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ACCOUNTING 9E
Principles & Practice
An Introduction to
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Workbook

Michael Wilson
Yvonne Wilson
Edward A. Clarke
ACCOUNTING9E

Copyright © 2018. Cengage. All rights reserved.


An Introduction to
Principles & Practice

Edward A. Clarke
Yvonne Wilson
Michael Wilson

ISBN 978-0170403832

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
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Copyright © 2018. Cengage. All rights reserved.

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-29 22:58:01.
Copyright © 2018. Cengage. All rights reserved.

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-29 22:58:01.
Edward A. Clarke
Yvonne Wilson
Michael Wilson

ACCOUNTING9E
Copyright © 2018. Cengage. All rights reserved.

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:18:22.
·-
,-'., CENGAGE

Accounting: An Introduction to Principles and Practice © 2019 Cengage Learning Australia Pty Limited
9th Edition
Edward A. Clarke Copyright Notice
Yvonne Wilson This Work is copyright. No part of this Work may be reproduced, stored in a
Michael Wilson retrieval system, or transmitted in any form or by any means without prior
written permission of the Publisher. Except as permitted under the
Copyright Act 1968, for example any fair dealing for the purposes of private
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Disclaimer:
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Copyright © 2018. Cengage. All rights reserved.

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:09.
CO NTE NT S

Guide to the text ix



Guide to the online resources xi


Preface xiii

Acknowledgements xiv

1 Accounting: its foundations
Introduction 
1
1

Introduction to business operations 2

Basic accounting terms 5

Types of business ownership, their advantages and disadvantages 10


Accounting assumptions: conventions and doctrines 
13
The Conceptual Framework and accounting standards 17

Ethics as it applies to accounting 21

2 Financial transactions and their documentation 26

Introduction 26

Personal transactions 27

Business transactions 28

Documentation 30

Filing of documentation 50

3 The accounting equation 55

Introduction 55

The accounting equation 56

Balance sheet (or statement of financial position) 62

The expanded accounting equation 65

Chart of accounts 70

4 Transactions, general journals and double-entry processing 79

Introduction 79
Copyright © 2018. Cengage. All rights reserved.


An overview of the accounting process 80

Introduction to the general journal 80

Introduction to the goods and services tax (GST) 82

Transactions entered in the general journal 84

General journals posted to the general ledger 92

Trial balance: summary of general ledger balances 98

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:18. v
CONTENTS

5 Transactions, specialised journals and double-entry processing 111


Introduction 111

The process so far 112


Specialised journals 113

Source documents entered in journals 114


Preparation of specialised journals 121


Sales journal: sell now, be paid later 122


Purchases journal: buy now, pay later 130

Cash receipts journal 138

Cash payments journal 147

Cash receipts journal with accounts receivable 155

Cash payments journal with accounts payable 155

Transactions review 163

Discounts: result of credit transactions 170

Cash accounting 173

Organisational standards and procedures 177

6 Separate ledgers for accounts receivable and accounts payable 184


Introduction 184

What can we now do? 185

Subsidiary ledgers and control accounts 185

Relevance of the inventory system to receivables and payables 187

Accounts receivable control and subsidiary ledger 188

Accounts payable control and subsidiary ledger 196

Administration of accounts receivable and accounts payable 210

Reconciliations 220

Reconciliations: accounts receivable 220

Reconciliations: accounts payable 233

Other subsidiary ledgers and control accounts 241

7 Journals and ledgers for special transactions 258
Copyright © 2018. Cengage. All rights reserved.


Introduction 258

Commencement of a business 259

Buying another business 260

Introduction of additional capital 261

Drawings of funds and goods 261

Purchase of non-current assets 263

Sale of a non-current asset at book value 264

Interest receivable and payable on overdue accounts 265

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
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CONTENTS

Dishonour of a cheque 267


Bad debt write-offs 272


Bad debts recovered 275


Bills receivable accepted and met 276


Bills payable accepted and met 278


Computerised accounting and special transactions 279


8 Management controls over cash 290


Introduction 290

Principles for internal control of cash 291

Bank reconciliation 293

Petty cash imprest system 322

9 The general ledger and financial reports 333

Introduction 333

Linking the general ledger to financial reports 334

Close general ledger accounts 338

Closing general journal entries 350

Income statement: trading basic format 351

Balance sheet: basic format 357

Account allocation to financial statements 361

Preparing financial reports for a servicing business 374

10 Matching expense and revenue to the accounting period 386

Introduction 386

Balance day adjustments 387

1. Expense accrued: expense incurred not yet processed 391

2. Expense prepaid: expense processed but not yet incurred 398

3. Revenue accrued: revenue not yet received 402

4. Revenue received in advance: revenue received not earned 407

5. Accounts receivable: uncollectable 411

Copyright © 2018. Cengage. All rights reserved.

6. Depreciation 418

7. Variance between perpetual inventory records and physical inventory 422

8. Leave provisions: annual leave, sick and carer’s leave and long service leave 432

Prepare adjusted trial balance 438

Summary of balance day adjustments 440

Reversals 441

Standing journals 446

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:18. vii
CONTENTS

11 Preparing final reports from a worksheet


Introduction 
458
458
Steps in preparing the 2-column worksheet: trial balance 459
8-column worksheet: format and columns 474
8-column worksheet incorporating balance day adjustments 476
From the 8-column worksheets to financial statements 483
Worksheets for simple service industry 492

12 Advanced management reports and correction of errors


Introduction499
499

Review of end-of-period processes 500


1. Periodic and perpetual inventory: trial balance, balance day adjustments
and closing journals 501
Both periodic and perpetual inventory  508
Financial statements from an 8-column worksheet or the adjusted trial balance 511
Preparation of financial statements 515
Correction of errors 527

13 Accounting for non-current assets


Introduction552
552

Key terms 553


Asset register 555
Depreciation expense: its nature and determination 558
Procedures for calculation of depreciation methods and recording in the accounts 560
Derecognition or disposal of depreciable assets 577

14 Payroll preparation and accounting entries


Introduction591
591

Main payroll functions and processes 592


Copyright © 2018. Cengage. All rights reserved.

Employment conditions 592


Employee benefits and payroll 594
Payroll preparation 598
Accounting for payroll 605
Provisions for leave 612
Pay-as-you-go – PAYG withholding 613
Other employer obligations 621

Glossary629
Index634

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
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Guide to the text
As you read this text you will find a number of features in every chapter
to enhance your study of accounting, helping you to understand
how the theory is applied in the real world.

CHAPTER-OPENING FEATURES

1
THE ACCOUNTING EQUATION

The accounting equation


The foundation or rules for the processing of all accounting entries in the accounting information system
can be traced back to the accounting equation. Simply expressed, it is the relationship of resources
controlled by the business to the present obligations the business has to third parties and also to the
owner.

Resources controlled by the business = Present obligations that the business has to third
parties + The owner’s investment in the business
Accounting: its
foundations
The introduction to each chapter provides a simple overview KEEP
of IN MIND
An asset is a resource owned or controlled by a business; it is of economic value and is expected to be
the concepts the content covers and the specific accounting used in operating the business.
Introduction
This book is intended to introduce you to the principles
In running a business there willand
bepractice
transactions that result in the business owing to another business;
skills and knowledge you are required to achieve. this is a liability.
of accounting. It will concentrate on the
operations of a business that is owned by one person – a
sole proprietor or sole trader. We will use examples of
The accounting entity convention means that, for accounting purposes, the owners of a business
businesses that:
must be treated as distinct from the• business.
sell a serviceThe business
(a service business)exists
or separately from the owner.
Therefore, the books of the business
• buy classify the(aowner’s
and sell goods share of its worth as owner’s equity.
trading business)
with the intention of making a profit.
However, the basics of accounting are relevant to all
business ownership structures and types of business
The accounting equation may therefore be written as:
activities (such as primary producers and manufacturing CHAPTER 4
industries). You will learn that the accounting equation
is the basis for recording business transactions. Initially,
Assets = Liabilities + Owner’s Equity
transactions are entered into the general journal and
These transactions are recorded in the general journal for Max in figure 4.5.
sometimes into specialised journals. These journals are
or
then summarised in the general ledger, and at the end
of the period a trial balance is prepared from the ending
General Journal A = Gardening
of Max’s L + OE and Landscaping GJ 1
account balances. Finally, financial reports are prepared.
Date Particulars
An income statement shows the revenues and expenses, Ref Debit Credit
and provides a picture of the financial performance of the
QUESTION 3.1
1 Mar 22 Bank
business over a particular period of time. The balance sheet
2 000
a Motor Vehicle 6 000
The business commenced with $5000represents
in assets what
andthe business
$5000owns/controls
in owner’sand owes. It Write
equity. this in the accounting
Capital states the financial position at a particular point in time. 8 000
equation format provided in the Workbook.
Assets on commencement of business
2 Mar 22 Equipment 1 091 1
QUESTION b 3.2 GST Receivable 109
BankBK-CLA-CLARKE_9E-170438-Chp01.indd
You are required to complete [payment]
the accounting equation 1
formats shown in the Workbook where a1business
200 10/05/18 4:41 PM
CHAPTER 3
commenced with: Purchased equipment with cash
a assets2$15Mar000
22 Computer 909
liabilities
b assets and$25cowner’s
000 GSTequity. Later in this chapter, we will expand the accounting equation
Receivable 91 to also include
Accounts Payable – Computers Ltd 1 000
revenues
c assetsand$20expenses.
000, liabilities $5000 and owner’s equity $15 000
FEATURES WITHIN CHAPTERS d Inassets
e assets7$10
$30 000
Mar000
Purchased
and
22 Fuel
computer
liabilities from Computers Ltd – given 30 days to pay
$7000
the same chapter we identified some examples of assets, including cash at bank, accounts receivable,
for Equipment
and owner’s equity $7000 30
machinery and office equipment. Rather than report on every asset individually, we can group similar
f liabilities d$15 000
GST Receivable
and owner’s equity $70 000. 3
assets together under appropriate
Bank [payment]headings. For example, all motor vehicles controlled by a business 33 can
be reported under one Cashaccount
purchasecalled ‘motor
of fuel for mower vehicles’.
and otherCash
relatedatequipment
bank, accounts receivable, machinery and
KEEP IN MIND
Important concepts that apply throughout a section office equipment may
The users of
also
Bank
d a business’s
be headings for grouped accounts.
[receipt]
Sales of Service
financial
165
150
reports need information that is relevant and a faithful representation of
Liabilities may includeGST accounts such as accounts payable and loans. Similarly, owner’s equity, revenues
are highlighted in the Keep in mind boxes. the business’s activities.
andverifiable
expensesand
The
willunderstandable.
include
Mowing aand
number
reports should have further qualitative characteristics: comparable,15timely,
Payable
of different
landscaping accounts.for cash
services performed
Later, we will analyse transactions and identify all the affected accounts. It is these accounts that are
FIGURE 4.5 General journal for Max’s service business
then classified as assets, liabilities, owner’s equity, revenues and expenses.
To record information simply under the headings of assets, liabilities and owner’s equity does not
provide sufficient meaningful information to assist users in making decisions. It is useful to know, for
QUESTION 3.3
QUESTION
example, the types 4.1of assets that the business controls. Similarly, it is useful to know more details about
You are required to complete the accounting equation formats shown in the Workbook where a business
Questions appear throughout the chapter to help you Show the following
liabilities
the general
and
commenced with:
transactions
owner’s
journal format
equity. for Cheryl’s Cyclist Courier Service, referenced by date as well as ‘a’ and ‘b’, in
a In chapter
assets 1 you
of cash werein
at bank
theintroduced
also
$12
Workbook. to the terms ‘revenues’ and ‘expenses’, and were shown how
000, motor vehicle $25 000 and owner’s equity $37 000
apply and test your understanding of the key topics a On 1 September 2022 Cheryl starts her Cyclist Courier Service in the Sydney central business district, with
btheyassets
impactof on owner’s
cash at bankequity.
$8000, At this stage,
machinery $20we000will
andonly look
office at transactions
equipment $10 000that directly affect assets,
Copyright © 2018. Cengage. All rights reserved.

$600 in the bank account. Her bicycle, communication equipment and protective clothing valued at $3000
as you go. 56 c cash at bank $5000, office equipment $30 000, motor vehicle $20 000 and inventory $5000, and a liability
are grouped in her accounts as ‘equipment’.
of a loan $10 000
b For the week ended 8 September courier fees received totalled $517 ($470 + $47 GST) with repairs
d cash at bank, a liability of a loan from D Shark $25 000 and owner’s equity $50 000.
expense $88 ($80 + $8 GST) to cycling equipment and protective clothing; both revenue and expense
transactions 56 were processed electronically through the bank account.
The accounting equation for a trading business
BK-CLA-CLARKE_9E-170438-Chp03.indd 10/05/18 5:21 PM

Example 2: Stephanie’s Fabrics and Materials – trading business


and the IN
KEEP general
MINDjournal
Worked examples demonstrate how to apply a AOn 1 August 2022 Stephanie formally commenced business with $5000 in the bank and an inventory
trading business generally buys goods and sells the products to individuals or other businesses.
of materials valued at $1500. newsagents, supermarkets, petrol stations and car sales yards.
Examples include greengrocers,
accounting principles in practice. b On 3 August 2022 Stephanie used her new debit card from the bank to purchase various bolts
of material1:(various
Example Ann’s lengths of material
trading rolled around
business a cardboard
– assets, cylinder or
liabilities, rectangle)equity
owner’s for
We$880 ($800
will look + $80atGST).
further a seriesShe purchased
of business other material
transactions on credit
for a trading from Gillian’s
business affectingFabrics
assets, liabilities
and$495 ($450
owner’s + $45
equity andGST).
consider how these are reflected in the accounting equation.
Note that in the general journal, and later in the general ledger, the name used for accounts payable
i. Commencement of business
is the accounts payable control account. This control account is used to summarise, rather than record
a On 1 July 2022 Ann commenced business with $40 000 in the bank and $4000 in inventory.

Assets $ = Liabilities $ + Owner’s Equity $


a. Bank + 40 000 a. Capital + 44 000
a. Inventory + 4 000
44 000 = + 44 000

85
FIGURE 3.1 Commencement of business

ii. Acquisition of assets and Ann brought more cash into business
BK-CLA-CLARKE_9E-170438-Chp04.indd 85 10/05/18 5:25 PM
b Ann’s business
Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, paid $33 000 with a bank cheque for motor vehicles on 2 July 2022.
http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:27. c On 3 July Ann’s business purchased a computer system on credit (received the computer but would ix
pay later) for $11 990 from Kurrawood, an account payable.
d Ann realised that the business required more cash. She deposited a further $7000 into the business’s
GUIDE TO THE TEXT

END-OF-CHAPTER FEATURES
CHAPTER 3

REVISION QUESTIONS
Confirm your understanding of this chapter by completing the following questions.

QUESTION 3.21
You are required to complete the figure in the Workbook for this question. Allocate the accounts into their account group
including their sub-classification where necessary. Identify whether the account is normally debit [dr] or credit [cr] and
allocate an account number as appropriate.
Accounts Payable Electricity Petty Cash
Accounts Receivable Interest Premises
Advertising Interest Received Rent Received
Bad Debt Expense Inventory Salaries
Bank Overdraft Investment in Shares Sales
Capital Long-term Loan Stationery
At the end of each chapter you will find several Cartage Inwards Motor Vehicles Telephone

tools to help you to review, practise and extend Dividends Received Office Equipment Vehicle Expense

QUESTION 3.22
ACCOUNTING FOR NON-CURRENT ASSETS
your knowledge of the key learning outcomes. You are required to prepare a balance sheet for S T David as at 30 April 2022 using the data provided. You will need to
REVISION QUESTIONS
calculate the profit – that is the revenue less expense – the owner’s equity and the capital value.

Revision questions reinforce and test your Account


Confirm your understanding $
of this chapter by completing Account
the following questions. $

knowledge of the material covered in the TIMEBank


Accounts Payable
LINE REMINDER
330 Accounts Receivable
1 500 Capital
3 300
??

chapter. Computers 8 800 Cost of Sales 3 300


You are reminded that the time line is a tool to assist you in obtaining the correct answer to depreciation questions. It is
Inventory 880 Bank Loan [repayable at year end] 4 000
not meant to be a work of art; it is your rough working, A time line solution will be given as part of the total solution for the
Motor Vehicles 22 000 Office Furniture 6 600
following questions, but there will be no requirement given in the question. The depreciation worksheet is also a tool to
Rent 1 100 Salaries 2 000
help in depreciation
Sales calculations and the values are
11actually recorded
000 Vehicle in the relevant columns of the asset
Expense 550register.

QUESTION 13.42
QUESTION 3.23
On 15 September 2021, Bendigo Fabricating purchased for cash from Battenfeld Importers a BF767 Multi-Ripple metal
For each of machine
folding the business transactions
for $30 listed+ below,
800 ($28 000 $2800 you areDelivery
GST). to enterandin the Workbook:
installation costs were included in the price.
a the account
The newname,
machinewithwas
thecommissioned
debit account on first
1 October 2021. It is depreciated at 15% straight line, as past experience
b whether
indicatedthe account
that entry
it should is a debit orfor
be operational credit
seven and a half years. The residual value was nil, as the amount was immaterial.
c the chart of account
An upgraded group
larger name;and
feeding that is, CA, NCA,
extraction CL, NCL, OE,
mechanism, R, E was obtained from Battenfeld Importers for $8800
BFM3.5,
d whether
($8000 +the entry
$800 is an
GST) to increase
enhance or
thedecrease
capabilitytoof
the account
the BF767.balance.
It was delivered and installed as part of BF767. Depreciation is
Where
to appropriate,
remain assume
at the same the perpetual
rate. Payment inventory
was made system
on the is used. date of 1 February 2023.
commissioning
The On
business
31 Maytransactions are listed
2025 the entire below.was traded in for $16 500 ($15 000 + $1500 GST) on a new digitised hydraulic
equipment
– Remitted
multitasked wages
folding machine from Battenfeld Importers.
– Prepare
Commenced business
an asset registerwith cashfor the life of the machine (assume appropriate account and serial numbers).
record
– Purchased inventory with the business debit card
QUESTION 13.43
– Sold inventory for cash
– Purchased postage stamps with business debit card
On 30 April 2022, E Shelley purchased a new Ford Falcon sedan registration KKW 443 from Steven Motors for $49 500
– Sold inventory on credit
($45 000 + $4500 GST). Funds were transferred electronically. The estimated life is four years with an estimated residual
The first entry for this question is completed as an example.
value of $8800 ($8000 + $800 GST). Depreciation is 22% p.a. diminishing balance method.

WORKBOOK Business
On 1 August 2026 Account
Transaction
Prepare:
Names
the car was Debit
traded in for $19 800or Credit
($18 000 +$1800Chart ofaAccount
GST) on
Group
Account
new motor vehicle Increase
purchased
Decrease
on or
credit.

Remitted wages
a a depreciation worksheet for the period that the car is owned
Wages debit E increase
b extract general journals
Bankfor the calendar year 2026
credit CA decrease
c an asset register record for the motor vehicle from its purchase to disposal (assume appropriate account and serial
numbers).
Workbook
75

BK-CLA-CLARKE_9E-170438-Chp03.indd 75 10/05/18 5:21 PM

The workbook for this new edition is structured to be used in ACCOUNTING9E


An introduction to
combination with the student book, providing consistent and Principles & Practice
professionally presented solution templates for each question in the
chapter.
Microsoft Excel™ versions of the answer templates are available 588

online for selected questions via CourseMate Express (see the


BK-CLA-CLARKE_9E-170438-Chp13.indd 588 29/05/18 5:12 PM

Guide to the online resources — For students).


Copyright © 2018. Cengage. All rights reserved.

Edward A. Clarke
Yvonne Wilson
Michael Wilson

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
x tafenswlib on 2020-05-30 00:20:27.
Created from xi
Guide to the online resources
FOR THE INSTRUCTOR
Cengage is pleased to provide you with a selection of resources that
will help you prepare your sessions and assessment plans. These teaching
tools are accessible via cengage.com.au/instructors for Australia
or cengage.co.nz/instructors for New Zealand.

SOLUTIONS MANUAL
The solutions manual provides detailed solutions to every question in the text.

POWERPOINTTM PRESENTATIONS
Use the chapter-by-chapter PowerPoint slides to enhance your lecture
presentations and handouts by reinforcing the key principles of your subject.

MAPPING GRID
The intermediate mapping grid is a simple tool that shows how the content of
this book relates to the units of competency needed to complete FNS30317 –
Certificate III in Accounts Administration and FNS40217 – Certificate IV in
Accounting and Bookkeeping.

ARTWORK FROM THE TEXT


Add the digital files of graphs, tables, pictures and flow charts into your
learning management system, use them in student handouts, or copy them
into your lecture presentations.
Copyright © 2018. Cengage. All rights reserved.

ADDITIONAL QUESTIONS
Use additional questions in your assessment materials or assign them as
homework or as an extension activity. Full answers are provided.

WEBLINKS
Use weblinks to research additional learning resources online and extend your
students’ understanding of complex topics

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:36. xi
GUIDE TO THE ONLINE RESOURCES

FOR THE STUDENT


New copies of the accompanying workbook come with an access code
that gives you a 12-month subscription to the CourseMate Express website.
Visit http://login.cengagebrain.com and log in using the access code card.
OR
Visit the Accounting: An Introduction to Principles and Practice
student companion website. You will find:
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COURSEMATE EXPRESS FOR ACCOUNTING


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Copyright © 2018. Cengage. All rights reserved.

problems presented in Accounting: An Introduction to Principles and Practice 9e, by Edward A. Clarke, Yvonne Wilson
and Michael Wilson.

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PRE FACE

When preparing for the first edition of this book from December 1989, technology and
electronics were very different from today. At the time, many businesses used manual
accounting systems. Computerised accounting systems were very basic and expensive.
In the intervening years, the business and accounting world has been ‘turned up-side
down’ with computers and electronic processes that include cloud-based accounting software
and storage facilities. Communication choices are considerable and have become inexpensive.
Electronic devices including cards and phones may be used as means of payment. Cash money
and cheques are being used less, as new technologies are developed and accepted. Technological
developments continue to change payment systems at a rapid pace.
The ninth edition of this book includes some of these ongoing major developments in
the way business is transacted.
This new edition includes the following features:
• The first chapter has been reduced in size and complexity to concentrate on the broad
concepts of recording and reporting business transactions.
• A new second chapter incorporates the second half of chapter one in the 8th edition.
It includes diagrams to demonstrate electronic forms of documentation and transfer of funds.
The importance of thorough authorisation and checking procedures to verify the accuracy and
authenticity of a transaction is also incorporated in diagrams and throughout the chapter.
• Further links are developed between manual accounting and computer accounting systems.
• The number of closing journals entries for end of year accounts has been reduced.
Students should understand the principles behind the process but not be expected to
complete excessive numbers of closing journal entries and general ledger postings.
• The emphasis on service industries has been enhanced throughout book. Service
industry questions have been expanded, but financial reporting has been limited to basic
income statements reporting to avoid undue complexity.
• Worksheets have been significantly upgraded as the need for having a ‘trading’ account
has been incorporated into the profit and loss. This has reduced the worksheet process
to an 8-column worksheet. The 6-column worksheet has been removed to place more
emphasis on learning to prepare financial reports.
Copyright © 2018. Cengage. All rights reserved.

• The payroll chapter has been updated in line with current minimum wage rates. The 2017–18
income tax rates are used, being the most current at the time of updating the book.
• The exposition of the principles and methods is supplemented with clear, worked
examples. This textbook is accompanied by CourseMate Express, a Cengage online
platform that includes fully worked solutions to all even-numbered questions, and a soft
copy of the workbook and additional templates in Excel format.
The ninth edition of Accounting: An Introduction to Principles and Practice supports
compliance with the VET Quality Framework and the Financial Services Training Package
(Release 3.0). It covers several core and elective units in the Accounting and Bookkeeping
qualifications and skills sets. It is designed for use by students studying at TAFE and other
tertiary education providers. It also continues to be very useful reading for university
students studying introductory accounting.
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ACK NOW LE DG E M E NT S

We – Yvonne, Michael and Ted – have appreciated the opportunity to combine our efforts
in writing this ninth edition of your accounting book. It is our hope and trust that it will
help you to understand and be able to apply the processes of accounting in your studies and
career, in whichever direction it takes you.
Our thanks are due also to colleagues across Australia, and particularly in TAFE NSW,
for feedback on the previous editions. We have noted your comments and hopefully have
included some of the recommendations that you have made. We acknowledge and are
grateful for the contribution you have made to this book. The invaluable contribution of
Diane Fowler, the editor of the book, is also acknowledged by Ted, Yvonne and Michael.
Diane’s guidance and dedication throughout the process has been greatly appreciated.

Edward A. Clarke
Yvonne Wilson
Michael Wilson

To special friends:

Very special thanks continue to Peggy, Ted’s friend, wife and confidante, who continues
showing kindness, love and understanding as we journey together.
Thanks also go to all those friends who have contributed to our many wonderful life
experiences down on the farm at Glenreagh.

Edward A. Clarke
Glenreagh NSW
Copyright © 2018. Cengage. All rights reserved.

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1
Accounting: its
foundations

Introduction
This book is intended to introduce you to the principles
and practice of accounting. It will concentrate on the
operations of a business that is owned by one person – a
sole proprietor or sole trader. We will use examples of
businesses that:
• sell a service (a service business) or
• buy and sell goods (a trading business)
with the intention of making a profit.
However, the basics of accounting are relevant to all
business ownership structures and types of business
activities (such as primary producers and manufacturing
industries). You will learn that the accounting equation
is the basis for recording business transactions. Initially,
Copyright © 2018. Cengage. All rights reserved.

transactions are entered into the general journal and


sometimes into specialised journals. These journals are
then summarised in the general ledger, and at the end
of the period a trial balance is prepared from the ending
account balances. Finally, financial reports are prepared.
An income statement shows the revenues and expenses,
and provides a picture of the financial performance of the
business over a particular period of time. The balance sheet
represents what the business owns/controls and owes. It
states the financial position at a particular point in time.

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ACCOUNTING: ITS FOUNDATIONS

Introduction to business operations


It is usual for introductory accounting texts to demonstrate the principles of accounting through a sole
trader ownership structure: that is, a business owned by one person who may employ other people. The
examples we will examine include trading and service businesses that buy and sell goods and/or services.

SERVICING BUSINESS
A servicing business mainly sells its knowledge or skills at a profit. Examples of service businesses
operated by sole proprietors may include vehicle maintenance and repair, building construction and
renovations, repair, installation and restoration of electrical or electronic products. Businesses that provide
professional services such as accounting, legal, veterinary, medical and dental practices as well as travel
and accommodation may also be operated as sole proprietors.

TRADING BUSINESS
A trading business generally buys goods in large quantities (in bulk) and sells the products in smaller
quantities, at a profit. Buyers purchase these goods for their individual or business use or consumption.
A petrol station buys many thousands of litres of petrol and diesel at a bulk price and sells them to
individual motorists, who drive in to fill up the tank of their car or truck. The petrol station does nothing
to the petrol or diesel. A stationery shop buys paper, pens, pencils and many types of folders and sells the
products or goods in smaller quantities. Other examples may include greengrocers and clothing retailers.
‘Retailer’ is another term used for businesses that buy and sell goods directly to the public.

COMBINED SERVICE AND TRADING BUSINESS


Some businesses may provide a combination of services and trade, such as a car dealership that sells cars,
provides maintenance services on the cars it has sold, and also sells spare parts. As well as its core business
of plumbing services, a plumber may also sell kitchen, laundry and bathroom fittings and provide
installation services for these items.
Can you identify businesses in your area that operate as sole traders and are service providers, traders
or both?

Departments or functions within a business


More complex businesses might have a number of departments or sections that are responsible for
different functions, including the following:
• purchases: buying goods and/or services for the business
• receiving: accepting deliveries of goods that have been purchased by the business
Copyright © 2018. Cengage. All rights reserved.

• warehouse: holding or storing goods before sale or use by the business


• sales: selling goods to various customers
• despatch: sending or delivering out goods that have been sold to customers
• accounting: recording and reporting financial transactions related to the business
• human resources (personnel) and payroll: employing and paying employees for their services.
Some departments, such as receiving and warehouse, will often interact with each other. All
departments, however, will interact with accounting as well as indirectly through accounting to each
other (see figure 1.1).

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CHAPTER 1

SALES DESPATCH

HUMAN RESOURCES
(PERSONNEL) AND PAYROLL ACCOUNTING PURCHASES

WAREHOUSE RECEIVING

FIGURE 1.1 Interactions between departments or sections within a business

These interactions will occur no matter which industry group the business belongs to: primary,
secondary, transport or service. More complex businesses generally operate through different ownership
structures. Later in this chapter we will briefly look at different structures of business ownership,
including sole traders, partnerships and companies.

Management
The objective of the owner or manager of a business (entity) is to plan, lead, organise and control the
business to enable a reasonable return of profit on the investment put into the business by the owner.
Managers need to develop systems to provide them with the information they require to make
decisions about a business. These systems are often referred to as the management information system,
or MIS.
If the owner or manager plans to expand into a new area, they have to consider whether there is a
market for the goods or services, whether the goods or services can be supplied and if there are trained
human resources or personnel available in the business. Financial information can assist in the
decision-making process. A money or dollar value needs to be placed on the cost or benefit of each option.
It will help the owner to decide whether it is worth expanding in an area or whether to look for different
alternatives.

Accounting
Accounting is the process of collecting, classifying, recording, reporting, analysing and interpreting
financial data to meet the financial information requirements of the various interests, or users, concerned
Copyright © 2018. Cengage. All rights reserved.

with the operation of a business both internally (within the business) and externally (outside of the
business).
Accounting has evolved from a single-entry record keeping system, dating from around 4000 BCE
and covering ownership of property and transactions between parties, to the double-entry accrual
accounting system used by many businesses today. Basically, accrual accounting is the matching of
revenue and expenses to the accounting period, usually one year. Although this book adopts the accrual
accounting method, chapter 5 includes a brief introduction to the cash accounting method
of recording.

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ACCOUNTING: ITS FOUNDATIONS

A system for recording accounting information, commonly called an accounting information


system, should be developed to provide relevant reports that faithfully represent the information to users.
The reports should also be comparable, verifiable, timely and understandable.
An accounting system is a collection of processes, procedures and controls designed to collect, record,
classify and summarise financial data for interpretation and management decision making.
Before the introduction of computers and appropriate software, businesses used a manual accounting
system, keeping their financial records by hand. Some businesses may still use a manual accounting
system.
Today many businesses use some form of computerised accounting system to maintain their
financial records. Computers and off-the-shelf or customised accounting software packages are used to
record, store and analyse financial data. In Australia, some commonly used off-the-shelf packages include
MYOB, Reckon, QuickBooks and Xero.
Although this book focuses on setting up and maintaining a manual accounting system, the same
principles are used in many computer accounting software packages. As data is input into the accounting
package, most of the steps you would complete in a manual system are automatically processed. You
would not be aware how the package is processing the data, but most accounting packages include reports
that are similar to those manually produced. They can manipulate data and present information far
quicker than manual systems.
Over time the accounting processes or systems of a business may need to change. As its operations
and structure become more complex, different or more frequent information may need to be produced.
Changes to legislation or accounting rules may also require changes in the way a business must report
information to its users.

USERS OF ACCOUNTING INFORMATION


There are two user groups interested in the financial details of a business: internal users and external
users.
• Internal users:
– owners and managers of the business, who need to know the revenue, expenses and the resulting
profit of the business so that decisions on the future for the business can be made. These users
should have access to all available financial information or can require it to be prepared for them at
any time.
• External users:
– other businesses, such as suppliers, who are owed monies by the business (also known as
creditors, or accounts payable); these may be concerned if the business is making insufficient
profit (or even a loss), in which case they may not be paid the amount that is owed to them
Copyright © 2018. Cengage. All rights reserved.

– government departments, including the Australian Taxation Office, which must ensure that the
correct taxes are paid by the business
– lenders, who are concerned that the funds lent to the business together with interest will be repaid
in full and on time
– employees, who are interested in the long-term financial viability of the business and its ability to
pay leave entitlements when they fall due.
External users generally only have access to financial reports or financial statements that are prepared
periodically and contain limited financial details about the business. Some external users, such as
government departments, may require more detailed information that is not available to other external users.

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CHAPTER 1

Basic accounting terms


Assets
An asset is a resource controlled by the entity (business) from which future economic benefits are
expected.1 Therefore, an asset is an item of value to the business, which can be used in its operations and
can be expressed as a dollar value.
There are two classifications of assets: current assets and non-current assets.

CURRENT ASSETS
Current assets are cash or other assets of the business that are expected to be used, consumed or
converted into cash within the next 12 months. Examples of current assets are:
• cash at bank; that is, funds that are held by a bank but owned and used by the business to buy and
sell goods and services. The words ‘cash’ and ‘bank’ also mean the same as ‘cash at bank’
• inventory; that is, all of the goods that a business has for sale. The words ‘stock’ and ‘stock on hand’
also mean the same as ‘inventory’. Service businesses that hold large amounts of materials for use in
providing their services may use the term ‘supplies’ for these current assets
• accounts receivable; that is, all the amounts owed by customers who have bought goods or services
from the business with the agreement that they will remit or pay the funds owing for that sale within
the next month or two. The word ‘debtors’ means the same as ‘accounts receivable’.

NON-CURRENT ASSETS
Non-current assets are assets the business expects to hold for more than 12 months; that is, they will not
be consumed or converted into cash within the next 12 months. Examples of non-current assets include:
• land – the area of earth, ground, soil or terrain that a business controls and uses in the business
• buildings – structures usually built on land controlled by the business and used in its operations
• machinery or machines – equipment used by a business to make goods or products for sale as
inventory, stock or goods
• motor vehicles – cars, utilities, trucks, forklift trucks and motorbikes. Trucks bring inventory and
goods from suppliers into the business, or deliver inventory to customers. Cars are used by salespeople
to visit customers or by other employees while carrying out their work responsibilities
• office equipment – equipment used in the office or administration area. It includes such assets as
tables, desks, chairs, cupboards, shelving, filing cabinets, photocopiers, fax machines and telephone
systems
• computers – these may form an integrated information and communication system between all areas
Copyright © 2018. Cengage. All rights reserved.

of the business
• investments – other long-term assets that the business has acquired. These may include shares and
debentures in a company, government bonds and other financial instruments.

Liabilities
A liability is a present obligation of the entity (business) that is expected to result in an outflow of
resources. Therefore, a liability is an obligation of the business that it must eventually discharge or repay.
Liabilities are what the business owes outside or external to the business.
There are two classifications of liabilities: current liabilities and non-current liabilities.

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ACCOUNTING: ITS FOUNDATIONS

CURRENT LIABILITIES
A current liability is an obligation that the business is required to satisfy or pay within the next 12
months. An example of a current liability is:
• accounts payable; that is, all the amounts owed by the business to suppliers from whom it has
purchased goods or services, with the expectation that it will remit the funds owing for that purchase
within the next month or two. Accounts payable include amounts owing to suppliers for inventory or
stock purchased for resale, as well as amounts owing for expenses incurred or acquired by the business,
such as electricity, telephone, postage and stationery. The word ‘creditors’ means the same as ‘accounts
payable’.

NON-CURRENT LIABILITIES
Non-current liabilities are obligations that the business is required to satisfy or pay after or beyond
12 months. Examples of non-current liabilities include:
• loan from a lending institution or other source; there is a requirement to repay the amount that has
been received from the loan, but this is expected to occur beyond or after 12 months
• mortgage: this is a special type of security for a loan, usually for a bank or other lending institution.
The funds are only given if the business and/or persons guaranteeing the loan assigns the title or right
to specific land (real estate) as security that the loan will be repaid. A mortgage allows the lender
(mortgagee) to sell the borrower’s land (real estate) if they default on the loan. This puts the lender,
often a bank, in a better position than most other creditors.

Owner’s equity
Owner’s equity is what the owner has put into or invested in the business. It shows what the business
owes to the owner. The total can be calculated by deducting liabilities from assets. The words
‘proprietorship’ or ‘equity’ mean the same as ‘owner’s equity’. Examples of owner’s equity are:
• capital, which shows the amount and details of what has been invested by the owner in the business.
Any profit made by the business is added to this capital amount. Any loss incurred by the business is
deducted from the capital amount
• drawings, which includes amounts of cash taken out of the business by the owner as well as the value
of any inventory taken by the owner that the business had originally purchased to sell to its customers.

Revenue
Revenue arises in the course of the ordinary activities of an entity. Therefore, revenue is the earnings,
proceeds or takings from the operations of a business. Examples of revenue are:
Copyright © 2018. Cengage. All rights reserved.

• sales, which includes the total amount or price obtained by the business when it sells its inventory or
goods. This is the main revenue source for a business selling inventory or goods
• fees, which includes the total amount or price obtained by the business when it sells its services. This is
the main revenue source for a business selling services
• commission received, which is revenue received from selling someone else’s inventory, goods or
property. It is not usually the main revenue source
• interest received, which is revenue received from investments that the business has made with
available funds. This may include interest-bearing deposits with a bank or other borrowing institution.
It is not usually the main revenue source
• rent received, which is revenue received from renting to a third party a part or all of a building that
the business controls but does not use. It is not usually the main revenue source.
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CHAPTER 1

Expense
We shall examine expenses that arise in the course of the ordinary activities of the entity (business).
Expenses usually take the form of an outflow or depletion of assets such as cash and cash equivalents,
inventory, property, plant and equipment.
For our purposes, ‘cost’ means the same as ‘expense’. Examples of expense are:
• cost of sales (services or goods), which is the cost of the service that has been provided or goods that
have been sold by the business
• wages or salaries, which are paid to the people who work for the business; they are employees of the
business
• rent expense, which is the amount paid to another business for the right to use an area of land and/or
building to store inventory and carry out the activities of the business
• postage expense, which includes the cost of sending and receiving items through the mail – that is,
Australia Post
• stationery expense, which includes the cost of pens, pencils, markers, paper and pre-printed forms
used by the business
• depreciation, which is an allocated expense spread over the estimated useful life of a non-current
asset.
If the total revenue is greater than the total expenses then the business has made a profit that is added
to owner’s equity.
Revenue $10 000 – Expense $8000 = Profit $2000
Owner’s Equity $50 000 + Profit $2000 = new Owner’s Equity $52 000
If the total revenue is less than the total expenses then the business has made a loss; this reduces the
owner’s equity.
Revenue $10 000 – Expense $11 000 = Loss $1000
Owner’s Equity $50 000 – Loss $1000 = new Owner’s Equity $49 000

Financial statements
Financial statements are particular reports that are prepared for users and provide information about
the business’s assets, liabilities, owner’s equity, revenues and expenses. We will develop two financial
statements in this book:
• statement of financial position or balance sheet, which shows the account balances of all assets,
liabilities and owner’s equity at the end of the accounting period
• statement of profit or loss and other comprehensive income or income statement, which shows the
account balances of all revenues and expenses that determine the profit or loss made for the period.
Copyright © 2018. Cengage. All rights reserved.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.1
From the following clues relating to the topic matters covered above, complete the crossword in figure 1.2.

Across
2 It can be an asset or a liability that still exists after 12 months.
5 An obligation that the business is required to satisfy or pay within the next 12 months
(2 words).
8 The type of accounting system used today by businesses.
10 If total sales revenue is greater than total expense then a . . . . . . . . . . occurs.
11 Part of the accounting process is the i . . . . . . . . . . of financial data.
12 Accounting information is prepared for them.
15 Part of the accounting process is the a . . . . . . . . . . of financial data.
16 The . . . . . . . . . . users of accounting information have very limited access to accounting information.
17 The earnings made from the operation of the business.
18 Accounting is not a science or an art but an ongoing . . . . . . . . . .

Down
1 Cash is this (2 words).
3 It is what the owner has put into or invested in the business (2 words).
4 Other businesses that are owed debts are called it (2 words).
6 This group of users of accounting information usually has full access to accounting data.
7 Accounting exists to provide this to the business.
9 Part of the accounting process is the c . . . . . . . . . . of financial data.
13 It is incurred or spent in making sales or running the business.
14 Items of value used by the business in its operations.

1 2 3

4
5

7 8 9

10

11

12
Copyright © 2018. Cengage. All rights reserved.

13 14

15

16 17

18

FIGURE 1.2 Crossword for question 1.1

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Created from
CHAPTER 1

QUESTION 1.2
From the following clues relating to examples used above for assets, liabilities, owner’s equity, revenue and
expenses, complete the crossword in figure 1.3.

Across
2 The business owes them for purchases of goods and services not yet paid.
5 A current asset summarising details of what amount is owed to the business and by whom.
6 The printed word you are reading this from is on it and it is included in this expense.
10 This non-current asset is used in the administration area (2 words).
11 A current asset that shows details of who and how much is owed by customers to the business (2 words).
14 An expense for using the mail system.
15 The business has this current asset to sell (3 words).
16 Amounts of cash and inventory taken by the owner.
17 This non-current liability provides funds to the business that must be repaid.
19 The business uses this non-current asset to make goods or products for sale.
20 These non-current assets are sometimes referred to as work stations.
21 A business selling goods calls the goods this, and it’s a current asset.

Down
1 This type of loan requires collateral or security and is a non-current liability.
3 The bank has this current asset but the business owns it.
4 If you don’t like flying, this non-current asset is very good to keep your feet on.
7 A current liability that shows details of who and how much is owed to suppliers by the business (2 words).
8 This current asset is used to pay for goods and services (3 words).
9 Cars, utilities, trucks and forklifts are this non-current asset.
12 This owner’s equity shows what the business is worth and any profit adds to it.
13 A structure that the business may construct and use for its operations; a non-current asset.
18 The same meaning as inventory.

1
2
3 4
5
6 7 8
9

10

11 12
Copyright © 2018. Cengage. All rights reserved.

13 14
15
16
17 18
19
20

21

FIGURE 1.3 Crossword for question 1.2

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ACCOUNTING: ITS FOUNDATIONS

Types of business ownership, their advantages


and disadvantages
Sole trader
A business that is carried on by a sole trader is owned by one person, who also usually runs and manages
the business. There may or may not be people working in the business; these are referred to as employees
of the business and the owner is the employer. This is the simplest form of ownership and numerically the
most common.
The sole trader receives all profits and is legally required to bear and satisfy all losses personally. In
other words, the sole trader has unlimited liability to repay amounts owing, or debts, of the business.
The total amount of cash and other assets brought into the business by the sole trader is the capital
that the business owes to the owner; it is called the owner’s equity. Over time, the owner’s equity will be
increased by profits made by the business, and reduced by losses made by the business and drawings (cash
or goods) from the business.
The sole trader is free to run the business as they think best and is not answerable to a boss. Although
such a business is inexpensive and easy to set up and run, additional finance may be difficult to obtain.
The business name, if different from the owner’s own name, must be registered with the Australian
Securities and Investments Commission (ASIC). A business bank account would normally
be set up.

Partnership
A business that is carried on by a partnership can generally be owned by between two and 20 people.
A partnership is a relationship between two or more persons with a view to profit. The partners usually
run and manage the business. However, there may be a silent partner who does not take any part in the
running of the business even though they have contributed capital to the partnership.
The amount of the capital that each partner brings to the partnership and the proportion in which
the profits and losses are to be split among the partners is agreed between them and usually written in
the partnership agreement. If a matter is not covered by the partnership agreement, then the position
as set out in the Partnership Act of the state or territory in which the business is registered applies.
Partnerships do not have any special legal, accounting or recording requirements. A partnership is
not a taxable entity. Profits and losses are allocated to each partner according to their entitlements in the
partnership. It is important the accounts correctly record income and losses for the partners’ individual
tax returns. The partners share in the profits of the partnership. However, they also must share in the
losses and can each be held personally liable for the debts of the partnership. There is unlimited liability
on the partners to repay the debts of the partnership. Partners are jointly and severally liable for debts.
Copyright © 2018. Cengage. All rights reserved.

This means that, if necessary, creditors can enforce their full debt against the personal assets of any
partner who can afford to pay.
The partners are able to use their individual skills and specialise in areas for the overall benefit of the
partnership and therefore should be able to earn more collectively than would be possible if they operated
individually as sole traders.
It is easy and inexpensive to set up a partnership. The business name should be registered and a
separate bank account must be used for the partnership.

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CHAPTER 1

Corporation
The most common type of corporation or company is one that is limited by shares. The shareholders
hold shares in the company and therefore own it. Shareholders have limited liability; that is, their
obligation is limited to the amount, if any, unpaid on their shares. Beyond this, the shareholder is not
required to contribute to satisfying the debts of the company. The company has a separate legal identity.
It can sue and be sued, but the shareholders (the owners) cannot be sued by creditors. The name of a
company limited by shares must end with ‘Limited’ or its abbreviation ‘Ltd’. There are approximately
2.5 million companies that are registered in Australia.
The Corporations Act 2001 (Cwlth) indicates that companies are either proprietary or public
companies.

PROPRIETARY COMPANY
A proprietary company is a company limited by shares and is sometimes referred to as a private company.
The Corporate Law Economic Reform Program Act 1999 (Cwlth), which became effective early in 2000,
changed a number of the areas covering these types of companies. Since the Act came into force, a
proprietary company need only have one member and one director, but must have no more than 50
non-employee shareholders and the transferability of shares is restricted. The word ‘Proprietary’ or its
abbreviation ‘Pty’ must appear in the company name; for example, ABC Pty Ltd. A proprietary company
can be either a small or a large proprietary company.
To be defined as a small proprietary company, the rules of ASIC require that the company must satisfy
at least two of the following conditions for a financial year:
• the consolidated revenue of the company and any entities it controls is less than $25 million
• the value of the consolidated gross assets of the company and any entities it controls is less than $12.5
million at the end of the financial year
• the company and any entities it controls have fewer than 50 employees at the end of the financial year.
To be defined as a large proprietary company, a company must satisfy at least two of the following
conditions for a financial year:
• the consolidated revenue of the company and any entities it controls is $25 million or more
• the value of the consolidated gross assets of the company and any entities it controls is
$12.5 million or more at the end of the financial year
• the company and any entities it controls have 50 or more employees at the end of the financial year.
Large proprietary companies must prepare and lodge a financial report and a directors’ report for each
financial year. The accounts must be audited unless ASIC grants relief.

PUBLIC COMPANY
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The Corporations Act 2001, Part 1.2 – Interpretation Div. 1 s. 9. defines a public company as any company
other than a proprietary company; it is a company limited by shares. Many – although not all – public
companies are listed on the Australian Securities Exchange (ASX). A public company is able to ask the
public for funds and its shares are readily transferable. It must have at least one member and at least three
directors, of which two must ordinarily reside in Australia.
A board of directors, which is elected by and acts on behalf of the shareholders, manages the company.
However, the board of directors recommends to the shareholders how much of the profit the company
should retain and how much should be paid to shareholders as a dividend (a return on their investment
in the company). Public companies are regulated by the Corporations Act, and they can be expensive to
establish. There are around 2400 that are listed and traded on the ASX.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.3
From the following clues relating to topic matters covered for the different types of businesses, complete the
crossword in figure 1.4.

Across
5 The liability of a sole trader and the partners in a partnership is . . . . . . . . . .
6 They usually run and manage the partnership.
8 How much capital is contributed and how profits are shared among partners is usually written in the
partnership . . . . . . . . . .
9 A . . . . . . . . . . partner does not take part in the running of the partnership.
12 The company is owned by them.
13 A . . . . . . . . . is owned by between two and 20 people.
14 A business owned by one person is a . . . . . . . . . . . . . . . . . . . . (2 words).
15 The last word in a company’s name is . . . . . . . . . .

Down
1 This Act regulates companies.
2 The abbreviation for limited.
3 They manage the company on behalf of the shareholders.
4 The abbreviation for proprietary.
7 The liability of a shareholder is limited to the amount, if any, unpaid on their . . . . . . . . . .
10 A company owned by between one and 50 people is a . . . . . . . . . . limited company.
11 If a sole trader operates a business using other than their own name as the business name, then the name
of that business must be . . . . . . . . . .
13 This type of company is listed on the Australian Securities Exchange.

1 2

3 4

6 7

10

11
12
Copyright © 2018. Cengage. All rights reserved.

13

14

15

FIGURE 1.4 Crossword for question 1.3

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CHAPTER 1

Accounting assumptions: conventions


and doctrines
The accounting process creates a common language that enables communication within and between
different businesses, no matter which language is spoken or what the ethnic background. Accounting is
used by all businesses.
The accounting language is guided by basic accounting concepts, ideas or thoughts. There are 10 concepts
listed on pages 13–15 that are often referred to as conventions or doctrines.
• Conventions are general agreements in accounting, which especially relate to standards or procedures.
• Doctrines or principles are fundamental or general truths upon which other truths depend.

Conventions
ACCOUNTING ENTITY CONVENTION
The accounting or financial information of the business is always treated as a separate unit or body from
the owner’s personal financial information.
The business exists separately from the owner; this is known as the accounting entity convention.
For example, the owner has a business, which includes a warehouse and trucks used in the business,
and these are both recorded (or shown) in the books of the business. However, the house where the owner
lives and the boat that is used on the weekend are personal property and are not shown (or recorded) in
the books of the business. Also, the bank account of the business must be kept separate from any personal
or private bank accounts.
In accounting, the owner is treated as separate from the business. In a court of law, however, the non-
business assets of a sole trader are not likely to be treated as separate from the business, if creditors have
not been paid. Legal separation occurs when a business is incorporated into a company that is owned
by shareholders. Running a business within a company structure offers a level of protection for personal
assets such as the family home.

ACCOUNTING PERIOD CONVENTION


The life of a business is divided into periods of equal lengths for reporting purposes. This is known as the
accounting period convention. Accounting or financial reports are prepared for a specific time period
to enable two things: to assess the results of buying and selling goods or services, and to meaningfully
compare the results for the period with expected or past period results. In Australia many businesses use a
financial year (or fiscal year) from 1 July to 30 June of the next year. Shorter accounting periods may be
used depending upon the needs of the user.
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The goods and services tax (GST) started in Australia on 1 July 2000. A business that has an annual
turnover (revenue or sales) of less than $75 000 is not required to register for GST but may choose to do
so. The GST is introduced in chapter 4 and is relevant throughout the book. Most small and medium
businesses registered for the GST are required to complete and submit a Business Activity Statement
(BAS) every three months. This is known as submitting on a quarterly basis. A business with an annual
GST turnover of $20 million or more must submit its electronic BAS on a monthly basis.
Businesses must also prepare financial reports showing their profit or loss on an annual (yearly) basis
to the Australian Taxation Office for final assessment of taxation. The specific time period is usually the
financial year from 1 July to 30 June.
Regardless of the size of a business or its GST registration obligations, it is wise for all businesses to
prepare regular reports. Certain monthly, quarterly or six-monthly reports are useful as they provide

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ACCOUNTING: ITS FOUNDATIONS

management with information on the finances of the business. They allow comparisons to be made and
corrective action taken where necessary. A loss of $10 000 revealed in an annual financial report might
have been avoided if monthly reports had been prepared. Early corrective action could have been taken to
change the loss for the year into a profit.

GOING CONCERN (OR CONTINUITY OF ACTIVITY) CONVENTION


Financial reports or statements are prepared on the assumption that the life of the business will continue
indefinitely. A business is regarded as a going concern as long as it can pay its liabilities when they have to
be paid and the intention of the owner is not to cease business but to carry on with that business.
A business is started because the owner expects it to be successful and to earn adequate profits. Even
when the owner wants to retire, there may be an expectation that the business will be sold and will carry
on indefinitely into the future.

MONETARY CONVENTION
All financial business transactions or events are recorded in Australian dollars and cents.
If a monetary value cannot be given to a transaction, then it cannot be recorded in the books of the
business and cannot be included in an accounting financial statement or report. This is known as the
monetary convention.
The sale of 1000 goods or items for $5.00 each is recorded as sales of $5000. The 1000 units are not
shown, only the monetary value of those units.

HISTORICAL COST (OR HISTORICAL RECORD) CONVENTION


The actual amount that a business receives or pays is the amount that is recorded or written in the
accounting books or records of that business. Non-current assets are recorded at their cost. This is known
as the historical cost convention.
This convention assumes that the buying capacity of a dollar is the same in the past as it is at present.
However, this is not the case, as the purchasing power of a dollar is reduced over time by inflation.
For instance, land that was purchased by a business 15 years ago for $8000 was recorded at its original
cost and would still be in the accounting records today at $8000. This is the case even though the land
might be worth $80 000 if it was sold now. This can lead to apparent distortions of the worth of a business
when only historical cost accounting records are used to record items purchased in the past. Certain
non-current assets may be revalued to ‘fair value’. This is a topic studied in more advanced financial
accounting and will not be covered in this book.
In another example, a delivery truck that was advertised for $35 000 is purchased at a special sale price
of $31 500. The delivery truck is recorded in the books of the business at its cost of $31 500 and not at the
advertised price.
Copyright © 2018. Cengage. All rights reserved.

Despite the valuation problem caused by inflation and the recording of items at their original cost to
the business, the historical cost convention remains the most commonly used method of reporting the
financial statements of businesses.
There are alternatives to historical cost accounting but these generate considerable debate and go
beyond our scope of study.

RECOGNITION OF LAW CONVENTION


The preparation of statements and reports must follow relevant laws. Taxation law includes specific
recording and reporting requirements to comply with GST and income tax purposes.
The Corporations Act 2001 requires companies that are reporting entities to comply with Australian
Accounting Standards.
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CHAPTER 1

Doctrines
DOCTRINE OF CONSISTENCY
The accounting principles used to prepare financial statements should be applied in the same way for each
accounting period, irrespective of whether the period is a month or a year.
If a business is not consistent in its reporting methods from one period to another, then differences
may appear to have occurred that in fact did not happen. More seriously, a change in valuation or
reporting may cover up a problem that the business is having. The valuation of inventory or stock needs
to be consistent, as it has a direct result on the profit of the business. If there is any change in consistency,
then the change should be disclosed.

DOCTRINE OF DISCLOSURE
The accounting reports should contain information that ensures that the users understand the financial
position of the business.
A loss should not be included with other figures if it has the effect of hiding or misleading an event of
significance. A profit on the sale of a truck should not be included with the diesel and other running costs
of the truck, as they are two different events. The cost or expense of running a truck and the profit on the
sale of a truck should be shown as separate figures.
The owner and other users who rely on the financial reports expect that full disclosure has taken place.

DOCTRINE OF MATERIALITY
The significance, importance or materiality of an amount depends on both the size of a business and the
importance of the item being considered.
A shortage of $100 from inventory or stock held in a warehouse where the total cost was $250 000
may not be considered material or significant and very little effort may be made to try to find it.
However, $1000 missing from $2500 that was to be deposited in the bank is material. It would result in
a significantly detailed investigation as to how and why the funds went missing and what was required to
prevent such an event happening again.
The accounting reports often reflect the doctrine of materiality, where a large business may report
in hundreds, thousands or millions of dollars, whereas a small business may report in dollars.

DOCTRINE OF CONSERVATISM
When there is a choice or uncertainty in the results to be reported, the preference is to understate
the profit results rather than to overstate them; the more conservative approach should be taken.
Generally, an expense in running the business should be included as an expense of the business when
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it is first anticipated. However, revenue would normally be included when it has been received, or when
there is strong probability that it will be received when it is due.
However, this should not lead to a distortion (or misunderstanding) of the financial reports, as there
should be a full disclosure of why the conservative alternative has been taken.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.4
From the following clues relating to topic matters covered in ‘Accounting assumptions: conventions and
doctrines’, complete the crossword in figure 1.5.

Across
1 This doctrine depends on the size and importance of the item being considered.
3 There should be full . . . . . . . . . . so the owner understands the financial position.
4 The assumption that a business will continue to operate in the future is the . . . . . . . . . . of activity
convention.
6 To record a non-current asset such as land at its cost rather than what it is now worth is applying
the . . . . . . . . . . . . . . . . . . . . convention (2 words).
9 Accounting principles should be applied to the accounts . . . . . . . . . .
11 To understate profit, rather than overstate it, is the doctrine of . . . . . . . . . .
12 Entries recorded in the accounts are expressed in . . . . . . . . . . dollars.
15 The business life should be broken into periods of no more than . . . . . . . . . . . . . . . . . . . . (2 words).
16 Non-current assets are recorded in the accounts at their historical . . . . . . . . . .

Down
2 The life of the business is usually expected to go on . . . . . . . . . .
5 An assumption that the life of a business continues well into the future is the . . . . . . . . . . . . . . . . . . . .
convention (2 words).
7 This accounting convention separates the business from the owner.
8 Unless a dollar value can be given to a transaction then it cannot be entered into the accounts. This is an
expression of the . . . . . . . . . . convention.
10 To enable an assessment of the results of buying and selling to be compared with the past and with
present expectations, the accounting . . . . . . . . . . convention breaks the life of the business into equal
time lengths.
13 If they affect the business or its reports then they are to be followed.
14 Accounting is used by . . . . . . . . . . businesses.

1 2

4
5
6
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7
8 9

10 11

12 13 14

15
16

FIGURE 1.5 Crossword for question 1.4

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CHAPTER 1

The Conceptual Framework and accounting


standards
Accounting standards are intended for more complex business structures that are classified as reporting
entities. This includes companies that are listed on the ASX, where generally management is separate
from ownership. These entities must prepare general purpose financial statements (GPFSs) that are
designed for external users. While the recording and reporting of the financial activities of sole traders and
partnerships do not have to comply with the standards, the terminology we use is consistent with them.
The standards are also useful in understanding how to report specific transactions or activities.

Australian Accounting Standards Board


Section 224 of the Australian Securities Commission Act 1989 (Cwlth) established the Australian
Accounting Standards Board (AASB). The AASB continues in existence under s. 261 of the Australian
Securities and Investments Commission Act 2001 (Cwlth) (the ASIC Act). Its functions, as set out in s. 227(1)
of the ASIC Act, include the development the Conceptual Framework (CF). Section 224 and ss 228 to 233
establish the framework within which the AASB is to formulate and make accounting standards.

The Conceptual Framework


The Framework for the Preparation and Presentation of Financial Statements is usually abbreviated to the
term ‘Framework’ or ‘Conceptual Framework’. This Framework is issued by the AASB and is equivalent
to the International Accounting Standards Board (IASB) Framework, with changes that make it more
relevant and appropriate to Australia.
It aims to:
• develop logical consistent accounting standards
• provide guidance where no accounting standard exists
• enhance understanding by report users.
The Framework sets out the objectives, assumptions, quality, elements and criteria for the recognition
of GPFSs. Financial reports should be relevant and faithfully represent the business’s financial
information. They should also be comparable, verifiable, timely and understandable. GPFS apply to
reporting entities and are prepared for external users (CF para 1).2
The Public Sector Accounting Standards Board of the Australian Accounting Research Foundation
and the AASB developed a number of Statements of Accounting Concepts (SACs). Only SAC1 Definition
of the Reporting Entity remains as a separate document from the Conceptual Framework.
The Statement of Accounting Concepts SAC1 establishes a minimum quality of financial reports for
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a business or entity to provide to external users. These users include individuals, other businesses and
governments. This information can help these users in their decision making.

Accounting standards
The AASB’s primary responsibility was to develop accounting standards (the AASB Standards) in
respect of general purpose financial reporting by reporting entities that are companies. The Corporations
Law Economic Reform Program Act 1999 (Cwlth) further empowered the AASB to develop accounting
standards for the private and public sectors (effective from 1 January 2000) with oversight responsibility
being undertaken by the Financial Reporting Council.
The AASB has adapted the accounting standards of the IASB applicable to annual reporting periods
commencing on or after 1 January 2005. Australian standards that were applicable before 1 January 2005
have been replaced with Australian standards equivalent to those of the IASB.
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ACCOUNTING: ITS FOUNDATIONS

Although you are not required to learn the names of each standard you should be aware of some.
The following list outlines standards that are relevant to an introductory accounting course. These and
other standards will be important in more advanced studies in accounting. A complete list of standards is
available on the AASB’s website.3
AASB 101 Presentation of Financial Statements
AASB 102 Inventories
AASB 107 Statement of Cash Flows
AASB 112 Income Taxes
AASB 116 Property, Plant and Equipment
AASB 118 Revenue
AASB 119 Employee Benefits
AASB 137 Provisions, Contingent Liabilities and Contingent Assets
AASB 138 Intangible Assets
AASB 1031 Materiality

LEGAL RECOGNITION OF STANDARDS


The AASB is an Australian Government agency, reporting to the Minister for Revenue and Financial
Services. The AASB’s principal funding is via parliamentary appropriation under the Australian Treasury
portfolio. When making standards, the AASB exercises its statutory powers under s. 334(1) of the
Corporations Act over companies. Standards have legal enforceability and are to be complied with by a
business that is subject to the laws.

PURPOSE OR OBJECTIVE OF STANDARDS


Financial statements [AASB 101 (9)] are a structured representation of the financial position and financial
performance of an entity. Their objective is to provide information about the financial position, financial
performance and cash flows of an entity, which can be used by a wide range of users to make economic
decisions. Financial statements also show the results of the management’s stewardship of the resources
entrusted to it. To meet this objective, financial statements provide information about an entity’s:
a assets
b liabilities
c equity
d revenues and expenses, including gains and losses
e contributions by and distributions to owners in their capacity as owners, and
Copyright © 2018. Cengage. All rights reserved.

f cash flows.
This information helps users of financial statements to predict the entity’s future cash flows and, in
particular, their timing and certainty. These reports must be prepared and presented to show a true and
fair view of the entity (Corporations Act 2001, s. 297).
The main requirements of AASB 101 (10) Presentation of Financial Statements are that the financial
statements of a reporting entity must include four statements plus notes. A complete set of financial
statements comprises:
• a statement of financial position as at the end of the period (a balance sheet, which shows assets,
liabilities and equity)
• a statement of profit or loss and other comprehensive income for the period (an income statement,
which shows revenues and expenses)

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CHAPTER 1

• a statement of changes in equity for the period


• a statement of cash flows for the period, and
• notes, which include a summary of significant accounting policies and other explanatory information.
A sole proprietorship business would not be required to prepare the full range of statements and notes
prescribed in the standards because it is not classified as a reporting entity. However, the standards assist
in clarifying how to record and report transactions. Each standard includes detailed objectives of its
purpose. Some of the principal considerations required by the standards are listed below.
• Fair presentation and compliance with International Financial Reporting Standards (IFRSs)
• Selection and application of appropriate accounting policies
• The entity’s ability to continue as a going concern
• Accrual basis of accounting
• Materiality and aggregation
• Comparative information
• Consistency of presentation
• The classification of items in the financial statements
• A range of disclosures about financial position and financial performance
For the purposes of this book, the statement of financial position will be titled the balance sheet,
and the statement of profit or loss and other comprehensive income will be titled the income
statement. The statement of changes in equity and the statement of cash flows are not covered in this
book, as they relate to more advanced studies in accounting.

QUESTION 1.5
From the following clues involving topic matters covered that relate to accounting standards, concepts and the
Framework, complete the crossword in figure 1.6.

Across
2 Since January 2000 the AASB has been empowered to develop accounting standards in the private
and . . . . . . . . . . sectors.
5 AASB 101 is titled Presentation of . . . . . . . . . . . . . . . . . . . . (2 words).
7 General purpose financial statements are provided to external . . . . . . . . . .
8 An overall consideration by an entity in presenting financial reports is that the . . . . . . . . . . basis of
accounting is used.
10 The AASB exercises its statutory powers under the . . . . . . . . . . Act.
11 Standards have legal . . . . . . . . . . and are to be complied with by reporting entities.
14 The Framework for the Preparation and Presentation of Financial Statements may be abbreviated to
the . . . . . . . . . .
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15 This type of user includes individuals and other businesses.


16 The Statement of Financial Position is referred to in this book as a . . . . . . . . . . . . . . . . . . . . (2 words).
17 Initially the AASB’s primary responsibility for general purpose financial statements was for reporting
entities that were . . . . . . . . . .
19 According to the AASB 101 standard, one of the considerations that an entity must take into account
when presenting financial reports is the . . . . . . . . . . basis of accounting.
20 The Framework sets out the objectives, . . . . . . . . . . , quality, elements and criteria for the recognition of
general purpose financial statements.

CONTINUED

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ACCOUNTING: ITS FOUNDATIONS

Down
1 Australian Accounting Standards Board, its abbreviation.
3 An overall consideration by an entity in presenting financial reports is that each year there should
be . . . . . . . . . of presentation.
4 An overall consideration by an entity in presenting financial reports is that the presentation and
compliance with Australian accounting standards should be . . . . . . . . . .
6 The Statement of profit or loss and other comprehensive income is referred to in this book as
an . . . . . . . . . . . . . . . . . . . . (2 words).
9 An overall consideration by an entity in presenting financial reports is that the business is continuing into
the future or that it is a . . . . . . . . . . . . . . . . . . . . (2 words).
12 From 1 January 2005, the AASB has adapted the accounting standards of the . . . . . . . . . . Accounting
Standards Board.
13 SAC1 is titled ‘Definition of the Reporting . . . . . . . . . .’.
14 The Conceptual Framework refers to the Preparation and Presentation of . . . . . . . . . . . . . . . . Statements.
18 Standards applicable before 1 January 2005 have been replaced with Australian Standards equivalent to
those of the . . . . . . . . . . , its abbreviation.

1 2 3 4

5 6

8 9

10

11 12

13 14

15

16

17

18

19 20
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FIGURE 1.6 Crossword for question 1.5

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CHAPTER 1

Ethics as it applies to accounting


The word ‘ethics’ can mean many things to many people, but in accounting it has a meaning similar to
principles, morals and beliefs, as they relate to professional conduct.
The Accounting Professional and Ethical Standards Board (APESB) has issued APES 110 Code of
Ethics for Professional Accountants,4 effective 1 July 2011. The Fundamental Principles introduced in
s 100.5 and elaborated in ss 110–150 of this code require that accountants conduct themselves ethically
and act in a professional manner in relation to behaviour in the areas of:
• integrity: the need to maintain a straightforward, honest, truthful and fair approach to professional
work
• objectivity: the need to be fair and not allow conflicts of interest, undue influence of others or bias to
override objectivity
• professional competence and due care: the need to perform professional services diligently in
accordance with applicable technical and professional standards as well as to maintain a high level of
professional knowledge and skill
• confidentiality: the need to respect the confidentiality of information acquired in the course of work
and not to disclose information to a third party without specific authority or unless there is a legal
or professional duty to disclose it; not using confidential information for personal advantage or the
advantage of third parties
• professional behaviour: the need for conduct consistent with the good reputation of the profession
and to refrain from any conduct that might bring discredit to the profession.

QUESTION 1.6
Using the jumbled words below, unscramble the six areas that relate to the requirements of accountants to be
ethical and act in a professional manner. The jumbled word may or may not relate to two words; however, the
Workbook indicates if there are one or two words.
a CDEURAE d AFILOPRSENOS COEPECEMTN
b IYTETNRGI e FDITLAIITNEOYNC
c JTYIIBCOETV f REPNIFOSSAOL AOUVBIHER
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ACCOUNTING: ITS FOUNDATIONS

REVISION QUESTIONS
Confirm your understanding of this chapter by completing the following questions.

QUESTION 1.7
Write down how you would explain to a relative or friend what accounting is and what it is about.

QUESTION 1.8
Define the following accounting terms and provide examples of each.
a assets
b liabilities
c owner’s equity
d revenue
e expense

QUESTION 1.9
Can you find the following 17 basic accounting terms in the find-a-word puzzle? Each word is in a straight line but the line
can be in any direction, including diagonal and reverse. Where the word consists of more than one word it is shown as a
joined word; for example ‘current asset’ will be shown as ‘currentasset’. The words are:
accounts payable current liability profit
accruals expense revenue
analysing interpreting service
asset non-current tax
collecting owner’s equity users
current asset process

J U B U H N G M P N D Z F L W A J S T F
E E O G N I S Y L A N A T I E M I W R L
S V P P K G S G W N O N C U R R E N T M
R X V Q D P R R E V E N U E V S Z N E A
Y O F A C C O U N T S P A Y A B L E L O
S E R V I C E H P R O F I T U D V P E D
M P O X O P Y P S Q Z A T E S S A M G O
Z L T X U K C O L L E C T I N G Q S M W
B D Y E X S S E C O R P W F J H K A M N
F T E J S M R C I D R W K R D M C R W E
C G O C H S Q H N R J M Y A Z C E E F R
Copyright © 2018. Cengage. All rights reserved.

V I C I B M A W K A Q M C A R A B N P S
H Y D S Y U O T N K T Q I U F C Q X W E
E G R C U R R E N T L I A B I L I T Y Q
K S A E C V X Q G E Y L R A S Q V T B U
F Z N W N A I W F Z R B Y I Q A T U H I
I J H E V V L F K P X R Z M G E A T C T
D N B I P U F S R E S U U Q K H X G Q Y
R I K Y T X J H Y D J H O C Y G I C X T
C M X O A B E A G N I T E R P R E T N I

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CHAPTER 1

QUESTION 1.10
From the 22 scrambled examples of current assets, non-current assets, current liabilities, non-current liabilities, owner’s
equity, revenue and expenses you are required to unscramble the letters to create account names.
a togesap i ihevtslcmeoro q iqeftefncuopemi
b olan j igubdnil r yntvinroe
c grwiadns k eyhamncri s rumetoscp
d troegagm l taailpc t assel
e eivtebcnascolrauec m hcas u cdantnshoko
f ahbakncats n anbk v okcst
g botserd o daln
h etcirsrod p buepnltcacaoasy

QUESTION 1.11
For each of the following business transactions or events, indicate the name of the convention or doctrine that applies.

Business transaction or event Name of convention or doctrine

1 Annual accounts were prepared.

2 The business pays amounts owed, through the business bank account.

3 The business expects to remain in existence into the foreseeable


future.

4 The business will be a law-abiding entity.

5 The payment of hockey fees for the owner’s child is not a business
expense.

6 The price of cars has increased from what the business paid last year.

7 The business was unsure how to record in its books the sale of goods
to overseas, as the invoice was required to be in US$.

8 The business commenced in January and wanted to prepare its


accounts in line with the fiscal year.

9 Almost identical land and buildings next to the one owned by the
business were sold for $30 000 more than the business had paid for
its own premises three years earlier.

10 The business valued its inventory this year in the same way it had
Copyright © 2018. Cengage. All rights reserved.

valued it last year.

11 The business explained in its report the effects of changing the way it
valued its inventory this year from the one used in previous years.

12 The loss on the sale of machinery was shown separately from the cost
of maintaining and running all machinery during the year.

13 The $75.00 inventory loss was not treated as a separate expense.

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ACCOUNTING: ITS FOUNDATIONS

QUESTION 1.12
There are six accounting conventions and four accounting doctrines but three of the conventions have acceptable
alternative names. Unscramble the 13 words to name the conventions and doctrines.
a tiooiicyntutycnvitfa f eialrtymait k asoociitlcrtsh
b oreiognngncc g dgoiocnrptiacnue l ntaoeyrm
c drlactocrieriohs h ncosetincys m ytssuninetbies
d tmeocvnraiss i teayctntiingnuco
e eoitwlgnnacofori j dcsrieusol

QUESTION 1.13
What is the purpose or objective of accounting standards? How does AASB 101 contribute to that purpose?

QUESTION 1.14
What is the Framework and how is it involved with the financial reports?

QUESTION 1.15
What are the names of the following AASB standards?
a AASB 101 d AASB 112 g AASB 119
b AASB 102 e AASB 116 h AASB 137
c AASB 107 f AASB 118 i AASB 138

QUESTION 1.16
Complete the following statements and locate the missing word(s) in the find-a-word puzzle. The answers are in straight
lines but can be in any direction, including diagonal and reverse.
a This Act regulates companies.
b Limited, its abbreviation.
c This type of company is listed on the Australian Securities Exchange.
d They manage the company on behalf of the shareholders.
e Proprietary, abbreviated.
f The liability of a sole trader and the partners in a partnership is . . . . . . . . . .
g They usually run and manage the partnership.
h The liability of a shareholder is limited to the amount, if any, unpaid on their . . . . . . . . . .
i How much capital is contributed and how profits are shared among partners is usually written in the
partnership . . . . . . . . . .
j A . . . . . . . . . . partner does not take part in the running of the partnership.
k A company owned by between one and 50 people is a . . . . . . . . . . limited company.
Copyright © 2018. Cengage. All rights reserved.

l If a sole trader operates a business that doesn’t use their own name as the business name then the name of that
business must be . . . . . . . . . .
m The company is owned by them.
n A . . . . . . . . . . is owned by between two and 20 people.
o A business owned by one person is a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2 words).
p The last word in a company’s name is . . . . . . . . . .

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CHAPTER 1

P M P O P F W D G S S X P R I I Q Y X W
F P D T I I Z Q U A W L S P K Q P T F G
D I B Q Y J V H D N T S M J J C P O Q T
C H P Y W M Z Z P E L P I W B B U H S N
I S E M C T W T B D R I G L B W A N R E
L R T O J Q J U E O R E M T E U V B E M
B E Y R Y T L Q P J S S T I S N Z M N E
U N W M N B K R S K R N R S T D T A T E
P T Z I U L I R A K E O R O I E B N R R
F R S N A E O F N Y D I T L K G D C A G
S A N A T T D H E Y L T U E T X E K P A
S P X A C G T L S C O A M T A Z D R R X
W W R E X H L X Q I H R Q R K L Z M S D
K Y R T U R D O Y A E O V A X I W F N O
J I A W S P P O L T R P N D N M H G K Y
D T S P E T C A T C A R A E K I O U K J
A Q F L R F Q P E Z H O X R S T L G G N
S S K G A S D L U R S C R G D E F W G L
S L W S H I P B L I C D W Y T D J D A A
I A K H S K S C A V H X O H K H L M O S

QUESTION 1.17
The Accounting Professional and Ethical Standards Board states that there are five areas in which accountants must
display a certain standard of professional conduct or ethics. What are they? Explain the ethics and give a meaningful
example of each area.

QUESTION 1.18
Define and give examples to explain the significance of the following conventions and doctrines used in accounting:
a accounting entity convention
b accounting period convention
c going concern convention
d historical cost convention
e doctrine of consistency
f doctrine of materiality
g doctrine of conservatism.

Endnotes
Copyright © 2018. Cengage. All rights reserved.

1 In this text when specific accounting terms are used we shall draw the explanations from published accounting
guidelines/authorities like the Conceptual Framework and Accounting Standards. Further details of this authority are
discussed later in this chapter.
2 The Conceptual Framework: http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx
3 http://www.aasb.gov.au/Pronouncements/Current-standards.aspx
4 http://www.apesb.org.au/page.php?id=12

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2
Financial transactions
and their documentation

Introduction
In Chapter 1 you learnt that accounting involves the
recording and reporting of transactions for a business. In
this chapter we will examine the main types of business
transaction and the documents that are used to record
the transactions in the business’s books.
Copyright © 2018. Cengage. All rights reserved.

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CHAPTER 2

Personal transactions
Before we look at common business financial transactions, let’s look at some financial transactions that
you may undertake. As an individual, you would regularly make decisions to buy or purchase goods,
such as food, clothing and electronic equipment, or services, such as travelling by bus or train, repairs to
equipment or visiting the doctor or dentist. What do these decisions involve?

Ate the food. It tasted as


Hungry – buy food Found the place Received the
Ordered food good as expected; I’m
What do I feel like? to buy the food food that was
and paid cash satisfied and not hungry
Made a choice of my choice ordered
any more

OR

Take the phone to a Is it ready?


No, sorry; Finally ready; repaired and
Mobile phone is faulty repairer. Check that it will
waiting for a part working correctly; paid
and needs repair be done properly, quickly
from supplier by electronic method*
and for a reasonable price

*Electronic methods may include a debit or credit card, a smart phone or other electronic technology

FIGURE 2.1 An individual buys goods or services and pays with cash or by an electronic method

Both of the transactions in figure 2.1 are financial transactions, as you are required to pay for the good
or service. There are several ways you can pay: pay with cash; insert or swipe a debit or credit card linked
to your bank account into a terminal; use a contactless method such as payWave or PayPass, where your
chip-embedded card is placed near a point-of-sale terminal reader; or use another electronic device such as
a mobile phone. The supplying business should give you some documentation (hard copy or electronic) as
proof of the purchase.
Similarly, a business undertakes financial transactions. A business event or transaction occurs when the
business agrees to either:
• buy goods or services, or other items of benefit to it, or
• sell goods or services, or other items that it owns.
Business event = Business transaction
Written records arising from business transactions = Documents
Every transaction can be expressed in monetary terms and requires some form of documentation. The
document may be a hard copy or an electronic copy. There are two types of documents:
• source document: the originating (or starting) document, used to record required information in the
Copyright © 2018. Cengage. All rights reserved.

accounting books of the business. The document records specific details about the transaction and
must include a monetary amount
• control document: a document used in the business to control the use, or prevent the misuse, of the
source documents. Control documents support a transaction; in other words, they provide information
that can be used to verify or check the accuracy and validity of the relevant source document. Most
control documents are for use within the business and have no direct use outside of that business.
Control documents are an integral component of a system of internal control, as they assist in the
prevention of misappropriation and detection of errors in the processing of business transactions.
This chapter includes a description of the more commonly occurring transactions of a business, related
documentation and an outline of how the documents are prepared. Each business uses documents that
are designed to suit its specific needs, and hence their format will be unique to that particular business.
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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

An organisation’s accounting policies and procedures will generally stipulate procedures relating to the
conduct of business transactions and the preparation and/or use of the relevant documents. It is essential
for employees to be aware of and follow these policies and procedures, which should be included in
the business’s operations manuals. On many documents, some information is mandated by Australian
taxation laws and regulations.

Business transactions
Purchase for cash and sale for cash
When a business buys assets, goods or services for use in the business it may have to pay cash at the time
of purchase or delivery; that is, the goods, services or items are paid for at the time of purchase. These are
called cash transactions.
When a business sells goods that it has previously purchased for resale or provides services, it may
require the receipt of cash at the time of sale or delivery to the customer; that is, cash is received at the
time the goods/services are sold/provided or at the time of delivery.

TRANSACTION – CASH PURCHASE


Remit funds for services, goods or other items at the time of their purchase
Business A remits funds to business B for services, goods or other items at the time they are purchased;
this is a cash purchase for business A.

$
Business A Business B

FIGURE 2.2 Business A makes a cash purchase from business B

TRANSACTION – CASH SALE


Receive funds for services, goods or other items at the time of their sale
Business A receives funds from business C for services, goods or other items at the time they are sold;
this is a cash sale for business A.
Copyright © 2018. Cengage. All rights reserved.

$
Business A Business C

FIGURE 2.3 Business A makes a cash sale to business C

Purchase on credit and sale on credit


When a business buys or sells a good or service, the business transaction may not immediately be
accompanied by the remittance (payment or receipt) of funds (money). These are called credit
transactions. The remittance of funds will occur at a later date, usually within a month or two. This is
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CHAPTER 2

referred to as buying or selling on credit as funds, cash or money are remitted (paid or received) after the
goods or other items of benefit have been exchanged.

TRANSACTION – PURCHASE ON CREDIT


Invoice from supplier for services provided, goods or other items purchased on credit
Business A buys services or goods from business E by receiving services or goods and a tax invoice
requested from business E.

Business A Tax invoice Business E

FIGURE 2.4 Business A purchases on credit from business E

Remit (pay) funds to supplier


Business A remits funds to business E for goods, services or other items purchased from business E at an
earlier date.

Business A $ Business E

FIGURE 2.5 Business A remits funds to business E

Credit note from supplier for services provided, goods or other items previously purchased on credit
Business A returns goods, previously purchased on credit from business E, as some were no longer
required by business A. If the return is agreed to by both parties, business A should then receive a
credit note from business E. This reduces the amount owed by business A to business E.
A credit note may also be used if there was a problem with the pricing or quality of the goods or
services. In this case, all the goods are still required by business A, and none would be returned to
business E. A credit note would be issued by business E and forwarded to business A to correct the pricing
or quality problem agreed to with business E.

Business A Business E
Credit note
Copyright © 2018. Cengage. All rights reserved.

FIGURE 2.6 Business A receives credit note from business E

TRANSACTIONS – SALES ON CREDIT


Invoice to customer for services provided, goods or other items sold on credit
Business A sells goods to business D by sending goods and a tax invoice required by business D.

Business A Tax invoice Business D

FIGURE 2.7 Business A sells on credit to business D

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FINANCIAL TRANSACTIONS AND THEIR DOCUMENTATION

Receive funds from customer


Business A receives funds from business D for services provided, goods or other items sold to business D
at an earlier date.

Business A $ Business D

FIGURE 2.8 Business A receives funds from business D

Credit note to customer for goods previously sold on credit


By agreement, business D returns goods previously purchased from business A as some were no longer
required by business D. Business A then sends a credit note to business D. This reduces the amount
owed to business A by business D. A credit note may also be used to adjust amounts owed if there was a
problem with the pricing or quality of the goods. In this case, all the goods are still required by business
D, and no goods would be returned to business A. A credit note would be issued by business A and
forwarded to business D to correct the pricing or quality problem.

Business A Business D
Credit note

FIGURE 2.9 Business A sends credit note to business D

Other adjustments
Internal memorandum
Business A authorises in writing the internal adjustment to a customer’s account.

Business A Memo

FIGURE 2.10 Business A authorises adjustment by internal memo


Copyright © 2018. Cengage. All rights reserved.

QUESTION 2.1
What is a business transaction?

QUESTION 2.2
Explain the difference between:
• a cash sale and a credit sale •   a cash purchase and a credit purchase.

Documentation
Buy goods, services and other items on credit
A business needs to buy goods and services from other businesses. A retailer will buy goods for resale
(inventory) from suppliers and also additional assets such as vehicles, plant and equipment. The business
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Section of Bunker Hill Monument
Reproduced from Solomon Willard, Plans and
Sections of the Obelisk on Bunker’s Hill
(Boston, 1843), Plate V
As described in the Baldwin Report, the circular winding
staircase is composed of granite steps, starting with a width of about
four feet and narrowing as the ascent is made. Baldwin called for
“places of repose” (landings) at intervals. Modern architects call the
part around which a circular staircase winds, the “newel.” Baldwin’s
newel is a hallow wall, 10 feet in diameter at the base, about two feet
thick.
Thus, the monument was designed by an engineer, not an
architect. Baldwin violated a common rule for the proportions of
ancient Egyptian obelisks, that the pyramidion should be as high as
the base is wide, which is one reason why the Washington
Monument is so beautiful. One regrets that architect Willard, who
picked up where Baldwin left off, did not see fit to modify the Baldwin
lines. There seems never to have been any question as to the
monument’s material: granite, the native New England stone.
Although we admire the Bunker Hill Monument for its somber
strength, it cannot be called a structure of beauty, as is the lighter-
tinted and finer-textured marble Washington Monument, with its
sharper apex.
We can also speculate on why Baldwin made the monument
wholly of granite. At today’s prices, the circular inner surface of the
shaft and the circular chimney, or newel, around which the stone
staircase winds, would be of tremendous cost. The dressing of the
stone for a square inner area would be much cheaper.
Before criticizing Baldwin on his ponderous stair design, which
could be replaced by a light, modern fire escape, we should look at
the status of the tiny American iron industry of his day. The
ironmasters were recovering from the decline of activity in the War of
1812, during which they had lost their British market. Baldwin would
know that certain early railroad promoters estimated that granite
tracks mounted with iron plates would be less expensive than the
English-rolled rails, which the Americans could not produce. With
masons in Massachusetts receiving about $0.18 an hour, granite
was considered cheaper than iron. Baldwin therefore designed his
stairway of granite, with a massive granite chimney “newel” to
support the inner ends of the treads. Long before the monument was
completed, however, a square staircase of either cast iron or
wrought iron could have been produced, economically, by American
ironmasters. It was then too late to make the change, however.
At about the time of the completion of the monument the first
mechanical elevator was exhibited, but there was no room for an
elevator at Bunker Hill—the newel was in the way. To climb a few
score steps would be an easy task to our sturdy forebears, and to
say that one has “climbed the Bunker Hill Monument” is a boast that
hundreds of thousands of tourists to Boston have been proud to
make for over 100 years. Baldwin may have been right again, as he
usually was.
Baldwin specified that the monument should be square with the
compass, a common Egyptian practice. As built, however, it is
oriented to fit the redoubt (southeast corner) of the battle fortification.
Structurally, Baldwin designed a sound foundation, 12 feet deep,
built of six courses of stone with no small rubble that might
deteriorate through the years. He specified that the starting level of
the base of the monument should be established at the best
elevation to avoid an uneconomical distribution of the excavated
earth; today we would say that he balanced cut and fill.
The modern building contractor finds the estimate that went with
the report both practical and quaint. He will find that the digging of
the pit for the foundation of the monument was figured in “squares,”
at $2.00 each; and since a square meant eight cubic yards, hand
excavation was therefore priced at $0.25 per cubic yard. This price
must have included the expense of shoring; also the pumping that
such a deep pit would require. Baldwin proposed to dig a deep well
on the site (today called a test pit), which would not only indicate the
adequacy of the soil, but would also furnish water for construction
purposes. Much water would be needed to mix the lime and sand
mortar for the monument as well as for the Roman cement, for which
5
the estimated 100 casks were figured at $7.00 each.

5
“The use of natural cement was introduced
by Mr. Parker, who first discovered the properties
of the cement-stone in the Isle of Sheppy, and
took out a patent for the sale of it in 1796, under
the name of ‘Roman Cement.’”—Edward
Dobson, Rudiments of the Art of Building
(London: John Weale, 1854).

Masonry was then estimated in “perches,” and by a little


arithmetic, the modern contractor will learn that a perch was then
equal to 25 cubic feet, or nearly a cubic yard. The 784 perches of
masonry for the foundation were priced at $10 per perch, including
“stones, hammering, mortar, laying, etc.”
The report of Baldwin contains no computations on the structural
stability of the monument. If the modern structural designer wishes to
investigate how near the safe limit the monument has been tested by
Boston’s occasional hurricane winds, he has available the major
dimensions given in the Baldwin Report, and the drawings of
Willard’s classic Plans and Sections of the Obelisk from which to
make this simple computation.
Such computation shows that the monument is so heavy that a
hurricane wind has an almost imperceptible effect on its stability.
When it is subjected to a 100-mile-per-hour wind, the resultant force
is displaced only a fraction of a foot from the center of the 50-foot-
wide foundation. The maximum load on the soil is about five tons per
square foot—a safe bearing load on “the bed of clay and gravel
which composes the soil of the Hill” as described in an old account.
The same account speaks of “great pains having been used in
loosening the earth, and in puddling and ramming the stones.”
Surely, our construction ancestors would not have purposely
disturbed the underlying soil, in an attempt to improve upon the
natural bearing strength of one of the firmest of foundations: glacial
hardpan. Like any good builder, they were undoubtedly merely
puddling with water the earth backfill around the completed
foundation.
Baldwin knew that granite would not deteriorate when exposed
to the alternately hot and cold temperatures of Boston. Half a century
later, the engineers who transported an Egyptian obelisk (one of the
Cleopatra’s Needles) to Central Park, New York, learned that the
lovely textured syenitic granite of the Nile Valley was markedly
inferior to New England granite in weather resistance, although it
had kept its surface intact for centuries in the mild climate of Egypt.
To protect Cleopatra’s Needle in New York, a paraffin coating was
found necessary.
Baldwin soon resigned from the building committee, partly
because of the press of other work, but largely in protest against a
clause which made its members, all of whom freely donated their
services, financially responsible for the estimate. Promptly after
accepting his resignation, the directors revised this clause. In
reviewing the quaint old methods, the question arises: Would
modern estimates be more accurate if the consulting architects and
engineers had to pay for overruns?

Transient Cornerstone
On 17 June 1825, the cornerstone of the monument was laid
with impressive ceremonies. As the colorful procession marched up
Bunker Hill to the stirring rendition of “Yankee Doodle” by the
drummer of Colonel William Prescott’s regiment, who, 50 years
before, had been in the battle, the rear of the procession was just
starting from distant Boston Common. The little Boston of over a
century ago was crowded with visitors who had come from places as
remote as South Carolina by stagecoach, sailing vessel, or on foot,
to hear the great speech of Daniel Webster, President of the Bunker
Hill Monument Association, and America’s first orator of the day.
Years earlier, Chaplain Joseph Thaxter had paid the last offices to
dying soldiers in the battle; now, he invoked God’s blessing on the
young American republic, as 40 veterans of the battle sat in a place
of honor.
The most important visitor, of course, was General Lafayette,
who, as a good Mason, spread the mortar on the stone when it was
laid by Most Worshipful Grand Master of the Grand Lodge of
Massachusetts, John Abbot. As the battle’s only monument up to
this date had been erected by the Masons, it was considered
appropriate that the permanent monument should have its
cornerstone laid with the Masonic ceremony. A little later, this
procedure was sharply criticized during the Antimasonic period,
6
which occurred before the monument was finished.

6
Joseph Warren, the outstanding hero of the
battle, was Grand Master of Freemasons for
North America.

Many of the spectators knew that the cornerstone records would


later have to be moved, for the plans of the monument were hardly
started. Now, the box with its old newspapers, Continental currency,
and other data is within a stone at the monument’s northeast corner,
and the original cornerstone stands in the center of the foundation.
With his usual generosity, Daniel Webster presented the
copyright of his famous speech to the Bunker Hill Monument
Association. The copyright was sold for $600, which was the second
largest single contribution up to that date.

The Leading Character


Solomon Willard, architect and superintendent of the Bunker Hill
Monument, developed the methods for the quarrying, dressing,
transporting, and erecting the huge stones of the monument that
started granite on its way to becoming a principal material for
massive structures in America for half a century, until reinforced
concrete took over. (Today, granite is used extensively as a
protective facing for concrete, for highway curbing, and for
memorials.)
It is impressive to note the universal respect for the integrity and
ability of this early American architect which all the records of the
monument stress. In the drama of the building of the Bunker Hill
Monument, he played the leading part, and his character resembled
the sturdy structure which he designed in detail and erected. During
his 18 years of service in the construction of his masterpiece, the
Bunker Hill Monument, he would accept no recompense except for
his expenses, deeming it his duty to work without pay on such a
patriotic venture. He was also a substantial contributor to the building
fund.
A self-educated man, who had learned architecture with
sufficient thoroughness to become a teacher in the subject, he had
also become proficient in the various sciences. Starting as a
carpenter, Willard had proved both his craftsmanship and artistry by
becoming an adept carver of ships’ figureheads and models,
including a model of the Capitol at Washington.
At the time the monument was begun, Willard was one of the
leading architects of Boston. Typical of an architect’s versatility, he
had played an important part in the change from the heating of
buildings by wood-burning fireplaces and Franklin stoves, to hot-air
furnaces, using either wood or coal. As an expert in furnace heat, he
was called in for advice in the design of the heating system of
America’s most important building, when the President demanded
that the national Capitol should have adequate heat.
Appointed in October, 1825, to the combined position of architect
and superintendent, Willard spent the following winter on the plans,
models, and computations required to develop the construction
details, from the over-all dimensions of the Baldwin Report. During
these preliminary steps, Willard experimented with a promising
machine for dressing the stones. The selection of the Bunker Hill
Quarry in Quincy, Mass., was made after Willard had made a careful
search for suitable stone, in which he was said to have walked 300
miles. The right to quarry, at Quincy, sufficient granite for the
monument was purchased for $325. Part of the amount to be
provided by the Commonwealth of Massachusetts was to have been
supplied by the cost of the dressing of the stone (then called
“hammering”) by the convicts of nearby Charlestown State Prison.
The convicts, however, were obviously not sufficiently independent
to work on this shrine of independence, so this procedure was not
adopted.

Up-To-Date Quarry (Circa 1825–1843)


From various old American and English records of masonry
construction, it is possible to construct an account of how the stones
for the Bunker Hill Monument must have been quarried and dressed.
The old names are used for the tools and methods, and the modern
mason will find many of these old descriptions quite familiar.
The hornblende granite of the Quincy region was (and is) of very
uniform texture and varies only in color, from gray to dark gray. In
Quincy, Willard would find that both “sheet” and “boulder” quarry
formations occurred: the joints in the ledge of the sheet areas
making the granite appear as if stratified, and hence more easily
removed; but the huge, rounded boulders in the other areas,
measuring up to 40 feet across, had no joints. Rows of holes were
drilled by hand (at least 25 years would elapse before practical
power-rock drills became available) and large blocks loosened from
the ledge or boulder, probably by wedges, possibly by light blasts of
gunpowder. At this stage the quarried block was called “quarry-
pitched.” Stone of the smaller size for the monument was split from
these blocks along lines of holes in which wedges were driven.
These were probably of the plug-and-feather type, in which an iron
wedge with an acute angle is fitted between two semicircular iron
feathers, which taper in the opposite direction to that of the wedge,
and thus fit the hole drilled in the stone, nicely. Granite has no
cleavage planes, like slate; but a routine of smart taps on the plugs,
back and forth along the line, soon splits the stone along a fairly
smooth face. Two lewises (an ancient device), attached at about the
quarter points of the top of the stone, were used to lift it. Three
members make the lewis: a flat center bar with an eye at the top, the
center bar being flanked by two wedge-shaped side pieces which
are thicker at the bottom of the hole, and these also have eyes at the
top. The wedges are inserted first, then the center bar slipped
between; thereafter any lifting pull on the three bars is bound to
expand the lewis to fill the hole and lift the stone, for the hole is
drilled wider at the bottom than at the top.
With Solomon Willard’s well-rendered isometric drawing of each
stone for a guide, the stonecutter dressed it, first selecting the best
face for the “bed” (bottom) and hammered it to a plane surface,
determined by shallow channels (chisel drafts) cut diagonally across
the stone.
From this surface, the stonecutter laid out the other faces,
including the “build” (top), by his good mason’s square or template.
The texture of the visible face was “tooled,” that is, the marks of the
chisel remained visible. Quincy granite is a quality product, taking a
high polish, but the builders of the Bunker Hill Monument desired no
polish on their monument. Today, the surface of the monument
shows faint, well-weathered lines, like those produced by the modern
bushhammer, which has a head made of several thin steel plates
bolted together, each sharpened to a cutting edge. In England during
the period, flat iron bars with rough edges were in use to saw softer
stone than granite, and at Quincy, Willard experimented with
dressing machines. The conclusion may be drawn, however, that the
stones which we now see on the monument were undoubtedly
shaped to their present dimensions by hand.
Today, 110 years after its capstone was put in place, the Bunker
Hill Monument stands as an impressive testimonial to the
conservative judgment of its designer, Loammi Baldwin, and the
painstaking fidelity of the man who supervised its construction,
Solomon Willard. An engineer familiar with its maintenance states
that there is no evidence of settlement, and that a check by
surveyor’s transit revealed no signs of misalignment. Its joints
occasionally need pointing, the last pointing being performed about
20 years ago. Various iron or steel members of the observation
chamber have had to be replaced. Its lightning rod has been in place
for many years, but there is no readily available record to check
whether the monument has ever been struck by lightning. With their
empirical methods of design and their crude, mostly hand-operated,
construction apparatus, our forebears built a sturdy structure, which,
barring an earthquake, should last for centuries.

The Granite Railway


On 7 October 1826, the first railroad in America started
operation. This was the horse-operated Granite Railway, built to
transport the stones for the Bunker Hill Monument from the quarry in
Quincy down to the Neponset River, a distance of nearly three miles.
The track and cars of the railroad had been designed and built by a
young engineer of 28, Gridley Bryant, whose Granite Railway project
started him on a long career of achievement in the invention of
equipment that played a major part in the rapid and successful
development of the American railroad system.
Ample precedent for the Granite Railway existed in England,
where, since the reign of Charles II, wooden tracks, sometimes
armored with iron plates, had been used as runways for coal cars
from the pits to the nearest waterway. Within five years of the start of
the Granite Railway, similar systems are recorded in the states of
Pennsylvania, South Carolina, New York, and Maryland. At first, the
motive power for these lines was supplied by gravity, stationary
engines, or horses, but soon tiny steam locomotives were tried.
Thus, in the year 1829, Peter Cooper built the famous Tom Thumb, a
successful locomotive which used rifle barrels for flues. In the same
year the Stourbridge Lion, “the first locomotive that ever turned a
7
driving wheel on a railroad on the Western Continent,” was brought
by sailing vessel from England and started operation in
Pennsylvania. The American steam railroad system was thus well
under way by the time the lower courses of the monument were
being raised.

7
Annual Report of the Smithsonian Institution,
1889.

Bryant later described his railroad as having stone sleepers laid


across the track, 8 feet apart. Upon these, were placed wooden rails,
6 inches thick and 12 inches high (replaced by stone within a few
years). Spiked on top of these were iron plates, 3 inches wide by ¼
inch thick. However, at road crossings, stone rails were used, with 4-
inch by ½-inch iron plates bolted on top. This “permanent”
construction was also used on the double-track, inclined plane at the
quarry. (Well-preserved vestiges of this “permanent” construction are
visible today at the rise to the Bunker Hill Quarry.) Here, an endless
chain allowed the loaded, descending cars to pull up the empty
ascending ones.
The standard gauge of American railroads is now 4 feet, 8½
inches, measured between railheads, a standard adopted after many
years of confusion before the present gauge dimension was
adopted. Although Bryant described his track gauge as 5 feet, this
dimension was measured between the “bearing points” of the wheels
on the tracks. If the bearing points are assumed to be the center of
the treads of the wheels, his gauge is found to match closely the
present standard gauge. This track gauge agrees with that adopted
by the famous English railroad engineer, George Stephenson, at
about the same time, after he had measured scores of carts used by
his farmer neighbors. Possibly, both Stephenson and Bryant knew
that their selected gauge had a very early beginning; for some
historians suggest that the English carts were originally made to fit
the ruts cut in the roads of Britain by the Roman chariots, many
centuries earlier, during the Roman occupation of Britain.
On the day when the railroad started operation, 16 tons of
granite from the Bunker Hill Quarry, and loaded on three “wagons,”
were easily pulled by one horse, once started. Bryant’s first car had
flanged wheels, 6½ feet in diameter, from the axles of which a
platform was hung to carry the granite. This platform was lowered to
receive the load and then raised by an ingenious gearing device.
Naturally, Bryant based the design of his early railroad cars upon
the construction of the horse-drawn wagons of his day. Like the
wagons, his cars had to be flexible if they were to keep on the track
when passing over the two curves of the otherwise straight Granite
Railway. In his description of another of his cars appear the road
wagon terms—bolsters, truck, and center kingpin, to allow a
swiveling motion. Rigidly bolted to cross timbers beneath the truck
were two iron axletrees, on which revolved cast-iron wheels. (Some
time would elapse in railroad progress before the wheels would be
fixed to, and revolve with, the axles in journals.)
In early American railroad development Bryant is credited with
the invention of the eight-wheel car, the turntable, switch, turnout,
and many other improvements. In 1832, he had invented and used in
the building of the United States Bank at Boston, his portable derrick,
“used in every city and village in the country wherever there was a
stone building to erect.” Others profited from Bryant’s amazing
ingenuity. Although the Supreme Court of the United States decided
in his favor in his most important invention, the eight-wheeled car, he
8
did not collect, and he died poor.

8
For more data on the Granite Railway and
Gridley Bryant, see: Charles B. Stuart, Civil and
Military Engineers of America (New York: D. Van
Nostrand Company, Inc., 1871); and The First
Railroad in America (Boston: Privately printed for
Granite Railway Company, 1926).

In the fine saga of the Bunker Hill Monument, the Granite


Railway plays a prominent part. The demand of the monument for
granite definitely inspired Bryant to conceive the idea of America’s
first railroad, and to design pioneer equipment that contributed
hugely to the subsequent progress of America’s great railroad
system. The accurate account of the building of the monument,
however, has to record the fact that the railroad was not so great a
benefit as anticipated. In the short distance of 12 miles there was too
much loading and unloading. Willard freely expressed his annoyance
at these hindrances. That he took action is indicated in the following
quotation from an apparently authentic source: “The stone used for
the foundation and for the first forty feet of the structure (the
monument) was transported from the quarry on a railroad to the
wharf in Quincy (actually located in Milton) where it was put into flat-
bottomed boats, towed by steam-power to the wharf in Charlestown,
and then raised to the Hill by teams moving upon an inclined plane.
The repeated transfer of the stones, necessary in this mode of
conveyance, being attended with delay, liability to accident, and a
defacing of the blocks, was abandoned after the fortieth foot was
laid, and the materials were transported by teams directly from the
9
quarry to the hill.” This account fails to tell how the teams got up
and down the steep hill at the quarry: the 84-foot rise at an angle of
15 degrees. Clever Bryant must have used his endless chain to drag
the empty teams up, and to brake the loaded ones down.

9
George E. Ellis, History of the Battle of
Bunker’s (Breed’s) Hill (Boston: Lockwood,
Brooks and Company, 1875).
Hoc nomen est in æternum, et hoc
memoriale in generationem et generationem.
© R. Ruzicka 1915

Bunker Hill Monument in 1915


Reproduced from a wood engraving by Rudolph
Ruzicka in the Boston Athenæum
Judah Touro
Reproduced from a portrait in the Redwood
Library, Newport, R. I.
Amos Lawrence
Reproduced from a portrait by Chester
Harding owned by the Massachusetts
Hospital Life Insurance Company
Foundation of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate II
Construction of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate IV
Construction of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate X
Bunker Hill Monument in 1830
Reproduced from C. H. Snow, A Geography of Boston (Boston, 1830)

Beacon for Mariners


In the noisy grogshops on the streets leading to the Boston
waterfront, in the sail lofts on what is now Commercial Street, and at
the tall desks of the counting rooms of State Street, those who got
their living from the sea eagerly discussed the progress of the
monument in Charlestown. It was to be their beacon, and when the
many frigates, packets, sloops, and schooners had safely passed
the danger spots of the lower harbor, the monument would welcome
them to the busy inner port of Boston, then much livelier than it is
today. But progress proved to be slow. Naturally the stones broken
from the Quincy ledges and boulders were not always of the
dimensions planned by Willard for the lower courses; many were of
sizes needed for the upper courses. Economical Willard dressed the

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