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.
Thursday, 18 June 2015
Money and wealth does not buy you class!
This is Donald Trump, a well known American billionaire, who is going to be a candidate for the US Presidency in 2016. He made his billions in Real Estate. Many commentators think he is arrogant and lacks class, possibly caused by being surrounded by sycophants for most of his life. So what? Some of you will end up as CEOs and have other leadership positions and some of you will become wealthy. Good luck to you. But still be kind and respectful to those around you. Talk to the cleaner with the same respect you speak to the Prime Minister. Not everyone has had the same opportunities as you along the way. Wealth does not equal class.
Wednesday, 17 June 2015
Sacked ...
This is the CEO of Woolworths who has just been sacked. Reason? Poor decision making, such as the idea to create "Masters" as a competitor to Bunnings, which has led to poor business performance. Business is tough. Performance is everything. If the KPIs are bad ... those responsible often have to pay the hard way ... with their jobs!
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