VCE Accounting Question Thread!

[nacho]

Hey, I have another question.
It's from Exercise 10.12 (page 205) and it's about the Interest expense on the general ledger.
We are given the following information for the adjustment (i believe so):
Pre-adjustment trial balance as at 31 December 2010:
Interest expense - DR: 1800
Mortgage HH Finance - CR: 180000
___________
Additional information:
Monthly repayments of $2000 are made on the principal of the mortgage - HH finance.
interest is charged at 6% p.a and payable on 28 February and 31 August each year.
___________

When i attempted the question, I recorded in the general ledger:
Mortgage - HH Finance - DR: 2000
Bank.                        - CR: 2000
___
Interest expense         - DR: (6/% of 180,000 plus 1800 (current expense)
Accr interest exp        - CR: [same as above]
_________________________________________

I get really confused in doing recordings like these, and almost never get them correct...

The answer:
 Interest Expense  - DR: 3600
   Accrud interest.. - CR: 3600
_____
I don't understand why you don't :
- make the adjustment for the payment of $2000 towards the mortgage..
- why the interest is doubled?( Is the info not vague? It says 6% p.a, 6% of the mortgage is not 1800, but 10800) so then why is only 1800 addded?
Any help would be much appreciated! Thanks

[_avO]

The important information listed above are:
*Pre-adjustments are made as at 31st Dec
*Mortgage of $180,000 was taken out
*6% interest per annum, payable on 28th Feb and 31st Aug every year
*Monthly repayments are made of $2,000

The purpose of adjustments are to record entries that have been incurred but not yet payed. In this case the mortgage repayment is monthly, you do not need to adjust the entry as it is correct every month (and as a rule Bank should never go into the G.J). However the interest is incurred every month but there are only 2 dates when the payments can be made. So from the 31st August to the 31st December, interest has been incurred but not accounted for.


Firstly to make things easier, when you get a question like this find the interest and then divide it by 12 (months)
interest x principal loan
= 6% x $180,000
= $10,800 p.a.

$10,800/12 = $900/month
From the end of Aug to the end of December you get:
31stAug|__________|30thSept|_________|31stSept|_________|30thNov|_________|31stDec, 4 months
(Drawing it out makes it a lot easier and reduces the chance of including an extra month by accident)

$900/month x 4 months
= $3600
Because this payment was incurred it is referred to as an 'Accrued' expense (incurred but not yet payed), and after you account for it it is then referred to as an expense (incurred and payed)
                              DR    |  CR
Interest expense     $3,600
      Accrued Int                $3,600

Hope this makes sense

[nacho]

Wow, thanks a lot, that really cleared things up. I'm printing this post out
Also, are there any  notes on the general journal uploaded anywhere here? I know that i'll be going over this stuff in school, which will aid in understanding, but i also know that for subjects like chemistry, i will also need to go over some concepts, so it's best to save time
Thanks again avo, for clearing things up

[_avO]

No problem.

I don't think I have any notes specifically for the GJ, but you will see that most GJ entries for BDAs (and unit 4 stuff including trade-ins, sales returns) are just repeats with different creditor/debtor names, or different transaction details but have the same exact two-fold effect (i.e. DR expense, CR accrued) so it's not very difficult.

[nacho]

Hey, another queston:
you said bank cannot go into the general journal right? But what about when you're showing the opening entry/commencement of double entry

[_avO]

Oh right, yes in that case there is bank xP but that's the only exception!

[hello_kitty]

Hey Guys, I have some really silly questions that I just need some clarification on :/

1. Referring to one Accounting principle, explain why owner’s equity is said to be what the ‘business owes the owner’.        Is it the Entity Principle? Because the owner and the business are two separate accounting entities?

2. Explain the difference between liabilities and owner’s equity.
Liabilities are what the business owes to external parties and owner's equity is what the business owes the owner?

3. Referring to the definition of owner’s equity, explain why the Accounting equation must always balance.??

4. Role of Balance Sheet?
Details a firm’s financial position at a particular point in time by listing its assets and liabilities and the owner’s equity

5. Explain the relationship between the Balance Sheet and the Accounting equation.
The elements of the Accounting equation – assets, liabilities and owner’s equity provide the headings within the Balance Sheet

[Fyrefly]

Hey Guys, I have some really silly questions that I just need some clarification on :/

1. Referring to one Accounting principle, explain why owner’s equity is said to be what the ‘business owes the owner’.        Is it the Entity Principle? Because the owner and the business are two separate accounting entities?

2. Explain the difference between liabilities and owner’s equity.
Liabilities are what the business owes to external parties and owner's equity is what the business owes the owner?

3. Referring to the definition of owner’s equity, explain why the Accounting equation must always balance.??

4. Role of Balance Sheet?
Details a firm’s financial position at a particular point in time by listing its assets and liabilities and the owner’s equity

5. Explain the relationship between the Balance Sheet and the Accounting equation.
The elements of the Accounting equation – assets, liabilities and owner’s equity provide the headings within the Balance Sheet

1. Owner's equity is the owner's residual interest in a business. It represents the owner's interest in the business; the owner's investment, if you will. In this sense, the "business owes the owner". Yes, you'd refer to the entity principle.

2. Go straight back to the definitions. You're correct, but expand on that a little bit. Remember, owner's equity is the residual interest held in a business (OE = A - L).

3. Again, the residual interest thing. By definition, OE = A - L... thus... the balance sheet must always balance, because OE is the "fill in the blank, missing figure" in the OE = A - L equation.

4. That's good. You could write an extra sentence about non-current and current assets and liabilities if you'd like... about how it's also useful to have indications like this handy.

5. Yep. Balance sheet is based on the accounting equation. OE = A - L. (Or, rearranged, A = L + OE... you probably do balance sheets in this format most of the time).


I'm sorry I didn't provide more comprehensive answers, I'm about to head off to a friend's house... if you need more information, please ask.

[nacho]

I just finished off unit 3.
I have a question, seeing that I was unable to answer a lot of the theory questions after chapter 8ish, (60% questions required  me to look at answers or skip)
should i then read over unit 3 lightly throughout the holidays, or, should i put it aside and just focus on my other subs and once school starts, the revision then will be enough.

[eeps]

Read over Unit 3 lightly. Don't burn yourself out before school even starts.

[hello_kitty]

I came across these review questions and am not too sure how to answer them??

Explain the practical consequences of adopting the Entity principle

Explain why the implementation of the Going concern principle requires the adoption of the reporting period principle


Thanks!

[eeps]

Explain why the implementation of the Going concern principle requires the adoption of the reporting period principle

I didn't come across this question when I did Accounting last year; but, I'll give it a crack. The Going Concern principle states that the life of the business is assumed to be continuous. Hence, to give financial information to the owner; that is useful for decision-making, the life of the business is divided into periods of time, so that financial reports can be produced - which will then assist the owner. That's my take on the question. I could be right or wrong. Other people can help you out. As for your first question; I have no idea. Sorry I can't be of further help!

[Furbob]

on Cambridge exercise 9.5... with the Profit and Loss Statement why was "buying expenses" listed under COGS?
I know COGS are expenses incurred in order to get stock in condition and position ready for sale but what exactly are "buying expenses" ?

[eeps]

Question:

What's the difference between 'Buying Expenses' and 'Selling Expenses'... like the definitions. Buying Expenses go under COGS right? and Selling Expenses go under 'Other Expenses'? [in the P/L Statement.]

Yeah, I would assume buying expenses relate to all the costs required to prepare stock, and selling expenses is everything else such as freight out, delivery.

I asked this exact question a while ago. I don't know if there is an exact definition of "Buying expenses", but I think it's things like Freight In, Delivery costs (getting stock into the business), Modification costs; items like that. It's not necessary to know what it is in Unit 3.

[hello_kitty]

Thanks You still helped!