Year 12 Accounting Tutorial

Year 12 Accounting Year 12 Accounting TutorialTutorialGavin CrosthwaiteGavin Crosthwaite

Mindarie Senior CollegeMindarie Senior College

Topics CoveredTopics Covered

CompaniesCompaniesCost Volume Processing - CVPCost Volume Processing - CVPCost AccountingCost AccountingTheoryTheory

Exam DetailsExam Details

The exam will be 3 hoursThe exam will be 3 hoursWill be broken up into practical Will be broken up into practical (65%) and theory (35%)(65%) and theory (35%)Make sure you show ALL workings. Make sure you show ALL workings. You will get follow on marks.You will get follow on marks.

Companies - What to Companies - What to studystudy

Theory (and lots of it)Theory (and lots of it)Retained EarningsRetained EarningsCalculating DividendsCalculating DividendsBalance Sheet (including notes to the balance Balance Sheet (including notes to the balance sheet)sheet)Statement of Changes in EquityStatement of Changes in EquityBonus SharesBonus SharesGeneral Journal entriesGeneral Journal entries

Cost AccountingCost AccountingClassification of CostsClassification of CostsJob Order Costing ( manufacturing and service)Job Order Costing ( manufacturing and service)Standard Order CostingStandard Order CostingVariancesVariances

Direct Material (Price and Usage)Direct Material (Price and Usage)Direct Labour (Rate and Efficiency)Direct Labour (Rate and Efficiency)Fixed Overheads (Spending and Capacity)Fixed Overheads (Spending and Capacity)Variable Overheads (Spending and Efficiency)Variable Overheads (Spending and Efficiency)

Cost Volume Profit Cost Volume Profit (CVP)(CVP)Contribution Margin and Contribution Margin RatioContribution Margin and Contribution Margin Ratio

Profit TargetProfit TargetCalculating ProfitCalculating ProfitBreak Even including Multiple productsBreak Even including Multiple productsMargin of SafetyMargin of SafetyLimitationsLimitationsCapacity constraintsCapacity constraintsSpecial OrdersSpecial OrdersMake or BuyMake or BuyOpen or Close DownOpen or Close Down

Types of CostsTypes of CostsFixedFixed Variable Variable MixedMixed

Fixed Costs do Fixed Costs do not change not change

based on the based on the number of number of

items produced.items produced.

Variable costs Variable costs change based change based on the number on the number

of items of items produced.produced.

Mixed costs Mixed costs contain both contain both

fixed and fixed and variable costs.variable costs.

RentRent Raw MaterialsRaw Materials Commission Commission EmployeesEmployees

InsuranceInsurance WagesWages Telephone Telephone ServiceService

Contribution MarginContribution MarginSales - Variable Expenses orSales - Variable Expenses or

What does it mean?What does it mean?This is the amount left over to cover the costThis is the amount left over to cover the cost

of the fixed expenses.of the fixed expenses.

Selling price per unit - Variable Expense per unitSelling price per unit - Variable Expense per unit

Contribution Margin Contribution Margin ExampleExample

Selling price per bed = $300Selling price per bed = $300Variable expenses per bed = $100Variable expenses per bed = $100Fixed expenses per bed = $120Fixed expenses per bed = $120Number of beds sold per month = 500Number of beds sold per month = 500

How much is the contribution How much is the contribution margin?margin?

Contribution Margin Contribution Margin RatioRatio

Contribution MarginContribution MarginRevenueRevenue

What does it mean?What does it mean?If the ratio is 54% then this means for every $1 worthIf the ratio is 54% then this means for every $1 worth

of sales we make we have 54c to cover fixed expenses.of sales we make we have 54c to cover fixed expenses.

Break Even Point (in Break Even Point (in units)units)

Total Fixed CostsTotal Fixed CostsContribution MarginContribution Margin

What does it mean?What does it mean?It means we have to sell this many units in It means we have to sell this many units in

order for us to break even for the given period order for us to break even for the given period of time.of time.

Break Even Point (in Break Even Point (in units)units)

A business sells pots for a living. The business A business sells pots for a living. The business sells pots for $10 each and has variable costs of sells pots for $10 each and has variable costs of

$5 per pot.$5 per pot.The business has fixed costs of $3,000. The business has fixed costs of $3,000.

What is the Break Even point in What is the Break Even point in Units?Units?

Break Even Point (in Break Even Point (in sales )sales )

Total Fixed CostsTotal Fixed CostsContribution Margin RatioContribution Margin Ratio


$5 per pot.$5 per pot.The business has fixed costs of $3,000. The business has fixed costs of $3,000.

Break Even Point Break Even Point (in multi-product firm )(in multi-product firm )

Total Fixed CostsTotal Fixed CostsWeighted Contribution Margin per unitWeighted Contribution Margin per unit

What does it mean?What does it mean?It means we have to sell this amount of each It means we have to sell this amount of each product in order for us to break even for the product in order for us to break even for the

given period of time.given period of time.

Forecast Revenue ( in Forecast Revenue ( in dollars)dollars)

• Variable Expenses + Fixed Expenses + Variable Expenses + Fixed Expenses + Target ProfitTarget Profit

Forecast Target Revenue Forecast Target Revenue ( in units)( in units)Total Fixed Costs + Target Net ProfitTotal Fixed Costs + Target Net Profit

Contribution Margin per unitContribution Margin per unit

What does it mean?What does it mean?It means we have to sell this total in units in It means we have to sell this total in units in

order for us to make our desired profit for the order for us to make our desired profit for the given period of time.given period of time.

Forecast Target Revenue Forecast Target Revenue ( in units)( in units)


$5 per pot.$5 per pot.The business has fixed costs of $3,000. It would The business has fixed costs of $3,000. It would

like to make a profit of $4,000 per month.like to make a profit of $4,000 per month.

Total Fixed Costs + Target Net ProfitTotal Fixed Costs + Target Net ProfitContribution Margin per unitContribution Margin per unit

JOB ORDER COSTINGJOB ORDER COSTINGJob Order Costing is used when a business Job Order Costing is used when a business makes a small number of identical products or makes a small number of identical products or when each product made is unique.when each product made is unique.It is used by the following types of businesses:It is used by the following types of businesses:

printersprintersmotor vehicle repairersmotor vehicle repairershouse paintershouse painters

Sunk vs Relevant CostsSunk vs Relevant Costs

• Sunk Costs are past costs that cannot be Sunk Costs are past costs that cannot be changed in the future.changed in the future.

• Relevant Costs are future costs linked to a Relevant Costs are future costs linked to a particular investment proposal.particular investment proposal.

• Sunk costs are not relevant when making an Sunk costs are not relevant when making an investment decision.investment decision.

JOB ORDER COSTINGJOB ORDER COSTINGThere are 3 types of costs that need to be There are 3 types of costs that need to be calculated:calculated:

• Direct MaterialsDirect Materials• Direct LabourDirect Labour• Factory Overheads - These can be be Factory Overheads - These can be be classified as either fixed or variableclassified as either fixed or variable

JOB ORDER COSTINGJOB ORDER COSTINGClassify the following expenses as either Classify the following expenses as either fixed or variable:fixed or variable:

• Wages of a Factory SupervisorWages of a Factory Supervisor• ElectricityElectricity• RentRent• InsuranceInsurance• Materials to make the productsMaterials to make the products• Depreciation of machineryDepreciation of machinery

JOB ORDER COSTINGJOB ORDER COSTINGClassify the following expenses as either Classify the following expenses as either fixed or variable:fixed or variable:

• Wages of a Factory Supervisor - FixedWages of a Factory Supervisor - Fixed• Electricity - VariableElectricity - Variable• Rent - FixedRent - Fixed• Insurance - FixedInsurance - Fixed• Materials to make the products - Materials to make the products - VariableVariable• Depreciation of machinery - FixedDepreciation of machinery - Fixed

JOB ORDER COSTINGJOB ORDER COSTINGThere are 3 types of costs that need to be There are 3 types of costs that need to be calculated:calculated:


In order to complete the task, we also need In order to complete the task, we also need the estimated direct labour hours for the the estimated direct labour hours for the given time period.given time period.

JOB ORDER EXAMPLEJOB ORDER EXAMPLEWe are going to calculate the job order cost for a cabinet We are going to calculate the job order cost for a cabinet maker. maker.

The direct material for the cabinets are $300.The direct material for the cabinets are $300.The direct labour costs are $120. The budgeted direct The direct labour costs are $120. The budgeted direct number of labour hours are $3,500 and will take 4 number of labour hours are $3,500 and will take 4 hourshoursThe business has the following overhead costs for the The business has the following overhead costs for the next 12 months:next 12 months:Wages of the Factory SupervisorWages of the Factory Supervisor 50 00050 000ElectricityElectricity 6 0006 000Depreciation of MachineryDepreciation of Machinery 4 0004 000Indirect Materials (nails etc)Indirect Materials (nails etc) 5 0005 000Cleaning of FactoryCleaning of Factory 4 0004 000RentRent 15 00015 000

DEPARTMENTAL DEPARTMENTAL APPLICATION APPLICATION OVERHEADSOVERHEADSA business may have more A business may have more than one department to than one department to allocate costs against so that it allocate costs against so that it can make a more accurate can make a more accurate costing of a job.costing of a job.

Mindarie Skate Designs creates Mindarie Skate Designs creates skateboards with custom images and has skateboards with custom images and has two factory departments:two factory departments:Art and Design and ManufacturingArt and Design and Manufacturing

ItemItem Art and Art and DesignDesign

ManufacturiManufacturingng

Estimated OverheadEstimated Overhead 47,88047,880 68,60068,600Estimated Direct Labour Estimated Direct Labour

HoursHours 5,040 hours5,040 hours 6,100 hours6,100 hoursEstimated Machine HoursEstimated Machine Hours 1,300 hours1,300 hours 1,400 hours1,400 hoursTo complete a skateboard it needs the following:To complete a skateboard it needs the following:

ITEMITEM TOTALTOTALDirect MaterialsDirect Materials 240240Direct LabourDirect Labour 160160

Direct Labour: Art and Direct Labour: Art and DesignDesign 2 hours2 hours

Machine Hours: Machine Hours: ManufacturingManufacturing 2 hours2 hours

OverheadOverheadArt & Design = Labour HoursArt & Design = Labour Hours

Manufacturing = Machine HoursManufacturing = Machine Hours

JOB COSTING - SERVICEJOB COSTING - SERVICE

Some of these types of businesses Some of these types of businesses will have direct material costs such will have direct material costs such as painters while other types such as painters while other types such as lawyers or accountants will not as lawyers or accountants will not have any material costs.have any material costs.

Service Job Costing - Service Job Costing - ExampleExampleBill Smith has a decided to operate a painting business and needs to work out Bill Smith has a decided to operate a painting business and needs to work out how much he should charge for a particular job. The business will have the how much he should charge for a particular job. The business will have the following overhead costs for the next 12 months:following overhead costs for the next 12 months:

Wages of Office PersonWages of Office Person 30 00030 000StationeryStationery 800800ElectricityElectricity 2 5002 500

Rent Rent 12 00012 000InsuranceInsurance 2 4002 400InterestInterest 1 6001 600

TelephoneTelephone 1 2001 200OtherOther 8 3008 300

The The number of number of labour labour hours = hours = 49004900

The direct materials will cost $1000 and the The direct materials will cost $1000 and the direct labour = $500. The profit margin is 25% direct labour = $500. The profit margin is 25% and take 15 hours to do the job.and take 15 hours to do the job.

CALCULATING THE COST CALCULATING THE COST OF A PRODUCTOF A PRODUCT

This can be combined with job costing to make This can be combined with job costing to make the most efficient cost of calculating the the most efficient cost of calculating the manufacture of a product. These are known as a manufacture of a product. These are known as a standard cost.standard cost.

There are 3 types of costs that need to be There are 3 types of costs that need to be calculated:calculated:


Example - Direct Example - Direct MaterialMaterialFunky Designs make shoes for the young and Funky Designs make shoes for the young and trendy. Funky Designs has the following direct trendy. Funky Designs has the following direct material standards which we can use to material standards which we can use to calculate the direct material costs:calculate the direct material costs:

ItemsItemsStandard Standard Quantity Quantity per unitper unit

Standard Standard Price per Price per

unitunit

Standard Standard Cost per Cost per

unitunitClothCloth 1.2 sq 1.2 sq

metresmetres$16 per $16 per

sqmsqmLeatherLeather .5 sq .5 sq

metresmetres$60 per $60 per

sqmsqmLacesLaces .2 metres.2 metres $9 per $9 per

metremetre

Example - Direct LabourExample - Direct Labour

ItemItem

Standard Standard Hours Hours

required to required to make a make a productproduct

Standard Standard Wage per Wage per

hourhour

Standard Standard Cost per Cost per

unitunit

Direct Direct labourlabour 1.8 hours1.8 hours $25$25

Example - Fixed Factory Example - Fixed Factory OverheadsOverheads

The company has budgeted for a total fixed The company has budgeted for a total fixed factory overhead of $120,000. It expects factory overhead of $120,000. It expects (budgets) for a total of 15,000 direct labour (budgets) for a total of 15,000 direct labour hours.hours.

Budgeted Fixed Factory OverheadsBudgeted Fixed Factory OverheadsBudgeted Direct Labour HoursBudgeted Direct Labour Hours

Example - Variable Example - Variable Factory OverheadsFactory Overheads

The company has budgeted for a total variable The company has budgeted for a total variable factory overhead of $75,000. It expects (budgets) factory overhead of $75,000. It expects (budgets) for a total of 15,000 direct labour hours.for a total of 15,000 direct labour hours.

Budgeted Variable Factory OverheadsBudgeted Variable Factory OverheadsBudgeted Direct Labour HoursBudgeted Direct Labour Hours

VARIANCE ANALYSISVARIANCE ANALYSISThe difference between the actual and The difference between the actual and standard performance is known as a variance standard performance is known as a variance and can be either favourable, unfavourable or and can be either favourable, unfavourable or no change. no change. The variances we will be looking at will affect The variances we will be looking at will affect Direct Material, Direct Labour, Fixed Overhead Direct Material, Direct Labour, Fixed Overhead and Variable Overheads.and Variable Overheads.You will be given the formulas in the exam.You will be given the formulas in the exam.

Variance ExampleVariance ExampleMindarie Gardens produces garden pavers. The business has developed Mindarie Gardens produces garden pavers. The business has developed the standard cost based on 2,400 direct labour hours per month.the standard cost based on 2,400 direct labour hours per month.

StoneStone 2 kilos * 3.40 per kilo2 kilos * 3.40 per kilo $6.80$6.80Direct LabourDirect Labour 0.2 hour * $24 per 0.2 hour * $24 per

hourhour $4.80$4.80Fixed Factory Fixed Factory

OverheadOverhead0.2 hour * $4 per DL 0.2 hour * $4 per DL

hourhour $0.80$0.80Variable Factory Variable Factory

OverheadOverhead0.2 hour * $3 per DL 0.2 hour * $3 per DL

hourhour $0.60$0.60Standard Cost per Standard Cost per

unitunit $13$13

Actual results for the Actual results for the monthmonthStones Produced: 13 000Stones Produced: 13 000Direct Material: 28,000 kilos of stone were bought for a cost of $89,600. A total of Direct Material: 28,000 kilos of stone were bought for a cost of $89,600. A total of 27,300 kilos were used to produce the pavers. 27,300 kilos were used to produce the pavers.

Fixed Factory Overhead: 10 000Fixed Factory Overhead: 10 000

Variable Factory Overhead: 7 Variable Factory Overhead: 7 000000Direct Labour: 2 500 hours * $24.50 per Direct Labour: 2 500 hours * $24.50 per hourhour

Direct Material Variance Direct Material Variance (Price)(Price)(Actual Price of Input - Standard Price of Input) (Actual Price of Input - Standard Price of Input)

x Actual Quantity of Input Purchasedx Actual Quantity of Input Purchased

(AP-SP) x AQP(AP-SP) x AQP

What does it mean?What does it mean?It compares the price of what we budgeted for It compares the price of what we budgeted for

materials materials to what we actually paid for the materialsto what we actually paid for the materials

Direct Material Variance Direct Material Variance (Price)(Price)

FAVOURABLE ReasonsFAVOURABLE ReasonsA cheaper supplier of materials has been foundA cheaper supplier of materials has been found

UNFAVOURABLE ReasonsUNFAVOURABLE ReasonsAn unexpected increase in the cost of An unexpected increase in the cost of

materialsmaterials

Direct Material Variance Direct Material Variance (Usage)(Usage)

(Actual Quantity of Input Issued - Standard (Actual Quantity of Input Issued - Standard Quantity of Input Allowed) x Standard Price of Quantity of Input Allowed) x Standard Price of

InputInput(AQI - SQA) X SP(AQI - SQA) X SP

What does it mean?What does it mean?It compares the price of what we budgeted for It compares the price of what we budgeted for materials to be used in the production of goods materials to be used in the production of goods

to what we actually used in the productionto what we actually used in the production

Direct Material Variance Direct Material Variance (Usage)(Usage)

FAVOURABLE ReasonsFAVOURABLE ReasonsWe have may used better grade materials We have may used better grade materials which results in less material being requiredwhich results in less material being required

UNFAVOURABLE ReasonsUNFAVOURABLE ReasonsAn unexpected increase in the cost of An unexpected increase in the cost of

materialsmaterials

Direct Labour Variance Direct Labour Variance (Rate)(Rate)(Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked

(AR - SR) X ADLH(AR - SR) X ADLH

What does it mean?What does it mean?It compares the actual cost of labour vs what It compares the actual cost of labour vs what

we planned to pay over the given period.we planned to pay over the given period.

Direct Labour Variance Direct Labour Variance (Rate)(Rate)(Actual Rate per Direct Labour Hour worked – Standard Rate per Direct Labour Hour worked) x Actual Direct Labour Hours worked

(AR - SR) X ADLH(AR - SR) X ADLH

What does it mean?What does it mean?It means that we have spent $1,250 more on It means that we have spent $1,250 more on

labour than we expected to for the given periodlabour than we expected to for the given period

Direct Labour Variance Direct Labour Variance (Price)(Price)

FAVOURABLE ReasonsFAVOURABLE Reasons

More than expected use of cheaper workersMore than expected use of cheaper workers

UNFAVOURABLE ReasonsUNFAVOURABLE Reasons

Using higher paid workers to complete work Using higher paid workers to complete work normally carried out by lower paid workersnormally carried out by lower paid workers

Direct Labour Variance Direct Labour Variance (Efficiency)(Efficiency)

(Actual Direct Labour Hours worked – Standard Direct Labour Hour allowed) x Standard Rate per Direct Labour Hour

(ADLH - SDLHA) X SRDLH(ADLH - SDLHA) X SRDLH

What does it mean?What does it mean?It compares the actual cost of labour vs what It compares the actual cost of labour vs what

we planned to pay over the given period.we planned to pay over the given period.

Direct Labour Variance Direct Labour Variance (Efficiency)(Efficiency)



Improved productivity and/or better and Improved productivity and/or better and more efficient machinerymore efficient machinery

Poorly trained workers and/or breakdown of Poorly trained workers and/or breakdown of plant and machinery.plant and machinery.

Fixed Factory Overhead Fixed Factory Overhead SpendingSpendingActual Fixed Factory Overhead - Budgeted Actual Fixed Factory Overhead - Budgeted

Fixed Factory OverheadFixed Factory Overhead

What does it mean?What does it mean?It compares the difference in the budgeted It compares the difference in the budgeted amount of FFO to the actual amount of FFO.amount of FFO to the actual amount of FFO.

Fixed Factory Overhead Fixed Factory Overhead Variance (Spending)Variance (Spending)



A lower than expected increase in A lower than expected increase in supervisors salaries or for indirect materialssupervisors salaries or for indirect materials

An unexpected increase in supervisors An unexpected increase in supervisors salaries or unexpected rise in indirect salaries or unexpected rise in indirect materialsmaterials

Fixed Factory Overhead Fixed Factory Overhead (Capacity)(Capacity)

Budgeted Fixed Overhead x (Standard Fixed Budgeted Fixed Overhead x (Standard Fixed Overhead per unit - Standard Activity Allowed)Overhead per unit - Standard Activity Allowed)

BFO x (SFO - SAA)BFO x (SFO - SAA)

What does it mean?What does it mean?It compares the difference between the amount It compares the difference between the amount

of FFO spending that was added to each of FFO spending that was added to each product to the amount that was budgeted for product to the amount that was budgeted for

each product.each product.

Variable Overhead Variable Overhead (Spending)(Spending)Actual Variable Overhead Cost - (Actual Hours Actual Variable Overhead Cost - (Actual Hours

x Standard Variable Overhead Rate) x Standard Variable Overhead Rate)

What does it mean?What does it mean?It compares the difference in the budgeted It compares the difference in the budgeted

amount of VFO to the actual amount of VFO.amount of VFO to the actual amount of VFO.

Variable Overhead Variable Overhead (Efficiency)(Efficiency)

(Actual Number of Hours - Standard Number of (Actual Number of Hours - Standard Number of Hours) x Standard Variable Overhead Rate) Hours) x Standard Variable Overhead Rate)

What does it mean?What does it mean?It compares the difference in the budgeted It compares the difference in the budgeted

amount of hours to the actual amount of hours amount of hours to the actual amount of hours set to allocate the VFO.set to allocate the VFO.

COMPANIESCOMPANIES

Calculating DividendsCalculating DividendsCents Per ShareCents Per Share

PercentagePercentage

CPS = Number of Shares x CPS = Number of Shares x DividendDividend

% = Value of Shares x % % = Value of Shares x % DividendDividend

Calculating DividendsCalculating DividendsA business has the following A business has the following shareholders equity extract.shareholders equity extract.Share EquityShare Equity200,000 ordinary shares at $1 200,000 ordinary shares at $1 each fully paid.each fully paid. $200,000$200,00010,000 5% preference shares 10,000 5% preference shares at $5.00 each fully paidat $5.00 each fully paid 50,00050,000

The business has declared a dividend of 5 The business has declared a dividend of 5 cents per share for ordinary shareholders cents per share for ordinary shareholders and the preference shareholders their and the preference shareholders their dividend entitlementdividend entitlement

Retained EarningsRetained Earnings


Retained Earnings are basically the after-tax Retained Earnings are basically the after-tax profit left over after dividends have been paid profit left over after dividends have been paid and transfers to or from the general reserve and transfers to or from the general reserve have been made.have been made.The retained earnings are classified as Equity The retained earnings are classified as Equity in the companies balance sheet.in the companies balance sheet.

DividendsDividendsThe dividends that are included in the retained The dividends that are included in the retained earnings are:earnings are:

The final dividends from the previous The final dividends from the previous accounting period (once they have been accounting period (once they have been approved by the shareholders)approved by the shareholders)The interim dividends from this yearThe interim dividends from this yearThe final dividends from this year are The final dividends from this year are NOTNOT included in the retained earnings.included in the retained earnings.

Graphical Example of Graphical Example of DividendsDividends

2008200820072007 20092009Financial YearFinancial Year

Final Dividends from Final Dividends from 2007 are included in 2007 are included in

2008 retained earnings2008 retained earnings

2008 Interim 2008 Interim Dividends are Dividends are

included in the 2008 included in the 2008 retained earningsretained earnings

2008 Final Dividends are 2008 Final Dividends are recommended in 2008 and PAID recommended in 2008 and PAID

in 2009 once approved by in 2009 once approved by shareholdersshareholders

WORKING WORKING EXAMPLEEXAMPLECompany XYZ Ltd has a retained earnings balance of $10 000 Company XYZ Ltd has a retained earnings balance of $10 000

as at 30 June 2008as at 30 June 2008The company’s directors recommended a final dividend which The company’s directors recommended a final dividend which was approved by shareholders at the AGM in August which was approved by shareholders at the AGM in August which consisted of $3,000 to ordinary shareholders and $1,500 for consisted of $3,000 to ordinary shareholders and $1,500 for preference shareholders.preference shareholders.The business issued an ordinary interim dividend of $2,000 on The business issued an ordinary interim dividend of $2,000 on January 1, 2009.January 1, 2009.The business posted an after-tax profit of $20,000 for the year The business posted an after-tax profit of $20,000 for the year ended 30 June 2009.ended 30 June 2009.A figure of $3,000 has been transferred to the general reserve.A figure of $3,000 has been transferred to the general reserve.The directors have recommended a final dividend of $4,000 to The directors have recommended a final dividend of $4,000 to the ordinary shareholders and $1,500 to the preference the ordinary shareholders and $1,500 to the preference shareholders subject to shareholder approval at the AGM.shareholders subject to shareholder approval at the AGM.

Retained Earnings Retained Earnings ledgerledger

30/630/6 FinalFinal Ordinary Ordinary DivDiv

30/630/6 BalanceBalance 10 00010 000

Final Preference Final Preference DivDiv P & LP & L

Interim Ordinary Interim Ordinary DivDivInterim Interim Preference DivPreference Div


as at 30 June 2008as at 30 June 2008The company’s directors recommended a final dividend which The company’s directors recommended a final dividend which was approved by shareholders at the AGM in August which was approved by shareholders at the AGM in August which consisted of $3,000 to ordinary shareholders and $1,500 for consisted of $3,000 to ordinary shareholders and $1,500 for preference shareholders.preference shareholders.The business issued an interim ordinary dividend of $2,000 on The business issued an interim ordinary dividend of $2,000 on January 1, 2009.January 1, 2009.The business posted an after-tax profit of $20,000 for the year The business posted an after-tax profit of $20,000 for the year ended 30 June 2009.ended 30 June 2009.A figure of $3,000 has been transferred to the general reserve.A figure of $3,000 has been transferred to the general reserve.The directors have recommended a final dividend of $4,000 to The directors have recommended a final dividend of $4,000 to the ordinary shareholders and $1,500 to the preference the ordinary shareholders and $1,500 to the preference shareholders subject to shareholder approval at the AGM.shareholders subject to shareholder approval at the AGM.

Retained Earnings Retained Earnings ledgerledger

30/630/6 FinalFinal Ordinary Ordinary DivDiv

3 0003 000 30/630/6 BalanceBalance 10 00010 000

Final Preference Final Preference DivDiv 1 5001 500 P & LP & L

Interim Ordinary Interim Ordinary DivDivInterim Interim Preference DivPreference Div


as at 30 June 2008as at 30 June 2008The company’s directors recommended a final dividend which The company’s directors recommended a final dividend which was approved by shareholders at the AGM in August which was approved by shareholders at the AGM in August which consisted of $3,000 to ordinary shareholders and $1,500 for consisted of $3,000 to ordinary shareholders and $1,500 for preference shareholders.preference shareholders.The business issued an interim ordinary dividend of $2,000 on The business issued an interim ordinary dividend of $2,000 on January 1, 2009.January 1, 2009.The business posted an after-tax profit of $20,000 for the year The business posted an after-tax profit of $20,000 for the year ended 30 June 2009ended 30 June 2009..A figure of $3,000 has been transferred to the general reserve.A figure of $3,000 has been transferred to the general reserve.The directors have recommended a final dividend of $4,000 to The directors have recommended a final dividend of $4,000 to the ordinary shareholders and $1,500 to the preference the ordinary shareholders and $1,500 to the preference shareholders subject to shareholder approval at the AGM.shareholders subject to shareholder approval at the AGM.


as at 30 June 2008as at 30 June 2008The company’s directors recommended a final dividend which The company’s directors recommended a final dividend which was approved by shareholders at the AGM in August which was approved by shareholders at the AGM in August which consisted of $3,000 to ordinary shareholders and $1,500 for consisted of $3,000 to ordinary shareholders and $1,500 for preference shareholders.preference shareholders.The business issued an interim ordinary dividend of $2,000 on The business issued an interim ordinary dividend of $2,000 on January 1, 2009.January 1, 2009.The business posted an after-tax profit of $20,000 for the year The business posted an after-tax profit of $20,000 for the year ended 30 June 2009.ended 30 June 2009.A figure of $3,000 has been transferred to the general reserve.A figure of $3,000 has been transferred to the general reserve.The directors have recommended a final dividend of $4,000 to The directors have recommended a final dividend of $4,000 to the ordinary shareholders and $1,500 to the preference the ordinary shareholders and $1,500 to the preference shareholders subject to shareholder approval at the AGMshareholders subject to shareholder approval at the AGM..

BALANCE SHEETBALANCE SHEET

Balance SheetBalance SheetA company balance sheet is different to a A company balance sheet is different to a normal balance sheet for sole traders and normal balance sheet for sole traders and partnerships.partnerships.Many of the items will be combined and their Many of the items will be combined and their will be separate notes to the balance sheet. will be separate notes to the balance sheet. (see separate podcast for more details on this)(see separate podcast for more details on this)The format and headings for the balance sheet The format and headings for the balance sheet will NOT change so you only need to change will NOT change so you only need to change the figures.the figures.

Current Current AssetsAssets

Current AssetsCurrent AssetsCash and cash Cash and cash equivalentsequivalents Cash at BankCash at BankTrade ReceivablesTrade Receivables Accounts Accounts

ReceivableReceivableAccrued IncomeAccrued Income

InventoriesInventories InventoryInventoryOtherOther Prepaid expensesPrepaid expensesTotal Current AssetsTotal Current Assets

Non-Current AssetsNon-Current Assets

Non-Current AssetsNon-Current Assets

InvestmentsInvestmentsShares to be held Shares to be held more than 12 more than 12 monthsmonths

Property, Plant and Property, Plant and EquipmentEquipmentOther Intangible Other Intangible AssetsAssets

Preliminary Preliminary ExpensesExpenses

GoodwillGoodwillTotal Non-Current Total Non-Current AssetsAssetsTotal AssetsTotal Assets

Current LiabilitiesCurrent Liabilities

Current LiabilitiesCurrent LiabilitiesTrade and other Trade and other payablespayables

CreditorsCreditorsAccrued ExpensesAccrued Expenses

Current tax liabilityCurrent tax liabilityOtherOther Unearned IncomeUnearned IncomeTotal Current Total Current LiabilitiesLiabilities

Non-Current LiabilitiesNon-Current Liabilities

Non-Current LiabilitiesNon-Current Liabilities

BorrowingsBorrowingsLoans (including Loans (including debentures for debentures for more than 12 more than 12 monthsmonths

Total Non-Current Total Non-Current LiabilitiesLiabilitiesTotal LiabilitiesTotal LiabilitiesNET ASSETSNET ASSETS

Shareholders EquityShareholders Equity

Shareholders EquityShareholders EquityShare CapitalShare CapitalRetained EarningsRetained EarningsReservesReservesTotal Share Total Share EquityEquity

Notes to the Balance Notes to the Balance SheetSheet

Why have Why have them?them?

It allows the balance sheet to be consistent in It allows the balance sheet to be consistent in format regardless of the business and the format regardless of the business and the number of assets that they have.number of assets that they have.Keeps the balance sheet short and allows users Keeps the balance sheet short and allows users to easily compare different balance sheets.to easily compare different balance sheets.

What goes in the notes?What goes in the notes?1. Property, Plant and Equipment - this includes 1. Property, Plant and Equipment - this includes all non-current assets, other than investments all non-current assets, other than investments or shares, which can be depreciated including or shares, which can be depreciated including motor vehiclesmotor vehicles2. Shareholders Equity - this includes all 2. Shareholders Equity - this includes all ordinary and preference sharesordinary and preference shares3. Final Dividends - this includes all the 3. Final Dividends - this includes all the dividends that have been recommended but dividends that have been recommended but not yet approved.not yet approved.

Practical Practical ExampleExample

The company had the following information provided:The company had the following information provided:250,000 ordinary shares at $1.00 each fully paid, 250,000 ordinary shares at $1.00 each fully paid, less share issue costs of $6,000less share issue costs of $6,00020,000 10% preference shares at $5.00 each fully 20,000 10% preference shares at $5.00 each fully paid, less share issue costs of $4,000. paid, less share issue costs of $4,000.

EQUITYEQUITYShare Capital 340 000Share Capital 340 000Reserves 45 000Reserves 45 000Retained Earnings 25 000Retained Earnings 25 000

Practical Practical ExampleExampleACCOUNTACCOUNT DEBITDEBIT CREDITCREDITCash at BankCash at Bank 15 00015 000Retained EarningsRetained Earnings 25 00025 000LandLand 150 000150 000Plant and EquipmentPlant and Equipment 80 00080 000Accumulated Deprecation - PlantAccumulated Deprecation - Plant 10 00010 000InventoryInventory 30 00030 000DebenturesDebentures 90 00090 000BorrowingsBorrowings 250 000250 000Share CapitalShare Capital 340 000340 000General ReserveGeneral Reserve 45 00045 000InvestmentsInvestments 60 00060 000BuildingsBuildings 100 000100 000Accumulated Deprecation - Accumulated Deprecation - BuildingsBuildings 20 00020 000

Additional Additional InformationInformationAll of the assets are depreciated at a rate of All of the assets are depreciated at a rate of 10% per annum on the straight line method.10% per annum on the straight line method.The directors have recommended a final The directors have recommended a final dividend of 10 cents per share for the ordinary dividend of 10 cents per share for the ordinary shareholders and the preference shareholders shareholders and the preference shareholders to receive their entitlement.to receive their entitlement.The business made a profit after tax of The business made a profit after tax of $35,000.$35,000.

2. PROPERTY, PLANT AND EQUIPMENT2. PROPERTY, PLANT AND EQUIPMENTLandLand 150 000150 000BuildingsBuildings 100 000100 000- Accumulated Depreciation on Buildings- Accumulated Depreciation on Buildings (20 000)(20 000)Plant and EquipmentPlant and Equipment 80 00080 000- Accumulated Depreciation on Plant/Equipment- Accumulated Depreciation on Plant/Equipment (10 000)(10 000)Total Property, Plant and EquipmentTotal Property, Plant and Equipment $300 000$300 000

3. EQUITY3. EQUITY250,000 ordinary shares at $1.00 each fully paid, less share issue 250,000 ordinary shares at $1.00 each fully paid, less share issue costs of $6,000costs of $6,000 244 000244 000

20,000 10% preference shares at $5.00 each fully paid, less share 20,000 10% preference shares at $5.00 each fully paid, less share issue costs of $4,000.issue costs of $4,000. 96 00096 000

Total EquityTotal Equity $340 000$340 0004. FINAL DIVIDENDS4. FINAL DIVIDENDSThe directors have recommended a final dividend of 10 cents per The directors have recommended a final dividend of 10 cents per share for the ordinary shareholders and the preference share for the ordinary shareholders and the preference shareholders to receive their entitlementshareholders to receive their entitlement

Statement of Changes Statement of Changes in Equityin Equity

What is it?What is it?Shows the changes in equity in company over a period of 1 year.Shows the changes in equity in company over a period of 1 year.

It shows the following items:It shows the following items:

Total recognised and income and expenses for the yearTotal recognised and income and expenses for the year

The total ordinary and preference shares issued by the company (it The total ordinary and preference shares issued by the company (it must show separately any shares issued during the financial year)must show separately any shares issued during the financial year)

The types and total of reserves including any changes in the The types and total of reserves including any changes in the reservesreserves

A summary of the retained earnings accountA summary of the retained earnings account

The format does The format does NOTNOT change ever, only the figures. change ever, only the figures.

Company XYZ Company XYZ InformationInformation

SHARE CAPITALSHARE CAPITAL300,000 ordinary shares at $1.00 each fully 300,000 ordinary shares at $1.00 each fully paid, less the share issue costs of $8,000paid, less the share issue costs of $8,0003,000 10% preference shares at $5.00 each 3,000 10% preference shares at $5.00 each fully paid less a share issue cost of $1,000fully paid less a share issue cost of $1,000RESERVESRESERVESGeneral - $10,000General - $10,000Asset Revaluation - $5,000Asset Revaluation - $5,000

Company XYZ Ltd has a retained earnings balance of $10 000 as Company XYZ Ltd has a retained earnings balance of $10 000 as at 30 June 2008at 30 June 2008The company’s directors recommended a final dividend which was The company’s directors recommended a final dividend which was approved by shareholders at the AGM in August which consisted of approved by shareholders at the AGM in August which consisted of $3,000 to ordinary shareholders and $1,500 for preference $3,000 to ordinary shareholders and $1,500 for preference shareholders.shareholders.The business issued an ordinary interim dividend of $2,000 on The business issued an ordinary interim dividend of $2,000 on January 1, 2009.January 1, 2009.The business posted an after-tax profit of $20,000 for the year The business posted an after-tax profit of $20,000 for the year ended 30 June 2009.ended 30 June 2009.A figure of $3,000 has been transferred to the general reserve.A figure of $3,000 has been transferred to the general reserve.The directors have recommended a final dividend of $4,000 to the The directors have recommended a final dividend of $4,000 to the ordinary shareholders and $1,500 to the preference shareholders ordinary shareholders and $1,500 to the preference shareholders subject to shareholder approval at the AGM.subject to shareholder approval at the AGM.The business issued 50,000 shares at $1.00 each on the 1st The business issued 50,000 shares at $1.00 each on the 1st March, 2009. The share issue costs amounted to $2,000.March, 2009. The share issue costs amounted to $2,000.The company’s land was revalued from $200,000 to $220,000.The company’s land was revalued from $200,000 to $220,000.

Recognised Income and Recognised Income and ExpensesExpenses

In this section, we will add 2 entries:In this section, we will add 2 entries:The Profit and Loss after tax. If the tax has The Profit and Loss after tax. If the tax has not been taken off, you will be required to not been taken off, you will be required to take 30% off the profit figure.take 30% off the profit figure.The gain or loss on revaluation on any The gain or loss on revaluation on any assets that are in the revaluation reserve. assets that are in the revaluation reserve. This will normally be land. You are only This will normally be land. You are only looking for assets that can appreciate in looking for assets that can appreciate in value such as land or investments.value such as land or investments.

Working exampleWorking example

Profit and Loss for the periodProfit and Loss for the period 20,00020,000Gain on Revaluation during the Gain on Revaluation during the periodperiod 20,00020,000Total income and expenses for Total income and expenses for the periodthe period 40,00040,000

Share CapitalShare CapitalIn this section we need to do 4 things for each type of In this section we need to do 4 things for each type of share we have for investors:share we have for investors:

We need to write in the opening balance at the We need to write in the opening balance at the beginning of the accounting period beginning of the accounting period We need to add any shares that were issued during We need to add any shares that were issued during the accounting periodthe accounting periodWe need to take off any share issue costs that were We need to take off any share issue costs that were incurred with the issue of the new sharesincurred with the issue of the new sharesWe need to write in the closing balance at the end We need to write in the closing balance at the end of the accounting period of the accounting period

Reserves (types)Reserves (types)In company accounting, there are two types of In company accounting, there are two types of reserves that can be included in the company reserves that can be included in the company financial records:financial records:

General Reserve: This is money set aside by General Reserve: This is money set aside by the directors to be used at a later date for the directors to be used at a later date for dividends, bonus share issues or to top up the dividends, bonus share issues or to top up the retained earnings during a bad financial yearretained earnings during a bad financial yearAsset Revaluation: This is considered income Asset Revaluation: This is considered income or an expense and this is when the asset the or an expense and this is when the asset the company owns is revalued such as land which company owns is revalued such as land which can increase in value. This is not used by can increase in value. This is not used by company’s in their retained earnings account.company’s in their retained earnings account.

Reserves (types)Reserves (types)In this section we need to do 3 things for each In this section we need to do 3 things for each type of reserve we have:type of reserve we have:

We need to write in the opening balance at We need to write in the opening balance at the beginning of the accounting period the beginning of the accounting period We need to add or subtract any figures into We need to add or subtract any figures into the reserve based on decisions by the the reserve based on decisions by the directors or a revaluation.directors or a revaluation.We need to write in the closing balance at the We need to write in the closing balance at the end of the accounting period end of the accounting period


For a more detailed explanation, please see For a more detailed explanation, please see the retained earnings podcast. I will be using the retained earnings podcast. I will be using the example from that podcast in this example the example from that podcast in this example so you can see the next step in the process.so you can see the next step in the process.

Cumulative Preference Cumulative Preference SharesShares

What are they?What are they?

These are special types of preference shares These are special types of preference shares that will accumulate their dividends if they that will accumulate their dividends if they aren’t paid in a particular year.aren’t paid in a particular year.

How to calculate How to calculate them?them?If we look at the following company, we can If we look at the following company, we can

see howsee howto calculate the dividends. Remember, that to calculate the dividends. Remember, that the majority of preference dividends are the majority of preference dividends are done using the % method.done using the % method.

2,000 $5.00 10% cumulative preference shares 2,000 $5.00 10% cumulative preference shares fully paid less share issue costs of $500fully paid less share issue costs of $500

2,000 x $5 = 10,000 x 10% = 2,000 x $5 = 10,000 x 10% = $1,000$1,000

So what does So what does cumulative mean?cumulative mean?

2,000 x $5 = 10,000 x 10% = 2,000 x $5 = 10,000 x 10% = $1,000$1,000

YearYear DividendDividend11 $1,000$1,00022 $1,000$1,00033 $1,000$1,00044 $1,000$1,000

YearYear DividendDividend11 $1,000$1,00022 $1,000$1,00033 $1,000$1,00044 $1,000$1,000

Non-CumulativeNon-Cumulative CumulativeCumulative

So what does So what does cumulative mean?cumulative mean?

2,000 x $5 = 10,000 x 10% = 2,000 x $5 = 10,000 x 10% = $1,000$1,000

YearYear DividendDividend11 $1,000$1,00022 $0$033 $1,000$1,00044 $1,000$1,000

YearYear DividendDividend11 $1,000$1,00022 $0$033 $2,000$2,00044 $1,000$1,000

Non-CumulativeNon-Cumulative CumulativeCumulative

How would it look in the retained How would it look in the retained earnings?earnings?

RETAINED EARNINGSRETAINED EARNINGS30/30/66

Final Pref Final Pref DivDiv 2,0002,000 30/630/6 BalanceBalance 7,0007,000

BalanceBalance 30,00030,000 P & LP & L 25,00025,000$32,00$32,00

00$32,00$32,00

00

The business had made a net profit after tax of The business had made a net profit after tax of $25,000 and had also decided to transfer $5,000 to $25,000 and had also decided to transfer $5,000 to the general reserve.the general reserve.The directors approved the recommended The directors approved the recommended preference dividend entitlement which was listed in preference dividend entitlement which was listed in Year 3 previously. The retained earnings balance Year 3 previously. The retained earnings balance was $7,000.was $7,000.

Things to be aware of?Things to be aware of?Remember, that you only have to include Remember, that you only have to include dividends which have been approved so if dividends which have been approved so if there is a cumulative dividend to include it there is a cumulative dividend to include it would have to be in the previous 2 years would have to be in the previous 2 years before that.before that.Always look for the word cumulative in the Always look for the word cumulative in the questions as examiners do like to use them questions as examiners do like to use them often.often.

Bonus SharesBonus Shares

What are bonus shares?What are bonus shares?

These are shares that are issued by the These are shares that are issued by the directors of companies to existing directors of companies to existing shareholders. shareholders. They are normally issued on a ratio basis such They are normally issued on a ratio basis such as a bonus share for every 10 held.as a bonus share for every 10 held.

Why issue bonus Why issue bonus shares?shares?

Bonus shares are generally issued by directors Bonus shares are generally issued by directors in order to keep existing shareholders happy if in order to keep existing shareholders happy if there has been a downturn in dividends.there has been a downturn in dividends.It is also used if there is a large amount of It is also used if there is a large amount of money in the reserves and the company money in the reserves and the company doesn’t want to give back the money in a cash doesn’t want to give back the money in a cash form.form.

Calculating Bonus Calculating Bonus SharesSharesA company has 80,000 shares at $1.00 A company has 80,000 shares at $1.00 each fully paid, less the share issue each fully paid, less the share issue costs of $2,000 which gives a total costs of $2,000 which gives a total share value of $78,000.share value of $78,000.

The company has a general reserve of The company has a general reserve of $25,000 and the company has decided $25,000 and the company has decided to issue a bonus share of 1 for every 8 to issue a bonus share of 1 for every 8 now held.now held.

Calculating Bonus Calculating Bonus SharesSharesA company has 80,000 shares at $1.00 A company has 80,000 shares at $1.00 each fully paid, less the share issue each fully paid, less the share issue costs of $2,000 which gives a total costs of $2,000 which gives a total share value of $78,000.share value of $78,000.

The company has a general reserve of The company has a general reserve of $25,000 and the company has decided $25,000 and the company has decided to issue a bonus share of 1 for every 8 to issue a bonus share of 1 for every 8 now held.now held.

80,000/8 = 10,000 bonus shares80,000/8 = 10,000 bonus shares

Effect on Retained Effect on Retained EarningsEarnings

NONENONEDo not include it in the retained earnings at all.Do not include it in the retained earnings at all.

How do we account for How do we account for it?it?

Ordinary Share CapitalOrdinary Share Capital30/630/6 BalanceBalance 78,0078,00

00

General ReserveGeneral Reserve30/630/6 BalanceBalance 25,0025,00

00

General Journal General Journal EntryEntryDateDate ParticularsParticulars FF DebitDebit CreditCredit30/630/6 General ReserveGeneral Reserve 8 0008 000

Ordinary Share Ordinary Share CapitalCapital 8 0008 000Bonus shares issued Bonus shares issued bybythe companythe company

Balance Sheet (extract)Balance Sheet (extract)EQUITYEQUITYShare CapitalShare CapitalReservesReservesRetained EarningsRetained Earnings

ACCOUNTING THEORYACCOUNTING THEORYTYPES OF ACCOUNTINGTYPES OF ACCOUNTINGFINANCIAL FINANCIAL

Is concerned with the preparation of reports Is concerned with the preparation of reports such as the Income Statement and Balance such as the Income Statement and Balance Sheet. For small businesses, its internal. For Sheet. For small businesses, its internal. For large companies, its external.large companies, its external.

MANAGEMENTMANAGEMENTHas an internal focus and provides decision Has an internal focus and provides decision making information to managers and making information to managers and business owners.business owners.

Role of the AccountantRole of the Accountant

Supervision of StaffSupervision of StaffPreparation of ReportsPreparation of ReportsCalculation of Break Even Point on new Calculation of Break Even Point on new productsproductsCommunication with business managersCommunication with business managersPreparation of BudgetsPreparation of Budgets

TYPES OF BUSINESSESTYPES OF BUSINESSESMANUFACTURINGMANUFACTURING

Converting raw materials into finished Converting raw materials into finished goods eg: Toys, Coffee Mugsgoods eg: Toys, Coffee Mugs

TRADINGTRADINGA business that buys and sells inventory A business that buys and sells inventory eg: Big Weg: Big W

SERVICESERVICEA business that provides a service to A business that provides a service to customers. eg: Hairdresser, Accountantcustomers. eg: Hairdresser, Accountant

AUDITINGAUDITING

Auditing is the checking of the external Auditing is the checking of the external accounting records to make sure that they are accounting records to make sure that they are correct and complete. It also makes sure that correct and complete. It also makes sure that its processes are efficient. its processes are efficient. There can be internal and external auditing.There can be internal and external auditing.

INTERNAL AUDITINGINTERNAL AUDITINGINTERNALINTERNAL

Would be done by a member of the company.Would be done by a member of the company.A check to make sure that all policies are A check to make sure that all policies are being completedbeing completedA check of the internal controls that a A check of the internal controls that a business has.business has.A review of the efficiency of the auditing A review of the efficiency of the auditing processprocess

EXTERNAL AUDITINGEXTERNAL AUDITINGEXTERNALEXTERNAL

They check to see that the external reports They check to see that the external reports that are prepared are correct and accurate.that are prepared are correct and accurate.They are a qualified accountant who is NOT They are a qualified accountant who is NOT an employee of the businessan employee of the businessThe reports must be independently audited The reports must be independently audited each year.each year.

ETHICAL DILEMMASETHICAL DILEMMASThere can be a range of dilemmas such as:There can be a range of dilemmas such as:

Employee ExploitationEmployee ExploitationOverseas workersOverseas workersInvestors ExploitationInvestors ExploitationAcceptance of gifts and bribesAcceptance of gifts and bribesConfidentiality breachesConfidentiality breachesConflict of interestConflict of interest

ACCOUNTING STANDARDSACCOUNTING STANDARDSThe purpose and importance of accounting standards:

protection of external usersassist directors in discharging their

obligationsfacilitate the Australian capital markets

TYPES OF FINANCETYPES OF FINANCE Short-Term: cash management trusts, money market and term deposits

Long-Term: shares, debentures, unsecured notes, trusts and term deposits.

CONCEPTUAL CONCEPTUAL FRAMEWORKFRAMEWORK

The role of the conceptual framework in Australia:

• The nature of the reporting entity • Evaluation and application of the qualitative characteristics of financial information (Reliability, Relevance, Understandability, Comparability)• The objectives of general purpose financial reports and their usefulness• Evaluation and application of asset, liability, income and expense recognition and measurement criteria

ROLE AND INFLUENCE ROLE AND INFLUENCE OF GOVERNMENTSOF GOVERNMENTS

The nature and importance of the: Financial Reporting Council (FRC), Australian Securities and Investments

Commission (ASIC), International Accounting Standards Board

(IASB), Australian Accounting Standards Board (AASB), Australian Securities Exchange (ASX) and lobby groups which regulate and influence the

accounting and finance of companies in Australia

THE THE ENDEND

THANK THANK YOUYOU

Year 12 Accounting Tutorial

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