NCA that has been consumed/incurred over its life so far

Carrying Value: the value of the NCA that is yet to be consumed/incurred as an expense,+ any RV. (HC - Accum
Depn)

Depreciation rate (% p.a.) = (Depreciation expense/ HC) x 100

Depreciation rate($ p.a) = (% p.a) x HC

Purpose of Depreciation
● Ensure that accurate profit is calculated, by comparing revenue earned against expenses incurred in the
current Reporting Period
● Depreciation recognises only the part of the asset that has been consumed within the Reporting Period as
an expense, ensuring the Income Statement upholds Relevance by including all information useful in decision
making.

Values needed:
● Historical cost(only Reliable figure)
● %
● Residual value: the estimated value of the non-current asset at the end of its useful life
● Carrying value: the estimated period of time for which the non-current asset will be used by the current entity
to earn revenue. Usually measured in years.

● Book value: current value ‘in the books’. Carrying value/residual value.

● Pay attention to:

○ Reporting period
○ When the asset was bought
○ Make a timeline

Depreciation on the Accounting Equation

● Decrease in assets( increase in accumulated depreciation)
● Decrease in owner’s equity(increase in expenses)

Cost of a Non-current Asset: the costs incurred in getting an non-current asset into a condition and location ready
for use, which will benefit for the life of the asset. E.g delivery costs, installation costs, modification costs.

● Write Accrued, Accumulated, Account, in full words.

Chapter 12
The need to report for cash
● Earning profit is the primary reason for being in a business
● However, many profitable businesses will still fail because they have not paid sufficient attention to managing
their cash
 ● Cash and profit are different measures of performance, and there are many possible reasons why a firm
would earn a profit but suffer a cash deficit
● Without information on both cash and profit, the owner will not be able to manage both effectively.

Role of Cash Journals

● Classify and summarise cash transactions
● CRJ provides info related to cash received
● CPJ provides info related to cash paid
● Cash Surplus: excess of cash receipts over cash payments, leading to an increase in bank balance
● Cash Deficit: excess of cash payments over cash receipts, leading to a decrease in bank balance.

Operating Activities: cash flows relating to day-to-day trading activities

E.g wages, receipts from debtors, payments to creditors, interest expense,

Investing Activities: cash flows relating to the purchase or sale NCA.

E.g purchase of office equipment, purchase of vehicle

Financing Activities: cash flows relating to the changes in the financial structure of the firm.
E.g loan, capital, drawings, loan repayment,

Uses of Cash Flow Statement

● Aid Decision-making by detailing uses and sources of cash in a particular period
● Assess the firm’s performance in meeting cash targets, by comparing with budgeted cash flow statement
● Assist in planning for future cash activities, by providing a basis for next budget
● Facilitate the calculation of financial indicators for analysis and interpretation