Transaction Analysis for GST

Chapter 5

Chapter 5

Transaction analysis for double-entry accounting (with GST)

1

Transaction analysis for Tr double-entry accounting (with GST) Working through this chapter will assist you to: • classify accounts to prepare financial records • apply accounting principles to record record transactions transactions..

Information Procedures IP 4.3 and 5.3

INFORMATION PROCEDURES Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 7

Chapter 8

Chapter 9

Managing

Source

Accounting

Chapter 5

Chapter 6

Nature of

The double-

Specialised

Other

End-of-

Control

information

information

documents

fundamentals

Transaction Tra nsaction analysis

entry

journals

accounting

period

procedures

systems

reports

process

Key topics:

Double-entry accounting

Chapter 10

2 Focus on Business 1

Chapter 5

Double-entry accounting In the previous chapters we’ve discussed accounting systems in a general way and the rules that these systems follow. In this chapter we will begin to look at an actual accounting system that businesses use. We’ll see how the rules for accounts and the accounting equation are applied to transactions in this system. The system we are examining is known as double entry .

Every time you buy a magazine or book or go to the movies, for example, you pay Goods and Services Tax (GST). Although businesses are also charged GST on goods and services they purchase, they are able to claim this back from the government. It is eventually only the final consumer who pays the GST. The Commonwealth government introduced this tax on 1 July 2000. It applies to most goods and services and is calculated at the rate of 10% of the total price of the product or service. Only businesses that register with the Australian Taxation Office (ATO) are required to charge GST. They receive an Australian Business Number (ABN), which they must display on all their business documents. Where a price includes the amount of GST to be paid, it is said to be GSTinclusive . When the GST component has not yet been added to the price for a product or service, the price is said to be GST-exclusive. Figure [5.2] shows prices in both formats.

double-entry system of accounting states that for every transaction there is a debit (DR) entry and a corresponding credit (CR) entry of equal value.

The double-entry system allows businesses to build safeguards into their accounting system and to prepare detailed and varied financial reports. It also ensures that the accounting equation remains equal. Owner’s equity

Figure [5.1] illustrates the flow of information in a double-entry system of accounting. In this chapter we are focusing on the thinking process involved in recording information into the accounting system of a business. In later chapters we’ll look at the other steps in the double-entry system. [5.1] Double-entry accounting process

3

Goods and Services Tax (GST)

✦ The

Assets = Liabilities + DR = CR


✦ GST-inclusive indicates

that the price given for a product includes the GST

component. ✦ GST-exclusive indicates

that the price given for a product has not had the GST

component added. [5.2] A document that shows both GST-inclusive and GST-exclusive prices

Thinking process:

transactionanalysis

Source documents

Journal

Ledger

Trial balance

Financial reports

Evaluation of reports

The GST-exclusive price The GST-inclusive price

Example GST-inclusive calculations

The GST-inclusive price of a product is given as $165. In order to determine the value of GST, it is necessary to divide the price by 11 or multiply by  . Therefore, the GST component of the above product =  × $165 = $15


Example GST-exclusive calculations

Chapter 5

The GST-exclusive price of a product is given as $150. In order to determine the value of GST, the product selling price is simply multiplied by 10%: GST = 10% × $150 = $15 Therefore, the full selling price of the product would be $150 + $15 = $165.

Example Purchase of an asset for cash

It is important to distinguish between the terms GST inclusive and GST exclusive, because the calculation of the GST component will vary accordingly. In this chapter, GST will be recorded in a GST account, and this account is a liability as it represents the amount of GST owed to the government. When a business pays for goods and services it purchases, it has to pay out the total cost including GST. However, as long as a business has kept correct records, it can reclaim from the government the amount of GST it has had to pay to run its business. This then reduces the GST liability. When the business makes sales of its goods or services, it must collect GST. This is a liability as this amount is paid to the government. GST is only involved in transactions that are based on the buying and selling of goods and services. If the transaction does not involve buying or selling, GST is not included. GST is also not included in financial transactions (e.g. transactions with a bank) and some food items (generally fresh food). The following is a list of transactions that will be included in this chapter that do not include GST: • capital contributions by the owner (cash and other assets) • drawings by the owner (cash only) • interest paid on a loan • interest received from a bank • a loan from a bank • a loan to another party • payment of wages to employees. Something to remember is that GST only involves sales and purchases of goods and services and that when a sale is concerned, GST is always creditedbecause the liability is increasing. When purchases are made, GST is always debited because the liability is decreasing.

✦ Transaction analysis is

a process used to break down a transaction into its debit and credit parts. It is the ‘thinking process’ involved in taking i nformation from the source document/transaction and applying the rules of debit and credit so that

5

Consider the following transaction: On 1 June 2007 Petra Pollack bought computer equipment for business purposes for $22 000 cash (including GST). The GST included in the price paid is 1/11th of the total. So that is 22 000 divided by 11 = $2 000. That means that the value of the equipment is $20 000, but the business has to pay $22 000 to purchase the equipment. GST that is paid by businesses on its purchases is able to be reclaimed (paid back) from the government. Equipment is an asset account, which has a debit nature. Because the computer equipment account is increasing (that is, the business has more invested in computer equipment than before this transaction), the computer equipment account would be debited . The GST included in the price i s also debited as it is decreasing the amount the business has to pay to the government because this amount of GST can be reclaimed by Petra’s business. Remember that you have learnt that assets are debit in nature and that to increase an account you do the same as its nature. On the other hand, the bank account (an asset ) would decrease because Petra’s Peraphernalia has paid money out of this account. Because the bank account is an asset account decreasing, it is credited .

Analysing transactions involves the following questioning process: 2 What category does each

1 Which accounts does

of these accounts belong to? (Revenue, expense, asset, liability or owner’s equity?)

the transaction affect? (names of individual accounts)

3 Is the value of the

4 Will this increase or

individual account going to increase or decrease as a result of the transaction?

decrease lead to this account being debited or credited?

If you apply this process in the table format called a transactional analysis table (see [5.3]), you will have an invaluable tool for learning the rules of double-entry accounting.

Transaction analysis We discussed the first step in the accounting process, the preparation of source documents, in chapter 3. These source documents contain the details of transactions. The next step is to record the information about the transactions into the journals of a business. First, however, you need to practise the thinking process that will help you apply the rules for accounts to transactions and ensure you enter the information correctly into the business’s financial records. This process is called transaction analysis.


[5.3] Transaction analysis table Tr ansaction

Account involved

Account type

Increase or decrease

A business activity with a financial value

Be concise and select the most obvious name or the common name used for that type of activity

Revenue, Expense, Asset, Liability or Owner’s equity

↑ or ↓

Debit or credit

Amount

Apply the rules: debit or credit so that Debits = Credits

Record the amount to be entered into each account


Chapter 5

We will use this table format to show how the following transactions are analysed: • contributions of cash or other • withdrawals of cash by the owner assets by the owner (no GST) (no GST) • purchases of assets for cash (GST) • purchases of assets on credit (GST) • sales of assets (other than • sales of assets (other than inventories) for cash (GST) inventories) on credit (GST) • sales of inventories for cash (GST) • sales of inventories on credit (GST) • sales of services for cash (GST) • sales of services on credit (GST) • return of inventories purchased • return of inventories purchased on for cash (GST) credit (GST) • return of inventories sold for cash • return of inventories sold on credit (GST) (GST) • cash paid to accounts payable • purchase of supplies and services for (not a sale or a purchase—no GST) cash (GST) • purchase of supplies and services on credit (GST)

• cash received from accounts receivable (not a sale or a purchase—no GST)

• other cash received (may involve GST e.g. commission or may not involve GST, e.g. interest).

Contributions of cash or other assets by the owner Business owners usually make an investment of cash and/or other assets to start a business. They do this so that the business can begin purchasing the items and services needed to begin the business. When the owner makes an investment, the name of the account used to record these contributions is called ‘ capital’ and is grouped with the owner’s equity accounts. ✦ Capital is

the name of the account used to record the owner’s contributions to a

business.

When an owner contributes cash or other assets to the business, we always represent (and record) the transaction from the business’s point of view. As the transaction analysis table [5.4] shows, the assets (for example, Bank or Computer equipment) are said to be increasing and therefore they are debited . At the same time, the amount invested by the owner is increasing and the Capital account is therefore credited .


7

[5.4] Transaction analysis of contributions by the owner Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Investment of cash by owner

Petra Pollack invested $20 000 cash

Bank Capital

Asset Owner’s equity

Increase Increase

DR CR

$20 000 $20 000

Investment of assets other than cash by owner

Petra contributed computer equipment for business use

Computer equipment Capital

Asset Owner’s equity

Increase Increase

DR CR

$25 000 $25 000

RULE

activity

Asset (e.g. Bank, Vehicle, Equipment)

Increase

DR

Owner’s equity (Capital)

Increase

CR

KNOWING AND DOING 5.1 1

What is transaction analysis?

2

Explain the double-entry system of accounting. Illustrate your answer. What are the steps involved in analysing transactions? Draw a flow diagram to illustrate the steps involved in analysing transactions.

3 Analysing and evaluating Applying Communicating Knowing and understanding

Amount

4 5 6 7 8 9

What are the benefits of preparing a transaction analysis table? Distinguish between GST exclusive and GST inclusive. List some items on which you pay GST. Find out which everyday items GST is not charged on. Calculate the GST amount for each of the following. a $700 (GST exclusive) b $440 (GST exclusive) c $165 (GST inclusive)

d $720 (GST exclusive)

e $1 210 (GST inclusive)

f

$66 (GST exclusive)

10 What is the purpose of the capital account? 11 Why do we always represent transactions from the point of view of the business? 12 Identify the accounts involved in each of the following transactions.

J Smith invested $40 000 cash into a business. B Clancy contributed $20 000 cash and a vehicle worth $40 000 into his new business. 13 What type of account is each of the following? a Capital b Bank a b

c Motor vehicle

d Equipment

e Furniture

f Buildings

14 Complete a transaction analysis table for the following transactions. •

Jenny Wong invested $100 000 cash into her new business.

•

Nicky’s Nautical Wear received a $60 000 contribution in cash from the owner. Jan Lowe commenced business with a vehicle valued at $25 000, equipment worth $10 000 and $40 000 cash.

•


Note to teachers:

This section of Chapter 5 Transaction analysis for double- entry accounting (with GST) differs slightly from Chapter 5 in the textbook. Drawings of cash only will be considered in this chapter as it does not involve GST. This chapter only considers drawings of cash, not other assets. GST as it applies to the withdrawal of inventories and other assets (other than cash) is outside the scope of this junior course.

Chapter 5

Withdrawal of cash by the owner A business owner may want to take out cash to use for their personal needs outside the business. When a business owner withdraws cash, a negative owner’s equity account called ‘drawings’ is used to record this transaction. GST is not involved in this type of transaction.

‘Goods’ are also called ‘inventories, stock or merchandise’.

✦ The

drawings account is the name of the account where businesses record that the owner has withdrawn cash from the business, for personal use.

As the transaction analysis table [5.5] shows, the drawings account is a ‘negative’ owner’s equity account and has a debit nature because it decreases the value of the owner’s investment. At the same time, the asset account from which the withdrawal is made is also decreasing and is therefore credited.


9

Purchase of assets—cash Just as we buy furniture or equipment (for example, washing machines or toasters) to use in our homes to make our lives comfortable, businesses buy assets such as v ehicles, furniture or equipment (for example, computers or fax machines). A trading business purchases goods and these goods are called inventories. Inventories are owned by the business (until they are sold) so they are also assets. GST is paid on all purchases of assets but the business can reclaim this amount of GST from the government at a later date. When abusiness buys anasset, the valueof theassets (what thebusiness owns) increases. You therefore debit the asset account (for example, the Motor vehicle, Inventories, Furniture or Equipment account), as [5.6] illustrates. GST is debited because it represents a decrease in the liability of GST owed to the government because GST paid on purchases can be reclaimed by a business. If the business uses cash to buy the asset, then the Bank account will decrease because there will be less money in the account. Decreases in assets are credited .

[5.6] Transaction analysis of the purchase of an asset for cash [5.5] Transaction analysis of cash withdrawn by the owner Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Drawings of cash by owner

Petra withdrew $200 cash for personal use

Drawings

Negative owner’s equity Asset

Increase

DR

$200

Decrease

CR

$200

Bank

Amount

Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Purchase of asset for cash

Bought equipment for $4 400 cash

Equipment GST clearing Bank

Asset Liability Asset

Increase Decrease Decrease

DR DR CR

RULE Asset (e.g. Furniture, Inventories, Motor vehicle) RULE Negative owner’s equity (Drawings)

Asset (Bank)

activity

Increase

DR

DR

Liability (GST)

Decrease

DR

Decrease

CR

Asset (Bank)

Decrease

CR

KNOWING AND DOING 5.2 2 Why do we debit the Drawings account when the owner takes out cash for

personal use? 3 Why is the Drawings account called a ‘negative’ owner’s equity? 4 Analyse the following transactions: a Benny Koutsis withdrew $200 to pay for personal expenses. b The owner paid for her $365 home electricity bill from her business’s bank account. c Johnny Liu (owner) took cash of $150 for his own use. 5 Analyse the following transactions for Linda Young: a Linda contributed a motor vehicle valued at $40 000. b Linda withdrew $50 for personal use. c Linda invested an additional $10000 into the business. d Linda paid a $400 account for her daughter’s school fees from the business’s

bank account.

$4 000 $400 $4 400

Increase

1 What is the purpose of the Drawings account?

Analysing and evaluating Applying Knowing and understanding

Amount


Chapter 5

Purchase of assets—credit

Sale of assets (other than inventories)—cash

If the business buys an asset on credit (that is, the business will pay for the asset at a later date), then a record of the business or person to whom the business owes money is necessary. The individual account used to record the amount owed to an individual or other business is called an ‘Accounts Payable’. This account is classified as a liability. Therefore, because the amount that the business owes has increased, it is necessary to credit the Accounts Payable account (see [5.7]). The GST involved in this transaction is recorded when the purchase is made. The cash owing is recorded at a different time.

Sometimes a business may find it has no further use for a particular asset, or the item now uses technology that has become out of date (for example, a computer). When a business sells its assets, the value of the business’s assets decreases. Therefore, we credit the individual asset account (for example, computer equipment or furniture) as [5.8] shows. If the business sells the asset for cash, then the bank account will increase because there will be more money in this account. Increases in assets are debited. When a business sells any of its assets it must charge GST on the sale. GST is a liability and it is remitted to the government at a later date; and as the amount owing is increasing it is credit .

[5.7] Transaction analysis of the purchase of assets on credit Type of transaction

Example

Purchase of asset on credit

Bought $2 200 worth of inventories from Mandy Taylor

Accounts involved

Type of account


Debit or credit

Inventories GST clearing Accounts payable— Mandy Taylor

Asset Liability Liability

Increase Decrease Increase

DR DR CR

RULE Asset (e.g. Furniture, Inventories, Motor vehicle)

activity

Increase

Amount

$2 000 $200 $2 200

[5.8] Transaction analysis of the sale of an asset (other than inventories) for cash Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Sale of asset for cash (not inventories)

Sold equipment for $770 cash

Bank Equipment GST clearing

Asset Asset Liability


DR CR CR

RULE Asset (Bank)

DR

Liability (GST clearing)

Decrease

DR

Liability (Accounts payable—name)

Increase

CR

KNOWING AND DOING 5.3

3 What is the rule for the purchase of inventories on credit? 4 What are three other names used to identify the inventories of a business? 5 Why are inventories an asset to a business? 6 What is the rule to record the purchase of goods on credit? 8 Analyse the following transactions: a Bought goods for $1100 cash. b Purchased stock valued at $5500 for cash. c Inventories worth $2200 were bought on credit from Wholly Suppliers. d Bought stock from Tickle Co. for $11000 on credit. e Georgia Parks purchased a new delivery van for $66000 cash. f

Hao Van Nguyen bought furniture for the business for $2200. He paid by cheque.

$770 $700 $70

Increase

DR

Asset (e.g. Furniture, Equipment)

Decrease

CR


Increase

CR

If the business sells an asset on credit (that is, it will receive the money for the asset at a later date), then it needs to keep a record of the person or business owing the money. The account used to record the amount that another business or an individual owes is called an ‘accounts receivable’. We classify this account as an asset. Therefore, because the value of the business’s assets is increasing, we debit the accounts receivable account (see [5.9]).

2 What is the rule for the purchase of an asset on credit?

7 What is the rule to record the purchase of inventories for cash?

Amount

Sale of assets (other than inventories)— credit

1 Explain the difference between a cash purchase and a credit purchase.


11


[5.9] Transaction analysis of the sale of an asset (other than inventories) on credit Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Sale of asset on credit

Sold motor vehicle to H Nolls for $16 500 on credit

Accounts receivable— H Nolls Motor vehicle GST clearing



DR CR CR

Amount

$16 500 $15 000 $1 500

g Chris Chester bought a new computer from Computer World for $3300 on credit. h Tommy Chan bought a new vehicle from Westside Motors for $33000 on credit. He

paid a $5 000 deposit.

RULE Asset (Accounts receivable—name)

Increase

DR

Asset (e.g. Furniture, Equipment)

Decrease

CR


Increase

CR


activity

Chapter 5

13

Sales of inventories—cash KNOWING AND DOING 5.4

Petra’s Paraphernalia, the business we’ve been using as an example in this book, is a trading enterprise, that is, Petra buys goods and resells them at a higher price. The price Petra buys goods for is called the cost price. When she sells the goods, they are sold at a different price, the selling price, which is the cost price plus a mark-up and with GST added on as well .

1 What is the rule to record the sale of assets (other than inventories) for cash? 2 What is the rule to record the sale of assets (other than inventories) on credit? 3 Explain the term ‘accounts receivable’. Analysing and evaluating Applying Knowing and understanding


4 Why is an accounts receivable an asset? 5 Complete the following transaction analysis table:

Transaction

Accounts involved

Sold vehicle for $22 000 cash

Bank Vehicle GST

Type of account

pri ce includes the cost of the goods bought and any costs of getting the goods ready for sale.

✦ Cost


Debit or credit

Amount

price is the price for which the business sells the product(s) and GST is added to this price .

✦ Selling

✦ Mark-up is

an amount added to the cost price to work out the selling price before GST is added.

Bank Furniture GST



$550 $500 $50

Accounts receivable— T Antonio Machinery GST clearing

Asset

Increase

$1 100

Asset Liability

Decrease Increase

$1 000 $100

Businesses use both sets of prices when recording a sale of inventories. The cost price is the value of the goods recorded in the inventories account. The selling price is the value used when the business records the revenue earned from the sale. Therefore, when a sale of inventories occurs, a business makes two distinct entries in the records of the business—a selling price entry (with GST) and a cost price entry (no GST).

Sold equipment to V Collins for $990

Recording the selling price

C Papadopoulos sold furniture worth $1 100 to B Henry on credit. Received a $200 deposit

If a business sells goods for cash, the bank account will increase by the full amount received from the customer, that is, the selling price and GST (as shown in [5.10]). Increases in assets are debited . The income earned by the business (that is, revenue) also increases and the GST liability also increases. We call the individual account used to record this type of income a ‘sales revenue’ account or just ‘sales’. Increases in revenue are credited .

D Coulter sold P Fleming a computer for $2 200 Accounts receivable— O Redding Bank Equipment GST clearing

$4 500 $1 000 $5 000 $500

Recording the cost price The business also needs to record the cost price effect of the entry. The value of inventories is decreasing; therefore, the asset account, inventories, is credited (see [5.10]). An expense account called ‘cost of goods sold’ is debited as this reflects the costs directly associated with selling the products.


Chapter 5

[5.10] Transaction analysis of sale of inventories for cash Type of transaction

Sale of inventories for cash

Example

Sold goods for $660 cash (cost price $300)

Accounts involved

Type of account


Debit or credit

Amount

Bank Sales GST clearing

Asset Revenue Liability

Increase Increase Increase

DR CR CR

$660 $600 $60

Cost of goods sold Inventories

Expense Asset

Increase Decrease

DR CR

$300 $300

activity

15


KNOWING AND DOING 5.5 1 Why do businesses need two prices to record the sale of inventories? 2 What is the rule to record the cost price of goods sold for cash? 3 What is the rule to record the selling price of goods sold for cash?


4 What is the rule to record the cost price of goods sold on credit? 5 What is the rule to record the selling price of goods sold on credit? 6 Analyse the following transactions: a Sold inventories for $1100 cash (cost price $600).

RULE

Selling price

Asset (Bank)

Increase

DR

b Sold stock for $1650 cash (cost price $700).

Revenue (Sales)

Increase

CR

c Inventories worth $2 200 were sold on credit to P Chester (cost price $1 400).


Increase

CR

e N Wiseman was sold goods on credit for $880 (cost price 50% of selling price).

Expense (Cost of goods sold)

Increase

DR

f

Asset (Inventories)

Decrease

CR

g Cash sales $3 300 (cost price $1 600).

d Y Polti was sold goods on credit for $3 300 (cost price $2 000).

Cost price

Sales of inventories—credit

Sale of services—cash

Similarly, when a business sells inventories on credit, it must record both the selling price (plus GST) and cost price part of the transaction. In a credit sale, however, the business has not yet received the cash, so it needs to record the name of the person or business who now owes it money. The account name given is ‘Accounts receivable—name of business or person ’. As shown in [5.11], we debit Accounts receivable (name) because this represents an increase in the business’s assets. All the other accounts involved remain the same as the ones used for cash sales of inventories.

When service enterprises (that is, businesses such as an auto-repair centre or an accountancy firm), sell their services, they increase their revenue. Service enterprises record this type of revenue in a ‘Service Fees Revenue’ account. GST is charged on the sale of services and remitted to the government. If the business provides a service for cash then the asset account, Bank, will increase and, therefore, will be debited (see [5.12]). The service fees revenue earned by the business will increase and therefore be credited . As this type of transaction represents a sale, the GST owing (liability) is increasing and is credited .

[5.11] Transaction analysis of sale of inventories on credit Type of transaction

Sale of inventories on credit

Inventories worth $990 were sold to B Vandermeer for cash (cost price 40% of selling price).

Example

Sold stock to Party Planners Ltd on credit for $880 (cost price $400)

[5.12] Transaction analysis of the sale of services for cash

Accounts involved

Type of account


Debit or credit

Accounts receivable— Party Planners Ltd Sales GST clearing



DR CR CR

$880 $800 $80

Cost of goods sold Inventories

Expense Asset

Increase Decrease

DR CR

$400 $400

RULE

Selling price

Amount

Asset (Accounts receivable—name) Increase

DR

Revenue (Sales)

Increase

CR


Increase

CR


Increase

DR

Asset (Inventories)

Decrease

CR

Cost price

Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Sale of service for cash

Serviced vehicle for a cash customer $330

Bank Service fees revenue GST clearing



DR CR CR

RULE Asset (Bank)

Increase

Amount

$330 $300 $30

DR

Revenue (Service fees revenue)

Increase

CR


Increase

CR


Chapter 5

of the returned goods. This means (as shown in [5.14]) that the bank account will increase and, th erefore, be debited . On the other hand, the inventories will decrease because the value of business’s assets is less—decreases in assets are credited . The GST clearing account is also affected and will be credited (opposite to when goods were purchased).

Sale of services—credit If a business sells its services on credit to a customer, then (as shown in [5.13]) it debits the Accounts receivable account for the customer because the customer now owes the business money and this results in an increase in assets. The Service fees revenue account will still be credited because the revenues for the business have increased, and as GST is charged it is therefore credited . [5.13] Transaction analysis of the sale of services on credit Type of transaction

Example

Sale of service on credit

Serviced E Winters’s vehicle for $220 on credit

Accounts involved

Type of account


Debit or credit

Accounts receivable—E Winters Service fees revenue GST clearing



DR CR CR

[5.14] Transaction analysis of the return of inventories that a business had purchased for cash Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Return of goods purchased for cash

Returned damaged inventories for $55 refund

Bank Inventories GST clearing



DR CR CR

Amount

$220 $200 $20 RULE Asset (Bank)

RULE Asset (Accounts receivable—name)

activity

Increase

DR

Revenue (Service fees revenue)

Increase

CR


Increase

CR

Amount

$55 $50 $5

Increase

DR

Asset (Inventories)

Decrease

CR


Increase

CR

Return of inventories purchased on credit If the business originally purchased the goods on credit, the amount that the business now owes to the supplier is reduced. This will result in a decrease in a liability account—Accounts payable—and this account will be debited (see [5.15]). Again, the value of inventories owned by the business has decreased and will be credited because the asset has decreased and GST clearing, a liability, will be increased—credited .

KNOWING AND DOING 5.6 1 What is ‘service fees revenue’? 2 List five types of businesses in your local area that would use a Service fees revenue

account. Analysing and evaluating Applying Knowing and understanding

17


3 What is the rule to record the sale of services for cash? 4 What is the rule to record the sale of services on credit? 5 Analyse the following transactions. a Received $660 cash for services provided. b $440 cash was received for accounting services provided. c Bookkeeping fees of $220 were provided to DH Chu on account. d Security services were provided on credit to Nick’s Nightclub for $165. e Design consultancy fees of $330 each were charged to G Kingley and W Quentin.

Return of inventories purchased for cash Sometimes when a business purchases inventories, it may find t hat the goods are faulty, the wrong size or unsuitable in some other way. The business may decide to return the goods or keep them if the supplier provides an adjustment to the price of the goods. This is called an ‘allowance’. Whether the goods are returned or an allowance is given, the effects on the accounts are the same. If the business originally bought the goods fo r cash, then it will receive a refund for the full value

[5.15] Transaction analysis of the return of inventories that a business had purchased on credit Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Return of goods purchased on credit

Returned goods worth $77 originally bought on credit from Parties Galore

Accounts payable— Parties Galore Inventories GST clearing

Liability Asset Liability

Decrease Decrease Increase

DR CR CR

RULE Liability (Accounts payable—name)

Decrease

Amount

$77 $70 $7

DR

Asset (Inventories)

Decrease

CR


Increase

CR


activity

Chapter 5


[5.16] Transaction analysis of the return of inventories originally sold for cash


Type of transaction

Example

Accounts Involved

Type of account


Debit or credit

Return of goods sold for cash

$110 worth of goods were returned for a cash refund. Cost price $55

Sales returns Bank GST clearing Inventories Cost of goods sold

Negative revenue Asset Liability Asset Expense

Increase Decrease Decrease Increase Decrease

DR CR DR DR CR

1 What is the rule to record the return of inventories purchased for cash? 2 What is the rule to record the return of inventories purchased on credit? 3 Why is a cash refund not received when inventories originally bought on credit are Analysing and evaluating Applying Knowing and understanding

19

returned? 4 Why might a business return inventories? 5 Analyse the following transactions:

Amount

$100 $110 $10 $55 $55

a Inventories worth $330 were returned to the supplier for a cash refund. RULE

b $110 worth of goods was sent back to the supplier because they were the wrong

colour.

Selling price

Negative revenue (Sales return)

Increase

DR

Asset (Bank)

Decrease

CR


Decrease

DR

Asset (Inventories)

Increase

DR


Decrease

CR

c The business received an adjustment note for $55 from T Hallam on goods purchased

on credit. d The business returned $88 worth of goods to S Dimitriou. Cost price

Returns of inventories sold for cash

Returns of inventories sold on credit

When a customer returns goods sold for cash because they prove to be incorrect for some reason, or are more than what the customer needs, the customer is entitled to receive a cash refund from the business for the full price paid. Remember that the sale of the goods involved a selling price and a cost price component. Similarly, when the goods are returned for a cash refund, the adjustments in the books of the business need to reflect the selling price and the cost price parts of the transaction and the reversal of the GST originally charged (as shown in [5.16]).

Recording the selling price of goods returned When abusiness providesa refund, theBank account willdecreaseand therevenue from the original sale will also decrease. The business records this decrease in sales in a ‘Sales returns’ account. This is a negative revenue account because there has been a decrease in the revenues earned by the business. The GST clearing account is also decreasing and will be debited .

Recording the cost price of goods returned Because the returned goods are now back in stock, the business’s Inventories account will now increase. The cost of goods sold (or the expense associated with the original sale) is also decreasing and therefore this account will be credited.

If the goods were originally sold on credit, then the records need to show a reduction in the amount owed to the business by the customer (that is, the amount of the original credit sale). A cash refund is not appropriate as the customer has not yet paid for the goods. Therefore, (as shown in [5.17]) a decrease in the asset account—Accounts receivable—is necessary to record the reduced amount that the customer now owes. Decreases in assets are credited . The other accounts involved are the same as in the cash example above. [5.17] Transaction analysis of the return of inventories originally sold on credit Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Return of goods sold on credit

Party Planners Ltd returned $220 worth of excess goods. Cost price $100

Sales returns Accounts receivable— Party Planners Ltd GST clearing Inventories Cost of goods sold

Negative revenue

Increase

DR

$200

Asset Liability Asset Expense

Decrease Decrease Increase Decrease

CR DR DR CR

$220 $20 $100 $100

RULE

Negative revenue (Sales returns) Selling price

Increase

Asset (Accounts receivable—name) Decrease

Amount

DR CR


Decrease

DR

Asset (Inventories)

Increase

DR


Decrease

CR

Cost price


activity

Chapter 5

[5.19] Transaction analysis of the payment to an accounts payable with a discount received


Type of transaction

Example

Cash paid to accounts payable (with discount)

Paid Parties Galore $1 045 and received a $55 discount for prompt payment

Accounts involved

Type of account


Debit or credit

Accounts payable— Parties Galore Bank

Liability Asset

Decrease Decrease

DR CR

$1 045 $1 045

Accounts payable— Parties Galore Discount revenue GST clearing

Liability Revenue Liability

Decrease Increase Increase

DR CR CR

$55 $50 $5

1 What is the rule to record the cost price of the return of inventories sold for cash? 2 What is the rule to record the cost price of the return of inventories sold on credit? 3 What is the rule to record the selling price of the return of inventories sold for cash? Analysing and evaluating Applying Knowing and understanding

4 What is the rule to record the selling price of the return of inventories sold on credit? 5 What is the nature of the Sales returns account? Why? 6 Analyse the following transactions: a A customer has returned inventories worth $440 (cost price $150) for a cash refund. b Customers returned stock to the value of $99 (cost price $30). c H Major returned $220 worth of goods (cost price $110). The business issued an

RULE Liability (Accounts payable)

adjustment note.

Decrease

DR

Revenue (Discount revenue)

Increase

CR

price). e A Huang returned goods worth $990 (cost price 60% of selling price).


Increase

CR

Asset (Bank)

Decrease

CR

activity

You will recall from our earlier examples that, when a business purchases an asset or goods on credit, it records this credit purchase in a liability account—accounts payable. This records the fact that the business owes someone money and that the amount owed includes the GST that was recorded when the purchase was recorded. The amount of GST owed is included in the amount paid but is not recorded again as this transaction is not a sale or purchase – just a subsequent payment of cash owing.

Example

Accounts involved

Paid Parties Galore $1 100

Accounts payable— Parties Galore Bank

1 What is the rule to record cash paid to an accounts payable? 2 What is the rule to record the discount received from an accounts payable? 3 Why is a discount given by an accounts payable? Analysing and evaluating Applying Knowing and understanding

4 Why is the Accounts payable account debited when recording a discount received? 5 Analyse the following transactions: a Sent a cheque to C Knight for $500 in full settlement of amount owing. b Paid P Xavier $900 in settlement of account.

GST). Type of account

Liability Asset

RULE Liability (Accounts payable—name)

Asset (Bank)


c Paid B Engles $400 and received a $44 discount for prompt payment (including

[5.18] Transaction analysis of a payment to accounts payable

Cash paid to accounts payable (no discount)

Amount

d G Fernando returned inventories to the value of $132 (cost price 40% of selling

Cash paid to accounts payable

Type of transaction

21



Debit or credit

Decrease Decrease

DR CR

Amount

d P Calder was paid $900 in full settlement of a $999 account. e We owed W Wilson $880. He gave us a discount of 5% for prompt payment. f

$1 100 $1 100

Decrease

DR

Decrease

CR

Discount received A discount has the effect of reducing the original transaction amount and as this included GST, an adjustment must also be made for GST in this transaction. Due to the GST, it may be easier to understand this transaction if done as two entries. The first entry is the amount actually paid. The second entry is the amount not paid which includes a component of GST in the discount.

The amount owing to C H Lai was $2200. The account was settled in full after deducting a 2 % discount for prompt payment.


Chapter 5

Purchases of supplies and services—cash

[5.21] Transaction analysis of the purchase of a supply or service on credit

In the previous sections we have been discussing the purchase of assets such as equipment and inventories. Businesses also need to pay for other supplies, such as stationery, and for services such as electricity, advertising and rent to keep operating and to carry out their main activities. These costs are called expenses because they must be incurred in order to earn the revenue. Expenses will reduce the overall profit made by the business at the end of the accounting period. If the business pays for the expense by cash (that is, with a cheque), then the expense account will increase and therefore be debited (see [5.20]). The amount paid for these expenses will generally include GST but because the amount can be reclaimed by the business from the government at a later date, the GST liability is decreasing. The bank account will decrease as there will be less cash available in this account—so the asset, Bank, is credited because it is decreasing. Wages and interest paid to a bank do not attract GST. [5.20] Transaction analysis of the purchase of a supply or service for cash Type of transaction

Purchase of supply or service for cash

Example

Paid $220 telephone bil l

Accounts involved

Type of account


Debit or credit

Telephone Bank GST clearing

Expense Asset Liability


DR CR DR

23


Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Purchase of supply or service on credit

Bought $770 worth of advertising from SunQuest News on account

Advertising Accounts payable— SunQuest News GST clearing

Expense

Increase

DR

$700

Liability Liability

Increase Decrease

CR DR

$770 $70

activity

Amount

RULE Expense (e.g. Electricity, stationery)

Increase

DR

Liability (Accounts payable)

Increase

CR


Decrease

DR

KNOWING AND DOING 5.10 1 What is the rule to record the purchase of a supply for cash?

Amount

2 What is the rule to record the purchase of a supply on credit? $200 $220 $20

3 Explain why an expense account is debited when a supply or service is purchased. Analysing and evaluating Applying Knowing and understanding

4 Analyse the following transactions: a Paid $440 for a telephone account. b Sent a cheque for $220 to Energex for electricity supplied. c Purchased advertising on account from Questfair Newspapers $990.

RULE Expense (e.g. Electricity, stationery)

Increase

DR

Asset (Bank)

Decrease

CR


Decrease

DR

Purchases of supplies and services—credit When the business buys the supply or service on credit, the expense account will increase and, therefore, be debited (see [5.21]). The amount that the business owes will also increase; therefore, the business’s liabilities will increase—and so liabilities will be credited . GST will be included in the amount paid and represents an amount that can be reclaimed from the government at a later date and is therefore decreasing the overall GST liability account.

d Received a tax invoice from Busy Bookkeepers for $880 accounting fees. e Paid $1 200 wages. (There is no GST in wages.) f

Auto Repairs Ltd charged our account $550 for repairs to the delivery van.

Cash received from accounts receivable You will remember from our earlier examples that the sale of an asset or goods on creditmeantthatthe customernowowesthe businessmoney.Thebusinessrecords the amount of money owing in an Accounts receivable account. This account is an asset. When the customer settles the account, that is, pays the business the full amount owing or part of the amount owing, the Accounts receivable (asset) decreases and therefore is credited (see [5.22]). GST is not included in this transaction as it has already been recorded at the time of the sale. At the same time the Bank account will increase and therefore be debited .


Chapter 5

[5.22] Transaction analysis of cash received from an accounts receivable customer Type of transaction

Cash received from accounts receivable (no discount)

Example

Party Planners Ltd paid us $300 for amount owing

Accounts involved

Type of account


Debit or credit

Bank Accounts receivable— Party Planners Ltd

Asset

Increase

DR

$300

Asset

Decrease

CR

$300

RULE Asset (Bank)

Asset (Accounts receivable—name)

Other cash received

Amount

Increase

DR

Decrease

CR

25


Sometimes a business earns income from sources other than its main service or trading activity. For example, it may rent a building to other businesses, or it may earn interest from money invested. When the business receives cash for these other revenues, the Bank account will be debited as it is increasing, and an individual revenue account will be credited for the type of revenue received and GST clearing will be credited also (see [5.24]). Interest from a bank or some other type of investment does not attract GST. [5.24] Transaction analysis of cash received from other revenue Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Receipt of revenue

Received $88 commission

Bank Commission GST clearing



DR CR CR

Discount given Because the original sale to the accounts receivable included GST, if discount is now given it really means that the amount charged for the goods has decreased. This also means that the GST we originally recorded must also decrease. It is generally easier to do this transaction in two parts to make it more simple. The first part of the entry deals with the cash actually paid. The second part deals with the amount of cash not paid—the discount that has a GST component.

RULE Asset (Bank)

[5.23] Transaction analysis of the payment from an accounts receivable customer with a discount Type of transaction

Example

Accounts involved

Type of account


Debit or credit

Cash received from accounts receivable (with discount)

Received $500 cheque from G Zammit. $55 discount was given for prompt payment

Bank Accounts receivable— G Zammit

Asset Asset

Increase Decrease

DR CR

Discount expense GST clearing Accounts receivable— G Zammit

Expense Liability Asset

Amount

activity

$500 $500

Amount

$88 $80 $8

Increase

DR

Revenue (e.g. Rent, commission)

Increase

CR


Increase

CR

KNOWING AND DOING 5.11 1 What is the rule to record cash received from an accounts receivable? 2 What is the rule to record the discount given to an accounts receivable? 3 Why is a discount sometimes given to an accounts receivable?


DR DR CR

$50 $5 $55


4 Make a list of sources of revenue a business might earn other than sales or service

fees revenue. 5 What is the rule to record cash received for other revenues? 6 Analyse the following transactions: a Received $900 from T Lee in full settlement of account.

Increase

DR

b P Reed sent a cheque for $245 to pay the amount owing on his account.

Expense (Discount expense)

Increase

DR

c Received $1 400 from K Makris in full settlement of a $1 499 debt.

Asset (Accounts receivable—name)

Decrease

CR


Decrease

DR

d L Jimmieson was given an $88 discount for prompt payment of a $988 account. e M Briggs owed $1 650. She received a discount of 7 % for prompt payment.

RULE Asset (Bank)

f

Received $200 interest on an investment. (There is no GST in this transaction.)

g Commission of $440 was received by cheque. h J Nagy (a tenant) paid his monthly rent of $800.


Chapter 5

Summary of business transactions

Sale of in ventories—cash

The following table [5.25] provides an overview of the types of transactions we have analysed in this chapter. [5.25] Summary of types of business transactions Transaction

Accounts involved (DR entry first CR entry indented) Bank Capital

Transaction

Capital contributed —assets

Asset account Capital

Sale of services—credit

Drawings of cash

Drawings Bank

Goods returned—originally purchased for cash (cash refund received)

Purchase of asset—cash

Asset account GST clearing Bank Asset account GST clearing Accounts payable— name

Goods returned—originally purchased on credit

Capital contributed—cash

Purchase of asset—credit

Sale of asset—cash

Bank Asset account GST clearing

S ale o f s er vi ce s— ca sh

Goods returned—originally sold for cash (cash refund paid)

Goods returned—originally sold on credit

S al e of a ss et —c re di t

A cc ou nt s re ce iv ab le — name Asset account GST clearing

Payment to accounts payable

Purchase of inventories— cash

Inventories GST clearing Bank Inventories GST clearing Accounts payable— name

Purchase of supplies and services—cash

Purchase of inventories— credit

Purchase of supplies and services—credit

Accounts involved (DR entry first CR entry indented) B an k Service fees revenue GST clearing Accounts receivable — name Service fees revenue GST clearing Bank Inventories GST clearing Accounts payable—name Inventories GST clearing Sales returns GST clearing Selling price Bank

Inventories Cost of goods sold Sales returns GST clearing Accounts receivable —name

Cost price

Selling price

Cost of goods sold Cost price Inventories Accounts payable—name Bank Accounts payable—name Discount revenue GST clearing Expense account GST clearing Bank Expense account GST clearing Accounts payable— name

Sale of inventories—credit


Bank Sales Selling price GST clearing Cost of goods sold Cost price Inventories Accounts receivable —name Selling price Sales GST clearing Cost of goods sold Inventories

Cost price

Payment from accounts receivable

Bank Accounts receivable— name Discount expense GST clearing Accounts receivable— name

Revenue received

Bank Revenue account GST clearing

27


Chapter 5

Goods and Services Tax and Business Activity Statements (BAS) The business collects the GST on behalf of the ATO and pays GST when it purchases goods, supplies and assets for the operation of its own business. The GST collected is owed to the government. The GST paid by the business can be reclaimed from the government. Businesses must complete a Business Activity Statement (BAS) to determine the net GST payable to the ATO.

activity

KNOWING AND DOING 5.12 1 What is transaction analysis? 2 Distinguish between GST exclusive and GST inclusive. 3 List some items on which a business does not pay GST.


4 Find out which everyday items GST is not charged on. 5 Using the form provided and the financial information listed below, prepare the quarterly

Business Activity Statement (BAS) for Parties Galore at 119 Waterworks Road, Ashgrove, Qld 4060 and change dates to Quarter 1 April 2008 to 30 June 2008. Amounts are inclusive of GST. a Calculate the total sales for the period and insert this figure at G1 in the BAS and tick the appropriate included/excluded box. b Calculate the total purchases for the period and insert this figure at G11 in the BAS and tick the appropriate included/excluded box. c Calculate total capital purchases for the period. Add 10% GST and insert this figure at G10 in the BAS and tick the appropriate included/excluded box. d Then turn the page of the BAS and calculate either the GST owing to the ATO, or the amount owed back to the business by the ATO. Parties Galore financial information for quarter 1 April to 30 June 2008:

Sales for each month in the quarter including GST are as follows. • Sales for April $33 000 • Sales for May $22 000 • Sales for June $44 000 Parties Galore purchased inventories during the period as follows. • Purchases for April $16 500 • Purchases for May $11 000 • Purchases for June $13 200 Parties Galore also purchased the following assets. The prices given here are exclusive of GST. • Computer in April $12 000 •

Tailormade filing system

$15 000


6 Identify the accounts involved in each of the following transactions. Transaction

Accounts involved

Borrowed $40 000 from bank Bought land for $100 000 Sold equipment for $4 400 cash Paid electricity $440 Received rent of $1 100 Paid $500 wages Received commission $330 Purchased building worth $90 000 Owner contributed delivery van wor th $40 000 for business use Paid telephone $330 A direct payment of $220 was made from our bank for rent Sold motor vehicle to G Brandt for $16 500 on credit 7 Categorise each of the following accounts into its correct group. Account title

Capital Bank Accounts payable Accounts receivable Rent (received) Wages Interest (paid) Advertising Commission (received) GST clearing Commission (paid) Building Mortgage on land Equipment Loan from AGC Finance Co. Loan to R Thore

Type of account

29


Chapter 5

8 State whether each account in the following transactions is increasing or decreasing.


9 Draw a transaction analysis table and analyse the following transactions (GST is

included when applicable). Transaction

Accounts involved

Bought motor vehicle for $44 000 cash

Motor vehicle Bank GST clearing

Bought equipment on credit from W Houston for $5 500

Equipment W Houston (accounts payable) GST clearing

Paid wages $900

Wages Bank

Paid cleaning $440

Cleaning GST clearing Bank

Sold equipment on credit to Eric Wise for $1 100

Eric Wise (accounts receivable) Equipment GST clearing

Owner invested $10 000 cash

Bank Capital

Owner contributed equipment worth $1 000

Equipment Capital

Received interest of $40 on investment

Bank Interest on investment

Received rent $440

Bank Rent GST clearing

Received commission $220

Bank Commission GST clearing


31

– Borrowed $40 000 from bank. – Bought land for $100 000. – Bought inventories $1 100 cash. – Bought inventories from W Rent on credit $330. – Sold equipment for $4 400 cash. – – – –

Paid electricity $440. Received rent of $1100. Paid $550 wages. Received commission $220

– Purchased building $90000. – Owner contributed delivery van worth $40000 for business use. – Paid telephone $330. – A direct payment of $220 was made from our bank account for rent. – Sold motor vehicle to G Brandt for $16500 on credit. – Sold inventories for cash $880 (cost price $400). – Sold inventories to G Brennan on credit for $550 (cost price $250).


Chapter 5

Capital name of the account used to record the owner’s contributions to a business

TRANSACTION ANALYSIS

Receipt no 78

Draw a transaction analysis table and analyse the following source documents on behalf of Dom’s Doughnuts owned by Dominic Haddad. The cost price of goods sold is 40% of the selling price in each case. Be sure to analyse the transactions in date order. 12/03/07

Credit: PA Chester Payment of account Details: Cash received: $24.00 Discount given:

Tax invoice no 258 09/03/07 Supplier: Mandy’sSupplies Sold to: Dom’s Doughnuts

Tax invoice no 944 Supplier: Sold to:

06/03/07

Motorworld Dom’s Doughnuts

4 cartons cocoa powder $9.00/carton

03/03/07

The following goods:

Supplier: Sold to:

02/03/07

11/03/07 Cheque no 2356

Dominic Haddad Cash drawings $300

Paid to: For: This cheque:

$600

Tax invoice no 698

Cheque no 2358

Cheque no 2357

2/3/07

Energex Electricity supply $200

07/03/07 Receipt no 77

Fran Flour Suppliers Dom’s Doughnuts


Fran Flour Supplies Settlement of account $71


5 bags self-raising flour $5/bag Adjustment note no 698 Tax invoice no 447


4/3/07

Supplier: Dom’s Doughnuts Sold to: Tommy Tucker

Supplier: Details: Re:

20 boxes mixed doughnuts $4.00/box Terms of trade: 5/10; n/30

2 bags self raising flour $5/bag 7 boxes yeast $8/box Terms of trade:

12/3/07 Tommy Tucker Payment of account $76.00 $ 4.00

03/03/07

Fran Flour Suppliers Damaged goods Invoice 698

Return/allowance:


Credit: Details: Cash received: Discount given:

Tax invoice no 446 Supplier: Sold to:

1/3/07

Dom’s Doughnuts PA Chester


6 boxes mixed doughnuts $4.00/box

5/10; n/30

If Dom’s Doughnuts had registered to collect GST, which of the following statements would be considered true for the month of March? • • • •

Cost price the cost of the goods bought and any costs of getting the goods ready for sale Double-entry system states that for every transaction there is a debit (DR) entry and a corresponding credit (CR) entry of equal value Drawings account name of the account used to record the amount of assets that the owner withdraws from the business for personal use GST-inclusive the price given for a product includes the GST component


Ford utility van $25 000 Cash register summary

33

GLOSSARY

Culminating activity

Analysing and evaluating Applying


All the transactions involving cheques would have had GST calculated. True/False The cash register summary figure would not include GST. True/False Mandy’s Supplies, Fran Flour Suppliers and Motorworld would have a GST figure on each source document. True/False Each of the transactions in the above source documents would include GST. True/False

GST-exclusive the price given for a product has not had the GST component added Inventories goods a business buys for resale to customers Mark-up an amount added to the cost price to work out the selling price Selling price the price for which the business sells the product(s) Transaction analysis the process used to break down a transaction into its debit and credit parts

Transaction Analysis for GST

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