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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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Edward A. Clarke
Yvonne Wilson
Michael Wilson
ACCOUNTING9E
·-
,-'., CENGAGE
Accounting: An Introduction to Principles and Practice © 2019 Cengage Learning Australia Pty Limited
9th Edition
Edward A. Clarke Copyright Notice
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1 2 3 4 56 7 22 21 20 19 18
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

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

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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

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

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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

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

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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

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
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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,
$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
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

Guide to the online resources — For students).

Edward A. Clarke
Yvonne Wilson
Michael Wilson
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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.
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
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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:
• quizzes
• weblinks
• flashcards
• and more tools to help you excel in your studies.
COURSEMATE EXPRESS FOR ACCOUNTING

Digital workbook templates
Fast-track expertise in accounting by practising the student book theory with the companion workbook. The time-
saving templates remove the need to recreate standard forms, so students can focus on solving the accounting
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.
• 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
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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,
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
• 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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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
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.
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
– 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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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
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.
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:
• 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.
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
13 14
15
16 17
18
FIGURE 1.2 Crossword for question 1.1
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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
13 14
15
16
17 18
19
20
21
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.
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
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.
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
13
14
15
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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.
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
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.
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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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
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.
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
7
8 9
10 11
12 13 14
15
16
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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
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.
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
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 . . . . . . . . . .
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
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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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
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
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
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.
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.
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
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
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.
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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
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.
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.
$
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
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
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

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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A NORTH COUNTRY NIMROD.
As a lad of 18, John Crozier was already well known as a keen

sportsman, as good with his rod in the becks and rivers here about, as he was
with his father's hounds, and fond of wrestling as he was of hunting. At that
day the pack numbered only six couples. They were kept at the farms all
through the year, and were trained to meet at the sound of the Master's horn.
The old Squire would often tell how he would stand on Kiln Hill, blow a
blast, and watch the beauties racing across the meadows to his call. John
Peel, in those days, was still hunting on the other side of Skiddaw, and John
Crozier remembered the last time he saw him was under Wanthwaite Crags,
where, after a long day's run, he invited the old veteran, who was on his
white pony, to come home to supper. 'Nay, nay, John,' said Peel, 'I'se
freetened o' gettin' neeted (benighted),' and so went back on his way to
Ruthwaite supperless. 'But I'll see thee again,' he added—who knows they
may again have met.
The first thing the young Master did was to improve the breed of his
hounds, and this he accomplished by getting a strain from John Peel's
kennels. How much of Ruby, 'Ranter, Royal, and Bellman, so true,' spoken
of in the song, still runs in the blood of the Blencathra pack, I know not.
Other strains since then have been introduced, but a hardier pack never
breasted a mountain side, and there is not one of them who would not carry
on the line himself, if his fellows failed, to the death.
John Crozier once received the following note: 'To J. Crozier, Esq.,
M.F.H., from Isaac and Edward Brownrigg, of Brownrigg. This hound
(Darling) brought a splendid dog-fox, and after a very exciting hunt
ultimately caught it in our house field. About an hour afterwards other five
dogs came. After being fed they left, but this one would not leave. We intend
having the fox preserved.' After carrying on the hounds at his own cost for
30 years, 'the Squire,' as he was always called, at the request of his
neighbours, allowed them to become a subscription pack, in the year 1870.
There was a general feeling in the dales that it was not fair to allow all the
burden to be upon one man, and on the conditions that he would remain
Master, and in case of the hunt ceasing, the hounds should be returned to
him. A treasurer and secretary were appointed, and the Blencathra Hunt
went on merrily as before.
The Master was fortunate in his huntsmen. Joseph Fearon, of honoured

memory, was succeeded by Isaac Todhunter, who carried the horn for 25
years. Isaac Todhunter handed it on to John Porter, who for a like time kept
up the best traditions of the pack, which Jem Dalton carries on to-day. The
names of these past huntsmen, with other members of the hunt, are inscribed
on the stone of memorial raised in the Threlkeld Churchyard at the charges
of the Squire and a few friends; and that pillar in the King's dale—for of this
dale John Crozier was truly king—if it does nothing else, goes to prove that
the following of the foxes in the Lake District adds years, even as it adds
cheer, to the lives of the dalesmen. Thus, for example, one sees that many of
the hunters were fourscore years before they were run to earth; one was 89,
another 91, another 95, and a fourth 98.
Up till the past two years the old Master of the hunt presided at the
annual hunt dinner, but it was known that his health was failing, and though
each week up to the end he kept in touch with all the doings of his pack, he
did not leave his house. Still week by week members of the hunt would go
up and have a 'crack' with him—always to be received with the same
courteous inquiry, 'Well, how about your wives and families, are they well?
That's right. Is any news stirring? What about the House last night?' He took
the keenest interest in politics up to the end, and that came, not
unexpectedly, at two o'clock on a quiet starlit morning, Thursday, 5th March,
1903.
I could not wonder that my old friend the yeoman had said it was a dark
day for Threlkeld, for he had lived among his own people, and loved them to
the end. How they loved him may be gathered from the fact that two days
before he died, a casket containing a book in which every householder in the
parish had entered his name, with an illuminated address, full of affection
and gratitude, for the friendship towards them of a long life, was brought to
the house. 'Ya kna,' said my friend, 'they knew t' aid Squire was house-fast,
and they likely thowt 't wad cheer 'im up a laal bit.' He never saw it, for it
was thought he was too ill to be 'fashed' with it, and he is beyond all earthly
cheering now; 'the Hunter is home from the Hill.'
On the following Monday there was such a gathering together of the

dalesmen from far and near as had never been seen in Threlkeld Church, or
Threlkeld Churchyard. They sang one of the old Squire's favourite hymns.
They bore the coffin to the grave with the veteran's hunting cap and crop and
the brush of the last fox killed by his pack upon it, and before and after the
service they talked of him kindly, as Cumberland folk ever do of the dead;
they spoke of him, not only as the oldest Master of Foxhounds in the land,
but as a man who entered into all the social enjoyments of the country-side,
and whilst on terms of close intimacy, almost familiarity, with the
companions, retained their regard, and in some things set them a good
example.
For in an age when the gambling spirit was abroad, it will be
remembered that John Crozier never bet a penny in his life. 'I did yance
think o' betting a hawpeth o' snaps,' he once said in the vernacular; 'but I
kind of considered it ower, and I didn't.' It will be remembered of him, too,
that he was against the use of bad language in the field, and that he never
would allow, if he could help it, a bit of scandal or 'ill gien gossip.' If he
heard one man running down another or passing an unkind judgment, or
setting an unkind tale 'agate,' he would jerk out, 'There, noo, thoo mun let
that hare sit'—and it sat. 'Ay, ay,' said an old friend as he turned away from
the graveyard, 'tho' he said nowt about it, he was a kind o' a religious man,
was varra partial to certain hymns, and had his favourite psalms, that he wad
gang off quietly to his bit summerhoose most mornings, and tek his prayer
book with him. They say t' housekeeper, after her master's death, found t' aid
beuk laid open on summerhoose taable, I suppose.'
But as they left the churchyard they all in memory saw the old Master in
his sealskin cap, with the lappets about his ears—squarely built and strong,
with his alpenstock in hand, as the prefatory verse tells:
But I think I see him stand,

Rough mountain staff in hand,
Fur cap and coat of grey,
With a smile for all the band
Of the sportsmen in the land,
And a word for all the merry men who loved his 'Hark away!'
And as they thought of what he has been to them for the last 65 years in the
Threlkeld vale, they admitted the truth of the following words:
Last hunter of your race!

As we bear you to your place,
We forget the hounds and horn,
But the tears are on our face,
For we mind your deeds of grace,
Loving-kindness, late and early, unto all the village-born.
A WINTER-DAY ON DERWENTWATER.
If November is the month for cloud effect, December certainly is the

month for marvellous dawns and eventides. Then it would appear as if by
some generous intent to give the minds of men unwonted tranquillity and to
impress all the dwellers in the vales with the thought of perfect restfulness,
the sun seems to prepare for his rising a heaven of cloudless silver washed
with faintest gold. All the heavy ragged companies of the night-wrack seem
withdrawn, and very slowly, while Helvellyn stands lilac-grey against the
silver dawn, the sun rolls into sight, kindles the cones of Grisedale and
Grasmoor, and bids the heavy dew upon the valley meadows rise up in finest
lines of delicate gossamer lawn.
Yesterday, though we had little wind in the valley, one could hear the
humming and the roaring of what seemed a tempest in middle heaven, but at
night-time heaven and earth were still, and the seven stars in Orion and the
Pleiads, 'like fireflies tangled in a silver braid,' shone clear, and we felt that
the Frost King had come in earnest. There was no snow on the hills this
morning; the leaves at one's feet tinkled as though they were made of iron; I
met schoolboys with rosy faces and skates upon their shoulders going off to
Tewfit Tarn—the little tarn upon the ridge dividing Naddle from St. John's in
the Vale, that always gives our skaters in the Keswick neighbourhood their
first winter happiness. Down to the lake I went, and standing at Friar's Crag,
saw that part of it was burnished steel and part black ebon water. It was
incredible that one night's frost should thus have partly sealed the lake from
sight.
A WINTER'S DAY ON DERWENTWATER.
I was bound for Brandelhow to meet the woodman to discuss the felling
of certain timber, and through the ice pack, if it were possible, I must needs
go. Coasting along round the island, I soon found myself in a narrow inlet of
water that stretched half across the lake; tiny spikules of ice that seemed like
floating straws were right and left of me in the still water; here and there
little delicate fans of ice were passed. These miniature ice-islands were the
nuclei round which the freezing mixture would crystallise. Forward across
towards Lingholme I steered, and suddenly should have been brought up
sharp had not the boat, with good way upon it, crashed right into the ice-floe
and shown me how unsubstantial a thing this first ice-covering of the lake
was. With every stroke of the oar the boat forged its way with marvellous
sound of crash and gride, and one remembered how the Ancient Mariner had
heard those 'noises in a swound,' and was able to summon up something of
the roar with which the great ice-breakers or steam rams on the Neva crash
their way up and down the river to keep the waterway clear for the Baltic
shipping. But in a short time the difficulty of rowing became doubled, and if
it had not been that one saw clear water ahead one would hardly have
ventured forward. Meanwhile in the wake of one's boat one saw how swiftly
the little ice-elves repaired the damage one had done by bringing back to its
own place and rest each fragment one had displaced, and piecing over with
exquisite exactness the breach that one had made.
Now the way was clear, for by some mysterious reason, known only to
the water-gods, the shallower the water became as one went shoreward the
freer it was of ice. It may have been mere fantasy, but it seemed as if the
water so near to freezing was semi-fluid, viscous; always right and left of
one swam by the little ice spikules, and the ice fans, with irridescent beauty,
floated and shone hard by. Presently another crash was heard, and an ice-
belt, only a yard wide, but stretching fifty or sixty yards along, was crashed
through, another and another, and so, with alternate noise and silence, one
made one's way to Victoria Point, and ran the boat ashore at Brandelhow.
Beautiful as that woodland is in early spring, it seemed that to-day there

were more beauties still. The bracken was silver-dusted with frost and shone
gold in the sunshine, and the green velvet of the mosses upon tree-trunk and
ground only heightened by contrast the rich russet of the fern. I climbed to
the russet seat on the rocky knoll above; there, sitting, I watched the
gambolling of five squirrels and listened to the crackling as their sharp teeth
made short work of the cones and fir-tufts. All these little merry feasters had
put on their winter coats, and were much less red of hue than when I
watched them last in August. They had put on their winter tails also. I saw
none of that curious white flaxen colour which the squirrel in September
seems so proud of, as, with a wave of his brush, he dashes out of sight.
There, as I watched these miracles of motion and alertness, I thought of
Ruskin—how lovingly he had described them. Here was one leaping on to a
twig that bent with just enough of swing in it to allow the little fellow to fly
through the air to the next bough. Here was another, now running along the
sturdier bough that bent not, now dropping five or six feet into a dark-green
tuft, now sitting cosily in a forked branch to munch his midday meal, now
racing for pure joy and mischief after his brother up a long tree-trunk, the
tail sometimes bent in an arch above the tufted ears, again thrown out
straight, and now bent and undulating—truly a balancing-pole, if ever one
was needed by such expert gymnasts. Children of perfect knowledge of the
woodland boughs, fearless as birds and swift as monkeys, the happy family
rejoiced in the winter sunshine, as free of care as the cloudless sky above
their heads. I moved, and the jay clanged and screamed from among the
alders below me, and in a moment the happy family had vanished out of
sight, and one saw what an intercommunion of alarm against strange comers
birds and beasts must surely have. Dropping down from this happy mount—
and truly it has been called Mons Beata—I made my way through crackling
fern across the chattering little brooklet to the second rocky height further to
the southward. Blencathra lilac-grey and Walla Wood purple-brown and
High Seat tawny yellow were reflected with such fidelity in the flood below
one that the beauty of two worlds seemed to be given me. The tranquillity of
the far-away fells was brought right across the flood to one's feet, a couple of
wild duck dashed into the water, and with the ripplings of their sudden
descent they set the whole fellside trembling. Looking now towards Cat
Bels, one marvelled at the extraordinary beauty of the colour. Never was
such bronze and gold seen to make the sky so blue, as one gazed up to the
hummock of Cat Bels; whilst, between our rustic seat and the high road, the
woodland hollow was filled with colour of gradation from silver-grey to
purple-brown, and here and there a beech tree full of leaf or a Scotch fir
green and blue gave emphasis to the general tone of softest harmony.
Passing on through the larches upon the little height, I gained a third seat,
and here the chief charm was the outlook up Borrodale. Immediately in the
foreground were young Scotch fir; beyond them the lake glinted in silver
through leafless birches. Away up Borrodale, with every variety of lilac
melting into purple-grey, ridge beyond ridge, one saw the bossy outliers of
the Borrodale ranges stand up in sunny calm; one felt the deep tranquillity of
Glaramara and of nearer Honister, the only sound a distant cockcrow from
the far-off Ashness farm and the quiet inland murmur of Lodore. The glory
of the vale was the wonderful Castle Hill, with its echo of old Rome upon its
head, that stood black-purple against the further lilac haze. But as one sat
there in silent content a school of long-tailed tits came quavering by. They
found abundant food, it would seem, in the Scotch firs close beside me, and
what the squirrels had done before to open one's eyes to their miracle of
movement these long-tailed titmice did again, for one here, as I sat and
watched their happy quest for food. Such balancing, such joyousness, such
fiery energy, such swiftness of sight, such whispering of heart's content
would have made the saddest man glad and the dullest marvel. As I rose
from that seat, with a long look up Borrodale, I could not wonder that our
Viking forefathers had called it the Vale of the Borg or Castle, for that Castle
Hill in Borrodale must surely have seemed to them a giant's hold, the fittest
place for some high fortress-camp, as it had seemed to the Romans of an
older day.
If the first height one had ascended was rightly called 'Mons Beata,' and
the seat one had last left was placed on a hill that might be called Mons
Blencathrae, which gave such fair prospect of Blencathra, surely this fair
mount might be called 'Mons Borgadalis,' or the Mount of Borrodale.
I heard a whistle, and to my answering hulloa came a shout. The forester

was waiting for me away up there on the highest point of the woodland, not
far from the main road and above the Brandelhow mines. Descending swiftly
and making my way through the frosty undergrowth, with rabbits scuttling
here and there and a soft-winged owl lazily fluttering from a bough above
my head, I was suddenly aware by the scent that hung upon the fern that a
fox had passed that way. But it must have been in the early morning or 'Brer
Rabbit' would not have been about and the jay would have been screaming,
and, making the best of my way up to the forester, we soon forgot all about
bird and beast in our honest efforts to let in light and give fair outlook to the
wanderers who should hither come for rest and thought in succeeding
summers.
It is not an easy matter to open up a woodland view—the branch of every

tree must be questioned, the joy of 'part seen, imagined part' must be had in
mind,—but the work was done at last. We sat down for rest on the woodland
seat on the fourth rocky eminence on Brandelhow. It is a seat within only a
few yards of the high road, yet so screened from it that it is hardly seen; but
it is a hill with so fair a prospect that indeed I think angels might pass the
little wicket in the wall and visit those who rest here unawares. There is no
better name imaginable for this high resting-place than 'Mons Angelorum.'
As I thought thus the great sun rolled beyond the hills and all the vale lay
darkened. Cat Bels and Brandelhow went black and grey, while still across
the lake Walla and Blencathra lay in full sunshine; but at that moment,
unthought of before, there rose a band of angels all along the riverside, and
tiny cloudlets swam up into shadow, and again from shadow into sun. The
Mount of the Angels was this height rightly called.
'It is likely getting late,' said the forester, 'and if you do not start soon
you'll happen hardly get through the ice to-night.'
Down to the boat landing in Victoria Bay I went, and as I went the
woodland filled with a mysterious light. I thought of St. Francis and the
visions he had seen at Al Verna; the sun was beyond the hills, it had faded
now even from Walla Crag, but the light from Brandelhow seemed to leap
up from the ground, the larches so dim and dead before gleamed into gold;
the red bracken at my feet burned like fire; it was an enchanted woodland;
the magic after-glow was the enchanter.
MONS BEATA, BRANDELHOW.
I pushed off from the shore, gained the ice-pack, crashed through it but
not without difficulty, and won the dark, clear water beyond. The sun had
sunk between Robinson and Grisedale, a dark cloud-bar had filled the
heavenly interspace, but there in the gap it seemed as if beneath its heavy
eyebrow the eye of God was keeping watch and ward above the quiet land.
One had often seen at the seaside the sun sink and the slender pillar of
golden light reach downward to the shore, but never had I seen such a
magnificent golden roadway laid upon shining water for happy dreams of
tired men to follow the flying day, as I saw that eventide upon the silver ice
and the darkling flood of tranquil Derwentwater.
WORDSWORTH AT COCKERMOUTH.
It was a difference that arose on the American question, between Sir

James Lowther and his law agent and steward, a certain John Robinson, in
the year 1766, that was the prime cause of the fact that Wordsworth, the
poet, was born here. For John Robinson resigned his stewardship, and young
John Wordsworth, then only 24 years of age, 'a man of great force of
character and real human capacity,' was appointed in his place to be 'law
agent and steward of the manor of Ennerdale.' To that post, which he
occupied for the next 18 years, the young man came from the Penrith
neighbourhood, bringing with him as his girl wife a certain Ann Cookson, a
mercer's daughter, who could boast, through her descent on her mother's side
from the Crackanthorpes, of Newbiggin Hall, an ancestry that flowed from
as far back as the time of Edward III. She was thus well suited to marry the
son of the land agent of Sockbridge, near Penistone, who traced his descent
through a long unbroken line of sturdy Yorkshire yeomen away in the
Penistone neighbourhood, as far as to the time of the Norman Conqueror.
They took up their abode in the substantial house now occupied by Mr.
Robinson Mitchell, then lately builded by one Sheriff Luckock. It bears date
1745-46, and is to-day unmarred and unmodernised, remaining much as it
was when John Wordsworth became its tenant. We know little of this young
John Wordsworth, but he must have been a man 'tender and deep in his
excess of love,' for when, after twelve years of happy married life here in the
old manor house beside the Derwent, his wife died from consumption,
caught, as we are told, by being put into a damp bed in the 'best room' when
on a visit to friends in London, he never seemed to recover his spirits, and he
himself died six years after her, in the year 1783, on the 30th December, and
lies buried at the east end of the All Saints' Church. He lost his way on the
fells when returning from some business engagement at Broughton-in-
Furness, and was obliged to stay out all night; the chill from exposure
brought on inflammation of the lungs, and his strength, sapped by deep
domestic sorrow, could not bear up against it. The orphans whom he left,
Richard, William, Dorothy, John, and Christopher, four of whom were
remarkable in after life, were then removed to the care of their uncle
Cookson at Penrith, and Cockermouth knew them no more. We have been
allowed, from William Wordsworth's autobiographical notes and his poems,
to glean something of those early days. The poet tells us:
Early died
My honoured mother, she who was the heart
And hinge of all our learnings and our loves,
Nor would I praise her, but in perfect love!
We can in fancy see her in earnest converse with Mr. Ellbanks, the teacher of
the school by the churchyard, talking about William's 'moody and stiff
temper'; we can hear her say 'that the only one of the children about whom
she has fears is William; and he will be remarkable for good or evil.' We may
note her pinning on the child's breast the Easter nosegay, for the young lad is
to go up to the church, to say his catechism. Daffodils I expect the flowers
were: years after, in the ecclesiastical sonnets Words worth, speaking of this
act of his mother's, writes:
Sweet flowers at whose inaudible command

Her countenance phantom-like doth reappear.
Or we can see the father, book in hand, hearing the lad recite the long
passages of Shakespeare, and Milton, and Spenser which were insensibly to
mould his ear to music, fire his imagination, and make a poet of him.
But when I think of Wordsworth in those childish days I do not go off to

the ancient school by the church to hear him stumble through Latin verbs.
He was not as happy there as he was at Mrs. Birkett's, the dame's school at
Penrith; there was no Mary Hutchinson to keep him company; and he
learned, he tells us, when he went to Hawkshead at the age of ten, more
Latin in a fortnight than he had learned the two previous years at
Cockermouth. No, rather when I want to see the little William Wordsworth
at his happiest, I go with him into the old Manor House Terrace garden by
the Derwent's side, and see him with his sister, that sister 'Emmeline,' as he
called her, chasing the butterfly, or hand in hand peering through the rose
and privet hedge at the sparrow's nest, 'wishing yet fearing to be near it.'
Or, follow him with his nurse, he a child of only five years of age,
bathing and basking alternate, all the hot August day in the shallows of the
mill pool, and leaping naked as an Indian through the tall garden ragwort on
the sands, and clapping his hands to see the rainbow spring from middle air.
Or I go with him by the river, 'winding among its grassy holmes,' whose
voice flowed along his earliest dreams—that Derwent he could never forget
—away to the Castle-hold of the barons of old time, Waldeof, Umfraville,
Multon, Lucies, and Nevilles, and watch him peering with look of awe into
the dark cellar and dungeons, watch him chase the butterfly through the grim
courts or climb after the tufts of golden wallflower upon its broken
battlements.
But happiest of all was he when with his story book he lay full stretched,
as he describes in the Prelude, upon the sun-warmed stones and sandy banks
'beside the bright blue river,' and there feasted his little heart on fairy tale
and filled his soul with scenes from wonderland.
Wordsworth was never unmindful of the home of his birth. He left

Cockermouth for schooldays at Hawkshead when he was a boy of nine, and
though in the holidays, for the next five years, he paid an occasional visit to
the place, his chief vacation associations were with Penrith. The Poet's
connection with this town ceased at his father's death in 1784, when he was a
lad of fourteen; but he never forgot it. From nature and her overflowing soul
here in his childhood days he had received so much that all his thoughts
were steeped in a feeling of grateful remembrance of it. He visited the home
of his childhood occasionally to refresh his heart with a cup of
remembrance, and we find a note of a certain visit in Dorothy's letter to Mrs.
Marshall. Writing in September, 1807, she says:—'W. and M. have just
returned. They were at Cockermouth, our native place you know, and the
Terrace Walk—that you have heard me speak of many a time—with the
privet hedge, is still full of roses as it was thirty years ago. Yes, I remember
it for more than thirty years.'
In 1836 he interests himself in a scheme for building a new church. He

writes to his friend Poole, of Nether Stowey, for assistance to this object. He
tells him that Cockermouth is in a state of much spiritual destitution, nearly
6000 souls and only 300 sittings for the poor. Wordsworth cared for the poor.
'I have been the means,' he says, 'of setting on foot the project of erecting a
new church there, and the inhabitants look to me for much more assistance
than I can possibly afford them, through any influence that I possess.'
As a Keswick parson, I gather with pride further on in that letter, that it

was the fact of the new church of St. John's having been built there that
spurred him on; and that he hopes Cockermouth will do as Keswick has
done, and thus excite other towns to follow so good an example.
It is interesting to note that the Cockermouthians of that day were not of

one mind in the matter, or the Poet had been misled as to native church
feeling; for the inhabitants having a windfall of £2000 given them by the
Lord of Egremont that year, to spend as they pleased, preferred a new market
place to a new church, and the old Poet writes:—'This was wanted, so we
cannot complain.'
But Wordsworth was disappointed and grieved too at the spirit of

unkindness shown by some of the people of his native town to his good Lord
Lonsdale. I have had access to a MS. letter of Wordsworth's, which shows
that the Church-building project fell through, as far as he was concerned, by
reason of what he considered the unfair treatment of an offer of help, made
by the then Lord Lonsdale to the town, in connection with the church
accommodation needed.
So far as I know this was the last public work he attempted to do for the
place that gave him birth. But at least we cannot regret that his last effort
was in a cause near to his heart, the cause of the religious interests and life of
his fellow Cumbrians, the cause of reverence, worship, and godly fear, of
'pure religion breathing household laws,' the cause of the worship and praise
of Almighty God, here in his native place.
The seed he sowed, though it lay dormant, did not fall on barren ground;
and in a real sense the present All Saints' Parish Church may stand as a
monument to the immortal Poet, who then, as ever, championed 'in perilous
times the cause of the poor and simple,' and did what he might in his day for
church life and piety in the place of his nativity, Cockermouth.
MOUNTAIN SILENCE AND VALLEY SONG.
Once more the Heavenly power makes all things new.
This was the line from Tennyson's poem that kept ringing in my ears, as on
the mid-most day of April I wandered out and away across the vale to the
skirts of Skiddaw.
Opens a door in Heaven;

From skies of glass
A Jacob's ladder falls
On greening grass,
And o'er the mountain walls
Young angels pass.
Before them fleets the shower

And burst the buds,
And shine the level lands,
And flash the floods,
The stars are from their hands
Flung thro' the woods.
No, no! this last couplet was untrue; the anemones had not yet opened their
delicate shells, and the blackthorn buds were only dimmest seed-pearls of
yellowish lustre. But as I gazed from the fence halfway up Latrigg and
watched the Greta flashing, and the great plain fresh-enamelled with the first
faint green of spring, a Jacob's ladder was let down from above Scafell and
Glaramara, and all the angels that ever came on earth to fill men's hearts
with April jollity came trooping downwards. They took on various forms.
Some of them became tortoise-shell butterflies that lay in sunny content
upon the moist woodland path. Others sailed out of blue air and became
glorious peacock butterflies upon whose underwings in blue and black one
clearly saw the head and face of human kind sketched in with lustrous
powdery pencillings. Other angels ministered to the pink coral glumes of the
sycamore; others, again, daintily untwisted the leafage of the wild rose in the
hedge; others delighted to unfold the tufts upon the elder. But the angels that
seemed to be busiest were those that made the vivid emerald of the 'dog's
mercury' contrast with the faded red of the bracken in the woods, and where
the purple birches showed against the flowering larches added moment by
moment a deeper, ruddier purple to the trees' beauty and a finer flash of
green to the surrounding wood to set the purple off.
But all the gifts of the angels of that April morning seemed as nothing
when compared with the joy of the sight of one single angel of the spring—
he a lustrous-backed swallow who flashed from steel-purple into black and
from black to steel-purple, and disappeared from sight behind the larches. I
had known of his coming, for a swift-eyed shepherd had seen one of his kind
in the valley as early as April 1, but April 13 to the 15th was marked in my
calendar as swallowtide, and I had not expected sight of him till this week.
Here he was, glossy with African sun, and full of silent message that
summer was sure. The chiffchaff would be a-trill and the cuckoo would be
calling for a mate within the week. Ah, swallow! swallow! flying north!
How much of hope and happiness you bring. Then as I moved through the
larchen grove, I heard the titmice whispering that they too were glad, they
too felt reassured by sight of the swallow, and one walked on in a kind of
consciousness that man and swallow and budding larches were more akin
than one had believed, until the joyousness of spring found the selfsame
echo in such divers hearts, and that indeed the over-soul was one, the music
and the melody one voice. Yes, Wordsworth sang truly when he wrote:
One impulse from a vernal wood

May teach us more of man,
Of moral evil and of good,
Than all the sages can.
I met a child halfway up Latrigg braiding her hat with larch flower. Truly
no rubies ever seemed so rich and rare as these which the simple village
child had twisted in her hat; her sister had a handful of primroses she was
taking to her father in the neighbouring cottage, for he was but slowly
recovering from pneumonia, and the child knew by instinct that a breath
from a primrose posy would do more for him than all the 'doctors' bottles' in
the world.
'You have been up Skiddaw betimes,' I said.
'Ay, ay, sir; you see they've gone to "laate" Herdwicks to-day for
lambing-time, and I went up to the Gale with the dogs.'
Herdwicks! Lambing! What did it all mean? Only that those great brown
slopes of Skiddaw which till this day have been vocal with flocks and alive
with sheep, will by this eventide be as silent as the grave. For between April
10 and April 20 the shepherds know that the Herdwicks will become
mothers of their springtide young, and so they will go forth to the fells and
upland pastures, to bring their woolly charges down from the mountain
heights to the safety and the food and care of the dale-farm enclosures. I
overtook the shepherds at the 'Gale,' and went with them. Soon the dogs
were seen scouring the fell-side, now disappearing from sight, now coming
back to get a signal from their master. A wave of the hand to left or right was
all that was needed, and away they went, and slowly and surely they seemed
to be able to search out and bring into a close company the Herdwicks from
all the heathery waste and grey-bleached mountain hollows.
Then began the home-bringing. Very tenderly and gently did the dogs
urge the sheep, heavy with young, down the fell-side slopes. Now and again
the shepherd cried, 'Hey, Jack!' and away the collies flew back towards him.
'Ga away by!' and away again the collies flew in a great circle out beyond
and behind the sheep. The sheep were a little hustled and came on too fast.
Then the shepherd whistled and held up his hand, and the dogs sat like
stones till he whistled and waved his hand again. So down from Lonscale
and across the gulfy Whitbeck the sheep came. The dogs dashed off to
where, through a great carpet of ever-lucent moss, the main fountains break
from the hill. They slaked their thirst, then came back slowly to urge the
flocks homeward and downward toward the Shepherd's Cross, and so over
the Gale to the Lonscale Farm. We stopped at the Cross, and a tall, 'leish,'
handsome man, with fair hair and the grey Viking eye, said in solemn
undertone, 'Fadder and brudder cud hev been weal content to be wid us on
sic a day as this, I'se thinking.' And the mist gathered in his eyes, and he said
no more, but just went homeward with the sheep. Ah, yes, that Shepherd's
Cross tells of men—father and son—who spent their whole lives in
following the Herdwicks on the sides of Skiddaw and Lonscale Fell;
wrought for their sheep, thought of them by day and dreamed of them by
night, and were as proud, as ever David was, of what they looked upon as
the finest life a man need care to live, the mountain shepherd's round of love
and toil.
I waved adieu, and up beyond the huts to 'Jenkin' I went. The red fern
had been washed into faintest ochre, the heather had grown grey with winter
storm, but everywhere beneath the blanched grass one felt new life and
tenderest first flush of April green was astir; and as one looked down from
'Jenkin' into the circle of the deep blue hills and the Derwent's perfect mirror,
one saw that though the larches were still brown there was an undertone of
something, neither brown nor green, that flooded not only the larch woods
but the great Latrigg pastures also, and betokened that the spring was even at
their doors, and that the fells would soon rejoice with the emerald valley
below. Gazing at the vale of Crosthwaite, where still all the trees seem
winter white, one was astonished at the darkness of the hedgerows that
divided the meadows, and one saw the new fallows shine and swim like
purple enamel upon the green flood of the springtide grass. 'Jenkin' was
reached, but not until many swathes of lingering snow, black with the smoke
of the blast furnaces of the coast and of Lancashire and Yorkshire mills, had
been passed. Here at 'Jenkin top' we found two men hard at work 'graaving'
peats for the Coronation bonfires on June 26.
'Well, how goes the peat-graving?' said I, and a ruddy-faced Norseman

from a Threlkeld farm said, 'Aw, gaily weel, sir; but I'm thinking we mud
hev nae mair kings upo' the throane, for this job will finish t' peat moss, and
peats are hard to finnd within reach o' Skiddaw top. You see,' said he, 'it's
lost its wire, and peat widout wire in it is nae use for makking a "low" wid.'
I saw that what he called 'wire' were the rootlets of the ancient
undergrowth of years gone by, the matted texture of primeval springtides,
and, stooping down, he broke a peat across and showed me the wire. 'You
kna,' he continued, 'we shall just leave peats ligging here, and thoo mun send
up scheul-lads to spreead them in a forthnet's time. Then they mud coom oop
a week laater and shift 'em and turn them, and then a week laater they mud
coom and foot 'em. That is if thoo want 'em in fettle by Coronation-daay, for
they are ter'ble watter-sick noo.'
'Foot them?' I said. 'What do you mean?' And the shepherd took a couple
and leaned them one against another, and showed me how thus a draught of
air passed between the peats and ensured their drying. 'Well, good-daay,
good-daay. But we mud hev nae mair kings to be crooned,' said he; 'for peat
moss ull nobbut howd oot for this un, I'm thinking.'
I bade farewell, and down to the valley I went, noting how doubly near
and blue the hills and vales all seemed to grow, as one passed down beneath
the veils of haze which had lent both greyness and distance to the view.
Again I saw the swallow skim; again I watched the gorgeous butterflies, and,
with a wand of palm-flower that had just lost its gold, and the rosy plumelets
of the larch in my hand, I made the best of my way homeward, through air
that throbbed and thrilled with the voice of thrush and blackbird, and felt the
deep contrast between these silent flockless slopes of Skiddaw, and the
ringing singing valley at his feet.
INDEX
Adelaide, Queen, 46.

Ambleside, 18, 22, 44, 53.
Angler, Complete, 120.
April song, 81.
Arnold, Dr., 19, 50.

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Guide to the text ix

5 Transactions, specialised journals and double-entry processing 111

Dishonour of a cheque 267

11 Preparing final reports from a worksheet

12 Advanced management reports and correction of errors

Review of end-of-period processes 500

13 Accounting for non-current assets

Key terms 553

14 Payroll preparation and accounting entries

Main payroll functions and processes 592

Employment conditions 592

The accounting equation

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

Assets $ = Liabilities $ + Owner’s Equity $

Revision questions reinforce and test your Account

knowledge of the material covered in the TIMEBank

chapter. Computers 8 800 Cost of Sales 3 300

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

online for selected questions via CourseMate Express (see the

Guide to the online resources — For students).

ARTWORK FROM THE TEXT

FOR THE STUDENT

COURSEMATE EXPRESS FOR ACCOUNTING

transactions are entered into the general journal and

Introduction to business operations

COMBINED SERVICE AND TRADING BUSINESS

Departments or functions within a business

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

FIGURE 1.1 Interactions between departments or sections within a business

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

USERS OF ACCOUNTING INFORMATION

Basic accounting terms

FIGURE 1.2 Crossword for question 1.1

FIGURE 1.3 Crossword for question 1.2

Types of business ownership, their advantages

FIGURE 1.4 Crossword for question 1.3

Accounting assumptions: conventions

ACCOUNTING PERIOD CONVENTION

GOING CONCERN (OR CONTINUITY OF ACTIVITY) CONVENTION

HISTORICAL COST (OR HISTORICAL RECORD) CONVENTION

RECOGNITION OF LAW CONVENTION

FIGURE 1.5 Crossword for question 1.4

The Conceptual Framework and accounting

Australian Accounting Standards Board

The Conceptual Framework

LEGAL RECOGNITION OF STANDARDS

PURPOSE OR OBJECTIVE OF STANDARDS

• a statement of changes in equity for the period

15 This type of user includes individuals and other businesses.

FIGURE 1.6 Crossword for question 1.5

Ethics as it applies to accounting

Business transaction or event Name of convention or doctrine

1 Annual accounts were prepared.

3 The business expects to remain in existence into the foreseeable

4 The business will be a law-abiding entity.

8 The business commenced in January and wanted to prepare its

11 Preparing final reports from a worksheet

12 Advanced management reports and correction of errors

Review of end-of-period processes 500

13 Accounting for non-current assets

Key terms 553

14 Payroll preparation and accounting entries

Main payroll functions and processes 592

Employment conditions 592