Task 1C - Elements of Accounting Solutions
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This document contains sample questions and explanations about accounting elements and definitions. It addresses topics like owner's equity, liabilities, revenue, assets, and expenses. The first question defines owner's equity as a business's assets minus liabilities. It then calculates owner's equity of $70,000 for a business with $110,000 assets and $40,000 liabilities. Subsequent questions provide explanations for whether creditors are a liability, how cash sales meet the revenue definition, how prepaid insurance should be treated as an asset, and how unpaid wages meet the definitions of a liability and an expense. The explanations reference accounting definitions for elements like assets, liabilities, owner's equity, revenue and expenses.
Task 1C - Elements of Accounting Solutions
- 1. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 1 Task 1C Elements of Accounting Question 1 A small business had Assets of $110,000 and Liabilities of $40,000. Define the term Owner’s Equity and state the Owner’s Equity of this business. Definition 1 mark Owner’s Equity represents the owner’s residual interest in the Assets of the firm after the deduction of Liabilities. Owner’s Equity 1 mark $70,000 1 + 1 = 2 marks Question 2 Explain whether the accountant is correct and justify your opinion with reference to the definition of a Liability. Explanation 1 mark The accountant is correct. Creditors are a Liability because: 1 mark The firm has a present obligation – in this case, the obligation to repay creditors the amounts owed. 1 mark There is a past event (transaction) – in this case, the firm purchased goods on credit. 1 mark It will result in an outflow of future economic benefits – in this case, the firm will pay cash to the creditor. 1 + 3 = 4 marks
- 2. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 2 Question 3 Cash sales are reported as revenue in the Income Statement. Explain how cash sales meet the definition of Revenue. Explanation Cash sales are Revenue because: 1 mark There is an inflow of economic benefits – in this case, the firm has received cash. 1 mark There is an increase in Assets – in this case, the firm’s cash balance will increase. 1 mark There is an increase in Owner’s Equity. 3 marks Question 4 With reference to the elements of Accounting, explain how the $36,000 should be treated in the firm’s books as at the end of 2015. Explanation Identify 1 mark At the end of 2015, the $36,000 should be recorded as an Asset. Define/Relate This is because: 1 mark There is a resource controlled by the business – in this case, the firm has a legal claim to insurance coverage over the next 3 years. 1 mark There is a past event (transaction) – in this case, the firm paid $36,000 for the insurance upfront. 1 mark It will result in a future inflows of economic benefits – in this case, the firm will have insurance coverage for the next three years. 1 + 3 = 4 marks
- 3. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 3 Question 5 a) Explain how the unpaid wages will be treated in the firm’s Balance Sheet at the end of February. Explanation Identify 1 mark The wages owed are a Liability because: Define/Relate 1 mark The firm has a present obligation – in this case, the obligation to pay their employees the wages owed. 1 mark There is a past event (transaction) – in this case, the employees performed work during February. 1 mark It will result in an outflow of future economic benefits – in this case, the firm will pay cash to its employees. 1 + 3 = 4 marks b) With reference to the SAC2 definition of the accounting elements, explain how the wages incurred but not yet paid during February meet the definition of an Expense. Explanation Define/Relate 1 mark There is an outflows of economic benefits as the firm has used up (consumed) the labour of its employees. 1 mark There is an increase in Liabilities as the unpaid wages are a present obligation of the firm. 1 mark There is an overall decrease in Owner’s Equity of $50,000. 3 marks
- 4. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 4 Total /20 marks