Reconstruction of accounts and error correction
1/07/2017 3:53 PM Lecture
T accounting (Part 1)
The video lecture for this topic is in two parts, which together look at steps 3-5 of the accounting, cycle as follows:
3. Journalise the transaction
4. Post from the journal to the General Ledger 5. Prepare a Trial Balance.
We will be revisiting step 4 and looking at the function of the t account.
The first function of the t account would be that of a ledger account (Part 1), and the second function is where we use the t account to find missing information (Part 2).
Part 1 will demonstrate the process of posting information from the general journal to ledger t accounts. It will also show you how to close each account. There is an online activity which you should complete after viewing Part 1. This will let you test your ability to close a t account.
Focus on the function of the T Account
• We use the T account to find missing information
Aim: to use a general journal entry from the previous lecture (week 2) and post to a T account.
To facilitate this we will:
1. Create a T Account
2. Post transactions to the T Account
3. Once all the transactions are posted, close the T Account 4. Open the T Account for the next accounting period
Using e.g.
1. Create a T account for each account that appears in the general journal
Date Name of Acc. Acc. Number Dr Cr
1.7.2016 Cash at Bank 1-1000 10,000
Sales 4-1000 10,000
Cash sales of $10,000
2.7.2016 Acc. Reci. - Apple 1-1200 30,000
Sales 4-1000 30,000 Sales on Credit
31.7.2016 Cash at Bank 1-1000 20,000
Acc. Reci. - Apple 1-1200 20,000
Payment received from Apple
1.8.2016 Office Equip. 1-3000 4,000
Cash at Bank 1-1000 4,000
Purchased a computer for $4,000 cash
A/C Name Cash at bank Acc. No: 1-1000
Date Details Dr Date Details Cr
1.7.16 Sales 10,000 1.8.16 Office Equip. 4,000 31.7.16 Acc. Rec. 20,000 c/d. Rec. 26,000 31.7.16 Total 30,000 31.7.16 Acc. Rec. 30,000 1.9.16 b/d. Rec. 26,000
A/C Name Sales Acc. No: 4-1000
Date Details Dr Date Details Cr
1.7.16 Cash at Bank 10,000 1 .c/d 40,000 2.7.16 Acc. Rec. 30,000 31.7.16 40,000 31.7.16 Total 40,000 31.7.16 Total 40,000 1.9.16 b/d 40,000
A/C Name Accounts Receivable - Apple Acc. No: 1-1200
Date Details Dr Date Details Cr
2.7.16 Sales 30,000 31.7.16 Cash at Bank 20,000 2.7.16 Sales 30,000 31.7.16 c/d 10,000
Total 30,000 20,000
A/C Name Office Equipment Acc. No: 1-3000
Date Details Dr Date Details Cr
1.8.16 Cash at Bank 4,000
2. Close the accounts
• Sum the largest column first
• Whatever the largest column sums to, immediately the opposite side does as well
• The carried down amount is added to the opposite side of the T account to balance both amounts
• The brought down amount is placed under the total amount on the side where the largest sum is to indicate how much was carried down to balance both sides
T accounting (Part 2)
Once you have closed each account, Part 2 demonstrates the process of posting these accounts to a trial balance and checking that the debit and the credit columns balance.
It then explains the second function of t account and shows you how to reconstruct accounts without having access to all the information
3. post the t accounts to the Trail Balance
• The trial balance is ordered in account number order also profit and loss/balance sheet (in order of liquidity)
Second function of the t accounts:
Account associations:
• Accounts receivables and sales
• Accounts payable and purchases
e.g. assume the only records available relating to accounts receivable are
• Opening balance $2,400
• Closing balance $4,200
• $65,000 cash received on 1/3/16
• $850 of cheques dishonoured on 4/3/16
• $8,000 bills receivable received on 1/5/16 How would we determine the credit sales for the 30/6/16 1. reconstruct t account
i. draw t account
ii. title the t account with the account name and account number iii. post the info you have been given (date, details and amount)
A/C Name Accounts Receivable Acc. No: 1-2000 Date Details Dr Date Details Cr
1.7.16 b/d 2,400 1.3.16 Sales 65,000 4.3.16 Dishon Cheques. 850 1.5.16 Bills Receiv. 8,000 31.7.16 Credit Sales 73,950 c/d 4,200 1.3.16 Total 77,200 1.3.16 Total 77,200
*missing figure
Tutorial preparation
After you have completed your textbook reading and viewed and taken notes on the video lecture pod provided above, you should complete the following activities to ensure you are prepared for this week’s tutorial class. Completing this work prior to class will ensure that you are prepared to participate effectively and fully benefit from our class activities and discussion.
Complete your homework for the previous week and make note of any questions or problems you would like to discuss in class.
Make some notes on the key concepts covered in the textbook reading and lecture pod – make sure you identify anything that you are unclear about or any questions you would like to ask in regard to this material.
Note: The first two weeks have focused on prerequisite material and company formations. From this week onwards we will be moving onto to more calculative work and therefore you will be required to bring your textbook, calculator, pens and paper to class.
Tutorial outline
The tutorial will be an active, engaged and collaborative learning
opportunity, so be ready to participate. In this class we will complete the following activities:
• Competitive quiz game using 'Kahoot' to test your learning
• Review of homework questions from the previous week
• Collaborative activity setting up and closing t accounts
• Complete a problem from the textbook.
Accounting for Receivables and Payables
1/07/2017 3:53 PM Receivables:
• Bad Debts
o Relates to accounts receivable, usually recognised at the time of sale
o Not all amounts owing (accs. receiv.) will be collected – referred to as bad and doubtful debts, a common risk associated with businesses that make sales on credit o This is minimised by credit checks, however there will still
be unpaid amounts
o Accounts receivable is written off periodically when it is assessed that the account will not be paid
Ways to account for bad debts:
• Allowance method – you need to estimate the amount of
doubtful debts at the end of the period. Once estimate is made, you journalise an adjusting entry recognising the expense an the contra-asset.
The Journal is as follows:
Date Account Dr Cr 30.6.2016 Bad Debts Expense 1,000
30.6.2016 Allowance for Doubtful Debts 1,000 - Estimated bad debts expense
There are two methods to account for the amount of the allowance:
1. Percentage of net credit sales: when applying the percentage of net credit sales you analyse the history of bad debts to establish a
relationship between credit sales and bad debts (GST is excluded from the calculation as it is based on sales, not accounts receivable)
Step 1: what are the net credit sales?
Total sales – sales returns = net credit sales x estimated % Step 2: Journal as of end of financial year
Date Account Dr Cr 30.6.2016 Bad Debts Expense 1,000
30.6.2016 Allowance for Doubtful Debts 1,000 - Bad debts expense for the year of % net credit sales
2. Ageing of accounts receivable: the ageing of accounts receivable method is based on the length of time the accounts are overdue (the older the account, the less chance of receiving payment) **make sure GST is removed)
Direct Write-off method:
• This method is used when there is no allowance account
• Charged to the expense account when the debt is considered the be uncollectable
E.g.
Dr Bad debt expense Dr GST Collections
Cr Accounts Receivable
• Bills Receivables
o Sometimes credit is only granted with formal instruments such as a bill of exchange or a promissory note
§ Bill of exchange: a written order made by a debtor to pay a certain amount of money on a predetermined date in the future
§ Promissory note: a written promise made by a debtor to pay a certain amount of money on a
predetermined future date in the future **the
predetermined date is known as the maturity date**
How to account for bills receivable:
Step 1: calculate the interest revenue that will be earned on settlement of the bill
= bill amount x interest rate % x days/365 Dr Bills Receivable
Cr Accounts Receivable
Cr Unearned Interest Revenue
- Receipt of a note in settlement of an account receivable
2 journals for when payment is received on the maturity date:
1st Journal:
Dr Cash at Bank Cr Bills Receivable
- Collection of promissory note
2nd Journal:
Dr Unearned Interest Revenue Cr Interest Revenue
- Interest earned on note
Payables:
• Bills Payable
o Like bills receivable, it is recognised by a bill of exchange or a promissory note
= amount x % x days/365
Dr Accounts payable Dr Unexpired Interest Cr Bills Payable
- Receipt of bill for account payable
Journal for making the payment at maturity date (Once again a two part journal)
1st Journal:
Dr Bills Payable Cr Cash at Bank - Payment of bill
2nd Journal:
Dr Interest Expense Cr Unexpired Interest
- Recognising unexpired interest
• Provision for warranties
** reasonably accurate estimates can be made based on past experience and the use of professional judgement. You need to set up a provision account and then any warranty returns are debited to the provision account.
E.g. establish a provision for warranty
1st: calculate the provision amount
= sold quantity x percentage requiring warranty repairs % x average warranty claim
Journal entry:
Dr Warranty Expense
Cr Provision for warranties
- provision for warranty expense related to sales made in the year end June 30
E.g. Journalise the warranty repair Journal entry:
Dr Provision for warranties Cr Cash at Bank
- warranty costs incurred
