Gr 11 Accounting - Adjustments - Activity 3
Summary
TLDRThe 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
📊 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.
🔍 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.
👜 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.
🛍️ 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.
📉 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.
🏆 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.
Mindmap
Keywords
💡Trading Stock
💡Perpetual Inventory System
💡Deficit
💡Surplus
💡Consumables on Hand
💡Stock Losses
💡Insurance Claim
💡Journal Entries
💡Adjusting Entries
💡Accrued Income
💡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
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