Accounting
Double-entry recording, financial reports, budgeting and ratio analysis — full 100-mark exams with fully worked solutions and mark-by-mark guides.
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Source Documents, GST and the Cash Receipts/Payments Journals
Source Documents: Purpose and the Principle of Verifiability
In VCE Accounting, a source document is any original business record that provides written evidence that a financial transaction has occurred. Source documents are the foundation of the entire recording process: no entry should ever be made in a journal without a supporting source document. This requirement directly satisfies the qualitative characteristic of verifiability — an independent observer examining the same evidence should be able to confirm that the financial information faithfully represents the underlying transaction.
Source documents also support the historical cost basis of accounting. Because the document captures the agreed price at the time of the transaction, assets and expenses are recorded at the amount actually paid or received, not at an estimated or current-market value.
The four source documents you must be able to identify and interpret in Unit 3 are:
- Tax invoice (from a supplier): Issued when goods or services are purchased. Must be retained by the buyer as evidence of the purchase price and any GST paid. Required by the ATO for GST credits to be claimed on purchases of $82.50 (GST-inclusive) or more.
- Receipt (issued by the business): Issued to a customer when the business receives cash payment. Confirms the amount received and the GST component charged. For cash sales, this is the source document for the Cash Receipts Journal.
- Memo (internal memorandum): An internal document authorising a transaction where no external document exists — for example, recording bank fees charged directly to the account, drawing cash for personal use by the owner, or making an adjusting entry at period end. Memos are prepared by the business owner or manager.
- EFT (Electronic Funds Transfer) record: A bank-generated or system-generated confirmation that an electronic payment has been made or received. Commonly used for wages paid, online supplier payments, and direct debit receipts from customers. The EFT record serves the same evidentiary function as a cheque butt or receipt.
Each source document must be numbered sequentially and filed in date order. This supports faithful representation: the accounting records reflect only transactions for which objective evidence exists.
GST Fundamentals: The 10% Rate, Tax Invoices and the GST Clearing Account
The Goods and Services Tax (GST) is a broad-based consumption tax of 10% levied on most goods and services supplied in Australia. Businesses registered for GST collect GST on their sales (called GST collected) and pay GST on their purchases (called GST paid or input tax credits). The net amount — GST collected minus GST paid — is remitted to the Australian Taxation Office (ATO), usually on a quarterly Business Activity Statement (BAS).
Importantly, GST is not an expense or income for the business: it is merely collected on the government's behalf. This is why a separate liability account called GST Clearing is used.
The GST Clearing account:
- Is a liability account in the Balance Sheet.
- Is credited when the business collects GST on sales (increasing the liability to the ATO).
- Is debited when the business pays GST on purchases (reducing the net liability).
- At BAS time, the credit balance (if credits are less than collections) represents the amount payable to the ATO; a debit balance means the ATO owes the business a refund.
Calculating GST:
- To find GST from a GST-inclusive amount: divide by 11. Example: $220 inclusive price → GST = $220 ÷ 11 = $20; GST-exclusive price = $200.
- To find the GST-inclusive price from a GST-exclusive price: multiply by 1.1. Example: $300 × 1.1 = $330.
- To find GST from a GST-exclusive price: multiply by 0.1 (10%). Example: $300 × 0.1 = $30.
A valid tax invoice issued by a GST-registered supplier must show: the words 'Tax Invoice'; the supplier's ABN; the date; a description of goods or services; the GST-inclusive price; and either the GST amount or a statement that the price includes GST. Without a valid tax invoice, the business cannot claim an input tax credit (i.e., cannot debit GST Clearing).
Question 1 (10 marks)
Sportfirst Melbourne is a sporting-goods retailer owned by Mia Tran. The business is registered for GST, uses the perpetual inventory system and records credit transactions in specialised journals. On 3 June 2025 Mia received the following source document.
| TAX INVOICE 4471 Alpine Footwear Pty Ltd (ABN 55 004 112 900) | |
|---|---|
| To: Sportfirst Melbourne Date: 3 June 2025 Terms: 30 days | |
| 50 pairs Trailblazer running shoes @ $80 | $4 000 |
| GST 10% | $400 |
| Total payable | $4 400 |
On 6 June 2025 Mia issued Receipt 812 for a cash sale of 20 pairs of these running shoes for $2 200 (including GST). The 20 pairs had cost the business $65 each.
a. Record the 3 June credit purchase in the Purchases Journal and the 6 June cash sale (both the sale and the cost of sales) in the Cash Receipts Journal of Sportfirst Melbourne. (6 marks)
b. Explain why the GST on the 3 June purchase is recorded as a debit to the GST Clearing account, with reference to one accounting assumption or qualitative characteristic. (4 marks)
Show the worked answer
Answer: Worked solution
a. Purchases Journal
| Date | Supplier / Doc | Creditors Control | Inventory | GST Clearing |
|---|---|---|---|---|
| 3 Jun | Alpine Footwear (Inv 4471) | 4 400 | 4 000 | 400 |
General-ledger effect: Dr Inventory 4 000, Dr GST Clearing 400, Cr Creditors Control 4 400.
Cash Receipts Journal (6 June, Rec 812)
| Date | Details | Bank | Sales | Cost of Sales | GST Clearing |
|---|---|---|---|---|---|
| 6 Jun | Cash sale (Rec 812) | 2 200 | 2 000 | 1 300 | 200 |
Working — sale: $2 200 ÷ 1.1 = $2 000 net sales; GST = $2 200 − $2 000 = $200. Cost of sales: 20 × $65 = $1 300 (Dr Cost of Sales 1 300, Cr Inventory 1 300).
Double-entry check: Dr Bank 2 200 = Cr Sales 2 000 + Cr GST Clearing 200. Separately Dr Cost of Sales 1 300 = Cr Inventory 1 300. Both entries balance.
b. The $400 GST paid to Alpine Footwear is a debit to GST Clearing because it is not an expense of the business — it is GST the business has paid on a purchase that it is entitled to claim back from the ATO, so it represents a reduction in the amount the business owes the ATO (or a receivable from the ATO). Recording it separately rather than adding it to the cost of inventory reflects faithful representation: the reported cost of inventory ($4 000) shows the true economic cost to the business, and the GST Clearing balance faithfully shows the net GST position. Under the entity assumption, GST is collected and paid on behalf of the ATO and is kept distinct from the owner's trading results, so it must not inflate the reported cost of the goods.
All 20 practice exams
- Exam 1 — Recording: double-entry journals, subsidiary records, GST Clearing, perpetual FIFO inventory (Units 3); Reporting: classified Income Statement, classified Balance Sheet, Cash Flow Statement (direct method); Balance-day adjustments: prepaid/accrued items, straight-line & reducing-balance depreciation, disposal of non-current assets, bad debts & provision for doubtful debts
- Exam 2 — Recording: double-entry journals, perpetual FIFO inventory, GST Clearing, source documents (tax invoices); Reporting: classified Income Statement, classified Balance Sheet, Cash Flow / cash budget, accounting equation; Balance-day adjustments: prepaid & accrued items, straight-line & reducing-balance depreciation, disposal of non-current assets, bad & doubtful debts
- Exam 3 — Unit 3 recording — source documents, double-entry journals, GST Clearing and FIFO perpetual inventory; Unit 3 & 4 reporting — classified Income Statement, Balance Sheet and Cash Flow Statement (direct method); Unit 4 balance-day adjustments — high prepaid advertising, accrued expenses and accrued revenue under the accrual assumption
- Exam 4 — Recording: double-entry general/specialised journals, GST Clearing, perpetual inventory (FIFO), ledger posting and balancing; Balance-day adjustments: prepaid and accrued expenses, straight-line and reducing-balance depreciation, disposal of non-current assets; Accounting for bad debts and the provision for doubtful debts (net realisable value of Accounts Receivable)
- Exam 5 — Recording: double-entry journals (general & specialised), GST Clearing treatment, FIFO perpetual inventory, drawings of inventory, settlement discount with GST adjustment; Balance-day adjustments: prepaid & accrued expenses, reducing-balance vs straight-line depreciation, bad debts and Allowance for Doubtful Debts; Disposal of non-current assets: carrying value, loss/profit on disposal, GST on sale of a depreciating asset
- Exam 6 — Unit 3 recording: FIFO perpetual inventory, specialised & general journals, GST Clearing treatment, cost of sales; Unit 4 balance-day adjustments: prepaid & accrued items, straight-line & reducing-balance depreciation, disposal of non-current assets, bad and doubtful debts; Reporting: classified Income Statement, classified Balance Sheet satisfying the accounting equation, Cash Flow Statement (direct method)
- Exam 7 — FIFO perpetual inventory recording and seasonal inventory write-down to net realisable value; Credit sales with GST, and balance-day adjustments for bad debts and a provision for doubtful debts; Depreciation (reducing-balance and straight-line) and disposal of a non-current asset
- Exam 8 — Unit 3 recording: source documents, double-entry general/specialised journals, GST Clearing, and a perpetual FIFO inventory card; Unit 3 reporting: classified Income Statement (trading format), classified Balance Sheet satisfying Assets = Liabilities + Owner's Equity, and Cash Flow Statement (direct method); Unit 4 balance-day adjustments: prepaid and accrued expenses/revenues, straight-line and reducing-balance depreciation, disposal of a non-current asset by trade-in, and bad and doubtful debts
- Exam 9 — Perpetual FIFO inventory recording and reconciling records to a physical stocktake (inventory loss/gain, write-down); Balance-day adjustments: prepaid and accrued expenses, straight-line and reducing-balance depreciation; General Journal, ledger and disposal of a non-current asset with correct GST treatment
- Exam 10 — Recording: perpetual FIFO inventory, specialised & general journals, GST Clearing, subsidiary/control accounts (Units 3); Reporting: classified Income Statement, classified Balance Sheet satisfying A = L + OE, Cash Flow Statement (direct method); Balance-day adjustments: prepaid/accrued expenses & revenues, straight-line & reducing-balance depreciation, disposal of a non-current asset, bad & doubtful debts / provision
- Exam 11 — Recording: double-entry journals, subsidiary/specialised journals, General Ledger and GST Clearing (Unit 3); Perpetual inventory using FIFO cost assignment (Unit 3); Balance-day adjustments: prepaid/accrued items, straight-line & reducing-balance depreciation, disposal of non-current assets, bad and doubtful debts (Unit 4)
- Exam 12 — Unit 3 recording — perpetual FIFO inventory, double-entry journals and GST Clearing from source documents; Unit 3 reporting — classified Income Statement and Balance Sheet satisfying the accounting equation; Unit 4 balance-day adjustments — prepaid/accrued items, doubtful debts, reducing-balance depreciation and disposal of a non-current asset
- Exam 13 — Recording: general-journal entries from source documents with correct GST Clearing treatment (credit purchase, cash sale under perpetual inventory, capital contribution, creditor payment with discount received); Perpetual inventory using FIFO cost assignment — inventory card, cost of sales and closing balance; Balance-day adjustments: prepaid expense, accrued wages, increase in Allowance for Doubtful Debts, accrued interest, and their effect on the accounting equation
- Exam 14 — Recording: credit purchases with GST Clearing, FIFO perpetual inventory cards, subsidiary and general journals (Unit 3); Balance-day adjustments: prepaid & accrued expenses, straight-line and reducing-balance depreciation, disposal of non-current assets, bad and doubtful debts (Unit 4); Reporting: classified Income Statement, classified Balance Sheet satisfying A = L + OE, Cash Flow Statement (direct method)
- Exam 15 — Unit 3 recording: FIFO perpetual inventory with foreign-exchange and freight costs embedded in landed cost, credit purchase and sale journals, GST Clearing; Unit 4 balance-day adjustments: prepaid insurance, accrued wages, accrued interest revenue, reducing-balance depreciation and their General Ledger effect; Unit 4 disposal of a non-current asset: straight-line depreciation to date of disposal, carrying value, trade-in, loss on disposal, GST, journals and Disposal ledger account
- Exam 16 — Recording under the double-entry system: specialised & general journals, GST Clearing, perpetual inventory (FIFO), General Ledger posting and balancing; Balance-day adjustments: prepaid & accrued items, straight-line & reducing-balance depreciation, disposal of non-current assets, bad debts and the Allowance for Doubtful Debts; Reporting: classified Income Statement, classified Balance Sheet (Assets = Liabilities + Owner's Equity), and Cash Flow / cash-budget construction under the direct method
- Exam 17 — Recording under the double-entry system with GST Clearing and FIFO perpetual inventory (purchases, credit sales, inventory card); Reporting: classified Income Statement, classified Balance Sheet (accounting equation) and Cash Flow Statement (direct method) for a sole-trader trading business; Balance-day adjustments: prepaid and accrued expenses, and the provision for doubtful debts, under the accrual assumption and matching
- Exam 18 — Recording: primary source documents, specialised/general journals, double-entry, GST Clearing, settlement discount; Perpetual inventory using FIFO cost assignment; inventory card, cost of sales, gross profit; Balance-day adjustments: reducing-balance depreciation and disposal of a non-current asset
- Exam 19 — Recording: FIFO perpetual inventory, GST Clearing, double-entry journals & ledgers, disposal of non-current assets; Reporting: classified Income Statement, classified Balance Sheet (accounting equation), Cash Flow Statement (direct method); Balance-day adjustments: prepaid/accrued items, straight-line & reducing-balance depreciation, bad & doubtful debts
- Exam 20 — Recording: opening entries, double-entry general & specialised journals, GST Clearing, perpetual inventory (FIFO), subsidiary records; Reporting: classified Income Statement, classified Balance Sheet (accounting equation), Cash Flow Statement (direct method); Balance-day adjustments: prepaid & accrued expenses/revenues, straight-line & reducing-balance depreciation, disposal of non-current assets, bad debts & provision for doubtful debts
All 20 revision notes
- Source Documents, GST and the Cash Receipts/Payments Journals
- Credit Sales, Credit Purchases and Returns Journals
- General Journal Entries Including Opening Entries and Error Corrections
- General Ledger Posting, Balancing Accounts and the Trial Balance
- Perpetual Inventory System Using the FIFO Cost Assignment Method
- Preparing the Income Statement (Service and Trading Business Format)
- Preparing the Classified Balance Sheet and Applying the Accounting Equation
- Preparing the Cash Flow Statement — Direct Method
- Adjusting Entries for Prepaid Revenue and Accrued Revenue
- Adjusting Entries for Prepaid Expenses and Accrued Expenses
- Calculating and Recording Depreciation — Straight-Line and Reducing-Balance Methods
- Recording the Disposal of a Depreciable Non-Current Asset
- Accounting for Bad Debts and Provision for Doubtful Debts
- Preparing Budgeted Financial Reports and Their Role in Planning
- Preparing a Cash Budget Including Debtors and Creditors Collections
- Calculating, Classifying and Explaining Budget Variances
- Calculating and Interpreting Liquidity and Efficiency Indicators
- Calculating and Interpreting Profitability and Financial Stability Indicators
- Integrating Non-Financial Information with Financial Indicators
- Ethical Responsibilities of the Accountant and Accounting Principles