Accounting Basics - Assignment Example

?Running Head: assignment Accounting Basics of the of the of the Rick Brennan Worksheetas on 1st July, 2012 Particulars Trail Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Capital 75500 3000 150000 222500 222500 Accounts Payable 79500 1200 38450 116750 116750 Equipment 93000 30000 123000 123000 Office Furniture 10000 8000 18000 18000 Office Supplies 2500 450 2950 2950 Inventory 10000 10000 10000 Accounts Receivables 21000 14520 3500 32020 32020 Cash 18500 166000 5850 178650 178650 Premium 1200 Accrued Income 25320 Profit on sale of clock 1700 Rent 1750 Salary 1000 Advertising Expenses 700 Bank A/c 3000 3000 Net Profit 22370 22370 22370 Total 364620 364620 27020 27020 364620 364620 2. Income Statement of Rick Brennan’s Business as on 31st July, 2012 Date Particulars L.F Amount (Dr.) Date Particulars L.F. Amount (Cr.) 13th July To Advertising Exp 700 By Income earned (See Note) 25320 19th July To Rent A/c 1750 24th July By profit on sale of clock 1700 28th July To Salary A/c 1000 31st July To Premium 1200 To Net Profit 22370 Total 27020 Total 27020 3. Balance Sheet of Rick Brennan’s Business as on 31st July, 2012 Liabilities Amount (Dr.) Assets Amount (Cr.) Capital Account: Capital 75500 Add: Increase in Capital 150000 Net Profit 22370 Less: Drawings 3000 244870 Fixed Assets Office Furniture 18000 Current Liabilities: Accounts Payable 116750 Office Suppliers 2950 Bank A/c 3000 Equipments 123000 Current Assets Accounts Receivables 32020 Inventory 10000 Cash 178650 364620 364620 Source adapted from Mills (2003) Working Notes: 1. As on 1st July the premium was paid in advance but at the last day of the month the premium was adjusted. So the contra entry was passed to adjust in account On 1st July Prepaid Insurance ...Dr 1200 To Cash 1200 And then 31st July Premium A/c ...Dr 1200 To Prepaid Insurance 1200 2. The equipment and furniture purchase on 2nd July and 25th July respectively, will be debited in equipment and furniture account and credited in creditors account as per the accounting rule. 3. The contribution of cash for capital on 3rd July will be debited in cash account and credited in capital account, as it will increase the assets side of cash account and will also be added in capital account of liabilities side. 4. The incomes which are earned and not yet received are called accrued income. It will be shown in the credit side of Income Statement so bill invoice on 4th July, 17th July and 26th July (only 5000$ as 500$ was received cash) will be shown in the credit side of Income Statement and will be added to debtors account as it is credit invoice. 5. On 8th July, Amount received against above invoice adjustment will be as debtors are reduced by 3500 $ and cash will increase by the same amount. 6. As on 9th July, Advertising bill was produced but payment was made on 13th July so the amount of advertising expenses will be shown in debit side of Income Statement and will be deducted from cash account. 7. The office supplies were purchased on 14th July and payment was done 1 week later so the amount will be shown in office suppliers as it’s an assets and 21st July cash entry will be done against that. 8. The amount was withdraw on 20th July for personal use from bank, as no bank account statement is given the amount will be shown in liabilities side of balance sheet and will be deducted from drawings 9. The clock of 3800$ was sold at the price of 5500 $. So the profit on sale of clock will be credited in Income Statement. 10. The personal assistant was appointed on 14th July @ salary of 26000$ per annum and was paid fortnightly. The salary paid to him on 28th July will be debited in Income statement and will also be shown in Cash Account. 11. Following are the accounts: Cash account Date Particulars Amount Date Particulars Amount 1st July To balance B/fd 18500 9th July By Office supplier 750 2nd July To Capital A/c 150000 13th July By Advertising Exp 700 8th July To Debtor 3500 19th July By Rent A/c 1750 16th July To Income earned from customers 6500 21st July By Office Supplier 450 24th July To Sale of clock 5500 28th July By Salary A/c 1000 26th July To Income earned from customers 500 31st July By Premium 1200 31st July By Balance c/fd 178650 Total 184500 Total 184500 Account Receivable A/c Date Particulars Amount Date Particulars Amount 1st July To balance B/fd 21000 8th July By Cash 3500 4th July To Accrued Income 7500 17th July To Accrued Income 2020 26th July To Accrued Income 5000 31st July By Balance c/fd 32020 Total 35520 Total 35520 Accounts Payable A/c Date Particulars Amount Date Particulars Amount 9th July To Cash 750 1st July By balance B/fd 21000 21st July To Cash 450 2nd July By Equipments 30000 25th July By Furniture 8000 31st July To balance c/fd 117500 14th July By Office Supplier 450 Total 118700 Total 118700 Question 4 Fred’s suggestion for selling assets at their fair value is supported because as per AASB 116: “Property, plant and equipment are tangible items that: (a) Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) Are expected to be used during more than one period.” (Australian Accounting Standards Board 2007) And “Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.” (Australian Accounting Standards Board 2007) At the time of dissolution of business the valuation is done for all assets and liabilities. All the liabilities are settled first from the assets amount and then the left over amount is for the owner. In this case the value in balance sheet is given but the value is just the historical value in which all the depreciation and accumulated impairment loss was deducted and the final amount is in balance sheet. The buyer who is willing to buy the business will always see that what the value of the assets in the market is? The seller will also see that he is getting worth amount or not. The elements of cost which are included in the fair valuation of assets are its purchase price, any costs to be incurred for the movement or transportation and costs of dismantling and removing the asset from its original location (Picker 2009). And then the amount will be the final/minimal amount that the owner wants from buyer. If the market value is more than the expected value the excess amount is considered as income of business and is distributed among owners. Thus, by using fair value method of valuation, Rick can have excess amount and will not run into losses as he plans to dissolve his business. On this ground, Fred’s suggestion to Rick is supported. Question 5 As per AASB 116, an entity shall choose either the cost model in paragraph 30 of AASB116 or the revaluation model in paragraph 31 of AASB116 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment (Australian Accounting Standards Board 2009). By definition of Cost Model: “After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.” (Australian Accounting Standards Board 2009) While Revaluation Model is defined as: “After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.” (Australian Accounting Standards Board 2009) For instance, Suppose: On 1st Jan 2010, the land is purchased at the price of USD 2, 00,000. Equipments are purchased at USD 50,000. The depreciation on equipments is 10% p.a. But on 31st Dec 2011 the business is closed and the market value according to the market experts are USD 3,00,000 for land and USD 40,000 for equipments (after deducting depreciation), respectively. So in case of cost model the value of assets on 31st Dec, 2011 will be: Land USD 2,00,000 and equipments USD 50,000 less 10% depreciation for two years is (5000+4500) = USD 40,500. Total value will be USD 2, 40,500. In case of revaluation model the value of assets are: Land USD 3, 00,000 and equipments USD 40,000. Total value USD 3, 40,000. If the assets are sold according to cost model then the owner will only receive the historical value of the business. But in case of revaluation, the land always appreciates and the market value increases, so the owner will receive USD 3, 40,000. The earned profit will be distributed among the owners of the firm or will be credited to revaluation reserves. Thus, as a user of financial statements, I would have preferred the fair value method. References Australian Accounting Standards Board. (2007). Impairment of Assets. Retrieved Oct 21, 2012 from http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf Australian Accounting Standards Board. (2009). Property, Plant and Equipment. Retrieved Oct 21, 2012 from http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_01-09.pdf Mills, D. (2003). Foundations of Accounting. Australia: University of New South Wales. Picker, R. (2009). Australian Accounting Standards. Australia: John Wiley & Sons. Read More