Gr 11 Accounting - Adjustments - Activity 3

Summary

The video script, delivered by Mrs. Brimaco, delves into the intricacies of accounting adjustments, focusing on trading stock management within a perpetual inventory system. It covers the impact of trading stock surpluses and deficits, consumables on hand, stock losses, and insurance claims on financial statements. The script provides detailed examples of journal entries for various adjustments, emphasizing the importance of accurate accounting practices for reflecting true business performance.

Takeaways

• 📊 Trading stock adjustments are crucial for maintaining accurate inventory records in a perpetual inventory system.
• 📉 A physical stock count that reveals a deficit compared to the trading stock account indicates a decrease in assets and an increase in expenses, negatively affecting owner's equity.
• 📈 Conversely, a surplus in physical stock count compared to the trading stock account is considered income, increasing assets and positively affecting owner's equity.
• 🧾 Consumables on hand, such as unused packing materials, should be accounted for by crediting the expense account and debiting consumables on hand, reflecting a positive impact on owner's equity.
• 🚫 Stock losses due to theft or damage require an entry to credit trading stock and debit 'lost due to', treating it as an expense.
• 💼 If a company has insurance, the claim process involves debiting 'lost due to' and crediting 'accrued income', which will later be reconciled with the actual payout.
• 🔄 The bookkeeper's oversight of processing a reversal for packing materials at the beginning of the year needs to be corrected with an adjustment entry.
• 💻 Personal use of company assets, such as a partner taking laptops, is recorded by debiting drawings and crediting the specific trading stock item, affecting owner's equity.
• 🔄 The end of the accounting period requires balancing and closing off accounts like drawings, sales, and insurance to reflect their impact on the business's financial health.
• 📚 Accurate journal entries for adjustments are essential for reflecting the true financial position of the business, as demonstrated by the various examples provided in the script.
• 💡 Success in accounting, as in other areas, requires hard work and effort, emphasizing the importance of diligence in maintaining financial records.

Q & A

What is a perpetual inventory system also known as?

A perpetual inventory system is also known as a continuous inventory system, which records all movements of trading stock in the trading stock account.

What happens if the physical stock count is less than the balance in the trading stock account?

If the physical stock count is less than the balance in the trading stock account, it indicates a trading stock deficit, which is recorded as an expense, decreasing assets and negatively affecting owner's equity.

How is a trading stock surplus treated in the accounting equation?

A trading stock surplus is regarded as an income, which increases assets and positively affects the owner's equity in the accounting equation.

What is the accounting treatment for consumables on hand?

Consumables on hand are treated as a current asset and are part of note number four, inventories, in the financial statements. Any unused consumables must be subtracted from the expense account and debited to consumables on hand.

What is the effect on the accounting equation when stock is written off due to losses?

When stock is written off due to losses, trading stock is credited, and the loss is debited as an expense, which decreases assets and negatively affects owner's equity.

How does insurance affect the accounting for stock losses?

If a company has insurance, it can claim from the insurance company for stock losses. The insurance claim is recorded as a debit to the bank account and a credit to the loss due to stock damage or theft.

What is the purpose of preparing journal entries for adjustments in accounting?

Preparing journal entries for adjustments ensures that the financial statements accurately reflect the true financial position of the company by incorporating all necessary changes that occurred during the accounting period.

What was the error in the June 2021 data's allowance journal entry mentioned in the script?

The error was that the credit note for the returned damaged headphones was erroneously omitted from the June 2021 data's allowance journal entry.

How does the return of damaged goods affect the accounting equation?

The return of damaged goods results in a credit to the debtors control account and a debit to the debtors allowance account, reflecting a decrease in assets and a decrease in owners' equity.

What is the significance of calculating the cost based on the original selling price rather than the discounted price?

Calculating the cost based on the original selling price ensures that the markup percentage is applied correctly and that the cost of sales is accurately reflected in the accounting records.

What is the effect on the accounting equation when a partner takes goods for personal use?

When a partner takes goods for personal use, the drawings account is debited and the trading stock account is credited, which decreases assets and equity.

How does the use of consumables during the year affect the accounting equation?

The use of consumables during the year is recorded as an expense, which decreases assets and owner's equity. The consumables on hand are debited, and the expense account for packing materials is credited.

What is the process for adjusting for stock damaged due to water leakage?

The process involves crediting the trading stock account with the original amount of the damaged stock and debiting a loss due to water damage. If an insurance company is involved, accrued income is debited, and the loss due to water damage is credited with the amount the insurance company agreed to pay.

What is the final step in adjusting for trading stock at year-end?

The final step is to compare the physical stock count with the adjusted trading stock balance and record any trading stock deficit or surplus, which is then closed off to the profit and loss account.

Outlines

00:00

📊 Trading Stock Adjustments and Perpetual Inventory System

This paragraph discusses the concept of trading stock adjustments within a perpetual inventory system, also known as a continuous inventory system. It explains the process of comparing physical stock counts with the balance in the trading stock account to identify deficits or surpluses. A trading stock deficit is treated as an expense, reducing assets and owner's equity, while a surplus is considered income, increasing assets and positively affecting owner's equity. The paragraph also touches on the handling of consumables on hand and stock losses, including the impact of insurance on stock loss adjustments.

05:02

🔍 Journal Entries for Stock Adjustments and Effects on Accounting Equation

The second paragraph delves into the preparation of journal entries for stock adjustments, focusing on a specific scenario involving damaged headphones returned by a customer named Data Brown. It outlines the process of calculating the selling price after a trade discount, determining the cost, and the subsequent journal entries required to record the transaction. The paragraph emphasizes the importance of specificity in identifying the type of stock (headphones or laptops) and the correct accounting treatment for trade discounts, markups, and the reversal of entries for omitted transactions.

10:03

👜 Personal Use of Stock and Reversal of Packing Materials

This section addresses the accounting treatment when a partner takes stock for personal use, using the example of a partner taking two laptops. It explains the journal entries for such drawings, the impact on the accounting equation, and the importance of specifying the partner's name in the entries. Additionally, it covers the correction of an oversight by the bookkeeper regarding the reversal of packing materials, detailing the necessary journal entries to adjust for the expense and its effect on the accounting equation.

15:05

🛍️ Year-End Stock Count and Insurance Claims for Damaged Goods

The fourth paragraph discusses the process of handling year-end stock counts and insurance claims for damaged goods. It provides a step-by-step guide on how to calculate the cost of damaged headphones due to water leakage, the insurance payout, and the resulting journal entries. The paragraph also explains how to determine the actual loss and the impact of insurance payouts on the accounting equation, including the use of accrued income.

20:07

📉 Trading Stock Deficit and Surplus: Calculation and Accounting Treatment

This paragraph focuses on the calculation and accounting treatment of trading stock deficits and surpluses identified during the year-end physical count. It explains how to compare the physical stock count with the adjusted trading stock balance and the resulting effects on the accounting equation. The paragraph emphasizes the importance of considering all adjustments before comparing balances and the correct journal entries for recording deficits and surpluses.

25:08

🏆 Closing Entries and the Importance of Hard Work for Success

The final paragraph wraps up the discussion by addressing the closing entries for drawings, sales, and insurance. It explains the process of transferring these accounts to their respective destinations in the general ledger. The paragraph concludes with a motivational quote emphasizing the need for hard work and effort to achieve success, highlighting the importance of diligence in accounting and business practices.

Keywords

💡Trading Stock

Trading stock refers to the inventory of goods held by a business for sale in the normal course of its operations. In the video, trading stock is central to the discussion on inventory accounting, particularly in the context of perpetual inventory systems. The script mentions how discrepancies between physical stock counts and the trading stock account can lead to the identification of a trading stock deficit or surplus, which have direct implications for the business's financial statements.

💡Perpetual Inventory System

A perpetual inventory system is a method of inventory tracking where the business continuously records each transaction that affects inventory levels. The script explains that in such a system, all movements of trading stock are recorded in the trading stock account, allowing for ongoing comparisons between physical counts and financial records.

💡Deficit

In the context of the video, a deficit refers to a situation where the physical count of trading stock is less than the balance recorded in the trading stock account. The script describes a trading stock deficit as an expense that decreases assets and negatively affects the owner's equity.

💡Surplus

A surplus is the opposite of a deficit and occurs when the physical count of trading stock exceeds the balance in the trading stock account. The video script explains that a trading stock surplus is considered income, which increases assets and positively impacts the owner's equity.

💡Consumables on Hand

Consumables on hand are items such as packing materials or other supplies that are used up in the normal course of business operations. The script discusses how unused consumables must be accounted for by transferring them from the expense account to the consumables on hand account, which is a current asset on the balance sheet.

💡Stock Losses

Stock losses refer to the reduction in inventory due to reasons such as theft, damage, or obsolescence. The video script explains the accounting treatment for stock losses, including the write-off process and the potential impact of insurance claims on the financial statements.

💡Insurance Claim

An insurance claim is a request for compensation made to an insurance company following a loss or damage covered under an insurance policy. The script details how the process of claiming from insurance affects the accounting equation, with potential adjustments to accounts such as 'lost due to' and 'accrued income'.

💡Journal Entries

Journal entries are the recording of financial transactions in the books of account. The video script provides examples of how to prepare journal entries for various adjustments related to trading stock, including the effects on the accounting equation and the financial statements.

💡Adjusting Entries

Adjusting entries are made at the end of an accounting period to ensure that the financial statements accurately reflect the financial position of the business. The script discusses several specific adjusting entries, such as those for damaged goods, partner drawings, and consumable expenses.

💡Accrued Income

Accrued income is revenue that has been earned but not yet received by the business. The video script explains how accrued income is accounted for when an insurance company agrees to pay out a claim, affecting the balance sheet and the profit and loss account.

💡Profit and Loss Account

The profit and loss account, also known as the income statement, summarizes the revenues, costs, and expenses incurred during a specific period, reflecting the profitability of the business. The script mentions how various adjustments, such as stock losses and insurance claims, are closed off to the profit and loss account.

Highlights

Introduction to trading stock adjustments in a perpetual inventory system.

Explanation of trading stock deficit and its accounting treatment as an expense.

Accounting for trading stock surplus as an income and its positive effect on owner's equity.

The process of handling consumables on hand and their impact on expenses and assets.

Stock losses and the accounting for writing off inventory due to theft or damage.

Insurance claims in the context of stock losses and their accounting implications.

Adjustment entries for trading stock and their effects on the accounting equation.

Specific case of data brown returning damaged headphones and the related journal entries.

Calculation of selling price after trade discount and its accounting treatment.

Adjustments for partner's personal use of company assets and its reflection in drawings.

Bookkeeper's oversight in processing the reversal for packing materials and the required adjustment.

Packing materials used during the year and their accounting closure to the profit and loss.

Headphones damaged due to water leakage and the insurance payout process.

Calculating the actual loss from water damage and its accounting entries.

Year-end stock count and the comparison with the pre-adjustment trial balance.

Trading stock deficit and surplus identification and their respective accounting treatments.

Closing entries for drawings, sales, and insurance to finalize the accounting period.

Quote on success and the importance of effort in achieving it.

Transcripts

good day junior tickets i'm mrs brimaco

we are going to look at adjustments and

this time we're going to focus on

trading stock

first we're going to look at trading

stock deficit or surplus in a perpetual

inventory system another word for that

is continuous

it means that all movement of trading

stock is recorded in your trading stock

account

this means when we do a physical stock

count we have something to compare it to

so what happens now if we do a physical

stock count and i compare it to the

balance in the trading stock account

if that balance that which we physically

counted

is less than the balance in the trading

stock account it means that there is a

trading stock deficit

trading stock will then be credited

account debited

trading stock deficit and this is

regarded as an expense effect on my

accounting equation my assets will

decrease because my expense increase it

will have a negative effect on the

owner's equity

so what happens now if we do a physical

stock count and that balance which we

physically counted is more

than the balance in the trading stock

account that means that there is a

surplus

a trading stock surplus is regarded as

an income

so what happens on the accounting

equation if there's a trading stock

surplus our assets will increase

and our income will have a positive

effect on the owner's equity

if we look at consumables on hand

anything not used and yeah we're

specifically looking at expenses of the

business

like packing material consumable stores

anything which is not used

must be subtracted from our expense

account

and taken to consumables on hand

our expense account will therefore be

credited

and consumables on hand will be debited

so my assets will plus and because my

expense decrease it has a positive

effect on the owner's equity

consumables on hand is a current asset

which forms part of note number four

inventories in your financial statements

in your balance sheet

we have stock losses now with stock

losses my stock my inventory

could get

stolen

or damaged there's various reasons but

what happens now if we need to write off

our stock

when we have stock losses in my trading

stock account we always need to show the

original amount what was the total loss

of the stock

trading stock is then credited and lost

due to will be debited

this is regarded as an expense

now if the company does not have

insurance it means that the total loss

will be equal to the total cost of the

stock which was damaged or stolen

but if the company does have insurance

it means that they can claim from the

insurance now please do not get confused

this has absolutely nothing to do with

the insurance account the insurance as

an expense

when we claim from the insurance

if the insurance company pays us the

money it means that our bank account

will be debited

and lost due to will be credited

if the insurance is still going to pay

us the money

then lost duty will still be credited

but now accrued income is going to be

debited

in my loss due to

that is where i will calculate what was

the actual loss

if you take the debit side and you minus

the claim the credit side

that is your total loss which will

appear in the profit and loss account

when we complete the accounting equation

the original amount

my assets is going to decrease

owner's equity because my expense

increase it has a negative effect on the

owner's equity

if we look at the claim

whatever the insurance company is going

to pay us out or did pay us

it means that

my expense account is now going to be

credited

because it's minus

it will have a positive effect on the

owner's equity

if the money is paid into my bank

account and we have a favorable bank

balance it means that assets will plus

accrued income if the insurance company

is still going to pay us up accrued

income is classified as an asset and

therefore it will also be plus

in activity free we need to prepare the

journal entries for the adjustments both

to the general lecture and show the

effect on the counting equation

so if we look at adjustment number a

a data brown returned damage headphones

with marked selling price of

3818

but the data had been granted a 20

trade discount

the markup on these headphones was 150

on cost

the credit note was erroneously omitted

from the june 2021 data's allowance

journal

so what do we need to do

first of all you need to identify that

we've got trading stock where we're

selling headphones and we are selling

laptops so you need to be specific

this data returned damaged headphones so

we need to open up trading stock

headphones

when you see the word trade discount you

should know that it's paid less

on items purchase we never ever show the

trade discount amount so we need to find

out what was the selling price after the

trade discount

then you need to remember to work out

the cost

i'm not going to take the amount after

the trade discount we are going to take

what was the selling price before the

trade is gone this is very important to

remember

we're going to start with the opening

balances and totals

data's control is an asset so the

balance brought down appears on the

debit side

trading stock is classified as an asset

so the balance brought down on the debit

side

data's allowance and cost of sales is an

expense so the total brought forward

will appear on the debit side

to work out the selling price after the

discount

we can save the selling price times

eighty percent where did we get that

eighty percent the original amount is a

hundred percent minus twenty percent

trade discount

if you would have taken the selling

price times twenty percent and then

subtract it you would get exactly the

same answer so step number one is now to

show the selling price to show the

selling price

debtors control is going to be credited

because this is a return by data so they

owe us less money

account debited debtors allowances

on my accounting equation we're going to

have exactly the same account debit

debtors allowance account credit debtors

control

assets

minus owners equity miners

to show the cost remember now the cost

must be calculated on the original

selling price

so the markup is 150

this is why we say times 100 divided by

215.

to show the cost

it means that trading stock is going to

be debited because we got the stock back

account credited

cost of sales because our expense is

going to decrease

on the accounting equation it will be

plus assets

plus owner's equity

there were no other adjustments that

relate to data's control

this is why we can close off the data's

control control by balancing it take the

debit side minus the credit side the

difference is my balance carried down

means balance brought down

they were another adjustment with

regards to trading stock headphones so

we're not gonna balance that yet

data's allowances

we can close that off it's an expense

where do we close it off to

the sales account

take the debit side minus the credit

side

cost of sales is an expense

where do we close this off to

the trading account take the debit side

minus the credit side

if we look at the general journal

remember the account which is debited is

always written first so we first going

to start with the selling price

data's allowances was debited

account credited not data's control

we've got a column for data control

make sure that you remember details is

the name of the data because that must

be taken to the data's ledger to the

individual's personal account

so then i will have credit and i will

have data's control on the credit side

if we look at the cost

account debited was trading stock

account credited cost of sales and the

amount 1500

narration what happened damaged goods

returned was omitted so we needed to

show it now

if we look at the next adjustment

adjustment number b

one of the partners

s three

took two laptops for personal use the

cost was five thousand two hundred per

laptop

inner partnerships

we have to always write the name of the

partner

what has the partner taken remember that

we've got trading stock headphones and

we've got laptops so we need to be

specific

for opening balances

drawings is an owner's equity account

the balance will appear on the debit

side and trading stock is an asset so it

will appear on the debit side

the total cost of the laptops was five

thousand two hundred times two

this means that drawings will be debited

account credited trading stock

laptops specifically take a note

the partner's name must be written in

there

on my accounting equation

assets minus

equity minus

in my general journal account which was

debited is written first that was

drawings

account credited

trading stock and specifically laptops

amount 10

400 narration

laptop taken for personal use

there were no other adjustments with

regards to drawings with tree

specifically so we can close this off

where do we close this off to this

will go to the current account remember

that the current account consists out of

what is a partner entitled to and what

has a partner actually taken from the

business so drawings must be closed off

to the current account

adjustment number c

the bookkeeper neglected neglected to

process the reversal at the beginning of

the year for packing materials

this means that we now need to make an

adjustment

take note the date specifically set in

the pre-adjustment trial balance

consumables on hand on the 1st of july

2020 1500.

to start with the opening balances

consumables on hand is an asset

july the 1st 2020 balance brought down

packing materials is an expense from the

pre-adjustment trial balance take note

of the date

june 2021 the 50th total brought forward

so now we need to do a reversal entry

this means that consumer bills

on hand will now be credited

account which will be debited

is packing materials

this forms part of my expense for this

accounting period

on my accounting equation account

debited packing materials in my general

journal account which is debited is

always written first packing materials

account credited consumables on hand

effect on the accounting equation will

be minus assets

minus owner's equity

narration this is a reversal entry that

was omitted by the bookkeeper

if we now go to

adjustment number e so we're jumping a

little bit here

packing materials used during the year

amounted to 7310

be careful

this is not which is leftover this is

the amount which was used so how do we

approach this

if we go to our packing materials

account

whatever we have used

will be closed off to the profit and

loss account

so this means that the consumables on

hand becomes the balancing figure

if you take the debit side

and you minus the credit side it means

that consumables on hand that which was

left over at the end of this accounting

period is 890 rand

packing material is credited account

debited consumables on hand

in my general journal and accounting

equation account debited consumables on

hand

account credited

packing material

asset plus 890 owners equity plus 8.90

now we can close off consumables we can

balance it at the end of this accounting

period

my balance will be

890 balance carried down means balance

brought down

adjustment number d

headphones got damaged due to water

leakage in the storeroom the insurance

company agreed to pay out 11

400 which covers 95

of the total damage

no entry was made

so the original amount is always equal

to a hundred percent

this is now unknown

why because they said to us

they agreed to pay out eleven thousand

four hundred

which covers ninety five percent of the

total damage it means that the loss is

equivalent to

five percent

to work out the hundred we are going to

say

eleven thousand four hundred times

hundred divided by ninety five

this means that my

trading stock headphones will be

credited with 12 000

account debited lost due to water damage

12 000.

the insurance company agreed to pay out

11 400 so they still owe us that money

this is why accrued income is going to

be debited account credited lost due to

water damage

if i now balance the loss due to water

damage

if i now balance that and i take the

debit side minus the credit side

this is my actual loss which is

equivalent to five percent which will be

closed off to the profit and loss

account

in my general journal an accounting

equation account which is debited

with the original amount lost due to

water damage 12 000

account credited

trading stock

effect on the accounting equation assets

minus

because my expense increase it will have

a negative effect on owner's equity

if we look at what the insurance company

is going to pay us out account debited

accrued income

in my general journal as well as the

counting equation

account credited

lost due to water damage

if you look at my expensive decrease

this means it will have a positive

effect on owner's equity assets plus

liabilities zero always remember to

write your narration so what is it that

happened

there were no other adjustment where

accrued income was involved so we can

balance this account take the debit side

minus the credit side that equals

balance carried down balance brought

down eleven thousand four hundred

if we now look at the last adjustment

the following items of stock were on

hand at year end

as

as per physical count 20 laptops were

left over with a selling price of 11

200. the markup on these laptops was 60

on cost

when we show

the trading stock balance what we

physically counted this must be at cost

this means you need to calculate the

cost

to calculate the cost

take

first 11 200 times 20 laptops were left

over

then we're going to say times 100

divided by 116.

a common mistake in test and exams is we

compare the physical stock balance with

the amount from the pre-adjustment trial

balance

that is wrong you always need to

consider all the adjustments that happen

before that

so if i look now at the laptops there

was drawings the owner took two laptops

for personal use

so we compare now we physically counted

the value of our trading stock left

a hundred and forty thousand

that should be your end balance

balance brought down means balance

carried down

now if i look at the trading stock

balance

the balance in the beginning

minus the trading stock that was taken

for personal use

equals

149

600.

if i compare that balance with what we

physically counted

we've got less

left over

that means this is a trading stock

deficit

so trading stock laptops will be

credited

account debit account debited trading

stock deficit

on my accounting equation

my assets will be minus 9600

owner's equity

minus because our expense increase it

will have a negative effect on the

owner's equity

trading stock of headphones per physical

count was 60 000.

again this must be compared after taking

all of the other adjustments into

account

so what we physically counted will be

our end balance

balance brought down means balance

carried down

if we look at our new trading stock

balance in other words we take the debit

side

minus that 12 000

it gives us a balance according to the

trading stock headphones account

that balance is compared to the physical

stock balance

i can see that our physical stock

balance is more

this means that there's a trading stock

surplus so when you're doing your ledger

account if you take the credit side and

you minus the debit side that trading

stock surplus becomes the balancing

figure

trading stock headphones will be debited

account credited trading stock surplus

this is regarded as an income

and therefore on the accounting equation

it will have a positive effect

the end of the accounting period trading

stock deficit is an expense which is

closed off to the profit and loss

account trading stock surplus is an

income

which is closed off to the profit and

loss account so take the credit minus

the debit so it's exactly the same

completing the general journal remember

account which is debited is written

first

so if we look at the surplus the trading

stock

headphones is debited trading stock

surplus is credited

if we look at the deficit the trading

stock deficit is debited account

credited

trading stock laptops remember to be

specific

the only thing that is left for us to do

is to close off the drawings for sales

and insurance there were no adjustments

with regards to that

so if we start with the opening balance

drawings it appears on the debit side

sales total brought forward on the

credit side insurance is an expense so

the total broad forward is on the debit

side

if i look at drawings

where do we close off drawings to and

specifically partner fund sale

it's closed off to

their current account

sales remember

debtors allowance is closed off to

sales

this means data's allowances is credited

and sales will be debited

then sales will be closed off to the

trading account so take the credit side

minus the debit side

remember

closing transfers your first one data's

allowance is closed off to sales

sales is closed off through the trading

account cost of sales is closed off to

the trading account why because we want

to calculate our gross profit

insurance is an expense which means that

will be closed off to the profit and

loss account

thank you very much

in our next activity we are going to

focus on debtors and specifically

looking at bad dates

what happens if these bad debts

recovered

provision for bad debt adjustment

interest on overdue data's account

transferring debtors and creditors

balances

i want to leave you with this quote lots

of people think they deserve success as

some sort of a right but here's the

truth success is something you need to

earn through effort work hard

hope you have a wonderful day