Accounting 7111AFE - Topic 2: Adjusting Process Homework Solution

This document presents a complete solution to an accounting homework assignment focused on the adjusting process. The solution begins with journalizing adjusting entries for ABC Accounting, covering prepaid rent, fees in advance, employee salaries, depreciation, and accrued interest. It then analyzes the impact of omitting a payroll expense accrual adjustment on net profit for both October and November, explaining why the accrual adjustment is crucial for accurate financial reporting. Furthermore, the solution provides reasons why a company's cash generation might exceed its recorded profit, considering factors like the timing of cash flows relative to revenue recognition and the impact of asset sales. The assignment demonstrates a solid understanding of accrual accounting principles and the importance of accurate financial statement preparation.

7111AFE Topic 2 Assessable Homework
7111AFE Accounting
Assessable Practical Work and Reflection
Topic 2 – The Adjusting Process
Due: Thursday 1 August, 2019 at 10am
Please show all workings and answer the following questions in your own words.
Question 1
Journalise any necessary adjusting entries for ABC Accounting in the General Journal at 30th
June 2015. Explanations/Narrations are NOT required.
1. On the first of April paid rent in advance for 12 months, $15,000.
2. Received $4,000 Fees in Advance on 1st March 2015. At the 30th 25% of the work has been
completed.
3. Employee Salaries owed for Monday to Wednesday of a five-day working week; the weekly
payroll is $12,500.
4. Depreciation for one month on Office Equipment costing $5,000 with a salvage value of zero
and a useful life of 10 years.
5. Interest expense accrued $1,200.
Journal
DATE ACCOUNTS AND EXPLANATIONS POST.REF. DEBIT CREDIT
Prepaid rent Dr. 15000
To rent expenses 15000
1st
march
Cash a/c Dr. 4000
To accrued income 4000
Payroll A/c Dr. 12500
To outstanding a/c 12500
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7111AFE Topic 2 Assessable Homework
Depreciation A/c Dr. 42
To accumulated depreciation 42
Accumulated depreciation Dr. 42
To fixed assets 42
Interest Expenses Dr. 1200
To interest expenses payable 1200
Question 2
Assume that Surfers Ltd.’s accountant neglected to record the payroll expense accrual
adjustment at the end of October.
a. Explain the effect of this omission on the net profit for October.
In the entire world the concept of the accounting that has been followed is the one which is
bifurcated into the accrual concept, the mercantile concept, the cash basis of the accounting
lastly the hybrid basis. If the net profit of the October is omitted the real value of the profit
would be overstated. Hence, the surfer’s limited when neglected to record the expenses of
the payroll the profits of the month of the October will be over sated and the Surfer’s limited
will be understated (Linarello, Petrella & Sette, 2019).
b. Explain the effect of this omission on the net profit for November.
The error of the omission is of two types namely, partial omission or complete omission. In
case of the partial transaction, the transactions are recorded in the books, but not posted in
the ledger. In case of the complete omission the transactions are not recorded at all. They are
completely omitted from the books. The net income for the November would be
understated. The net profit adjustment for the omission of the month of the November will
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7111AFE Topic 2 Assessable Homework
be the opposite of the case presented in the month of the October (Oliadnichuk & Pidlubna,
2017).
c. Explain why the accrual adjustment should have been recorded as of 31 October 2019.
The accrual entries are nothing but the adjusting entries which are required to be presented
at the end of the accounting period. This method is followed in order to comply with the
accrual method of accounting. In the simpler terms the accrual adjusting entries are the
means of the transactions that occurred during the current accounting period, and are yet to
be recorded in the ledger of the company accounts. If the accrual adjustments are not made
the adjusting entries are likely to be reported in the next financial year. The overall result
will lead to the incorrect amounts in two accounting periods. Hence, the accrual adjustment
was to be recorded necessarily (Burks, 2015).
Question 3
Assuming there have been no accounting errors, provide two reasons why cash generated by a
company might be greater than the profit recorded in the company’s income statement.
Cash of the company is one of the most important assets of the company. The cash reveals the true
position of the company. The company tends to look much healthier when the cash is more than the
net profit. The profits on the other hand are the surplus of the expenses that have arrived after
deducting the operating as well as non-operating expenses. The cash might be greater than the
company when the cash is not tied up within the hands of the accounts receivable or the inventory.
Once the debt is paid there is an increase in both profit as well as the cash inflow thereafter
increases. The second reason would be the sale of the securities. The cash can be higher when the
shares have been sold and the profit remains constant. Hence, the can generated by the company is
greater than the profit recorded in the company’s income statement (Buchanan & Davis, 2018).
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7111AFE Topic 2 Assessable Homework
References
Buchanan, D. L., & Davis, M. H. (2018). Cash Flow Modelling and Financial Accounting. World
Scientific Book Chapters, 7-37.
Burks, J. J. (2015). Accounting errors in nonprofit organizations. Accounting Horizons, 29(2), 341-
361.
Linarello, A., Petrella, A., & Sette, E. (2019). Allocative efficiency and finance (No. 487). Bank of
Italy, Economic Research and International Relations Area.
Oliadnichuk, N., & Pidlubna, O. (2017). Accounting of Export-Import Operations. Accounting and
Finance, (1), 48-56.
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