The document contains review questions and scenarios relating to recording business transactions using accrual accounting. It includes: 1) A table to complete showing the accounting equation for various entities. 2) Scenarios to determine which are business transactions, including purchasing stock on credit, paying electricity bills, and withdrawing assets for personal use. 3) Worksheet examples recording business transactions for entities over a month period, including calculating profit and loss.

1. TOPIC 7 – RECORDING & REPORTING BUSINESS TRANSACTIONS
USING ACCRUAL ACCOUNTING
TOPIC REVIEW QUESTIONS
E5.3 Complete the following table.
Assets Liabilities Equity
50 000 = 20 000 + 30 000
77 000 = 10 000 + 67 000
45 000 = 25 000 + 20 000
10 300 = 5 500 + 4 800
E5.4 For each of the following scenarios, explain why each transaction is or is
not a business transaction.
a. An entity negotiates a lease with a finance company.
b. A sole trader purchases stock for his or her shop on credit.
c. A public company signs an employment contract for a new director
two months before he or she actually starts.
d. An entity receives an invoice for electricity expense.
e. The entity pays the electricity amount outstanding.
f. The partner withdraws furniture from the business for home use.
g. The owner has lunch with a potential client and discusses a discount
incentive scheme for future business between the two parties.
h. The business partner uses personal funds for a new home theatre
system.
(a) An entity negotiates a lease with a finance company.
This is not a business transaction as it has not resulted in an exchange of goods
occurring between the business entity and an outside entity. It is just a
negotiation at this stage. If the entity decides to go ahead with the lease
(assuming it is a finance lease) then the correct entry will be to record the asset
and the associated present value of the future lease payments.
(b) A sole trader purchases stock for his or her shop on credit.
This is a business transaction as it has resulted in an exchange of goods
occurring between the business entity and an outside entity. The sole trader will
receive the stock which will be recorded as an asset and also will record the
associated debt which will be shown as an accounts payable or creditor.

2. (c) A public company signs an employment contract for a new director two months
before he or she actually starts.
This is not a business transaction as it is just a contract at this stage and has not
resulted in an exchange of goods occurring between the business entity and an
outside entity. Once the director commences employment and wages expense
has been incurred or paid then a business transaction can be recorded.
(d) An entity receives an invoice for electricity expense.
This is a business transaction as there has been an exchange of goods between
the business entity and the supplier of the electricity. The business entity has
used up/consumed the electricity and has now incurred a debt associated with
this usage.
(e) The entity pays the electricity amount outstanding.
This is a business transaction as there has been an exchange of goods between
the business entity and the supplier of the electricity. In this transaction the
entity is paying the supplier the outstanding debt.
(f) The partner withdraws furniture from the business for home use.
This is a business transaction as the event results in a change in the entity’s
financial position as the withdrawal of furniture reduces the entity’s equity. It
also reduces the assets (furniture) of the entity.
(g) The owner has lunch with a potential client and discusses a discount incentive
scheme for future business between the two parties.
This is not a business transaction as it is merely a negotiation between the two
parties. Until the discount has actually been applied to goods or services, it will
remain unrecorded by the entity.
(h) The business partner uses personal funds for a new home theatre system.
As long as personal funds are used by the business partner then this is not a
business transaction as it does not impact on the entity’s accounting equation or
financial position. If business funds were used then this would be shown as
drawings of equity and would be classified as a business transaction.
P5.4 Preparing a worksheet
Using the worksheet you created in problem 5.3, enter the following
transactions for the month of October 2008 and calculate the net profit or
loss for the period.

3. Answer for P5.3 and P5.4
Date Cash Prepaid Office Accounts Furniture Accounts Loan Capital Profit
October Rent supplies Receivable Payable and loss
2008
3 35 000 35 000
4 –450 450
7 600 600
8 9 000 9000
8 –900 900
10 21 000 21 000
12 850 850
17 –490 –490
27 450 450
Totals 42 760 900 450 1300 21 000 21 000 9000 35 000 1 410
(profit)

4. P5.5 Preparing a worksheet
The closing balance sheet items are given below for Casey Charmers in
accounting equation form, as at 30 June 2008. Transactions for the
following month of July are also given. Prepare worksheet entries for the
business transactions for the month ended 31 July 2008
Date Cash Accounts Office = Accounts Mortgage Capital Profit
July receivable Equip payable and
loss
June 30 64 200 5 400 4 600 45 000 20 000
2 3 700 – 3 700
3 –2 000 –2 000
4 –20 000 –20 000
5 5 600 5 600
7 -4200 4200
9 3000 3000
10 800 800
14 –560 –560
23 500 500
31 –800 –800
Total 43 840 8 100 4200 2 600 25 000 19 200 9 340
(profit)

5. P5.6 Preparing income statements and balance sheets
Using the information in problem 5.5, prepare:
a. an income statement for the period ending 31 July 2008
b. a balance sheet as at 31 July 2008.
CASEY CHARMERS
Income Statement
for month ending 31 July 2008
Revenue
Sales 9900
Less expenses
Rent 560
Net profit $9 340
CASEY CHARMERS
Balance sheet
as at 31 July 2008
Assets Liabilities
Cash in hand 43 840 Accounts payable 2 600
Accounts receivable 8 100 Mortgage 25 000 27 600
Office Equipment 4 200 Owner’s equity
Capital, C. Charmers 19 200
+ Net profit 9 340 28 540
Total assets $56 140 Total liabilities + Owner’s equity $56
140

6. P2.5 Preparing an income statement and a balance sheet
The account balances, dated 30 September 2007, of sole trader Muna
Green (Lake Bicycle Sales & Hire) are shown below. Use this information
to prepare an income statement and a balance sheet as at this date:
capital (Muna Green) $6000; hire revenue $12 000; sales revenue $6000;
cost of bike sales $4000; administrative expenses $2000; rent expense
$1100; wages $4000; interest expense $9000; cash at bank $600; cash on
hand $700; office equipment $14 000; depreciation of office equipment
$1400; accumulated depreciation of office equipment $2800; drawings
$2000; accounts payable $5000; bank loan $7000.
MUNA GREEN – LAKE BICYCLE SALES AND HIRE
Income Statement
for period ending 30 September 2007
Hire revenue 12 000
Sales revenue 6 000 18 000
Less expenses
Cost of bike sales 4 000
Administrative expenses 2 000
Rent expense 1 100
Wages 4 000
Interest expense 9 000
Depreciation of Equipment 1 400
21 500
Net loss ($3 500)
MUNA GREEN – LAKE BICYCLE SALES AND HIRE
Balance Sheet
as at 30 September 2007
Current assets
Cash 600
Cash on hand 700 1 300
Non-current assets
Office equipment 14 000
Less Accumulated Depreciation of Office Equipment 2 800 11 200
Total assets $12 500
Current liabilities
Accounts payable 5000
Non-current liabilities
Bank loan 7 000
Total liabilities $12 000
Net assets $500
Owner’s equity
Capital– M. Green 6 000
– net loss 3 500
2 500

7. Less drawings 2 000 $500
P2.9 Preparing an income statement and balance sheet
Pedersen Pty Ltd commenced business on 1 October 2007 as a
manufacturer of computer chips. Transactions for the month of October
were:
Required
a. Prepare an income statement for Pedersen Pty Ltd for the period
ended 31 October 2007.
b. Prepare a balance sheet for Pedersen Pty Ltd as at 31 October 2007.
PEDERSEN PTY LTD
Income statement
for period ending 31 October 2007
Income
Sales.......................................................................................... 40 350
Less cost of goods sold............................................................. 18 000
Gross profit............................................................................... 22 350
Less delivery outwards............................................................. 4 500
Net profit.................................................................................. $17 850
PEDERSEN PTY LTD
Balance Sheet
as at 31 October 2007
Assets Liabilities
Bank 417 850 Accounts payable 2 800
Computer 2 800 Shareholders’ equity
Ordinary shares 200 000
Preference shares 200 000
_______ Retained earnings 17 850 417 850
Total assets $420 650 Total equities $420 650