Task 1C - Elements of Accounting

1. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 1
Task 1C Elements of Accounting
Question 1
A small business had Assets of $110,000 and Liabilities of $40,000. Define the term Owner’s Equity
and state the Owner’s Equity of this business.
Definition
1 mark
 Owner’s Equity represents the owner’s residual interest in the Assets of the firm after the
deduction of Liabilities.
Owner’s Equity 1 mark $70,000
1 + 1 = 2 marks
Question 2
Explain whether the accountant is correct and justify your opinion with reference to the definition of
a Liability.
Explanation
1 mark
The accountant is correct. Creditors are a Liability because:
1 mark
 The firm has a present obligation – in this case, the obligation to repay creditors the
amounts owed.
1 mark
 There is a past event (transaction) – in this case, the firm purchased goods on credit.
1 mark
 It will result in an outflow of future economic benefits – in this case, the firm will pay cash
to the creditor.
1 + 3 = 4 marks

2. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 2
Question 3
Cash sales are reported as revenue in the Income Statement. Explain how cash sales meet the
definition of Revenue.
Explanation
Cash sales are Revenue because:
1 mark
 There is an inflow of economic benefits – in this case, the firm has received cash.
1 mark
 There is an increase in Assets – in this case, the firm’s cash balance will increase.
1 mark
 There is an increase in Owner’s Equity.
3 marks
Question 4
With reference to the elements of Accounting, explain how the $36,000 should be treated in the
firm’s books as at the end of 2015.
Explanation
Identify
1 mark
 At the end of 2015, the $36,000 should be recorded as an Asset.
Define/Relate
This is because:
1 mark
 There is a resource controlled by the business – in this case, the firm has a legal claim to
insurance coverage over the next 3 years.
1 mark
 There is a past event (transaction) – in this case, the firm paid $36,000 for the insurance
upfront.
1 mark
 It will result in a future inflows of economic benefits – in this case, the firm will have
insurance coverage for the next three years.
1 + 3 = 4 marks

3. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 3
Question 5
a) Explain how the unpaid wages will be treated in the firm’s Balance Sheet at the end of
February.
Explanation
Identify
1 mark
The wages owed are a Liability because:
Define/Relate
1 mark
 The firm has a present obligation – in this case, the obligation to pay their employees the
wages owed.
1 mark
 There is a past event (transaction) – in this case, the employees performed work during
February.
1 mark
 It will result in an outflow of future economic benefits – in this case, the firm will pay cash
to its employees.
1 + 3 = 4 marks
b) With reference to the SAC2 definition of the accounting elements, explain how the wages
incurred but not yet paid during February meet the definition of an Expense.
Explanation
Define/Relate
1 mark
 There is an outflows of economic benefits as the firm has used up (consumed) the labour of
its employees.
1 mark
 There is an increase in Liabilities as the unpaid wages are a present obligation of the firm.
1 mark
 There is an overall decrease in Owner’s Equity of $50,000.
3 marks

4. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 4
Total /20 marks