First edition published 1994 (reprinted 4 times) Second edition published 1999 (reprinted twice) Third edition published 2002 (reprinted 5 times) Fourth edition published 2006 (reprinted 5 times) Fifth edition published 2011 by
macmillan education australia pty ltd
15–19 Claremont Street, South Yarra, VIC, 3141 Visit our website at www.macmillan.com.au Associated companies and representatives throughout the world.
Copyright © Neville Box 1994, 1999, 2002, 2006, 2011 The moral rights of the author have been asserted. All rights reserved.
Except under the conditions described in the
Copyright Act 1968 of Australia (the Act) and subsequent amendments, no part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of the copyright owner. Educational institutions copying any part of this book for educational purposes under the Act must be covered by a Copyright Agency Limited (CAL) licence for educational institutions and must have given a remuneration notice to CAL.
Licence restrictions must be adhered to. For details of the CAL licence contact: Copyright Agency Limited, Level 15, 233 Castlereagh Street, Sydney, NSW 2000. Telephone: (02) 9394 7600. Facsimile: (02) 9394 7601. Email: [email protected] National Library of Australia Cataloguing-in-Publication entry
Author: Box, Neville.
Title: VCE Accounting : Units 3 & 4 / Neville Box. Edition: 5th ed.
ISBN: 978 1 4202 3058 1 (pbk.) Target Audience: For secondary school age.
Subjects: Accounting—Problems, exercises, etc. Accounting—Study and teaching (Secondary)—Victoria. Victorian Certificate of Education examination—Study guides.
Dewey Number: 657.044 Publisher: Benjamin James Project editor: Laura Howell Editor: Carolyn Leslie
Illustrators: Marg Jackson, Guy Holt Cover designer: Dimitrios Frangoulis Text designer: Polar Design
Production control: Loran McDougall Permissions clearance: Liz Sim Photo research: Kait Jordan
Typeset in 10.75 pt ITC Garamond by Marg Jackson, Emtype Desktop Publishing Cover image: Getty Images/Helen Ashford
Indexer: Fay Donlevy Printed in Malaysia Internet addresses
At the time of printing, the internet addresses appearing in this book were correct. Owing to the dynamic nature of the internet, however, we cannot guarantee that all these addresses will remain correct.
iv ❯ Contents
C h a p t e r
4The double entry recording process
57
4.1 Double entry accounting: an introduction 58 4.2 Double entry for revenues and expenses 62 4.3 Footing and balancing ledger accounts 65
4.4 The role of the trial balance 67
4.5 Detecting errors through a trial balance 68 4.6 Alternative presentation of a trial balance 68 4.7 Case study: from transactions to the balance sheet 69
4.8 Accounting for drawings 73
Glossary of terms 73
Summary questions 74
Practical exercises 75
Case study 84
C h a p t e r
5Special journals: cash transactions
86
5.1 The need for special journals 87
5.2 The role of special journals 87
5.3 Recording in the cash receipts journal 88 5.4 Recording in the cash payments journal 92 5.5 Recording cash discounts for debtors and creditors 95
Glossary of terms 98
Summary questions 98
Practical exercises 99
C h a p t e r
6Credit sales and credit purchases journals
105
6.1 Credit transactions 106
6.2 Recording in the credit sales journal 106 6.3 The need for control accounts 109
6.4 Debtors schedules 110
6.5 The cash receipts journal and debtors control 111 6.6 Recording in the credit purchases journal 111 6.7 The creditors control account 113
6.8 Creditors schedules 114
6.9 The cash payments journal and creditors control 114 6.10 Advantages and disadvantages of control accounts 115
Glossary of terms 116
Summary questions 117
Practical exercises 118
Case study 130
C h a p t e r
7The general journal
131
v ❯Contents
7.8 Accounting for bad debts 140
7.9 Correcting recording errors through the general journal 143
Glossary of terms 145
Summary questions 146
Practical exercises 147
C h a p t e r
8Accounting for the goods and services tax (GST)
153
8.1 The GST: an introduction 154
8.2 GST and the sales journal 154
8.3 GST and the purchases journal 156
8.4 The GST clearing account 157
8.5 GST and the cash receipts journal 159 8.6 GST and the cash payments journal 161 8.7 GST and double entry accounting 164
Glossary of terms 165
Summary questions 165
Practical exercises 166
Case study 171
C h a p t e r
9The perpetual inventory system
175
9.1 What is inventory? 176
9.2 The physical stocktake 176
9.3 What is perpetual inventory? 177
9.4 The stock control account 178
9.5 Double entry under the perpetual method: a summary 179 9.6 Identifying the cost price of sales 179 9.7 First in, first out stock valuation 183
9.8 The role of stock cards 184
9.9 Stock cards and the general ledger 186 9.10 Stock losses and stock gains 187 9.11 Recording stock losses and gains 188 9.12 Donations of goods as advertising 192 9.13 From stock cards to journals 193
Glossary of terms 197
Summary questions 198
Practical exercises 199
C h a p t e r
10Closing the general ledger
212
10.1 The closing of the general ledger 213 10.2 The profit and loss summary account 213
10.3 Closing a ledger account 214
10.4 The general journal and closing entries 215 10.5 The general journal: transfer of net profit 216 10.6 Closing entries: accounting for a net loss 218 10.7 Case study: the closing of the ledger 219
Glossary of terms 222
Summary questions 223
vi ❯ Contents
C h a p t e r
11Income statements
231
11.1 The income statement 232
11.2 Preparing an income statement 232 11.3 The link between profit and the balance sheet 234 11.4 Evaluating a net profit figure 234 11.5 Cost of goods sold and gross profit 235
11.6 Reporting discounts 237
Glossary of terms 238
Summary questions 238
Practical exercises 239
Case study 245
C h a p t e r
12Cash flow statements: an introduction
246
12.1 The role of the cash flow statement 247 12.2 Classification of cash flows 247
12.3 The concept of cash 249
12.4 The format of the cash flow statement 249 12.5 Preparing a cash flow statement 252 12.6 Cash flows and decision-making 254
Glossary of terms 255
Summary questions 255
Practical exercises 257
Case study 266
C h a p t e r
13Depreciation of non-current assets
269
13.1 The meaning of depreciation 270
13.2 The meaning of cost 270
13.3 Straight-line method of depreciation 271 13.4 The adjusting entry for depreciation 272 13.5 Depreciation and the balance sheet 275 13.6 Depreciation and the income statement 276
Glossary of terms 276
Summary questions 277
Practical exercises 278
Case study 281
C h a p t e r
14Profit determination and balance day adjustments
282
14.1 Profit determination: underlying assumptions 283 14.2 Accrual accounting and balance day adjustments 284 14.3 Prepaid expenses (the asset approach) 284 14.4 Accrued expenses (expenses owing) 287
14.5 Stock losses and gains 290
14.6 Case study: adjusting and closing entries 291
14.7 The adjusted trial balance 297
Glossary of terms 298
Summary questions 299
Practical exercises 300
Case study 308
vii ❯Contents
Control and analysis of business performance
325
C h a p t e r
15Accounting for sales returns and purchases returns
326
15.1 Credit notes for returns 327
15.2 Purchases returns 327
15.3 Sales returns 330
15.4 Recording returns in stock cards 332
Glossary of terms 336
Summary questions 337
Practical exercises 337
C h a p t e r
16The reducing balance method of depreciation
346
16.1 The need for an alternative method of depreciation 347 16.2 The straight-line method of depreciation 347 16.3 The reducing balance method of depreciation 348 16.4 Depreciation methods: a comparison 350 16.5 Depreciation methods: which one to use? 354
Glossary of terms 355
Summary questions 355
Practical exercises 356
C h a p t e r
17Buying and selling non-current assets
360
17.1 Recording credit purchases of non-current assets 361 17.2 Disposal of non-current assets 362 17.3 Trading in non-current assets 365
Glossary of terms 368
Summary questions 369
Practical exercises 369
Case study 374
C h a p t e r
18Inventory valuation
375
18.1 Product costs versus period costs 376 18.2 Lower of cost and net realisable value 377 18.3 Determining the NRV of a product 381
Glossary of terms 383
Summary questions 383
Practical exercises 384
Case study 389
C h a p t e r
19Balance day adjustments: prepaid revenue and accrued revenue
391
19.1 What is revenue earned for a period? 392 19.2 Prepaid revenue (the liability approach) 392
19.3 Prepaid sales revenue 395
19.4 Accrued revenue (revenue owing) 398
Glossary of terms 401
Summary questions 402
Practical exercises 403
Case study 1 407
Case study 2 409
viii ❯ Contents
C h a p t e r
20Managing and controlling debtors, creditors and stock
411
20.1 Controlling inventory 412
20.2 Evaluating stock turnover 416
20.3 Controlling debtors 419
20.4 Evaluating debtors turnover 421
20.5 Evaluating the cash cycle 423
20.6 Evaluating creditors turnover 424
Glossary of terms 427
Summary questions 428
Practical exercises 429
Case study 434
C h a p t e r
21Budgeting: planning for the future
435
21.1 The need for budgeting 436
21.2 Cash budgeting 437
21.3 Case study: preparing a budgeted cash flow statement 439
21.4 Budgeted income statements 444
21.5 Case study: preparing a budgeted income statement 445
21.6 The budgeted balance sheet 447
21.7 Case study: preparing a budgeted balance sheet 447
21.8 Budget variance reports 450
Glossary of terms 454
Summary questions 455
Practical exercises 456
Case study 468
Internet activity 469
C h a p t e r
22Analysis and interpretation of accounting reports
470
22.1 The role of analysis and interpretation 471 22.2 Distinguishing between analysis and interpretation 471
22.3 Analytical ratios 475
22.4 Ratio benchmarks 476
22.5 Types of analytical ratios 476
22.6 Profitability ratios 477
22.7 Operating efficiency ratios 482
22.8 Efficiency ratios and profitability 485
22.9 Liquidity analysis 486
22.10 Liquidity analysis and cash flows 489 22.11 Gearing and financial stability 491 22.12 Gearing and the rate of return on owner’s investment 492
22.13 Other analysis tools 494
22.14 Limitations of ratio analysis 498
Glossary of terms 498
Summary questions 499
Practical exercises 501
Case study 510
Internet activity 512
