7.4 Situation 1 - Commencing a new business

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VCE Accounting Unit 3. Video of this presentation can be found on my YouTube channel here https://www.youtube.com/channel/UCf5jyuJoYwie8tWfvjEc0zg.
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  • 1. 7.4 SITUATION #1: COMMENCING A NEW BUSINESS
  • 2. © Michael Allison. Author’s permission required for external use. 7.4 SITUATION #1 COMMENCING A NEW BUSINESS  The General Journal is first used when the owner commences a new business by giving it assets and liabilities  Example: an owner started a business on June 11th with:  A cash contribution of $60,000  A vehicle (cost $50,000, agreed value $40,000)  Equipment of $5,000  A loan of $18,000 which the owner had taken out on the vehicles What is agreed value?
  • 3. © Michael Allison. Author’s permission required for external use.  Definition of agreed value… Agreed Value An estimate by an independent party of: • The current market value • Of a second-hand asset • That the owner contributes to the business. 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 4. © Michael Allison. Author’s permission required for external use.  E.g. the vehicle (cost $50,000, agreed value $40,000)  Which figure do we use when valuing assets contributed by the owner to the business?... Agreed Value “When the owner contributes non-current assets to the business, the valuation of assets will: • Not be based on what the owner originally paid but on… • The agreed value at the time the asset is contributed to the business” VCAA Study Design p25 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 5. © Michael Allison. Author’s permission required for external use.  Why are assets valued at their agreed value rather than the cost to the owner or the owner’s personal estimate? Relevance • Information is relevant if it influences the decision-making of the business • Agreed value IS a relevant figure as it is the best estimate of the asset’s current market value • This assists in making decisions such as: • How much to insure the asset for • The future economic benefits the asset will provide • How much the asset could be sold for in the future 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 6. © Michael Allison. Author’s permission required for external use.  Why are assets valued at their agreed value rather than the cost to the owner or the owner’s personal estimate? Reliability • Information is reliable if it is free from error, bias, personal opinions and estimates and has a source document to verify it • Agreed value is NOT a reliable figure as: • It is an estimate of an asset’s current market value • It is subject to the personal opinion of the estimator • There is no reliable source document (although this can be somewhat overcome by getting a valuation document from a professional estimator) 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 7. © Michael Allison. Author’s permission required for external use.  Example: an owner started a business on June 11th with:  A cash contribution of $60,000  A vehicle (cost $50,000, agreed value $40,000)  Equipment of $5,000  A loan of $18,000 which the owner had taken out on the vehicles Cash $60,000 Vehicle $40,000 Equipment $5,000 Loan $18,000 BusinessOwner How will these items be transferred into the firm’s General Ledger?... [A] [A] [A] [L] 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 8. © Michael Allison. Author’s permission required for external use. Cash $60,000 Vehicle $40,000 Equipment $5,000 Loan $18,000 BusinessOwner [A] [A] [A] [L] Cash Receipts Journal Cash Payments Journal Sales Journal Purchases Journal Special Journals Can any of these transactions be entered via the firm’s Special Journals? The $60,000 cash represents an inflow of cash for the business so it can be entered via the Cash Receipts Journal… Cash $60,000 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 9. © Michael Allison. Author’s permission required for external use. Vehicle $40,000 Equipment $5,000 Loan $18,000 BusinessOwner [A] [A] [L] Cash Receipts Journal Cash Payments Journal Sales Journal Purchases Journal Special Journals But none of these can be entered into the firm’s books via the Special Journals… General Journal Records transactions that do not belong in the 4 Special Journals These must be entered via the firm’s General Journal… Vehicle $40,000 Equipment $5,000 Loan $18,000 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 10. © Michael Allison. Author’s permission required for external use. Owner Cash $60,000 Vehicle $40,000 Equipment $5,000 Loan $18,000 [A] [A] [A] [L] Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 60000 Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 60000 60000 General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Owner contributed assets and liabilities to commence firm (Memo 1) Owner’s Equity How was this figure calculated? LiabilitiesAssets= --$27,000 $18,000$45,000 7.4 SITUATION #1 COMMENCING A NEW BUSINESS
  • 11. © Michael Allison. Author’s permission required for external use. Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 60000 60000 Cash [A] 30/6 Capital 60000 Capital [OE] 30/6 Cash 60000 7.4 SITUATION #1 COMMENCING A NEW BUSINESS Debit Credit Assets   Cash [A] 30/6 Capital 60000 Debit Credit Assets   Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 60000 60000 Cash Receipts Journal Date Details Rec. No. Bank Debtors Control Cost of Sales Sales Sundries GST Jun 11 Capital 7 60000 60000 Debit Credit Owner’s Equity   Capital [OE] 30/6 Cash 60000 Debit Credit Owner’s Equity   Posted on last day of period Posted on last day of period Entered on actual day of transaction
  • 12. © Michael Allison. Author’s permission required for external use. General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 7.4 SITUATION #1 COMMENCING A NEW BUSINESS Vehicle [A] 30/6 Capital 40000 Loan [L] 30/6 Capital 18000 Equipment [A] 30/6 Capital 5000 Capital [OE] 30/6 Loan 18000 30/6 Vehicle 40000 30/6 Equipment 5000 Debit Credit Assets   Debit Credit Assets   Debit Credit Liabilities   General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Vehicle [A] 30/6 Capital 40000 Debit Credit Assets   General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Equipment [A] 30/6 Capital 5000 Debit Credit Assets   General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Loan [L] 30/6 Capital 18000 Debit Credit Liabilities   General Journal Date Details General Ledger Subsidiary Ledger Debit Credit Debit Credit Jun 11 Vehicle [A] 40000 Equipment [E] 5000 Loan [L] 18000 Capital [OE] 27000 Capital [OE] 30/6 Loan 18000 30/6 Vehicle 40000 30/6 Equipment 5000 Capital [OE] 30/6 Loan 18000 30/6 Vehicle 40000 30/6 Equipment 5000 Capital [OE] 30/6 Loan 18000 30/6 Vehicle 40000 30/6 Equipment 5000 Entered on actual day of transaction Posted on last day of period Posted on last day of period Posted on last day of period Posted on last day of period
  • 13. © Michael Allison. Author’s permission required for external use. TASK In-class Homework SQ8 X SQ9 X SQ10 X Ex7.2 X Ex7.3 X
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