1. Business Model and Accounting System
1.1 Business Model Introduction
Mr White is the sole proprietor of White Washers – a GST-registered retail business that sells washing machines and dryers. It is a continuing business with opening balances in its permanent accounts. The business purchases and sells inventory. It also has some other income from rent received from leasing out part of its building.
The business uses MS Excel spreadsheeting software to record transactions, manage accounts and prepare the financial statements.
1.2 Accounting policies
Being GST registered, pays GST on sales and services to the Australian Government. The business uses a GST paid (Asset account) and GST collected (Liability account) to record its GST. Unless otherwise stated, assume all transaction amounts are inclusive of GST (10%). The business remitted GST owing to the government at the end of last month.
The business has adopted the following policies:
- accrual accounting method
- the business records office supplies as a prepayment and adjusts for expenses
- the business accrues expenses such as internet and interest
- perpetual inventory system with weighted average
- the business records differences between inventory schedule (on hand amounts) and stocktake counts using the Cost of Sales account
- delivery/transit costs on inventory purchases are incorporated into the goods purchase price
- delivery costs associated with selling goods is a selling expense for the business
- Depreciation of building using reducing balance method at the rate of 5.71% over 20 years with a residual value of $58 000. The building was purchased on 30 June and has no accumulated depreciation as at 1 July
- Depreciation of vehicles using straight line method, with an effective life of 5 years. The vehicle has a residual value of $1 332 at the end of its effective life. As at 1 July it has been depreciated for three full financial years (FY 2017, 2018 and 2019) and has an accumulated depreciation amount of $19 000 as at 1 July 2019
- Provision for Bad debts adjusted at the end of each accounting cycle, and estimated based on net credit sales revenue
1.3 Accounting Schedules
The business has several debtors and creditors. The balances of each as at 1 July y are shown in the schedules below:
Schedule of Accounts Receivable as at 1 July: Schedule of Accounts Payable as at 1 July:
| Arcadia Apartments | $0 |
|
Whitegood Discounts | $9 000 |
| Lainie’s Laundromat | $15 000 | CG | $30 000 | |
| Ocean Springs | $50 000 | |||
| $65 000 | $39 000 |
Inventory Schedule as at 1 July:
| Inventory Item | Inventory on Hand | ||
| No. | Cost | Total Cost | |
| Clothes dryers CD1 | 8 | $150 | $1200 |
| Front Load Washer FL1 | 6 | $420 | $2520 |
| Top Load Washer TL1 | 20 | $290 | $5800 |
1.4 White Washers Opening Balances and Chart of Accounts
As at 1 July, the business had the following opening balances:
| White Washers | |||
| Post Closing Trial Balance | |||
| as at 1 July 2019 | |||
| No | Account Name | Debit | Credit |
| 100 | Cash | 17680 | |
| 104 | Accounts Receivable | 65000 | |
| 105 | Provision for Doubtful Debts | 1200 | |
| 106 | Office Supplies | 1000 | |
| 113 | Inventory | 9520 | |
| 130 | Delivery Truck | 33000 | |
| 131 | Accumulated depreciation (truck) | 19000 | |
| 138 | Building | 188000 | |
| 139 | Accumulated depreciation (building) | 0 | |
| 200 | Accounts Payable | 39000 | |
| 210 | Interest Payable (on loan) | 3000 | |
| 211 | Internet Payable | 350 | |
| 212 | Rates Payable | 1650 | |
| 230 | Bank Loan (Building) | 80000 | |
| 300 | Capital, White | 170000 | |
| Total | 314200 | 314200 | |
The business’s Chart of Accounts has the following:
| Chart of Accounts | |||||||||
| ASSETS | LIABILITIES | OWNERS’ EQUITY | REVENUES | EXPENSES | |||||
| No. | Account Name | No. | Account Name | No. | Account Name | No. | Account Name | No. | Account Name |
| 100 | Cash | 200 | Accounts Payable | 300 | Capital, White | 400 | Sales Revenue | 505 | Cost of Sales |
| 104 | Accounts Receivable | 210 | Interest Payable | 310 | Drawings | 405 | Sales Returns & Allow | 515 | Insurance Expense |
| 105 | Provision for Bad Debts | 211 | Internet Payable | 320 | P&L Summary | 406 | Sales Discount | 518 | Interest Expense |
| 106 | Office Supplies | 212 | Rates Payable | 412 | Interest Revenue | 519 | Office Supplies Expense | ||
| 113 | Inventory | 214 | GST collected | 520 | Depreciation Expense | ||||
| 116 | GST Paid | 230 | Bank Loan (Building) | 522 | Advertising Expense | ||||
| 118 | Prepaid Insurance | 524 | Rates Expense | ||||||
| 130 | Delivery truck | 526 | Electricity Expense | ||||||
| 131 | Accum dep (truck) | 528 | Internet Expense | ||||||
| 138 | Building | 530 | Freight Expense | ||||||
| 139 | Accum dep (building) | 532 | Bad Debts Expense | ||||||
1.5 During the month, the business records the following transactions:
| Date | Transactions |
| July 2 | Sold three top load washers on credit to Arcadia Apartments on credit for $1680 total (incl GST) |
| 4 | Paid rates owing as at 1 July (no GST on rates) |
| 5 | Received payment from Arcadia Apartments with 2% discount applying |
| 6 | Paid interest owing on loan |
| 7 | Sold one front load washer to Ocean Springs on credit for $800 incl GST |
| 8 | Paid freight outward charges of $55 (incl GST) |
| 8 | Received bank interest of $58 (no GST on interest) |
| 9 | Paid internet account owing as at 1 July |
| 11 | Credit sale of five clothes dryers to Lainie’s Laundromat $2000 total (incl GST). |
| 15 | Purchased three top load washers on credit from Whitegood Discounts Pty Ltd for $320 each (not incl GST) |
| 15 | Received $1500 from Lainie’s Laundromat |
| 16 | Purchased two front load washers for cash for $455 each (not incl GST) |
| 17 | Paid advertising expense $89 (incl GST) |
| 17 | Paid office supplies (prepayment) $128 (incl GST) |
| 17 | Pre-paid 12 months office business insurance $1320 (incl GST) |
| 18 | Sold three front load washers $2400 total (incl GST) to Arcadia Apartments |
| 19 | Sold two top load washers for cash $1120 total (incl GST) |
| 20 | Purchased four clothes dryers on credit from CG for $220 each (not incl GST) |
| 23 | Purchased two top load washers on credit from CG for $330 each (not incl GST) |
| 24 | Owner withdrew cash from business $800 |
| 25 | One clothes dryer sold to Lainie’s Laundromat on 11th was returned and incorporated into the business’s stock |
| 26 | Paid total amount owing to Whitegood Discounts Pty Ltd. |
| 30 | Cash sales of two clothes dryers $800 total (incl GST) |
| 31 | Paid rates owing to 31 July (one month) (no GST). Same amount as previous month. |
| 31 | Received and paid electricity account $585 (incl GST) |
1.6 Journals, Ledgers and other records
The business uses the following journals and ledgers:
| General Journal
|
– | to record all transactions (including Adjustments and Closing entries – use the hyperlinks to locate these in the template) |
| General Ledger
|
– | all GJ entries are posted to the General Ledger (please refer to notes below regarding posting adjustments and closing entries |
| Trial Balance
|
– | totals of all accounts – link from the General Ledger (please note, this is a Live Trial Balance and you must complete the Worksheet before journalising the adjustments) |
| Worksheet
|
– | to record adjustments and changes to the accounts when preparing the Adjusted Trial Balance |
| Inventory Record | – | to record purchases, sales and inventory on hand for both stock items |
Post Closing Trial Balance – totals of all permanent accounts following the completion of the closing entries – shows starting balances for next accounting cycle
1.7 Financial Reports
The business prepares the following Financial Statements:
Balance Sheet – Assets, Liabilities, Owners’ Equity
Income Statement – Revenue, Expenses, Goss/Net Profit or Loss
Statement of Changes in Equity – Capital, Drawings
1.8 Adjustments (to be completed at the end of the accounting cycle):
- Calculate and record the depreciation expense for one month for: building using the reducing balance method and delivery truck using straightline method (see 1.2 above)
- Physical stocktake of inventory reveals that there are 19 Top load washers. Record the missing inventory as cost of sales
- Accrued internet expense for the month is $180
- Calculate and record accrued insurance expense on the loan given an interest rate of 3.75% per month
- Physical stocktake of office supplies revealed supplies on hand is $780
- Calculate the Provision for Bad Debts at the rate of 2% of net credit sales for the period
- Record adjustment for prepaid insurance given half has been used up
2. Completing the Accounting Cycle
(Use the Task 2 template. Make adjustments as required including using formulas and links as instructed.)
2.1 Prepare the General Journal entries for the Transactions that occurred during the month. Transactions are listed above at 1.3. Use the accounts listed in the Chart of Accounts at 1.4. For inventory, all sales and purchases must be entered into Inventory Record as they occur. Use EXCEL formulas for calculations (eg GST) and linking as required. Check the journal is in balance.
2.2 In the General Ledger, enter the starting balances for the permanent accounts. Find these balances in the Post-closing Trial Balance as at 1 July. Post the GJ entries, recorded above at 2.1, to the General Ledger. Enter names for the ledger accounts and add accounts to the template as necessary. Use linking function in EXCEL to link the transaction amounts from the GJ to the relevant GL account. Create final balances for each ledger account using EXCEL formulas.
2.3 Prepare a Trial Balance as at 31 July by linking from the ledger accounts to the (Live)
Trial Balance. Linking means it will perpetually update, but at this point it is Unadjusted Trial Balance as it does not include the Adjustments which will be recorded in step 2.5 below. Check it is in balance before moving on. (If it is not in balance, try using sort & filter function to find errors in posting. Ask your tutor if you need assistance.)
2.4 Prepare the Worksheet by copying your Trial Balance figures into columns B and C. VERY IMPORTANT – copy these as VALUES (using Paste Special function in EXCEL).
2.5 Record the Adjustments in the General Journal. Adjustments are listed above at 1.8 (a. to g.). Enter these into both the Worksheet (in columns E and F) and the General Journal. Check the journal is in balance.
2.6 Post the adjustment journal entries (from the General Journal) to the General Ledger using new accounts as necessary. (This will change the figures in your Trial Balance but not your Unadjusted Trial Balance in your Worksheet. Check this.)
2.7 Finalise the Worksheet – return to the Worksheet to calculate balances in the Adjusted Trial Balance (columns H and I), using EXCEL functions for additions and subtractions. (Check the Adj Trial Balance figures in these columns match the account balances in the Trial Balance – they should be the same.)
2.8 Prepare the Financial Statements – still in the Worksheet, copy or link the appropriate figures to the Income Statement columns and to the Balance Sheet columns. Then take these figures across to the Financial Statements sheet and create Financial Statements according to a standard format (refer to the textbook page 240). Identify Assets and Liabilities as ‘current’ or ‘non-current’ for the Balance Sheet (this was to be done in the Chart of Accounts).
2.9 Prepare the closing entries in the General Journal. Closing:
- debit revenue accounts and credit P& L Closing Account;
- credit all expense accounts and debit P& L Closing Account;
- debit P & L Closing Account (if a profit) and credit Capital account;
- credit Drawings and debit Capital account
- Post the closing entries to the General Ledger.
2.10 Prepare a Post closing Trial Balance – copy and paste as values the accounts and balances from the (Live) Trial Balance. The Post Closing Trial Balance should only contain the permanent accounts
2.11 EXCEL functions and Number formats – Basic EXCEL functions and formulas should be used as described in the instructions above. All amounts to be displayed to two decimal places but should not be rounded. Use $ only in Financial Statements.
2.12 Use the Inventory Reconciliation table to check that your inventory record matches the balance in your Inventory account in the general ledger.
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