e-Generation-manual_practice_question

Introduction

e-Generationis a manual practice set,producedprimarily as a teaching aid to be used in  association  with  introductory  accounting  texts  and  the  international  accounting standards.

Thispracticeset provides experience  inmanually recording  andposting  avariety of  business  transactions   common  to  small  businesses,   so  that  students   gain   an

understanding  ofthe  flowofdata in  an accountingsystem.  Manyof theseprocesses are outofsight ina computerisedaccountingsystem.  Completion of the practice  set for a one-monthperiodshouldensure a greater appreciationof:

•  the stepsintheaccounting cycle fora small business

•  the use of specialjournals  for processingdata more efficiently

•   theuse ofsubsidiaryledgers to removedetail from the general ledger

•   thestepsin postingjournalstothe generalledgerandsubsidiaryledgers

•  theperpetualinventorysystem

•  the bank account reconciliation

•  balance-dayadjustmentsand the general ledgerclosing process

•   how the accountingcycle culminatesinthepreparationof financial statements

•  how the goods and services tax(GST) impacts on accounting

•  the varietyof sourcedocuments, and

•  howtoextractinformation from source documentstorecordtransactions.

Business  background:   e-Generation

e-Generationis  a  small  retail businessthat  has operatedsuccessfullyfor  some  years, buying and selling electronic equipmentand accessories.Thestructure of the businessis thatof a sole trader,with the owner being ChrisHill.

The  owner  works  in  the shop,  and  employs  a part-time  clerk/salesperson,  Emma Tomlinsonwho is paidfortnightly,based on an hourly rate. Taxisdeducted fromthe employee's  wages  (PAYG withholding  tax)  and remitted  to the Australian  Taxation Office (ATO) ona quarterlybasis.

Thebusinessis registered withthe ATO forthegoodsandservices tax (GST) and its  Australian  Business  Number  (ABN)  is  91  006  670  060.  It  reports  and  pays

amounts  owing  for GST  and  PAYG  withholding  quarterly  via  the  business  activity statement (BAS).Thebusinesshas elected to use theaccrual basisof accounting  for bothaccounting andGST purposes.

Accounting  policies

Accruals

Expenses  incurred  but  not paid  at  the  end  of  a  period,  such  as  the  liability  to  pay employees  for timeworkedbetween  thelastpaydate  andthe  end ofthe  month,are entered into thejournal  atthe end ofthemonth as anaccrualandreversed bygeneral journal entry atthestart of the nextmonth.

Bad  and  doubtful    debts

Thebusinessusesthetdirect write-off method'  when accountingfor baddebts asthey are rare.

Discounts  and  credit  terms

Somecustomers areoffered a discountfor promptpayment,and termsvary from7to

30  days.  Some  suppliers  give  the  business  a  prompt  payment  discount,  which  is

recognised  as income  in thefinancial statements.Trade  or volumediscounts  givento customers or received  from suppliersreduce the  costof the goods purchased  orsold and are not recognisedseparatelyinthefinancial statements.

Inventory

Thebusiness maintainsaperpetual inventory systemand uses the 'average'  method to calculate the costofgoodssold forits complete range of goods.

Prepayments

Expenses  paid in advance oftheir use,  such asinsurance,are initially  recorded  asan asset. The  portion  consumed  forthe  period  is  recorded  in  the  general journal  as  an expense for the period.

Property,   plant  and  equipment

The  business  has  adopted  the  ATO  rates  of  depreciation  forall  depreciable  assets. These rates are basedonthe ATO's  estimate of useful life, with noresidual value. The straight  line (prime  cost) method is  used  for the calculation  of  depreciation  on these assets. Leaseholdimprovementsare amortised  over the term of the shop lease,which is  five years,  using  the straight  line  method.  Amounts  calculated  are  rounded  to  the nearest dollar.

Accounting  records

The  business  maintains  thebooks  of  original  entry  set  outbelow.  These  have  been customised to suit the operationsof e-Generation.

•   General  journal   (GJ):  to  record  all  transactions  that  cannot  be  recorded  in  the   ' specialjournals.

•   Sales journal  (SJ):to record all  sales of goods or services  oncredit,  cost ofgoods sold, freight outwardsandGST collected.

•   Purchases journal  (Pl):  to  record  all  credit  purchases  of  goods  for  resale,freight inwards,inventoryandGST paid.

•   Cashreceiptsjournal  (CRJ):  torecord all  receipts of cash, including  cashsales  of

goods orservices.

•   Cash  payments  journal  (CPJ):  to  record  all  payments  made  on  the  business's cheque account,including cash purchasesof goodsfor resale.

•   Petty  cash  journal   (PCJ):  to  record  all  payments  made  from  petty  cash  and reimbursement of petty cash.

•   Accounts  receivable  and  accounts  payable  subsidiary  ledgers:  separate  accounts

are maintainedfor each customerand each supplier.

•   Inventory subsidiaryledger: stock cards are maintained for allinventory items.

•   General   ledger:  separate   accounts  are  maintained   for  income,   expense,  asset, liability and equity accounts.

2  e-GAccounting   procedures

At  the  start  of  each  month  reversing  general  journal  entries  are  prepared   and  posted. On a daily  basis,  all relevant  source  documents  are collected  andtransactions   recorded in the  appropriate  journals.   Transactions   recorded  in the  'other  accounts'   columns  and all   entries   relating   to   customer   or   supplier    accounts    or   inventory    items   in   the subsidiary   ledgers  are  posted  daily.  On  a monthly   basis,  special  journals   are  totalled and   posted   after   the   bank   statement   has   been   received   and   any   missing   items recorded.  A worksheet   is then prepared  from  the general  ledger  andamonthly  income statement    and   balance    sheet   are   produced    together    with   schedules    of   accounts receivable,   accounts  payable  and  inventory.  At  the  end  of  each  month,  adjusting   and closing  general journal  entries  are prepared  and  posted  to thegeneral  ledger  accounts.

Businesses   registered  for  GST  are  required  tomaintain  appropriate   records  so  that

a  business   activity  statement   (BAS)  can  be  prepared  when  required.   The  difference between  the  GST  paid  (outlays)  and  GST  collected   indicates  that  the  business   either owes  money  tothe ATO  or theATO  owes  money  to thebusiness.

Inventory   records

Acquisitions   are  recorded   on  the  inventory   cards  on  the  day  the  invoices   and  goods are received  from  suppliers.  Note  is made  on the invoice  when  stock  has  been  entered on the  inventory  cards,  to avoid  duplication  or  omission.  Purchase  invoices  are  stored in   alphabetical     and    invoice-date     order    until    paid    and,   when    paid,    are   filed alphabetically.   All  stock  movements   out  of  the  shop  arerecorded  at  the  time  of  sale. All  purchases  arerecorded  on the cards  at the cost  price,  excluding  GST.

Cost  of  goods  sold  is  determined   from  the  inventory   cards  on  the  day  of  the  sale using   the  average   method   and   recorded   in  a  separate   column   in  the  sales   or  cash receipts   journal.   Freight   inwards   is  recorded   in  a  separate  column   in  the  purchases journal,  and thetotal  isposted  at month-end  toa  'freight'   cost  of sales account.

Cash  receipts

All  cash  receipts   from   customers   and   other  sources   are  banked   into   the  business cheque  account  at  the  Bank  of  Adelaide.   A  deposit  slip  is  prepared   for  this  purpose. The  person  making  a  cash  sale  is  required  to  record  the  receipt  on the  sales  invoice, indicating   how  the  customer  paid  (e.g,  cash,  cheque,  EFT  or  credit  card).  Cash  sales, other  than  those  paid  by  EFT  or  credit  card,  are  not  banked  until  early  the  following week.

Cash  payments

All  payments,   except  those  made  from  petty  cash,  are  made  by  cheque  drawn  on  the Bank  of  Adelaide;   appropriate   details  are  recorded   on the  cheque  butt.  Cheque  butts provide   information    for   recording   in  the   cash   payments   journal.    When   purchase invoices   arepaid,  'Paid'   is written  on  theinvoice,  together  with  the  date  paid  and  the cheque   number.   An   imprest   petty   cash   system   is   used  and   a  petty   cash   book   is maintained.   Either   a  petty  cash  voucher   or  a  shop  docket  provides   information   for recording   transactions   in  the  petty  cash  journal.   A  running  balance  is  maintained   in thisjournal  andperiodically   this is checked  against  actual  cash  on hand.

Bank  reconciliation

A  bank  statement   is  received  at  the  end  of  each  month  and  this  is  compared   with  the cash  journals.   Items  missing   from  the  cash  journals   are  entered  before   final  closing and a monthly  bank  reconciliation   statement  is then  prepared.  The  bank  reconciliation statement  prepared  at the end of November  2014  isset outbelow.

Bank   Reconciliation

as at 30  November   2014

Balance   as per  bank  statement                                                                        Cr       $16190.90

Add:  Outstanding   deposit

FIGURE   1.1

Bankreconciliation

as at 30 November 2014

300.00

Less:  Unpresented   cheques                                                                                          16490.90

Number   1190                                                           500.00

Number  1193                                                           180.60

Balance  as  per  cheque  account                                                                                         680.60

Dr      $1581030

Account   balances

Accounts    receivable    (customer)    opening   balances,    including    invoice    details,   are shown  in  figure  1.2. Accounts  payable  (supplier)   opening  balances,   including  invoice details,  are  shown  in  figure  1.3.Opening  balances   for  the  inventory   subsidiary   ledger are  shown   in   figure   1.4.  The  post-closing    trial  balance   for   e-Generation    as  at  30

November   2014  isshown  in figure  1.5.                                  '

Schedule    of  Accounts    Receivable asat  30  November   2014

Customer                            Invoice    No.           Terms            Date  of  Invoice             Amount    Due

Schedule   of  Accounts     Payable as  at30  November   2014

Accountspayable

as at 30November2014

$6416'60

Schedule   of  Inventory

as at  30  November   2014

Code          Description                                           Quantity                   Amount               Selling   Price

(exclud  ing_G ST)

FIGURE   1.4

Inventoryitems onhand

as at30 November 2014

SCP           Smart  Cover  -   Plastic                                   2

4320                           325

330                            50

-                           20

-                           60

30                            30

-~~-.

:12  25  ZoQ

e-Generation

Post-closing     Trial   Balance

as at  30  November   2014

Account

Number        Account                                                                              Debit                       Credit

160           Furniture  & Equipment   (Cost)                                      15500.00

161           Accumulated    Depreciation   -Furn   &Equip                                               $ 3345.00

170           Leasehold   Improvements   (Cost)                                   7220.00

171           Amortisation   -  Leasehold   Improvements                                                     5415.00

200           Accounts   Payable                                                                                            6476.60

210           GST  Collected                                                                                                  2429.90

220           PAYG  Withholding   Payable                                                                               299.00

230           superannuation    Payable                                                                                   292.50

240           Wages  Payable                                                                                                   100.00

310           Capital  -  Chris  Hill                                                                                        53642.00

FIGURE1.5                                                                                                                                                    ..

Trial balance as                                                                                                                                  $72  000.00             $72000.00

at 30 November2014

Instructions

1.   Read   the   information    provided   in   this   chapter   and   the   appendices    to   gain familiarity   with  the  various   source  documents,   business   operations,   accounting policies  and  procedures,  accounting  system  andGST.

2.   Record  the  opening  balances   at  1 December   2014  in  the  appropriate   accounts   in the  general  ledger.

3.   Record  the  opening  balances  of  customers   (figure  1.2),  suppliers   (figure   1.3)and

inventory  items  (figure  1.4) inthe  appropriate   subsidiary  ledgers.

4.   Prepare  and  post  reversing   general  journal   entries  in  accordance   with  accounting procedures  and  office  memorandum.

5.   Record   the  transactions    in  the  appropriate    general   or  special   journals    for  the month   of   December.    Record    and   post   all   transactions    in   accordance    with accounting  procedures.

6.   Enter   all  details   of  stock   movements   on  the   inventory   cards   using   unit   costs

rounded  to the nearest  ten(10)  cents.

7.   Check    the   cash   journals    against    the   bank    statement    and   prepare    a   bank reconciliation   statement  atthe  endofthe month.

8.   Complete  andpost  alljournals.

9.   Prepare  schedules   of  accounts   receivable,   accounts   payable   and  inventory   as  at

31  December   2014,  and  reconcile   these  with  the  control   accounts   in  the  general ledger.

10.   Prepare  a trial balance  asat 31 December  2014  on theworksheet   provided.

11    Record  balance-day  adjustments   andcomplete  theworksheet.

12.   Record  thebalance-day   adjustments   inthe  general  journal  and  post  to  the  general ledger.

13.   Prepare   an  income   statement   for  the  month   of  December   2014   and  a  balance

sheet  as at 31December  2014.

14.   Prepare  andpost-closing   general  journal  entries  for  theperiod.

15.   Prepare  apost-closing   trial  balance.

Conclusion

This  concludes  the  introduction   to the  practice  set.  The  structure  of  the  practice  set  is listed  below.

•   Chapter   2  contains   the  source   documents   to  be  used   for  the  transactions    for  the month  ofDecember  2014  to be  entered  into  the  manual  accounting   system.

•   The   intervening    segments   of  the  practice   set  contain   the  journals,    ledgers   and reports.

•   Appendix   1provides   an  introduction   to  GST  and  guidance   in  how  to  account   for

GST  inthe special  journals.

•   Appendix  2 isa glossary  ofsource  documents.

At   the   conclusion    of   the   practice    set,   users    will    have    acquired    a   greater understanding   of the  functioning   of a manual  accounting  system.

The  companion   practice   set  to  this  introduces   users  to  a  computerised   accounting system  and  will  assist  users  to  gain  an  appreciation   of  the  similarities   and  differences between  amanual  and a computerised   accounting  system.

Source   documents

December   2014

Transactions   for  e-Generation   for  the  month  of  December   2014  are  to  be  recorded from  these  source  documents.    A  glossary  is  provided  in  appendix   2.   Unit  costs  for inventory   are  rounded   to  the  nearest   ten  (10)  cents.    With  cash  sales  paid  by  EFT (electronic   funds  transfer)   the  money  is  deposited   directly   into  the  business's    bank account   on  that  day  or  the  next   banking   day.  When   a  customer   pays   by  cash   or cheque,  themoney  is sometimes   not banked  until  a few  days  later,  together  with  other money  received  prior  to or  on thedate  shown  onthebank  deposit  slip.