AC3001 ACCOUNTING CONCEPTS NCEA LEVEL

Transcription

1 te mātauranga mahi kaute accounting AC3001 ACCOUNTING CONCEPTS NCEA LEVEL /1

2 accounting ncea level 3 Expected time to complete work This work will take you about 12 hours to complete. In this booklet you will start to work towards all the standards at Level 3. This booklet is the foundation for which all the standards will be built from. In this booklet you will focus on the following learning outcomes: reviewing and explaining accounting concepts accounting for GST where necessary in Balance Day Adjustments presenting Income Statements and Statements of Financial Position. Copyright 2013 Board of Trustees of Te Aho o Te Kura Pounamu, Private Bag 39992, Wellington Mail Centre, Lower Hutt 5045, New Zealand. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the written permission of Te Aho o Te Kura Pounamu.

3 contents 1 What is accounting? 2 GST 3 Income statement 4 Statement of Financial Position 5 Balance day adjustments 6 Assets 7 Teacher-marked activities 8 Answer guide AC3001 1

4 how to do the work When you see: 1A Complete the activity. Check your answers. Your teacher will assess this work. Note this key point. Check the website. You will need: a pen and paper a calculator templates provided (AC3001A). Resource overview Complete your practice activities on your own paper (or one of the templates provided) and return them along with your completed teacher-marked activities in this booklet. Ensure you have attempted all activities on your own before referring to the Answer guide. At the end of each lesson mark your practice work (P/X) from the Answer guide. Add any corrections/amendments in a different colour. Take particular note of the key points as they will help you in your assessments. Refer to the glossary in the Reference guide for an explanation of any new words you are not familiar with. Each lesson begins with: Learning intentions: what you are learning in this lesson Success criteria: what you should be able to do by the end of this lesson. Assessment In this booklet you will start to work towards meeting the full criteria for all the Level 3 standards. This booklet is a foundation booklet which reviews and identifies key accounting ideas that you will need to be familiar with before you continue to work through the remaining booklets in this course. Refer to your Reference guide for a copy of all the achievement standards. The following key competencies are covered in this booklet: Thinking; using language, symbols, and text; managing self; relating to others; participating and contributing. 2 AC3001

5 1 what is accounting? learning intention To define accounting and explore possible accounting career paths. success criteria You will be able to: define accounting recognise the functions of the New Zealand Institute of Chartered Accountants identify accounting career paths. introduction Welcome to Level 3 Accounting! In this lesson we will start to introduce you, or as the case may be re-introduce you, to the exciting world of accounting. We will define what accounting is and then show you the diverse possibilities that studying accounting can bring to your career prospects. what is accounting? There are many definitions of accounting but all definitions have a common thread. This common thread relates to the fact that accounting is a system that presents financial information in a certain way, so that users can take this information, combine it with non-financial information and make informed decisions. Key point The Level 3 course uses the following definition of accounting: Accounting is a subject that measures, records, reports and interprets both financial and non-financial information about an entity, enabling communication to take place between the preparer and user of such information so that informed decisions can be made. There are some key accounting terms in this definition that we need to expand a little more before we continue. financial information Financial information refers to transactions that involve income, expenses, profits and losses, assets, liabilities, equity, cash flow from operating activities, cash flow from investing activities, cash flow from financing activities, budgeting and so on. AC3001 3

6 what is accounting? All this information can be presented in useful ways with the purpose of providing useful information to users so that they are able to make decisions. Further on in this booklet we will start to look at how these various pieces of financial information are often presented to users. istock 1A If you have 10 minutes, a computer and Internet available, go to the website On the quick links you will find an item called Annual Report; click on this and have a quick look through the annual report. You will be able to see various pieces of meaningful financial information about Restaurant Brands. the accountant the preparer of the financial information An accountant is usually in charge of the accounting process in a business. In this role the accountant is concerned with interpreting computerised reports and advising or recommending certain actions to management. An accountant can work in business, public practice, government or other institutions. 4 AC3001 istock istock A career in accounting is more diverse than you might think. People working in the accountancy field also work in a variety of industries including fashion, law, Government, entertainment, telecommunications and advertising. te ah o o te k u ra p ou n a mu

7 what is accounting? The following table, which has been taken from the New Zealand Institute of Chartered Accountants (NZICA) website, provides a selection of some of the most common jobs in the accounting field. Job title Financial planner Auditor Chief financial officer Advisory consultant Executive officer Tax specialist Management accountant Superannuation accountant Systems accountant Forensic accountant Description Provides clients with a strategy for meeting their financial goals. Analyses an organisation s financial accounts to test that controls are in place to prevent fraud and errors. Manages the financial risks of an organisation and is responsible for all financial aspects. Helps clients improve and manage risk to maintain and develop the performance of the business. Oversees the management of an organisation and reports to the board. Prepares corporate and personal income tax statements and provides strategies and advice. Uses accounting information to make business decisions and provide advice to improve overall business performance. Specialises in the financial management of super or pension funds. Examines an organisation s accounting and financial systems, provides a review of the existing processes and procedures, and suggests ways they can be improved. May also help implement any new systems, and advise on budgets and business performance. Part detective, part lawyer, part accountant. Tends to be involved when fraud or if legal action is involved. Through analysis and investigation, examines the past for clues to uncover the truth behind financial and business actions which may disclose fraud. istock AC3001 5

8 what is accounting? new zealand institute of chartered accountants The New Zealand Institute of Chartered Accountants (NZICA) is the professional body of accountants in New Zealand. functions of the new zealand institute of chartered accountants The statutory functions of NZICA, as set out in the New Zealand Institute of Chartered Accountants Act 1996, are: a. To promote quality, expertise and integrity in the profession of accountancy by its members in New Zealand. b. To promote, control and regulate the profession of accountancy by its members in New Zealand. c. To promote the training, education and examination of persons practicing, or intending to practice, the profession of accountancy in New Zealand or elsewhere. d. To promote the provision of information and informative material to the Institute s members by use of the membership database by the Institute or by an authorised third party. e. Any other functions that are conferred on the Institute by these Rules or pursuant to any enactment. f. Any other functions that are ancillary to the above functions. nzica Chartered accountants (CAs) are highly qualified professionals who have completed three to four years of degree level study supplemented with workplace experience and a professional competence programme. The three main steps to becoming a chartered accountant are to: 1. complete a recognised academic programme 2. complete a practical experience programme 3. complete a professional competence programme. code of ethics Accountants that are members of NZICA are recognised as trusted expert business professionals. The purpose of many accounting functions is to provide accountability to shareholders, investors and taxpayers. 6 AC3001

9 what is accounting? Key point The code of ethics is used by NZICA to help the profession meet its public interest responsibilities by promoting the key principles of competence, integrity, objectivity, quality and professionalism. users of financial information There is a diverse group of people who would be interested in financial information. If you did get the opportunity to look at the annual report in 1A above, you might have concluded that the purpose of an annual report is to show off the entity over a period of time to existing shareholders (investors) and potential shareholders. These shareholders become the users of this piece of information. They will use the various pieces of financial and non-financial information in this report to make important financial decisions about their shareholding. Example Extract from the 2011 Restaurant Brands annual report net profit after tax was $24.3 million (24.9 cents per share) compared with $19.5 million in 2009/2010 This is a very good piece of financial information that an existing shareholder might use to make the decision to keep his/her current shares in the company with the hope of getting bigger returns from the investment in the future if the company continues to grow in a similar fashion. istock Key point Users of financial information can be categorised into internal and external users. Internal users are managers, supervisors, foremen and other decision-makers within a business. External users are those parties outside the business such as investors, bank managers and government departments. AC3001 7

10 what is accounting? 1B Match each description in column B with the correct term in column A. Column A Management accountant Column B Uses accounting information to make business decisions and provide advice to improve overall business performance. Auditor Tax specialist Part detective, part lawyer, part accountant. Tends to be involved when fraud or legal action is involved. Through analysis and investigation, examines the past for clues to uncover the truth behind financial and business actions that may disclose fraud. Analyses an organisation s financial accounts to test that controls are in place to prevent fraud and errors. Chartered accountant Provides clients with a strategy for meeting their financial goals. Forensic accountant Must be a member of NZICA. NZICA Prepares corporate and personal income tax statements and provides strategies and advice. Financial planner Is provided by NZICA for its members. Continuing education New Zealand Institute of Chartered Accountants. Check your answers. 1C Access the website, look under the heading For students and click on Where your career could take you. Write a paragraph letting your Accounting teacher know: what career path you could take if you chose accounting what some members have to say about accounting as a career what salary could be expected if you chose accounting as a career. Your teacher will assess this work. 8 AC3001

11 what is accounting? entity Level 1 and Level 2 Accounting focuses on small service and trading businesses that are owned by one person, often referred to as sole proprietorships. A sole proprietorship is the simplest form of business ownership. A sole proprietor can start up or buy a business and operate it immediately in his/her name. Because this business is owned by one person, the owner takes all the profits for him/herself, makes all the decisions and takes the risk (losses). Let us look at this type of ownership structure using the diagram below. SOLE PROPRIETOR Money in Money out Owner Capital invested Loan money Business Buy assets Machinery Building Inventory Bank istock The person intending to go into business, for example, a gardener, invests money into a business, for example a garden shop. This is called equity (and is also known as capital). This equity is put into a bank account and is used to buy assets to enable the owner to provide inventory and earn an income. Assets such as a building, equipment, a motor vehicle, fittings and fixtures are acquired using the equity that has been contributed into the business. If the equity is insufficient to obtain assets, additional money may have to be borrowed from other sources. Usually a loan is sought from a bank. The loan is referred to as a liability because in the future cash from the business will be given up in order to repay the loan. The Level 3 Accounting course (AC3000) extends the context of entities beyond the sole proprietor to include partnerships and reporting entities. But before we look at each of these new entities in detail, let us look at some key accounting ideas. istock bigstock AC3001 9

12 2 gst learning intention To account for GST in a business. success criteria You will be able to: calculate GST for a business explain what GST inclusive and exclusive means identify transactions exempt from GST identify when to debit and credit GST prepare and complete a GST account in the ledger correctly. introduction Accounting is the language of business it provides a range of useful information to management and other interested parties. GST (goods and services tax) is part of this language of business. We need to learn how businesses account for GST in their day-to-day transactions. gst goods and services tax Goods and services tax (GST) is a domestic, consumer tax on the sale of most goods and services in New Zealand and is charged at the rate of 15%. A business registered for GST adds GST on its sales and collects this tax on behalf of the government. Since GST is also included in the price of purchases made by the business, the business is able to offset the GST it pays on purchases against the amount of GST it collects on its own sales before paying the balance to Inland Revenue Te Tare Taake. 15% Final payer Producer Wholesaler Retailer Consumer 15% 15% The producer, wholesaler and retailer all claim back any GST they have paid. Key point All businesses with an annual turnover (sales) greater than $60,000 must register for GST. Many businesses with a smaller turnover will choose to register for GST so they can claim GST paid on assets, purchases and expenses. 10 AC3001

13 gst GST is a consumption tax, meaning that only the final consumer pays tax. Businesses that buy goods for resale can claim back the GST they paid on these purchases because they are not the final consumer of the goods. The customer (which is most of us) cannot claim back the GST because we are the final user of the goods or service and not registered for GST. The following diagram illustrates how the GST liability of the business is calculated. This illustration uses an item that costs a business $207 including GST and is sold to the customer for $621 including GST. GST LIABILITY TO INLAND REVENUE Supplier is paid $207 for the item Customer pays $621 for the item Business pays $27 of GST 207/1.15 = = $27 Business collects $81 of GST 621/1.15 = = $81 istock Business owes $54 of GST to IRD GST received GST paid = $54 Inland Revenue Te Tare Taake AC

14 gst Key point If the business owes GST to the Inland Revenue it is a current liability. If the Inland Revenue owes the business a GST refund it is a current asset. calculating gst Points to consider when calculating GST: GST is 15%. GST inclusive means the price already includes GST. GST exclusive means the price does not include GST. If price includes GST then divide by 1.15 to find the $ value of the GST exclusive amount and then subtract this figure from the GST-inclusive amount to find the $ value of the GST. If price excludes GST then multiply by 1.15 to find the GST-inclusive amount and then subtract the GST exclusive amount from the GST-inclusive amount to find the $ value of the GST. Multiply by 1.15 GST exclusive price GST inclusive price Divide by 1.15 The business takes the GST exclusive amount and adds GST; this is now the GST-inclusive figure. The difference between the exclusive and inclusive figures is the GST. Example 1 $ inclusive GST = $ / 1.15 = $ is the GST exclusive amount. GST = $670 $ = $87.39 (the difference). Example 2 $ exclusive GST = $ x 1.15 = $ is the GST-inclusive amount. GST = $ $ = $82.50 (the difference). 12 AC3001

15 gst 2A Calculate the GST-inclusive price of the following exclusive prices: 1. $1, $4, $6, $9,900 Check your answers. 2B Calculate the GST in the following GST-inclusive prices. 1. $1, $1, $2, $5,175 Check your answers. Key point In 2010, GST was increased from 12.5% to 15%. Be wary of old texts and exams that use 12.5%, as this is now incorrect. istock registering for gst To register for GST a business must fill in a registration form. The business will be given a GST number and once registered the business must include GST in the value of all goods and services they supply. The current rate is 15%. AC

16 gst gst and business transactions As seen above in the illustration, businesses collect GST from customers on behalf of Inland Revenue and also pay GST to suppliers and other service providers. The GST that a business entity collects from customers is called output GST and must be handed over to Inland Revenue GST paid by the business to its suppliers is called input GST and an entity that is registered for GST with Inland Revenue can claim this GST back. The effect of GST must be shown on all relevant business transactions such as, the business: buying goods for resale selling goods or services paying for expenses buying and selling assets writing off bad debts. bigstock gst exempt items Not all business transactions have GST. Financial transactions such as interest, loan repayments and bank charges are exempt from GST. Wages are not subject to GST. Capital contributions and cash drawings by the owner are only a transfer of cash and are not subject to GST. accounting for gst There are two ways a business can account for GST: the invoice basis or the payments basis. Invoice basis the business claims GST on purchases and expenses when they receive an invoice and accounts for GST on sales and income when they issue an invoice or receive a payment, whichever comes first. Payments (or cash) basis the business claims GST on purchases and expenses and accounts for GST on sales and income when a payment is made or received. Businesses choose whichever method best suits their type of activity. Key point In the examples used for NCEA Level 3 Accounting, all businesses are registered for GST on the invoice basis. When using the invoice basis GST is recorded when an invoice is issued or received even if no cash is exchanged, as can be the case with credit sales and credit purchases. It is possible that the GST return will have to be made before the cash is collected from the debtor or paid to the creditor. 14 AC3001

17 gst gst invoice (tax invoice) If an entity supplies goods and services to another GST-registered business, they must provide a tax invoice within 28 days of the purchaser asking for one. It is an offence if the business doesn t supply one after such a request and the business may be charged penalties. The information a tax invoice must show depends on the value of the goods and services supplied. A tax invoice is not needed for supplies of $50 or less (including GST). However, it is best practice to keep records for these purchases, such as invoices, vouchers or receipts. Tax invoices must include the following: the words tax invoice in a prominent place the name (or trade name) and GST registration number of the supplier the name and address of the recipient of the supply the date the invoice was issued a description of the goods and/or services supplied Best practice think about the terms referred to here. Why would it be good to keep records in accounting? the quantity or volume of the goods and/or services supplied. Examples litres of petrol, hours of labour, kilos of potatoes and so on. It must also have either: the amount, excluding tax, charged for the supply the GST and the total amount payable for the supply, or a statement that GST is included in the final price if it has been. AC

18 gst Here is an example of a tax invoice from the Inland Revenue website. ABC ELECTRONICS Main Street WELLINGTON To: Wyatt Firsound 712 John Street WELLINGTON PO Box WELLINGTON Phone: (04) Fax: (04) GST number Date: TAX INVOICE Name and address of the supplier The words tax invoice Supplier s GST registration number Date of issue Name and address of the recipient Quantity Description of goods & services Unit price Total 4 Video camera $1,200 $4,800 Quantity of goods supplied Description of the goods and services supplied Amount excluding tax, charged for the supply Plus goods and services tax $720 GST charged Total amount due $5,520 Total amount payable taxable periods This is the length of time covered by a GST return. A business makes a GST return to Inland Revenue at regular intervals such as one-monthly, two-monthly or six-monthly. The return shows how much the business owes for GST or what the business s refund should be. gst in the ledger Goods and services tax is a liability when GST is owed to Inland Revenue and an asset when Inland Revenue owes it to the business. Generally, businesses have to pay tax to Inland Revenue, rather than receive a refund. 16 AC3001

19 gst When GST is received from customers for goods sold for cash or on credit this amount of GST does not belong to the business and should be handed over to Inland Revenue, the GST account will be credited. Therefore, GST received is a liability, which means in the future money will be sacrificed in order to pay the Inland Revenue. When GST is paid by the business for purchases or for an expense, this GST can be claimed back and the GST accounted will be debited. See how this works below: GST paid (asset) GST received (liability) Cash purchases, credit purchases Tax invoices received for most expenses Cash paid for most expenses, bad debts, purchase of assets Cash sales, credit sales Sales of assets, other income received Debit (Dr) GST Credit (Cr) GST If GST received is larger than GST paid then the difference must be paid to Inland Revenue If the GST paid is larger than the GST received then the difference is a refund from Inland Revenue AC

20 gst Below is a GST account in the General Ledger recording some transactions. But before you look at it, read the key point below. This will refresh your memory as to what is the purpose of a General Ledger. Key point A General Ledger tells a story about a particular account, that is, why has the GST account increased and decreased during March? It is important that you know the debit and credit rules so that you understand the story that is being told in each account in the General Ledger. Below is a simple table to help you remember the debit and credit rules. Asset Expense Liability Equity Income Increase (+) Debit Credit Decrease ( ) Credit Debit As you can see from the table above, if the account is an asset or an expense then you increase these particular accounts by debiting the account and decrease these accounts by crediting the account; the opposite applies if the account is a liability or equity or is income $ March 1 Balance (amount owing to Inland Revenue) Payment to Inland Revenue for GST GST owing on cash sales and income 350 GST paid on cash purchases and expenses 52 GST included in accounts receivable (for sales) 400 GST included in accounts payable (for purchases) 290 general ledger Date Particulars Debit $ GST 2016 Mar 1 Balance Credit $ Balance $ 250 Cr Mar 18 Bank 250 Mar 31 Bank Cr Bank Cr Accounts receivable Cr Accounts payable Cr 18 AC3001

21 gst gst and financial statements In the next two lessons we will look at two very important financial statements the Income Statement and the Statement of Financial Position. Hopefully, you would have gathered from your learning of GST that the business is just a collector and receiver of GST for the government this is often termed an agent. Therefore, profits of the business are not affected by GST. Key point The New Zealand Institute of Chartered Accountants Financial Reporting Standard 19 (FRS 19) states that income and expense items must be stated as GST exclusive in the income statement and in the Statement of Financial Position items, except for accounts receivable and accounts payable, must be stated as GST exclusive. istock 2C Using the templates provided, create the GST ledger account for Chocolate Heaven. Record the following list of transactions $ Apr 1 Balance (amount owing to Inland Revenue for GST) Payment to Inland Revenue for GST GST paid on cash purchases and expenses 180 GST owed on cash sales and income 360 GST included in accounts receivable 540 GST included in accounts payable 270 Check your answers. AC

22 gst 2D Read the phrases below and state the word or words with reference to GST. 1. The phrase that describes what a business does, in relation to GST, is. 2. Transactions that are not subject to GST are called. 3. To become registered for GST, a business. 4. The current GST tax rate in New Zealand is. 5. The government department called collects GST from businesses on behalf of the government. 6. Businesses that must register for GST. 7. If a business accounts for GST when a payment is made or received, this is known as the accounting method. 8. The shortest taxable period is. 9. Every GST invoice must have a. Check your answers. bigstock 20 AC3001

23 3 income statement learning intention To present an income statement. success criteria You will be able to: define income and expenses in accordance with the NZ Framework classify income and expenses prepare an income statement. introduction The Income Statement of an entity provides information about the financial performance and profitability of an entity during the year. It includes elements directly related to the measurement of the financial performance: income expenses. defining income and expenses The New Zealand Framework for the Preparation and Presentation of Financial Statements (New Zealand Framework), used by The New Zealand Institute of Chartered Accountants (NZICA), defines these elements as follows: a. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. b. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. income Income is classified according to the activities of the entity as follows: Sales/fees depending on the principal operating revenue of the entity. A trading entity, an entity that sells goods, commonly has sales as its main operating income. A service entity, an entity that provides services, commonly has fees as its main operating income. istock Other income includes all other revenues/income and gains. This is income derived from other activities of the entity, such as interest received on term deposits and so on. AC

24 income statement expenses Businesses are likely to have a variety of expenses and it would be more meaningful for management decision-making to classify these expenses into various useful groups. How expenses are classified depends on the type of business for which the financial statements are being prepared. Generally, expenses are classified according to their function, as follows: Cost of sales are costs associated with getting inventory to the business location ready to sell to customers. There is an assumption that the entity uses a perpetual inventory system. A service entity would not show cost of sales (or gross profit). Distribution costs are expenses incurred through the promotion, storage, selling and delivery of inventory for sale. Administrative expenses are costs associated with the administration of the entity as a whole. Included are those expenses that can t be specifically defined as distribution or finance costs. Finance costs arise from an entity financing its operations from external sources. These are limited to the costs of borrowing and include only interest expenses. Important It is important to learn key definitions in Accounting, that is, the definitions for income and expenses. However, it is more important to be able to apply the definitions learnt to the context given. Example: explain why the $20,000 paid for advertising in the Income Statement for the year ended 31 March 2014 meets the definition of an expense. A perfect answer to this question would read as follows: The $20,000 paid for advertising is a decrease in economic benefit because money has been paid to the advertising supplier out of the business bank account. This results in a decrease in equity because there is less profit. Paying advertising is not a distribution to the owner/owners. 3A Here is an example of an Income Statement. The Income Statement displayed here is a special purpose report prepared for internal users (the management). Study this income statement carefully and answer the questions below. 22 AC3001

25 income statement Revenue hamilton traders income statement for the year ended 31 march 2016 $ $ $ Sales 1,580,000 Less Cost of sales 780,000 Gross profit 800,000 Add Other income Interest received 6,400 Gain on sale of vehicle 13,600 20,000 Less Expenses Distribution costs Wages sales staff 66,000 Discount allowed 4,000 Depreciation on vehicles 18,000 88,000 Administrative expenses Salaries 160,000 Telephone 28,800 Power 39,680 Rates 20,000 Insurance 16,000 Bad debts 8,600 Doubtful debts 11,400 Depreciation on buildings 24,000 Depreciation on equipment 20, ,480 Finance costs Interest on loan 14,400 Interest on debentures 4,800 19, ,000 Total expenses 435,680 Profit for the year $384, Define the accounting term Income. 2. Describe the purpose of the Income Statement shown. 3. Explain why the $160,000 paid for salaries in the Income Statement for the year ended 31 March 2016 meets the definition of an expense. 4. Explain why the $6,400 interest received in the Income Statement for the year ended 31 March 2016 meets the definition of income. Check your answers. AC

26 income statement 3B The accountant for Say It With Flowers has prepared the following trial balance. say it with flowers trial balance as at 31 march 2016 $ $ Inventory 144,000 Capital 258,400 Accounts receivable 24,000 Bank 16,800 Vehicles 50,000 Sales 510,000 Land 100,000 Rent received 10,000 Building 300,000 Mortgage 200,000 Shop fittings 28,000 Accumulated depreciation building 18,000 Cost of sales 276,000 Accumulated depreciation vehicles 22,000 Insurance 4,000 Accumulated depreciation shop fittings 12,600 Telephone 7,000 Accrued expenses 1,600 Stationery 3,000 Accounts payable 30,000 Vehicle expenses 12,000 Allowance for doubtful debts 2,800 Power 10,000 Interest 16,000 Shop wages 80,000 Rates 5,000 Freight out 3,600 Bad debts 2,400 Depreciation shop fittings 4,200 Depreciation vehicles 7,000 Depreciation building 6,000 $1,082,200 $1,082,200 additional information The mortgage is secured over the business land and buildings with an interest rate of 8% and a maturity date of 31 March Prepare the income statement prepared for management at Say It With Flowers for the year ended 31 March Check your answers. 24 AC3001

27 4 statement of financial position learning intention To present a Statement of Financial Position. success criteria You will be able to: define assets, liabilities and equity in accordance with the NZ Framework classify assets and liabilities prepare a Statement of Financial Position. introduction The Statement of Financial Position of an entity provides information about the assets, liabilities and equity and the relationship of these elements to each other at a point in time. The presentation of these elements involves a process of sub-classification. Assets and liabilities are classified to display information in the manner most useful for decision-making. defining assets, liabilities and equity The New Zealand Framework for the Preparation and Presentation of Financial Statements (New Zealand Framework), used by The New Zealand Institute of Chartered Accountants (NZICA), defines these elements as follows: a. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. b. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. c. Equity is the residual interest in the assets of the entity after deducting all its liabilities. In the Statement of Financial Position, disclosure requirements include: assets divided into current and non-current liabilities divided into current and non-current equity notes to the Statement of Financial Position containing additional information. The notes to the accounts show a clear presentation of changes in major accounts without cluttering the statement with unnecessary detail. The users can refer to the numbered note for a fuller explanation of how a total has been made up. AC

28 statement of financial position Key point A Statement of Financial Position is often referred to as a Balance Sheet, these accounting terms are interchangeable. However, it is important to note that the words financial position better reflect the function of this statement in comparison to balance sheet. The term financial position of the business encompasses the study and analysis of: the entity s economic resources (assets) controlled by it financial structure (liabilities vs equity) liquidity (current assets current liabilities) solvency (can the business meet its debts), and therefore its capacity to adapt to a changing business environment. 26 AC3001

29 statement of financial position Below is an example of a Statement of Financial Position. Study this statement very carefully and answer the questions on the next page. Current assets kiwigold traders statement of financial position as at 31 march 2016 Notes $ $ $ Bank 10,000 Accounts receivable 1 2,600 Inventory 5,400 Prepayments ,600 Non-current assets Property, plant and equipment 2 Total carrying amount 325,000 Intangible asset Goodwill 19, ,000 Total assets 362,600 Less Liabilities Current liabilities GST 6,000 Taxation payable 1,000 Accounts payable 3,500 Accrued expenses 400 Income in advance ,200 Non-current liabilities Loan 3 110,000 Total liabilities 121,200 Net assets $241,400 Equity Opening capital 200,000 Profit for the year 41,400 Closing capital $241,400 AC

30 statement of financial position notes to the statement of financial position 1 Accounts receivable $ Accounts receivable 2,800 Less Allowance for doubtful debts 200 2,600 2 Property, plant and equipment Note extract Vehicles Shop fittings Total Cost or valuation 25, , ,500 Accumulated depreciation (2,500) (30,000) (32,500) Carrying amount 22, , ,000 4 Loan The loan has an interest rate of 11% p.a. and a maturity date of 31 March A Using the trial balance from activity 3B in the previous lesson, prepare the Statement of Financial Position and notes for Say It With Flowers Limited as at 31 March Check your answers. bigstock 28 AC3001

31 statement of financial position 4B The accountant for Adventure Holiday Tours has prepared the following trial balance: adventure holiday tours trial balance as at 31 march 2016 $ $ Bank 270 Capital 300,000 Accounts receivable 47,000 Loan 60,000 Tour vehicles 360,000 Accounts payable 57,770 Tents and equipment 180,000 Bank 6,000 Bad debts 1,800 Tour income 522,000 Vehicle expenses 108,000 Accumulated depreciation Equipment repairs 5,000 tour vehicles 144,000 Office expenses 9,700 Accumulated depreciation Telephone 19,000 tents and equipment 32,000 Tour food expenses 189,000 Revenue in advance 18,000 Insurance 12,000 Accrued expenses 3,000 Interest on loan 6,000 Allowance for doubtful debts 2,000 Track and hut fees 117,000 Depreciation tour vehicles Depreciation tents and equipment 72,000 16,000 Prepayments 2,000 $1,144,770 $1,144,770 additional information The loan has an interest rate of 10% p.a. and a maturity date of 31 March Prepare the income statement for the year ended 31 March Prepare the Statement of Financial Position and notes as at 31 March Check your answers. istock AC

32 5 balance day adjustments learning intention To record General Journal entries for balance day adjustments. success criteria You will be able to: identify the effect GST has on balance day adjustments record balance day adjustments in the General Journal. introduction On balance day, adjustment entries are made in the General Journal so that the financial statements report fair values for all elements (assets, liabilities, income and expenses). Examples of adjustments required include: income due at balance day accounts payable on balance day. Balance day adjustments recognise assets owned and liabilities due on balance day and by taking these into account, a true and fair view of the financial position, financial performance and changes in financial position of the entity is presented. accrual accounting Key point Accrual accounting is about ensuring that outstanding transactions such as those involving assets owned and liabilities due are reported in the Income Statement and Statement of Financial Position of the reporting period they relate to (even if cash will be received or paid in a different reporting period). Under accrual accounting, items are reported in the financial statements as assets, liabilities, income and expenses when they fully satisfy the definition for those financial elements. This is important because the information about an entity s assets, liabilities, income and expenses during a reporting period provides a better basis for assessing the entity s past and future performance than information solely about cash inflows and cash outflows during that period. gst Where a business is registered for GST on the invoice basis, GST must be accounted for where an invoice dated before balance day has been issued or received. This means that GST applies to balance day adjustments for accounts receivable and accounts payable. 30 AC3001

33 balance day adjustments invoices on hand for expenses Invoices on hand for expenses dated before balance day are credited to accounts payable. These expenses include GST. invoice for march electricity, $690, dated 30 march general journal Date Particulars Debit $ Mar 31 Electricity 600 GST 90 Credit $ Accounts payable 690 (Electricity owing at balance sheet date) accrued expenses The only accrued expense adjustments examined are: wages interest. Both of these transactions are exempt from GST. $600 wages/interest owing at balance day general journal Date Particulars Debit $ Mar 31 Wages/Interest 600 Credit $ Accrued expenses 600 (Wages/Interest owing at balance day) Remember that GST is not applicable to wages and interest. AC

34 balance day adjustments accrued income The only accrued income adjustments examined are: dividends interest. Both items are exempt from GST. $2,400 dividends income owing at balance day general journal Date Particulars Debit $ Mar 31 Accrued income 2,400 Credit $ Dividends 2,400 (Dividends due but not received at balance day) 5A Alert Systems is registered for GST on the invoice basis. Prepare the General Journal entries using the templates provided to record the following balance day adjustments. On 31 March 2015, invoices dated 30 March had been received for advertising, $1,127, and computer repairs, $1,150. Both amounts include GST. Interest income of $1,260 is due. Check your answers. 32 AC3001

35 balance day adjustments istock prepayments and income in advance Key point GST is not included in balance day adjustments for prepayments and income in advance. This is because it is accounted for at the time the transaction takes place which was when the cash was paid or received. In other words, the GST exclusive figure is used in the General Journal recording. insurance of $800 has been paid in advance general journal Date Particulars Debit $ Mar 31 Prepayments 800 Credit $ Insurance 800 (Insurance prepaid at balance day) commission received in advance, $360 general journal Date Particulars Debit $ Mar 31 Commission income 360 Credit $ Income received in advance 360 (Commission received in advance at balance day) AC

36 balance day adjustments bad debts A bad debt is written off when it is not possible to collect an amount owed by a debtor. A bad debt can be written off at any time during the accounting period. At balance day, businesses may review accounts receivable and write off further bad debts if necessary. The amount of GST in the bad debt must be identified and removed. City Road decided to write off $506 (including GST) owing for sales to a debtor, A Trump. general journal Date Particulars Debit $ Mar 31 Bad debts 440 GST 66 Credit $ Accounts receivable (A Trump) 506 (Bad debts written off at balance day) This entry increases bad debts in the ledger and reduces the asset, accounts receivable. The GST is claimable from Inland Revenue and reduces the business s liability for GST. Here are the ledger accounts. Date Bad debts Particulars city road general ledger Debit $ Credit $ Balance $ Mar 31 Balance 1,000 Dr GST Accounts receivable 506 1,506 Dr Mar 31 Balance 15,000 Cr Accounts receivable GST reduced Bad debts increased Accounts receivable 66 14,934 Cr Mar 31 Balance 40,630 Dr Bad debts ,124 Dr GST 66 40,058 Dr Accounts receivable reduced 34 AC3001

37 balance day adjustments allowance for doubtful debts If it is felt that some accounts receivable shown in the Statement of Financial Position might not be paid an amount may also be allowed for doubtful debts. GST is not included since no account is actually being written off; instead doubtful debts are being accounted for. City Road decided to increase its present allowance for doubtful debts to 4% of accounts receivable. Currently the balance of allowance for doubtful debts is $1,440 and the balance of accounts receivable is $40,000. general journal Date Particulars Debit $ Mar 31 Doubtful debts 160 Credit $ Allowance for doubtful debts 160 (To increase allowance for doubtful debts) Allowance increased to the required $1,600, 4% of 40,000, ($1,600 $1,440 = $160). 5B On 31 March 2015, Café Cuisine Wholesalers decided to write off $8,625 (including GST) owed by Jamie s Catering Limited and increase the allowance for doubtful debts to 2.5% of accounts receivable. These are the relevant ledger account balances: accounts receivable $105,625 Dr allowance for doubtful debts $2,200 Cr bad debts $3,200 Dr. You are required to: 1. make the necessary balance day adjustments 2. show how bad debts and doubtful debts would appear in the income statement 3. show how accounts receivable would appear in the Statement of Financial Position and note. Check your answers. AC

38 balance day adjustments inventory revaluation The valuation of inventory on hand at balance day is essential for the preparation of financial statements. Remember that for financial information to be useful for decision-making it needs to have certain characteristics. Let us stop and think about this and apply it to real life. If the supermarket down the road included left over Christmas stock in their inventory valuation at the same value after Christmas as before this would not be a piece of financial information that is accurate. If the business changed the value to incorporate the fact that the left over stock is not as valuable after Christmas in comparison with before Christmas then the information in the financial statements would be more useful for decision-making. Important note Thinking about real life situations can improve your understanding of certain accounting terms. The supermarket down the road provides a real life situation that is easily visible to you and can provide a great resource to interpret accounting terms. istock Inventory is an asset. When we start to talk about how we value or revalue an element in the financial statement it raises the Accounting idea of measurement of the elements of financial statements, should that Christmas stock after Christmas still be measured at historical cost or something different? Later in the course we will look at a number of measurement processes for elements of the financial statements, but for now let us look at historical cost and realisable (settlement) value in relation to inventory. 36 AC3001

39 balance day adjustments Historical cost assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition (original cost). Realisable (settlement) value assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Inventories are usually carried at the lower of cost and net realisable value (likely selling price). This means that if inventory has become obsolete, like the left-over Christmas stock at the supermarket, the selling price will be lower than the original cost price, then it should be valued at the lower price. The accountant has to be cautious (conservative) and must not overestimate the value of inventory. Information provided must be reliable. In areas of uncertainty prudence requires that estimates are made with caution so that assets or income are not overstated and liabilities or expenses are not understated. Key point When an entity revalues its inventory downwards to net realisable value, a balance day adjustment entry records the write down of inventory (sometimes referred to as inventory revaluation loss). example On 31 March, City Road re-valued its $150,000 inventory downwards by $50,000 to its net realisable value, $100,000. general journal Date Particulars Debit $ Mar 31 Write down of inventory 50,000 Credit $ Inventory 50,000 (Inventory re-valued to net realisable value) Inventory adjustments are GST exclusive as GST was accounted for when the inventory was purchased. Write down of inventory is added to the total cost of sales (debited to the cost of sales). Inventory in the Statement of Financial Position is shown at the re-valued amount. City Road s inventory will appear as $100,000 ($150,000 $50,000). AC

40 balance day adjustments 5C Use the Trial Balance below and the additional information to do the three activities on the next page. rimutaka wines trial balance as at 31 march 2016 $ $ Bank 70,140 Sales 4,000,160 Accounts receivable 54,650 Interest received 2,930 Inventory 500,000 Rent 28,000 Land 500,000 Loan 120,000 Buildings 600,000 Allowance for doubtful debts 2,000 Delivery vehicles 160,000 Capital 862,270 Fixtures 125,800 Mortgage 200,000 Cost of sales 2,700,000 GST 5,250 Wages sales staff 140,800 Accumulated depreciation Salaries 88,000 on buildings 40,000 Advertising 70,000 Accumulated depreciation Depreciation on buildings 20,000 on delivery vehicles 64,000 Depreciation on delivery Accumulated depreciation vehicles 32,000 on fixtures 32,000 Depreciation on fixtures 16,000 Term deposit 100,000 Interest on loan 11,400 Interest on mortgage 14,000 Telephone 48,000 Electricity 90,000 Bad debts 3,120 Insurance 12,700 $5,356,610 $5,356, AC3001

41 balance day adjustments additional information The loan has an interest rate of 9.5% and a maturity date of 31 March The mortgage is secured over the business land and buildings with an interest rate of 7% and a maturity date of 21 July The investment is a fixed term deposit with an interest rate of 5% and a maturity date of 31 March The following adjustments were needed at balance day. Accrued income and expenses at 31 March were interest on term deposit $2,070 and wages sales staff $1,200. $700 has been prepaid for insurance. Bad debts of $1,150 incl. GST are to be written off, after which the allowance for doubtful debts is to be adjusted to 4% of accounts receivable. Inventory is to be revalued downwards by $50,000 to its net realisable value. Do the following three activities on the templates provided: 1. Prepare General Journal entries for the adjustments. 2. Prepare an Income Statement for the year ended 31 March Prepare a Statement of Financial Position and notes as at 31 March Check your answers. summary of balance day adjustments and gst Account for GST in the following balance day adjustments: accounts payable invoices on hand at balance day (credit to accounts payable) bad debts. Do not account for GST (use the GST exclusive figure in the General Journal entry) in the following balance day adjustments: prepayments income in advance accrued expenses creating/changing an allowance for doubtful debts revaluation of inventory. AC

42 balance day adjustments 5D Riverton Traders has a balance date at 31 March Rule up the following table and complete the second column stating whether GST is required for each of the balance day adjustments. Balance day adjustments Wages owing on balance day Prepaid insurance Telephone account for March dated 28 March 2015 Interest credited on March bank statement Dividends receivable at balance day 2015 Inventory revalued downwards at balance sheet date GST required Yes/No Check your answers. 40 AC3001

43 assets learning intention To review assets, both current and non-current, the measurement bases used for recording tangible assets and the depreciation of tangible assets. success criteria You will be able to: explain current and non-current assets calculate and record two methods of depreciation straight-line and diminishing value show the effect of depreciation on both financial statements. introduction An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Often the future economic benefit that flows to an entity from their assets is money, so put very simply assets help a business earn money, and therefore help the business to continue to operate. Because of this, it is important that we spend some time reviewing assets. assets istock istock Assets are separated into current assets and non-current assets. Non-current assets are further sub-divided into investment assets, property, plant and equipment assets and intangible assets. istock 6 te ah o o t e k ur a p o un a m u AC

44 assets Assets Current assets Non-current assets Investments Property, plant and equipment Intangibles Cash and other assets that are expected to be converted into cash, or is intended for sale or consumption by the entity in the next accounting period Examples: Petty cash Bank Accounts receivable GST receivable Inventory Accrued income Prepayments Assets, like shares and term deposits, which are kept to earn revenue such as dividends and interest Examples: Term deposits Shares Tangible items that are held for use in the production of goods or services, for rental to others, or for administrative purposes. They are expected to be used for more than one accounting period Examples: Land and buildings Plant Vehicles Furniture Equipment Assets that have value but no physical presence Examples: Goodwill Patents Copyright Trademark year 1 accounting, eng lim lawrey, pearson longman 42 AC3001

45 assets current assets According to the requirements of NZIAS 1 (New Zealand International Accounting Standards 1) an asset must be classified as current when it satisfies any of the following criteria: it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle it holds the asset primarily for the purpose of trading it expects to realise the asset within twelve months after the reporting period the asset is cash or a cash equivalent (as defined in NZ IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets that do not fit into the criteria above as non-current. non-current assets Non-current assets are expected to be kept in the business for more than just the next accounting period. Non-current assets are of a long-term nature. Investment assets these are more easily converted into cash than property, plant and equipment and are not normally the main revenue-producing assets of the business. shutterstock Property, plant and equipment these are the main income-producing assets of the business and are expected to be retained for long periods of time. shutterstock Intangible assets these assets have no physical presence. istock AC

46 assets elements of cost The cost of a non-current asset comprises: the purchase price, including import duties, plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. recording non-current assets The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases. The New Zealand Framework for the Preparation and Presentation of Financial Statements (New Zealand Framework), used by The New Zealand Institute of Chartered Accountants (NZICA), defines the different measurement bases as follows: a. Historical cost Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. b. Current cost Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. c. Realisable (settlement) value Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. d. Present value Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. a4.55 (chapter 4, paragraph 55), nz framework Important note Stop and think for a moment! Why would some entities choose to use current cost basis rather than historical cost accounting? Think back to the original definition of accounting in lesson 1: Accounting is a subject that measures, records, reports and interprets both financial and non-financial information about an entity enabling communication to take place between the preparer and user of such information so that informed decisions can be made. Looking carefully at this definition, why would the use of historical cost as a measurement base in our financial statement not always be useful in helping users make informed decisions? Some entities use the current cost basis as a response to the inability of the historical cost accounting measurement base to deal with the effects of changing prices. Imagine the supermarket down the road from you. It has probably been there since you were born, about 17 years or more. If the supermarket continued to report their building at the cost it was purchased for 17 years ago then this figure would more than likely be quite irrelevant for management purpose. It is likely it has increased substantially in value over that time. 44 AC3001

47 assets istock Decisions made using an out-of-date historical cost could prove very unwise (and potentially fatal!). For example, the supermarket owner/manager might decide not to go ahead with plans to expand the supermarket as the buildings do not provide anywhere near enough security for the level of borrowings required. Such a decision could prevent the supermarket from generating the sorts of profits it otherwise could have in the future (and perhaps even lead to its closure). depreciation Depreciation records the consumption (decrease in future economic benefit) of items of property, plant and equipment due to usage, wear and tear, obsolescence processes that decrease the future economic benefit of these assets over the years they are used to earn revenue. te ah o o t e k ur a p o un a m u istock bigstock Depreciation is calculated at the end of each accounting period (on balance day) to provide a true and fair view of the value of property, plant and equipment. As most entities report their property, plant and equipment at historic cost, depreciating these assets provides a carrying value that more closely resembles their future economic benefit to the entity. AC

48 assets Important note Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset less its residual value. Useful life is the period over which an asset is expected to be available for use by an entity, determined after considering the following factors: expected usage of the asset expected physical wear and tear technical or commercial obsolescence. Residual value is the estimated amount that an entity would currently obtain from disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life. Depreciation of an asset begins when it is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. The depreciation method used shall reflect the pattern in which the asset s future economic benefits are expected to be consumed by the entity. calculating depreciation Depreciation is an expense because it is a decrease in economic benefit in the form of a depletion of an asset. To calculate depreciation you need: cost (exclusive of GST if the business is registered for GST) expected useful life estimated residual (salvage or scrap) value. Depreciation is often calculated by allocating the cost of an asset over its useful life. However, there are a number of different methods that can be used to calculate depreciation. For this particular course the two methods that are important are: straight-line diminishing value. 46 AC3001

49 assets straight-line method This method allows the cost or future economic benefit of an asset less residual value to be spread equally over its useful life. It is called the straight-line method because the amount of depreciation is the same for every year of the useful life of the asset. Here is the formula: cost of asset residual value estimated useful life For example, Laser Link Services purchased office equipment for $12,000 (excluding GST) on 1 April It is expected to have a useful life of four years and a residual value of $2,000. $12,000 $2,000 4 = $2,500 depreciation expense per year Year Cost Annual depreciation Accumulated depreciation Carrying amount 1 $12,000 $2,500 $2,500 $9,500 (12,000 2,500) 2 $2,500 $5,000 (2,500 x 2) 3 $2,500 $7,500 (2,500 x 3) 4 $2,500 $10,000 (2,500 x 4) $7,000 (12,000 5,000) $4,500 (12,000 7,500) $2,000 (12,000 10,000) Year The annual depreciation expense of $2,500 will be reported in the Income Statement (the amount is the same each year). The $12,000 cost of the office equipment will be reported in the property, plant and equipment note to the Statement of Financial Position each year, in accordance with the historical cost. The carrying amount that resembles most closely the economic benefit of the office equipment will be reported in the property, plant and equipment note to the Statement of Financial Position: Year 1 $9,500, Year 2 $7,000, Year 3 $4,500, Year 4 $2,000. AC

50 assets diminishing value Key point The diminishing value (or reducing balance) method depreciates the carrying amount of an asset by a percentage every reporting period and allows for more consumption of the future economic benefit of the asset in its early years. The depreciation accumulated to date is subtracted before the depreciation for the current reporting period is calculated. Here is the formula: (cost accumulated depreciation) x rate (%) The residual value is not subtracted. The aim of this method is to arrive at the residual value when the useful life of the asset is over. At the time the asset is sold, the business calculates whether there has been a gain or loss on sale. Consider a vehicle purchased for $25,000 (excluding GST) and assume the rate of depreciation is 20% for motor vehicles. Year Cost Annual depreciation 1 $25,000 $5,000 (20% x 25,000) 2 $4,000 (20% x 20,000) 3 $3,200 (20% x 16,000) Accumulated depreciation $9,000 (5, ,000) $12,200 (9, ,200) Carrying amount $5,000 $20,000 (25,000 5,000) $16,000 (25,000 9,000) $12,800 (25,000 12,200) Year Shown graphically, the diminishing value method looks like this. $ 5,000 4,000 3,000 2,000 1,000 0 Year 1 Year 2 Year 3 You can see from the graph that this method is appropriate where the consumption of the future economic benefit of the asset is greatest in its first years of life, so it is a good method for machinery or vehicles. The depreciation expense is lower as the asset gets older, the time when these assets are more likely to have repairs and maintenance costs to charge against the income of the period. 48 AC3001

51 assets 6A Con s Driving Range bought a new drive-on mowing machine on 1 April 2014 that cost $32,000 (excluding GST) and has a residual value of $2, Prepare a table showing depreciation for the first three years of the vehicle s life using the straight-line method of calculation useful life is five years. 2. Prepare another table, showing depreciation for the first three years of the vehicle s life using the diminishing value method of calculation rate 25%. Accumulated depreciation and carrying amount should also be shown for this method. In addition to the two tables you are to: 3. Prepare the General Journal entry on 31 March 2015 for depreciation at the end of the first year using the straight-line method of calculation. Check your answers. AC

52 7 teacher-marked activities This is the time to revise the main topics in this booklet before you attempt the teacher-marked activities. You can: make notes, highlight key points, have another go at the activities contact your teacher if you would like to discuss your work check the success criteria for each lesson to make sure you can do these. When you have revised the topics, you are ready to attempt the teacher-marked activities. Achievement criteria Please refer to the Reference guide (AC3000R) for the achievement criteria for the Level 3 Accounting standards. 7A This activity should take between 0ne and two hours and will contribute to your understanding of all the achievement standards at Level 3. Using the information provided on the following page, prepare: General Journal entries for the balance day adjustments Income Statement as at 31 March 2016 Statement of Financial Position and Notes to the Statement of Financial Position as at 31 March 2016 using the templates provided. 50 AC3001

53 teacher-marked activities wordwise trial balance as at 31 march 2016 $ $ Inventory 260,000 Capital 640,000 Accounts receivable 82,700 Bank 15,700 Vehicles 60,000 Mortgage 300,000 Land 200,000 Sales 800,000 Buildings 600,000 Accumulated depreciation Equipment 100,000 buildings 24,000 Cost of sales 380,000 vehicles 15,000 Insurance 7,000 equipment 20,000 Telephone 12,800 Accounts payable 40,000 Electricity 18,000 GST 1,600 Rates 10,000 Interest 1,000 Wages sales staff 30,000 Salaries 90,000 Bad debts 4,800 $1,856,300 $1,856,300 additional information The mortgage is secured over the business land and buildings with a maturity date of 31 July The interest rate is 7%. The following adjustments were needed at balance sheet date. Additional bad debts of $5,980, including GST, are required to be written off. An allowance for doubtful debts is to be created to 2.5% of Accounts receivable. Invoices dated 29 March for expenses owing are on hand for telephone $1,380, including GST and electricity $2,024, including GST. Wages owing sales staff, $5,000. Depreciation is to be provided on: buildings at 2% straight-line vehicles at 20% diminishing value equipment at 10% straight-line. Inventory is to be revalued downwards by $10,000 to its net realisable value. Profit for the year, after adjustments, is $190,322. Your teacher will assess this work. AC

54 teacher-marked activities What to do now Check that you have: 3/5 marked and corrected the self-marked practice activities filled in the self-assessment rubric on the back page detached and filled in the cover sheet from the back of the booklet and attached it to your self-marked activities and teacher-marked activities. Send your teacher-marked activities and self-marked activities to your teacher using the cover sheet AC AC3001

55 8 answer guide Use a red or green pen to mark your work. Work through the activity again if your answer is incorrect. Phone or your teacher if you need more help. 1A 1. what is accounting? Student s own work. 1B Column A Management accountant Column B Uses accounting information to make business decisions and provide advice to improve overall business performance. Auditor Analyses an organisation s financial accounts to test that controls are in place to prevent fraud and errors. Tax specialist Prepares corporate and personal income tax statements and provides strategies and advice. Chartered accountant Must be a member of NZICA. Forensic accountant NZICA Part detective, part lawyer, part accountant. Tends to be involved when fraud or legal action is involved. Through analysis and investigation, examines the past for clues to uncover the truth behind financial and business actions that may disclose fraud. New Zealand Institute of Chartered Accountants. Financial planner Provides clients with a strategy for meeting their financial goals. Continuing education Is provided by NZICA for its members. 1C Your teacher will mark this paragraph when you send in your work. AC

56 answer guide 2A 2B 2C 2D 3A 2. gst 1. $1,440 x 1.15 = $1, $4,500 x 1.15 = $5, $6,300 x 1.15 = $7, $9,900 x 1.15 = $11, a. $1,035/1.15 = $900 $1,035 $900 = $135 (GST) 2. b. $1,656/1.15 = $1,440 $1,656 $1,440 = $216 (GST) 3. c. $2,484/1.15 = $2,160 $2,484 $2,160 = $324 (GST) 4. d. $5,175/1.15 = $4,500 $5,175 $4,500 = $675 (GST) general ledger Date Particulars Debit $ gst 2016 Apr 1 Balance Credit $ Balance $ 400 Cr Apr 17 Bank 400 Apr 30 Bank Dr Bank Cr Accounts receivable Cr Accounts payable Cr 1. The phrase that describes what a business does, in relation to GST, is taxable activity. 2. Transactions that are not subject to GST are called exempt supplies. 3. To become registered for GST, a business fills in a GST registration form. 4. The current GST tax rate in New Zealand is 15%. 5. The government department called Inland Revenue collects GST from businesses on behalf of the government. 6. Businesses that have over $60,000 in income must register for GST. 7. If a business accounts for GST when a payment is made or received, this is known as the payment basis accounting method. 8. The shortest taxable period is one month. 9. Every GST invoice must have a GST number. 3. income statement 1. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. 54 AC3001

57 answer guide 2. The purpose of the Income Statement is to show income, expense and profit over a period of time, for example for the year ending 31 March Salaries paid of $160,000 are an expense because there is a decrease in the asset cash at bank (or increase in liability if bank is in overdraft) that will reduce the profit of the business and this will reduce equity but is not the result of drawings by the owner. 4. Interest received of $6,400 increases economic benefits in the form of inflows of assets cash at bank, that results in increases in equity, and is not a contribution from equity participants. 3B Revenue say it with flowers income statement for the year ended 31 march 2016 $ $ $ Sales 510,000 Less Cost of sales 276,000 Gross profit 234,000 Add Other income Rent received 10,000 Less Expenses Distribution costs Shop wages 80,000 Freight out 3,600 Depreciation shop fittings 4,200 Depreciation vehicles 7,000 Vehicle expenses 12, ,800 Administrative expenses Insurance 4,000 Telephone 7,000 Stationery 3,000 Power 10,000 Rates 5,000 Bad debts 2,400 Depreciation building 6,000 37,400 Finance costs Interest 16, ,000 Total expenses 160,200 Profit for the year $83,800 AC

58 answer guide 4. statement of financial position 4A Current assets say it with flowers statement of financial position as at 31 march 2016 Notes $ $ $ Accounts receivable 1 21,200 Inventory 144, ,200 Non-current assets Property, plant and equipment 2 Total carrying amount 425,400 Total assets 590,600 Less Liabilities Current liabilities Bank 16,800 Accounts payable 30,000 Accrued expenses 1,600 48,400 Non-current liabilities Mortgage 3 200,000 Total liabilities 248,400 Net assets $342,200 Equity Opening capital 258,400 Profit for the year 83,800 Closing capital $342,200 notes to the statement of financial position 1. Accounts receivable $ Accounts receivable 24,000 Less Allowance for doubtful debts 2,800 21, Property, plant and equipment Note extract Land Building Shop fittings Vehicles Total Cost or valuation 100, ,000 28,000 50, ,000 Accumulated depreciation (18,000) (12,600) (22,000) (52,600) Carrying amount 100, ,000 15,400 28, , Mortgage The mortgage is secured over the business land and buildings with an interest rate of 8% p.a. and a maturity date of 31 March AC3001

59 answer guide 4B 1. Revenue adventure holiday tours income statement for the year ended 31 march 2016 $ $ $ Tour income 522,000 Less Distribution costs Depreciation tour vehicles 72,000 Vehicle expenses 108, ,000 Administrative expenses Depreciation tents and equipment 16,000 Equipment repairs 5,000 Tour food expenses 189,000 Track and hut fees 117,000 Telephone 19,000 Office expenses 9,700 Insurance 12,000 Bad debts 1, ,500 Finance costs Interest on loan 6,000 Total expenses 555,500 Loss for the year $(33,500) AC

60 answer guide 1. Current assets adventure holiday tours statement of financial position as at 31 march 2016 Notes $ $ $ Bank 270 Accounts receivable 1 45,000 Prepayments 2,000 47,270 Non-current assets Property, plant and equipment 2 Total carrying amount 364,000 Total assets 411,270 Less Liabilities Current liabilities Bank 6,000 Accounts payable 57,770 Accrued expenses 3,000 Revenue in advance 18,000 Total current liabilities 84,770 Non-current liabilities Loan 3 60,000 Total liabilities 144,770 Net assets $266,500 Equity Opening capital 300,000 Less Loss for the year (33,500) Closing capital $266, AC3001

61 answer guide notes to the statement of financial position 1. Accounts receivable $ Accounts receivable 47,000 Less Allowance for doubtful debts 2,000 45, Property, plant and equipment Note extract Tents and equipment Tour vehicles Total Cost or valuation 180, , ,000 Accumulated depreciation (32,000) (144,000) (176,000) Carrying amount 148, , , Loan The loan has an interest rate of 10% p.a. and a maturity date of 31 March AC

62 answer guide 5. balance day adjustments 5A alert systems general journal Date Particulars Debit $ 2015 Mar 31 Advertising 980 Computer repairs 1,000 GST 297 Accounts payable (Expenses invoiced but unpaid at balance day) Accrued income 1,260 Interest income (Interest due but not received at balance day) Credit $ 2,277 1,260 5B 1. café cuisine wholesalers general journal Date Particulars Debit $ 2015 Mar 31 Bad debts 7,500 GST 1,125 Accounts receivable (Jamie s Catering Limited) (Bad debts written off at balance day) Doubtful Debts 225 Allowance for doubtful debts (To increase the allowance for doubtful debts to 2.5% of accounts receivable, $97,000) Credit $ 8, AC3001

63 answer guide café cuisine wholesalers income statement (extract) for the year ended 31 march 2015 Administrative expenses $ Bad debts 10,700 Doubtful debts 225 café cuisine wholesalers statement of financial position as at 31 march 2015 (extract) Current assets Note $ $ Accounts receivable 1 94,575 notes to the statement of financial position 1. Accounts receivable $ Accounts receivable 97,000 Less Allowance for doubtful debts 2,425 94,575 AC

64 answer guide 5C 1. rimutaka wines general journal Date Particulars Debit $ 2016 Mar 31 Accrued income 2,070 Credit $ Interest received 2,070 (Interest due but not received at balance day) Wages sales staff 1,200 Accrued expenses 1,200 (Expenses owing but not paid at balance day) Prepayments 700 Insurance 700 (Insurance paid in advance at balance day) Bad debts 1,000 GST 150 Accounts receivable 1,150 (Further bad debts written off at balance day) Doubtful debts 140 Allowance for doubtful debts 140 (To increase allowance for doubtful debts $2,000 to 4% of accounts receivable $53,500) Write down of inventory 50,000 Inventory 50,000 (Inventory revalued to net realisable value) 62 AC3001

65 answer guide 2. Revenue rimutaka wines income statement for the year ended 31 march 2016 $ $ $ Sales 4,000,160 Less Cost of sales *2,750,000 Gross profit 1,250,160 Add Other income Rent 28,000 Interest received 5,000 33,000 Less Expenses Distribution costs Advertising 70,000 Wages sales staff 142,000 Depreciation on delivery vehicles 32, ,000 Administrative expenses Depreciation on buildings 20,000 Depreciation on fixtures 16,000 Salaries 88,000 Telephone 48,000 Electricity 90,000 Insurance 12,000 Bad debts 4,120 Doubtful debts ,260 Finance costs Interest on loan 11,400 Interest on mortgage 14,000 25,400 1,283,160 Total expenses 547,660 Profit for the year $735,500 *Write down of inventory is included in cost of sales. AC

66 answer guide 3. Current assets rimutaka wines statement of financial position as at 31 march 2016 Notes $ $ $ Bank 70,140 Accounts receivable 1 51,360 Inventory 450,000 Accrued income 2,070 Prepayments ,270 Non-current assets Investments Term deposit 2 100,000 Property, plant and equipment 3 Total carrying amount 1,249,800 1,349,800 Total assets 1,924,070 Less Liabilities Current liabilities Accrued expenses 1,200 GST 5,100 6,300 Non-current liabilities Loan 4 120,000 Mortgage 5 200, ,000 Total liabilities 326,300 Net assets $1,597,770 Equity Opening capital 862,270 Plus Profit for the year 735,500 Closing capital $1,597, AC3001

67 answer guide notes to the statement of financial position 1. Accounts receivable Accounts receivable Less Allowance for doubtful debts $ 53,500 2,140 51, Investments Investments are in a Fixed Term Deposit with an interest rate of 5% p.a. and a maturity date of 31 March Property, plant and equipment Note extract Land Buildings Fixtures Delivery vehicles Total Cost or valuation 500, , , ,000 1,385,800 Accumulated depreciation (40,000) (16,000) (64,000) (136,000) Carrying amount 500, ,000 93,800 96,000 1,249, Loan The loan has an interest rate of 9.5% p.a. and a maturity date of 31 March Mortgage The mortgage is secured over the business land and buildings with an interest rate of 7% p.a. and a maturity date of 21 July D Balance day adjustments Wages owing at balance day Prepaid insurance Telephone account for March dated 28 March 2015 Interest credited on March bank statement Dividends receivable at balance day 2015 Inventory revalued downwards at balance day GST required Yes/No No No Yes No No No AC

68 answer guide 6. assets 6A 1. STRAIGHT-LINE METHOD Cost of asset Depreciation Year 1 $32,000 $32,000 $2,000 5 = $6,000 Year 2 $32,000 $32,000 $2,000 5 = $6,000 Year 3 $32,000 $32,000 $2,000 5 = $6, DIMINISHING VALUE METHOD Cost of asset Depreciation Accumulated depreciation Carrying amount Year 1 $32,000 $8,000 (25% $32,000) $8,000 $24,000 Year 2 $32,000 $6,000 (25% $24,000) $14,000 $18,000 Year 3 $32,000 $4,500 (25% $18,000) $18,500 $13, con s driving range general journal Date Particulars Debit $ 2015 Mar 31 Depreciation on mowing machine 6,000 Credit $ Accumulated depreciation on mowing machine 6,000 (Depreciation on mowing machine) 66 AC3001

69 acknowledgements Every effort has been made to acknowledge and contact copyright holders. Te Aho o Te Kura Pounamu apologies for any omissions and welcomes more accurate information. Diagram text: Year 11 Accounting, Eng Lim Lawrey, Pearson Longman. Extract only. Logo: NZICA, New Zealand Institute of Chartered Accountants, Used by permission. Photos istockphoto Business graph documents, Kentucky fried chicken logo on street billboard, Editorial use only Downtown Wellington, Business man and woman, Starbucks coffee logo, Editorial use only Young man is working in a greenhouse, Woman at shop window, GST, Chef s touch, Mechanics shop, Airliner landing, Security system, Christmas shopping, Modern business, Inspecting tools, Free delivery, Copyright, Supermarket, Old grain harvester, Bigstock Financial statements, Shopping for flowers, Pretty student revising, Networking on golden dollar coin, Combine in a field, Shirts in store, Shutterstock 68 shares close-up of a vintage stock market object, Excavator loader driver working, AC

70 68 AA2000

71 self-assessment ac3001 Fill in the rubric by ticking the boxes you think apply for your work. This is an opportunity for you to reflect on your achievement in this topic and think about what you need to do next. It will also help your teacher. Write a comment if you want to give your teacher more feedback about your work or to ask any questions. Fill in your name and ID number. Student name: Student ID: Not yet attempted Didn't understand Understood some Understood most Very confident in my understanding Review and explain accounting concepts. Account for GST where necessary in Balance Day Adjustments. Present Income Statements and Statements of FInancial Position. Please place your comments in the box below. Student comment Contact your teacher if you want to talk about any of this work. Freephone teacher use only Please find attached letter Teacher comment

72 cover sheet ac3001 students place student address label below or write in your details. Full Name ID No. Address (If changed) authentication statement I certify that the assessment work is the original work of the student named above. Signed (Student) Signed (Supervisor) for school use only assessment