June 2026
The 2025 VCE Accounting exam made one distinction especially important: profit is not cash.
This seems familiar to Accounting students, but the exam showed how easily it can break down under pressure. Students had to prepare ledger accounts, calculate GST, complete a Budgeted Cash Flow Statement, explain why net cash flow could be higher than net profit, and record balance-day adjustments for wages, insurance, depreciation, electricity and a customer deposit.
These questions were not simply about formats.
They tested whether students could classify transactions correctly.
Is the item cash or non-cash?
Has the expense been incurred?
Has the revenue been earned?
Is the amount prepaid, accrued or unearned?
Does GST apply?
Should the item appear in the Income Statement, Balance Sheet or Cash Flow Statement?
That is where marks were won.
Cash flow statements only record cash
Question 4 asked students to prepare the Operating Activities section of the Budgeted Cash Flow Statement for Dizzies Metalworks for November 2025.
The business had a completed Budgeted Income Statement, balance sheet extracts, credit sales, sales returns, bad debts, discount expense, depreciation, prepaid advertising, accounts receivable and GST.
This was a classification task.
The correct operating cash flows included cash received from Accounts Receivable, purchases of inventory, GST paid, prepaid advertising, rent and wages. The net cash flow from operating activities was $34,720.
The Examination Report noted that common errors included including non-cash items in the Cash Flow Statement. Some students included GST collected as a cash inflow and discount expense as a cash outflow.
That is the key lesson.
A Cash Flow Statement does not record every revenue or expense. It records cash inflows and cash outflows.
Depreciation reduces profit, but it is not a cash outflow. Bad debts reduce profit, but they do not involve cash leaving the business in the period. Discount expense affects the amount received from Accounts Receivable, but it is not recorded as a separate cash payment.
Students who treat the Cash Flow Statement like a rearranged Income Statement will lose marks.
Budgeted Net Profit and Budgeted Net Cash Flow measure different things
Question 4d asked students to explain why Budgeted Net Cash Flow from Operating Activities may be higher than Budgeted Net Profit for the same period.
This is one of the most important conceptual distinctions in VCE Accounting.
Budgeted Net Profit is calculated using accrual accounting. It includes revenue earned and expenses incurred, regardless of when cash is received or paid.
Budgeted Net Cash Flow from Operating Activities records actual cash movements.
This means the two figures can differ significantly.
A business may report expenses such as depreciation or bad debts in the Income Statement, reducing net profit, even though these do not involve cash payments in the period. It may also receive cash from Accounts Receivable relating to credit sales from previous periods, increasing cash flow without increasing current-period revenue.
In Question 4, this distinction was central. Students needed to recognise that non-cash expenses and timing differences can make operating cash flow higher than profit.
A high-scoring response did not simply say “cash and profit are different”. It explained why.
GST required precise treatment
Question 4a asked students to calculate the GST expected to be paid in November 2025.
This looked straightforward, but the report noted several errors. Some students calculated GST on inventory using a GST-inclusive approach, even though purchases of inventory were listed as $55,000 plus GST. Others calculated GST on the full advertising expense of $1,300 rather than recognising that only $300 related to a cash payment in November, because $1,000 had already been prepaid.
The correct GST paid was made up of:
- GST on purchases of inventory: $5,500
- GST on advertising paid in November: $30
- GST on rent: $250
Total GST expected to be paid was $5,780.
This question rewarded students who could read the timing and GST status of each item.
GST is not a general add-on to every figure. Students must know whether the amount is GST-inclusive, GST-exclusive, prepaid, accrued, paid this period or already recorded.
That is why GST questions often expose weak classification.
Prepaid advertising was about timing
The advertising amount in Question 4 required careful treatment.
The Budgeted Income Statement showed Advertising of $1,300. The balance sheet extract showed Prepaid Advertising of $1,000 at 31 October and nil prepaid advertising at 30 November.
This meant only $300 of advertising involved a cash payment in November.
The remaining $1,000 had already been paid before November and was now being consumed as an expense.
That is why the Budgeted Cash Flow Statement included Prepaid Advertising of $300, not the full Advertising expense of $1,300.
This is exactly the kind of timing issue VCE Accounting tests.
The Income Statement records the expense incurred. The Cash Flow Statement records cash paid.
The same business activity can appear differently depending on the report.
Accounts Receivable required ledger control
Question 4b required students to prepare the Allowance for Doubtful Debts and Accounts Receivable General Ledger accounts to determine cash received from Accounts Receivable.
This was a high-value technical task. Students had to work through credit sales, sales returns, bad debts, GST, discount expense, opening and closing balances.
The report noted that higher-scoring responses recognised that Allowance for Doubtful Debts required an adjustment for a bad debt write-off and that GST had to be applied to the bad debt write-off in the Accounts Receivable ledger. They also used accurate cross-references to determine cash received.
Common errors included failing to record GST in the Sales and Sales Returns transactions, reversing debit and credit entries, and recording balances incorrectly.
This shows why ledger practice matters.
A ledger account is not just a table. It is a way of tracing the movement in an account across a period. If students do not understand what each side represents, they can quickly lose control of the calculation.
Bad debts and doubtful debts are not the same thing
Question 4b also required students to distinguish between bad debts and allowance for doubtful debts.
A bad debt is an amount confirmed as uncollectable and written off. Allowance for Doubtful Debts is an estimate of debts that may become uncollectable in the future.
This distinction matters because the accounting treatment differs.
A bad debt write-off directly reduces Accounts Receivable. An adjustment to the allowance changes the estimate of future doubtful debts. In the 2025 question, students needed to account for the write-off and the required closing balance in Allowance for Doubtful Debts.
This is another example of the exam testing classification.
The accounts are related, but they are not interchangeable.
Monthly budgeting gave management better control
Question 4e asked students to explain one potential advantage of changing from quarterly budgeting to monthly budgeting.
The answer needed to focus on business control.
Monthly budgeting allows the business to monitor performance more frequently. This can help identify variances earlier, respond to cash shortages sooner, adjust spending, review sales targets, or change inventory purchasing decisions before small problems become larger ones.
The advantage is not simply that monthly budgets are “more accurate” or “more detailed”.
The key benefit is more timely decision-making.
In VCE Accounting, budgeting questions often require students to explain how information helps management act. A budget is not valuable because it exists. It is valuable because it supports planning and control.
Balance-day adjustments tested accrual accounting
Question 7 required students to record a series of balance-day adjustments for 454High as at 31 October.
The additional information included:
- inventory on hand from a physical count
- wages owing at the end of the week
- prepaid insurance
- depreciation using the reducing-balance method
- an unpaid electricity bill
- a cash deposit received for goods not yet provided
This question tested accrual accounting in several forms.
Students needed to recognise expenses incurred but not yet paid, benefits paid for but not yet consumed, depreciation of assets, inventory adjustments and revenue not yet earned.
These adjustments ensure that reports reflect the accounting period accurately.
Without them, profit, assets and liabilities would be misstated.
Accrued expenses had to be recognised as liabilities
In Question 7, wages were paid each Thursday up to and including the previous day. Since 31 October fell on a Friday, wages for Thursday and Friday had to be considered based on the timing given in the question.
The business also received an electricity bill of $300 plus GST on 31 October that had not yet been paid or recorded.
These items required recognition because the expenses had been incurred, even though cash had not yet been paid.
Accrued wages and accrued electricity create liabilities. The business owes these amounts and must report them.
The report noted that in the Current Liabilities section of the Balance Sheet, higher-scoring responses included Accrued Electricity Expense and Accrued Wages Expense, along with Accounts Payable, GST Clearing and Unearned Sales Revenue.
A common error was to omit liabilities created by balance-day adjustments.
That is a significant issue because the Balance Sheet must show obligations existing at balance day.
Prepaid insurance required the expired portion
Question 7 also included insurance of $4,800 plus GST paid in August for 12 months commencing 1 September.
By 31 October, two months of the insurance benefit had expired: September and October. That meant two months became Insurance expense, while the remaining ten months stayed as Prepaid Insurance.
This is the same principle seen in the advertising questions.
A prepaid item is initially an asset because it represents a future economic benefit. As time passes and the benefit is consumed, the expired portion becomes an expense.
Students need to be comfortable allocating prepaid amounts across periods.
The calculation is usually not difficult. The classification is what matters.
Depreciation required method and timing
Question 7 involved equipment depreciated using the reducing-balance method at 20% per annum. It also stated that new equipment costing $15,000 plus GST was purchased on 1 October.
This required students to calculate depreciation based on carrying value and ownership period.
Reducing-balance depreciation is not calculated on original cost in the same way as straight-line depreciation. It is based on the carrying value of the asset. Students also needed to account for the new equipment being purchased during the month, not owned for the entire reporting period.
This is where depreciation questions often become demanding.
Students must use the correct method, the correct asset base and the correct time period.
Customer deposits were not sales revenue
Question 7c asked students to explain the treatment of the $800 deposit received on 31 October.
The goods had not yet been provided to the customer.
That meant the business had received cash, but had not earned revenue. The $800 was treated as unearned sales revenue and reported as a current liability.
The report noted that higher-scoring responses recognised that the business had a present obligation to provide the goods in the future and that this obligation was expected to be settled within the next 12 months. Common errors included treating the deposit as revenue or as a current asset.
This is a major Accounting distinction.
Cash received is not always revenue.
Revenue is recognised when the business has fulfilled its obligation by providing the goods or services. Until then, the business owes something to the customer.
Current liabilities needed all relevant obligations
Question 7b asked students to prepare the Current Liabilities section of the Balance Sheet.
The report noted that some students included Accounts Payable and GST Clearing but omitted liabilities arising from the balance-day adjustments, such as Accrued Electricity Expense, Accrued Wages Expense and Unearned Sales Revenue.
This shows why adjustments and reports cannot be treated separately.
A balance-day adjustment affects the final reports. If students record an accrued expense or unearned revenue in the General Journal but fail to include the resulting liability in the Balance Sheet, the reporting process is incomplete.
Accounting is cumulative.
Each treatment flows into the next report.
Why classification errors are so costly
The 2025 cash flow and adjustment questions show why classification errors can cost multiple marks.
If a student treats a deposit as revenue, profit is overstated and liabilities are understated. If they treat depreciation as a cash outflow, the Cash Flow Statement is wrong. If they include the full advertising expense as cash paid, operating cash flows are misstated. If they omit accrued expenses from current liabilities, the Balance Sheet is incomplete.
These are not isolated mistakes.
They affect the usefulness of the accounting reports.
That is why VCAA rewards students who can classify each item precisely.
What future Accounting students should learn from 2025
The 2025 VCE Accounting exam shows that students need strong control over cash flow and balance-day adjustments.
Students should be able to:
- distinguish profit from cash flow
- identify cash and non-cash items
- calculate GST based on actual cash payments and GST treatment
- use ledger accounts to determine cash received from Accounts Receivable
- distinguish bad debts from allowance for doubtful debts
- explain why operating cash flow may differ from net profit
- understand the purpose of more frequent budgeting
- recognise accrued expenses as liabilities
- calculate expired portions of prepaid expenses
- apply depreciation methods accurately
- treat customer deposits as unearned revenue when goods have not been provided
- carry adjustment effects into the Balance Sheet
These skills are connected. They all depend on understanding timing, classification and reporting.
How ATAR STAR approaches cash flow and adjustments
At ATAR STAR, students are taught to see Accounting as a reporting system, not a collection of isolated formats.
We train students to follow transactions from source documents to journals, ledgers, adjustments and final reports. This helps them understand how one treatment affects profit, cash flow, assets, liabilities and owner’s equity.
The 2025 Examination Report confirms why this matters. High-scoring responses distinguished cash from profit, recognised timing differences and included the correct obligations at balance day.
They understood where each figure belonged.
That is what accurate Accounting requires.