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Seminar 326 October 20091. All accounting transactions are reflected in changes to the Balance Sheet. Describe in no more than 100 words the guiding principles that determine how such transactions are recorded?2. If an accounting transaction is recorded completely and correctly the initial equality of the Balance Sheet equation is maintained. Explain, and illustrate by way of numerical examples, your understanding of the various possible impacts on the Balance Sheet resulting from accounting transactions.3. What would be a non-valid accounting transaction? Give two numerical examples.4. What effect does each of the following transactions have on the Balance Sheet? Illustrate, by showing the movements in a separate Balance Sheet for each transaction.a. The owner invests 50,000 cash in the business.b. The business receives 5,000 cash from Debtorsc. The business pays 4,000 by cheque to Creditorsd. The business takes out a loan for 6,000e. The business purchases a machine for 75,000, paying 50,000 by cheque and the remainder is paid by taking out a medium term loan.f. The business purchases 3,000 of stock, paying 2,000 by cheque and the rest is owed.5. In one sentence explain how each of the following alters the Balance sheet.a. Employee wages paid by chequeb. Payment from cash to cancel an overdraft with the bankc. A debtor is viewed as never going to pay the money owed.6. Is it possible for a Balance Sheet to be equal and yet be incorrect? If so, provide an example.7. A Machine costs 1,000 and will last 5 years and then will be scrapped. Profit each year (in the form of cash) is 300. Demonstrate by a series of balance sheets, over the life of the machine, the following two scenarios: (i) all profit is withdrawn each year; and (ii) allow for depreciation each year of 200.Which scenario maintains the owners capital? Assume no other assets in the balance sheet other than those mentioned in the question.Answers overleaf .Seminar 3 - suggested solutions1. Accountants endeavour to be objective. Entries in the accounts must be capable of verification by an independent party and free from bias. Such entries are said to be objective. Conservative: accountants could deal with items in more than one way. In deciding between the alternatives the most conservative should take precedence. Economic events, (if no exchange of money occurs) generally are not recorded. But, if it is considered the impact of such an event leads to a reduction in the value of an asset, example inventory, then it would be recorded - to be conservative - at the lower value. (100 words)2. To record an accounting transaction completely and correctly the Balance Sheet equation must remain equal after the transaction entries have been made, since total Assets must equal, by definition, total Claims. There are nine permissible combinations of accounting transactions (see Slide 24 in Lecture), such as an increase in an asset and at the same time an increase in a liability (or claim).Two illustrations are as follows:(i) Owner purchased a machine, costing 5,000, with a 5-year bank loan. Balance Sheet as at Non-current Liab.Non-current AssetBank Loan +5,000 Machine +5,000 5,000 5,000(ii) Business received 3,000 in cash from Debtors (Trade Receivables) Balance Sheet as at .Current Assets Trade Receiv. 3,000Cash + 3,000 _ 0_3. Any combination of asset/claim change that is not included in the above nine permissible combinations is a non-valid accounting transaction.Two examples of non-valid accounting transactions are as follows: (i) Received cash (5,000) from debtors (Trade Receivables) but recorded the transaction, by mistake, as a reduction in Trade Payables instead of Receivables.Trade Pay. 5,000Cash +5,000(ii) Owner introduced cash (3,000) to the business but recorded the transaction, by mistake, as an increase in Trade Receivables instead of an increase in Capital.Cash +3,000Trade Receiv. +3,000 4. (a)Capital +50,000 Cash + 50,000 (b)Trade Receiv. 5,000Cash + 5,000 (c) Trade Pay. 4,000Cash - 4,000 (d)Loan +6,000Cash +6,000 (e)Machine +75,000Loan +25,000Bank - 50,000 +25,000 +25,000 (f)Inventory +3,000Trade Pay. +1,000Bank - 2,000 +1,000 +1,0005. a. The Bank account is reduced by the amount of the payment for wages expense and in turn Capital (by way of the Income Statement) is reduced by the same amount. b. The Cash account is reduced by the amount of payment to the bank and in turn the Bank Overdraft account is reduced, since money is no longer owed to the bank. c. Trade Receivables are reduced by the amount that is expected not to be paid and in turn Capital (by way of the Income Statement) is reduced by the same amount, since this non-payment has now been treated in the accounts as a bad debt expense.(Note: In the above three sentences the two accounts that are changed in the Balance Sheet are underlined)6. Yes, it is possible to maintain the equality of the Balance Sheet and yet it could be incorrect. An example is as follows:The owner introduced 10,000 of Capital but it was incorrectly recorded as money borrowed from the Bank. The equal, but incorrect, Balance Sheet is thus:Bank Loan + 10,000Cash + 10,0007. Scenario (i) Balance Sheet as at Year 1Capital 1,000 Profit 300Machine 1,000Cash 300 1,300 1,300If: the owner withdraws all profits, the following would be the Balance Sheet at the end of year 1. Balance Sheet as at Year 1Capital 1,000Profit 300Drawings 300 0Machine 1,000 1,000 1,000If: this continued each year, at the end of five years the balance sheet would be as follows (given that the machine will be scrapped) Balance Sheet as at Year 5Capital 0Profit 300Drawings 300 0Machine 0 0 0However: Profit has been defined by the Economist, Hicks, as the maximum amount that could be withdrawn in a period from an organisation, while leaving the Capital (Ownerships interest) intact. Thus, an allowance must be made over the five-year period - 200 per year depreciation which is equivalent to the allocation of the cost (1,000) over the Machines useful life. T