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On 1 July 2026 the owner of Richmond Rugs bought a delivery van for $80 000 plus GST (Inv 435). The entries in the General Ledger would be .....
Dr Delivery Vehicle $80 000, Dr GST Clearing $8 000, Cr Accounts Payable $88 000
Which accounting assumption does not support the need for balance day adjustments? Period, Going Concern, Entity, Accrual Basis
Entity
Elwood Eggs pays $8 000 wages on the 15th of each month. The balance day adjustment required for annual reports at 31 December would be?
Dr Wages, Cr Accrued Wages.
Which of the following is not an accounting assumption? Accrual basis assumption, Period assumption, Conservatism assumption, Going concern assumption
Conservatism assumption
A clothing boutique takes out a $10,000 loan to purchase new inventory for the upcoming season. The loan must be repaid over the next two years. The accountant records the amount owed as a liability in the business’s financial statements. Why the loan is classified as a liability?
The loan is an obligation that must be repaid in the future.
Define depreciation.
The allocation of the cost of a non-current asset over its useful life.
Which qualitative characteristic supports recording balance day adjustments?
Relevance
A bakery purchases a new commercial oven on a payment plan whereby they do not need to pay for the first three months. The bakery starts using the oven immediately and the accountant records it as an asset, even though no payments have been made yet. Which accounting assumption is relevant in this scenario?
Going Concern
A business prepares its annual financial report and ensures that all the information is clearly presented and easy to follow so that people without a background in accounting can still understand the key financial details. Which qualitative characteristic is relevant in this scenario?
Understandability
A cafe sells $1,500 worth of coffee and baked goods in one day. On the same day, the owner makes a contribution of $1000 into the cafe’s bank account. Determine the amount of revenue that will be recognised in the financial records for this day and explain how this amount is determined.
$1500 of revenue will be recognised in the financial records for this particular day. The sales of coffee and baked goods are recognised as revenue since this increases assets or decreases liabilities and results in an increase in owner’s equity. The owner’s contribution of $1000 is not classified as revenue since these contributions are excluded from being recognised as revenue.
A vehicle with a historical cost of $100 000 was purchased on 1 December 2024. Reports are prepared six-monthly. It is depreciated using the straight-line method at 15% per annum.The amount of depreciation expense allocated for the reporting period ended 30 June 2025 would be?
$7 500
On 1 January 2025, a business acquired a five-year loan of $72,000. The loan will be repaid in monthly instalments of $1200. How will this loan be classified on the balance sheet as at 30 June 2026?
Current liability – $14,400; non-current liability – $36,000
On 30 June 2026, the post adjustment trial balance for Ascot Vale Audio Visual included an item called Accrued Electricity with a $115 Cr balance. The business paid its electricity bill of $330 including GST on July 20, 2026. State the effect of this transaction on the Balance Sheet.
Assets - decrease (bank) $330
Liabilities - decrease (accrued expense & GST Clearing) $145
OE decrease (NP) $185
Describes the difference between accounting assumptions and the qualitative characteristics of financial reports?
Accounting assumptions are rules that provide the framework for financial reporting, whilst qualitative characteristics ensure the usefulness and reliability of financial information
A clothing store purchases new stock from a wholesaler on credit. Identify which accounting elements will be affected by this transaction.
Assets (inventory) will increase. Liabilities (accounts payable) will increase. Liabilities (GST Clearing) will also decrease.
On 26/06, Em’s Electronics has been contacted by its account receivable, TV Traders. They have gone bankrupt and have paid $1 100 towards their outstanding account totalling $2 750. The remaining balance will not be paid. How would this be recorded in the General Journal?
Debit Bank $1 100, Allowance for Doubtful Debts $1 500, GST Clearing $150; Credit Accounts Receivable $2 750
A paint business pays $800 for its monthly warehouse rent. The accountant records the rent payment as an expense in the financial records. Explain why the rent payment is classified as an expense.
It represents a cost incurred to operate the business that will either result in a decrease in assets (if paid in cash) or an increase in liabilities (if paid using credit). The payment of this cost reduces the business’s profit for the period and therefore decreases owner’s equity.
Sam’s Sofas sells household furniture. On 01 June, the balance in the allowance for doubtful debts ledger account for Sam’s Sofas was $2 290 cr. On 25 June, one customer’s account of $3 300 was totally written off as a bad debt. Credit sales for June were $121 000 and sales returns were $4 500. On 30 June, it was decided to increase the allowance for doubtful debts to 3% of net credit sales. Outline the impact on the Balance Sheet if the allowance for doubtful debts was not recorded in the accounts of Sam’s Sofas on 30 June.
If the allowance for doubtful debts was not recorded, the assets would be overstated due to the allowance for doubtful debts of $4 205 being understated.1 The owner’s equity would also be overstated, due to the profit being overstated as a result of the bad debts expense being understated.
A business delays releasing its financial report for several months because the manager is waiting for more favourable business results. When the report is finally released, it shows significant profits but is no longer useful for making business decisions. Which qualitative characteristic has been compromised in this scenario? Explain how this affects the usefulness of the financial information for decision-making.
The qualitative characteristic that is compromised in this scenario is timeliness. Timely information is crucial for users to make informed decisions based on current data, so the delay has made the report less relevant thus impacting its usefulness.
Penny owns and operates Penny’s Puzzles and has provided you with the following list of transactions relating to one of their most popular items, the ‘ABC Giant Puzzle’. 10/08 Purchase of 25 ‘ABC Giant Puzzle’, cost price $11 incl. GST each. (Inv 56). 12/08 Cash sale of 5 ‘ABC Giant Puzzle’ for $15 plus GST each, cost price $9 each (EFT). 18/08 1 ‘World Puzzle’ and 1 ‘ABC Giant Puzzle’ taken home for personal use, cost price $10 each (Memo 17). 19/08 Credit sale of 10 ‘ABC Giant Puzzle’ to Princeton Primary for a total of $165 incl. GST, cost price $10 each (Inv PP 276) Explain the impact on the accounting reports if Penny’s Puzzles used the first-in, first-out cost assignment method instead of the identified cost method.
If Penny’s Puzzles used the identified cost method instead of first-in, first-out, the impact on the accounting reports would be as follows. Both the advertising and cost of sales expenses will be lower, which will result in a higher profit on the Income Statement. The impact on the Balance Sheet will be that the more expensive, newer, Inventory will remain, increasing the inventory asset. The increased profit will also increase the owner’s equity. There will be no impact on the Cash Flow Statement.
Explain how the provision of an allowance for doubtful debts satisfies an accounting assumption.
The recording of an allowance for doubtful debts satisfies the accrual basis assumption. This assumption requires that expenses are recorded when they incurred, to match them against the revenues earned in the same period, to enable an accurate calculation of profit. The bad debts expense should be recorded when it is incurred, which is in the same period that the credit sales are earned to which it relates.
A retail store purchases inventory in December but does not sell it until January of the following year. The store’s accountant ensures that the expense is only recorded in January, when the sales are made. In addition, the accountant prepares the financial report assuming the store will continue to operate into the foreseeable future, and the financial records are kept completely separate from the owner’s personal finances. Explain three accounting assumptions demonstrated in this scenario.
The financial report assumes that the store will continue to operate into the future, meaning the entity is not expected to close or wind up in the near future. This relates to the going concern assumption. The financial records for the store are kept separate from the owner’s personal finances, ensuring the business is treated as a separate entity for accounting purposes.
The expense for the inventory is recorded when the revenue is earned in January (when the inventory is sold), rather than when the inventory was purchased in December as this follows the principle that expenses are recognised when incurred and revenue when earned. This relates to the accrual basis assumption.
Elwood Eggs pays $8 000 wages on the 15th of each month. They report monthly. A balance day adjustment for 30 June was recorded. Explain the effect of this balance day adjustment on the financial reports for Elwood Eggs.
Balance Sheet - Assets no effect, Liabilities increase $4,000 accrued wages, OE decreases $4,000 net profit. Income Statement - NP decrease $4,000 due to wages Cash Flow - no affect
Sam’s Sofas sells household furniture. On 01 June, the balance in the allowance for doubtful debts ledger account for Sam’s Sofas was $2 290 cr. On 25 June, one customer’s account of $3 300 was totally written off as a bad debt. Credit sales for June were $121 000 and sales returns were $4 500. On 30 June, it was decided to increase the allowance for doubtful debts to 3% of net credit sales. Calculate the bad debts expense to be reported in June.
Balance in Allowance for Doubtful Debts at 1 June 2 290cr less amount written off on 25 June 3 000 cr = Balance remaining 710 dr. 3% allowance required (121 000 – 4 500) x 0.3 = 3 495 cr less balance remaining 710 dr.
Bad Debts Expense for June $4 205
Lucia’s Luxuries sells designer handbags and accessories. The business reports monthly. On 13/01, the business purchased 30 leather tote bags from a London designer for $900 plus GST each, and 20 leather clutch bags for $1 200 plus GST each. (Inv. 9021). On 15/01, the business paid $825 incl. GST for the freight charges. (EFT 89101). On arrival in the shop, a protective dust bag with the business logo on it is added to each leather bag, at a cost of $5 plus GST each. Calculate the cost price of one leather tote bag.
Cost price of one leather tote bag = unit price + product costs
= 900 + 52 (dust bag)
= $905