Accrual and Cash Accounting, Trial Balance - Math Problem Example

Question 1 a. i. Accrual Accounting is a method of accounting which recognizes transaction when it takes place regardless of the fact when cash is exchanged. The basic idea is to match the revenues and expenses and the inflow or outflow of cash is cash is not considered. This thus gives a better picture of the financial position Cash Accounting is a method which recognises receipts when actual cash is received and is recorded in the period when cash is received and payment is recognised in the period when it is actually made. Here importance is laid to the actual inflow and outflow of cash. ii. The rules are as follows Real Account What comes in is debited What goes out is credited Nominal Account All expenses and loses are debited All incomes and gains are credited Personal Account Giver is debited Receiver is credited b. The final figures in the unadjusted trial balance are determined through the ledger account balances. Every business post their accounting transaction in the form of journal entries which are later posted into the respective ledger. The unadjusted trail balance is just a mere reflection of the ledger accounts which is classified according to the debit and credit balance the ledger account has without adjusting the balances. c. i. No, all entries haven’t been done correctly. The entries which are wrong are the art supplies expense which should be treated as a debit entry since it is an expense and art supplies for the same needs to be credited. The other entry which is wrong is that interest payable should be credited instead of prepaid insurance as it has been wrongly done. Thus the entries which needs adjustment is art supplies expense and interest payable as it has been wrongly posted. ii. The journal entries are as follows The journal entry for art supplies is Art Supplies Expense A/c Dr 3400 To Art Supplies A/c Cr 3400 (Being, art supplies expenses debited which was wrongly credited) The journal entry for Interest expense is Interest Expense A/c Dr 850 To Interest Payable A/c Cr 850 (Being, interest expense debited and the interest still due for payment credited to interest payable account) d. i. The partial work sheet is not complete and has certain errors. To improve the accuracy and to ensure proper presentation of financial statements the adjustments needs to be passed which will result in creating the Post Closing Trial Balance. This trial balance will be complete in all aspect and will have the correct financial information relating to each account. This will there by facilitate in the preparation of financial statements which holds prime importance for the investors and persons associated with the company. ii. Trail Balance of George’s Advertising Agency As at 30th June 2009 Accounts Dr Cr Cash 12500   Accounts Receivable 18000   Interest Receivable 1500   Art Supplies 5000   Prepaid Insurance 3350   Printing Equipment 60000   Accumulated Depreciation   35000 Accounts Payable   500 Interest Payable   850 Bank Loan   9250 Unearned Revenue   8400 Salary Payable     Capital- George Martin   25500 Drawings 12000   Advertising Revenues   58700 Interest Revenue     Salaries Expense 10000   Insurance Expense     Interest Expense 1450   Depreciation Expense 7000   Art Supplies Expense 3400   Rent Expense 4000     138200 138200 iii. It is important that the work sheet is worked upon and completed in all respect as it will result in providing the wrong balances for the concerned ledger account. This could result in the financial statements depicting a wrong picture for the organisation which might lead towards misguiding the investors. This will also result in either over or under estimating the profits thereby not reflecting the correct financial stature. e. i. Melissa needs to prepare the profit and loss statement and the final balance sheet to know the actual position of the enterprise. ii. A classified balance sheet is where the “assets and liabilities are divided under the head current and non-current or long term liabilities. iii. Trading & Profit and Loss Statement Of George Advertising Agency For the year ended June 30, 2009 Dr Cr Particulars Amount Particulars Amount To Salary expenses 10000 By Advertising Revenue 58700 To Insurance Expense 1450 To Interest Expense 7000 To Depreciation 3400 To Art Supplies Expense 4000 To Net Profit 32850 58700 58700 Balance sheet of George Advertising Agency As at 30th June, 2009 ASSETS       Current Assets       Cash A/c   12500   Accounts Receivable   18000   Interest Receivable   1500   Prepaid Insurance   3350   Total Current Assets     35350 Capital Assets or Fixed assets       Printing Equipment 60000     Less: Accumulated Depreciation 35000 25000   Art Supplies   5000   Total Capital Assets     30000 Total Assets     65350 LIABILITIES & EQUITY       Current Liabilities       Account Payable   500   Interest Payable   850   Unearned Revenue   8400   Total Current Liabilities     9750 Long Term Liabilities       Bank Loan   9250   Total Long Term Liabilities     9250 Owners Equity       Capital Assets or Fixed assets 25500     Add: Net Profit 32850     Less: Drawings 12000           46350 Total Liabilities     65350 f. i. Reversing entries are done so that revenues and expenses are not counted twice which will make the accounting system efficient and allow the balances to be correctly reflected. For example Suppose, a retailer takes the help from a company from March 15 to March 31 and the bill for the same is $10,000. The company will bill the retailer on April 10 and the retailer agrees to pay the bill by April 15. The accounting year ends on 31st March. The retailer on March 3 will make the following entry Service Expense Dr 10,000 Accrued Expense Payable Cr 10,000 On 1st April the retailer will pass the reverse entry as Accrued Expense Payable Dr 10,000 Service Expense Cr 10,000 This is the reversing entry that needs to be passed and when the amount is received by the service company then the retailer will debit the invoice which will result in the service account having a zero balance thereby ensuring that revenues and expenses are not counted twice. ii. Reversing entries are passed on the “first day of the accounting period so that the adjusting entries are corrected”. iii. The entries which would be reversed are related to the interest revenue and interest receivable and advertising revenue and unearned revenue. Reversing both this entries will result in ensuring that the adjustments are made and the revenues and expenses are not neither under estimated nor over estimated. iv. The reversing entries are Unearned Revenue Dr 1400 To Advertising Revenue Cr 1400 (Being, reversing entry for unearned revenue passed) Interest Receivable Dr 500 To Interest Revenue Cr 500 (Being, reversing entry for interest receivable passed) g. i. The other trial balance apart from the Unadjusted Trial Balance is a Preliminary Trial Balance prepared from the ledger balances before the adjusting entries are passed and Post Closing Trial Balance prepared after all the closing entries are passed. ii. The other two trial balance needs to be prepared because the preliminary trail balance will help to provide the details of the actual ledger balances and will help to find if any mistakes were committed while posting in the ledger accounts. The post closing trial balance will ensure that the books are true and reflect the correct value. It will ensure that the balances of each account are correctly reflected. Preparing the trial balance in each step will also help to find the errors if any and will help the management to ensure that the financial statements are free from biasness. iii. The trial balance will be as follows Trail Balance of George’s Advertising Agency As at 30th June 2009 Accounts Dr Cr Cash 12500   Accounts Receivable 18000   Interest Receivable 1500   Art Supplies 5000   Prepaid Insurance 3350   Printing Equipment 60000   Accumulated Depreciation   35000 Accounts Payable   500 Interest Payable   850 Bank Loan   9250 Unearned Revenue   8400 Salary Payable     Capital- George Martin   25500 Drawings 12000   Advertising Revenues   58700 Interest Revenue     Salaries Expense 10000   Insurance Expense     Interest Expense 1450   Depreciation Expense 7000   Art Supplies Expense 3400   Rent Expense 4000     138200 138200 Read More