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VCTA A Walk through the new exam format and the new aspects of Unit 3. Vicki Baron Celia Mara Haileybury Toorak College. New Study Design – Points to Note. Unit 3 – Area of Study 1 - Outcome 1 2007 – 2011

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vcta a walk through the new exam format and the new aspects of unit 3

VCTAA Walk through the new exam format and the new aspects of Unit 3

Vicki Baron Celia Mara

Haileybury Toorak College

new study design points to note
New Study Design – Points to Note

Unit 3 – Area of Study 1 - Outcome 1

2007 – 2011

  • On completion of this unit the student should be able to record financial data into appropriate accounting records using a double entry accrual-based system for a single activity sole trader, and explain related aspects of this accounting system.

2012 – 2016

  • On completion of this unit the student should be able to record financial data for a single activity sole trader using a double entry system, and discuss the function of various aspects of this accounting system
new study design points to note1
New Study Design – Points to Note
  • Unit 3 – Area of Study 2 - Outcome 2

2007 – 2011

On completion of this unit the student should be able to record balance day adjustments, prepare financial reports and explain related aspects of the accounting system

2012 – 2016

On completion of this unit the student should be able to record balance day adjustments and prepare and interpret accounting reports.

the new additions to 2012
The New Additions to 2012
  • General Journal entries for
    • Contribution of non-current assets by the owner at agreed value
    • Use of stock for advertising purposes
  • The distinction between historical cost and agreed value in relation to non-current assets
  • Posting to the general ledger from the general journal and special journals on a monthly basis
  • Process of balancing the general ledger and subsidiary ledger accounts in preparation for the next reporting period
  • Reasons for using control accounts
  • Internal control procedures and practices of this accounting system
  • Classified Accounting reports
    • Cash Flow Statement
    • Income Statement
    • Balance Sheet
impact on the classroom
Impact on the classroom
  • Teaching and Learning activities to meet NEW key knowledge
    • Principles and Concepts can be introduced at APPLICABLE moments
    • Students MUST be able to RECORD and REPORT BDA’s
    • Students MUST be able to show knowledge of how to PAY accrued expenses in subsequent reporting periods
    • Students MUST be taught new terminology of ‘Income Statement’
impact on the classroom1
Impact on the classroom
  • Teaching and Learning activities to meet NEW key skills
    • Students MUST be able to also REPORT accounting information
    • Students MUST be able to EXPLAIN and APPLY the characteristics and principles underlying the recording of financial data and the reporting and presentation of accounting information
    • Students MUST be able to DISCUSS the effect of financial transactions on the accounting equation and accounting reports
    • Students MUST be able to PREPARE, EXPLAIN and INTERPRET Accounting reports
    • Students MUST be able DISTINGUISH between cash and profit and EXPLAIN the effect on accounting reports
    • Students MUST be able to DISCUSS the function of the various aspects of the accounting system for a single activity trading business
      • http://www.vcaa.vic.edu.au/vcaa/vce/studies/account/TeachingLearningUnit3.pdf
unit 3 outcome 1
Unit 3 – Outcome 1

Relevant points from new study design

The process of posting to the general ledger from the general journal and special journals on a monthly basis

The process of posting to the general ledger and subsidiary ledger accounts in preparation for the next reporting period

Different Ways we can get our students to practice this:

  • Present them with already completed journals, over a 3 month period and demonstrated the journals being posted to the General Ledger
  • A prepaid expense question where expense has been prepaid quarterly in advance and show posting to General Ledger
  • An accrued expense question where outstanding accrued amount is paid at the beginning of the quarter and there is an outstanding balance at the end of the quarter.
  • Present them with a trial balance assuming a business reports quarterly
completed journals example
Completed Journals example
  • The bookkeeper for Aaron’s Antiques provided the following journal extract for the 3 month period ending 30 June 2012:
prepaid expense example
Prepaid Expense Example

Question 1: On 1 September 2011 Jim Laurence commenced trading as Woodstock Neckwear. A firm that specialises in men’s formals neckwear. Their accounting system is set up using the accrual method of accounting and their reporting period is 30 June each year.

  • On the 1st September 2011, Jim paid $1200, plus GST for 6 months insurance on the business premises. During February 2012 he was informed that the insurance would increase to $250 per month. On 27 February 2012, Jim paid $1650, including $150 GST, to cover insurance for March to August 2012 (chq 123)
  • Complete the Prepaid InsuranceExpense account as it would appear in the General Ledger after all adjusting and balancing entries were made and in preparation for the commencement of the next reporting period
prepaid insurance example
Prepaid Insurance Example
  • Cash Payments Journal would have included both of these cash payments of Insurance
  • Each MONTH the Cash Payments journal would have been transferred to the General Ledger, thus 2 entries into the Prepaid Insurance Expense General Ledger
accrued expense example
Accrued Expense Example
  • Wages expense is currently $10 000 per month, paid in arrears on and up to the 15th of each month.
  • The following information relates to wages for the business:

• Accrued wages at 1 October 2009 – $5 000

• Payments to employees for wages on 15 October were $10 000

• During November 2009 a wage increase of 20% was approved, effective from 16 December 2009

• Wages owing at 31 December 2009 – $6 000

  • Record the wages payments in the Cash Payments Journal for

• 15 October (Chq. 473)

• 15 November (Chq. 491)

• 15 December (Chq. 522).

  • Show how the

• Wages Expense account

• Accrued Wages account 

would appear after all information has been recorded and posted in preparation for the next reporting period.

trial balance example
Trial Balance example

Additional Information:

  • The business reports yearly on 30the June
  • Rent is paid quarterly commencing on 1 September each year.
  • The Prepaid Rent amount represents rent paid for this financial year ($24000), plus the balance from the previous reporting period.
  • Show how the Prepaid Rent and Rent Expense accounts would appear after all appropriate entries have been posted. You are required to balance and/or close the accounts
changes to exam format
Changes to Exam Format
  • Multiple questions
  • Stand alone theory question(s)
  • Higher order skills being examined
  • Aspects of the accounting system
    • Understanding what they are and how they function
    • Strengths and weaknesses of these aspects
changes to exam format1
Changes to Exam Format
  • Explain the effect of financial transactions on the accounting equation and accounting reports

Repaid a loan $100 and interest on the loan of $10

  • The repayment of the loan and interest will decrease the Bank by $110 and reduce the current liability of the loan by $100 and will also reduce the owner’s equity (net profit) of the business by $100 as the interest on the loan is an expense.
double entry
Double Entry
  • What is it?
    • Double entry accounting means recording in ledger accounts whereby at least two ledger accounts are affected by each transaction
  • How does it operate?
    • Two entries are made for each transaction – one entry as a debit to one account and the other entry a credit to the other account. These two transactions keep the accounting equation (A=L+OE) in balance
  • What is the ‘two-fold effect’?
    • The two fold effect takes the form of debits and credits. For each debit there is an equal and opposite credit and the sum of all debits must equal the sum of all credits.
  • Advantages and limitations /benefits and costs to the business
  • Is double entry used when recording in subsidiary ledgers?
    • No - double entry is maintained in the General Ledger only – the individual ledgers in the subsidiary ledgers reflect only the transactions from the Control Account
  • Question to consider:
    • Is double entry always the best recording system for all businesses? Why/why not?
      • Double entry accounting provides for
        • An accurate calculation of profit/loss
        • Preparation of financial reports directly from the ledger
        • Easier detection of errors and fraud
        • Accurate bookkeeping is required for owners and managers to understand the financial status of their business
documents
Documents
  • What is the purpose of the source document?
    • describes the basic facts of the transaction and
    • is the initial input to the accounting process and
    • serves as verifiable evidence of the transaction
    • provides the information required to analyse and classify the transaction and to create the journal entries
special journals
Special Journals
  • What is a journal?
    • A chronological listing of the firm’s transactions, including the amounts, accounts that are affected and the direction the accounts are affected. Known as the book of original entry
  • What are the special journals?
    • A journal which groups specific types of transactions and allows for improved efficiency and organisation in the accounting system
    • The journals provide a link between the ledger entries and the source documents
  • Benefits and costs to the business / advantages and limitations
    • Summarises similar transactions
    • Allowing totals to be posted to the general ledger
    • Allows for the removal of bulky detail from the general ledger
    • However involves additional recording which may require additional staff and increase costs
  • Why are the special journals constructed differently from each other?
  • Which ledger accounts are affected when special journals are balanced and transferred to the general ledger?
  • Question to consider:
    • Should all recording systems include special journals for Cash Receipts, Cash Payments, Credit Sales and Credit Purchases? Why/why not?
      • It is up to each business to determine which journals to use based on their own circumstances and needs. If for example they do not purchase or purchase limited stock on credit they may not require the need for a Purchases Journal
the general ledger
The General Ledger
  • What is the purpose of the general ledger?
    • The general ledger is a collection of T-accounts to which debits and credits are transferred and facilitates the tracking of individual account balances
  • What is the purpose of the subsidiary ledgers?
    • To record the individual transactions which affect debtors, creditors and stock items on the date that they occur
    • Allows for the removal of this bulky detail pertaining to individual accounts from the general ledger
the trial balance
The Trial Balance
  • What is the purpose of the trial balance?
    • To verify the accuracy of the double entry recording as the sum of all debits in the general ledger must equal the sum of all credits
    • Used as a tool for detecting errors
    • Calculated by summing the balances of all the ledger accounts
    • Prepared prior to the preparation of final reports
  • Can a balanced trial balance still be incorrect?
    • Omission of an entry
    • A journal entry posted to the wrong ledger account
    • Reversal of debit and credit entries
control accounts
Control Accounts
  • Which areas do we have control accounts for?
  • How do they operate?
  • How are they reconciled?
  • Advantages and limitations
  • Benefits and costs to the business
  • Questions to consider:
    • Should control accounts always be used? Should they be limited to debtors, creditors and stock? Justify your answers.
process of balancing accounts
Process of balancing accounts
  • Why should accounts be balanced?
    • Assets and liabilities will exist into the future. That is, the Balance Sheet items involve a future benefit or future sacrifice and so should not be reset to zero, but their balances should carry forward into the next Reporting Period.
  • Why do businesses need to prepare for the next reporting period? What would happen if accounts weren’t balanced?
    • Once the length of the reporting period has been established it is important for decision making to ensure that accounts relate only to the period under consideration in order for decisions to be made
  • Benefits/costs to the business
    • Allows for the accounts to be prepared in preparation for the next reporting period.
  • The difference between footing and balancing an account
    • Footing – an informal process used to determine the balance of a ledger account
    • Balancing – ruling off an A, L and OE account to determine its balance at the end of the reporting period and transferring that balance to the next reporting period.
  • Where are the balances of accounts shown in reports?
    • Balance of all revenue and expense accounts are shown in the Income Statement
    • Balances of all Asset, Liability and Owner’s Equity accounts are reflected in the Balance Sheet
  • Question to consider:
    • Are all accounts balanced? Why/why not?
stockcards
Stockcards
  • What is the purpose of a stock card?
  • What is the First-In, First Out (FIFO) method of managing stock?
  • Definition of perpetual inventory method
  • How does the business check the stock record is accurate?
  • Costs/benefits to the business
  • How are details of the stock cards entered into the general ledger?
  • Question to consider:
    • Should all businesses use the perpetual inventory method? Why/why not?
changes to exam format2
Changes to Exam Format
  • Explain the effect of financial transactions on the accounting equation and accounting reports

Repaid a loan $100 and interest on the loan of $10

  • The repayment of the loan and interest will decrease the Bank by $110 and reduce the current liability of the loan by $100 and will also reduce the owner’s equity (net profit) of the business by $10 as the interest on the loan is an expense.
approaching extended theory
Approaching extended theory
  • On 30 June 2012 the owner decided to contribute his personal vehicle to the business which he purchased in July 2011 for $55 000 including GST. The accountant has valued the vehicle at $45 000.

Justify with reference to qualitative characteristics and accounting principles the value at which the vehicle should be reported in the Balance sheet

sample solution
Sample solution
  • The vehicle should be reported by the business at $45 000 (1) as this is the agreed value that is regarded as the accepted value of a non-cash asset at the time of its contribution by the owner.(1)
  • Whilst $50 000 is the historical cost of the vehicle, that is the original purchase price of the non current asset which can be verified by a source document (1) and so provides a reliable value for the vehicle which is free from bias (1), this value is no longer useful or relevant for decision making.(1)
  • The future economic benefit the vehicle is expected to provide to the business is less than its original purchase price and it is important to recognise this so that when allocating the cost of the vehicle as an expense against revenue (via depreciation expense) expenses are not overstated and net profit understated. The reporting period principle requires that revenues earned be matched against expenses incurred to accurately calculate net profit.
  • The GST has no impact on the valuation of the vehicle as this amount was paid by the owner and is not included in the historical cost of the vehicle.
approaching extended theory1
Approaching extended theory
  • The owner is convinced that if they use the FIFO method of cost assignment that the stock on hand will reflect the most recent purchases.
  • Explain the FIFO method of cost assignment and explain to the owner if they are correct. In your response discuss the implications of using this system on the valuation of stock on hand, cost of sales and net profit
sample solution1
Sample solution
  • FIFO stock valuation assumes that the first stock purchased by the business is the first stock that is sold by the business. Many businesses use this method for stock valuation because it is too difficult to individually/label each individual item of stock, especially when the stock items are small and are of relatively low value. The owner believes it is not worth the time, effort and additional cost. Without physically labelling every item of stock there is no way the owner can match the stock items sold with the actual cost price.
  • FIFO is applied to all transactions in the OUT column of the stock card, but it is an assumption only. The business makes an assumption about the cost price of stock as they have no way of knowing for certain the exact cost price for the stock as without marking the stock there is no way of knowing the cost price for the stock that has been sold. (Smarties task)
  • In times of rising prices the valuation of stock on hand in the Balance Sheet will be higher as the stock is reported at the most recent purchases which are the most expensive (prices are rising). As the earlier stock purchased (which is cheaper) is sold first under the FIFO assumption, cost of sales will be lower and net profit will be higher.
approaching extended theory2
Approaching extended theory
  • The owner of a business believes that recording prepaid expenses as assets is an unnecessary waste of time.
  • Justify/explain/discuss with reference to accounting principles and qualitative characteristics why recording prepaid expenses as assets is necessary
approaching extended theory3
Approaching extended theory
  • Sandra has commenced a business from home. She works from her spare room in her home and the firm’s only assets are a chair, computer, desk and filing cabinet which have a total value of $7 500. When preparing her annual Income Statement, Sandra does not include depreciation of these non current assets and instead writes them off as an expense in the period of purchase.
  • Discuss with reference to qualitative characteristics and accounting principles if Sandra should change her treatment of non current assets in the Income Statement.
sample solution to sample exam

Sample solution to sample exam

Solution prepared by presenters and not VCAA approved.

solution to sample exam
Solution to sample exam

Question 1

  • A double-entry accounting system means recording in ledger accounts whereby at least two ledger accounts are affected by each transaction

2 marks

solution to sample exam4
Solution to sample exam

Question 4

a.

FIFO stock valuation assumes that the first stock purchased by the business is the first stock that is sold by the business. Many businesses use this method for stock valuation because it is too difficult to individually/label each individual item of stock, especially when the stock items are small and are of relatively low value. The owner believes it is not worth the time, effort and additional cost. 2 marks

solution to sample exam5
Solution to sample exam

Question 4

c.

The use of the treadmill for advertising purposes should be treated as an expense as there has been an outflow of economic benefit caused by the decrease in the asset (Stock Control), which reduced owner’s equity (net Profit). That is the treadmill will not be sold and will therefore not contribute to future economic benefit.

2 marks

solution to sample exam8
Solution to sample exam

Revenue:

8 sold @ $ 1950 = $15600 + 1 sold @ $ 2250 = $2250

COGS = 8 x $1300 = $10400 + 1 @ $1500 = $1500

Revenue $17850

LESS COGS $11900

LESS Stock Loss $1500

Adjusted Gross Profit $4 4 50

solution to sample exam13
Solution to sample exam

Question 5

d.

Discuss benefits and limitations of using Control Accounts

  • Control accounts serve a useful purpose in the recording and reporting processes and further assist in the management of debtors and creditors for businesses that deal with numerous customers and suppliers.
  • The benefits of using control accounts and subsidiary ledgers in the accounting system
    • Allows for transactions to be summarised and removes clutter from the general ledger.
    • Reporting – only one amount reported, relevant for decision making
    • Management – separation of duties – checking mechanism, enhance internal control
  • However there are also limitations of using control accounts and subsidiary ledgers in the accounting system which include
    • the additional record keeping required
    • not suitable for all businesses to use and
    • increases the costs of record keeping due to the extra specialised staff which may be required.
solution to sample exam14
Solution to sample exam

Question 6

a.

GST would have been reported as a Current Asset

This is because there are two entries in the Cash Receipts Journal pertaining to the GST, one from the GST Column representing GST received on cash sales, the other from the Sundries column which indicates that the business has received a GST refund from the ATO as the GST paid and incurred in the last period was greater than the GST earned/received.

3 marks

solution to sample exam16
Solution to sample exam

Question 7

a.

Explanation:

The short term impact of the new cafe has been detrimental to the cash flow of the business as evidenced by the bank overdraft position that the business is now in.

The cost of the new café has exceeded the loan / capital that was contributed (as evidenced by the cash flows from financing activities) and used for its construction

Gus has injected loan and possibly additional capital to purchase the necessary non current assets and additional stock required for the new cafe (as evidenced by the net cash outflows from Investing Activities).

4 marks

.

solution to sample exam17
Solution to sample exam

Question 7

b.

Disagree

  • In order to Gus to make relevant decisions about the cash flow of the business Gus should have access to the details of his cash flows in order to determine why operating activities is Negative, all details of inflows and outflows should be examined. Investing activities may be negative as a result of the purchase of a new NCA and Gus needs to know how Financing Activities has managed to increase, that is whether it has been due to additional capital contributed or through loans taken out which need to be repaid and on which interest is incurred.

3 marks

solution to sample exam18
Solution to sample exam

Question 8

Last year made a loss but bank increased despite having no loans or capital contributed

Discuss:

Under accrual accounting there is a difference between revenue earned and received and expenses paid and incurred. Cash and profit are different resources. Whilst the business made a loss in the previous year, the bank balance may have increased due to

Receipts from debtors being greater than credit sales, payments for expenses being less than expenses incurred or cost of sales being greater than payments to creditors. All of these examples will impact a net loss but have a lesser impact on the bank balance. In addition the business may have sold non current assets for cash or deferred a loan repayment or the owner may have reduced their drawings from the business preferring to leave cash in the business because of the net loss incurred.

4 marks

solution to sample exam20
Solution to sample exam

Question 9

b.

Qualitative Characteristic: Relevance

Explanation: Whilst there is a stock loss in one area and a stock gain in another, only the overall effect is reported in the income statement as the business would use a control account for stock in the General ledger and it is the overall impact that is relevant for decision making

3marks

solution to sample exam21
Solution to sample exam

Question 9

c.

Impact of Memo 44

Explanation: The inclusion of this information will reduce Net Profit by $1000 in the Income Statement as the operating expenses are currently understated and this will impact on the accurate calculation of profit. In addition, in the Balance Sheet, the Current Assets of Debtors Control will decrease by $1100 and GST Clearing will decrease by $100. Owner’s Equity will decrease by $1 000.

4marks

solution to sample exam22
Solution to sample exam

Question 9

d.

Justification: The vehicle should be valued at $20 000 which is the agreed value of the NCA by the Accountant at the time of contribution to the business.

Whilst Historical cost states that assets should be recorded at their original purchase price as it can be verified by a source document, this value is no longer relevant for decision making the accountant has valued the vehicle at its agreed value which is lower than its historical cost as this value is far more relevant for decision making as the asset is no longer new and its contribution to the business is limited.

3 marks