Accounting for Management Decisions Accruals and Deferrals

Question: Discuss about the Accounting for Management Decisions of Accruals and Deferrals. Answer: 1 (a) Journalizing the adjusting entries that were made by ABC Ltd on 30 September S.No. Account Description Debit ($) Credit ($) 1 Depreciation Expense 910.00 Accumulated Depreciation Equipment 910.00 2 Salary Expense 1,040.00 Salary Payable 1,040.00 3 Interest Expense 130.00 Interest Payable 130.00 4 Rent Expense 1,560.00 Rent Payable 1,560.00 5 Supplies Expense 520.00 Supplies 520.00 6 Commission Receivable 1,560.00 Commission Revenue 1,560.00 Total 5,720.00 5,720.00 1 (b) a) Income statement of ABC Ltd. for the 3 months ending 30 September Particulars Amount ($) Amount ($) Revenues Commission 37,960.00 Rent 1,820.00 Total (A) 39,780.00 Less: Expenses Salary expense 24,440.00 Rent expense 3,900.00 Depreciation Expense 910.00 Supplies Expense 520.00 Electricity Expense 1,326.00 Interest Expense 130.00 Total (B) 31,226.00 Net Profit 8,554.00 b) Statement of changes in equity for the 3 months ending 30 September Particulars Amount ($) Amount ($) Balance as at 1 July 2014 36,400.00 Add: Retained Earnings 6,994.00 (8554-1560) Balance as at 30 Sep 2014 43,394.00 c) Statement of financial position as at 30 September Particulars Amount ($) Amount ($) Current Assets Cash 17,420.00 Commission Receivable 2,600.00 Prepaid rent 2,340.00 Supplies 2,600.00 24,960.00 Non- Current Assets Equipment Less Depreciation 38,090.00 Total Assets 63,050.00 Current Liabilities Accounts Payable 3,926.00 Salaries Payable 1,040.00 Interest Payable 130.00 Rent revenue received in Advanced 1,560.00 6,656.00 Non-Current Liabilities Bank Loan (Due 31.12.2018) 13,000.00 Equity Share Capital 36,400.00 Retained Earnings 6,994.00 43,394.00 Total Liability and Equity 63,050.00 1 (c) Accounts that should be closed on 30 September: S.No. Account Name 1 Commission Revenue 2 Rent Revenue 3 Salaries Expense 4 Rent Expense 5 Depreciation Expense 6 Supplies Expense 7 Electricity Expense 8 Interest Expense 9 Dividends 1 (d) The interest expense is $130 as at 30.09.2014. It can be observed that applying the rate of 12% per annum on the total loan outstanding of $13000, one month interest works out to be $130 (13000*12%/12). This means that the loan was taken one month ago from 30.09.2014 that is on 31.08.2014. Thus, it could be articulated that ABC Ltd took loan on 31.08.2014. 2 (a) Trial balance comprises of a list of all accounts having closing balance. The accounts which show balance at the end of the accounting period are listed in the trial balance. The main purpose to prepare trial balance is to summarize and get all the accounts at one place so that the final accounts such as income statement and balance sheet could be prepared without difficulty (Needles and Powers, 2013). 2 (b) The two primary categories of adjusting entries are accruals and deferrals (Weygandt, Kimmel, and Kieso, 2009). The accrual category of adjustment entries covers the journal entries for the items of income/expense that have not been taken into books of accounts yet, but those items of income/expense have occurred and it is required to make adjustment to take them to the books of accounts. The example of accrual adjustments includes interest payable and salary payable. In contrast to this, the deferral category of adjustment entries covers adjustment entry for an item of income/expense that has already been entered in the books of accounts, but it is essential to classify the amount into two accounting periods. The example under this category includes prepaid expense and supplies expense (Weygandt, Kimmel, and Kieso, 2009). Referencing Needles, B.E. and Powers, M. 2013. Principles of financial accounting. Cengage Learning. Weygandt, J.J., Kimmel, P.D., and Kieso, D.E. (2009). Financial accounting. John Wiley Sons.