Internal Code: MAS686
Report Writing Assignment:
The Recording Process
David Johnson has decided that a company is the best business structure for him and on 1 July, 2015 Electronic Emporium Pty Ltd was incorporated as a private company with David as sole director/shareholder. The company now has a tax file number and an Australian Business Number and at this stage David has decided not to register the company for GST. David has signed a lease on a shop for 2 years with an option to renew for a further 5 years. He has
opened a bank account in the company’s name with the ANZ Bank, and at the same time applied for a loan of $50,000 from the bank to enable him to set up the shop and provide him with working capital. He contracted a shopfitter to fit out the shop, which opened for business on 1 July. As David’s accountant you have recommended that the following accounts are used as a guide when setting up the chart of accounts for the general ledger: accountancy fees (600), accounts payable (200), accounts receivable (120), advertising expense (605), bank fees (610), bank loan (280), borrowing expenses, cash at bank (100), depreciation expense, discount allowed, dividends (351), electricity expense, insurance expense, interest expense, motor vehicles expense, motor vehicles (160), accumulated depreciation – motor vehicles (161), office supplies expense, prepaid advertising (140), prepaid insurance (145), prepaid rent (150), rent expense, repairs expense, retained earnings (350), service revenue (400), share capital (300), shareholders loan account (250), shop equipment and fittings (170), accumulated depreciation – shop equipment and fittings and telephone expense.
Transactions for the first month of operation:
July 1 David deposited $10,000 to open the business bank account. This was his investment in the company in exchange for 10,000 ordinary shares. David purchased from Tony’s Second-hand Mart, a cash register for $350, a lounge suite for $400 and a table and chairs for $380 for the shop (cheque no. 1).
July 5 The bank deposited the $49,500 loan funds into the bank after deducting $500 in costs to establish the loan. (Hint: Post the costs to establish the loan to borrowing expenses).
July 7 Paid rent of $1,980 to Atlas Realty (cheque no. 2).
July 8 Paid Adams Shopfitters $20,000 for display cabinets, counters and shelving (cheque no. 3).
July 12 Paid the local newspaper (Community Times) $1,000 for a series of weekly advertisements to comment this week (cheque no. 4).
July 14 Paid $1,460 to Bayview Insurance Brokers for a 1-year business insurance policy commencing 21 July (cheque no.5).
July 24 David contributed equipment valued at $5,000 for repairing computers to the business. At present he does not want to take cash out of the business, so this will take the form of an interest free loan to be repaid two years from now.
July 31 Banked $2,520 cash and cheques from servicing computers since the shop opened.
(a) Use the worksheet provided create the chart of accounts ensuring that you correctly classify the accounts by type, i.e. asset, liability, equity, revenue, cost of sales and expenses. A few account numbers have been provided as a guide. Asset accounts begin with the number 100, liabilities with 200, equity with 300, income with 400, purchases of inventory with 500, and expenses with 600. (Hint: number expense and prepayment accounts 5 numbers apart, and for all other accounts number the accounts 10 numbers apart. Exceptions are related non-current asset accounts, which use consecutive numbers for the cost of the asset and the corresponding accumulated depreciation for that asset).
(b) Use the general journal to record the transactions for July, with brief narrations.
(c) Post the journal entries to the general ledger T accounts. Remember to include posting references as they provide an audit trail. Use pencil to subtotal and calculate the balance of each account. Do not close off these accounts as they will be used again.
(d) Prepare a trial balance on 31 July.