Wednesday 9 September 2015
Monday 7 September 2015
Monday 17 August 2015
Budgeting ...
Budgeting is looking into the future and anticipating business performance. If a problem is predicted, the management team can plan now to overcome/mitigate the problem. The budgeted data will not be reliable ... but it is relevant for stakeholders.
Friday 14 August 2015
Monday 3 August 2015
Deposits ...
Example A
Ong Enterprises. You have found a client who will rent your spare car parking space, Vishy Traders. They will pay $1000 per month plus GST and pay 3 months in advance ($3300 in total). They will start renting on 1st July 2015. On 5th June 2015, Vishy Traders pay a deposit of $500.
How does Ong Enterprises record this $500 cash deposit?
Cash Receipts Journal.
The term 'Deposit' is not used in the accounting system ... never, ever! And, never ever use the term 'Lay-By'. The $500 deposit is prepaid rent revenue. Important. Deposits do not attract GST. Repeat ... deposits do not attract GST. The GST will only be counted when the full amount is paid in advance, which is $3000 plus GST in this example.
Assume the the balance owing is paid on 30th June, $2800. ($3300 less $500 deposit = $2800).
Cash Receipts Journal.
In the 'Details' column, Prepaid Rent Revenue would be recorded. $2800 in Bank, $2500 in Sundry and $300 in GST. Note that the $300 GST is not 10% of the $2500 in the Sundry column. This seems strange. The $300 is 10% of the full amount of prepaid rent, $3000, which is made up of the $500 deposit and the additional $2500 received later.
When the CRJ is posted, Prepaid Rent Revenue will be credited with $3000 ($500 + $2500).
PS; I have never seen this example on a VCAA exam ... but the following deposit examples have appeared.
Example B.
Ong Enterprises. You have found a client who will rent your spare car parking space, Vishy Traders. They will pay $1000 per month plus GST and pay 3 months in advance ($3300 in total). They will start renting on 1st July 2015. On 5th June 2015, Vishy Traders pay a deposit of $500.
How does Ong Enterprises record this $500 cash deposit?
Cash Receipts Journal.
The term 'Deposit' is not used in the accounting system ... never, ever! And, never ever use the term 'Lay-By'. The $500 deposit is prepaid rent revenue. Important. Deposits do not attract GST. Repeat ... deposits do not attract GST. The GST will only be counted when the full amount is paid in advance, which is $3000 plus GST in this example.
Assume the the balance owing is paid on 30th June, $2800. ($3300 less $500 deposit = $2800).
Cash Receipts Journal.
In the 'Details' column, Prepaid Rent Revenue would be recorded. $2800 in Bank, $2500 in Sundry and $300 in GST. Note that the $300 GST is not 10% of the $2500 in the Sundry column. This seems strange. The $300 is 10% of the full amount of prepaid rent, $3000, which is made up of the $500 deposit and the additional $2500 received later.
When the CRJ is posted, Prepaid Rent Revenue will be credited with $3000 ($500 + $2500).
PS; I have never seen this example on a VCAA exam ... but the following deposit examples have appeared.
Example B.
Sunday 2 August 2015
Accrued Revenue ...
You are the CFO of Toon Traders who report monthly and you notice that you have excess liquidity ... so you decide, on 1st January 2017, to invest $60000 cash into a high interest account for 3 months at an annual rate of 10%. At the end of 3 months, 7th March 2017, you will receive the $60000 plus the interest.
You work out that interest per month is $500.
At the end of January, balance day, you need to do a balance day adjustment to count the $500 interest revenue since you have not received the interest ... in fact you will not receive any interest until 7th July 2017 as per your agreement with the Bank.
General Journal:
Dr: Accrued interest revenue $500
Cr: Interest revenue $500
Accrued interest revenue sounds like revenue ... but it is not! It is a current asset because it represents a benefit that the business will receive within 12 months ... sort of like debtors without the stock!
Reports at end of January:
Cash Flow Statement
no impact ... no interest has been received yet.
Income Statement
Other Revenue
Interest revenue $500
Balance Sheet
Current Assets
Accrued interest revenue $500
Another month passes ... end of February ... another balance day.
Dr: Accrued interest revenue $500
Cr: Interest revenue $500
Reports at end of February:
Cash Flow Statement
no impact ... no interest has been received yet.
Income Statement
Other Revenue
Interest revenue $500
Balance Sheet
Current Assets
Accrued interest revenue $1000
Another month passes ... end of March ... another balance day.
Dr: Accrued interest revenue $500
Cr: Interest revenue $500
Reports at end of March:
Cash Flow Statement
no impact ... no interest has been received yet.
Income Statement
Other Revenue
Interest revenue $500
Balance Sheet
Current Assets
Accrued interest revenue $1500
Now, on 7th March, as per the original agreement with the Bank, the business receives the $60000 plus the interest of $1500, a total of $61500.
This would be recorded in the Cash Receipts Journal:
$61500 would be allocated $60000 investment (sundry) and $1500 accrued interest revenue (sundry).
At the end of March, the CRJ would be posted:
Dr: Bank $61500
Cr: Investment $60000 (that cancels that account)
Cr: Accrued interest $1500 (that cancels that account)
Reports at end of April:
Cash Flow Statement
Operating Activities
Accrued interest revenue $1500
Investment $60000
Prepaid revenue (service)
You are the CEO of Ace Traders who report monthly. Your office is in the Melbourne CBD and has 3 carpark spaces ... but you only need 2! You decide that it would be a good idea to rent the spare carpark space to add an additional revenue stream to the business ... Sales as well as Rent Revenue coming from the spare carparking space. You decide that $1000 plus GST per month is the going rate! You advertise this spare carparking space and get lots of offers. You decide on one customer, Chan Enterprises, and on 1st July, they pay $3000 plus $300 GST for 3 months rent of that carpark.
How would you record this $3300, Receipt #89?
It is recorded in the Cash Receipts Journal as ... Prepaid Rent Revenue.
Prepaid Rent Revenue sounds like Revenue ... but it is not ... it is a current liability.
Why? The business has an obligation to the customer who just gave them $3000 plus GST! The obligation is to Chan Enterprises to provide that car parking space for the next 3 months.
At the end of the month, the CRJ is posted. The $3000 will be a credit to the Prepaid Rent Revenue ledger account.
And it is balance day on the last day of the month. Of the $3000 received from your client, Chan Enterprises, you have only earned $1000. So we do a balance day adjustment in the General Journal:
Dr: Prepaid Rent Revenue $1000
Cr: Rent Revenue $1000
Accrual accounting says we must report revenue earned less expenses incurred ... and we have just done that ... $1000 revenue has been recorded and reported as earned.
Reports:
In the Cash Flow Statement, Operating Activities will show Prepaid Rent Revenue $3000.
In the Income Statement, Rent Revenue $1000 will be reported as Other Revenue.
In the Balance Sheet, Prepaid Rent Revenue $2000 will be reported as a Current Liability.
How would you record this $3300, Receipt #89?
It is recorded in the Cash Receipts Journal as ... Prepaid Rent Revenue.
Prepaid Rent Revenue sounds like Revenue ... but it is not ... it is a current liability.
Why? The business has an obligation to the customer who just gave them $3000 plus GST! The obligation is to Chan Enterprises to provide that car parking space for the next 3 months.
At the end of the month, the CRJ is posted. The $3000 will be a credit to the Prepaid Rent Revenue ledger account.
And it is balance day on the last day of the month. Of the $3000 received from your client, Chan Enterprises, you have only earned $1000. So we do a balance day adjustment in the General Journal:
Dr: Prepaid Rent Revenue $1000
Cr: Rent Revenue $1000
Accrual accounting says we must report revenue earned less expenses incurred ... and we have just done that ... $1000 revenue has been recorded and reported as earned.
Reports:
In the Cash Flow Statement, Operating Activities will show Prepaid Rent Revenue $3000.
In the Income Statement, Rent Revenue $1000 will be reported as Other Revenue.
In the Balance Sheet, Prepaid Rent Revenue $2000 will be reported as a Current Liability.
Wednesday 29 July 2015
Prepaid Sales ...
This is an image of the yet to be released, iPhone7.
Imagine you are the manager of 'Just Phones'.
Lots of customers are excited about the yet to be released iPhone7 ... so excited that 10 of them are prepared to pay the full price (assume $900 plus GST with a cost price of $500 plus GST) BEFORE the stock is available.
So the business has just received $9 000 plus $900 GST. How should we record this?
$9 900 cash has been received so it would be recorded in the Cash Receipts Journal.
Under 'Details' you would record Prepaid Sales. $9 900 would be recorded in 'Bank' $9000 would go in 'Sundry' and $900 would go in 'GST'.
How would you classify 'Prepaid Sales'?
It sounds like Sales or Revenue ... but it is a current liability!! Remember that.
Why? The business has received the money from its customers but has not supplied any stock ... yet. Thus it has an obligation to its customers. Thus, a current liability. They expect to meet this obligation in the short term (less than 12 months).
Now assume stock of iPhone7 arrives. 50 units, each at $500 plus GST. Invoice 46.
This would be recorded in the Purchases Journal (or Cash Payments Journal if it was a cash purchase of stock) as well as the iPhone7 stock card in the IN column.
The business would then ring/contact/email/text the customers who have already paid for the iPhone7s. "Come and get your new iPhone7".
The customers arrive and collect their iPhone7s. They leave happy.
How is this recorded?
The stock card would record 10 units going OUT.
The Prepaid Sales must be converted to Sales so ...
General Journal
Debit: Prepaid Sales $9 000 (this cancels out the current liability)
Credit: Sales $9 000 (this counts the sale)
Debit: Cost of sales $5 000
Credit: Stock Control $5 000.
Imagine you are the manager of 'Just Phones'.
Lots of customers are excited about the yet to be released iPhone7 ... so excited that 10 of them are prepared to pay the full price (assume $900 plus GST with a cost price of $500 plus GST) BEFORE the stock is available.
So the business has just received $9 000 plus $900 GST. How should we record this?
$9 900 cash has been received so it would be recorded in the Cash Receipts Journal.
Under 'Details' you would record Prepaid Sales. $9 900 would be recorded in 'Bank' $9000 would go in 'Sundry' and $900 would go in 'GST'.
How would you classify 'Prepaid Sales'?
It sounds like Sales or Revenue ... but it is a current liability!! Remember that.
Why? The business has received the money from its customers but has not supplied any stock ... yet. Thus it has an obligation to its customers. Thus, a current liability. They expect to meet this obligation in the short term (less than 12 months).
Now assume stock of iPhone7 arrives. 50 units, each at $500 plus GST. Invoice 46.
This would be recorded in the Purchases Journal (or Cash Payments Journal if it was a cash purchase of stock) as well as the iPhone7 stock card in the IN column.
The business would then ring/contact/email/text the customers who have already paid for the iPhone7s. "Come and get your new iPhone7".
The customers arrive and collect their iPhone7s. They leave happy.
How is this recorded?
The stock card would record 10 units going OUT.
The Prepaid Sales must be converted to Sales so ...
General Journal
Debit: Prepaid Sales $9 000 (this cancels out the current liability)
Credit: Sales $9 000 (this counts the sale)
Debit: Cost of sales $5 000
Credit: Stock Control $5 000.
Tuesday 28 July 2015
Next SAC ...
It is week 3 as I type this and with the last section of Outcome 1 about to start, I estimate the next SAC will be in week 5 or early week 6.
60 minute SAC. Manual. 50 marks.
Topics:
Following the Outcome 1 SAC (above) the next SACs are:
That's it ... until the exam on November 6th.
60 minute SAC. Manual. 50 marks.
Topics:
- Purchases and sales returns.
- Credit purchase of non current assets. Includes definition of cost of NCA and concept of sundry creditors.
- Disposal of NCAs. Cash disposal and trade-ins using sundry creditor. Reason for profit or loss on disposal.
- Reducing balance depreciation.
- Product costing (new) versus period costing (old).
- NRV and stock write downs. This includes the lower of cost and NRV rule due to Conservatism.
- Prepaid revenue (service activity like tattooing), prepaid sales and accrued revenue.
Following the Outcome 1 SAC (above) the next SACs are:
- Budgeting SAC. VCAA directs that this is done on the computer (Excel). Probably 3rd last week of term 3.
- KPIs SAC. We use Quia to do this. FIrst week of term 4.
That's it ... until the exam on November 6th.
Monday 27 July 2015
Stock Write Down ...
The original Microsoft Surface Tablet was a disaster and led to massive stock write downs. Without the stock write downs, the Microsoft data would be over optimistic for stakeholders. Profit would be overstated. Assets (particularly stock) would be overstated. The stock write down, an expense, ensures expenses are not understated and profit and assets are not overstated. (the latest Surface is very successful, but not the original)
http://thenextweb.com/microsoft/2013/07/31/with-just-853m-in-revenue-microsofts-surface-experiment-is-officially-a-financial-failure/
Friday 24 July 2015
Seek!
If there is one thing I have learned over the journey it is that ...
"success does not come knocking ... you have to seek it out"!
"success does not come knocking ... you have to seek it out"!
Wednesday 22 July 2015
One women!
Check out this photo. It was taken today at the Australian Heads of Governments meeting. The Prime Minister and the Premiers of the States. Problem. Only one woman. You can change that in the future.
Monday 20 July 2015
Reducing Balance Depreciation ...
The only thing that changes is how to calculate the depreciation ... the rate, which is always given, is applied to the carrying-value rather than the historical cost ... except in the first reporting period when the rate is applied to the historical cost as well.
Using reducing balance depreciation means periodic depreciation expense decreases each reporting period. Why? This is important. Because it is assumed that NCA is contributing less to revenue over which each new reporting period hence the depreciation expense should match that declining revenue to better match the revenue generated by the NCA to its depreciation expense. MATCH, MATCH, MATCH, MATCH, MATCH. That is a word that examiners like in this context. Matching the revenue generated by the NCA to its depreciation expense to provide stakeholders with more relevant information for the reporting period.
Using reducing balance depreciation means periodic depreciation expense decreases each reporting period. Why? This is important. Because it is assumed that NCA is contributing less to revenue over which each new reporting period hence the depreciation expense should match that declining revenue to better match the revenue generated by the NCA to its depreciation expense. MATCH, MATCH, MATCH, MATCH, MATCH. That is a word that examiners like in this context. Matching the revenue generated by the NCA to its depreciation expense to provide stakeholders with more relevant information for the reporting period.
Tuesday 14 July 2015
Key Accounts ...
The Stock Control account is now complete. (we have not done stock write down yet ... soon). Learn these debits and credits. Know which each entry means and the source journal.
Debtors Control
Debtors Control
Creditors Control
GST Clearing
Capital ... this one shows net profit.
Disposal of NCA ... this one is for cash and shows a loss on disposal.
Disposal of NCA ... this one is a trade-in and shows a profit on disposal.
Monday 13 July 2015
Saturday 11 July 2015
Lesson 4 ... the last one!
Lesson 4
The trade-in of a non current asset (NCA) which leads to a profit on the disposal.
Example.
The old Boardroom Table at 30/6/17:
Boardroom Table $12 000
less Accum. Deprec. $8 500 $3 500
The owner has picked out a new boardroom table which has a price of $18 000 plus GST. The vendor, Ace Traders, has agreed on a trade-in allowance of $5 000 on the old boardroom table.
The $5 000 trade-in allowance is $1 500 more than the carrying value of $3 500 on the old boardroom table, thus this $1 500 is a profit on disposal.
Recording:
General Journal entries
Dr: Disposal Boardroom Table $12 000
Cr: Boardroom Table $12 000
... transfer of historical cost to disposal account
Dr: Accum Depreciation Boardroom Table $8 500
Cr: Disposal Boardroom Table $8 500
... transfer of accum depreciation to disposal account
Dr: Disposal Boardroom Table $1 500
Cr: Profit on disposal boardroom table $1 500
... profit on disposal of boardroom table
Dr: Sundry creditor/Ace Traders $5 000
Cr: Disposal Boardroom Table $5 000
... trade-in allowance on old boardroom table
Dr: Boardroom Table $18 000
Dr: GST Clearing $1 800
Cr: Sundry creditor/Ace Traders $19 800
... purchase of new boardroom table from Ace Traders
Key Accounts
Disposal Boardroom Table
1/7/17 Boardroom table $12 000 1/7/17 Accum Deprec BRTable $8 500
Profit disposal $1 500 Sundry creditor/Ace $5 000
$13 500 $13 500
Sundry Creditor: Ace Traders
1/7/17 Disposal BRTable $5 000 1/7/17 BRTable/GST Clr. $19 800
Boardroom Table
1/7/17 Balance $12 000 1/7/17 Disposal BRTable $12 000
Sundry Creditor Ace $18 000
Reporting
Cash Flow Statement
No impact!
Income Statement
Add Other Revenue
Profit Disposal Boardroom Table $1 500
Balance Sheet (accounting equation)
Assets:
Increase in new Boardroom Table $18 000
Decrease in carrying-value of old boardroom table $3 500
thus net increase $14 500
Liabilities
Decrease GST clearing $1 800
Increase Sundry Creditor: Ace $19 800
Decrease Sundry Creditors (allowance): Ace $5 000
Thus net increase $13 000
Owner's Equity
Increase $1 500 due to profit on disposal boardroom table.
Thus the net change in equities, increase of $14 500, equals the increase in net assets.
Summary
What caused the profit on disposal $1 500?
1. The proceeds of disposal, $5 000 was more than the carrying-value of $3 500.
2. The boardroom table was over-depreciated over its useful life due to under-estimating the scrap value and/or the estimated useful life.
We have now covered the four scenarios:
1. Sell NCA for cash which leads to a loss on disposal
2. Sell NCA for cash which leads to a profit on disposal
3. Trade-in old NCA for a new NCA which leads to a loss on disposal
4. Trade-in old NCA for a new NCA which leads to a profit on disposal
You should also appreciate what causes ...
a profit on disposal of a NCA ... and/or
a loss on disposal of a NCA
The trade-in of a non current asset (NCA) which leads to a profit on the disposal.
Example.
The old Boardroom Table at 30/6/17:
Boardroom Table $12 000
less Accum. Deprec. $8 500 $3 500
The owner has picked out a new boardroom table which has a price of $18 000 plus GST. The vendor, Ace Traders, has agreed on a trade-in allowance of $5 000 on the old boardroom table.
Recording:
General Journal entries
Dr: Disposal Boardroom Table $12 000
Cr: Boardroom Table $12 000
... transfer of historical cost to disposal account
Dr: Accum Depreciation Boardroom Table $8 500
Cr: Disposal Boardroom Table $8 500
... transfer of accum depreciation to disposal account
Dr: Disposal Boardroom Table $1 500
Cr: Profit on disposal boardroom table $1 500
... profit on disposal of boardroom table
Dr: Sundry creditor/Ace Traders $5 000
Cr: Disposal Boardroom Table $5 000
... trade-in allowance on old boardroom table
Dr: Boardroom Table $18 000
Dr: GST Clearing $1 800
Cr: Sundry creditor/Ace Traders $19 800
... purchase of new boardroom table from Ace Traders
Key Accounts
Disposal Boardroom Table
1/7/17 Boardroom table $12 000 1/7/17 Accum Deprec BRTable $8 500
Profit disposal $1 500 Sundry creditor/Ace $5 000
$13 500 $13 500
Sundry Creditor: Ace Traders
1/7/17 Disposal BRTable $5 000 1/7/17 BRTable/GST Clr. $19 800
Boardroom Table
1/7/17 Balance $12 000 1/7/17 Disposal BRTable $12 000
Sundry Creditor Ace $18 000
Reporting
Cash Flow Statement
No impact!
Income Statement
Add Other Revenue
Profit Disposal Boardroom Table $1 500
Balance Sheet (accounting equation)
Assets:
Increase in new Boardroom Table $18 000
Decrease in carrying-value of old boardroom table $3 500
thus net increase $14 500
Liabilities
Decrease GST clearing $1 800
Increase Sundry Creditor: Ace $19 800
Decrease Sundry Creditors (allowance): Ace $5 000
Thus net increase $13 000
Owner's Equity
Increase $1 500 due to profit on disposal boardroom table.
Thus the net change in equities, increase of $14 500, equals the increase in net assets.
Summary
What caused the profit on disposal $1 500?
1. The proceeds of disposal, $5 000 was more than the carrying-value of $3 500.
2. The boardroom table was over-depreciated over its useful life due to under-estimating the scrap value and/or the estimated useful life.
We have now covered the four scenarios:
1. Sell NCA for cash which leads to a loss on disposal
2. Sell NCA for cash which leads to a profit on disposal
3. Trade-in old NCA for a new NCA which leads to a loss on disposal
4. Trade-in old NCA for a new NCA which leads to a profit on disposal
You should also appreciate what causes ...
a profit on disposal of a NCA ... and/or
a loss on disposal of a NCA
Tuesday 7 July 2015
Lesson 3
I hope you are enjoying your holidays.
Here is lesson 3. Trading in an old NCA for a new one ... that results in a loss on disposal.
Details about the old delivery van at 1/7/17:
Historical cost $35 000
Accum Deprec $28 000 $7 000
The new delivery van is $50 000 plus GST and will be purchased from Ace Motor Traders ... they have offered a trade-in allowance of $5 000 on the old van.
Thus the proceeds of disposal, $5 000 is less than the carrying-value of $7 000, hence a loss of $2 000 occurs on the disposal of the old delivery van.
Records
Recording in the General Journal:
Dr: Disposal of Delivery Van $35 000
Cr: Delivery Van $35 000
... that transfers the historical cost of the delivery van to the Disposal Account
Dr: Accumulated Depreciation Delivery Van $28 000
Cr: Disposal of Delivery Van $28 000
... that transfers the accum deprec of the delivery van to the Disposal Account
Dr: Sundry Creditor: Ace Motor Traders $5 000
Cr: Disposal Delivery Van $5 000
... that is the trade-in allowance given on the old delivery van by Ace Motor Traders
Dr: Loss on Disposal Delivery Van $2 000
Cr: Disposal Delivery Van $2 000
... that transfers the loss on disposal of the delivery van to the expense account, loss on disposal of delivery van.
Dr: Delivery van $50 000
Dr: GST clearing $5 000
Cr: Sundry creditor: Ace Motor Traders $55 000
... that is the credit purchase of the new delivery van
Key Accounts
Disposal Delivery Van
1/7/17 Delivery Van $35 000 1/7/17 Accum Deprec Del. Va $28 000
Sundry creditor/Ace $5 000
Loss on disposal DV $2 000
$35 000 $35 000
Sundry Creditor: Ace Motor
1/7/17 Disposal DV $5 000 1/7/17 Delivery Van/GST Clr. $55 000
Delivery Van
1/7/17 Balance $35 000 1/7/17 Disposal DV $35 000
Sundry Creditor Ace $50 000
Reporting
Cash Flow Statement
No impact!
Income Statement
Less Other Expenses
Loss Disposal Delivery Van $2 000
Balance Sheet (accounting equation)
Assets:
Increase in Delivery Van $50 000
Decrease in carrying-value of old delivery van $7 000
Thus net decrease $43 000
Liabilities
Decrease GST clearing $5 000
Increase Sundry Creditor: Ace $55 000
Decrease Sundry Creditors (allowance): Ace $5 000
Thus net increase $45 000
Owner's Equity
Decrease $2 000 due to loss on disposal delivery van.
Thus the net change in equities, decrease of $43 000, equals the decrease in net assets.
Summary
What caused the loss on disposal $2 000?
1. The proceeds of disposal, $5 000 was less than the carrying-value of $7 000.
2. The delivery van was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life.
Stay tuned for lesson 4 in a few days!
Here is lesson 3. Trading in an old NCA for a new one ... that results in a loss on disposal.
Details about the old delivery van at 1/7/17:
Historical cost $35 000
Accum Deprec $28 000 $7 000
The new delivery van is $50 000 plus GST and will be purchased from Ace Motor Traders ... they have offered a trade-in allowance of $5 000 on the old van.
Thus the proceeds of disposal, $5 000 is less than the carrying-value of $7 000, hence a loss of $2 000 occurs on the disposal of the old delivery van.
Records
Recording in the General Journal:
Dr: Disposal of Delivery Van $35 000
Cr: Delivery Van $35 000
... that transfers the historical cost of the delivery van to the Disposal Account
Dr: Accumulated Depreciation Delivery Van $28 000
Cr: Disposal of Delivery Van $28 000
... that transfers the accum deprec of the delivery van to the Disposal Account
Dr: Sundry Creditor: Ace Motor Traders $5 000
Cr: Disposal Delivery Van $5 000
... that is the trade-in allowance given on the old delivery van by Ace Motor Traders
Dr: Loss on Disposal Delivery Van $2 000
Cr: Disposal Delivery Van $2 000
... that transfers the loss on disposal of the delivery van to the expense account, loss on disposal of delivery van.
Dr: Delivery van $50 000
Dr: GST clearing $5 000
Cr: Sundry creditor: Ace Motor Traders $55 000
... that is the credit purchase of the new delivery van
Key Accounts
Disposal Delivery Van
1/7/17 Delivery Van $35 000 1/7/17 Accum Deprec Del. Va $28 000
Sundry creditor/Ace $5 000
Loss on disposal DV $2 000
$35 000 $35 000
Sundry Creditor: Ace Motor
1/7/17 Disposal DV $5 000 1/7/17 Delivery Van/GST Clr. $55 000
Delivery Van
1/7/17 Balance $35 000 1/7/17 Disposal DV $35 000
Sundry Creditor Ace $50 000
Reporting
Cash Flow Statement
No impact!
Income Statement
Less Other Expenses
Loss Disposal Delivery Van $2 000
Balance Sheet (accounting equation)
Assets:
Increase in Delivery Van $50 000
Decrease in carrying-value of old delivery van $7 000
Thus net decrease $43 000
Liabilities
Decrease GST clearing $5 000
Increase Sundry Creditor: Ace $55 000
Decrease Sundry Creditors (allowance): Ace $5 000
Thus net increase $45 000
Owner's Equity
Decrease $2 000 due to loss on disposal delivery van.
Thus the net change in equities, decrease of $43 000, equals the decrease in net assets.
Summary
What caused the loss on disposal $2 000?
1. The proceeds of disposal, $5 000 was less than the carrying-value of $7 000.
2. The delivery van was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life.
Stay tuned for lesson 4 in a few days!
Thursday 2 July 2015
Greece is in arrears!
Put simply (and to sort of tie it into the VCE course), Greece has an accrued expense. It is owing to the European Union. Or, the European Union has accrued revenue.
Profit on disposal of a NCA ...
Lesson 2
Assume you want to sell an old computer. At 30th June 2024 the following is provided:
$ $
Computer 4 700
-Accumulated depreciation 2 300 2 400
$2 400 is the carrying-value. Assume you sell the computer, on 30/6/24, for cash and receive $3 000 (market value). The proceeds of disposal, $3 000, is more than the carrying-value, $2 400, so a profit on disposal of $600 occurs.
The $3 000 (market value) is recorded in the Cash Receipts Journal as 'Disposal of Computer'. There is no GST on the sale on the VCA course. Remember that. At the end of the month the $3 000 would be posted to the credit side of the Disposal of Computer account, the cross reference is 'Bank'.
General Journal entries
Dr: Disposal of Computer $4 700
Cr: Computer $4 700
Dr: Accum Deprec Computer $2 300
Cr: Disposal Computer $2 300
Dr: Disposal Computer $600
Cr: Profit Disposal Computer $600
Of course these entries would then be posted to the ledger.
The Disposal of Computer account would appear (sort of)
Disposal Computer
30/6/24 Computer $4 700 30/6/24 Accum Deprec Computer $2 300
Profit disposal computer $600 Bank $3 000
$5 300 $5 300
Reporting
Cash Flow Statement
Investing Activities
Proceeds Disposal Computer $3 000
Income Statement
Add Other Revenue
Profit Disposal Computer $600
Balance Sheet (accounting equation)
Assets:
Increase in Bank $3 000
Decrease in carrying-value of computer $2 400
Thus net increase $600.
Liabilities
No impact
Owner's Equity
Increase $600 due to profit on disposal computer.
Summary
What caused the profit on disposal $600?
1. The proceeds of disposal, $3 000 was more than the carrying-value of $2 400.
2. The computer was over-depreciated over its useful life due to under estimating the scrap value and/or the estimated useful life.
Stay tuned for lesson 3 in a few days!
Wednesday 1 July 2015
Some of the team at BDO ...
Some of the team at BDO recently. That is My-Linh on the right, Class of 2013. Find her name in the Red Book! Thanks to Amanda for photo.
Tuesday 30 June 2015
Loss on disposal of a non current asset (NCA)
How are you going with the holiday homework?
Lesson 1
The first section is about selling a NCA for cash and making a loss. What does this mean?
Example.
On 1/7/15 (today) the business sells its old boardroom table (NCA) for $200. (no GST on the sale in the VCE study design).
This $200 would be recorded in the Cash Receipts Journal. Under 'Details' would be 'Disposal of Boardroom table'. The $200 would be recorded in 'Bank' and 'Sundry'. Remember ... no GST. This would be posted at the end of the month to the Disposal of Boardroom Table ledger account.
On the date of the disposal (or sale), the carrying-value was $400. (Remember that the carrying-value is historical cost, $3000, less accumulated depreciation $2600.) This means the business received $200 less than the carrying-value ... this is a loss on the disposal of the boardroom table.
We have to 'zero' the Boardroom Table ledger account so credit it with the historical cost of the boardroom table.
General Journal:
Dr: Disposal of Boardroom table $3000
Cr: Boardroom table $3000
We also have to 'zero' the Accumulated Depreciation Boardroom Table ledger account so debit it with this value.
General Journal:
Dr: Accumulated depreciation boardroom table $2600
Cr: Disposal of Boardroom table $2600
The Disposal of Boardroom Table account has now 'collected' the historical cost, $3000, and the accumulated depreciation, $2600. So we can easily determine the carrying-value of $400. The credit side of this account will also 'collect' the cash proceeds of the sale, $200, using the cross-reference, 'Bank'. Now complete the account. This means 'find the balance of $200 on the credit side (so both sides add up to the same value, $3000). This $200 'balance' is the loss on disposal of the boardroom table since the proceeds of sale, $200 was $200 less than the carrying-value of $400. Thus the corresponding debit entry goes to 'Loss on Disposal of Boardroom Table'. This account is an expense and will be reported under 'Other Expenses' in the Income Statement.
The loss on disposal is recorded in the General Journal:
Dr: Loss on disposal of Boardroom Table $200
Cr: Disposal of Boardroom Table $200
Why is this ledger (Loss on Disposal of Boardroom Table) an expense?
Because it fits the definition of an expense! An expense is a ... decrease in an asset .... etc. The net change in assets due to this transaction is a decrease of $200. This is due to an increase of $200 due to cash and a decrease of $400 due to the carrying-value, thus a net decrease of $200.
Reports?
Cash Flow Statement
The $200 received is reported in the Investing Activities section of the Cash Flow Statement as Proceeds of Disposal Boardroom Table.
Income Statement
The loss on disposal boardroom table is reported as an expense under 'Other Expenses' in the Income Statement.
Balance Sheet
There is no boardroom table now!
Assets:
Thus assets have decreased by $400 (the carrying-value) and increased by $200 cash ... a net decrease of $200.
Liabilities:
No impact.
Owner's equity:
Decrease of $200 due to Loss on Disposal of Boardroom Table.
Summary.
What caused the $200 loss on disposal of boardroom table?
If that was an exam question ... here is the answer!
The proceeds of disposal, $200 (the market-value), was less than the carrying-value of the non current asset, $400.
The boardroom table was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life of the boardroom table. (remember that)
... stay tuned during the holidays for the next parts of this holiday homework topic.
Lesson 1
The first section is about selling a NCA for cash and making a loss. What does this mean?
Example.
On 1/7/15 (today) the business sells its old boardroom table (NCA) for $200. (no GST on the sale in the VCE study design).
On the date of the disposal (or sale), the carrying-value was $400. (Remember that the carrying-value is historical cost, $3000, less accumulated depreciation $2600.) This means the business received $200 less than the carrying-value ... this is a loss on the disposal of the boardroom table.
We have to 'zero' the Boardroom Table ledger account so credit it with the historical cost of the boardroom table.
General Journal:
Dr: Disposal of Boardroom table $3000
Cr: Boardroom table $3000
We also have to 'zero' the Accumulated Depreciation Boardroom Table ledger account so debit it with this value.
General Journal:
Dr: Accumulated depreciation boardroom table $2600
Cr: Disposal of Boardroom table $2600
The Disposal of Boardroom Table account has now 'collected' the historical cost, $3000, and the accumulated depreciation, $2600. So we can easily determine the carrying-value of $400. The credit side of this account will also 'collect' the cash proceeds of the sale, $200, using the cross-reference, 'Bank'. Now complete the account. This means 'find the balance of $200 on the credit side (so both sides add up to the same value, $3000). This $200 'balance' is the loss on disposal of the boardroom table since the proceeds of sale, $200 was $200 less than the carrying-value of $400. Thus the corresponding debit entry goes to 'Loss on Disposal of Boardroom Table'. This account is an expense and will be reported under 'Other Expenses' in the Income Statement.
The loss on disposal is recorded in the General Journal:
Dr: Loss on disposal of Boardroom Table $200
Cr: Disposal of Boardroom Table $200
Why is this ledger (Loss on Disposal of Boardroom Table) an expense?
Because it fits the definition of an expense! An expense is a ... decrease in an asset .... etc. The net change in assets due to this transaction is a decrease of $200. This is due to an increase of $200 due to cash and a decrease of $400 due to the carrying-value, thus a net decrease of $200.
Reports?
Cash Flow Statement
The $200 received is reported in the Investing Activities section of the Cash Flow Statement as Proceeds of Disposal Boardroom Table.
Income Statement
The loss on disposal boardroom table is reported as an expense under 'Other Expenses' in the Income Statement.
Balance Sheet
There is no boardroom table now!
Assets:
Thus assets have decreased by $400 (the carrying-value) and increased by $200 cash ... a net decrease of $200.
Liabilities:
No impact.
Owner's equity:
Decrease of $200 due to Loss on Disposal of Boardroom Table.
Summary.
What caused the $200 loss on disposal of boardroom table?
If that was an exam question ... here is the answer!
The proceeds of disposal, $200 (the market-value), was less than the carrying-value of the non current asset, $400.
The boardroom table was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life of the boardroom table. (remember that)
... stay tuned during the holidays for the next parts of this holiday homework topic.
Monday 22 June 2015
Term 2 holidays ...
What should you do in the holidays?
It is important that you get lots of rest and freshen-up after a long, long term 2. Spend quality time with friends and family but take some time to plan your work tasks as well. Jot down these plans. It is important to see your commitments in writing even if they are just dot points. As far as Accounting goes ...
1. Ensure you have done most of chapters 13 & 14.
2. Quia quiz on returns
3. Holiday Homework booklet. The topic is Disposal of non current assets (NCAs).
That is, what happens when the business sells a NCA for cash and, later, what happens if the business trades an old NCA in on a new one? This will take you a good morning or afternoon session. Why not get a friend or two and do this task together! 2 or 3 brains makes the work easier. Of course you need access to the resources on NEO: videos, solutions and (optional) podcasts. There are Quia quizzes on this topic as well. Do these last. If you think you need extra work on this topic, try some Nano Exams that include this topic. Do not wait until the last Sunday of the holidays to do this topic!
Email me during the holidays if you need help.
4. Optional. How did you go on SAC3 and/or the Mid Year Exam? If you did not go as well as you planned, why not re-do them to improve your skill and confidence level. They are on NEO with the solutions.
As you start your term 2 holidays know that there is only 12 school weeks left when you return. Those weeks will go very quickly. Make the most of your opportunities.
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