Mac Ltd. provides legal advice to customers for fees. On 30 June 2020, Mac Ltd. completed its first year of operations. Some of the ledger account balances of the business, before any financial year end (30 June) adjustments, are provided below: $ Fees Revenue 295,000 Rent Expense 14,640 Electricity Expense 5,640 Wages Expense 108,800 Advertising Prepaid 1,800 No adjusting entries have been made to these accounts at any time during the year. An analysis of the business records reveals the following. The total Fees Revenue recorded includes $1,500 that was prepaid by a client as a deposit for legal advice to be provided in July 2020. The balance in Advertising Prepaid represents the amount paid for an advertising on a legal magazine for 6 months. The agreement with the publisher of the magazine covers the period 1 May 2020 to 31 October 2020. The Electricity Expense ledger balance does not include the amount for June 2020. The account amounted to $1,050 and was received and paid during July. The firm’s lease agreement for the office premises commenced from 1 July 2019. The agreement indicates a rent of $1,220 per month is to be paid on the first day of each month. In addition, an annual amount equal to 0.2% of the entity’s total fees revenue earned each year should be paid. This extra rental is payable within 15 days of the end of the reporting period. The entity hired part-time employees. Wages are paid fortnightly on Fridays (5 working day each week and each pay period covers Monday from preceding week to Friday in the pay week). In 2020, 30 June falls on a Tuesday and the wages for the two-week pay period ended on Friday 3 July 2020 is $7,800. All employees worked the normal office hours during the two--week pay period. Required: Journalise the necessary adjusting entries at the end of the period. Apply the knowledge that you have learned from Lecture 4, using an example to explain the differences between cash basis and accrual basis accounting, and further discuss why adjusting entries are necessary.
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Question 1
Mac Ltd. provides legal advice to customers for fees. On 30 June 2020, Mac Ltd. completed its first year of operations. Some of the ledger account balances of the business, before any financial year end (30 June) adjustments, are provided below:
|
|
$ |
|
Fees Revenue |
295,000 |
|
Rent Expense |
14,640 |
|
Electricity Expense |
5,640 |
|
Wages Expense |
108,800 |
|
Advertising Prepaid |
1,800 |
No
- The total Fees Revenue recorded includes $1,500 that was prepaid by a client as a deposit for legal advice to be provided in July 2020.
- The balance in Advertising Prepaid represents the amount paid for an advertising on a legal magazine for 6 months. The agreement with the publisher of the magazine covers the period 1 May 2020 to 31 October 2020.
- The Electricity Expense ledger balance does not include the amount for June 2020. The account amounted to $1,050 and was received and paid during July.
- The firm’s lease agreement for the office premises commenced from 1 July 2019. The agreement indicates a rent of $1,220 per month is to be paid on the first day of each month. In addition, an annual amount equal to 0.2% of the entity’s total fees revenue earned each year should be paid. This extra rental is payable within 15 days of the end of the reporting period.
- The entity hired part-time employees. Wages are paid fortnightly on Fridays (5 working day each week and each pay period covers Monday from preceding week to Friday in the pay week). In 2020, 30 June falls on a Tuesday and the wages for the two-week pay period ended on Friday 3 July 2020 is $7,800. All employees worked the normal office hours during the two--week pay period.
Required:
- Journalise the necessary adjusting entries at the end of the period.
- Apply the knowledge that you have learned from Lecture 4, using an example to explain the differences between cash basis and accrual basis accounting, and further discuss why adjusting entries are necessary.
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