chap 7- other transactions Flashcards
(21 cards)
What is a memo?
An internal source document used to verify a transaction that does not involve cash and is not a sale, purchase or return of inventory
What is the purpose of a memo?
Memos are issued to help the business communicate with itself and verify transactions which do not relate to a sale, purchase or return of inventory, or the movement of cash.
What transactions use memos?
- commencing entries
- non-cash contributions by the owner
- non-cash drawings by the owner
- establishment of a double-entry system (for an existing business)
- correction of errors
- use of inventory for advertising purposes
- inventory losses and gains
- inventory write downs
- balance day adjustments
What is fair value?
The price of an asset contributed by the owner that would be received if the asset was sold at the time it was acquired by the business.
Why must the fair value be recorded?
Because there is no ‘sale’ from the owner to the business there is no ‘sale’ document to verify its cost, so the asset must be valued at its fair value.
AA- Fair value
Why must contribution be recorded?
The price paid by the owner relates to a separate Accounting entity. Thus the transaction must be recorded as changes to the owner’s capital.
QC- Why must it be recorded at its fair value and not original purchase price?
The fair value provides a Faithful
representation of the asset’s value
at the time it is acquired by the
business.
and this valuation ensures Relevance
in the reports of the business.
Why is the valuation of a contribution by an owner less verifiable than other assets purchased by a business?
The specific dollar amount of the fair value is based on an estimate, therefore not Verifiable in same way as other assets that have been purchased by the business as there is no source document to verify valuation.
Ethical approach that ensures fair value provides a faithful representation of an asset’s value?
By referring to current market valuations of other comparable assets (of a similar age and/or in asimilar condition) will help to ensure that the fair value chosen provides a valuation that is as neutral (without bias) as possible. The owner may wish to consider an independent valuation, but would need to consider costs.
Why is it important to report ‘fair value’?
Because an incomplete or inaccurate valuation will undermine the Relevance of the firm’s reports and weaken its decision-making.
What is a commencing entry?
- Also known as an establishing or an opening entry.
- A General Journal entry to establish double-entry records by entering existing asset, liability and owner’s equity balances in the ledger accounts.
Why a commencing entry may be necessary.
When the business has been operating for some time already, and the owner decides to switch from single-entry Accounting to double-entry Accounting or the business is just starting up
QC- why making correcting entries?
- Required to address (correct) any errors detected in the General Ledger
- thereby ensure that the records provide a Faithful representation of the firm’s transactions.
- ensures the accounting records are complete, free from error and bias.
Why make correcting entries instead of just crossing them out?
The need to provide an audit trail, which allows the records to be checked and verified, means that entries cannot just be crossed out or rewritten.
Source docs relating to cash paid
- EFT payment
- ATM (plus tax invoice)
- Bank statement
Source docs relating to cash received
- EFT/manual receipt
- ATM receipt
- Credit card receipt
- Bank statement
What is an order form?
- a document issued by a business requesting the supply of inventory or other goods
- Sometimes called a purchase order
- Such requests are important for ensuring a business does not run out of inventory.
- does not specify dollar amount as business ordering is not able to set selling price (some may but price invalid until supplier agrees to sale)
Does order form have to be recorded and why/why not?
- does not need to be recorded in the
General Journal or General Ledger as an order form is simply a request for items. - Goods requested may not be available or may not be delivered for some time to come so no transaction occurs when inventory is ordered.
- only when goods are exchanged, and invoice is sent, that a transaction occurs.
- invoice, not the order form, that must be recorded.
What is an order confirmation?
- A document issued by the supplier confirming the receipt of an order (for inventory)
- Having received the order form, the supplier may send an order confirmation to notify the business that it has received the order.
- At this point, it may also be able to confirm that it has the inventory that was requested and the selling price
for those items.
What is a shipping confirmation?
- a document issued by the supplier
confirming that the inventory has been dispatched and is being shipped to the business - Even though inventory has been shipped, at this point there is still no
transaction to record, as the business (cannot yet recognise inventory as asset as dont have control and as they do not have inventory, there is no present obligation so no liability to recognise)
What is a delivery docket?
- a document issued by the supplier to accompany a delivery, listing the type and quantity of all items delivered
- should be checked against the items themselves to ensure that what is listed has been received.
- Accompanying or provided soon after the delivery of the goods should be the purchase invoice, and the delivery docket should also be checked against the invoice to verify (verifiability) that the goods delivered matches the goods for which the business has been charged.
- only at this point (when goods have been received) does business have control over economic resource thus have asset of inventory and liability of Accounts payable
