Student Workbook FNSACC404A

FNSACC404A
Prepare Financial
Statements for NonReporting Entities
Student Workbook
Crown Institute of Business and Technology Pty Ltd ABN 86 116 018 412 National Provider No: 91371 CRICOS Provider Code: 02870D
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Acknowledgement
This workbook is developed by Abed Miah for Crown Institute of Business and Technology.
CIBT would like to acknowledge Abed Miah for his assistance with the development of this
resource.
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reserved for Crown Institute of Business and Technology. No part of this workbook may be
reproduced in any form or by any means, electronic or mechanical, including photocopying or
recording, or by any information retrieval system without written permission from Crown Institute
of Business and Technology.
The information contained in this workbook is drawn from sources believed to be reliable. CIBT is
not responsible for any injury, loss or damage as a result of material included or omitted from this
workbook.
FNSACC404A Student Workbook v1.1
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Table of Contents
Section 1 Sole Traders .......................................................................................................................... 6
Business............................................................................................................................................... 6
Types of Business Structures .......................................................................................................... 6
Sole Traders ........................................................................................................................................ 6
Business Registration .......................................................................................................................... 7
Business Transactions ......................................................................................................................... 9
Source/Supporting Documents....................................................................................................... 9
Accounting Cycle ............................................................................................................................... 10
Journal ........................................................................................................................................... 10
Ledger ........................................................................................................................................... 10
Example: Journal and Ledger ........................................................................................................ 11
Types of Ledger Accounts ............................................................................................................. 11
Trial Balance .................................................................................................................................. 16
Example: Trial Balance from Ledger Account balances ................................................................ 16
Correction of Errors .......................................................................................................................... 18
Errors in the Account .................................................................................................................... 18
Correction of Errors ...................................................................................................................... 18
Correction of Errors and GST ........................................................................................................ 19
Errors in a Trial Balance .................................................................................................................... 19
Disclosed Errors............................................................................................................................. 19
Undisclosed Errors ........................................................................................................................ 20
Example: Errors in Trial Balance.................................................................................................... 20
Learning Activity 1.1...................................................................................................................... 22
Cash and Accrual Accounting ............................................................................................................ 23
Cash Accounting ............................................................................................................................ 23
Accrual Accounting ....................................................................................................................... 23
The Matching Principle ................................................................................................................. 23
Balance Day Adjustments ................................................................................................................. 24
Section 2 Financial Statements ...................................................................................................... 25
Financial Statements ......................................................................................................................... 25
Statement of Financial Performance (Income Statement) ............................................................... 25
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Statement of Financial Position (Balance Sheet) .............................................................................. 28

Example: Income Statement and Balance Sheet .......................................................................... 30
Statement of Cash Flow .................................................................................................................... 36
Example: Cash Flow Statement..................................................................................................... 39
Section 3 - Financial Statement Analysis .............................................................................................. 42
Ratio Analysis .................................................................................................................................... 42
Liquidity Ratios .................................................................................................................................. 42
Activity Ratios ................................................................................................................................... 43
Profitability Ratios............................................................................................................................. 44
Application of Ratio Analysis............................................................................................................. 44
Limitations of Ratio Analysis ............................................................................................................. 45
Example: Ratio Analysis .................................................................................................................... 46
Learning Activity 3.1.......................................................................................................................... 51
Section 4 Partnership ......................................................................................................................... 52
Partnership........................................................................................................................................ 52
Types of Partnership ......................................................................................................................... 53
Types of Partners .............................................................................................................................. 54
Partnership Agreements ................................................................................................................... 55
Elements of the Partnership Agreement ...................................................................................... 55
Accounting Entity Convention for Partnership ................................................................................. 56
Formation of a Partnership ............................................................................................................... 56
Cash Contribution by Partner ....................................................................................................... 56
Contribution by partners of cash and other assets ...................................................................... 57
Combining (Amalgamating) Existing Business .............................................................................. 57
Purchase of an Existing Business .................................................................................................. 58
Balance Sheet on Partnership Formation ......................................................................................... 60
Section 5 Not For Profit Organisations .............................................................................................. 62
Not for Profit Organisation ............................................................................................................... 62
Types of Not-for-Profit Organisations............................................................................................... 62
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Charities ........................................................................................................................................ 63
Income Tax Exempt Funds ............................................................................................................ 63
Other Non-Profit Organisations .................................................................................................... 63
Registering Not for Profit Organisation ........................................................................................ 63
Terms relating to Not-for-Profit Organisations ................................................................................ 64
Revenue and Expenditure Items ....................................................................................................... 65
Financial Statements for Not-for-Profit Organisations ..................................................................... 66
Statement of Receipts and Payments ........................................................................................... 66
Example: Receipts & Payments Statement ................................................................................... 66
Income and Expenditure Account ................................................................................................. 67
Example: Income and Expenditure Account and Statements ...................................................... 67
Statement of Assets and Liabilities ............................................................................................... 69
Example: Statement of Assets and Liabilities ............................................................................... 69
Bibliography .......................................................................................................................................... 73
Mapping Grid........................................................................................................................................ 73
FNSACC404A Prepare financial statements for non-reporting entities................................................ 74
Elements and Performance Criteria.................................................................................................. 74
Required Skills and Knowledge ......................................................................................................... 74
Evidence Guide ................................................................................................................................. 75
Range Statement............................................................................................................................... 76
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Section 1 Sole Traders

Business
A business (enterprise or firm) is an organization involved in the trade of goods and services to
customers with the intention of making profit.
Types of Business Structures
Sole Trader
Sole Traders or Proprietorships are businesses formed and owned by a single person. The owner
usually manages the business.
Partnership
A partnership joins two or more individuals together as co-owners, who jointly own the business
in predetermined proportions. Many professional organisations of doctors, lawyers and
accountants are partnerships.
Company
A company is an entity created by law and is considered to have an existence which is separate
and distinct from the people who own and / or manage the company. Its shareholders are only
liable for the unpaid amount on their share.
Entity
In business, an entity is an individual, corporation, partnership, or other group with whom it is
possible to conduct business.
Reporting Entity
Reporting entity means an entity in respect of which it is reasonable to expect the existence of
users who rely on the entitys general purpose financial statement for information that will be
useful to them for making and evaluating decisions about the allocation of resources. A
reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries.
All companies are reporting entities. They are required to prepare general purpose financial
statements for the stakeholders under Corporations Act 2001.
Sole Traders
Sole Traders are businesses formed and owned by a single person. The owner may operate the
business alone or may employ others.
Characteristics of a sole trader business include:
The affairs of the sole trader business are accounted for separately from the private
affairs of the owner.
Legally, the owner is personally responsible for all debts incurred by the business and has
unlimited liability for the repayment of debts.
The owner is the beneficiary of all profits earned by the business and bears all losses
incurred.
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A sole trader business ends when the owner either sells the business, closes down the
business or at the owners death or incapacity.
Advantages
The owner controls the business.
The owner is entitled to all profits.
It is easy and inexpensive to set up and operate.
It is easy to change to another legal structure.
It is simple to establish, with few legal formalities or restrictions.
It has minimal formal reporting requirements.
Disadvantages
The owner has unlimited liability for the debts of the business.
The size of the business is generally restricted by the amount of the owners capital and
capacity to raise funds.
Some sole traders have difficulty in taking holidays and sick leave because they have
problems finding someone to replace them.
The success of the business may be limited by the abilities and talents of the owner,
unless gaps can be filled by good quality employees.
The owners death will terminate the business.
Business Registration
The Australian Business Number (ABN) is an 11 digit unique identification number quoted by
businesses dealing with the ATO and other government agencies. The ABN is the public
registration number for the GST. An entity quotes its ABN when dealing with the ATO, other
businesses and the public, on matters regarding the GST.
ABN registration is not mandatory. A business can trade without an ABN, but the businesses it
deals with are required to withhold (and remit to ATO) an amount equal to 46.5% of the amount
of the payment if an ABN is not quoted. However, an entity must have an ABN to register for GST
purposes.
Enterprises with a yearly turnover of $75,000 or more must register for GST and will need an ABN.
Enterprises may choose to register if they're below these thresholds.
ABNs are necessary for the following business dealings with ATO:
1.
2.
3.
4.
5.
6.
Pay As You Go (PAYG) system

Lodging Business Activity Statements (BAS)
Lodging Instalment Activity Statements (IAS)
Goods and Services Tax (GST)
Fringe Benefits Tax (FBT)
Fuel Tax Credits
Page 7 of 76
Page 8 of 76
Business Transactions
The financial activities of an organisation consist of hundreds and thousands of transactions or
economic exchanges between the business and other parties. Every organisation has financial
dealings with other parties.
Transactions may include:
Capital contributions in cash by owner
Cash purchases
Credit purchases
Cash sales
Credit Sales
Collections from debtors
Payment to creditors
Electronic fund transfer
Payment by cheques
Petty cash transactions
Day to day operating expenses
Handling sales/purchase returns
Withdrawal of cash by owner.
Source/Supporting Documents
Each transaction leads to the creation of source documents. The different types of source or
supporting documents used in order to process financial transactions include:
Invoices
Cheques
Claim forms
Petty cash vouchers
Purchase orders
Receipts
Credit notes
Delivery dockets
Remittance advice
Deposit books
Bank Statements
Credit Card Statements.
Each of these financial transactions results in some kind of financial information being created.
The organisation must record and collect information on every financial transaction it engages in
via its accounting systems. This data is then evaluated, coded, aggregated and summarised in the
preparation of financial reports for management and others to use in decision making.
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Accounting Cycle
The organisation's accounting process consists of the steps required to record all of the
transactions that take place, and to organise and collate this information, before finally
producing financial reports that are analysed and used in decision making. The accounting
process is made up of the following sequence.
Journal
Journal is a form of a diary in which transactions are recorded sequentially.
General Journal of .. (1)

Particulars(4)
Date(3)
Folio(5)
GJ (2)
Debit(6)
Credit(7)
Debit Account Name(4(a))

Credit Account Name(4(b))
Narration(4)
There are five types of journals:

1. General journal to record special transactions and end of year adjustments
2. Sales journal to record credit sales
3. Purchase journal to record credit purchases
4. Cash receipts journal to record receipts of cash
5. Cash payment journal to record payments of cash.
Ledger
Ledger is the record of financial transactions. The information entered into the general journal
will be posted to the ledger.
There are two formats of ledger accounts:
The T Account Format:
Debit Side (Dr)
Credit Side (Cr)
The Running Balance Format:
Date
Particulars
Folio
Debit
Credit
Balance
Page 10 of 76
Example: Journal and Ledger
On 1 April 2013, Mark Industries commenced business. The owner deposited $150,000 in the
business bank account on that date. The transaction is recorded in the journal and posted to the
ledger, as follows:
Mark Industries General Journal

Date
Particulars
April
Bank
GJ1
Folio
Debit
Credit
$150,000
Capital
150,000
Capital introduced on commencement of

business
Bank
01-Apr-13 Capital
150,000
Capital
1-Apr Bank
150,000
Types of Ledger Accounts
1. Assets
2. Liabilities
3. Owner's Equity
4. Revenue
5. Expenses
The general ledger is the complete set of all of these accounts.
1. Assets
The resources owned by the business that have a measurable future economic benefit.
Current Assets
Assets that will be converted into cash within the next 12 months.
Cash at Bank (Bank)
Cash on hand (Petty Cash)
Accounts Receivable (Debtors)
Provision for Doubtful Debts
Bills Receivable
Inventory
Prepayment
Page 11 of 76
Accrued Income
GST Input Control
Non-Current Assets
Assets that could be used by the business for a period greater than 12 months.
Land
Buildings/Premises
Accumulated Depreciation of Building
Plant & Equipment/ Plant/ Equipment/ Machinery
Accumulated Depreciation of Plant & Equipment
Motor Vehicles
Accumulated Depreciation of Motor Vehicles
Office furniture/Office Equipment
Goodwill
Investments
2. Liabilities
Funds provided by outsiders (creditors) that are used to finance the acquisition of assets.
Current Liabilities
Obligations that the business must pay within 12 months.
Accounts Payable (Creditors)
Bills Payable
GST Payable
Accrued Expenses
Income Received in Advance
Bank Overdraft
Non-Current Liabilities
Obligations that the business will repay over a time span longer than 12 months.
3.
Mortgage on Land & Building
Secured Loan (Long term)
Owners Equity
Capital
Drawings
Trading
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Profit and Loss
Page 13 of 76
4.
Revenue
Operating Income
Sales
Fees Received/Fees Income
Other Operating Income
5.
Rent Income
Interest Income
Commission Received
Discount Received
Dividend Received
Gain on Disposal
Bad Debts Recovered
Operating Expenses
Cost of Goods Sold
Purchases
Purchase Returns
Customs Duty
Freight Inwards
Wharfage Costs
Opening Inventory
Closing Inventory
Marketing Expenses
Advertising
Sales Commission
Sales Wages
Freight/ Cartage Outwards/ Delivery Expenses
Depreciation of Non-Current Assets (Delivery Truck)
Administration Expenses
Salaries and Wages
Insurance
Office Expenses
Page 14 of 76
Rent
Electricity/light and power
Telephone
Rates and Taxes
Stationery
Repairs/Maintenance
Motor Vehicle Expenses
Loss on Disposal
Donations
Depreciation- Building/Plant/Equipment
Financial Expenses
Discount Allowed
Doubtful Debts
Bad Debts
Interest expense
Bank Charges/Fees
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Trial Balance
In double-entry bookkeeping all transactions must have an equal dollar amount of debits and
credits recorded in the general ledger accounts. The trial balance is a statement that lists all of
the accounts in the general ledger and their debit or credit balances, to ensure that the overall
general ledger is in balance, i.e. that all debits equal all credit balances.
Function of a Trial Balance:
To substantiate the accuracy of the bookkeepers work
To substantiate the arithmetic accuracy of the ledger posting if the total of the debit
balances of the ledger accounts equals the total of credit balances of ledger accounts.
Example: Trial Balance from Ledger Account balances
Account Balances of LMN Ltd as at 30 June 2012

Account
Amount
Debit
$
$
Capital
200,000
Drawings
12,000
Sales
210,500
Purchases
42,300
Interest income
8,540
Wages
70,850
Insurance
1,450
Rent
1,600
Repairs on factory machinery
950
Cash at Bank
79,670
Inventory
12,900
Investments in Government Bonds
155,250
Accounts Receivable- J Green
10,120
Accounts Payable- G Gartner
8,240
Factory machinery
65,550
GST Payable
26,250
Computer equipment
11,780
Interest expense
1,800
GST Input Control
7,310
Loan from Richmond Finance Company
20,000
Credit
$
Page 16 of 76
Trial Balance of LMN Ltd as at 30 June 2012

Account
Capital
Drawings
Sales
Purchases
Interest income
Wages
Amount
Debit
Credit
200,000
12,000
200,000
12,000
210,500
42,300
210,500
42,300
8,540
8,540
70,850
70,850
Insurance
1,450
1,450
Rent
1,600
1,600
950
950
Cash at Bank
79,670
79,670
Inventory
12,900
12,900
155,250
155,250
Accounts Receivable- J Green
10,120
10,120
Accounts Payable- G Gartner
8,240
Repairs on factory machinery
Investments in Government Bonds
8,240
Factory machinery
65,550
GST Payable
26,250
Computer equipment
11,780
11,780
Interest expense
1,800
1,800
GST Input Control
7,310
7,310
Loan from Richmond Finance Company
65,550
26,250
20,000
20,000
473,530
473,530
Page 17 of 76
Correction of Errors
Errors in the Account
Even though great care may be taken by a business, errors will still be made in the accounting
records. Most of the errors will be quickly discovered and can be corrected easily by a simple
cross-out and re-entry of the correct figure. However, some errors may be discovered after the
completion of the accounting tasks for the period, when it is too late to make a simple
correction.
There are mainly four types of errors:
1.
Errors in Documentation: The wrong amount or quantity has been entered on a source
document
2. Errors of Omission: An entry has been omitted or left out of the journals and ledger
accounts altogether
3. Errors of Commission: Errors in entering, posting or balancing
4. Errors in Allocation: Entries posted to the wrong ledger accounts.
Correction of Errors
Making errors is a problem in any recording process. It is important, however, that errors are
corrected in a proper manner. Where possible all errors should be corrected by a general journal
entry, even if the correction could be achieved by the re-writing of figures.
Not all errors can be corrected by a general journal entry as:
Only one side of the double entry may be in error where a debit or credit is correctly
entered and the corresponding credit or debit is incorrectly entered or omitted.
This error will need to be corrected by ruling out the error and inserting the correct figure above
the error or by completing the posting in the case of omission.
Where two or more accounts are affected by an error or a complete transaction has been
omitted, then it should be corrected by recording the transaction in the appropriate journal.
If the transaction has been correctly recorded in the appropriate journal, but not posted to the
ledger, then ledger postings will need to be completed.
Example:
Error: Stationery $1,100 purchased on credit from Office Supplies Ltd incorrectly debited to
Purchases. The cost included GST of $100.
The stationery purchased here was for office use, and not for sale. Therefore, it should be
charged as an expense, not as a purchase. The original entry correctly debited GST paid $100 and
credited Office Supplies Ltd $1,100. The purchase account has been incorrectly debited $1,000. To
rectify this, The Purchases account will be credited and the Stationery account will be debited.
Page 18 of 76
Correction: The correcting journal entry would therefore be:

Particulars
Debit
Stationery Expense
Credit
$1,000
Purchases
$1,000
Correction of error - wrong account debited
Correction of Errors and GST
Not all errors will affect a GST entry. If the GST entry is correct but the entry generating the GST is
incorrect- for example, a payment for stationery incorrectly posted to the telephone account,
then the correction need not involve the GST account
Example
Error: A sale invoice for $2,200 in the name of R Wood was entered in the Sales Journal as $220
and posted as such.
The correct accounts have been posted to, i.e. R Woods debtor account was debited $220. Sales
was credited $200 and GST Collected was credited $20. The debit and credit entries balance.
However, the debit and credit amounts are understated by $1,980 ($1,800 plus $180 GST). The
error can be corrected by a general journal entry.
Correction:
Particulars
Debit
Accounts Receivable - R Wood
Credit
$1,980
Sales
GST Collected
$1,800
$180
Correction of error in the Sales Journal
Errors in a Trial Balance

Trial Balance errors fall into two main categories:
Disclosed errors where the trial balance totals do not agree
Undisclosed errors where the trial balance totals agree
Disclosed Errors
If the Trial Balance totals do not agree the error may have occurred for a number of reasons,
including:
Addition error in the Trial Balance or one of the ledger accounts
Posting an entry to the wrong side of an account
Listing an account balance on the wrong side of the Trial Balance
Transposition error- posting an entry for $176 as $167.
Page 19 of 76
Locating Disclosed Errors
Find the difference and divide by 2.
Look for this amount in the Trial Balance or one of the ledger accounts
Undisclosed Errors
A Trial Balance that balances is an indication of the arithmetic accuracy of the recording process.
However, a number of errors could still occur even though the Trial Balance balances. These
include:
Compensating Errors where two errors for the same amount occur and compensate each other.
For example, the credit side of the Trial Balance is over-added by $10 and the balance of the
inventory account is recorded for $10 more than the correct amount.
Errors of Omission where a complete transaction is not recorded.
For example, a sales invoice is lost and not recorded.
Mathematical Errors where the calculation on the original source document is incorrect.
The document is then correctly recorded but for the wrong amount.
Clerical Errors where the entry is posted to the correct side of the wrong account.
For example, credit sales are posted to the credit side of the bank account instead of the credit
side of sales account- classified as errors of principle.
Undisclosed errors are difficult to control and locate.
Example: Errors in Trial Balance
Find the error in the following trial balance and prepare a corrected trial balance:
Trial Balance as at 30 June 2012
Account
Debit
Credit
Capital
37,500
Bank
3,940
Purchases
9,140
Sales
GST Payable
GST Input Credit
Motor vehicle
1,100
110
3,414
25,000
Accounts Payable- D Piper

Wages
3,674
890
42,494
42,274
Page 20 of 76

Account
Debit
Credit
Capital
37,500
Bank
3,940
Purchases
9,140
Sales
1,100
GST Payable
GST Input Credit
Motor vehicle
110
3,414
25,000
Accounts Payable- D Piper

Wages
3,674
890
42,384
42,384
Page 21 of 76
Learning Activity 1.1
Find the error in the following trial balance and prepare a corrected trial balance:
Account
Bank overdraft
Capital
Fees received
Debit
Credit
5,450
80,515
120,300
Premises
125,500
Office equipment
8,190
GST Input Credit
5,200
Interest expense
Purchases
5,995
7,820
Mortgage on premises
37,750
Donations
390
Delivery expenses
950
Electricity
450
Salaries and wages
20,800
Rent income
12,000
Shares in PMA Ltd
88,000
GST Payable
Petty cash
9,680
100
Accounts Receivable- A Brown
3,500
Accounts Payable- D Jones
1,200
350,165
183,625
Page 22 of 76
Cash and Accrual Accounting

Cash Accounting
Under the cash basis of accounting, the organisation's revenues are recorded in the accounting
period when cash is received and expenses are recorded when cash is paid.
Accrual Accounting
Under the accrual basis of accounting, revenues are recorded when they are earned (i.e. when
the business sells goods or performs services) and expenses are recorded when they are incurred
in earning that revenue (i.e. when goods and services are consumed).
Thus, the concept of receiving or paying cash is not relevant in determining profit. Most
organisations use the accrual basis of accounting because this most accurately determines the
organisation's performance when there are transactions that overlap from one accounting
period to the next.
The Matching Principle
One of the core principles of accounting is the matching principle, which states that all revenues
generated in an accounting period should be matched with the expenses incurred in generating
them, in order to determine the organisation's performance (profit).
Hence, the accrual basis of accounting facilitates the matching principle by recording revenues
and expenses when they are earned or incurred, rather than recording them when cash is
received or paid.
Benefits of accrual accounting include:
Fair presentation of the financial reports for a given period

Providing a better method of planning expenses, as well as preparing monthly and yearly
budgets
Budget projections are more likely to be accurate and fair representations of the future
financial position of the business.
Page 23 of 76
Balance Day Adjustments

The life of a business is divided into accounting periods. There are many transactions that affect
the income or expense of one single accounting period. Balance day adjustments become
necessary when the period covered by the expense or revenue does not exactly correspond to
the accounting period of the business.
At the end of the accounting period, adjusting journal entries are recorded to update accounts
for proper revenue recognition and expense matching before final reports can be prepared.
Adjusted journal entries are reversed on the following day.
Prepaid Expenses
Prepaid expenses are those expenses which have been paid in advance at the balance date.
Payments are often made in advance for expenses such as insurance and rent. The total benefit
will not be used in the financial year in which it was paid. Prepayment is a Current Asset.
Accrued Expenses
Expenses that have been incurred but not yet paid at the balance date. The benefit has been
received by the business, but has not been paid for by the end of the financial year. An expense
for which an accrual is usually necessary is Wages Expense, as wages accrue from day to day, but
are not recorded until they are paid. Accrued Expense is a Current Liability.
Accrued Income
The income that has been earned by a business during the current financial year but not received
by the end of that financial year. Perhaps additional goods or services are being provided to the
same customer. The invoice will be presented when the job (maintenance project) is completed.
Some income accounts may only be credited when the money is received. For examplecommission income, interest on money invested or dividend income. Accrued Income is a Current
Asset.
Income Received in Advance
Income that has been received but all or part of the income has not been earned in the same
financial year. For example, an airline will sell tickets in advance. Those that have not been used
at balance date represent unearned income. Other examples are landlords rent, and policy
premiums received by an insurance company.
General journal entries are also entered for depreciation, doubtful debt, bad debt written off and
closing inventories on the balance day.
Page 24 of 76
Section 2 Financial Statements

The financial reports are the end product of the accounting process and are generated from the
information that has been collected during the accounting period and recorded in the general
journal and general ledger accounts. These financial reports are generally prepared from the Trial
Balance.
Financial Statements
Financial statements are a structured representation of the financial position and financial
performance of an entity. Financial statements should be understandable, relevant, reliable and
comparable.
There are mainly three types of financial statements:
1. Statement of Financial Performance (Income Statement)
2. Statement of Financial Position (Balance Sheet)
3. Statement of Cash Flow (Cash Flow Statement)
Statement of Financial Performance (Income Statement)

The Income Statement is a financial report to the owner of the business (and other
users) which shows the revenue for an accounting period matched with the expenses of
earning that income.
The Income Statement shows information, from the Trading and the Profit and Loss
Accounts. It is a combination of the information in these accounts, which is arranged in a
meaningful order for management, owners and other users.
Information is shown in the Income Statement in a narrative form (top to bottom). Items
are grouped together to help with analysis and interpretation.
Classification in an Income Statement
The initial part of the narrative in the statement shows the calculation of gross profit
from the buying and selling of inventory. The information needed for this is extracted
from the Trading account.
Operating Income (or Revenue) Sales
This is the value of the net sales from the normal operations of the business.
Cost of Goods Sold (COGS)
This is the cost of buying and getting trading goods into store and ready for sale. Cost of
goods sold takes into account unsold inventory both at the beginning and end of the
period. Cost of goods sold equals opening inventory plus purchases, freight inwards etc.,
less closing inventory.
Gross Profit (or Loss)
Page 25 of 76
Gross profit is the difference between sales revenue and cost of goods sold.
Other Operating Income
Income (revenue) arising in the course of regular business operations (discount received,
interest income).
Total Operating Income
Sum of all revenues from regular business activities.
Operating Expenses
Expenses incurred in earning the operating income. In a merchandising business,
operating expenses are grouped into:
Marketing- Costs incurred in the promotion, selling and delivery of trading inventory. For
example, advertising, sales salaries, sales commission, freight outward, other sales
expenses, sales staff vehicle expenses.
Administration- General costs incurred in the organisation and running of the business.
For example, office salaries, motor vehicle expenses, general expenses, insurance, office
expenses, rent, electricity, gas, telephone, stationery, computer expenses.
Financial- Costs incurred in the financing of the business, such as interest, bad debts,
doubtful debts and discount allowed.
Net Profit/Loss
Profit from regular activities of the business. Operating revenue less operating expenses.
Page 26 of 76
Income Statement Format

Statement of Financial Performance for the year ended 30 June 2013
Sales (Net)
xxx
Less Cost of Goods Sold

Inventory 01/07/2012
xxx
Purchases (Net)
Customs Duty
xxx
xxx
Freight Inwards
xxx
Goods available for sale
xxx
Less Inventory 30/06/20X0
xxx
Gross Profit
xxx
xxx
Add Other Operating Income

Discount Received
Interest earned
xxx
xxx
xxx
xxx
Less Operating Expenses

Marketing
Advertising
xxx
Sales Commission
Sales wages
Cartage Outwards
Depreciation- Delivery Truck
xxx
xxx
xxx
xxx
Administration
Salaries and wages
Insurance
Office Expenses
Rent
xxx
xxx
xxx
xxx
Electricity
Telephone
Depreciation- Building/Plant/Equipment
xxx
xxx
xxx
xxx
Financial
Discount Allowed
Bad Debt
Doubtful Debt
Interest
xxx
xxx
xxx
xxx
xxx
Total Operating Expenses

xxx
xxx
Page 27 of 76
Net Profit
xxx
Statement of Financial Position (Balance Sheet)

The Balance Sheet is a statement of the assets, liabilities and owners equity of a business at the
end of an accounting period. It represents the financial position of the business at a particular
point in time.
Classification in a Balance Sheet
Assets Resources of the business having a future benefit.
Current Assets- Assets which are cash or convertible into cash within twelve months, or which
will provide a benefit to the business within twelve months.
Non-Current Assets- Assets which will provide benefit to the business beyond twelve months.
Liabilities Amounts owing by the business.
Current Liabilities Debts which have to be paid within twelve months.
Non-Current Liabilities Debts which are not due to be paid until after twelve months.
Net Assets Total Assets less Total Liabilities. Equals Owners Equity in accordance with the
Proprietorship Equation, OE = A L
Owners Equity The value owed by the business to the owner of the business.
The opening value of the owners equity (Capital) plus Net Profit for the year (which accrues to
the owner) less any withdrawals by the owner (Drawings).
Page 28 of 76
Balance Sheet Format

Statement of Financial Position as at 30 June 2013
Current Assets
Bank
Accounts Receivable
Inventory
Prepayment
GST Input Control
Accrued Income
Total Current Assets
Non-Current Assets
Land & Building
Less Accum Depreciation
Machinery
Plant & Equipment
Motor Vehicles
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Total Non-Current Assets

Total Assets
Current Liabilities
Accounts Payable
GST Payable
Accrued Expenses
Income in advance
Bank Overdraft
Total Current Liabilities
Mortgage on Land & Building
Secured Loan (Long term)
Total Non-Current Liabilities
Total Liabilities
Net Assets
Owner's Equity/Proprietorship
Capital as at 01/07/2012
add: Net Profit
less: Drawings
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Page 29 of 76
Example: Income Statement and Balance Sheet
The Trial Balance has been extracted from the books of Mascot Trading as at 30 June 2013:
Trial Balances of Mascot Trading as at 30 June 2013
$
Opening Stock (1/7/12)
87,480
Accounts Receivable
47,140
GST Paid
76,725
Petty Cash
1,000
Bank (Overdraft)
79,690
Land and Buildings
196,075
Plant & Machinery
79,500
Computer Equipment
34,000
Accounts Payable
38,160
GST Payable
107,500
Bank Loan payable in December 2009
55,000
Sales
1,075,600
Discount received
Purchases
Freight Inwards
4,500
697,880
9,110
Salaries- Sales Staff
89,260
Salaries- Office Staff
133,330
Sales Return
5,360
Commission Income
12,100
Insurance
12,940
Delivery Expenses
8,900
Electricity
6,610
Postage & Telephone
3,020
Rates & Taxes
9,090
Purchase Returns
5,360
Stationery
3,200
Advertising
11,940
Interest Expense
13,450
Discount Allowed
3,200
Bad Debts
2,690
Drawings
21,610
Capital
175,600
1,553,510
1,553,510
Page 30 of 76
Additional Information:
Closing Stock on 30/6/13
$88,600
Required: Prepare
(a) Classified Statement of Financial Performance
(b) Classified Statement of Financial Position
Statement of Fin Performance of Mascot Trading for the year ended 30 June 2013
$
Sales (Net) (1,075,600 - 5,360)
$
1,070,240

Inventory (01/07/2012)
Purchases (Net) (697,880 - 5,360)
Freight Inwards
87,480
692,520
9,110
789,110
Less Inventory 30/06/2013
88,600
Gross Profit
700,510
369,730
Add Other Operating Income

Discount Received
4,500
Commission Income
12,100
16,600
386,330

Marketing
Advertising
11,940
Salaries- Sales Staff
89,260
Delivery Expenses
8,900
110,100
Administration
Salaries- Office Staff
133,330
Insurance
12,940
Electricity
6,610
Postage & Telephone
3,020
Rates & Taxes
9,090
Stationery
3,200
168,190
Financial
Discount Allowed
3,200
Interest Expense
13,450
Page 31 of 76
Bad Debts
Total Operating Expenses
Net Profit
2,690
19,340
297,630
88,700
Page 32 of 76
Statement of Financial Position of Mascot Trading as at 30 June 2013

$
Current Assets
Petty Cash
Inventory
1,000
88,600
Accounts Receivable
47,140
GST Paid
76,725
Total Current Assets
213,465
Non-Current Assets
Land and Buildings
196,075
Plant & Machinery
79,500
Computer Equipment
34,000
Total Non-Current Assets
309,575
Total Assets
523,040
Current Liabilities
Bank (Overdraft)
79,690
Accounts Payable
38,160
GST Payable
107,500
Total Current Liabilities

Bank Loan payable in December 2014
225,350
.
55,000
Total Non-Current Liabilities
55,000
Total Liabilities
280,350
Net Assets
242,690
Owner's Equity
Capital
175,600
add: Net Profit
88,700
less: Drawings
264,300
21,610
242,690
Page 33 of 76
The account balances of Delta Trading at 30 June 2012 are given below:
Delta Trading Account Balance at 30 June, 2012
Debit
Inventory (01/07/2011)
Credit
$13,378
Telephone
582
Customs Duty
744
Purchases
116,444
Purchase Return
3,580
Drawings
2,000
Interest
Advertising
Land
Light & Power
568
1,000
20,000
260
Accounts Receivable
2,630
GST Paid
2,218
Stationery
Rent
Sales Salaries
Delivery Expenses
Insurance
Motor Vehicles
Office Equipment
440
2,000
48,400
1,104
624
18,000
2,400
Sales Expenses
10,600
Office Salaries
54,000
Discount Allowed
1,000
Discount Received
600
Sales
239,576
Sales Return
5,600
Accounts Payable
7,300
GST Collected
3,232
Bank
4,068
Owner's Equity
Additional Information:
Closing Inventory at 30/06/2012 was $21,376
Page 34 of 76
Required: Prepare
(a) Trial Balance
(b) Classified Statement of Financial Performance
(c) Classified Statement of Financial Position
Page 35 of 76
Statement of Cash Flow

The cash flow statement will show where a sole trader obtained cash and how that cash was
spent. The standard requires the statement to report cash flows classified into three activities:
Operating Activities: Cash flows from operating activities are primarily provided by the revenue
producing activities of the entity i.e. activities that provide the income for the business and the
incurring of expenses and result in the profit or loss for the reporting period.
Operating activities include:
Receipts from customers
Dividends received
Interest received
Payments to suppliers
Payments to employees
Payment of interest and borrowing costs
Income tax paid
Note: These items are Income Statement (Profit and Loss Account) items.
Investing Activities: Cash flows from activities involved in the acquisition or disposal of noncurrent assets used in the operation of the business.
Investing activities include:
Purchase of non-current assets
Proceeds from sale of non-current assets
Purchase of investments
Proceeds from sale of investment
Loans made to other businesses
Repayment of loans made to other businesses
Note: These items are Balance Sheet (non-current assets) items.

Financing Activities: Cash flows from financing activities relate to the financing or capital raising
function of the business.
Financing activities include:
Additional capital issue
Borrowings/Loan (detailed)
Drawings
Repayment of Borrowings
Note: These items are Balance Sheet (liabilities and equity) items.
Page 36 of 76
Cash Flow Format

Cash Flow Statement for the year ended 30 June 2013
Cash Flows from Operating Activities:
Receipts:
From Customers - Cash Sales
- from Accounts Receivable
Other cash income (detailed)
Payments:
To Suppliers - Cash Purchases
To Employees
Other Operating Expenses
- to Accounts Payable
Net Cash Inflow/Outflow from Operating Activities
xxx
Cash Flows from Investing Activities:

Receipts:
Sale of Non-Current Assets
Payments:
Purchase of Non-Current Assets
Net Cash Inflow/Outflow from Investing Activities
xxx
Cash Flows from Financing Activities:

Receipts:
Additional Capital
Borrowings (detailed)
Payments:
Drawings
Repayment of Borrowings
Net Cash Inflow/Outflow from Financing Activities
xxx
Net Increase (decrease) in Cash Held
xxx
Cash at the beginning of the financial year
xxx
Cash at the end of the financial year
xxx
Page 37 of 76
Reconciliation of the Net Cash Flow from Operating Activities with Net Profit
Indirect method of calculating Cash Flow from Operating Activities
Operating Profit after tax
plus
Non-cash expenses (depreciation, bad debt, doubtful debt, impairment, loss on sale of assets)
minus
Non-cash revenues (profit on sale of non-current assets)
plus
Decrease in A/C Receivable, inventory and repayment
minus
Increase in A/C Receivable, inventory and repayment
plus
Increase in A/C Payable and accrued expenses
minus
Decrease in A/C Payable and accrued expenses
Equals
Cash flows from Operating Activities
Page 38 of 76
Example: Cash Flow Statement
Prepare a Statement of Cash Flow of North Sydney Trading for the year ended 30 June 2013 from
the following information:
$
Cash Sales
20,000
Credit Sales
150,000
Repayment of Mortgage- Principal

- Interest
50,000
2,000
Wages and salaries
50,000
Other Operating Expenses paid
20,000
Payments to Accounts Payable
30,000
Discount Received
1,000
Depreciation expense
5,000
Receipts from Accounts Receivable

Dividends received on share investments
Proceeds from sale of Office Equipment
New Capital introduced by the owner
Bad Debts written off
Drawings by the owner
160,000
500
2,000
40,000
3,000
20,000
Purchase of Office Equipment
5,500
Cash at Bank 1/7/2012
5,000
Cash at Bank 30/6/2013
Page 39 of 76
Cash Flow Statement of North Sydney Trading for the year ended 30 June 2013
Cash Flows from Operating Activities:
Receipts:
From Customers- Cash Sales
- from Accounts Receivable
Dividend received
$20,000
160,000
500
Payments:
- to Accounts Payable
-30,000
To Employees
-50,000
Other Operating Expenses
-20,000
Interest paid
-2,000
Net Cash Inflow/Outflow from Operating Activities
78,500
Cash Flows from Investing Activities:

Receipts:
Sale of Equipment
2,000
Payments:
Purchase of Equipment
-5,500
Net Cash Inflow/Outflow from Investing Activities
-3,500
Cash Flows from Financing Activities:

Receipts:
Additional Capital
40,000
Payments:
Drawings
-20,000
Repayment of Bank Loan
-50,000
Net Cash Inflow/Outflow from Financing Activities
-30,000
Net Increase (decrease) in Cash Held
45,000
Cash at the beginning of the financial year

Cash at the end of the financial year
5,000
50,000
Page 40 of 76
Prepare a Cash Flow Statement based on the following Bank Account of Mr X for the year
ended 30 June 2013.
Cash at Bank
Opening Balance
Accounts Receivable
Cash Sales
$40,000 Accounts Payable

50,000 Wages paid
150,000 Other expenses paid
$138,000
30,000
16,000
Interest received
4,000 Bank Loan repaid
25,000
Sale of Equipment
6,000 Purchase of equipment
22,000
Additional Capital- Mr X
50,000 Drawings- X
Closing Balance
$300,000
20,000
49,000
$300,000
Page 41 of 76
Section 3 - Financial Statement Analysis

Ratio Analysis
Financial statement analysis or ratio analysis is the measurement of the relationship between
items in the financial statements and the interpretation of those measurements. A ratio shows
the relationship between two or more financial statement items. Ratios can be expressed as a
percentage, fraction, proportion, according to the needs of users.
Financial ratio analysis is a useful way of analysing the performance and stability of a firm or
business organisation. Financial ratios give the analyst a way of making meaningful comparisons
of a firms financial data at different points in time. Comparisons are normally made against
benchmarks, e.g. against prior periods, against planned performance or against similar
businesses.
Financial ratios may be classified according to their purpose:
1. Liquidity Ratios
2. Activity Ratios
3. Profitability Ratios
Liquidity Ratios
The Liquidity Ratios measure the ability of a business to meet its short-term financial obligationsto pay its debt as they fall due and to convert its Accounts Receivable and inventory into cash.
The Liquidity Ratios, the Current Ratio (Working Capital Ratio) and Liquid Ratio (Quick Ratio)
express the relationship between current assets and current liabilities.
Current Ratio:
Current ratio is the ratio of Current Assets to Current Liabilities and indicates the extent of shortterm resources available to meet short-term liabilities. The Current Ratio is also known as the
Working Capital Ratio.
Current Ratio =
Current Assets
Current Liabilities
Liquid Ratio:
Liquid ratio is the ratio of Quick Assets to Quick Liabilities.
Quick Assets are Current Assets less Inventory and Prepaid Expenses. Quick Liabilities are
Current Liabilities less Bank Overdraft.
Liquid Ratio =
Current Assets Inventory - Prepayment

Current Liabilities Bank Overdraft
Current ratio and liquidity ratio are normally expressed as a ratio. It is generally accepted that the
current ratio for new businesses should be at least 2:1 and the liquid ratio should be at least 1:1.
Page 42 of 76
The Liquidity ratio is critical to the successful operation of the business. The implications of poor
liquidity are severe. Failures to pay accounts on time could result in the withdrawal of credit, with
inventory supply being halted and/or the incurrence of late payment penalties.
Measures to improve poor liquidity include:
Encourage cash sales in preference to credit sales

Speed up collection of Accounts Receivable
Identify and dispose slow moving stock
Offer discounts for prompt payment
Be more restrictive when offering credit
Consider factoring.
Activity Ratios
The Activity Ratios show the efficiency with which a business uses its assets.
Two activity ratios are the Inventory Turnover Rate and the Debtors Turnover Rate.
Inventory Turnover Rate
The Inventory Turnover Rate measures the number of times the average inventory of a business
is sold or turned-over during a year. It is calculated by dividing the Cost of Goods Sold by the
average Inventory for the year.
The average inventory for a business using the periodic inventory system is opening inventory
plus closing inventory divided by two.
Inventory Turnover Rate =
Cost of Goods Sold

Average Inventory
Inventory Turnover Rate is normally expressed as number of times for the year.
Average no of days stock is held =
365 (days in a year)

The inventory turnover rate reflects the effectiveness or efficiency of the purchasing department
in buying goods that can be sold and of the selling department in being able to sell the goods.
Debtors Turnover Rate
The Debtors Turnover Rate or Average Collection Period measures the average time taken by the
debtors / accounts receivable to pay their accounts.
It is usually analysed in relation to the normal terms of credit allowed by the business, for
example 7 days, 14 days or 30 days and against industry averages. It is calculated by dividing
debtors balances at balance date by the average daily credit sales. Average daily credit sales are
credit sales for the financial year divided by 365 days
Page 43 of 76
If the opening balance of Trade Debtors or Accounts Receivable is not known, use the closing
balance.
Debtors Turnover Rate =
Accounts Receivable
Average Daily Credit sales
Debtors Turnover Rate is normally expressed in days
Average daily credit sales = Total Credit Sales
365 (days)
The Debtors Turnover Rate reflects the effectiveness or efficiency of the credit department, in its
selection of customers to whom it allows credit, and of the collection department, in its followup of outstanding and especially, overdue debtors.
Profitability Ratios
These analyse profit margins in relation to sales and are measures of efficiency.
Gross Profit Rate
Gross Profit Rate is the percentage of sales available to meet operating expenses and to provide
return by way of profit to the owner.
Gross Profit Rate =
Gross Profit x 100

Net Sales
Net Profit Rate

Net Profit Rate is the percentage of sales which represents return by way of Net Profit to the
owner.
Net Profit Rate =
Net Profit x 100

Net Sales
Net Profit Rate is normally expressed as a percentage (%).
Application of Ratio Analysis

Financial ratios provide useful tools for analysis when compared against a standard or norm.
Firstly, ratios computed from the recent financial statements are compared with previous ratios.
Trend Analysis: An analysis of a firms financial ratios over time.
Secondly, the firms ratios are compared with the corresponding ratios of other like businesses,
industry-wide measurements and global comparisons in order to form an opinion about how well
the firm is faring relative to its competitors.
The evaluation of financial ratios should consider the identification of the reasons for changes,
especially when the changes are unfavourable in terms of business performance or financial
position.
The following are examples and possible reasons for the changed condition:
A lower stock turnover rate
Page 44 of 76
Accumulation of unsaleable or obsolete stock, possibly caused by:
Inefficiency of buying department
Inefficiency of selling department
A decrease in gross profit rate
Increase in purchase costs with no corresponding increase in selling price
Sales at mark-down prices i.e. "clearance" sales or promotional sales
An increase in debtor collection period
Inefficiency in follow-up of overdue accounts
Inefficiency in credit assessment of new customers
A relaxation of credit terms
A decrease in liquidity ratios
Purchases of non-current assets using "current resources
An increase in debtors collection period
Advice to management as to what remedial action should be taken is also an integral part of the
evaluation process:
Identification of slow-moving or unsaleable stock so as to improve the inventory turnover

rate. The discounting of this stock and its sale would also contribute to an improvement
in the cash flow.
Steps to speed-up collection of debtors by telephone, overdue account notices and even
use of debt collection agency services. This would also improve cash flow.
Encouragement of prompt payment by accounts receivable by offering discounts.
A more critical appraisal of prospective credit customers as to their ability to pay.
A balanced use of internal (capital) and external (debt) funds with appropriate term
funds used for non-current asset acquisitions.
Limitations of Ratio Analysis

Ratio analysis, while an important tool for management, shareholders, potential investors and
analysts, has its limitations:
It is sometimes difficult to identify the industry category to which a firm belongs when
the firm engages in multiples of business.
Published industry averages are approximations only and provide the user with general
guidelines rather than scientifically determined averages of the ratios of all of the firms
within the industry.
Page 45 of 76
Accounting practices differ widely among firms and can lead to differences in computed
ratios. Accounting standards, methods and procedures may differ, making comparison of
figures less meaningful.
An industry average may not provide a suitable target ratio or norm. Just because a ratio
is the average for the industry it is not necessarily a desirable figure.
The accuracy of ratios is more relevant when comparison is made over a number of years.
Analysts should not believe that the figures produced are 100% accurate.
Ratios do not take into account the effect of inflation. The main danger here is asset
values being under or over valued.
Despite their limitations, financial ratios provide the analyst with a very useful tool for assessing a
firms financial condition. The analyst should, however, be aware of these potential weaknesses
when performing a ratio analysis. In many cases, the real value derived from analysing financial
ratios is that they tell us what questions to ask.
Example: Ratio Analysis

You are given the following financial statements for Bowman Trading:
Income Statement for the year ended 30 June 2013

$
Sales (all credit)

Inventories (1/7/2012)
Purchases
Less Inventories 30/6/2013
$
480,000
54,500
331,800
386,300
69,500
316,800
Gross Profit
Other Income
163,200
5,000

168,200
110,600
Net Profit
57,600
Page 46 of 76
Balance Sheet as at 30 June 2013

Current Assets
Accounts Receivable
Less Allowance for Doubtful Debts
Inventories
Prepaid Expenses
Accrued Revenue
Non-Current Assets
Land
Buildings (net)
Plant & Equipment (net)
Motor Vehicles (net)
78,000
3,000
75,000
69,500
500
1,000
146,000
100,000
54,000
80,000
20,000
254,000
Total Assets
Current Liabilities
Bank - Overdraft
Accounts Payable
Accrued Expenses
Mortgage Loan (due 31 March 2017)
Total Liabilities
Net Assets
Owner's Equity
Capital - A Bowman (1/7/2012)
Add Net Profit for the year
Less Drawings
400,000
25,000
52,500
2,500
80,000
80,000
80,000
160,000
240,000
222,400
57,600 280,000
40,000 240,000
Page 47 of 76
Other Information:
30/06/2012
Industry
Average
Gross Profit Rate
40.00%
35.00%
Net Profit Rate
13.50%
15.00%
Current Ratio
1.6 : 1
2.0 : 1
Liquid Ratio
1.3 : 1
1.2 : 1
5.8 times
5 times
Average Collection Period
50 days
45 days
Required:
1
Calculate for the year ended 30 June 2013:

(a) Gross Profit Rate
(b) Net Profit Rate
(c) Current Ratio
(d) Liquid Ratio
(e) Inventory Turnover Rate
(f) Average Collection Period
Based on the ratios you have calculated and the other information given, comment briefly
on each of the following for Bowmans business:
(a) Profitability
(b) Business Activity
(c) Liquidity
Advise Bowman of possible reasons for any unsatisfactory situations that exist in relation
to the business and suggest actions that may be taken to improve them.
Page 48 of 76
Solution:
Gross Profit Rate =
Gross Profit x 100

Sales
= 163,200 x100
480,000
= 34.00%
Net Profit Rate =
Net Profit x 100

Sales
= 57,600 x 100
480,000
= 12.00%
Current Ratio =
Current Assets
Current Liabilities
= 146,000
80,000
= 1.83 : 1
Liquid Ratio =
C.A. Inventory - Prepayment = 146,000 69,500 - 500 = 1.38 : 1

C.L. Bank Overdraft
80,000 25,000
Inventory T/O =
Cost of Goods Sold

Average Inventory
= 316,800
= 5.11 times
(54,500 + 69,500)/2
A/C Rec T/O =
A/C Rec x Days

Credit Sales
= 78,000 x 365
480,000
= 59.31 days
2. Profitability
The Gross Profit Rate of 34% for 2013 is less than the 40% for 2012 and also less than the 35%
industry average.
The Net Profit Rate of 12% is also less than the 13.5% for 2012 and the 15% industry average.
Business Activity
The Inventory Turnover Rate of 5.11 times for 2013 is down on the 5.8 times for 2012 but still
exceeds the industry average of 5 times for the year.
The Accounts Receivable Collection Period of 59.31 days (the average time taken by accounts
receivable to pay their accounts) is markedly worse than the 50 days for 2012 and also 45 days
industry average.
Liquidity
The Current Ratio (the ratio of current assets to current liabilities) of 1.83 : 1 for 2013 is more than
the 1.6 : 1 of 2012, but is less than the industry average of 2 : 1.
The Liquid Ratio of 1.38 : 1 is slightly more than 1.3 : 1 of 2012 and also exceeds the industry
average of 1.2 : 1. The generally accepted rate is 1 : 1.
3.
Observation and Recommendation
Decline in Gross Profit Rate and Net Profit Rate

The decline in Gross Profit Rate could result from:
Increase in purchase costs absorbed in existing sales prices
Page 49 of 76
Forced/intentional sales at mark-down prices
Although percentage return (to the owner) has been maintained and exceeds the
industry average, the decline in the Net Profit Rate and the extent to which it is less than
the industry average should be of concern. Monitoring of operations in terms of pricing
policy and incurrence of expenses should be a priority. In future years the interest on the
mortgage borrowing will continue to impact on the Net Profit Rate.
Decrease in Inventory Turnover Rate
Although exceeding the industry average there has been a severe decline in the
Inventory Turnover Rate. The obvious reason is the marked increase in inventory holding
at 30 June 2013 of $69,500, up from $54,500 at 30 June 2012.
Should this increase be as a result of an accumulation of obsolete or unsaleable
inventory, attention needs to be given to:
More selective purchasing practices
Sale action to shed unwanted inventory.
Increase in Accounts Receivable Turnover Rate

The marked increase in the average time taken by accounts receivable to pay their
accounts should also be of concern. The maintenance of reasonable liquidity ratios has
been achieved by the injection of funds from the Mortgage Loan on 31 March 2013. This
has masked what might have been a cash flow problem and has probably eased pressure
to collect overdue accounts receivable.
Attention needs to be given, nonetheless, to adequate follow up of outstanding
accounts receivable by telephone, reminder notices and even the use of debt collection
agencies.
Consideration could also be given to offering incentives (discounts) for prompt payment.
Liquidity
As already mentioned the injection of funds from the mortgage borrowing has masked
what may have been an unsatisfactory short-term liquidity position.
Page 50 of 76

Following are the financial statements of Ben Goldfield & Co for the year ended 30 June 2013:
Income Statement for the year ended 30 June 2013

$
Sales - Cash
Credit
1,000
2,500 3,500

Inventories (1/7/2012)
Purchases
500
2,000

Less Inventories 30/6/2013
2,500
600 1,900
Gross Profit
1,600
Less Expenses
1,000
Net Profit
600
Balance Sheet as at 30 June 2013
Current Assets
Inventory
A/C Receivable
Non-Current Assets
Current Liabilities (including Bank Overdraft of $50)
Net Assets
Owner's Equity
Capital 1/7/2012
Add Net Profit
600
900
1,500
2,000 3,500
900
300 1,200
2,300
1,700
600 2,300
2,300
Required: From the above information for Ben Goldfield & Co calculate:
(a) Gross Profit Rate
(b) Net Profit Rate
(c) Current Ratio
(d) Liquid Ratio
(e) Inventory Turnover Rate
Page 51 of 76
(f) Average Collection Period
Section 4 Partnership
Partnership
A partnership is defined by the Partnership Act 1892 (NSW) as the relationship which exists
between persons carrying on a business in common with a view to profit. It involves an
agreement between two or more parties to enter into a legally binding relationship and is
essentially contractual in nature.
Like proprietorships, the law does not distinguish between the business and its owners. The
partners should have a legal written partnership agreement that sets forth how decisions will be
made, profits will be shared, disputes will be resolved, how future partners will be admitted to
the partnership, how partners can be bought out, or what steps will be taken to dissolve the
partnership when needed.
Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be invested in

developing the partnership agreement.
Formation and operation costs are relatively less than for companies.
Not subjected to government controls to the extent applicable to companies.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners' personal tax returns.
Prospective employees may be attracted to the business if given the incentive to become
a partner.
The business usually will benefit from partners who have complementary skills.
Individual partners can take holidays and leave the running of the business to other
partner(s).
Flexibility of operations, as changes to the partnership can be effected simply by
agreement.
Disadvantages of a Partnership
Partners are jointly and severally liable for the actions of the other partners and for the
debts of the partnership.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnership may have a limited life; it may end upon the withdrawal or death of a
partner.
Page 52 of 76
Types of Partnership
The Partnership Act (PA) enables three types of partnership to be formed:
a partnership (normal partnership),

a limited partnership, and
an incorporated limited partnership.
There are differences between these types of partnership in terms of their requirements and
features, for example registration, complexity, source of funds, liability of the partners for the
debts of the partnership and taxation treatment.
In the case of registration requirements, the Partnership Act only requires limited partnerships
and incorporated limited partnerships to be registered.
Normal (General) Partnership
Normal partnerships may be a suitable structure where more than one person wants to carry on
a business together and use a structure which is usually simpler than a company structure.
Partners divide responsibility for management and liability, as well as the shares of profit or loss
according to their internal agreement. Equal shares are assumed unless there is a written
agreement that states differently. A general partnership can be formed simply by an oral
agreement, but a legal partnership agreement drawn up by an attorney is highly recommended.
If you are a normal partnership but are using a name to conduct business under other than your
own name that name must be registered under the Business Names Registration Act 2011 (Cth).
Business names are administered by the Australian Securities and Investments Commission
(ASIC).
Limited Partnerships
A limited partnership is more flexible than a normal partnership, in that it has two types of
partners general partners and limited partners whose duties and liabilities vary.
General partners are responsible for the day to day management of the limited partnership and
their liability for its debt is unlimited. There must be at least one and up to 20 general partners in
a limited partnership.
Limited partners play no role in managing the limited partnership and their liability for its debts is
limited to the amount of money contributed to that partnership. The upper number of limited
partners for a limited partnership is not restricted, but there must be at least one such partner
per partnership. A person may be admitted as a partner of the limited partnership without the
need to obtain consent of any other limited partner.
Raising funds with a limited partnership is more flexible. The limited partners can contribute
funds for the operation of the partnership in return for a share of its profits, without having to be
involved with the running of this partnership. In effect, they are passive investors in the limited
partnership.
Page 53 of 76
Limited partnerships can be used in most businesses needing to raise capital and where the
additional formalities and complexities of a company registered under the Corporations Act 2001
(Cth) are not required. Examples where a limited partnership might be a suitable business
structure could include:
industrial or real estate developments

agricultural schemes
mining projects
arts, theatrical and film ventures
other small to medium businesses needing to raise funds in a relatively straight forward
way.
Incorporated Limited Partnerships

The NSW Partnership Legislation also provides for a special type of partnership, the Incorporated
Limited Partnership (ILP), to be registered for four types of limited partnerships which can be
established under Commonwealth legislation for venture capital investment purposes:
Venture Capital Limited Partnerships (VCLP)

Early Stage Venture Capital Limited Partnerships (ESVCLP)
Australian Venture Capital Fund of Funds (AVCFOF)
Venture Capital Management Partnerships (VCMP).
Types of Partners
There are three types of partners:
Active Partner
An active partner is a partner who shares in the profits and losses of the business and also takes
part in the management of the business.
Sleeping or Dormant Partner
A sleeping or dormant partner is a partner who shares in the profits and losses of the business in
return for his contribution to the partnership but does not take any part in the management of
the business.
Limited Partner
A limited partner is a partner in a limited partnership whose liability is limited to the amount
agreed to be contributed to the capital of the partnership. Limited partners cannot take part in
the management of the business otherwise they will lose their limited status.
Page 54 of 76
Partnership Agreements
Partnership agreements are written documents that explicitly detail the relationship between the
business partners, as well as their individual obligations and contributions to the partnership.
Since partnership agreements should cover all possible business situations that could arise during
the life of the partnership, the documents are often complex, and legal counsel in drafting and
reviewing the finished contract is generally recommended.
Elements of the Partnership Agreement
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Name and address of partnership

Duration of partnership: Partners can point to a specific termination date or include a
general clause explaining that the partnership will exist until all partners agree to dissolve it
or a partner dies.
Purpose of business
Bank account information: This section should note which bank accounts are to be used for
partnership purposes, and which partners have check-signing privileges.
Partners' contributions: Amount of equity to be invested by each partner whether in cash,
property or services.
Partners' compensation: Determine in detail how and when profits (and salaries, if
applicable) will be distributed.
Management authority: What are the operational responsibilities of each partner? Will
partners be able to make some decisions on their own? Which decisions will require the
unanimous consent of all partners? What are the voting rights of each partner? How will tie
votes be resolved?
Circumstances under which new partners might be admitted into the partnership.
Work hours and vacation.
Determination of authority for which expenditures and how expenditure decisions are to be
made.
Kinds of outside business activities that will be allowed for partners.
Disposition of partnership's name if a partner leaves.
Dispute resolution: Stipulates what kind of mediation or arbitration will be utilised in the
case of disputes that cannot be resolved amongst the partners. This is a way to avoid costly
litigation.
Miscellaneous provisions: This portion of the agreement might delineate the circumstances
under which the agreement could be amended.
Buy-Sell Agreement: The buy-sell agreement is one of the most important elements of any
partnership agreement. It details what will happen to the partnership if one of its partners
leaves the business. In essence, it specifies the terms of a buyout in the event of death,
divorce, disability, or retirement.
Page 55 of 76
Accounting Entity Convention for Partnership

The accounting entity principle applies to partnerships in the same manner as other forms of
business enterprise. Transactions are recorded from the point of view of the business, and the
affairs of the partners are identified separately from those of the business. The one essential
difference is that each partner has an equity share in the net assets of the partnership. This is
recognised by a separate Capital, Drawings and sometimes Current account being kept for each
partner.
Formation of a Partnership
The accounting for the formation of a partnership business will therefore vary little from the
accounting for the formation of a sole trader business having additionally only to recognise the
separate capital contributions made by each of the partners.
Accounting for the formation of a partnership can involve:
Capital contribution of cash (only) by the partners

Capital contribution of cash and other assets by the partners
Combining the existing businesses of the partners
Purchase of an existing business
Cash Contribution by Partner
On 1 May 2013 X and Y agree to go into a business partnership contributing $60,000 and $40,000
respectively as capital.
Required: Prepare general journal entries to record the capital contributions of X and Y.
General Journal of X and Y

Date
Description
1/05/2013 Bank
Capital - X
Capital - Y
Capital contributions by X and Y
Debit
100,000
Credit
60,000
40,000
Page 56 of 76
Contribution by partners of cash and other assets
A and B agree to form a partnership on the 15 March 2013. A will provide the business premises
valued at $200,000 and Motor Vehicle $50,000 as his capital contribution. B is to bring in an
equivalent amount in cash $250,000.
Required: Prepare general journal entries to record the capital contributions of A and B.
General Journal of A and B
Date
Description
Debit
15/03/2013 Premises
Credit
200,000
Motor Vehicles
50,000
Capital - A
250,000
Capital contribution by A
Bank
250,000
Capital - B
250,000
Capital contribution by B
Combining (Amalgamating) Existing Business
Accounting for the combination or amalgamation of the existing businesses of partners is

basically the same as that for the contribution of each and other assets. The essential difference
is that, as the businesses are operating, they will usually have values greater than their net asset
values. The agreed value of the businesses of the individual partners is then their respective
capital contributions, giving rise to goodwill valuation. Assets and liabilities are brought into the
partnership at their agreed values with the exception that any adjustment to the value of
accounts receivable is by way of an allowance for doubtful debts.
On 1 April 2013, N and O agree to combine their businesses and operate as Enno Traders. The
balance sheets of the respective businesses are as follows:
N
Balance Sheet as at 1 April 2013
Assets
$
Inventory
15,000
Accounts Receivable
6,000
Bank
5,000
26,000
Liabilities
Accounts Payable
6,000
Net Assets
20,000
O
Balance Sheet as at 1 April 2013
Assets
$
Inventory
10,000
Delivery Van
10,000
Premises
35,000
55,000
Liabilities
Bank Overdraft
15,000
Net Assets
40,000
Owner's Equity
Capital - N
Owner's Equity
Capital - O
20,000
20,000
40,000
40,000
Page 57 of 76
The agreed values of Ns and Os businesses are $25,000 and $50,000 respectively. The agreed
value of Ns inventory and accounts receivable are $20,500 and $5,500 respectively. The agreed
value of Os premises and delivery van are $47,000 and $8,000 respectively. The agreed value of
all other items was at their book value.
Required: Prepare general journal entries to record the capital contributions of N and O.
General Journal of Enno Traders
Date
Description
1/04/2013 Inventory
Debit
Credit
20,500
Accounts Receivable
6,000
Bank
5,000
Allowance for doubtful debts
500
Accounts Payable
6,000
Capital - N
25,000
Capital contribution by N
Inventory
10,000
Delivery Van
10,000
Premises
35,000
Bank Overdraft
15,000
Capital - O
50,000
Capital contribution by O
Purchase of an Existing Business
There are instances when persons go into partnership contributing capital to purchase an
established business. This is usually referred to as a purchase of a going concern. A Goodwill
account is created for the amount by which the purchase consideration i.e. the purchase price
exceeds the fair value of the net tangible assets acquired. Should the fair value of the net
tangible assets acquired exceed the purchase consideration, a discount or gain on acquisition
results.
Goodwill is included as an asset in the Balance Sheet. If the purchaser has made a gain from a
bargain purchase that gain on acquisition is recognised in the Income Statement.
R and S each contribute $200,000 in cash to purchase the business of T on 1 February 2013 for
$400,000. The assets and liabilities of the business are Land and Buildings $250,000, Furniture
and Fittings $50,000, Accounts Receivable $45,000, Inventory $30,000 and Accounts Payable
$20,000. These values are accepted, except that the agreed value of Accounts Receivable is
$40,000.
Required: Prepare general journal entries to record the capital contributions of R and S and the
acquisition and payment of Ts business.
Page 58 of 76
General Journal of R and S

Date
Description
1/02/2013 Cash at Bank
Debit
Credit
400,000
Capital - R
200,000
Capital - S
200,000
Capital contributed by R and S

Land and Buildings
250,000
Furniture and Fittings
50,000
Accounts Receivable
45,000
Inventory
30,000
Goodwill
50,000
Allowance for doubtful debts
5,000
Accounts Payable
20,000
T (Vendor)
400,000
Purchase of business from T

T (Vendor)
Bank
400,000
400,000
Settlement of purchase price to T
Page 59 of 76
Balance Sheet on Partnership Formation

The Balance Sheet of a partnership is the same as that of a sole trader except under Owners
Equity a capital account is shown for each partner.
Using the data for Combining Existing Businesses and subsequent journal entries, prepare a
Balance Sheet for Enno Traders after the formation of the partnership.
Balance Sheet of Enno Traders as at 1 April 2013

Current Assets
Inventory (20,500 + 10,000)

Accounts Receivable
Less Allowance for doubtful debts
30,500
6,000
500
5,500
36,000
Non-Current Assets
Delivery Van
Premises
8,000
47,000
Total Assets
55,000
91,000
Current Liabilities
Accounts Payable
Bank Overdraft (15,000 - 5,000)
6,000
10,000
16,000
Total Liabilities
16,000
Net Assets
75,000
Owner's Equity
Capital - N
25,000
Capital - O
50,000
75,000
75,000
Page 60 of 76
In 1 May 2013 G and H agree to form a partnership sharing profits and losses 2:1. It is agreed that G
is to provide the business premises valued at $100,000, motor vehicles $50,000 and the inventory
for the business $50,000 as his capital contribution. Hs agreed capital contribution is to an
equivalent amount in cash, $200,000.
Required: Prepare general journal entries to record the capital contributions of G and H.
Mark and Malcolm form a partnership on 1 April 2013 each contributing $100,000 out of which it
has been agreed to purchase the business of Michael for $150,000. The assets and liabilities of
Michaels business are plant and equipment $60,000, furniture & fittings $30,000, accounts
receivable $45,000, inventory $30,000 and accounts payable $20,000. These values are accepted
except that the agreed value of the plant & equipment is $50,000 and accounts receivable is
$40,000.
Required: Prepare general journal entries to record:
1) The capital contributions of Mark and Malcolm
2) The acquisition and payment of Michaels business.
Page 61 of 76
Section 5 Not For Profit Organisations

Not for Profit Organisation
A non-profit organisation is an organisation that is not operating for the profit or gain of its
individual members, whether these gains would have been direct or indirect unlike trading
organisations where the essential purpose is the carrying on of business with a view to profit.
This does not mean that Not-for-Profit organisations do not operate with a view to profit but
rather that the profit motive is not the primary objective. While the profit goes to the owner or
shareholders in any trading organisations, any profit made by the not-for-profit organisation goes
back into the operation of the organisation to carry out its purposes and is not distributed to any
of its members.
'The assets and income of the organisation shall be applied solely in furtherance of its abovementioned objects and no portion shall be distributed directly or indirectly to the members of the
organisation except as bona fide compensation for services rendered or expenses incurred on
behalf of the organisation.'
Non-profit organisations operate in many areas of society. They can include:
church schools
churches
community child care centres
cultural societies
environmental protection societies
neighbourhood associations
public museums and libraries
scholarship funds
scientific societies
scouts
sports clubs
surf lifesaving clubs
traditional service clubs.
Types of Not-for-Profit Organisations

Non-profit organisation types fall within three broad categories:
1. Charities
2. Income tax exempt funds (ITEFs)
3. Other non-profit organisations.
Charities consist of charitable funds and charitable institutions. Charitable institutions include
public benevolent institutions (PBIs) and health promotion charities (HPCs).
Page 62 of 76
Charities
The characteristics of a charity are:
it is an entity that is also a trust fund or an institution

it exists for the public benefit or the relief of poverty
its purposes are charitable within the legal sense of that term
it is non-profit
its sole purpose is charitable.
In brief, purposes are charitable if they are to benefit the community, or a section of it, through
the following activities:
The relief of poverty, sickness or the needs of the aged

The advancement of education
The advancement of religion
Other purposes beneficial to the community
Income Tax Exempt Funds
An income tax exempt fund (ITEF) is a non-charitable fund that is endorsed by ATO to be exempt
from income tax.
Other Non-Profit Organisations
Other non-profit organisations are non-profit organisations that are not charities or income tax
exempt funds. Other non-profit organisations include sports clubs, community service groups
and recreational clubs.
Registering Not for Profit Organisation
To access various concessions and comply with organisations tax obligations, organisation may
need to register for an Australian business number (ABN), goods and services tax (GST), fringe
benefits tax (FBT), pay as you go (PAYG) withholding or other taxes.
Page 63 of 76
Terms relating to Not-for-Profit Organisations

Constitution
The constitution is a statement in writing of the fundamental principles by which the organisation
is managed. It is the rules and regulations that have been adopted by the members for the
operation of their organisation, covering such matters as:
Organisation name
Aims or objectives
Membership
Meetings
Elections
Duties of office bearers
Committee
The committee is a group of members elected by the membership. Its role is to manage the
operations and affairs of the organisation. They are the executive of the organisation and, as
office bearers, are elected or re-elected at the annual general meeting in accordance with the
constitution.
Traditional office bearers include:
President
Vice-President
Secretary
Treasurer
Other general committee members
Accumulated Funds
Accumulated Funds or Members Funds of a not-for-profit organisation are the equivalent of
Proprietors Funds in other types of business organisations. It represents the accumulation of
surpluses (and deficits) of income over expenditure by the organisation.
Accumulated Funds = Assets Liabilities as in the Accounting Equation.
In a business organisation, profits are distributed to the owners and in the event of winding up of
the business, the remainder of the assets, after payment of all liabilities, is returned to the
owners. In a not-for-profit organisation, there is no distribution of surpluses to members and the
Constitution usually provides that, in the event of the winding up of the organisation, the
remaining assets are to be transferred to another organisation with similar aims.
Members Subscriptions
Members subscriptions or membership fees are the amounts payable, usually annually, by
members of a club or other such organisation entitling them to have access to the facilities of the
organisation or to take part in the activities of the organisation. The amount of members
subscriptions due/receivable for the year by the organisation is transferred to the Income &
Expenditure account for the year.
Page 64 of 76
Entrance Fees
Entrance fees or Joining fees are a premium paid by new members for being able to have access
to the facilities provided by the previous operations of the organisation. They are a one-off
payment and are in addition to the annual subscription. Entrance fees are not treated as
subscriptions, but are separately identified as revenue in the Income and Expenditure account.
Special Levies
Special levies are usually infrequent additional payments required of members of the
organisation. They are made because of unusual circumstances, such as a short-term income
deficiency, or to finance approved capital outlays, such as alterations or additions to club
facilities.
Depending on the circumstances, they may be treated as revenue in the Income and Expenditure
account, or they may be credited to a special purpose Levy account to the relevant expenditures
will be charged. Any balance of the Levy account as shown on the Statement of Assets and
Liabilities as a current liability until the completion of the particular project.
Honorarium
An honorarium is an amount paid by an organisation to an office bearer, acting in a voluntary
capacity, to compensate for out-of-pocket expenses incurred.
Revenue and Expenditure Items

Revenue (income) and expenditure items specific to Not-for-Profit Organisations:
Revenue
Members subscriptions
Entrance fees
Special levies
Bar/dining room sales
Green fees/tennis court hire
Special activity income
Income from poker machines
Expenditure
Purchases for bar/dining room

Trophies and prizes
Maintenance of facilities
Donations
Club publications and printing
Levy expenses
Special activity expenses
Page 65 of 76
Financial Statements for Not-for-Profit Organisations

The financial statements prepared for a not-for-profit organisation will include some or all of the
following:
1. Statement of Receipts and Payments
2. Income and Expenditure Account (Profit & Loss Account)
3. Statement of Assets and Liabilities (Balance Sheet)
Statement of Receipts and Payments
The Statement of Receipts and Payments is a summary of all of the cash transactions of the
organisation for a period. It includes all items, whether of a capital or operating nature.
For many small organisations it may be the only financial statement presented to members. In
those organisations, what is of concern to members is:
Has our cash received exceeded our cash paid for the period?
What money do we have in our bank account?
What amounts are owing, if any?
Statement of Receipts and Payments for the period ended...

Receipts (detailed)
Less Payments (detailed)
Excess of Receipts over Payments for the period
Add: Cash at Bank at beginning of period
Cash at Bank at end of period
xxx
xxx
xxx
xxx
xxx
Example: Receipts & Payments Statement
The Ivy Garden Club- Statement of Receipts & Payments for the year ended 30 June
Receipts:
Entrance Fees
Members' Subscriptions
$
150
10,250
Sale of old furniture
450
Donations Received
100
Payments:
Bank Fees & Charges
Electricity
Postage and Stationary
10,950
300
500
200
Purchase of Meeting Room Furniture
1,800
Rent
Telephone
General Expenses
3,550
450
1,030
7,830
Excess of Receipts over Payments for the year

Cash at Bank balance at 1 July
3,120
3,500
Cash at Bank balance at 30 June
6,620
Page 66 of 76
Income and Expenditure Account
The Income and Expenditure account is used for a not-for-profit organisation similar to the Profit
& Loss account for a trading business. It matches the income for a period with the expenses of
that period to arrive at the Net Surplus or Net Deficit for the period which is then transferred to
Accumulated Funds.
The Income and Expenditure account is prepared on an accrual accounting basis giving
recognition to prepayments and accruals of income and expenses and of non-cash charges such
as depreciation of non-current assets.
Example: Income and Expenditure Account and Statements
The following balances have been extracted from the ledger of the China Bear Club for its
operations for the year to 30 June 2012:
$
Subscription Revenue
Printing of Club Journal
Wages - General
25,500
2,500
15,050
Depreciation - Club Equipment
1,250
Telephone
1,200
General Expenses
Interest received
750
2,500
Joining Fees
500
Electricity
300
Treasurer's Honorarium
Postage
Garden Tours - Receipt
Garden Tours - Expenses
Surplus from Refreshments Trading
500
600
2,000
1,000
4,000
Required: Prepare for the year ended 30 June 2012:

1. Income and Expenditure Account
2. Income and Expenditure Statements
Page 67 of 76
China Bear Club

Income & Expenditure Account for the year ended 30 June 2012
Wages - General
2,500 Subscription Revenue
25,500
15,050 Interest received
2,500
1,250 Joining Fees
500
Telephone
1,200 Surplus from Tours- Receipt 2,000
General Expenses
750
Electricity
300 Surplus from Refreshments Trading
500
Postage
600
Net Surplus to Accumulated Funds
1,000
1,000
4,000
11,350
33,500
33,500
Income & Expenditure Statement for the year ended 30 June 2012
$
Income
Subscription Revenue
25,500
Joining Fees
500
Interest received
2,500
Surplus from Refreshments Trading
4,000
Garden Tours - Receipt
2,000
Less Garden Tours - Expenses
1,000
1,000
33,500
Expenditure
Wages - General
2,500
15,050
1,250
Telephone
1,200
General Expenses
750
Electricity
300
500
Postage
600
22,150
11,350
Page 68 of 76
Statement of Assets and Liabilities
The Statement of Assets and Liabilities for a Not-for-Profit organisation is similar to a Balance
Sheet for a trading business, with the standard classifications of Current Assets, Non-Current
Assets, Current Liabilities and Non-Current Liabilities. The Owners Equity section or
Proprietorship section, in a Balance Sheet is replaced by Accumulated Funds in the Statement of
Assets and Liabilities.
The assets and liabilities of the organisation will vary according to the nature of the activities of
the organisation, with items specific to Not-for-Profit organisations, including subscription in
arrears and subscription in advance.
Example: Statement of Assets and Liabilities
The following balances were obtained from the ledger of the Lane Cove Club after preparation of
the Income & Expenditure account for the year ended 30 June 2012:
Required: Prepare a Statement of Assets and Liabilities as at 30 June 2012.
$
Accounts Payable
8,000
Accrued Expenses
600
Cash at Bank
5,300
Cash on hand
100
Prepaid Expenses
400
Land & Building
230,000
Furniture & Equipment
14,000
Motor Vehicles
40,000
Inventory
Subscription in arrears
Subscription in advance
Bank Loan (due 2015)
Acc Depreciation- Furniture & Equipment
3,000
200
2,400
40,000
6,000
Acc Depreciation- Motor Vehicles
18,000
Acc Depreciation - Buildings
50,000
Income & Expenditure (Net Surplus for the year)
32,400
Accumulated Funds (1/7/2011)
135,600
Page 69 of 76
Lane Cove Club - Statement of Assets and Liabilities as at 30 June 2012

$
Current Assets
Cash at Bank
5,300
Cash on hand
100
Inventory
3,000
Prepaid Expenses
400
Subscription in arrears
200
9,000
Non-Current Assets
Land & Building
230,000
Acc Depreciation - Buildings
50,000
Furniture & Equipment
14,000
Acc Depreciation- Furniture & Equipment
6,000
Motor Vehicles
40,000
Acc Depreciation- Motor Vehicles
18,000
180,000
8,000
22,000
Total Assets
210,000
219,000
Current Liabilities
Accounts Payable
8,000
Accrued Expenses
600
Subscription in advance
2,400
11,000
40,000
40,000
Bank Loan
Total Liabilities
51,000
Net Assets
168,000
Accumulated Funds
Balance at 1/7/2011
Add Net Surplus for the year
135,600
32,400
168,000
168,000
Page 70 of 76
The summarised Cash Book of the Outback Sailing Club showed the following receipts and
payments for the year ended 30 June 2013:
Receipts:
Members Subscriptions
Donations Received
Interest on Investments
$
41,500
500
1,300
Sale of Magazines
17,220
Sale of Investments
4,000
Payments:
Purchase of Investments
Printing
13,100
2,520
Improvements to Boats
23,000
Wages
10,300
Telephone
General Expenses
1,000
850
The Bank balance at 1 July 2012 was $3,200.

Required: Prepare a Statement of Receipts and Payments for the year ended 30 June 2013.
Page 71 of 76
The following information is for the B & S Social Club for the year ended 30 June 2013:
$
Bar Trading Surplus
Snack Bar Trading Deficit
2,400
700
Subscription Received
6,500
General Expenses
1,900
Entrance Fees
Promotion Expenses
Depreciation - Club Furniture
Secretary's Honorarium
200
1,100
500
1,040
Required: Prepare
1.
Income and Expenditure Account
2. Income and Expenditure Statement
Page 72 of 76
Bibliography
G Dumbrell and R Walsh, Prepare Financial Statements for Non-Reporting Entities- 3rd Ed,
National Core Accounting Publications 2012
2. A Duncan, Introductory Accounting- 8th Ed, National Core Accounting Publications 2011
3. W Woodford, V Wilson, S Freeman and J Freeman, Accounting: A Practical Approach- 2nd
Ed, Pearson Education Australia 2008
1.
Mapping Grid
Element
1.
Section/Chapter
Compile data
Section 1, 2, 3, 4, 5
2. Prepare reports
Section 1, 2, 3, 4, 5
Page 73 of 76
FNSACC404A Prepare financial statements for non-reporting entities

Unit descriptor
This unit describes the performance outcomes, skills and

knowledge required to develop a range of commonly required
financial reports for entities that do not have a statutory duty to
file financial reports with government agencies and regulators.
Elements and Performance Criteria

ELEMENT
PERFORMANCE CRITERIA
1. Compile data
1.1. Data is systematically coded, classified and checked for

accuracy and reliability in accordance with organisational
policies and procedures
1.2. Internal and external financial data is checked to ensure
consistency and accuracy
2. Prepare reports
2.1. Charts, diagrams and supporting data are presented in an

appropriate manner
2.2. Reports are prepared following a clear and appropriate
structure and format and to conform with organisation
requirements
2.3. Statements and data are error free and comprehensive with
the full report cross-checked against original data and
accounting standards
2.4. Any necessary corrections are made and verified and
authorised by relevant persons
Required Skills and Knowledge

REQUIRED SKILLS AND KNOWLEDGE
This section describes the skills and knowledge required for this unit.
Required skills
communication skills to:
determine and confirm report requirements, using questioning and active listening as
required
liaise with others, share information, listen and understand
use language and concepts appropriate to cultural differences

literacy skills to:
read and interpret documentation from a variety of sources

read and interpret financial statements and reports
well-developed writing skills for preparing reports and recommendations, recording and
classifying financial information
numeracy skills for financial calculations and analysis
IT skills for setting up and analysing spreadsheets
estimating, forecasting and analysis skills
organisational skills, including the ability to plan and sequence work and meet
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REQUIRED SKILLS AND KNOWLEDGE

organisational timelines
Required knowledge
ethical considerations for the handling of financial matters including conflict of interests
financial legislation including for:
taxable transactions
reporting requirements
forecasting and analysis techniques
methods of presenting financial data
options, methods and practices for deductions, benefits and depreciations
organisational guidelines and procedures
principles of double-entry bookkeeping and accrual accounting
Evidence Guide
EVIDENCE GUIDE
The Evidence Guide provides advice on assessment and must be read in conjunction with the
performance criteria, required skills and knowledge, range statement and the Assessment
Guidelines for the Training Package.
Overview of assessment
Critical aspects for
assessment and evidence
required to demonstrate
competency in this unit
Context of and specific

resources for assessment
Method of assessment
Evidence of the ability to:
interpret and comply with organisational policies and

procedures
access, analyse and compile relevant financial data
draft comprehensive and accurate reports and financial

statements.
Assessment must ensure:
competency is demonstrated in the context of the financial

services work environment and conditions specified in the
range statement either in a relevant workplace or a closely
simulated work environment
access to and the use of a range of common office

equipment, technology, software and consumables.
A range of assessment methods should be used to assess
practical skills and knowledge. The following examples, in
combination, are appropriate for this unit:
evaluating an integrated activity which combines the

elements of competency for the unit or a cluster of related
units of competency
simulated tasks involving preparation of reports from
supplied data
verbal or written questioning on underpinning knowledge
and skills
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EVIDENCE GUIDE
evaluating samples of work.
Guidance information for

assessment
Range Statement
RANGE STATEMENT
The range statement relates to the unit of competency as a whole. It allows for different work
environments and situations that may affect performance. Bold italicised wording, if used in
the performance criteria, is detailed below. Essential operating conditions that may be
present with training and assessment (depending on the work situation, needs of the
candidate, accessibility of the item, and local industry and regional contexts) may also be
included.
Data may include:
Organisational policies
and procedures may
include:
Report types and formats
may include:
Organisations may
include:
Relevant persons may
include:
budgets and forecasts

financial and operational statements and reports:
expenditures and receipts
statements of financial performance.

financial management manuals
recording and filing systems
reporting requirements
standard financial analysis techniques.
cash statements
electronic forms
financial year reports
operating statements such as statements of financial
performance
spreadsheets
statements of financial position.
not for profit

partnerships
sole traders.
registered tax agents.
Page 76 of 76

Student Workbook FNSACC404A

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FNSACC404A

FNSACC404A Student Workbook v1.1

Statement of Financial Position (Balance Sheet) .............................................................................. 28

FNSACC404A Student Workbook v1.1

Section 1 Sole Traders

The owner controls the business.

The owner is entitled to all profits.

It is easy and inexpensive to set up and operate.

It is easy to change to another legal structure.

It is simple to establish, with few legal formalities or restrictions.

It has minimal formal reporting requirements.

The owners death will terminate the business.

Pay As You Go (PAYG) system

FNSACC404A Student Workbook v1.1

FNSACC404A Student Workbook v1.1

Capital contributions in cash by owner

Collections from debtors

Electronic fund transfer

Petty cash transactions

Day to day operating expenses

Handling sales/purchase returns

Withdrawal of cash by owner.

Journal is a form of a diary in which transactions are recorded sequentially.

General Journal of .. (1)

Debit Account Name(4(a))

There are five types of journals:

Debit Side (Dr)

Credit Side (Cr)

The Running Balance Format:

FNSACC404A Student Workbook v1.1

Example: Journal and Ledger

Mark Industries General Journal

Capital introduced on commencement of

Types of Ledger Accounts

Cash at Bank (Bank)

Cash on hand (Petty Cash)

Accounts Receivable (Debtors)

Provision for Doubtful Debts

FNSACC404A Student Workbook v1.1

GST Input Control

Accumulated Depreciation of Building

Plant & Equipment/ Plant/ Equipment/ Machinery

Accumulated Depreciation of Plant & Equipment

Accumulated Depreciation of Motor Vehicles

Office furniture/Office Equipment

Accounts Payable (Creditors)

Income Received in Advance

Mortgage on Land & Building

Secured Loan (Long term)

FNSACC404A Student Workbook v1.1

Profit and Loss

FNSACC404A Student Workbook v1.1

Fees Received/Fees Income

Other Operating Income

Bad Debts Recovered

Cost of Goods Sold

Freight/ Cartage Outwards/ Delivery Expenses

Depreciation of Non-Current Assets (Delivery Truck)

Salaries and Wages

FNSACC404A Student Workbook v1.1

Electricity/light and power

Rates and Taxes

Motor Vehicle Expenses

FNSACC404A Student Workbook v1.1