PART A – Practical Application
Introduction
This accounting exercise is designed to be completed using a manual accounting system.
The
A periodic inventory method is used. Inventory purchases should be debited to the relevant Purchases account. At the end of the month, a stocktake is performed to determine the closing balance of inventory. The cost of goods sold for the period can then be calculated.
Background
Mary Nguyen has left her job as a music teacher at the local TAFE and has invested in a new business venture. The business, called Mary’s Music Store will sell musical instruments as well as provide a repair service.
Mary commenced trading operations on the 1st February 2016 with the following assets and liabilities:-
EastPac Bank Business Account $50,000
Premises $375,000
Shop Fittings $40,000
Motor Vehicle $20,000
Loan: - Ezy Finance Co: $70,000
Mortgage – EastPac Bank $300,000
Mary Nguyen - Capital ??
Additional information:
• Mary will bank all receipts directly into the cheque account.
• All payments are to be made by cheque or direct debit.
• All expenses paid during February relate to that month.
• Monthly reports are to be prepared.
• Mary has registered for GST and from the commencement of business will need to account for GST. GST of 10% will apply to all purchase and sales unless specified otherwise.

Accounting System
Mary’s Music Store: Chart of Accounts
Type Number Name
Current Assets 1-1100 EastPac Bank Business Account
1-1150 Petty Cash Fund
1-1200 Accounts Receivable Control
1-1700 GST Paid
Non Current Assets 1-2100 Premises
1-2200 Shop Fittings
1-2300 Motor Vehicles
Current Liabilities 2-1100 Accounts Payable Control
2-1200 GST Collected
Non Current Liabilities 2-2100 Loan Ezy Finance Co
2 -2200 Mortgage – EastPac Bank
Equity 3-1100 Mary Nguyen, Capital
3-1200 Mary Nguyen, Drawings
Tommy Tinker, Drawings
Income 4-1000 Sales - Instruments
4-2000 Service Fees - Repairs
Cost of Sales 5-1000 Purchases - Instruments
5 -2000 Purchases - Parts
Expenses 6-1100 Advertising Expense
6-1200 Wages Expense
6-1300 Rent Expense
6-1400 Insurance Expense
6-1500 Telephone Expense
6-1600 Electricity Expense
6-1700 Printing & Stationary
6-1800 Motor Vehicle Maintenance
6-2100 Bad Debts
6-2200 Bank Charges

You will need to create your own General Ledger Accounts using the ‘Chart of Accounts’ provided as a guide.
? You can create additional accounts as needed.
? Journals have been provided for you.

Transactions for February:
Prepare a general journal entry for opening assets and liabilities.

Feb 1 Paid rent to Fletch Real Estate $1,100. (i.e $1000 + GST ) Cheque 6001
Paid AMI Insurance $275 for Feb Insurance. Cheque 6002
Purchased stock of musical instruments from Maton Ltd on Credit $8,250. Invoice M51
Purchased stock of musical instruments from Pearly Drums Ltd on Credit $5,500. Invoice 66
Purchased stock of musical instruments from Steiners Ltd on Credit for $16,500 Invoice SW57
Purchased spare parts from Muso Bits on credit for $3,300 Invoice 41

3 Provide repairs services on Cash for $825 Rec 800
Cashed a cheque to establish the Petty Cash fund $200 Cheque 6003
Paid for Printing & Stationary from OfficePlus on cash for $550 Cheque 6004

4 Purchase a new Computer for $2,200 from Bits and Bytes Ltd.
Mary was out and about when she saw the computer and did not have the business cheque book with her; she paid for the computer using her personal credit card Invoice BB05
Credit sale to Jane Strummer for musical instruments $4,400 Invoice M001

5 Credit sale to Slamming Sam for repairs to his drum kit $550 Invoice M002
Cash Sales – Musical Instruments $11,000 Rec 801

6 Returned instruments to Maton Ltd due to damage caused during delivery $935 CN123

8 Credit sale to Jays Music World:-
• Musical Instruments $6,600
• Service Fees for repairs $1,100 Invoice M003

10 Purchased spare parts from Musack Ltd $3,410 Invoice 2406
Sale of Instruments to Jane Strummer $1,320 Invoice M004
Paid Pearly Drums the amount owing on invoice 66 Cheque 6005

11 Cash Sale of Instruments $7,425. Rec 802
Mary took home musical instruments to the value of $770 for her personal use Memo

12
Jane Strummer paid for invoice M001 Rec 803
13 Paid for service to Motor Vehicle $528 Cheque 6006
Paid for Telco Ltd for phone connection and usage to date $737 Cheque 6007
Paid Leader Papers for advertising in local paper $440 Cheque 6008
Paid wages to part time sales assistant $375 Cheque 6009

14 Service Fees for repairs to Julies Sound of Music $6,930 Invoice M005
Service fees for repairs $1,870 Rec 804

17 Purchase of musical Instrument from Julies Sound of Music $2,035 Invoice J023
Paid Muso Bits amount owing on invoice 41 Cheque 6010

18 Cash sales of instruments $3,905 Rec 805
Mary cashed a cheque for personal expenditure $250 Cheque 6011
Musical Instrument sales on credit to Jane Strummer $1.045 Invoice M006

20 Paid PowerCO Electricity for electricity connection and Feb electricity usage $561. Cheque 6012
Service Fees for repairs $1,155 Rec 806
Paid wages to part time sales assistant $375 Cheque 6013

22 Cash Sales of instruments $902
Service Fees for repairs $605 Rec 807
Service Fees for repairs on credit to Orkestra & Co $2,200 Invoice M007

25 Orkestra & Co, were so happy with the service they received they came back and purchases some new Musical Instruments on Credit to the value of $5,170
Invoice M008

27 Paid wages to part time sales assistant $375 Cheque 6014
Paid a principle payment on the Mortgage of $10,000 Cheque 6015

29 Prepare a contra entry for the amounts owing to and from ‘Julies Sound of Music’
Was advised that Slamming Sam had left the country. As he had not paid his account Mary decided to write off the amount owed as a bad debt
Update and Balance Petty Cash Book as per the Petty Cash information provided.
Reimburse fund
Use next consecutive cheque number ?
Carry out bank reconciliation and update journals as needed ?
Required:
1) Prepare a general journal entry for commencement of business.
2) Enter February’s transactions into journals.
3) Balance the Petty Cash book as at 29 Feb and record the reimbursement cheque in the cash payments journal. Use the next consecutive cheque number
4) Prepare a Bank Reconciliation as at 29 Feb
5) Balance and cross add all Journals
6) Post journals into general and subsidiary ledgers.
7) Prepare listings of Accounts Receivable and Accounts Payable as at 29 Feb
8) Prepare a Trial Balance as at 29 Feb 2016.
Petty Cash Information
The Petty Cash Information for Mary’s Music Store has been summarised below
a) Enter the Advance cheque into the Petty Cash book
b) Enter the transactions into the Petty Cash Book
c) Balance the Petty Cash Book and prepare the Reimbursement
d) Enter the Reimbursement cheque into the Cash Payments Journal on 29 Feb, and post to the Ledger

Date PC Vouchers No Particulars $
Feb 02 PC101 Courier 16.50
04 PC102 Coffee & Tea (NO GST) (Staff amenities) 25.00
07 PC103 Cab Fare 17.60
10 PC104 Cleaning 33.00
12 PC105 Stamps 7.70
18 PC106 Courier 14.30
22 PC107 Stationary 11.00
23 PC108 Cab Fare 5.50
24 PC109 Cleaning 33.00
28 PC110 Courier 16.50

** All amounts include GST unless told otherwise

The statement issued by EastPac Bank at the end of February is reproduced below:

EastPac BANK
ACN 32 123 456 789 Page 1

Mary’s Music Store Account No: 075 290 31 2272
123 The Boulevard
Melody VIC 3042 Date this statement
29 Feb 2016

Mary Nguyen Date last statement
31 Jan 2016
Date Details Dr Cr Balance
Feb-01 Deposit 50,000 50,000 Cr
cheque 6001 1,100 48,900 Cr
cheque 6002 275 48,625 Cr
3 cheque 6003 200 48,425 Cr
4 Cash deposit 825 49,250 Cr
5 Cash deposit 11,000 60,250 Cr
12 Cash Deposit 7,425 67,675 Cr
cheque 6004 500 67,175 Cr
13 Cash Deposit 4,400 71,575 Cr
cheque 6007 670 70,905 Cr
15 Cash deposit 1,870 72,775 Cr
cheque 6006 480 72,295 Cr
cheque 6009 375 71,920 Cr
cashed cheque 6011 250 71,670 Cr
20 Cash deposit 3,905 75,575 Cr
cheque 6008 400 75,175 Cr
cheque 6013 375 74,800 Cr
21 Cash deposit 1,155 75,955 Cr
cheque 6010 3,300 72,655 Cr
cheque 6012 510 72,145 Cr
23 Cash deposit 1,507 73,652 Cr
27 cheque 6014 375 73,277 Cr
cheque 6015 10,000 63,277 Cr
29 Bank Fees 20 63,257 Cr
Interest charged 1,375 61,882 Cr

PART B – Knowledge Questions
You are required to answer each of the following short answer questions to demonstrate your understanding of the theoretical concepts that underpin the accounting process.
1) Why is it important to record transactions from the point of view of the ‘accounting entity’?
2) List and describe the steps that you would take to follow up an overdue amount owing from a Debtor.
3) Your manager has asked you for some guidance on establishing a ‘Cash Handling’ policy. To assist you provide him with some information on each of the following issues:-
a) What are the essentials of good internal control?
b) What are the risks involved in handling cash?
c) What procedures should be adopted for taking money to the bank?
d) When the cash has been banked, what

4) Complete the bank deposit form from the information provided.
a. Once you have deposited the money with the bank what should the bank teller do to indicate that the funds are correct and have been banked?
b. What is the importance of this?
Cheque Received Listing
Drawer Bank Branch Amount
Musack Ltd CBB Holbrook $2,500
James Brown NAZ Sydney $3,000
M Lane CBB Newcastle $1,520
Cash Drawer Count
Notes: $3,750
Coins: $175

Bank Deposit Form
Mary’s Music Store
EastPac Bank Drummer St Melody DEPOSIT
Mary’s Music Store 023 115 1006678
Drawer Bank Branch Amount

Subtotal
Paid in by:
Date 29Feb
Notes
Coins
Cheques
Total $
5. Explain the difference between Cash and Accrual Accounting
6. As a bookkeeper it is important that you stay up-to-date with current practices.
a) List 3 pieces of legislation relevant to your role.
b) What is the value in joining a professional association?
c) What is a industry Code of Practice and why is it important?
7. What is the purpose of a Trial Balance? What is its limitation’s when it comes to identifying errors?