VCE Accounting Question Thread!

[Ematuro]

I think I sort of get it but just to clear things up a bit could someone please give an example with actual figures in it so I can actually see it in my head? Sorry I'm a bit slow ahaha.

[nacho]

Okay
think of it this way.
On day 1 when the business opens and it has not purchased anything, all it has is money in it's bank account (which is contributed by the owner) lets say $10,000.

Say now, if the business sells sport equipment, it decides to buy stock on Jan 1 , so that it can sell and earn revenue. (this is the aim of the business).

The business buy 10 tennis racquets, costing $50 dollars each, plus $5 dollars GST. All in all it has paid $550 dollars ($500 for the 10 tennis racuets, and $50 for the GST.)

At this point, the business has paid $50 to the tax office, and so the Tax office owes the business $50 - as the when the business paid the tax office, it had a GST Liability of $0.

Now on Jan 2 , if the business were to sell all these tennis racquets for $100 dollars each, plus $10 dollars GST, it will have received $1100 dollars in total. $1000 of this is from the sale and the extra $100 is the GST it charges on the sale. Please note that it does not earn revenue of $1100, it only RECEIVES $1100. The revenue it has earned is $1000 as the other $100 is to be given to the ATO.
So, since the business must forward this $100 to the ATO, it can be said the Business has a GST Liablity of $50.

Why?
Well, on our first transaction in Jan.1 we paid $50 in GST to the ATO, and as our GST Clearing balance at this stage was zero, the ATO owed us $50.

THEN, the transaction on Jan.2 the business colelcted $100 dollars in GST. Since it collected this GST, it must give it to the Tax office.
Since the tax office owes the business $50 dollars, we only have to pay them $50 ($100[GST Liability] - $50[GST Asset]),
The business therefore has a GST Liability of $50.
If on Jan.3 the business purchased 5 racquets at $100 each + $10 dollars GST. then, the business has further paid $50 dollars in GST.
This means that we have paid off our GST Liability of $50 and thus owe nothing to the tax office.

hopefully that makes sense

[Ematuro]

Oh I get that.. so does that mean the business overall doesn't actually pay GST at all? They just literally act as a collector?

[Hodgeyhodgey]

Does anyone have a detailed definition of depreciation? All I can get out of both textbooks (neville box + cambridge) is 'the allocation of the cost of a non-current asset over its effective (or useful) working life'.
Can anyone top that or is that just about it?

Thanks

[nacho]

Oh I get that.. so does that mean the business overall doesn't actually pay GST at all? They just literally act as a collector?

In a way, but not exactly.
You see, EVERYONE pays GST, it's just that a registered business is able to claim it back as they buy things.

If you don't get what i mean, think of it this way:
for ex, a business which sells speakers
BUSINESS:
- buys 10 speakers  (at $100 each, plus $10 GST)
As of the moment, this business has paid $100 in GST to the tax office ( 10 x 10 = 100), which is fair enough, as every citizen must pay GST on all goods and services (except fresh food)
- now, the business sells these ten speakers at ($200 each, plus $20 GST). BUT WAIT A SECOND! The business charged 10% GST, and so it doesn't get to keep this money, because it collects GST on behalf of the government. So, it must forward this $200 the GST (20 x 10 = 200). Correct? INCORRECT! It must only forward $100 of this in GST, can you tell me why?
now, moving on to the average person, named joe

PERSON:
A person (not a business/firm) does not collect GST on behalf on anyone, so any GST paid by the person is paid directly on purchases.

______________

Does anyone have a detailed definition of depreciation? All I can get out of both textbooks (neville box + cambridge) is 'the allocation of the cost of a non-current asset over its effective (or useful) working life'.
Can anyone top that or is that just about it?

Thanks

(Refer below to sammy's post)

__________
I've a question of my own.
If a business sells stock on credit, for lets says, $1000 on credit + $100 GST, and the debtor is then recognised to be a bad debt, does our GST liability remain, or decrease?
Because, techincally, if we have no way of receiving our money, isn't this similar to a drawing/donation, because the business hasn't actually collected GST?
e.g, if a business decides to donate $1000 worth of stock to a local school, (and thus not receive anything)

thanks

[sam.utute]

Has the sale still taken place? If it has, then the GST has to be recognised (remember that GST is recorded when the sale actually takes place). There is no difference between recognition of GST on cash sales and credit sales. The ATO is not interested in whether or not you are receiving money from your debtors.
I'm pretty sure GST remains unaffected.

Regarding the depreciation question:
Depreciation is NOT a method of finding the value of the asset at a particular point in time. The textbook is very clear about this. It actually involves allocating the cost of the asset, dependent on its estimated revenue generation, over the life of the asset. Some assets are depreciated rapidly due to being used up very quickly. While some, such as heavy machinery, will be depreciated at a slower rate due to the fact they will contribute to revenue generation for a lengthy period.
You must avoid assuming that depreciation is an attempt to revalue assets. It is nothing of the sort. It does exactly what its definition states: allocates its cost over its effective (revenue generating) life.

[Ematuro]

awesome explanations! I finally understood thanks

[soopertaco]

GENERAL JOURNALS! D;

okay so for the most part general journals are easy as pie but i do tend to sometimes get stuck on the entries that involve more than two accounts or the ones that aren't your standard 'withdrawal of stock', 'donation/advertising expense' or recording error i.e. 248 recorded as 284 

for example: a receipt of $800 from a debtor - B. Billiten had been incorrectly recorded as a payment to a creditor - B. Bolton (memo19)

so i was just wondering if anyone can help me with making sure i have a strategy in taking these on? any tips or tricks that anyone can dish out that would cut the time i spend on these sort of problems would be much appreciated

[nacho]

GENERAL JOURNALS! D;

okay so for the most part general journals are easy as pie but i do tend to sometimes get stuck on the entries that involve more than two accounts or the ones that aren't your standard 'withdrawal of stock', 'donation/advertising expense' or recording error i.e. 248 recorded as 284 

for example: a receipt of $800 from a debtor - B. Billiten had been incorrectly recorded as a payment to a creditor - B. Bolton (memo19)

so i was just wondering if anyone can help me with making sure i have a strategy in taking these on? any tips or tricks that anyone can dish out that would cut the time i spend on these sort of problems would be much appreciated

yep they are a bit confusing.
What you will be doing is called a 'correcting entry'
Basically, you have to make sure the account you've incorrectly debited/credited is returned to a neutral balance (i.e it's correct balance)
and then you have to make the actual credit/debit you should have done in the first place.

so in this instance,
the question says you incorrectly recorded $800 as a payment to a creditor - B. Bolton which basically means you've debited creditor - B. Bolton by $800 right? But in actual fact, you have not paid your creditors, so as of this stage, your Creditors control account is understated by $800.
Therefore, you have to increase it, and in order to do this, you have to credit it by $800.
and if you think about it, what you've done is this:

                 Creditor - B. Bolton
__DR____________|_________CR_________
$800                   |         $800

Both of them cancel each other out, and you've returned to a neutral account, which is the correct account.

But we're not finished yet.
Because you've received $800 from a debtor - B. Billiten, he/she will owe you $800 less. But this has not yet been recorded.
So apply the following:

                  Debtor - B. Billiten
_____DR__________|_____CR__________
                                     $800
Credit the debtor - B. Billiten by $800, as this should have been done in the first place.

Now you are finished.
Notice that you don't need to make an adjustment to the bank. Why? Because the question never says you did it incorrectly, it just said you Debited your creditor account incorrectly.
Hope that helped

[Hodgeyhodgey]

Exercise 7.6 (Cambridge)

On 12 August 2010, Wendy donated to her business a computer that she had purchased for herself a year ago for $2000. The business will have exclusive use of the computer, which was professionally valued on 12 August 2010 at $1100.

a. Show the General Journal entries necessary to record this transaction. (Narration not required.)
b. Referring to one Qualitative characteristic, explain your valuation of the computer.

MY ANSWERS

a. Computer   2000
      Capital            2000

b. Characteristic = Historical Cost
Explanation = The computer is valued at its original cost ($2000) as this is the unbiased and verifiable value, whereas the value of $1100 is simply an estimate and has no evidence to verify the value.

CAMBRIDGE ANSWERS

a. Computer   1100
      Capital           1100

b. Characteristic = Relevance
Explanation = As far as the business is concerned, the new value of $1100 is more useful for decision making; $2000 was the price paid by the owner, but the business is a separate entity.


My question; why is this so? Is the value of $1100 used because it's assumed that the professional who valued it accounted for depreciation of the asset? Or is it as simple as 'this is the value at which the asset entered the business'. I was under the impression that the historical cost should be used as the $1100 has no source document or any distinguishable evidence to support it..

[_avO]

You're hinted as to which method to use (Look at question b. Referring to one Qualitative characteristic...). With questions like this and many other questions Relevance>Reliability is the general rule of thumb.

Say for example you purchased a building in 1989 for 100k, and now its market value (appreciated) to 750k, it would be more relevant to record the 750k into the statement of financial position because its worth more now (dw about inflation/real terms and all that) and if you were to sell the building you would make the market value (or close to), as opposed to the initial value of 100k.

So for this question the computer contributed by the owner should be valued at its market value of $1,100. Also if it says 'professionally valued' then you can assume that the value is market value or is relevant to the current period.

The only reason why it should be $2000 is if the owner specifically stated that it uses the historical cost method of valuation (accurate valuation) as opposed to revaluation over time (fair value) and is consistently using it in all their reports, otherwise Relevance>Reliability

[Hodgeyhodgey]

Bummer, overthought the question didn't I :/ I guess I should've remembered relevance>reliability, like with depreciation..

[marr]

Not sure if this applies here as it is actually a uni question but even still it may help in VCE accounting. Having done 3/4 accounting last year I'm completely stumped/forgotten everything I've learnt! Anyway here goes:

Question 1:

In a small local business, the 4 business owners have decided to donate their wages for a day to a charity. They each earn $100 a day.

i) Name the accounts effected
ii) Classify each account as an asset, liability, owner's equity, revenue or expense.
iii) What effect does this have on the accounting equation?
iv) Classify the accounts in the cash flow statement (ie. operating outflow)


- Not sure about this one, is it deemed to be advertising? drawings? is it even supposed to be recorded?


Question 2:

The business has also decided to donate 100 items of stock (apples as it is an apple orchard company) for the charity. As the apples were grown by the business the cost price of each apple is considered to be $0. The selling price of the apples is $2 each.

i) Name the accounts effected
ii) Classify each account as an asset, liability, owner's equity, revenue or expense.
iii) What effect does this have on the accounting equation?
iv) Classify the accounts in the cash flow statement (ie. operating outflow)


- Once again I can't remember recording anything like this in VCE


Any ideas?

[_avO]

Question 1:
I think its a trick question? My guess is that it's just
DR Payment for wages $400
    CR Cash $400
As for how the money is used by the owners its their own discretion and it doesn't affect the business

Question 2:
Refer back to the Conceptual Framework definition of an expense.

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

In this case the 'depletions of assets' would be your supplies (apples) which does result in a 'decrease in owner's equity'. So thus donation is an expense. As long as you can elaborate on your thoughts then you can say donations is also considered as advertising (the apples might have the company logo sticker which is a direct method of advertising).

i) The accounts affected would be Debit Advertising and Credit Supplies... but there is no cost price so I'm not quite sure what you do when you value it.
ii) Advertising = expense, Supplies = asset
iii) Decrease Assets (supplies), Decrease Owner's Equity (advertising)
iv) In the Statement of Cash Flows under Operating Activities
Operating outflow
Advertising ($__)

[marr]

Thanks for your help _avO!!

Sorry I wrote the wrong thing for question 1, it's actually supposed to be:

"In a small local business, the 4 business owners have decided to donate a day's work to help a local charity. They usually earn $100 a day which will be deducted from their week's pay".

Is it still the same principle/solution even though they are not giving money and the business is actually saving $400? (If that makes sense?)

The second question I understand although I'm unsure as to what amount to enter as the cost was $0. If I use cost price then the transaction would have no effect on accounts at all would they? Or do I use the selling price but wouldn't this go against the historical cost principle? I'm really not sure what to do with this one.


Also I have a couple of other questions (not in VCE Accounting syllabus however):

- If there is damage to a non current asset that makes it unusable, what is the name of this account? Ie. for stock it is called stock loss but what do you call the account if it does not involve stock?
- Do you happen to know how to account for a 'lease' of a non current asset?