Quiz 3: Theadjusting Process
The Facts of the given case are as below: Daryl Kirby opened Squid Realty Co. on January 1, 2013, at the end of the first year, the business needs additional capital. For that, he applied for a loan of $ 375,000 to the Ocean National Bank. Basing on the Squid Realty Co. financial statement prepared on cash basis they rejected the loan as too risky. After receiving the rejection notice, the financial statements were revised and prepared on accrual basis, by disclosing all accounts receivables and all accounts payable. In accounts receivables Mr. Daryl included $ 30,000 receivable for the commission on property for which a contract had been signed on December 28, 2013. The title to the property is to be transferred on January 5, 2014, when an attorney formally records the transfer of the property to the buyer. Again, Daryl applied to Free Spirit Bank for a loan of $ 375,000, using revised financial statements. On this application, Daryl indicated that he had not previously been rejected for credit. Mr. Daryl approaching Free spirit Bank for a loan after receiving the rejection notice from Ocean National Bank is not a professional misconduct but not indicating the same fact in the application to Free spirit Bank is not ethical and it is a professional misconduct. At first, the financial statements of Squid Realty Co. were prepared on cash basis and after rejection of loan by Ocean National bank the financial statements were revised and prepared on accrual basis. The method of accounting should be consistently adopted and it should not be changed frequently whenever required. For Squid Realty Co. it is the first year of the business operations, the change in method of accounting from cash basis to accrual basis will not be a professional misconduct if the accrual basis of accounting is followed consistently in future. The financial statements should represent a true and view of the business transactions, weather it is cash basis or accrual basis but to get a loan from the bank, Mr. Daryl intentionally included commission receivable on property. The title to the property is to be transferred on January 5, 2014 in Accounts Receivables of current year is unethical and it is also a professional misconduct.
1) Journalizing Adjustment Entries : Journal Entries for Adjustments In the books of PS Music on July 31, 2014 2) Posting adjustment entries in Ledger of PS Music: Accounts Receivable Account Fees Earned Account Supplies Account Supplies Expense Account Prepaid Insurance Account Insurance Expense Account Depreciation Expense Account Accumulated Depreciation Account Unearned Revenue Account Wages Expense Account Wages Payable Account 3) Adjusted Trial Balance : PS Music Adjusted Trial Balance July 31, 2014
(1) Under the cash basis of accounting expenses and revenues are reported on the income statement as they are received. Therefore the only thing that matters is when the money is paid or received. The accrual basis of accounting requires companies to recognize the revenue or expense as they are actually earned throughout the year. Therefore companies must set up prepaid and unearned accounts to record the receipt of the cash but don't recognize until it has been earned.