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Background
AssumeitiscurrentlyJune1,2015.
YouareworkingforthetemporaryaccountingemploymentagencyknownasTempathy.Todayyouhavebeenasked
toworkatDiscOTech,asmallmusicstorethatoperatesininnercitySeattleandisownedbyStephanoBartos.
YourtaskhereistocompletetheaccountingcycleforDiscOTechforthemonthofJune2015.Toassistyouinthis
task,Stephanotellsyoutoreadthecompany'saccountingpoliciesandprocedures.Notethatyouwillberequiredto
followthesepoliciesandprocedureswhencompletingtheaccountsforDiscOTech.

Accountingpolicies
a. Businessoperations:DiscOTechissetupasaprivatenonlistedcorporationbasedinSeattlewith
StephanoBartosasthesolestockholder.Thebusinessderivesitsmainsourceofrevenuefromretailsalesof
musicrelatedgoods.
Toassistinmanagingthebusiness,DiscOTechrentsasmallofficespace.Notethatthebusinessisrequiredto
payfortherentforthispremisesinadvance.
Theelectricityandwaterexpensesincurredduringthemonthrelatetotherunningoftheoffice.Additional
expensesincludeaninsurancepolicytoprotecttheequipmentintheofficeintheeventoftheftorfire.
Allcostsassociatedwiththeofficeareclassifiedasgeneralandadministrativeexpenses.
Stephanoistheonlyfulltimeemployeeandhisroleistohandlealladministrativetasks.Stephano'ssalaryis
paidonceattheendofeachmonth.Allotheremployeesaresalesstaffwhoareemployedonaparttimebasis.
Thesalesstaffreceivetheirwageseverytwoweeks.
b. Accountingcycle:Thebusinessadoptsamonthlyaccountingcycle.
c. Purchases:Purchasesarerecordedwhenthebusinessreceivesthegoods.Allitemspurchasedarereceivedon
thesamedayasrecordedinthetransactionlist,exceptforpurchaseorderswhicharereceivedatalaterdate.
Notethatthebusinessusesthegrossmethodofrecordingpurchasesandreceivestradediscountsandearly
paymentdiscountsfromsomesuppliers.
d. Purchasereturns:ToallowStephanotoseparatelytrackandanalyzethevalueofgoodsreturnedtosuppliers,
allpurchasereturnsarerecordedinthePurchaseReturnsandAllowancesaccountratherthandirectlyinthe
Purchasesaccount.
e. Revenuerecognition:Thebusinessrecognizesrevenueswhengoodssoldaredeliveredtocustomers.Allitems
soldaredeliveredonthesamedayasrecordedinthetransactionlistexceptforsalesorders,whicharedelivered
atalaterdateasagreedwiththecustomer.Notethatthebusinessusesthegrossmethodofrecordingsalesand
sometimesgrantstradediscountstocustomers.Pastexperiencehasshownthatofferingearlypayment
discountsdidnotincreasethelikelihoodofaccountsreceivablebeingpaidpromptly.Therefore,discountsfor
earlypaymentofaccountsarenotnormallyofferedtocreditcustomersexceptinexceptionalcircumstances.
f.

Salesreturns:Sothatthebusinesscaneasilytrackthelevelofsalesreturnsinrelationtooverallsales,all
salesreturnsarerecordedusingacontrarevenueaccount(SalesReturnsandAllowances)ratherthanbeing
recordeddirectlyintheSalesRevenueaccount.

g. Salestax:Stephanohasadvisedyoutoignoretheeffectofsalestax.[ASIDE:Thisisanassumptiontomake
thepracticeseteasierforyoutocomplete.Intherealworld,salestaxcannotbeignored.]
h. Cash:Thebusinessacceptscashandchecksandusescheckstopayforthemajorityofitsexpenses.Ontheday
checksarereceived,Stephanodepositsthematthebank.Itmaytakeanumberofdaysforthecheckstobe
clearedbythebank.ThebusinessholdsitscheckingaccountwithBitiBank.
i.

Shortterminvestments:ThebusinessholdsasixmonthtermdepositaccountwithBitiBankatasimple
interestrateof6%.Interestiscalculatedonamonthlybasisandreceivedattheendofthedepositterm.The
monthlyinterestearnediscalculatedastheyearlyinterestdividedbythenumberofmonthsinayear.Notethat
whenthedepositmatures,Stephanousuallyrollsovertheprincipalandinterestreceivedattheendoftheterm.
ThetermdepositaccountwasrolledoveronJune1,2015.

j.

Inventories:Thebusinessusestheperiodicinventorysystemandandrecordsallpurchasesofinventoryinthe
Purchasesaccount,ratherthanrecordingthemdirectlyintheMerchandiseInventoryaccount.Attheendofthe

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reportingperiod,thePurchasesaccountandtheopeningbalanceoftheMerchandiseInventoryaccountare
closedtotheIncomeSummaryaccountandMerchandiseInventoryisrestatedtoitsendingbalance.Notethat
thecompanydoesnotuseaCostofGoodsSoldaccount.
k. Prepayments:Thebusinesshasapolicyofrecordingprepayments,includingofficesupplies,asassets.Atthe
endofthemonth,adjustmentsaremadetotherelevantaccountstorecognizetheexpenseincurredduringthe
accountingperiod.
l.

Property,plantandequipment:Property,plantandequipmentitemsaredepreciatedovertheirestimated
usefullifeusingthestraightlinemethodtocalculatethedepreciationcharge.Depreciationisallocatedona
monthlybasisandthemonthlydepreciationchargeiscalculatedastheyearlydepreciationexpensedividedby
thenumberofmonthsinayear.

m. Longtermliabilities:ThebusinessobtainedaninterestonlyloanfromEastPacBankonJune1,2015ata
simpleinterestrateof6%peryear.ThefirstinterestpaymentisdueattheendofAugust2015andtheprincipal
ontheloanisdueonJune1,2018.

Accountingprocedures
DiscOTechadoptsamanualaccountingsystemandusesthegeneraljournalandspecialjournalsfortherecording
ofindividualtransactions.StephanoBartoshastailoredthedesignofthosejournalstomeetthespecificneedsofthe
businesssotheformatofthosejournalsmaybeslightlydifferenttothoseyouhaveseenbefore.However,he
advisesyouthatthegeneralprinciplesofhowtousespecialjournalsarefollowedinhisbusiness.
Thetablebelowshowsthejournalsusedbythebusinessandthetypesoftransactionsthatcanberecordedineach
ofthesejournals:

Journal

Code

Transactiontype

Generaljournal

GJ

Alltransactionsthatarenotabletoberecordedinthe
specialjournalsbelow.

Salesjournal

SJ

Creditsalesofinventory

Purchasesjournal

PJ

Creditpurchasesofinventory

Cashreceiptsjournal

CRJ

Cashinflowstothebusiness

Cashpaymentsjournal

CPJ

Cashoutflowsfromthebusiness

Tosummarizetheeffectsoftransactionsrecordedinthosejournals,Stephanomaintainsthegeneralledgerandthe
followingsubsidiaryledgers:
accountsreceivablesubsidiaryledger,and
accountspayablesubsidiaryledger.
Stephanothenindicatesthatheisawareotherbusinessesusingamanualaccountingsystemmayposttransactions
fromjournalstoledgersatdifferenttimes(i.e.dailyormonthly).Althoughthepostingproceduresusedinhis
businessmaybedifferenttowhatyouhaveseenbefore,heasksthatyouspecificallyfollowhiscompany's
accountingpoliciesandprocedures.
Theinformationbelowexplainswhentransactionsarerequiredtobepostedfromthejournalstotheappropriate
ledgeraccounts:
Postingofentriesrecordedinthegeneraljournal
Alltransactionsthatareenteredinthegeneraljournalarepostedonadailybasis.Notethatifatransaction
recordedinthegeneraljournalinvolvesbothacontrolaccountandasubsidiaryledgeraccount,thatjournalentry
willneedtobepostedtobothledgers.
Postingofentriesrecordedinthespecialjournals
Whenatransactionisrecordedinaspecialjournal,partofthejournalentrymayneedtobeposteddailyandpartof
thatentryistobepostedmonthly.
a. Daily:
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Ifatransactionaffectsasubsidiaryledgeraccount,thentheentrythatinvolvesasubsidiaryledger
accountistobepostedtothatsubsidiaryledgeronadailybasis.However,thesameamountpostedto
thesubsidiaryledgeraccountisnotpostedtotherelatedcontrolledgeraccountimmediately.This
procedureallowsthebusinesstokeeptrackofsupplierandcustomerbalancesonadailybasis.
Inthecashreceiptsjournalorthecashpaymentsjournal,ifatransactionisrecordedintheOther
Accountscolumn,thentheamountrecordedintheOtherAccountscolumnistobepostedtothe
appropriategeneralledgeraccountdaily.
b. Monthly:
Attheendofthemonth,thetotalsofeachcolumninthespecialjournalsaremanuallycalculated.Those
totals,withtheexceptionofthetotalsoftheOtherAccountscolumnsinthecashjournals,arepostedto
theappropriategeneralledgeraccountsattheendofthemonth.

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