University Accounting Case Study: Magic Thread and Partnership Issues

This case study analyzes two scenarios related to accounting principles and business ethics. Case 1 focuses on Samantha Kennedy's craft shop, Magic Thread, exploring the source documents needed in a manual accounting system for sales, cash receipts, and supplier payments. It also examines how a computerized accounting package can aid in Samantha's decision-making and business management. Case 2 presents a partnership between Derek and Kate, where Derek's financial actions and withdrawals raise ethical concerns. The analysis identifies the stakeholders, evaluates whether Derek's actions are wrong, and highlights the ethical issues involved, focusing on fairness, transparency, and the potential for exploitation within the partnership. The study references various accounting and finance texts to support its findings.

Principles of Accounting

Table of Contents
Case 1 3
Case 2 6
References 9
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Case 1
A. Different kind of source documents that is required in a manual accounting system in
order to record the sales to customers and receipt of cash, and to ensure correct payment of
money to suppliers
Source documents are the different kind of documents that are generated while any of the
business organizations makes any kind of transactions. It consists of a trail of documentation,
which comes up if any kind of payments, or receipts are being made by the business
organization. In the case of Magic Thread, the receipts of payments received and the cheque
written by it for its supplies are the source documents. These source documents help in the
process of accounting. The source documents prove the authenticity of the journal and ledgers
books while any kind of auditing is conducted on the organization. Different of the source
documents are cancelled checks, Credit memo for a customer refund, deposit slips, Purchase
order, Invoices, Cash register receipts, and the Employee time cards that are required in the
process of conducting accounting by making use of a manual accounting system1. Through these,
sales can be recorded and documented and the receipts of cash are recorded. It also helps in
ensuring that the correct amount of money is paid off to the suppliers. Cash is received for any
sales and it is then documented in the books of accounts by referring to the bills and the cash
receipts copies kept by the organization. If some raw materials for the crafts items are ordered,
than the purchase order papers prove the authenticity and reports about the expenses to the
organization. After making the payments for it, bills are received from the suppliers. This helps
in making correct payments to the supplier's when the date of payments comes2. The books are
checked and tallied with all these source documents and vouchers and then, the ultimate
payments are made based upon the investigation. The payments on the ground of sales are also
checked with the documents such as credit memo for customer refund. While asking the
payments from the customers, these papers are tallied and on basis of that, the payment is
received. In case of sales, the debit memo for suppliers refund is checked so that any kind of
1 Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance. Pearson
Higher Education AU, 2015.
2 Ingram, Thomas N., Raymond W. LaForge, Michael R. Williams, and Charles H. Schwepker Jr. Sales
management: Analysis and decision making. Routledge, 2015
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return is made to the suppliers and on basis of that the correct payments are made and then in this
process, the debit item is cancelled in the books of accounts.
B. The different ways by which a computerized accounting package can help Samantha
make better decisions and manage her business better
The accounting package can helps a great deal and play a great role in the life of Samantha in
order to enable her to the right kind of decisions. Computerized accounting is mainly handled by
a package of software. There are different of the accounting packages that Samantha can choose
in order to meet her tailored needs. It can be said that many of her work can be done by the
software Payroll and Accounting software. She can also make use of ERP and Microsoft Excel in
order to keep her accounting in the most desired order and format. The computer based
accounting software out of the package shall help her in many ways. They shall play a great role
in recording the different kind of transactions that have been made by her and her organization.
The computerized accounting software shall enable the process of automation in the calculation
and recording procedure making it much faster and easy to handle3. These packages help in
maintaining accuracy in the calculations as well in the recording procedure. It also helps in
getting quick and much quicker access to all the accounting data and information. This shall help
Samantha to look for the accounting information at any time and place she wants and shall
enable her to take better decisions and in a much quick manner4. The data are measurable,
scalable and reliable and thus they make decision making more rational and accurate. Knowing
that the data are absolute in their reliability, based on them, important decision regarding
purchase and budgeting can be taken by Samantha. Based on the data shown by stock is recorded
in the computer, she can even make purchase of handicraft materials on basis of that to avoid any
kind of over ordering of the craft materials for selling as well as conducting the craft classes. It
will make the data more secure, safe to use cost effective and easily represent able5. The data can
3 Laudon, Kenneth C., and Jane Price Laudon. Management information systems. Vol. 8. Prentice Hall,
2015
4 Monczka, Robert M., Robert B. Handfield, Larry C. Giunipero, and James L. Patterson. Purchasing
and supply chain management. Cengage Learning, 2015
5 Rajaraman, V. Analysis and design of information systems. PHI Learning Pvt. Ltd., 2018
4

be used to carry on with the accounting and verification at any point of time. The computerized
accounting packages shall give better visuals to Samantha. This shall help her to make the
correct decisions related to her business.
Case 2
A. The stakeholders in this situation
In this situation, there are mainly two stakeholders that can be seen here. The two of the partners
of the business that is Derek and Kate are the main stakeholders. In this case, Derek has
introduced $60,000 in the business and Kate has introduced $50,000 in the business. However,
Derek first withdraws an amount of $20,000 for financing the deposit of his house. He also
withdrew another $20,000 out of the partnership capital in order to reduce his mortgage on the
house. Thus, in the final position out of the two partners, Kate is having more stake in the
business as she still has a deposit of $50,000 in the title partnership capital6. While on the other
hand, Derek had $60,000 in the first place but he then withdrew $20,000 for two times. Thus, his
capital contribution came to $20,000. This caused top the decrease of his stake in the business.
B. Does Derek appear to be doing anything wrong? Explain your response.
It can be said that Derek is taking the undue advantage out of the capital that he had contributed
in the first place. He had contributed an amount of $60,000 for the partnership capital. On the
other hand, Kate had deposited $50,000 for the business, being $10,000 less that the amount
deposited by Derek. Derek used to do with all the accounting and other financial tasks, which
Kate used to handle all the clients of the business. However, Derek declared that the profits and
the remunerations of the business should be divided based on the capital contribution made by
each of them. In this manner, Derek already exploited and took advantage of Kate. However,
after some time, showing some of the ground for taking the money, Derek withdrew a big
account. He withdrew around $20,000 for the deposit to be made on his house. Then, Derek after
smoke point of time again deducted and withdrew $20,000 from his partnership capital in order
to meet the mortgage on his house. This led to further decline in the overall share or the
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contribution made by him the total capital of the partnership7. However, Kate did not say
anything to him about thee and gladly accepted what he wanted to do. However, at present Derek
having a contribution of $20,000 in the partnership capital in contrary to the $50,000
contribution still held by Kate gets the same salary as Kate. Both of them get a salary of $30,000
based on the statement that they make equal contributions made by them. However, at present
Kate has a bigger capital contribution. Thus, it can be said that Derek is being dishonest and
dominating. Thus, it can be clearly said that Derek was being wrong in the kind of things that he
was doing. After making such kind of big withdrawals and lessening his overall contribution in
the partnership capital, he should have taken less amount of salary in order to keep the share all
right and correct8.
C. Ethical issues involved here and identifying them.
Here, some ethical issues are definitely involved. It can be said that Derek was unethical.
However, he had informed about the Kate about the withdrawals but still he brought his overall
contributions at a much lower level. This was hampering the overall capital of the partnership
organization. He was even taking the same salary as Kate even after having less contribution in
the capital of the organization9. He was exploiting Kate, as Kate was not such well acquainted
with all the accounting figures and the calculations involved in the whole of the business.
Though Kate the whole responsibility of handling all the clients of the business, still Kate was
not been given the accurate returns for the contributions put up by her towards the business.
Derek took the same credits and the share of the salary even after having lesser capital
contributions than Kate has. Thus, all these things can be pointed out to be unethical things that
were carried out here by Derek on Kate. The most unethical things that Derek has done is
withdrawing huge chunk amounts of money from the total partnership contribution capital
formed at the starting phase of the business.
76 Wells, Joseph T. Corporate fraud handbook: Prevention and detection. John Wiley & Sons, 2017.
87 Lachman, Vicki D. "Ethical issues in the disruptive behaviors of incivility, bullying, and
horizontal/lateral violence." Urologic nursing 35, no. 1 (2015): 39
98 Parrott, Lester. Values and ethics in social work practice. Learning Matters, 2014
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References
Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance.
Pearson Higher Education AU, 2015.
Ingram, Thomas N., Raymond W. LaForge, Michael R. Williams, and Charles H. Schwepker
Jr. Sales management: Analysis and decision making. Routledge, 2015.
Lachman, Vicki D. "Ethical issues in the disruptive behaviors of incivility, bullying, and
horizontal/lateral violence." Urologic nursing 35, no. 1 (2015): 39.
Laudon, Kenneth C., and Jane Price Laudon. Management information systems. Vol. 8. Prentice
Hall, 2015.
Monczka, Robert M., Robert B. Handfield, Larry C. Giunipero, and James L.
Patterson. Purchasing and supply chain management. Cengage Learning, 2015.
Parrott, Lester. Values and ethics in social work practice. Learning Matters, 2014.
Rajaraman, V. Analysis and design of information systems. PHI Learning Pvt. Ltd., 2018.
Weiss, Joseph W. "Business ethics a managerial, stakeholder approach." (1994).
Wells, Joseph T. Corporate fraud handbook: Prevention and detection. John Wiley & Sons,
2017.
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