Quick questions on Double entry recording for a trading business (VCE Accounting Unit 3)

Source documents are the verifiable evidence that a transaction occurred. They satisfy the qualitative characteristic of faithful representation and the assumption that records should be supported by evidence. Common documents include:

The General Journal is the book of original entry. It records the accounts to be debited and credited, the amounts, and a narration explaining the transaction. Recording in the journal first means the ledger is built from a clear, dated, cross-referenced record rather than directly from documents.

The General Ledger holds an account for every asset, liability, owner's equity, revenue and expense item. Journal entries are posted to these accounts. Each ledger account is balanced and the closing balances feed the reports. A running record of debits and credits in each account lets the business prepare a trial balance to check that total debits equal total credits.

Under the perpetual inventory system, a separate inventory card tracks each line of stock by quantity, unit cost and total cost. Cards are updated at the time of every purchase and sale. The First In First Out (FIFO) assumption means the earliest units purchased are assumed to be sold first, so the cost of sales uses the oldest cost layers and the closing balance uses the most recent costs.

Two entries are needed because the business records both the selling price and the cost of the goods given up:

Debit Inventory, Debit GST Clearing, Credit Accounts Payable.

Debit Drawings, Credit Inventory at cost. No GST and no profit is recorded because the owner is not a customer.