Background

Assume it is currently 1 June 2020.

You are working for the temporary accounting employment agency known as Accomptemp. Today you have been asked to work at Choco Holly, a small chocolate store that operates in inner city Perth and is owned by Helen Bridgman. Your task here is to complete the accounting cycle for Choco Holly for the month of June 2020. To assist you in this task, Helen tells you to read the company's accounting policies and procedures. Note that you will be required to follow these policies and procedures when completing the accounts for Choco Holly.

Accounting policies

a.Business operations: Choco Holly is set up as a private non-listed company based in Perth with Helen Bridgman as the sole shareholder. The company derives its main source of revenue from retail sales of chocolate.

To assist in selling the products, Choco Holly rents a large showroom. Note that the business is required to pay for the rent for this premises in advance.

The electricity and water expenses incurred during the month relate to the running of the showroom. Additional expenses include an insurance policy to protect the business against inventory items being damaged or lost during deliveries.

All costs associated with the showroom are classified as selling and distribution expenses.

All part-time employees in the business are sales staff who receive their wages every two weeks. Helen is the only full-time employee and her role is to handle all administrative tasks. Helen's salary is paid once at the end of each month.

b.Accounting cycle: The business adopts a monthly accounting cycle.

c.Purchases: Purchases are recorded when the business receives the goods. All items purchased are received on the same day as recorded in the transaction list, except for purchase orders which are received at a later date. Note that the business uses the gross method of recording purchases and receives trade discounts and early payment discounts from some suppliers.

d.Purchase returns: To allow Helen to separately track and analyse the value of goods returned to suppliers, all purchase returns are recorded in the Purchase Returns and Allowances account rather than directly in the Purchases account.

e.Revenue recognition: The business recognises revenue when goods sold are delivered to customers. All items sold are delivered on the same day as recorded in the transaction list except for sales orders, which are delivered at a later date as agreed with the customer. Note that the business uses the gross method of recording sales and sometimes grants trade discounts to customers. Past experience has shown that offering settlement discounts did not increase the likelihood of accounts receivable being paid promptly. Therefore, settlement discounts are not normally offered to credit customers except in exceptional circumstances.

f.Sales returns: So that the business can easily track the level of sales returns in relation to overall sales, all sales returns are recorded using a contra revenue account (Sales Returns and Allowances) rather than being recorded directly in the Sales Revenue account.

g.Goods and services tax (GST): Helen has advised you to ignore the effect of the Goods and Services Tax (GST). [ASIDE: This is an assumption to make the practice set easier for you to complete. In the real world, GST cannot be ignored.]

h.Cash: The business accepts cash and cheques and uses cheques to pay for the majority of its expenses. On the day cheques are received, Helen deposits them at the bank. It may take a number of days for the cheques to be cleared by the bank. The business holds its cheque account with MRMC Bank.

i.Short-term investments: The business holds a six-month term deposit account with MRMC Bank at a simple interest rate of 6%. Interest is calculated on a monthly basis and received at the end of the deposit term. The monthly interest earned is calculated as the yearly interest divided by the number of months in a year. Note that when the deposit matures, Helen usually rolls over the principal and interest received at the end of the term. The term deposit account was rolled over on 1 June 2020.

j.Inventories: The business uses the periodic inventory system and and records all purchases of inventory in the Purchases account, rather than recording them directly in Inventory. At the end of the reporting period, the Purchases account and the opening balance of the Inventory account are closed to the Profit and Loss Summary account and Inventory is restated to its ending balance. Note that the company does not use a Cost of Sales account.

k.Prepayments: The business has a policy of recording prepayments, including office supplies, as assets. At the end of the month, adjustments are made to the relevant accounts to recognise the expense incurred during the accounting period.

l.Property, plant and equipment: Property, plant and equipment items are depreciated over their estimated useful life using the straight line method to calculate the depreciation charge. Depreciation is allocated on a monthly basis and the monthly depreciation charge is calculated as the yearly depreciation expense divided by the number of months in a year.

m.Long-term liabilities: The business obtained an interest only loan from ZNZ Bank on 1 June 2020 at a simple interest rate of 6% per year. The first interest payment is due at the end of August 2020 and the principal on the loan is due on 1 June 2025.

Accounting procedures

Choco Holly adopts a manual accounting system and uses the general journal and special journals for the recording of individual transactions. Helen Bridgman has tailored the design of those journals to meet the specific needs of the business so the format of those journals may be slightly different to those you have seen before. However, she advises you that the general principles of how to use special journals are followed in her business.

The table below shows the journals used by the business and the types of transactions that can be recorded in each of these journals:

Journal	Code	Transaction type
General journal	GJ	All transactions that are not able to be recorded in the special journals below.
Sales journal	SJ	Credit sales of inventory
Purchases journal	PJ	Credit purchases of inventory
Cash receipts journal	CRJ	Cash inflows to the business
Cash payments journal	CPJ	Cash outflows from the business

To summarise the effects of transactions recorded in those journals, Helen maintains the general ledger and the following subsidiary ledgers:

• accounts receivable subsidiary ledger, and
• accounts payable subsidiary ledger.

Helen then indicates that she is aware other businesses using a manual accounting system may post transactions from journals to ledgers at different times (i.e. daily or monthly). Although the posting procedures used in her business may be different to what you have seen before, she asks that you specifically follow her company's accounting policies and procedures.

The information below explains when transactions are required to be posted from the journals to the appropriate ledger accounts:

Posting of entries recorded in the general journal

All transactions that are entered in the general journal are posted on a daily basis. Note that if a transaction recorded in the general journal involves both a control account and a subsidiary ledger account, that journal entry will need to be posted to both ledgers.

Posting of entries recorded in the special journals

When a transaction is recorded in a special journal, part of the journal entry may need to be posted daily and part of that entry is to be posted monthly.

a.Daily:

• If a transaction affects a subsidiary ledger account, then the entry that involves a subsidiary ledger account is to be posted to that subsidiary ledger on a daily basis. However, the same amount posted to the subsidiary ledger account is not posted to the related control ledger account immediately. This procedure allows the business to keep track of supplier and customer balances on a daily basis.
• In the cash receipts journal or the cash payments journal, if a transaction is recorded in the Other Accounts column, then the amount recorded in the Other Accounts column is to be posted to the appropriate general ledger account daily.

b.Monthly:

• At the end of the month, the totals of each column in the special journals are manually calculated. Those totals, with the exception of the totals of the Other Accounts columns in the cash journals, are posted to the appropriate general ledger accounts at the end of the month.

Transactions for June

You will use the following five weeks of transactions as you complete the books for June. Note that the transactions are divided into five separate weeks. This is because you will not enter this whole list of transactions on any one page. You will be given five separate pages in which to enter the transactions for each of the five weeks.

Date	Description
Week 1
1	Obtained a loan of $41,000 from ZNZ Bank at a simple interest rate of 6% per year. The first interest payment is due at the end of August 2020 and the principal of the loan is to be repaid on 1 June 2025.
2	Paid the full amount owing to Gillard Wholesalers, Cheque No. 603. Payment fell within discount period.
4	Purchased 6 boxes of Drinking Chocolate from Brennan Imports Group for $100 each, terms net 30.
4	Purchased 6 boxes of Liquorice Chocolate from East Tangiers Cooperative for $90 each, terms 2/10, n/30.
4	Sold 10 Chocolate Fondue Sets to Mercury Square for $150 each, Invoice No. 501.
4	Made cash sales of $5,842 during the first 4 days of the month.
4	Purchased 7 Chocolate Fondue Sets with cash for $130 each, Cheque No. 604.
6	Paid the full amount owing to Hershel's, Cheque No. 605. Payment fell within discount period.
Week 2
9	Candy Rush paid the full amount owing on their account. Since Candy Rush has been a loyal customer from the day the business commenced, a 5% discount was given for this early repayment.
10	Paid the full amount owing to Spud's Confectionery, Cheque No. 606.
11	Sold 8 boxes of Chocolate Nibbles to Candy Man for $160 each, Invoice No. 502.
11	Made cash sales of $9,722 during the week.
12	Mercury Square returned $994 worth of product. Issued a Credit Note for $994.
Week 3
15	Paid sales staff wages of $5,103 for the two weeks up to and including yesterday, Cheque No. 607.
16	Mercury Square paid the full amount owing on their account.
17	Sold 7 boxes of Chocolate Coated Coffee Beans to Sugar-hi for $190 each, Invoice No. 503.
18	Made cash sales of $11,884 during the week.
18	Returned $1,237 worth of faulty product to Brennan Imports Group. Received a Credit Note for $1,237.
19	Candy Man paid $700 in partial payment of their account.
21	Received a purchase order from Candy Man. Created a corresponding sales order to deliver 8 boxes of Chocolate Bars to this customer for $170 each, Invoice No. 504.