ACC5202 Accounting Principle For Accrual Method of Accounting

Question 1
A. A student was overheard to say “The trial balance is a very important report. If the Trial Balance ‘balances’ the books are correct!” Comment on the statement (i) that the Trial Balance is a very important report and why, and (ii) whether it is correct to assume that the books are correct. Give 2 examples to either support or disprove this statement.

B. As a graduate accountant you are confronted with the following task in your first job. Your boss informs you that the Trial Balance as at 31st December 2018 does not balance and asks why? You discover a number of errors and in order to correct the Trial Balance

Answer:

It is true that trial balance is very important statement; this is so because trial balance gives a bird’s eye view of the entire transactions posted in the books. In other words, it is the summary of the entries posted in the general ledgers. With the help of trial balance, the other financial statements like balance sheet, income statement, etc. are prepared, without trial balance one cannot think of preparing these statements (Accounting-simplified.com, 2018).

this is not correct to assume that if the trial balance “balances”, then the books are correct. Because the trial balance cannot highlight the compensating error like error of omission or error of commission. The examples of such errors are if the amount required to be posted to the fuel account is posted to the maintenance account, so this error will not be reflected by trial balance, since it is an error of commission, similarly if an entry is omitted to be posted in the books, then also it will not affect the trial balance (Accounting-simplified.com, 2018).

	Would the error cause the Trial Balance not to balance		Which accounts would be affected and how?	How would the error be corrected	Effect on Trial Balance totals
	Yes	No			Debit	Credit
Example A payment for wages of $500 was credited to cash correctly but debited to wages twice expense.	Yes		Wages expense	Debit side of Wages Expense reduced by 500	$ (500)
1. The Accrued Wages account with a balance of $500 was omitted from the Trial Balance.	Yes		Accrued Wages	Credit side of Accrued Wages to be increased by 500		$ 500
2. A payment of $490 for Prepaid Rent was only posted to the Cash at Bank account and not to Prepaid Rent	Yes		Prepaid Rent	Debit side of Prepaid rent account to be increased by 490	$ 490
3. A debit of $458 to Cash at Bank was posted as $485. The credit entry was correct.	Yes		Cash at bank	Debit side of cash at bank account to be reduced by $27	$ (27)
4. A credit of $600 to Accounts Payable should have been made to Fees Revenue		No	Accounts Payable, Fees revenue	Credit side of accounts payable to be reduced by $600, and credit side of fees revenue account is increased by $600	$ -
5. A Dr for a cash receipt of $500 from customers in settlement of their accounts was posted twice as a DR to the Cash at Bank and a Dr to Accounts Receivable accounts	Yes		Cash at bank	Debit side of cash at bank account to be reduced by $500	$ (500)
6. The Prepaid Expense balance of $7280 was listed in the Trial Balance as $7820	Yes		Prepaid Expense	Debit side of prepaid expense account to be reduced by $540	$ (540)
7. A $5210 credit to Fees Revenue was posted as a $521 credit. The debit entry to Accounts Receivable was made correctly.	Yes		Fees revenue	Credit side of fees revenue account to be increased by $4689		$ 4,689
8. A purchase of office equipment for $3300 on credit was not recorded.		No	Office equipment, accounts payable	Debit side of office equipment to be increased by $3300 and credit side of accounts payable to be increased by $3300	$ 3,300	$ 3,300
9. A purchase of Furniture for $7500 using a loan was posted as a debit to the Loan Payable account and a debit to the Equipment account.	Yes		Loan Payable	Credit side of loan payable account to be increased by $15,000		$ 15,000
10. The drawings account balance was listed as a credit for $1500.	Yes		Drawings	Debit side of the Drawings account to be increased by $3000	$ 3,000

Matching principle is the basic accounting principle, which states that the expenses should be booked in the period in which associated income is booked. This principle works best with accrual method of accounting, but is not in line with cash method of accounting. Under accrual method of accounting, the expenses are booked on accrual basis, i.e. when they are incurred, irrespective of when their payment is made, whereas under cash basis of accounting, expenses are booked when they are actually paid in cash. So, if a company pays commission on its sales, which is required to be paid in the following month of sale let’s say for December sales, the commission is payable in January. So, matching principle and accrual method of accounting requires the company to account for commission payable in December only whereas cash method of accounting requires the commission to be accounted for in January, i.e. when it is paid (AccountingCoach.com, 2018).

Part-B

Journal entries in the books of J. Jackson for the year ended 30^thJune, 2018

Sr. No.	Particulars	Debit ($)	Credit ($)
(i)	Wages expense (21000/5*2)	8,400
	To Wages payable		8,400
	(To record the wages payable for the 2 days in June, 18)

(ii)	Commission fees receivable	1,520
	To Commission fees		1,520
	(To record income earned but not received)

(iii)	Prepaid Rent (36000/12*7)	21,000
	To Rent expense		21,000
	(To record prepaid rent)

(iv)	Interest receivable (25,0006%1/4)	375
	To Interest income		375
	(To record interest earned but not received)

(v)	Unearned revenue (12000*30%)	3,600
	To Revenue		3,600
	(To record revenue earned)

(vi)	Office furniture	6,000
	To Office expenses		6,000
	(To record the rectifying entry)

(vii)	Supplies expense (800+5200-1500)	4,500
	To Office supplies		4,500
	(To record consumption of office supplies)

(viii)	GST Collected	7,960
	To GST Paid		7,960
	(To record the settlement of amounts)

Calculation of new profit figure

Particulars		Amount ($)
Old Profit		3,281,001
Adjustments
(Increase) / decrease in expense
Wages expense	(8,400)
Rent expense	21,000
Office furniture purchased	6,000
Supplies expenses	(4,500)	14,100

Increase / (decrease) in income
Commission fees	1,520
Interest income	375
Unearned revenue	3,600	5,495

Revised Profit		3,300,596

The four qualitative characteristics as mentioned in IASB’s conceptual framework are (Jan, 2018):

Relevance– Means the financial information should be relevant and useful to the users of the financial statements.
Materiality– All the possible information affecting the users of the financial statements should be disclosed
Faithful representation– The financial information should be free from errors and should reflect true and fair view.
Comparability– The financial information should be comparable with the financial information of other companies or for previous years.

HARDYARDS ACCOUNTING SERVICES
Worksheet for period ended 30th June, 2018

Account	Adjusted Trial Balance		Income Statement		Balance Sheet
Account	Debit	Credit	Debit	Credit	Debit	Credit
Cash at Bank	14,900				14,900
Accounts Receivable	25,825				25,825
Prepaid Expenses	2,200				2,200
Office Supplies	6,160				6,160
Accrued Revenue	2,540				2,540
GST Paid	26,000				26,000
Equipment	163,000				163,000
Accumulated Depreciation		28,000				28,000
Accounts Payable		6,320				6,320
Loan Payable		55,000				55,000
Salaries Payable		1,930				1,930
GST Collected		32,740				32,740
Unearned Revenue		2,750				2,750
B. Bright Capital		50,000				50,000
B. Bright Drawings	5,000				5,000
Painting Revenue		204,055		204,055
Wages Expenses	100,020		100,020
Rent Expense	6,550		6,550
Depreciation Expense	11,000		11,000
Marketing Expense	5,520		5,520
Office Supplies Expense	6,180		6,180
Interest on Loan Expense	5,900		5,900
	380,795	380,795	135,170	204,055	245,625	176,740
Profit						68,885
Total					245,625	245,625

Closing entries in the journal

Sr. No.	Particulars	Debit ($)	Credit ($)
1	Painting Revenue	204,055
	To Income Summary		204,055

2	Income Summary	135,170
	To Wages expense		100,020
	To Rent expense		6,550
	To Depreciation expense		11,000
	To Marketing expense		5,520
	To Office supplies expense		6,180
	To Interest on loan expense		5,900

3	Income summary	68,885
	To Retained earnings		68,885

4	B. Bright Capital	5,000
	To B. Bright Drawings		5,000

No, the way the credit are offered will not change, however the process will change at the end of the businesses as now instead of collecting the debts on their own, they will hire the factors who will collect the debts on their behalf. They need to incur additional factoring costs for this.
Yes, the firms will no longer be required to monitor their receivables. Factoring means outsourcing the collections of debts to the third party.
Not allowing the bad and doubtful debts will make the profit and loss account reflect the false picture with overstated profits and overstated accounts receivable.

Part-B

Journal Entries for June

Sr. No.	Particulars	Debit ($)	Credit ($)

(i)	Allowance for Doubtful Debts	11,510
	To Accounts Receivable		11,510
	(To record for bad debts written off)

(ii)	Cash (99550*20%)	19,910
	Accounts receivable (99550*80%)	79,640
	To GST Collected (99550/110%*10%)		9,050
	To Sales (99,550/110%)		90,500
	(To record sales during the month)

(iii)	Cash	121,600
	To Accounts receivable		121,600
	(To record cash collected from customers)

(iv)	Accounts receivable	1,870
	To Allowance for Doubtful Debts		1,870
	(To record reversal of accounts receivable)

	Cash	1,870
	To Accounts receivable		1,870
	(To record cash collected from customers)

(v)	Accounts receivable	2,200
	To Sales		2,200
	(To record sale not recorded earlier)

(vi)	Bad debts expense	13,075
	To Allowance for Doubtful Debts		13,075
	(To record bad debts expense)

Ledger Accounts

Accounts Receivable
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance	$265,400		$ 265,400
30-June	Allowance for doubtful debts		$ 11,510	$ 253,890
30-June	GST Collected	$ 7,240		$ 261,130
30-June	Sales	$ 72,400		$ 333,530
30-June	Cash		$121,600	$ 211,930
30-June	Allowance for doubtful debts	$ 1,870		$ 213,800
30-June	Cash		$ 1,870	$ 211,930
30-June	Sales	$ 2,200		$ 214,130

Allowance for Doubtful Debts
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance		$ 15,565	$ (15,565)
30-June	Accounts receivable	$ 11,510		$ (4,055)
30-June	Accounts receivable		$ 1,870	$ (5,925)
30-June	Bad debts expense		$ 13,075	$ (19,000)


Cash at Bank
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance	$106,000		$ 106,000
30-June	GST Collected	$ 1,810		$ 107,810
30-June	Sales	$ 18,100		$ 125,910
30-June	Accounts receivable	$121,600		$ 247,510
30-June	Accounts receivable	$ 1,870		$ 249,380


Sales
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance		$878,490	$(878,490)
30-June	Cash		$ 18,100	$(896,590)
30-June	Accounts receivable		$ 72,400	$(968,990)
30-June	Accounts receivable		$ 2,200	$(971,190)


GST Collected
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance
30-June	Cash		$ 1,810	$ (1,810)
30-June	Accounts receivable		$ 7,240	$ (9,050)


Bad debt expense
Date	Particulars	Dr	Cr	Balance
01-Jun	Opening balance
30-June	Allowance for doubtful debts	$ 13,075		$ 13,075

Classified Income Statement and Balance Sheet

Extract Income Statement in the books of Homewares Company Ltd
Particulars	Amount ($)
Income
Sales	$ 971,190
Expense
Bad debts expense	$ 13,075

Extract Balance Sheet in the books of Homewares Company Ltd
Particulars		Amount ($)
Assets
Current assets
Accounts receivables	$ 214,130
Less: Allowance for doubtful debts	$ (19,000)	$ 195,130
Cash		$ 249,380
Total Assets		$ 444,510

Liabilities
Current liabilities
GST Collected	$ 9,050	$ 9,050

Total Liabilities		$ 9,050

The two methods that can be used to calculate allowance for bad debts are(Cliffsnotes.com, 2018):
1. Percentage of credit sales method– In this method, bad debts are taken at a percentage of credit sales made during the year.
2. Ageing of debtors method– In this method, debtors outstanding beyond a specified period say 1 year are taken for provisioning.

Solution-5

Part-A

Calculation of the value of the machine for depreciation purposes

As per AASB 116, the cost of asset includes initial purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as per intended use. Hence, the following costs will become part of the asset cost.

Particulars	Is it a part of asset?	Remarks
Initial price paid to the supplier	Yes	Purchase cost is part of asset cost as per AASB 116
Cost to deliver the machine to the site	Yes	Delivery costs are part of asset cost as per AASB 116
Amount to paint the company name on the machine	No	Not required for putting machine to use
Amount paid to an engineer to fit the machine ready for work	Yes	Installation costs are part of asset cost as per AASB 116
Repairs to the factory door damaged when bringing in the machine	No	Since, it is not related to machine and would come under repairs
Repairs made to replace bolts which had dislodged during transit	Yes	As it is mandatory for putting machine to use

Particulars	Amount ($)
Initial price paid to the supplier	$65,000
Cost to deliver the machine to the site	$3,500
Amount paid to an engineer to fit the machine ready for work	$14,500
Repairs made to replace bolts which had dislodged during transit	$1,500
Total Machine Cost	$84,500

The best method would be straight line depreciation method.

Depreciation under SLM using years as life (84,500-7,000)/10 = $7,750
Depreciation under SLM using hours as life (84,500-7,000)/100,000*10,000 = $7,750

Assuming 10,000 hours are used in each year

Hence, no change in depreciation under both of the methods, however the depreciation may change in the 2nd method, if the usage of machine hours changes.

When the fair value of assets differ significantly from its carrying value, then the revaluation of assets is considered. It is necessary so that the assets reflect true and fair view in the books.

Part-B

Journal Entries

Sr. No.	Particulars	Debit ($)	Credit ($)

01-Mar-18	Truck 3	130,000
	GST paid	13,000
	To Cash		30,000
	To Loan payable		113,000
	(To record purchase of truck)

31-Mar-18	Depreciation	8,543
	To Accumulated Depreciation		8,543
	(To record depreciation till the date of sale)

31-Mar-18	Accumulated Depreciation	70,980
	To Truck 2		70,980
	(To record transfer of amount)

31-Mar-18	Cash	44,000
	To Truck 2		37,020
	To Profit on sale (refer WN-1)		2,980
	To GST collected		4,000
	(To record sale of truck)

30-Jun-18	Depreciation (130,0009%/124)	3,900
	To Accumulated Depreciation		3,900
	(To record deprecation for the year end)

Note: GST to be assumed at 10%

WN-1 Calculation of Profit on sale of Truck -2

Given Information	Truck 2	Truck 3
Date of purchase	1st July, 2014	1st March, 2018
Purchase cost	108,000	130000
Residual value	12,000	13000
Useful life (years)	8	10
Dep method	WDV	SLM
Dep rate	25%	9.00%

Year ended on	Opening WDV	Dep	Closing WDV
30/06/2015	108,000	27,000	81,000
30/06/2016	81,000	20,250	60,750
30/06/2017	60,750	15,188	45,563
31/03/2018	45,563	8,543	37,020
		70,980

WDV as on 31st March, 2018		37,020
Sale value (44,000/110%)		40,000
Profit on sale		2,980

Calculation of depreciation charges if the method of dep is change to SLM for Truck 2

Depreciation on Truck 2 as per WDV method
Year ended on		Opening WDV			Dep			Closing WDV
30/06/2015		108,000			27,000			81,000
30/06/2016		81,000			20,250			60,750
30/06/2017		60,750			15,188			45,563
31/03/2018		45,563			8,542.97			37,020
					70,980
Depreciation on Truck 2 as per SLM method
Depreciation rate			((108000-12000)/8)/108000 =				11.11%

Year ended on	Opening WDV			Dep		Closing WDV
30/06/2015	108,000			12,000		96,000
30/06/2016	96,000			12,000		84,000
30/06/2017	84,000			12,000		72,000
31/03/2018	72,000			9,000		63,000
				45,000

Effect on Profit under two methods of depreciation

Particulars	WDV	SLM
Revenue as on 30th June, 2017	212,000	212,000
Depreciation for the year	15,188	12,000
Revenue after depreciation	196,813	200,000

Difference between profits is $3,188 (200,000-196,813)

Solution-6

Part-A

Journal Entries

Perpetual				Periodic
Transaction	Particulars	Debit ($)	Credit ($)	Transaction	Particulars	Debit ($)	Credit ($)
1	Inventory (32*55)	1,760		1	Purchases (32*55)	1,760
	To Accounts payable		1,760		To Accounts payable		1,760

2	Accounts payable	110		2	Accounts payable	110
	To Inventory (2*55)		110		To Purchase return (2*55)		110

3	Accounts receivable (58*180)	10,440		3	Accounts receivable (58*180)	10,440
	To Sales		10,440		To Sales		10,440

	Cost of goods sold (58*48)	2,784
	To Inventory		2,784

4	Sales return (2*180)	360		4	Sales return (2*180)	360
	To Accounts receivable		360		To Accounts receivable		360

	Stock loss (2*48)	96			Inventory (ending)	3,570
	To Cost of goods sold		96		COGS	2,880
					To Inventory (opening)		4,800
5	Stock loss (2*48)	96			To Purchases		1,650
	To Inventory		96

Income Statement

Income Statement under Perpetual Method

Particulars	Amount ($)
Sales	10,440
Less: Sales return	(360)
Less: Cost of goods sold	(2,688)
Less: Stock loss	(192)
Gross Profit	7,200

Income Statement under Periodic Method

Particulars	Amount ($)
Sales	10,440
Less: Sales return	(360)
Less: Cost of goods sold	(2,880)
Gross Profit	7,200

Perpetual method is preferable because it provides the real time details of inventory, sale and purchases.

As per accounting standards, the inventory should be measured at lower of cost of NRV, NRV or net realizable value means the amount at which the inventory can be sold in the open market.

Part-B

Identifying the approach and method adopted for below items on the basis of Annual Report 2017 of Super Retail Group:
Revenue Recognition- Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, duties and taxes paid.

Inventory Valuation- Inventories are measured at the lower of cost and net realisable value. Costs are assigned to individual items of stock on the basis of weighted average costs.
Depreciation of non-current assets- Depreciation and amortisation are calculated on a straight line basis for accounting and on a diminishing value basis for tax. Depreciation and amortisation allocates the cost of an item of property, plant and equipment net of residual values over the expected useful life of each asset to the consolidated entity.

The company makes the following statement:
Ethical Practice- We are committed to romoting better working conditions in our global supply chain and ensuring the products we provide to our customers are ethically and sustainably sourced.

Sustainability- At Super Retail Group we share your passion to make our world a cleaner, healthier and happier place. We recognise the important role we have to play ensuring the well-being of the environment and the communities in which we operate.

References:

AccountingCoach.com. (2018). What is the matching principle? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/what-is-the-matching-principle [Accessed 4 May 2018].

Accounting-simplified.com. (2018). Trial Balance | Explanation & Example. [online] Available at: https://accounting-simplified.com/trial-balance.html [Accessed 4 May 2018].

Jan, O. (2018). Qualitative Characteristics of Financial Information. [online] accountingexplained.com. Available at: https://accountingexplained.com/financial/principles/qualitative-characteristics [Accessed 4 May 2018].

Cliffsnotes.com. (2018). Estimating Bad Debts—Allowance Method. [online] Available at: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/receivables/estimating-bad-debts-allowance-method [Accessed 4 May 2018].

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