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BU1002/BU1902 – Accounting for Decision Making

Solutions – Topic 3, 2017

Topic 3 Chapter 4 – Business Transactions Questions from Chapter 4 4.5

Distinguish between personal transactions and business transactions. Illustrate with five examples of each.

Business transactions involve an exchange of goods between the business entity and another entity. Examples of business transactions include the following: •

Payment of rent of building

• • • •

Purchase of goods from supplier Sale of goods on credit to customer Payment of tax to the Australian Taxation Office Payment of wages to employees

Personal transactions of the owner, partners or shareholders do not involve an exchange of goods between the business entity and another entity. They involve a transaction between the individual and another entity. An example of a non-business transaction could include the following: • • • • •

Payment of personal health insurance Purchase of family car Taking the family on an overseas holiday paid for in cash Sale of personally owned shares in Coles Myer Purchase of tickets to the AFL Grand final by the individual

It is important to keep business transactions separate to those of the owner(s) as the financial reports for the entity should reflect the performance, position and cash flow of the entity only and not include personal assets. If payments for these types of transactions are made out of business funds the amount should be treated as a reduction in the owner’s equity (drawings) and it is therefore recorded as a business transaction.

4.9 What is meant by the ‘concept of duality’? Provide an illustration involving a business transaction where the business purchases office furniture on credit. The concept of duality means that every business transaction will have a dual effect on the accounting equation. The equation always stays balanced. For example the purchase of office furniture on credit will mean that the office furniture will be increased and the supplier (accounts payable) will be increased.

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BU1002/BU1902 – Accounting for Decision Making

4.16

Solutions – Topic 3, 2017

Classify each of the following according to whether it is an asset, liability or equity account. Apply your learning from the definitions in Chapter 1 to provide a justification for each:

a. Accounts receivable

b. Stationery

c. Bank loan

d. Profit

e. Interest expense

f. Sales

g. Rent revenue

h. Inventory

i. Property, plant and equipment

j. Cleaning expense

k.Service fees

l. Bank fees

Solution: a. Asset

b. Equity (Expense)

c. Liability

d. Equity

e. Equity (Expense)

f. Equity (Revenue)

g. Equity (Revenue)

h. Asset

i. Asset

j. Equity (Expense)

k. Equity (Revenue)

l.Equity (Expense)

4.17

Using your knowledge of the accounting equation, solve the missing values in the following table:

Solution: Assets 200 000 = 206 000 = 250 000 = 17 800 =

4.18

Liabilities 46 000 66 000 + 204 000 + 11 600 +

Equity 154 000 140 000 46 000 6 200

Determine the missing entries:

Solution: a. 8 600 b. 21 000 c. 41 900

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BU1002/BU1902 – Accounting for Decision Making

4.20

Solutions – Topic 3, 2017

State the effect of each of the following business transactions for Humphrey Sports. For example, in (a) increase cash and increase capital. a. J. Humphrey commenced business by injecting cash into her business. b. Paid wages. c. Purchased goods for sale on credit. d. Sold goods on credit e. Received an invoice for annual insurance on building and paid the account. f. J. Humphrey withdrew an iPad from the business. g. Sold inventory for cash. h. T. Comery (accounts receivable) paid amount outstanding. i. Humphrey Sports paid accounts payable in full.

Solution: a. increase cash and increase capital b. decrease cash and decrease profit or loss (equity) c. increase inventory and increase accounts payable d. increase accounts receivable and increase income (profit or loss which impacts on equity). e. decrease cash and decrease profit or loss (equity) f. decrease office equipment and decrease capital g. increase cash and increase profit or loss (equity) h. decrease accounts receivable and increase cash i. decrease cash and decrease accounts payable 4.27

Preparing a worksheet The closing balance sheet items are given below for Jason Woodstock in accounting equation form as at 30 June 2018. Transactions for the following month of July are also given.

Transactions for July 2018 were as follows:

Required a.

Prepare worksheet entries for the business transactions for the month ended 31 July 2018.

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BU1002/BU1902 – Accounting for Decision Making b.

Solutions – Topic 3, 2017

At the end of July, Jason realised that the customer invoice sent on 5 July was recorded incorrectly. The correct amount should be $6500. Explain what type of error Jason made and explain the impact of this error on the balance sheet and the statement of profit or loss.

Solution: Date July 2018 June

Total

Cash

30 2 3 4 5 7 9 10 14 23 31

39 400 2 800 -1 000 -700

Accounts receivable

Office Equip

2 800 -2 800

= Accounts payable 1 200

Capital

41 000

-1 000 -700 5 600

5 600 -2 000 800

2 000 800 1 500 -330 2 000

1 500 –330 2 000 –800 40 170

Profit and loss

7 100

2 000

200

- 800 40 200

8 870

b. This is a transposition error. You can identify it as a transposition error as the difference (6500 and 5600) is divisible by 9.

4.29

Allocating transactions and demonstrating duality Choose appropriate account names and demonstrate the dual effect that occurs when the following business transactions take place. For example, in (a) we would increase cash $14 000 and increase capital $14 000. a. b. c. d. e. f. g. h. i.

Sam Major commenced business by contributing $14 000 cash. Received $7000 income for services performed. Paid telephone account $191. Sam Major withdrew cash from business $800. Purchased office stationery on credit $1 900. Cash sales $700 Credit sales of $610 Sam Major withdrew office equipment from business $2 000 Sam Major negotiated with possible business partner to contribute $50 000 as a silent partner to the business. Sam Major purchased meal for his partner’s on his personal credit card.

j. Solution: a. increase cash $14 000 and increase capital $14 000 b.

increase cash $7 000 and increase revenue $7 000

c.

decrease cash $ 191 and increase telephone $191 4

BU1002/BU1902 – Accounting for Decision Making

Solutions – Topic 3, 2017

d.

decrease cash $800 and increase drawings $800

e.

increase office stationery on credit $1 900 and increase accounts payable $1 900.

f.

increase cash $700 and increase sales revenue $700

g.

increase accounts receivable $610 and increase sales revenue $610

h.

decrease office equipment $2 000 and increase drawings $2 000.

i.

no recording necessary as it is not a business transaction

j.

meal was purchased on personal credit card so is not a business transaction.

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