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ACCOUNTING 9E
Principles & Practice
An Introduction to
Your Smart Hub!
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INSTRUCTORS: Resources to help you teach are available for this textbook. Visit cengage.com.au/instructors or cengage.co.nz/instructors

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_9E_03832_sb_cvr.indd All Pages 14/08/2018 8:02 AM

ACCOUNTING9E
Copyright © 2018. Cengage. All rights reserved.

Accounting: An Introduction to Principles and Practice © 2019 Cengage Learning Australia Pty Limited
9th Edition
Edward A. Clarke Copyright Notice
Yvonne Wilson This Work is copyright. No part of this Work may be reproduced, stored in a
Michael Wilson retrieval system, or transmitted in any form or by any means without prior
written permission of the Publisher. Except as permitted under the
Copyright Act 1968, for example any fair dealing for the purposes of private
Head of content management: Dorothy Chiu study, research, criticism or review, subject to certain limitations. These
Content manager: Chee Ng limitations include: Restricting the copying to a maximum of one chapter or
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ongoing currency of URLs. in New Zealand call 0800 449 725

Eighth edition published in 2014 by Cengage Learning Australia. For permission to use material from this text or product, please email
aust.permissions@cengage.com
Disclaimer:
This material is designed to provide general information on how to use National Library of Australia Cataloguing-in-Publication Data
MYOB® AccountRight 2016.2. The information provided may not apply to ISBN: 9780170403832
earlier or later versions of the program. This material is not designed to A catalogue record for this book is available from the National Library of
provide specific business, accounting or legal advice for particular Australia.
circumstances. Business circumstances vary greatly, so before you rely on
this material for any important matter for your business, you should make Cengage Learning Australia
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For learning solutions, visit cengage.com.au

Printed in China by China Translation & Printing Services.

1 2 3 4 56 7 22 21 20 19 18
Copyright © 2018. Cengage. All rights reserved.

Guide to the text ix

Guide to the online resources xi

Preface xiii

Acknowledgements xiv

1 Accounting: its foundations
Introduction
1
1

Introduction to business operations 2

Basic accounting terms 5

Types of business ownership, their advantages and disadvantages 10

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

Ethics as it applies to accounting 21

2 Financial transactions and their documentation 26

Introduction 26

Personal transactions 27

Business transactions 28

Documentation 30

Filing of documentation 50

3 The accounting equation 55

Introduction 55

The accounting equation 56

Balance sheet (or statement of financial position) 62

The expanded accounting equation 65

Chart of accounts 70

4 Transactions, general journals and double-entry processing 79

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

An overview of the accounting process 80

Introduction to the general journal 80

Introduction to the goods and services tax (GST) 82

Transactions entered in the general journal 84

General journals posted to the general ledger 92

Trial balance: summary of general ledger balances 98

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

5 Transactions, specialised journals and double-entry processing 111

Introduction 111

The process so far 112

Specialised journals 113

Source documents entered in journals 114

Preparation of specialised journals 121

Sales journal: sell now, be paid later 122

Purchases journal: buy now, pay later 130

Cash receipts journal 138

Cash payments journal 147

Cash receipts journal with accounts receivable 155

Cash payments journal with accounts payable 155

Transactions review 163

Discounts: result of credit transactions 170

Cash accounting 173

Organisational standards and procedures 177

6 Separate ledgers for accounts receivable and accounts payable 184

Introduction 184

What can we now do? 185

Subsidiary ledgers and control accounts 185

Relevance of the inventory system to receivables and payables 187

Accounts receivable control and subsidiary ledger 188

Accounts payable control and subsidiary ledger 196

Administration of accounts receivable and accounts payable 210

Reconciliations 220

Reconciliations: accounts receivable 220

Reconciliations: accounts payable 233

Other subsidiary ledgers and control accounts 241

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

Introduction 258

Commencement of a business 259

Buying another business 260

Introduction of additional capital 261

Drawings of funds and goods 261

Purchase of non-current assets 263

Sale of a non-current asset at book value 264

Interest receivable and payable on overdue accounts 265

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

Dishonour of a cheque 267

Bad debt write-offs 272

Bad debts recovered 275

Bills receivable accepted and met 276

Bills payable accepted and met 278

Computerised accounting and special transactions 279

8 Management controls over cash 290

Introduction 290

Principles for internal control of cash 291

Bank reconciliation 293

Petty cash imprest system 322

9 The general ledger and financial reports 333

Introduction 333

Linking the general ledger to financial reports 334

Close general ledger accounts 338

Closing general journal entries 350

Income statement: trading basic format 351

Balance sheet: basic format 357

Account allocation to financial statements 361

Preparing financial reports for a servicing business 374

10 Matching expense and revenue to the accounting period 386

Introduction 386

Balance day adjustments 387

1. Expense accrued: expense incurred not yet processed 391

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

3. Revenue accrued: revenue not yet received 402

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

5. Accounts receivable: uncollectable 411

Copyright © 2018. Cengage. All rights reserved.

6. Depreciation 418

7. Variance between perpetual inventory records and physical inventory 422

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

Prepare adjusted trial balance 438

Summary of balance day adjustments 440

Reversals 441

Standing journals 446

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

11 Preparing final reports from a worksheet

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

12 Advanced management reports and correction of errors

Introduction499
499

Review of end-of-period processes 500

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

13 Accounting for non-current assets

Introduction552
552

Key terms 553

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

14 Payroll preparation and accounting entries

Introduction591
591

Main payroll functions and processes 592

Employment conditions 592

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

Glossary629
Index634

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
viii tafenswlib on 2020-05-30 00:20:18.
Created from
Guide to the text
As you read this text you will find a number of features in every chapter
to enhance your study of accounting, helping you to understand
how the theory is applied in the real world.

CHAPTER-OPENING FEATURES

1
THE ACCOUNTING EQUATION

The accounting equation

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

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

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

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

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

Assets $ = Liabilities $ + Owner’s Equity $

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

85
FIGURE 3.1 Commencement of business

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

END-OF-CHAPTER FEATURES
CHAPTER 3

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

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

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

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

Revision questions reinforce and test your Account

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

knowledge of the material covered in the TIMEBank

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

chapter. Computers 8 800 Cost of Sales 3 300

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

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

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

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

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

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

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

online for selected questions via CourseMate Express (see the

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

Guide to the online resources — For students).

Edward A. Clarke
Yvonne Wilson
Michael Wilson

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

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

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

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
Copyright © 2018. Cengage. All rights reserved.

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

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

• The payroll chapter has been updated in line with current minimum wage rates. The 2017–18
income tax rates are used, being the most current at the time of updating the book.
• The exposition of the principles and methods is supplemented with clear, worked
examples. This textbook is accompanied by CourseMate Express, a Cengage online
platform that includes fully worked solutions to all even-numbered questions, and a soft
copy of the workbook and additional templates in Excel format.
The ninth edition of Accounting: An Introduction to Principles and Practice supports
compliance with the VET Quality Framework and the Financial Services Training Package
(Release 3.0). It covers several core and elective units in the Accounting and Bookkeeping
qualifications and skills sets. It is designed for use by students studying at TAFE and other
tertiary education providers. It also continues to be very useful reading for university
students studying introductory accounting.
Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:20:44. xiii
ACK NOW LE DG E M E NT S

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

Edward A. Clarke
Yvonne Wilson
Michael Wilson

To special friends:

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

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

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

transactions are entered into the general journal and

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

Introduction to business operations

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

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

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

COMBINED SERVICE AND TRADING BUSINESS

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

Departments or functions within a business

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

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

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

SALES DESPATCH

HUMAN RESOURCES
(PERSONNEL) AND PAYROLL ACCOUNTING PURCHASES

WAREHOUSE RECEIVING

FIGURE 1.1 Interactions between departments or sections within a business

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

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

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

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

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

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

USERS OF ACCOUNTING INFORMATION

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

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

Basic accounting terms

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

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

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

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

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

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

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

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

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

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

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

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

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

12
Copyright © 2018. Cengage. All rights reserved.

13 14

16 17

FIGURE 1.2 Crossword for question 1.1

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

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

13 14
15
16
17 18
19
20

FIGURE 1.3 Crossword for question 1.2

Types of business ownership, their advantages

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

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

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

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

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

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

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

11
12
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FIGURE 1.4 Crossword for question 1.3

Accounting assumptions: conventions

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

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

ACCOUNTING PERIOD CONVENTION

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

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.
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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.
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.
14 tafenswlib on 2020-05-30 00:31:30.
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CHAPTER 1

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

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

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

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

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

7
8 9

10 11

12 13 14

15
16

FIGURE 1.5 Crossword for question 1.4

The Conceptual Framework and accounting

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

Australian Accounting Standards Board

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

The Conceptual Framework

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

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

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

LEGAL RECOGNITION OF STANDARDS

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

PURPOSE OR OBJECTIVE OF STANDARDS

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

• a statement of changes in equity for the period

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

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

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

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

CONTINUED

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

11 12

13 14

FIGURE 1.6 Crossword for question 1.5

Ethics as it applies to accounting

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

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

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.

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.
Copyright © 2018. Cengage. All rights reserved.

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

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.

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

Clarke, Edward A., et al. Accounting : An Introduction to Principles and Practice, Cengage, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/tafenswlib/detail.action?docID=6189033.
Created from tafenswlib on 2020-05-30 00:31:30. 25
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