SWINBURNE UNIVERSITY OF TECHNOLOGY

SARAWAK CAMPUS

FACULTY OF BUSINESS, DESIGN AND ARTS

ACC10007 FINANCIAL INFORMATION FOR

DECISION MAKING

Semester 1, 2020

Discussion Questions and Solutions

Topic 2 (Part 3): Recording and reporting business

transactions using accrual accounting
(Financial Position and Financial Performance)
 Swin Ltd. Year 2 of operations
ASSETS = LIABILITIES + OWNER'S EQUITY
Cash at Motor (Accum. Retained
Receivables Inventory Prepayments Payables Accruals Capital Profit & Loss Notes
Bank Vehicles Depreciation) Profits
Bal 750 19,600 65,000 5,300 12,000 (2,500) 22,000 1,250 50,000 26,900
1 (20,000) (20,000)
2 (15,000) (15,000) Rent expense
3 (1,300) (1,300) Rates expense
4 (13,000) 13,000
5 (36,700) (630) (36,070) Wages expense
6 (1,820) (1,820) Utilities expense
6 (620) (620)
7 67,000 67,000
8 (8,000) 8,000
9 179,000 179,000 Sales
9 (89,000) (89,000) Cost of sales
10 54,000 54,000 Sales
10 (25,000) (25,000) Cost of sales
11 178,000 (178,000)
12 (71,000) (71,000)
13 (16,200) (16,200) Vehicle running exp
a (5,000) (5,000) Rent expense
b (300) (300) Rates expense
c 325 325 Rates expense
d (5,000) (5,000) Depreciation expense
e 860 (860) Wages expense
f 690 (690) Utilities expense

49,110 20,600 26,000 325 25,000 (7,500) 18,000 1,550 30,000 26,900 37,085
113,535 113,535
Notes

 In a Worksheet, all Statement of Financial Position accounts (i.e. Assets, Liabilities and Equity
accounts) have their own individual columns for recording (e.g. Cash, Receivables, Payables, Capital, etc)

 However, all Statement of Comprehensive Income accounts (i.e. Income and Expenses accounts) are to
be recorded in the Worksheet under 1 column called “Profit & Loss”.
 For this reason, we use the “Notes” column to record the exact Income or Expense account names. We use
this information in the “Notes” when preparing the Statement of Comprehensive Income later.

Opening balance: This is the second year of operations for Swin Ltd (i.e. Year 2). Therefore, there are Opening
Balances brought forward from the previous year (Year 1).

Transfer (i.e. write down) the ending balances from Year 1 Worksheet as the opening balances
for this Year 2 Worksheet.

Note that in the Owner’s Equity section, there is an additional column called “Retained
Profits”. Transfer the “Profit & Loss” figure of $26,900 here.

Transaction 1: When the owners withdrew cash from the business, “Cash” decreases by $20,000. The
drawing also reduces “Capital” by the same amount.

Transaction 2: The business paid $15,000 for rent expenses. This is a payment; therefore “Cash” decreases
by $15,000. At the same time, there is Rent Expense. Since this is an expense, “Profit &
Loss” is reduced.

Transaction 3: The business paid $1,300 for rates expenses. This is a payment; therefore “Cash” decreases
by $1,300. At the same time, there is Rates Expense. Since it is an expense, “Profit & Loss”
is reduced.

Transaction 4: The business bought a second delivery vehicle ($13,000) and paid cash to buy it. Therefore,
“Cash” decreases by $13,000. At the same time, this second delivery vehicle is recorded
under “Motor Vehicles” and the value increases by $13,000.

Transaction 5: The business paid $36,700 for wages, therefore “Cash” decreases by $36,700.

However, the amount of $36,700 includes payment for $630 accrued in 2018. Hence,
“Accruals” decrease by $630 as the liability is settled. The remaining amount of $36,070 (i.e.
$36,700 – $630) will be considered 2019’s wages expense.

Transaction 6: The business paid $1,820 for 9 months’ electricity expenses (Jan – Sep 2019). This is a
payment; therefore “Cash” decreases by $1,820. At the same time, there is Electricity (or
Utilities) Expense. Since it is an expense, “Profit & Loss” is reduced.

The business also paid the $620 accrued in 2018. Hence, “Cash” decreases by $620, and
“Accruals” decrease by $620 as the liability is settled.

Transactions 7 to 13: The explanations similar to Swin Ltd (Year 1). Please refer.

Unlike Swin Ltd Year 1, the information for Adjustments are not separately listed out
in Swin Ltd Year 2. You will need to look back at Transactions 1 to 13 and find which
transactions require Adjustments.
Adjustment (a): Refer to Transaction 2 in the Question. In Swin Ltd Year 1, remember that we created a
“Prepayment” of rental amounting to $5,000? That prepayment ($5,000) in Year 1 is now
being “used up” in Year 2 (2019). Therefore, we have to remove the prepayment (i.e.
decrease Prepayment by $5,000) and record the usage of the prepayment as Rent Expense in
2019. Hence, “Profit & Loss” decreases by $5,000.
Adjustment (b): Refer to Transaction 3 in the Question. In Swin Ltd Year 1, remember that we created a
“Prepayment” of rates amounting to $300? That prepayment ($300) in Year 1 is now being
“used up” in Year 2 (2019). Therefore, we have to remove the prepayment (i.e. decrease
Prepayment by $300) and record the usage of the prepayment as Rates Expense in 2019.
Hence, “Profit & Loss” decreases by $300.

Adjustment (c): Refer again to Transaction 3 in the Question. Out of the total amount of $1,300 payment
for rates, only $975 relates to Year 2 (2019), calculated as follows:

Apr 2019 – Dec 2019 (9 months): $1,300 / 12 months x 9 months $ 975

=====

This means that there is a Prepayment of $325 on 31 Dec 2019, i.e. $1,300 – $975.

Therefore, increase Prepayment by $325 and reduce Rates Expense by the same amount.

Adjustment (d): Refer to Transaction 4 in the Question. Since the business has 2 motor vehicles in 2019, we
will need to calculate Depreciation Expense for both of them:

First vehicle (bought on 1 Jan 2018):

Depreciation for 1 year (i.e. 2019)
= (Cost – Residual Value) ÷ Useful life
= (12,000 – 2,000) ÷ 4 years
= $2,500

Second vehicle (bought on 1 Jan 2019):

Depreciation for 1 year (i.e. 2019)
= (Cost – Residual Value) ÷ Useful life
= (13,000 – 3,000) ÷ 4 years
= $2,500

Therefore, total depreciation in 2019 = $2,500 + $2,500 = $5,000

We will increase Accumulated Depreciation by $5,000 and increase Depreciation Expenses by

the same amount.

Note that Accumulated Depreciation is a “negative asset” and will always be a negative figure
in the Left Hand Side (i.e. Assets side) of the Worksheet.

Adjustment (e): Refer to Transaction 5 in the Question. The last week’s wages amount to $860, and this
needs to be accounted for. The amount is only going to be paid in 2020. Therefore, the
business owes the employees $860 on 31 Dec 2019 and this increases Accruals. At the same
time, the Wages Expense need to be recorded.

Adjustment (f): Refer to Transaction 6 in the Question. Transaction 6 above records only 9 months’
electricity expenses (Jan – Sep 2019) amounting to $1,820. The last 3 months’ electricity (Oct
– Dec 2019) amounts to $690, and this needs to be accounted for. The amount is only going
to be paid in 2020. Therefore, the business owes the utility company $690 on 31 Dec 2019
and this increases Accruals. At the same time, the Utilities Expense need to be recorded.

There are no further Adjustments.

Transactions 1, 7, 8, 9, 10, 11, 12 and 13 do not give rise to any Adjustments.

Remember:

1. After entering each line (i.e. transaction) in the Worksheet, check that the total on the Left Hand Side (LHS)
is equal to the total on the Right Hand Side (RHS).

2. After recording any Income or Expense item in the “Profit & Loss” column, you must write the exact name
of the Income or Expense account in the adjacent “Notes” column. Use the information in the “Profit &
Loss” and “Notes” columns to prepare the Statement of Comprehensive Income.

3. Total up every column. Use these totals to prepare the Statement of Financial Position.

4. At the bottom of the Worksheet, write the grand total of the LHS ($113,535) and the RHS ($113,535). If
you done Steps 1 and 3 correctly, these 2 grand total figures should be the same.

After you have done the Worksheet, try to prepare the:

 Statement of Comprehensive Income, and
 Statement of Financial Position

You can compare your answers with the ones in Lecture Illustrations, page 5.