What is Accounting The Balance Sheet Accounting Principles and by yaofenjin



                                                 Accounting Unit 3 - Week 1

 What is Accounting?
 The Balance Sheet
 Accounting Principles and Characteristics
In the first week of accounting you will be introduced
to the purpose of accounting, users of financial
information and the accounting process.
You will learn the basic principles which are the
foundation of the accounting process, and the
qualitative characteristics of accounting information.
We also cover the fundamental accounting elements,
and introduce you to the accounting equation which
forms the basis of the balance sheet and double-
entry accounting.

             Key Knowledge
               •         The   purpose of accounting
               •         The   principles and characteristics of financial information
               •         The   accounting equation
               •         The   balance sheet
               •         The   effect of financial transactions on the balance sheet

             Key Skills
                   •   Explain the role of accounting
                   •   Identify the users of accounting information and financial information
                       they may require
                   •   Distinguish between financial data and financial information
                   •   Identify and explain the stages in the accounting process
                   •   Define and apply the accounting principles and qualitative
                   •   Explain the relationships between the accounting principles and
                       qualitative characteristics
                   •   Identify and define the elements of financial statements
                   •   Define and identify assets, liabilities and owner’s equity
                   •   Explain the relationship between the elements of the accounting
                   •   Explain the relationship between the accounting equation and the
                       balance sheet
                   •   Define and identify current and non-current items
                   •   Prepare fully classified Balance Sheet
                   •   Apply the rules of double entry accounting
                   •   Analyse how transactions affect the accounting equation and the
                       Balance sheet

Before we launch into the course, we will start on the next page by looking at
individual learning styles – which learning style best describes you?

Learning Styles

 Know your learning style. (Look and use the link below to determine your learning
 style if you are not sure). Depending on your style of learning use the below
 mentioned aides in your learning.

            Visual (V). The student who learns best by seeing will benefit from
             visual learning aides:

                 Handouts
                 Flash cards or note cards
                 PowerPoint presentations
                 Visual demonstrations

            Reading (R). The student who learns best by reading will benefit from-

                 Reading the chapter
                 Taking notes
                 Outlining the chapter

            Listening (A). The student who learns best by hearing instruction will
             benefit from –

                 Discussion with the teacher
                 A buddy or study groups where the student can get together with
                  another student(s)from the class and discuss topics covered by
                  the teacher
                 IPod lectures/talks

            Doing (K). The student who learns best by doing will benefit by –

                 Asking questions from the teacher or other accounting students
                 Repeat homework exercises or work additional problems (practice,
                 Taking on-lines quizzes if available
                 Using free periods to work problems similar to those in the text

       If you don’t know your learning style, click on the following link and you can
       determine which of the above you fall under:     http://www.edutopia.org/mi-

       Tasks this week relate to Outcome 1.

       There are 2 parts to this week’s work.

       Part 1              The Purpose of Accounting       Page 1.4
       Part 2              The Accounting Equation         Page 1.12

Part 1 - The Purpose of Accounting

      In the space below, write down 3 reasons why you think businesses must keep
      accounting records.

      Why is it not sufficient to have a box of receipts and bills like this?

      Why not? After all, it can be argued, that you are keeping records. They are just
      in a shoe box. List some reasons why shoe box accounting is not acceptable.

               Read section 1.1 on page 1 of your text book. Remember to
                make your own summary notes in your exercise book as you read
                through the text.

      The reference for the first part of this week’s work is Chapter 1 of your text
      Accounting is the formal process of collecting, sorting, classifying, recording and
      reporting, analysis and interpretation of financial information to assist the owner
      and manager of a business to make decisions. As the owner or manager of a
      business, you will need to know
         •   if the business is making a profit or a loss;
         •   how much cash is in the bank;
         •   whether your investment in the business is providing a reasonable rate of
         •   how much you owe your creditors;
         •   the value of the business assets;
         •   how they are financed;
         •   how much tax you have to pay – and these are just a few example of
             why accounting is so important to businesses.

                If you come across words that you are not familiar with, your
                text book has a glossary of accounting terms from page 401.
                This DECV course book will also explain new accounting terms
                as you work through the course.

      If you have never studied Accounting before, you will find many of the concepts
      new and different to what you are used to. If you want to be successful in your
      study of VCE Accounting you must be prepared to work at it!

Users of Financial Information

               Read section 1.2 of your textbook.

       The users of financial information are not
       always interested in the same thing. There are
       several different types of people or businesses
       who, apart from the owner or manager, have
       an interest in the financial details of a
       business. For example, whereas the owner may
       be interested in finding out the rate of return
       on his/her investment in the business, a bank
       manager may be interested in a healthy cash
       flow and what the budgeted reports show.

       Later you will learn about the particular
       qualities that make accounting reports useful
       to the various people or organisations that use

     Financial Data and Financial Information
     In simple terms an accounting system collects raw financial data then
     processes it to produce financial information in the form of reports. These
     reports can be used to help decision making in the management of the business
     and for other purposes.
     An accounting system will be designed to suit the needs of a particular business
     and the people or organisation which have an interest in that business. So it’s
     fair to say that an accounting system for a small corner shop will be a lot
     different to the accounting system put in place by a huge business like Telstra!

The Accounting Process

                 Read Section 1.3 of your text book.

     The accounting process is a bit like making a meal. I
     am sure that you have watched some parts of Master
     Chef Australia or closer home, your mum preparing a
     meal. The steps to preparing a meal or baking a cake
     are as follows:
     a. Get all the ingredients together
     b. Mix them in the required sequence
     c. Present them on serving plates/platters
     d. Get feedback/advice how to do it better

     The FOUR steps can be linked to the accounting process as follows:
     Source Documents
       Source documents verify a financial transaction.
       Source documents include: cash receipts, cheques and cheque butts,
       invoices, and memos. Source documents will be introduced in Week
       3 of this course.
       Source documents are sorted and processed manually or using
       computers. The financial information is recorded in the journals and
       Financial information from the business records enable the
       preparation of the Cash Flow Statement, the Profit and Loss
       Statement and the Balance Sheet.
       The three main accounting reports mentioned above are analysed by
       the business owner, manager and accountant, from whom advice
       may be sought and business decisions can be made.

      So basically we have a four stage process. In Unit 4, we take the processes
      even further – using the financial information to prepare budgets and to analyse
      the performance of the business.

Accounting Principles
      Before we begin this section, in the space below write down the meaning of the
      word “principles”
      Check – did your definition or explanation include any of the following:
      •   Code
      •   Truth
      •   Law/rules
      •   Guide
      Consider this:
      What would happen if there were no
      principles to guide businesses, people
      or governments?

                       Read Section 1.4 on pages 8-9 of your text book.

                               Podcast on CD/online course

      One thing you will find quite early when you get into
      the study of accounting is how much theory you will
      need to learn, as well as the practical skills. In fact,
      be prepared for up to 40% of your exam marks to
      be based on the theory of accounting!
      However, you just can’t learn all the theory in week one
      and forget about it for the rest of the year. The theory
      runs right through the course, alongside the practical
      In the next two sections we will look at the difference between ‘Accounting
      principles’ and ‘Qualitative Characteristics’ of accounting reports. These will
      come up time and time again in Units 3 and 4

      Accounting principles are really the basic rules of accounting that have
      become established over time. For example, our society has rules that govern
      its behaviour, so the practice of accounting also has rules that govern the way
      businesses and accountants process, record and report financial information.

1. Accounting entity
The transactions of the business must be kept separate from the business
owner. For example, the owner’s personal bank account cannot be combined
with the business bank account. When the owner takes out business assets for
his/her personal use this must be recorded as ‘drawings’. When the owner
contributes non-current assets to the business, the valuation of the assets will
not be based on what the owner originally paid, but on an agreed value at the
time the asset is contributed to the business.

2. Going concern
Assumes the business will go on indefinitely, so that non-current assets can be
recorded and credit transactions which overlap different reporting periods can be
recorded. This principle also helps us to distinguish between expenses consumed
in the current reporting period as opposed to assets whose benefits extend into
the future reporting period. Below is an example of a business operation that
has been going since 1923.

3. Reporting period
Following on from the going concern principle, this rule allows the life of the
business to be divided into reporting periods (weekly, monthly, but more often
quarterly, half-yearly, or yearly) for the purpose of preparing accounting reports
in order to aid decision making and more importantly to meet the taxation

4. Historical cost
All transactions have a monetary value, and this is the value that is recorded –
the original or historical cost. (There is an exception with stock valuation, but
this will be covered later in the course).

5. Conservatism
An important principle. It means that accountants act cautiously, so that losses
can be recognised before they are expected to occur, but gains and revenues
are not recognised unless there is verifiable evidence. This is to ensure that
expenses and liabilities are not understated and revenues and assets are not
overstated. Conservatism also applies to the valuation of stock. Again, this will
be covered later in the course.

6. Consistency
Accounting reports should be prepared in a consistent manner over consecutive
reporting periods so that users of the reports can compare the reports from
period to period.

7. Monetary unit
All transactions between the business and another entity must be recorded and
reported in $ Australian recorded and reported in $ Australian.

Qualitative characteristics of accounting information

                       Read Section 1.5 on pages 11 – 12 of your text book

      The previous section on accounting principles looked at the basic rules that
      underpin the recording process in accounting. But accounting information
      must have certain qualities that make the information useful to the people who
      use accounting reports. These qualities are covered in detail in Section 1.5 of
      your text book. They are briefly summarised here but we suggest that you
      make your own summary notes in your own words as you are reading through
      the text book. These “qualitative characteristics” will come up throughout Units
      3 and 4 accounting, so it’s not necessary to memorise them, but refer back to
      them when they come up again. Make a note of the ‘Study Tip’ in the margin on
      page 12 of your text book.

      1. Relevance
      Relevance means that accounting reports must include all financial information
      relevant to the particular business. For example, the personal financial
      information of the business owner is not relevant to the business, and would not
      be included in the business reports. Also, transactions involving only immaterial
      amounts must be recorded by the business, but they don’t need to be shown in
      accounting reports. For example paying $1.50 for a packet of envelopes would
      be recorded, but not shown as an individual item in the accounting reports.
      Instead the amount of $1.50 would be included in the figure for ‘Stationery’.

      2. Reliability
      Business financial reports must only include information that has come from
      reliable, verifiable sources. For example, when reporting the amount of sales,
      there should be proof that the sales have taken place, such as invoices or
      receipts. In addition, information should be objective and unbiased, so for
      example the value of the business assets would be reported at their cost price,
      and not a value that the owner/manager thinks they are worth.

      3. Comparability
      Business success depends on analysing its performance over weeks, months and
      years. In order to do this, business reports are compared over time to analyse
      performance. Comparability means that the reports should be prepared using
      the same, consistent accounting methods from one reporting period to the next,
      or that the users of accounting reports are informed about the methods used to
      prepare them if they are changed. Comparability is linked to the principle of

      4. Understandability
      This really means that accounting reports should be set out in such a way that
      all sorts of users can work them out! Using consistent headings, columns and
      including explanatory notes where appropriate will help users of accounting
      information to understand the content of the financial reports.
      You’ve probably noticed that some of the qualitative characteristics and
      accounting principles are linked. As you work through Units 3 and 4 you will
      see how they apply in specific areas of the accounting process.

  The Accounting Elements

               Read section 1.6 on pages 13 – 15 of your text book. These
              definitions may seem rather formal, but as you work through
              the course you may be asked why something is classified as an
              expense instead of an asset.

  ASSETS: An asset is “a resource controlled by the entity as a result of past
  events and from which future economic benefits are expected to flow to the
  entity”. Assets include bank, debtors, stock, furniture and equipment, motor
  vehicles, business premises and shop fittings.

   LIABILITIES: A liability is “a present obligation of the entity arising from
   past events, the settlement of which is expected to result in an outflow from
   the entity of resources embodying economic benefits”. Liabilities include
   creditors, bank loans, mortgages and bank overdraft.

   OWNER'S EQUITY: This is the ‘residual interest’ in the assets of the
   business after all the liabilities have been deducted. In other words if the
   owner wants to sell the business, owner’s equity what he/she is left with
   after the liabilities have been paid out. This is represented by the balance
   in the owner’s Capital account.

   REVENUE: Revenue is defined as the “inflows of economic benefits or
   savings in outflows in the form of increases in assets or decreases in
   liabilities that lead to an increase in owner’s equity, except capital
   contribution”. Revenue occurs when goods are sold for cash or on credit, but
   also includes interest received or fees earned. Revenue increases the value
   of Owner’s Equity.

   EXPENSES: Expenses are defined as “outflows of economic benefits or
   reductions in inflows in the form of decreases in assets or increases in
   liabilities that lead to a decrease in the owner’s equity”. Main examples
   wages, electricity, telephone, repairs and maintenance, cleaning, interest
   expense, and so on.

   Before we move to the next section, take a break and revise all the reading
   you have done so far and complete the following tasks in your exercise

             Complete the following tasks on the next page in your
              Exercise Book:

Practice Exercise
         1.    Define, in your own words, the meaning of the term

      2.    List five factors that are likely to influence the success of a
      3.    Explain why financial institutions such as banks would be
            interested in the financial information of a small business.
      4.    Explain the difference between financial DATA and financial
      5.    Explain the difference between RECORDING financial
            information and REPORTING financial information.
      6.    Explain the link between the GOING CONCERN principle and the
            REPORTING PERIOD principle.
      7.    Explain how the recording system in accounting can ensure
            comparability of accounting reports.
      8.    State one reason why Electricity would be regarded as an
            EXPENSE, and not an ASSET.
      9.    A business owner deposits $10,000 of his personal cash into the
            business bank account as a capital contribution. Explain why
            this transaction is NOT recorded as REVENUE.
      10.   Complete all parts of exercise 1.1 (Accounting Principles) at the
            end of Chapter 1 in your text book.

Part 2 - The Accounting Equation

The reference for the second part of this week’s work is Chapter 2 of your
text book. If you’ve forgotten the definitions of these three terms, revise the
first part of this week’s work. Read also Section 2.1 from Chapter 2 of your
text book.

        Assets = Liabilities + Owner's Equity

The Accounting equation is the most important fundamental relationship
between Assets, Liabilities and Owner’s Equity. It forms the basis of double
entry accounting. These elements make up the three basic elements of The
Balance Sheet, one of the accounting reports you will study in depth this

A business can have hundereds, thousands of transactions in a day,
week or month and they each will affect the accounting equation in
some way.

Every day the business is recording transactions and these transactions must
be recorded as part of the accounting process. But what is meant by a
‘financial transaction’?
“A financial transaction is an exchange of goods or services of a
monetary value between the business and another entity”.
      Examples of transactions:
        •       The owner contributes capital to commence business
        •       The business takes out a loan from the bank
        •       The business purchases office equipment on credit
        •       The business pays the wages to its employees
        •       The business receives cash from sales
        •       The owner withdraws assets from the business for his/her
                personal use – this transaction is called DRAWINGS – see the
                next section:

So how do we work out the effect of a transaction on the accounting

            •    When analysing a transaction, ask yourself the following
            •    Is it a transaction (i.e., has something of value been
                 exchanged)? If yes, continue.
            •    Which accounts have been affected? At least two are

      Example 1:
      A tutor promised to tutor a student next week in return for $20 per
      Is it a transaction? No, as nothing of value has been exchanged, just
      promises! No need to continue.

      Example 2:
      Joe starts a new business by making $1000 deposit in a business bank
      1.     Is it a transaction? Yes, money has been transferred from a
            personal bank account.
      2. Accounts affected: Ask yourself: What did you get? Where did it
         come from?
      3. You got cash for the business, where did it come from, the owner.
      4. So the accounts are Bank and Capital
      5. Cash/Bank is an asset and has increased in value, as $1000 has
         been deposited in it, there was nothing before, Capital, an owner’s
         equity account has also increased in value, the owner now has an
         investment of $1000 in the business that he did not have before.

Watch the visual demonstration as mentioned below, as you are taken
through a number of transactions and shown how they impact on the
accounting equation.
                                                     Visual demonstration for
                                                     Exercise 2.5, page 32 of
                                                         your text book

The Balance Sheet

                    Read Section 2.2 on page 24 of your text book.

         Figure 2.1 in your text book shows you the basic format of a
         Balance Sheet. This is called the T-form presentation, with the
         Assets shown on the left hand side and the Liabilities and Owner’s
         Equity shown on the right hand side.
         Figure 2.2 shows an example of a completed balance sheet.

Who? What? When? The Balance Sheet (as well as all financial reports)
must always show three parts to the heading, so in Figure 2.2:

      1. The name of the business entity for whom the report is prepared:
         ‘Morgan’s Merchandise’ (WHO)
      2. The title of the report: ‘Balance Sheet’ (WHAT)
      3. The date that the report was prepared: ‘as at 30 June 2012’.

Note also the use of columns in setting out, and that the figures
for ‘Total Assets $96,000’ and ‘Total Equities $96,000’ are on the same line
with a double-underline underneath on both sides: 96,000.

               Summary of the Accounting Equation:

               The Accounting Equation can be expressed in 3
                     Assets = Liabilities + Owner's Equity
                      Liabilities = Assets - Owner's Equity
                      Owner's Equity = Assets - Liabilities

Assets must always equal liabilities plus owner's equity because
if a business has any assets, somebody must have a claim on them, they
must ‘belong’ to somebody, either the owner or some outside entity. The two
sides of the accounting equation could be thought of as the two sides of the
same coin. Total equities are made up of Liabilities + Owner’s Equity.

  Example 1
  This example shows how either assets or liabilities or owner's equity can be
  calculated if two of the three items are given.
           1. Calculating owner's equity: A – L = OE
                  • Assets (A) = 200,000
                  • Liabilities (L) = 80,000
                  • therefore Owner's Equity (OE) = 200,000 - 80,000 =

           2. Calculating liabilities: A – OE = L
                  • Assets = 500,000
                  • Owner's Equity = 230,000
                  • therefore Liabilities = 500,000 - 230,000 = 270,000

           3. Calculating assets: L + OE = A
                  • Liabilities = 320,000
                  • Owner's Equity = 180,000
                  • therefore Assets = 320,000 + 180,000 = 500,000

  Classification in the Balance Sheet

            Read section 2.3 on pages 25 – 27 of your textbook.

  The essential distinction between current and non-current assets is how
  quickly they will be used up or converted into cash.
  The essential distinction between current and non-current liabilities is
  how urgently the obligation will have to be met. Note that a LOAN can be
  classified as both a current and non-current liability, depending on how much
  needs to be repaid within 12 months, and how much needs to be repaid over
  a longer period.
  Classification in the Balance Sheet is important because in assists in the
  decision making of the business. This will be covered in more detail
  throughout the course.

  Example 2
  The following information relates to Rhonda’s Office Supplies.
  On 01 June 2012, Rhonda Stubbs commenced a double entry accounting
  system for Rhonda’s Office Supplies, with the following assets and liabilities:

                 Bank                            4,000
                 Shop Fittings                  21,000
                 Office Equipment                8,000
                 Stock Control                   3,500
                 Creditors Control               2,000
                 Loan – Otway Bank*             14,000

  *$4,000 of the Otway loan must be paid back within 12 months, and the
  balance by 2012.


a) Calculate the equity (capital) of R. Stubbs as at 01 June 2012.
b) Prepare a Balance Sheet as at 01 June 2012.

                                 Assets: (4,000 + 21,000 + 8,000 + 3,500) =
                                 Liabilities: (2,000 + 14,000) = 16,000
                                 Owner’s Equity = A – L = $20,500

                          b)     Rhonda’s Office Supplies – Balance Sheet as at 01 June
Current Assets                                    Current Liabilities
Bank                            4,000             Creditors Control          2,000
Stock Control                   3,500       7,500 Loan – Otway               4,000          6,000
Non-Current Assets                                Non-Current
Shop Fittings                  21,000             Loan – Otway                             10,000
Office Equipment                8,000      29,000
                                                  Owner’s Equity
                                                  Capital – R.                             20,500

Total Assets                              36,500 Total Equities                           36,500

                      Reminder: The Balance Sheet must always show the following
                      essential information:
                      •        the name of the business (who)
                      •        the title of the statement (what)
                      •        the date at which the report was prepared (when)
                      •        the assets, liabilities and owner's equity, with Assets and
                               Liabilities classified according to whether they are current or

                Take your time and if you have any questions please call your DECV

                Double-Entry Accounting

                              Read section 2.4 on pages 28-29 of your text book.

                The Balance Sheet represents the financial position of the business at a
                particular point in time. A balance sheet is not prepared every day but on a
                regular basis throughout the life of the business to show the financial position
                of the business.

            ‘Drawings’ is the accounting term which means the owner has taken out
            business assets for their own use. Drawings reduces the value of the Assets
            and Owner’s Equity by the same amount. Business assets which the owner
            withdraws could include cash, stock, or non-current assets.

            Drawings is NOT an expense, it causes a reduction in the value of
            Owner’s Equity and Assets.

Of course there are many other types of transactions that you will come across
in your study of Accounting this year.

There are the two ‘Golden Rules’ of Double-Entry Accounting –
memorise these!

           1. Every transaction will affect at least 2 elements of the accounting

        After each transaction is recorded, the Balance Sheet
        must remain in balance.

            Study the Imelda’s Shoe Shop example in Section 2.4 on pages
             28-29 of your text book, then study the following example:

Example 3
At 30 November 2012, Supa-Cheap Car Parts, owned and operated by Jerry
Goltz, had the following assets and liabilities:

Bank                                               8,250
Debtors Control*                                  15,000
Creditors Control*                                24,000
Stock Control*                                    36,000
Storeroom Equipment                              145,000
Office Furniture                                  12,000
Premises                                         200,000
Loan – Kilcunda Bank                             175,000

Note: $5,000 of the Loan from Kilcunda Bank must be paid within 12 months.

         *The word ‘Control’ in Debtors and Creditors Control means that all
         the individual debtor and creditor balances are shown in the Balance
         Sheet as a single figure for debtors under current assets and a single
         figure for creditors under current liabilities. In Stock ‘Control’, only
         one figure for stock is shown in the Balance Sheet, even if the
         business has several hundred different types of stock. Stock Control is
         a current asset.

Look at the visual demonstration that takes you through the
effect of transactions on the balance sheet entitled
introduction to ledgers

                                                     Effects of transactions on
                                                     the Balance Sheet
                                                     Ex 2.7 Sam Booker
                                                     Liquor page 33 of text

              1. Calculate Owner’s Equity and prepare a Classified Balance Sheet as at 30
              November 2012. The solution follows:

                                   Supa-Cheap Car Parts
                           Balance Sheet as at 30 November 2012

Current Assets                 $               $         Current Liabilities     $            $
Bank                                8,250                Creditors Control     24,000
Debtors Control                     15,00                Loan – Kilcunda        5,000          29,000
Stock Control                      36,000      59,250
Non-Current Assets                                       Non-Current
Storeroom Equipment             145,000                  Loan – Kilcunda                      170,000
Office Furniture                 12,000
Premises                        200,000       357,000 Owner’s Equity
                                                      Capital – J. Goltz                      217,250

Total Assets                                  416,250 Total Equities                      416,250

              During the week ending 7 December 2012 the following transactions took place:
                   1.      The business received $6,000 cash from debtors.
                   2.      The business paid creditors $9,000 cash.
                   3.      The business bought additional stock on credit from Wang’s
                           Importers for $3,000.
                   4.      J. Goltz, proprietor, withdrew $200 cash and $150 worth of stock
                           for his personal use.

         2.   Prepare a Balance Sheet for Supa-Cheap Car Parts as at 7 December 2012
              after taking the above transactions into account:
                        Solution: Supa-Cheap Car Parts –

                        Balance Sheet as at 07 December 2012
 Current Assets             $          $              Current Liabilities       $             $
 Bank                     5,050                       Creditors Control         18,000
 Debtors Control          9,000                       Loan – Kilcunda            5,000        23,000
 Stock Control           38,850      52,900           Bank

 Non-Current Assets                                   Non-Current
 Storeroom Equipment 145,000                          Loan – Kilcunda                    170,000
 Office furniture     12,000                          Bank
 Premises            200,000 357,000

                                                      Owner’s Equity
                                                      Capital – J. Goltz       217,250
                                                      less Drawings                350   216,900

 Total Assets                       409,900           Total Equities                     409,900

              Remember the two Golden Rules? Each of these transactions will have TWO
              EFFECTS on the Balance Sheet:

                        1. The business received $6,000 cash from debtors:
                        The receipt from Debtors INCREASES the Bank balance and
                        DECREASES the Debtors balance. There is NO change to Total Assets.

         2. The business paid creditors $9,000 cash:
         The payment to Creditors DECREASES the Bank balance and
         DECREASES the Creditors balance.

         3. The business bought additional stock on credit from Wang’s
         Importers for $3,000:
         The purchase of stock on credit INCREASES the Stock Control by
         $3,000 and INCREASES the Creditors Control by $3,000.

         4. J. Goltz, proprietor, withdrew $200 cash and $150 worth of spare
         parts for his personal use:
         The drawings have DECREASED Capital and DECREASED Bank and
         Stock Control.

Practice Exercise
         Complete the following tasks in your Exercise Book:
         11.   Define the terms ‘asset’ and ‘liability’.
         12.   Explain the meaning of ‘owner’s equity’.
         13.   Explain the relationship between the accounting equation and
               the balance sheet.
         14.   State the 3 pieces of information that must form part of the
               heading in a balance sheet.
         15.   Distinguish between ‘current’ and ‘non current’ assets.
         16.   Explain how a bank loan could be classified as both ‘current’ and
         Tasks continued on the next page
         17. Explain the nature of a transaction.
         18. Explain why the balance sheet must balance after every
         19. Complete Exercise 2.2 from Chapter 2 of your text book (p. 31)
         20. Complete Exercise 2.7 from Chapter 2 of your text book (p. 33)

         If there is a change in one item there must be a corresponding change
         in another item in the Balance Sheet.
         On the following pages you will be given a set of tasks to complete
         and send to your DECV teacher. You can complete these tasks
         manually in the spaces provided, but because you will be required to
         submit some of your work using information technology, such as a
         spreadsheet program (Excel) you should complete the practical
         exercises using a spreadsheet.
         Important! We know from experience that the first 5 weeks of
         accounting are the ‘building blocks’ for the rest of the year. If you
         have not understood this week’s work or your have any difficulties
         with the following tasks contact your DECV teacher.
         On the following page is a summary and checklist of Week 1. Before
         you start the work for submission, make sure you have attempted all
         the tasks we have given you in this week’s work, then read through
         the summary on the next page and complete the checklist.

                    If you cannot complete the checklist, work through the course notes
                    again until you feel confident with the topics.
                    If you have any questions, please contact your teacher.


             Summary of Week 1

             This is a basic introduction to the nature of double-entry accounting. This
             week’s work covers the need for financial information, and the people or
             organizations that use financial information. You have probably realised
             already that there is going to be quite a bit of theory in Accounting this year!
             The theory in Week 1 introduced you to accounting principles and
             qualitative characteristics of accounting information. You do not need
             to memorise this theory for Week 1, because you will come across it again
             throughout Units 3 and 4 in a number of topics.
             Week 1 introduces the Balance Sheet and its relationship to the accounting
             equation. Make sure that you can give the correct definitions of accounting
             terms such as asset, liability, revenue, expense and owner’s equity.
             You should be able to classify the Balance Sheet, clearly showing the
             relationship between Assets (current and non-current), Liabilities (current
             and non-current), and Owner’s Equity.
             The most important part of Week 1 is understanding how a transaction
             affects the accounting equation, and that in double-entry accounting, a
             transaction affects two elements in the accounting equation.

Key skills from Week 1: (Tick off only when you are confident in each key skill).
   Explain the purpose of accounting
   Identify the users of financial information
   Explain the basic process of accounting
   Explain the meaning of qualitative accounting characteristics and give
   Explain the meaning of accounting principles and give examples
   Describe the nature and purpose of the Balance Sheet
   Define the elements of Asset, Liability and Owner’s Equity, Revenue and
   Distinguish between current and non-current items in a balance sheet
   Calculate owner’s equity, assets or liabilities from a given set of figures
   Explain the meaning of Drawings
   Explain how transactions affect each element of the accounting equation
   Prepare a classified Balance Sheet from a given set of figures
   Prepare a classified Balance Sheet following a series of transactions


  1. Have you completed all the exercises from your textbook?
  2. Have you completed all the practices exercises in the
     course book?
  3. Have you completed the additional exercises provided?
  4. Did you check all your answers?

                 If you have completed all the above or at least up to
                     and including point 2, then proceed onwards.


Send the following tasks to your DECV teacher

                          Unit 3 Accounting

  Week 1 Name__________________________

 Task 1 Study the following definitions in column A, and in column B, write the term that
 corresponds to the definition. The first definition has been completed for you.
                                 Column A                                           Column B
 1.1 The accounting report that shows the relationship between Assets,
                                                                               Balance Sheet
 Liabilities and Owner’s Equity at a particular point in time.
 1.2 An attitude adopted by accountants which requires a cautious
 approach in recording and reporting financial information.
 1.3 The general term to describe the basic rules of accounting which
 have become acceptable practice over time.
 1.4 An accounting principle that requires personal transactions of a
 business owner must be kept separate from business transactions.
 1.5 Inflows of economic benefits or savings in outflows in the form of
 increases in assets or decreases in liabilities that lead to an increase in
 owner’s equity, except capital contribution.
 1.6 A quality of accounting information that results from the consistent
 application of accounting methods from year to year.
 1.7 The term used to describe the transaction where the owner of a
 business takes out business assets for his or her personal use.
 1.8 A resource controlled by the entity as a result of past events and
 from which future economic benefits are expected to flow to the entity.
 1.9 A present obligation of the entity arising from past events, the
 settlement of which is expected to result in an outflow from the entity of
 resources embodying economic benefits.
 1.10 A qualitative accounting characteristic that requires accounting
 information is presented in a simplified and understandable way.

Task 2 For each of the following situations, indicate with a brief explanation the qualitative
characteristic or accounting principle which is involved (use the space on the right to complete
your response. The first exercise has been completed as an example).
 2.1 Ruby Diamond owns and operates                  Example: The Qualitative Characteristic of
 Preston Jewellers. On her way home she lost         Reliability
 the business cash books with one week’s             Reports need to be free of bias so Ruby should
 transactions so when she prepared her               not make guesses. The original documents
 accounting reports she made an educated             must be used as they verify any transactions
 guess as to the type and amount of the cash         that have taken place.
 transactions for that week.
 2.2 Kevin Page owns and operates Page’s
 Bookshop. The business purchased shop
 fittings cheaply for $10,000 but Kevin
 believes they are worth $15,000 and this is
 the value that they are recorded in the
 accounting reports.

2.3 Rose Potter owns and operates Potter’s
Plants. She applied for a loan and her bank
manager requested the accounting reports
from the previous 5 years. Rose went along
to the bank with several sheets of handwritten
notes and figures, some prepared by her as
well as her husband. The bank manager was
very confused and did not grant Rose the

2.4 Sonya Mouskouri owns and operates a
home furnishing shop in Bairnsdale. During
the reporting period 01 January 2009 to 30
June 2009 she purchased a new stapler for the
business costing $6.95. The transaction was
recorded in the business records but it did not
appear in the Balance Sheet on balance day,
30 June 2009.

2.5 Gavin Greaseman owns and operates GG
Auto Parts. The business has been running
for 5 years and Gavin has not prepared any
accounting reports in that time.

NOTE: Sundry creditors are suppliers of any other type of good or service other than
stock items that a business trades in on a day to day business. When creating an account,
the name of the creditor should be noted as part of the account title. Trade creditors must
be kept separate from sundry creditors.
Trade creditor is a supplier that provides stock to a business on credit, that is, trade
creditors are suppliers of the goods that the business trades in on a regular basis. When
you have a transaction involving stock purchased on credit, you do not write sundry
creditor, you write creditor and identify the name, until later on (Week 4)when you will
refer to creditors you buy stock on credit from as ‘creditors control’.

Task 3 Complete the following exercise. The first transaction has been completed for you.

   1.   Owner deposited $100,000 to commence business
   2.   Purchased stock on credit for $10,000 from Rockbank supplies
   3.   Purchased office furniture for $15,000 from Harvey Normandy on credit
   4.   Paid Harvey Normandy $1000 on account
   5.   Took out a loan from ANZ bank of $15,000
   6.   $5000 of the loan was repaid
   7.   Paid Harvey Normandy $1000 on account
   8.   Received $1,000 from Debtors
   9.   Bought shop fittings for cash $35,000

                 Item                Classification (Asset,      Increase or   Amount $
                                  Liability or Owner’s Equity)    Decrease
  1              Bank                          Asset              Increase      100,000
                Capital                 Owner’s Equity            Increase      100,000








Task 4 On February 01 2010, Sharon’s Shoe Shop, owned and operated by Sharon Smith,
reported the following assets and liabilities:

 Bank                                   3,250
 Debtors Control                        5,600
 Creditors Control                     10,900
 Stock Control                          8,250
 Shop Fittings                        100,000
 Office Furniture and Equipment        25,000
 Shop Premises                        180,000
 Mortgage from Bendigo Bank           120,000

4.1 Calculate the value of Sharon Smith’s equity as at February 01 2010. (Show your workings).

Assets                           Liabilities                         Owner’s equity

Total Assets                     Less Liabilities                    Equals Owner’s equity

During the week ending 7 February 2010 the following transactions took place.

1.     The business bought additional stock on credit from WPZ Wholesalers for $5,000.
2.     The business received $3,700 from debtors.
3.     The business paid creditors $5,000.
4.     The business purchased additional stock of gifts to the value of $750
5.     The proprietor (Sharon Smith) withdrew $1,000 cash and $200 stock for her personal use.

Additional Information: $15,000 of the mortgage is due be paid back within the next 12 months.
Stock                                                  Creditors


4.2 Prepare a Classified Balance Sheet for Sharon’s Shoe Shop as at February 07 20010 after
the five transactions and additional information above have been taken into account.
 FEBRUARY, 7 2010
 Assets                                                Liabilities

 Non Current Assets                                    Non Current Liabilities

                                                       Owner’s Equity

4.3 State the accounting principle that would be breached if Sharon’s drawings were not
reported in the Balance Sheet. Explain your answer.
    Accounting Principle:


Task 5 In Column B, circle or highlight the corresponding letter of the Accounting
Element for each item in Column A. (Revise page 1.6 of your DECV Course Book). The
five accounting elements are:

•        Asset                        (A)
•        Expense                      (E)
•        Liability                    (L)
•        Owner’s Equity               (OE)
•        Revenue                      (R)

    Column A                   Column B
    1. Mortgage                   A          E      L        OE         R
    2. Electricity                A          E      L        OE         R
    3. Debtors Control            A          E      L        OE         R
    4. Capital                    A          E      L        OE         R
    5. Shop Cleaning              A          E      L        OE         R
    6. Bank Overdraft             A          E      L        OE         R
    7. Shop Fittings              A          E      L        OE         R
    8. Interest paid              A          E      L        OE         R
    9. Drawings                   A          E      L        OE         R
    10. Wages                     A          E      L        OE         R
    11. Creditors Control         A          E      L        OE         R
    12. Credit Sales              A          E      L        OE         R
    13. Cash Sales                A          E      L        OE         R
    14. Interest earned           A          E      L        OE         R
    15. Stock Control             A          E      L        OE         R

      Task 6a)     Having completed the week 2’s submission fill in the following and identify
      how well you have understood the areas of study for this week’s work.

ACCOUNTING                                         Learning         Process-Reflection
                                                                                      Summary     Demonstration
       UNIT 3                                                                           Notes          s
        2013                                                                         Completed?     Watched
                                             HOW CONFIDENT AM I?
                                                                                                  Identify which
                                                                                                    ones were
    Areas of study
                                                                                     YES    NO     YES      NO

                                                                                   √      X      √        X

Accounting elements of
financial reports–
definition and relationship
between assets, liabilities,
owner’s equity, revenue
and expenses
Two fold effect of
transactions on the
Accounting equation

      Task 6b)        What areas did you struggle with and would like more help with?

      Task 7
      Having read page 1.2 at the beginning of this week’s work, identify your style of learning
      here, remember go to this link to determine your style if you are not sure.

      My style of learning is and the way I intend to study in accounting will be:

      Task 8 - Please complete the personal profile on the following pages.

Task 8 – A personal profile - Accounting Units 3/4 2013

We are asking you to complete this section so we can get to know you a little better, the
reasons why you are studying Accounting at the DECV, and if you have access to a
computer, email and the internet.
Your Name

Your DECV number

Complete the following if you are attending a school.
Name of School

Your Supervisor

If you are not attending a school, please tell us how you will be studying, for example, at
home, while travelling with parents, etc.

Briefly explain why you are studying Accounting at the DECV.

Are you studying other subjects this year? If ‘yes’, please list them.

Have you studied any accounting related subjects in the past?
Yes  No 
If you ticked ‘Yes’ to the last question tell us a bit about what you have previously studied
in accounting, for example ‘Units 1 and 2 at my school last year’.

Briefly outline what you would like to do when you have finished school or your DECV

Briefly describe any problems or issues that you may experience this year which could
impact on your studies, for example, travelling for sport, looking after children or other
family members, working full or part time, medical issues, etc.

What public or school libraries do you have access to?

Do you have access to a computer (please tick)      Yes          No 
Do you have access to the Internet?                 Yes          No 

Indicate below your experience with the following software programs:

Microsoft Word (or similar word processing program)

No experience                
Some experience              
A lot of experience          

Microsoft Excel (or similar spreadsheet program)
No experience                
Some experience              
A lot of experience          

If you have an email address, please write it clearly below – this is how we can keep in
touch with you, and you can submit your work by email.

Email address: ………………………………………...............................................................
Will you be submitting your work by email?

Yes           No            Don’t know     

Your teacher will send you an introductory letter so you will find out something about them.
On a separate page, or in an email to your teacher, why not write a brief letter about
yourself, your hobbies, interests, likes, dislikes, pets, favourite music and TV shows – and a
current photo of yourself if possible. All information we receive from you is kept in strict

                                                                          Please attach a recent
                                                                          photo of yourself here.

                                                                          (It can be just yourself,
                                                                             or with friends, at a
Work for Submission Checklist for Week 1:                                     party, on holiday,
Please complete the following checklist, and keep this as your
record. You should make a photocopy of all hand-written work
you send to the DECV.

           Task 1: Accounting definitions and meanings

           Task 2: Accounting Characteristics and Principles

           Task 3: Exercise on Accounting Equation/Analysis Chart

           Task 4:    Sharon’s Shoe Shop

           Task 5:    Examples of the Accounting elements.

           Task 6: Reflection of learning

           Task 7: Identifying learning style

           Task 8: Personal profile

           Date sent to the DECV: ………………………………..

                                    END OF WEEK 1

                     315 Clarendon Street, Thornbury 3071
                     Telephone (03) 8480 0000               Fix your student barcode
                     FAX (03) 9416 8371 (Despatch)
                     Toll free (1800) 133 511                 label over this space.

 SCHOOL NO.                                                 62001
 STUDENT NUMBER ___________________

 SCHOOL NAME _______________________                        [62001]
 STUDENT NAME ______________________

SUBJECT                     Accounting Unit 3

YEAR/LEVEL             12           WEEK         1

TEACHER          ________________________


Please tick the following work that you have attached:

      Task 1: Accounting definitions and meanings

      Task 2: Accounting Characteristics and Principles

      Task 3: Exercise on Accounting Equation/Analysis Chart

      Task 4: Sharon’s Shoe Shop

      Task 5: Examples of the Accounting elements

      Task 6: Reflection of learning

      Task 7: Learning Style

      Task 8: A personal profile

Use the space on the back of this sheet to explain if you were not able to complete
any of these tasks, or if you have any questions you would like to ask, or any
other comments or issues that you would like to raise with your teacher.

                              REVIEW, REFLECT AND ASK

I found this week’s course work:          I think the work was:

(   )   Very interesting                  (   )   Too easy
(   )   Interesting                       (   )   Easy
(   )   Sort of Interesting               (   )   OK
(   )   Unsure                            (   )   Challenging (it got me thinking)
                                          (   )   Hard
                                          (   )   Too Hard

Questions I have about this week’s work: (Why? What? When? Who? How?)

           Why…

           When…

           How….

I would like further explanation on:

Other comments:

                               TEACHER’S FEEDBACK

Some good things about your work were:

Please consider doing the following in your next piece(s) of work:

                                    DISTANCE EDUCATION CENTRE TEACHER

To top