Business Transactions

Published:

GB518 | Assignment 2

Business Transactions

Total marks

50 marks

Weight

10%

Due date

Wednesday of Week 4 (11th June 2014) by 5 PM

PLEASE NOTE THE FOLLOWING INSTRUCTIONS

  • The portal will close at 5 PM AEST – Students in Adelaide and Brisbane please note to adjust for the time difference accordingly.
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  • Submission: The assignment must be submitted electronically through the student portal – use the link under “Assessments” to submit your assignment.
  • This assignment consists of 5 questions and you are required to answer all of the questions. Please use this word document to complete the assignment and upload it on the portal.
  • Please make sure you follow the guidelines noted in your subject outline especially those relating to presentation of written work, late policy and academic integrity.
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Question 1 (10 marks | Word limit: 300)

The owner of a very small, part-time business was not interested in keeping detailed accounts for the business. Recently, an accountant advised that the business should have its accounts recorded under the double-entry system. The owner argued that the system was too costly and too detailed for the needs of the business. What arguments could the accountant use to support the double-entry system? Do you agree with the owner?

Double entry system is an accounting system which involves two or more accounts in a business transaction. For example, when a business firm lends money from financial institution, the cash account goes up and the loan liability account goes up as well, so in this transaction we can clearly see that there are two accounts being affected, this type of keeping accounts in a single business transaction is called double data entry system.

I don’t necessarily agree with the owner of the small business company, because the advantages are greater than the single data entry system if he was at all interested in maintaining his business accounts.

Financial statement and reports can be maintained easily by the use of double data entry system. In today period of time, all the accounting software make use of double entry accounting where by the business firms are able to produce correct report of accounts on the income statement, balance sheet, cash flow statement and other financial statements and reports. Financial statements allow you to assess the financial health of the company and compute financial ratios for further analysis. Double data entry system accounting allows keeping record of assets and liabilities. Suppose in single-data entry accounting system, the record of transactions is only one of the two-revenue and expense. Double data-entry system has the advantage of the accounting equation in which assets equal liabilities plus shareholders’ equity. The recording of assets, liabilities and shareholders’ equity allows to prepare a balance sheet. A balance sheet is an important financial statement of a business firm as it shows the capital the firm owns and the liabilities the firm owes. The other importance of double entry data accounting is that it maintains checks and balances, where by preventing fraud as it makes it difficult to manipulate accounts. In double data entry system we can detect account manipulation by going through the journal entries and comparing them to previous journal entries for the same or similar transactions as both sides of the accounting equation must balance. The expenses are also not so high, just for maintaining two accounts.

Question 2 (10 marks | Word limit: 300)

Recently, a new student of accounting was overheard making the following remarks: “Why are we learning how to use the double-entry system of recording in the accounting cycle? Surely there are good computer packages available these days which can handle all of these details.” Provide a suitable reply.

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Double entry system of accounting is preferred than other computer packages because it is not so sophisticated than other accounting software’s since it is modified version of single entry data system of accounting. In double data entry accounting, it’s only the maintenance of credit and debit accounts. The accounts are placed on the right and left side respectively horizontally. We Can find the account balance by calculating the differences on the credit side and debit side or also from the side of T account. Through the use of double entry system, we can find the errors easily. Suppose if the total credit does not equal the total debit, there must be some errors. In double entry data the asset is equal to liabilities plus owners equity. In double data entry system the debit entry increases the asset accounts and decreases the liability equity accounts. On the other hand, credit entry increases liability and equity accounts and decreases assets accounts. A systematic technique is followed in recording financial transaction in double data entry system. It records financial transactions in a systematic and chronological order with suitable narration of the financial transaction. Double-entry system is a complete system of book keeping. It records not only each and every financial transaction, but also each aspect of the transaction. Double data entry system is based on the double-entry principle which means ' for every debit amount there is a corresponding credit amount'. Such a method of debit and credit can help ensure arithmetical accuracy of the recordings of financial transactions. The profit and loss account can be found by preparing the profit and loss account for the given period of time. Through the use of Double-entry book-keeping system, the information about the financial status can be known through the use of balance sheet. Double entry book keeping system keeps a detailed record of financial transactions. Therefore, the recording of financial transactions in books provides necessary information for the purpose of costs control. Double entry book keeping system communicates financial information that is necessary for taking decisions by a business. Double entry book keeping will provide information for owners, managers and creditors about the business ,so, that they can make good decision about the business.

Question 3 (10 marks | Word limit: 300)

An antique dealer was in the habit of visiting local garage sales and flea markets in the hope of finding a bargain or two. On one occasion he purchased a china plate for $2, because he knew that the plate was rare and was worth at least twenty times that amount among antique collectors. In preparing the accounts for the antique dealer, what value should the dealer put on the plate? Why? Provide reasons to support your answer.

The antique dealer while preparing the accounts should keep in mind that he brought the china plate for $2, which was rare and worth twenty times more than what he paid. The account he should maintain is double data entry system, where he can put debit on the one side and credit account on the other side. The details he can add up are the price he paid for the items and the year.

The dealer after knowing everything should raise the price tag to twenty times higher, which would come up to $40. The price I agreed to because, firstly, the china plate was rare and antique, secondly, because the china plate is definitely going to be sold to antique collector. The item would be sold immediately or may be after few years, since price will go up with the time. The more he prolong his sale, the better the price he will fetch. So in his account of double data entry system, the profit margin will shoot up, he can clearly calculate the profit or loss statement. Since in this scenario, the differences margin will be greater, the profit will be huge. The antique dealer has the habit of always going for bargain; this I would say is his best buy. All the antique items have the good probability of fetching good price and he should always double the price or more, as they have big market value. In today’s time it is so difficult to find antique and it’s rare someone will have, so the prices should always be high. If he planning to store that antique, he should do in such a manner that attracts the customer, by displaying good effects on the item. He should Price the items using a secure labelling system to avoid sticker-switch fraud. Breakaway stickers can be used to avoid fraud if Anyone tries to remove the sticker, it will separate into two tiny silvers.

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Question 4 (10 marks)

For each of the following transactions, indicate whether the accounts affected are an asset, a liability, equity, an income or an expense. Also indicate whether the accounts are being increased or decreased and whether the increase or decrease is a debit or credit. For example, Wages paid to staff. Increase an expense (debit) and decrease an asset (credit).

TRANSACTION

ANALYSIS

Eg.

Wages paid to staff.

Increase an expense (debit) and decrease an asset (credit).

A

Owner invested cash.

Increase in asset(credit)

B

Paid creditor by cheque.

Decrease in liability(debit) and decrease in asset(credit)

C

Cash payment made for insurance 6 months in advance.

Increase in expense(debit) and decrease in asset(credit)

D

Purchased supplies on account.

Increase in liability(debit) and increase in asset(credit)

E

Sold a vehicle for cash.

Decrease in asset(debit) and increase in income(credit)

F

Invoiced a customer for services performed.

Increase in income(credit)

G

Owner withdrew money from business bank account for private use.

Decrease in asset(debit)

H

Received payment on an account receivable.

Increase in income(credit)

I

Issued cheque and took out a loan to purchase machinery.

Increase liability(debit) and increase asset(credit)

J

Paid for an advertisement aired on television.

Increase in expense(debit) and decrease in asset(credit)

Question 5 (10 marks)

Sally’s Spa began operations on 1 June 2014 and completed the following transactions during the first month.

  1. Sally-Anne deposited $25,000 of her personal funds in a current account of the business.
  2. Spa equipment was purchased at a total of $15,000, of which $10,000 was paid immediately. A loan payable was arranged for the remaining amount.
  3. Sally collected $3,000 from customers for services performed.
  4. Rent was paid for the month $1,200
  5. Supplies costing $1,370 were purchased on credit.
  6. Wages of $500 were paid as well as an account for electricity $270
  7. Sally paid for the supplies purchased in (5) above.
  8. Supplies used during the month amounted to $640.

Required:

Record the above transactions in a worksheet. List the following assets, liabilities and equity as column headings: Cash at Bank; Supplies; Equipment; Loan Payable; Accounts Payable; Sally-Anne, Capital. Indicate totals after each transaction and complete the worksheet.

  1. Sally-Anne deposited $25,000 of her personal funds in a current account of the business.

Bank A/c Dr...................25000

To Owner Capital A/c Cr.......................25000

  1. Spa equipment was purchased at a total of $15,000, of which $10,000 was paid immediately. A loan payable was arranged for the remaining amount.

Equipment A/c Dr............15000

To Cash/Bank A/c Cr........10000

To Loan A/c Cr..................5000

  1. Sally collected $3,000 from customers for services performed.

Bank/Cash A/c Dr.............3000

To Income A/c Cr............3000

  1. Rent was paid for the month $1,200

Rent Exp A/c Dr..................1200

To Bank A/c Cr.................1200

  1. Supplies costing $1,370 were purchased on credit.

Supplies A/c Dr............1370

To Sundry Creditors A/C Cr.....1370

  1. Wages of $500 were paid as well as an account for electricity $270

Wages& Electricity Expenses A/c Dr............770

To Bank A/c Cr.......................................770

  1. Sally paid for the supplies purchased in (5) above.

Sundry Creditors A/c Dr..............1370

To Bank A/c Cr........................1370

  1. Supplies used during the month amounted to $640.

Operation Exp A/c Dr ...............640

To Supplies A/c Cr................640

ASSETS

LIABILITIES

EQUITY

Cash at Bank

+

Supplies

+

Equipment

=

Accounts Payable

+

Loan Payable

+

Sally-Anne, Capital

GB518 | Assignment 2 | Marking Sheet

Requirement

Maximum

Marks

Marks Awarded

What arguments could the accountant use to support the double-entry system?

10

“Why are we learning how to use the double-entry system of recording in the accounting cycle? Surely there are good computer packages available these days which can handle all of these details.”

10

In preparing the accounts for the antique dealer, what value should the dealer put on the plate?

10

Transaction analysis

10

Prepare a worksheet

10

Total above

50

Weighted down

10

Marker’s general comments

Marker’s name

Marker’s signature

Date marked

Campus

GB518 | Assessment 2 Business TransactionsPage 1 of 11