accounting basics

Accounting practice

? Correct inclusion of all accounts required
? Correct dates and account names applied
? Correct format of worksheet used
? Correct calculation

Income statement
? Correct account and amount applied
? Correct calculation of profit/loss
? Correct format used

Balance sheet
? Correct account and amount applied
? Correct balance of each element
? Correct format used

Explain advantages and limitations of different asset valuation methods
? Clear argument
? Include supportive evidence or examples
? Include reference(s) to support the explanation
Accounting Basics

Rick Brennan has been conducting his own business, Rick’s Clock, selling clocks, as well as providing
services to fix them. Rick’s record keeping was rudimentary and he decided that, from 1 July 2012, he would
conduct transaction analysis and use worksheet to summarise transactions. He identified his business’s assets
and liabilities as at 1 July 2012 as follows:

Cash $18 500
Accounts Receivable $21 000
Inventory $10 000
Office Supplies $2 500
Office Furniture $10 000
Equipment $93 000
Accounts Payable $79 500
Capital $75 500

During the month of July, Rick’s Clock conducted the following transactions:

1 July
A premium of $1200 for 12 months’ insurance is paid in cash.
2 July Purchased a new equipment for $30 000 on credit.
3 July Contributed $150 000 cash to the business account.
4 July Invoiced customer for service completed $7500.
8 July Received $3500 payment from customers who have previously been billed.
9 July Paid supplier $750 for office supplies purchased last month.
10 July Received a $700 bill from the local newspapers for advertising.
12 July A personal assistant was hired to commence work from 14 July at an annual salary of $26 000
payable fortnightly (assume 52 weeks a year).
13 July Paid bills from the local newspaper for invoice received on 10 July.
14 July Purchased office supplies for $450 to be paid one week later. Rick recorded office supplies
as asset.
16 July Provided services to customers for $6500 cash.
17 July Invoices were sent to clients for clock repairing work, $2020. The customers were allowed 30
days in which to pay their invoices.
19 July Paid rent for $1750 cash.
20 July Withdrew $3000 cash from the business’s bank account to meet personal expenses.
21 July Paid for the purchase of office supplies on 14 July.
24 July Sold clocks for $5500 cash, cost of clocks was $3800.
25 July Purchased office furniture for $8000 on credit.
26 July Provided services to customers and received $500 cash payment and the balance of $5000 would
be paid in 30 days.
28 July Paid two weeks’ salary to the personal assistant.
31 July Adjusted the insurance prepaid.

However, despite the growth of the business, due to health problem, Rick was not able to continue his
business in August. On 16 August, Tick Tock Ltd, a large public company offered to acquire Rick’s business.
Rick was hesitated what he should do and asked Fred Collier for advice. Fred is a retired accountant and one
of Rick’s best friends since high school. He suggested Rick to re-examine the value of Equipment before
negotiating a good selling price with Tick Tock Ltd. Rick used the Cost Model to value and record his
Property, Plant and Equipment (PPE). Fred suggested Rick to revaluate PPE to its fair value.


1. Prepare a worksheet outlining the transactions of Rick’s Clock in July (worksheet should include the
items possessed at the beginning of July);

2. Prepare an income statement for July 2012;

3. Prepare a classified balance sheet as at 31 July 2012;

4. Do you support Fred’s suggestion to have items of PPE valued at fair value? Explain why.

5. If you are a user of financial statements, would you prefer items of PPE valued at cost or fair
value? Explain why.

ignore income tax expense when preparing the income statement;