Principles of accounting case study Essay Example

Ethical Issues

Impact of a bonus incentive scheme on the financial statement

In this specific scenario, the main stakeholders are Lucia and Freda. This is because each one of them have them has the duty to uphold the ethical conduct that their job requires. There are clear guideline of Freda’s role as a manager and the ethical standards that she is to uphold. On the other hand, Lucia is guided by both the organization’s ethical rules and the General Accepted Accounting Principles famously known as GAAP. It is therefore important that each one of them observes the required ethical standards for the proper running of the business and so as to prevent any serious financial, legal and ethical consequences.

There could be numerous reasons as to why Freda asked Lucia to defer the recognition of the huge revenue as much as possible. However, what is plainly clear is that the reason behind Freda’s request is not for the sake of the company but for her own benefit. One of the reason behind Freda’s suggestion could be because she would like to continually benefit illegally from the 100, 000 dollar grant. If proper investigation is to be carried out, it might be identified that the grant is not being used for its intended purpose by Freda and that she could taking advantage of her position as manager to misappropriate funds.

Some of the major ethical issues that are involved in the scenario are fraudulent Financial Reporting, Misappropriation of Assets and disclosure. Fraudulent financial reporting refers to the misstatement of a company’s financial statement by the management. In most cases this is done with the intention of misleading the investors and owner of the business. Misappropriation of assets refers to the use of a company assets on any other purpose other than the company’s interests. Disclosure is an ethical issue that is very prominent in this scenario since disclosure refers to intentionally recording transactions in a manner that is not in line with the Generally Accepted Accounting Principles.

Any attempt by Lucia to defer revenue and accrue expenses will be unethical in all standards. This is because it will be against the disclosure principle in accounting.

Retain or Sell a business

principles of accounting case studyCash Account

principles of accounting case study 1Debit Credit

The 900 dollars cash that was received but service not offered is debited to the cash account because there is an increase in asset cash and the accounting principle dictates that we deposit it.

principles of accounting case study 2Salaries Account

principles of accounting case study 3Debit Credit

We credit the salaries account with the amount that the employee was given considering the fact that he or she had already gone on holiday by end of June.

principles of accounting case study 4Rent Account

principles of accounting case study 5Debit Credit

The rent prepayment is no longer a prepayment anymore and therefore desists from being an asset and hence it is credited in the rent account.

principles of accounting case study 6Depreciation Expense Account

principles of accounting case study 7Debit Credit

An increase in Depreciation expense is debited to the depreciation account and credited to the asset account and therefore in this case 6000 dollars is debited to the account.


Salaries expenses will be reduced by the value 23,000

283,170 — 23,000 = 260,170

Rent expense is also reduced by the value 14,000

19,800 — 14,000 = 5,800

Depreciation expense is increased by 6,000

2,400 + 6,000 = 8,400

The income of the business will be increased by the cash increase incurred by the business.

414,285 + 900 = 415,185

Calculation using new figures


260,170 + 57,815 + 2,600 + 7,000 +12,500 + 5,800 +8,400 = 354,585

New profit value = Income – Expense

415,185-354,585 = 60,600

60,600/415,185 * 100% = 14.15%

Lucy should continue with the business for the reason that the profit margin is actually greater than 10 percent in fact it is 14.15 percent and this value is good for business. With proper restructuring and proper maintenance of her accounting documents, Lucy will be able to get a much higher profit margin.

Decision Analysis

Sales Journal

Sales journal refers the book of initial entry for the sales invoices that are issued to the clients/ customers for service offered or goods supplied. Entries of this kind are posted to the specific customer’s account and the totals ledger accounts as credit to sales account and as debit to the account receivables. This is because the sales journal are used to record the sales that a company has incurred on credit. However the cash sales are recorded in the journal of cash receipts.

The company should use sales journal because its sales are on credit basis and that sales journal tends to have columns such as invoice number, account receivables amount, posting check box and cost of goods sold amount. These columns will be significant to Silvertail Petroleum Limited. I recommend that they record the entries via computer since this will enhance record keeping and minimize maintenance costs. Recording via computer will also play a crucial role on the mode in which the company will use in sending invoice to their customers. The business will be able to send the invoices to their clients via email which will be faster and cheaper way to send the invoices.

Purchase journal is journal in which all the purchases are recorded initially before being shifted to the main or subsidiary ledger. Just like the sales journal, the purchase journal; is where all the credit purchases are recorded. It is important to record the credit purchase on the purchase journal other than the general journal. This is because the general journal is always an all-purpose where all the transactions are recorded. Because all the transactions are recorded in the general journal, it can be very large thus making finding information about a specific transaction very difficult to find.

Cash receipts journal is a journal book that is used to record every transactions that involves the receipt of cash. This means that this journal book is only used to record cash transaction and not credit transactions. It is therefore not right to use cash receipt for recording the transaction since there are chances of default and it is much more appropriate to maintain a sales journal as initially stipulated. Maintaining one book for transaction will reduce the maintenance cost compared to running both the cash receipt and the sales journal for credit sales. On the other hand it is important for the company to maintain cash payments journal for it is important for them to record all the cash costs that it incurs.

JB Hi-Fi Limited Financial Analysis

After a thorough review if the company’s Financial report, it can be observed that the major accounting documents that can be used are Purchase journals, Cash Payments Journal, Sales Journals , Cash receipts journal and the General journal, cash disbursement journal, cash receipt journals and payroll journals.

Some of the journals that one expects to be used upon receipt from a customer are sales journal and the cash receipt journals whereas payments to suppliers and employees is likely to include mainly the purchase journal and the cash payments journal. The cash receipt journal will be used to record the dividend paid to members of the parent entity. The payments for property, equipment and plant are recorded on the purchase journal.

The cost of sales is likely to be found in the purchase journal and the cash payments journal. The sales and marketing expenses are likely to be recorded in the sales journal and cash receipts journal. Other incomes and the occupancy expenses are likely to be recorded in the general journal.







New Plant



Advertising Expense




Income from Services


Occupancy expenses

The above general journal format provides entries that could have been made by JB HI-FI.

Works Cited

Flood, Joanne M. Wiley GAAP 2013: interpretation and application of generally accepted accounting principles. Hoboken: Wiley, 2013.

Jones, Michael. Accounting. Chichester: Wiley, 2006.

May, Gordon S. The encylopedia of journal entries. Rockville: AIPB, 2004.

JB HI-FI. «Annual Report 2011.» (2011): 1-88.

Kieso, Donald E, Jerry J Weygandt and Terry D Wartfield. Intermediate Accounting. Hoboken,NJ: Wiley, 2012.