Financial Accounting Concepts - Essay Example

Financial Accounting Advise to Dr. Leo Krusack on basic accounting procedures for the month of July showing how each transaction is handled on the accrual basis of accounting: On July 1st, he paid out $1,200 in office rent for the month of July. This is considered as expense for the month of July. .He purchased a new dental chair for $1,300 cash on July 6th. This is capital investment and hence a Balance sheet item. This is not to be considered in the revenue account for July. On July 10th, he purchased $2,000 worth of dental supplies on account.

Under the accrual system of accounting only the actual supplies used during the month is considered and not the total purchases. He used $1,300 worth of dental supplies in July. This is an expense for July. On July 10th, he paid an electric bill for $250 This pertains for the month of June and even though paid in July cannot be considered in the revenue account for July under the accrual system of accounting. On July 12th, he paid $75 to place an ad in the local newspaper.

This is an expense for July. He paid out $1,500 in wages to his hygienist on July 15th and 31st. This is an expense for July. On July 18th, he withdrew $250 for personal expenses. Personal drawings are accounted for in the Balance Sheet when the profits are added to the Capital account. On July 25th, he received an electric bill for $287, which he will pay in August. This is an expense for July irrespective when the payments will be made. By July 31st, the practice had received $7,710 in cash payments for services rendered in June.

This is revenue for June and hence not included in July income. For services revenue is recognized in the period in which the service is rendered. By July 31st, his practice had received $4,340 in cash from and billed $7,560 to patients for services rendered during July. The total billing of $7560 is the revenue (earned in July and the total has to be considered even though only a part of it has been received in cash. Amount of Revenue (Expense) for July 2005 Date— Revenue(Expense)-- Accrual-Basis Amount July 1st Office Rent $1200 July 12th Publicity 75 July 15th Wages 750 July 25th Electricity 287 July 31st Wages 750 July 31st Supplies used during the month 1300 Amount of Revenue (Expense) for July 2005 $4362 *Note: It is not clear whether the wages paid to Hygienist is $1500 on each of the two days on a total of $1500.

Hence it has been assumed that this was the total of two payments. July net income (loss) under the accrual basis of accounting. Billing for services rendered in July………………………………$7560 Costs Wages and Salaries…………………………………………..$1500 Supplies used………………………………………………… 1300 Electricity……………………………………………………. 287 Office Rent………………………………………………….. 1200 Publicity…………………………………………………….

75 Total……………………………………………………….. $4362 Income…………………………………………………………….. $3198