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.