SECTION 1 CHAPTER 2 ACCOUNT IDENTIFICATION, TRANSACTION ANALYSIS AND THE ACCOUNTING EQUATION Solution 2.1 (a) A = L + OE (b) (i) A – L = OE (ii) OE + L = A Solution 2.2 (a) Items owned by the business which will be of use to future accounting periods. (b) Amounts owed by the business for goods and services received but not paid for or financed. (c) Owners’ investment in the business, represented by net assets. Solution 2.3 Assets = Liabilities + Proprietorship (a) Cash $10 000 = Nil + Capital $10 000 (b) Cash 5 000 + Capital $11 000 A/C Receivable 6 000 ____ _______ $11 000 = Nil + $11 000 (c) Inventory 8 000 + Capital $17 000 A/C Receivable 9 ____ _______ 000 $17 000 = Nil $17 000 (d) Cash 9 000 + Capital $21 000 Inventory 5 000 A/C Receivable 7 000 ____ _______ $21 000 = Nil $21 000 (e) Cash $9 000 = A/C Payable $3 000 + Capital $6 000 (f) Cash 4 000 A/C Payable $2 000 + Capital $5 500 Inventory 3 500 ______ ______ $7 500 = $2 000 + $5 500 1 Solutions to Accounting – A Practical Approach Solution 2.4 Assets = Liabilities + Proprietorship (a) Cash 8 000 A/c payable $1 500 + Capital $20 500 Inventory 9 000 A/C Receivable 5 000 ______ ______ $22 000 = $1 500 $20 500 (b) Plant & mach 22 000 A/c payable $3 700 + Capital $35 200 Inventory 14 000 Cash 2 400 Petty cash 500 _____ _______ $38 900 = $3 700 + $35 200 (c) Motor vehicle 42 800 Bank o/d $5 700 + Capital $60 600 A/C Receivable 14 300 Inventory 9 200 ______ ______ $66 300 = $5 700 + $60 600 (d) Computer 27 300 Bank o/d $11 300 + Capital $136 Equipment 200 Furniture & fittings 18 200 Mortgage 45 000 Land & bldg 147 000 _______ _______ $192 500 = $56 300 $136 200 Solution 2.5 (a) OE = $28 000 (b) L = $13 000 (c) OE = $21 500 (d) A = $18 600 (e) L = $32 200 Solution 2.6 (a) OE increases $8 400 (b) OE decreases $5 200 (c) OE increases $7 900 (d) OE increases $10 000 (e) OE decreases $18 500 (f) OE increases $1 800 (g) OE decreases $1 600 (h) OE decreases $9 900 Solution 2.7 Assets, Liabilities, Owner’s equity, Income and Expense. Solution 2.8 (a) Current assets are assets that will be converted into cash or used by the business within the next 12 months (such as accounts receivable). That is, they will be fully used up by the business in its operations within the next 12 months. Examples of current assets include: petty cash, bank, accounts receivable, inventory and GST paid. Non-current assets are assets that could be used by the business for a period greater than 12 months. These are assets that have a longer life span than just one year and include: land, buildings, motor vehicles, office equipment and computers. (b) Current liabilities are obligations that the business must pay within 12 months. Examples of current liabilities include: accounts payable, short-term loans, GST collected and bank overdraft. Non-current liabilities are obligations that the business will repay over a time span longer than 12 months. Examples include: mortgages and long-term loans. (c) Liabilities are amounts owed to third parties. Owner’s equity is the amount owed to the business owner after all other liabilities have been paid. (d) Assets are items that have value to the business. Expenses are items that have been spent in order for the business to operate and have no ongoing value. (e) Income is revenue received by the business from its operations and liabilities are amounts owing by the business. 2 Chapter 2: Account Identification, Transaction Analysis and the Accounting Equation Solution 2.9 (a) Current assets include bank, accounts receivable, inventory and petty cash (other accounts may be acceptable). (b) Current liabilities include accounts payable, bank overdraft and GST collected (other accounts may be acceptable). (c) Non current assets include land, buildings, office equipment, motor vehicles and computer equipment (other accounts may be acceptable). (d) No current liabilities include mortgages and loans (other accounts may be acceptable). (e) Income accounts include sales, interest income, services revenue and dividends received (other accounts may be acceptable) Solution 2.10 Current Assets Non-current Assets Inventory Motor vehicles Sundry debtors Plant & machinery Cash at bank Solution 2.11 Current Assets Current Liabilities Petty cash Bank overdraft Inventory Sundry creditors Solution 2.12 Current Liabilities Current Assets Non-current Assets Bank overdraft A/C receivable Premises A/C payable Petty cash GST Collected Inventory Solution 2.13 Current Assets Current Liabilities Non-current Assets Cash at bank Sundry creditors Furniture & fittings Petty cash GST collected Land Loan to brother Buildings GST paid Premises Non-current Liabilities Owners’ Equity Mortgage on buildings Capital Drawings Solution 2.14 Current Assets Current Liabilities Expenses Petty cash Bank overdraft Rates & taxes Inventory GST collected Advertising GST Paid Interest on bank overdraft Electricity Telephone Solution 2.15 Income Expenses Sales Stationery Rent received Cost of goods sold Commission received Advertising Fees earned Printing Salaries & wages Donations Water rates Bad debts Payroll tax Insurance Solution 2.16 Current Assets Non-current Assets Current Liabilities Cash at bank Warehouse buildings A/C payable Petty cash Factory machinery GST collected Shares in CIQ Ltd Non-current Liabilities Owners’ Equity Income Loan from mother Drawings Fees received Mortgage on Warehouse buildings Capital Commission received Rent received Dividends received 3 Solutions to Accounting – A Practical Approach Expenses Repairs & maintenance Wages & salaries paid Interest paid Photocopying Accounting fees Solution 2.17 (a) The chart of accounts is a listing of account names in a logical order. Accounts have been classified under one of the five major classifications (assets, liabilities, owners’ equity, income and expenses). Assets and liabilities have been further classified as current or non-current. It is also common to classify expenses as cost of sales, marketing, general & administrative and financial expenses. (b) Allows efficient management of accounts by the business. Allows for efficient and accurate preparation of financial reports. Solution 2.18 (Other solutions are possible.) Assets Current assets 10 Cash at bank 20 Inventory 30 Accounts receivable 30.1 A Dove Non-current liabilities 30.2 R Sparrow 300 Mortgage on premises 30.3 D Magpie Owners’ Equity 400 Capital Non-current assets 100 Premises Income 110 Plant & machinery 500 Sales 120 Computer equipment 510 Interest received 130 Goodwill Expenses Liabilities 600 Cost of goods sold Current liabilities 610 Stationery 200 Accounts Payable 620 Telephone 200.1 A Blue 630 Electricity 200.2 T Ongue 640 Bank charges 200.3 L Izard 650 Rent 220 GST collected 660 Salaries & wages Solution 2.19 (Other solutions are possible.) Current assets (0–99) 05 Inventory 10 Sundry debtors 10.1 T Hair Owners’ Equity (300–349) 10.2 S Hegoes 300 Capital 15 Petty cash 305 Drawings 20 GST Paid Income (350–399) Non-current assets (100–199) 350 Sales 100 Land and buildings 355 Rent received 105 Motor vehicles 360 Commission received 110 Shares in PQ Ltd 365 Interest received 115 Patents 370 Dividends received 120 Trademarks Expenses (400–499) Current liabilities (200–249) 400 Cost of goods sold 200 Sundry creditors 415 Advertising 200.1 M Yold 420 Sales staff salaries 200.2 P Lace 425 Telephone 210 Bank overdraft 430 Office salaries 220 GST collected 435 Bad debts 4 Chapter 2: Account Identification, Transaction Analysis and the Accounting Equation 440 Interest on mortgage Non-current liabilities (250–299) 445 Bank fees 250 Mortgage on land & buildings 450 Interest on overdraft Solution 2.20 (a) Current assets (b) Current liabilities (c) Non-current assets (d) Current assets (e) Revenue/income (f) Non-current liabilities (probably) Solution 2.21 Assets = Liabilities + Owners’ Equity 1 *Cash $150 000 *Capital $150 000 2 *Cash $95 000 *GST paid $5 000 *Machinery $50 000 = Capital $150 000 $150 000 $150 000 3 Cash $95 000 Machinery $50 000 *GST paid $6 200 *Inventory $12 000 = *A/cs Payable $13 200 + Capital $150 000 $163 200 $13 200 $150 000 4 *Cash $81 800 = + Capital $150 000 Machinery $50 000 *A/cs Payable Nil GST paid $6 200 Inventory $12 000 $150 000 Nil $150 000 Solution 2.22 Assets = Liabilities + Owners’ Equity 1 *Cash $15 000 *Capital $25 000 *Office furniture $10 000 = $25 000 2 *Cash $4 000 Office furniture $10 000 *GST paid $1 000 *Inventory $10 000 = Capital $25 000 $25 000 3 Cash $4 000 *Office furniture $4 000 GST paid $1 000 Inventory $10 000 *A/c receivable $6 600 = *GST collected $600 Capital $25 000 $25 600 $600 $25 000 Solution 2.23 Assets = Liabilities + Owners’ Equity 1 *Cash 17 000 *Capital 20 000 *Inventory 3 000 _______ _______ $20 000 = Nil $20 000 2 Cash 17 000 *Creditors 23 100 + Capital 20 000 Inventory 3 000 *GST paid 2 100 5 Solutions to Accounting – A Practical Approach *Motor vehicle 21 000 ________ _______ $43 100 = $23 100 $20 000 3 *Cash 15 900 Creditors 23 100 + Capital 20 000 Inventory 3 000 *GST paid 2 200 Motor vehicle 21 000 *Office equip 1 000 _______ _______ $43 100 = $23 100 $20 000 4 *Cash 15 400 *Creditors 22 600 + Capital 20 000 Inventory 3 000 GST paid 2 200 Motor vehicle 21 000 Office equip 1 000 _______ _______ $42 600 = $22 600 $20 000 5 *Cash 23 400 Creditors 22 600 + *Capital 28 000 Inventory 3 000 GST paid 2 200 Motor vehicle 21 000 Office equip 1 000 _______ ________ $50 600 = $22 600 $28 000 Solution 2.24 (a) A business may receive cash for a number of reasons (for example the sale of a non current asset).