MBS 544 Accounting Processes | Business A Periodic Inventory System

Business Background

Zennith’s Musical Instruments Pty Ltd has been in business in Peth since July 2013. The Company was started by David Zennith and operates a shop which sells musical instruments on a wholesale basis to other businesses on credit and cash terms. The Company’s share capital consists of 1,134,000 ordinary shares, issued at $1 each, that are owned by various members of the Zennith family. The company enjoys a combination of staff to operate the business. The company has a financial year end of 30 June and prepares adjusting entries at the end of the financial year.

The business is registered with the ATO for the goods and services tax (GST), and its Australian Business Number (ABN) is 78 303 238 978. It reports and pays amounts owing for GST quarterly via the business activity statement (BAS). The business has elected to use the accrual basis of accounting for both accounting and GST purposes. 

Inventory

The business maintains a periodic inventory system.

Prepayments

Expenses paid in advance for their use, such as insurance, are initially recorded as assets. Any used portion at the end of period is entered into the journal as an expense.

Property, Plant And Eqiupment

The business has adopted the ATO rates of depreciation for all depreciated assets. These rates are based on the ATO’s estimate of useful life. The straight-line method is used for the calculation of depreciation on these assets. Amounts calculated are rounded to the nearest dollar.

Accounting Records

To ensure efficiency of its accounting procedures, the company uses the following special journals to maintain its accounting records.

• General journal (GJ): to record all transactions that cannot be recorded in the special journals
• Sales journal (SJ): to record all sales of goods or services on credit, and GST collected
• Purchases journal (PJ): to record all credit purchases of goods for resale, and GST paid
• Cash receipts journal (CRJ): to record all receipts of cash, including cash sales of goods or services.
• Cash payments journal (CPJ): to record all payments made on the business’s cheque account, including cash purchases of goods for resale.
• Accounts receivable and accounts payable subsidiary ledgers; separate accounts are maintained for each customer and each supplier
• General ledger: separate accounts are maintained for income, expense, asset, liability and equity accounts.

Accounting Procedures

On a daily basis, all relevant source documents are collected and transactions recorded in the appropriate journals. Transactions recorded in the ‘other accounts’ columns and all entries relating to 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 have been recorded. A worksheet is then prepared from the general ledger and a monthly income statement and balance sheet are produced, together with schedules of accounts receivable and accounts payable. At the end of the year, adjusting and closing general journal entries are prepared and posted to the general ledger accounts.

The chart of accounts includes the following accounts: 151 Accumulated depreciation – Showroom Fittings, 201 Interest Payable, 202 Utilities Payable, 203 Wages Payable, 204 Salaries Payable, 205 Income Tax Payable, 206 Dividends Payable, 302 Dividends Declared, 303 Profit or Loss Summary, 602 Depreciation Expense – Showroom Fittings, 603 Depreciation Expense – Equipment, 604 Supplies Expense, 605 Rent Expense, 606 Insurance Expense, 608 Interest Expense, 610 Income Tax Expense, 614 Bad Debts Expense.

An Unadjusted Trial Balance and Chart of Accounts at 31 May 2019 has the following account balances. All accounts have normal debit and credit balances.

The following transactions occurred during June 2019 and are inclusive of GST where relevant

Week 1

1 – Bach Cellos paid the entire balance of its account that was still outstanding.

   – Delivered goods to Mozart Guitars for $75,121.20 and issued invoice #910. Issued Cheque #153 to pay $8,316 for delivery costs of inventory to their premises.

3 – Paid the amount owing to Strauss Synthesisers. Cheque #154 was sent.

4 – Total cash sales for the week were $21,205.80.

Week 2

8 – Brahms Pianos paid $30,076.20 toward the amount it owes us.

9 – Made a purchase from Vivaldi Violins for $64,449 for boutique lighting. The date of invoice was 8 June. Invoice No. VV08.

9 – The firm issued Cheque #155 for the purchase of store supplies amounting to $6,098.40.

10 – Bach Cellos purchased inventory of $75,675.60. Invoice #911 was issued.

11 – Some of the boutique light fittings purchased on 7 June from Vivaldi Violins were the wrong design. Returned inventory in exchange for a Credit Note of $20,790.

12 – Total cash sales for the week were $28,967.40.

Week 3

15 – Purchased inventory from Strauss Synthesisers for $106,029. The invoice was dated 14 June. Invoice No. SS14.

15 – Paid office staff salaries of $73,458. Cheque #157 was issued for payment. Cheque #158 was issued to pay sales staff wages, $62,370.

16 – Sold inventory to Brahms Pianos for $136,798.20 on invoice #912. Issued Cheque #156 to pay for delivery costs of $10,395.

16 – The company issued Cheque #159 to pay the amount still owing to Vivaldi Violins.

19 – Total cash sales for the week were $27,512.10.

Week 4

22 – Brahms Pianos returned $25,918.20 of inventory purchased on 14 June. Issued a Credit Note for the transaction.

23 – Issued Cheque #160 $12,600 to pay for the annual gift the Company donates to the Smith Foundation Charity Fund. The gift is to be recorded as a sundry expense in the accounts.

24 – Purchased inventory from Vivaldi Violins worth $103,257. The date of the invoice was 22 June. Invoice No. VV09.

25 – Received the total amount owing from Brahms Pianos.

26 – Total cash sales for the week were $43,243.20.

Week 5

28 – Mozart Guitars paid the entire balance of its still outstanding account.

29 – Reduced $83,160 of the amount owing to Vivaldi Violins and Cheque #161 was issued.

29 – A dividend of $177,100 was declared to the Company shareholders. However, the dividend will not be paid until September 30, 2019. Paid sales staff wages, $62,370 and Cheque #162 was issued to meet the payment.

30 – Issued additional shares to the owners of the Company for cash, and $126,000 was received and banked. Total cash sales for the week were $25,779.60.

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