TACC401 Principles of Accounting Week 4:  Accrual Accounting

TACC401 Principles of Accounting

TACC401 Principles of Accounting  

Week 4:  Accrual Accounting

Seminar Guide

Seminar Activity 4.1:  Accrual Accounting

Andrew Darby manages and owns all the shares in a small proprietary company called Darby’s Derbys Pty Ltd which buys and sells hats. The assets, liabilities and owner’s equity of the business at 1 January 2018 are shown on the accompanying worksheet.

The following information about Darby’s Derbys Ltd is available:

  • The business has an accounting period of one month. It determines profit or loss for each month on its worksheet following proper accrual principles.
  • The opening balance in the prepayments column relates to rent for the months of January, February and March 2018 which was paid in December 2017.
  • The accrual on 1 January relates to an amount owing for advertisements that appeared in the local newspaper in December 2017.
  • The shop fittings owned by the business have an expected life of 8 years, and an expected residual value of $1 000 at the end of that time.

The following transactions took place during January 2018:

  1. The business borrowed $4 800 from Darby’s sister. The loan is to be repaid in three year’s time but interest at 5% per annum has to be paid (in arrears) each six months, starting on 1 July 2018.
  2. Paid an insurance premium of $1 200 that will cover the business until 30 June 2018.

3       Received payment for accounts receivable $6 000.

6       Purchased hats on credit $12 000.

8       Credit sales of hats $14 000 (these hats had cost $9 000).

12     Paid wages of $1 400.

15     Cash sales of hats $5 000 (these hats had cost $3 000).

16     Paid the local newspaper for the advertisements that appeared in December 2017 and for some others which appeared in January 2018, total payment being $1 200.

20     Paid accounts payable $7 800.

25     Wrote off an account receivable to the value of $500 because it was accepted that the amount was never going to be paid.

26     Purchased shop supplies on credit $200 and paid wages of $1 400.

27     Received $600 from a customer for hats that are not going to be supplied until March.

31     Wages for work done in January but not yet paid amounted to $300. Shop supplies on hand at the end of January amounted to $100.

Required

  1. Record entries on the attached worksheet for the events that occurred in January and also record all the accrual accounting adjustments that are necessary to determine profit for the month. (Hint – you will need six adjustments including the two mentioned on 31 January.)
  • Prepare an income statement, cash flow statement and balance sheet at 31 January 2018.
Darby’s Derbys Ltd
  Cash atAccountsInventoryShopPrepaymentsShop fittings(Acc dep – AccountsAccrualsUnearnedLoanShareRetained
  bankreceivable Supplies  shop fitt.)=payable Revenue CapitalProfits
Bal 6,00010,00012,0005001,50025,000(15,000) 7,500800  30,0001,700
Jan-01               
2              
3               
6               
8               
                
12               
15               
                
16               
20               
25               
26               
                
27               
a               
b               
c               
d               
e               
f               
Bal               
Darby’s Derbys Ltd
Income Statement
For the month ended 31 January 2018 
$
Sales 
Less cost of goods sold 
Gross Profit 
  
Less Other Expenses 
Depreciation of shop fittings 
Interest  
Wages 
Rent 
Insurance 
Bad debts 
Advertising 
Supplies 
  
Net Profit 
Add retained profits at beginning 
  
Less dividends 
Retained Profits at end 
Darby’s Derbys Ltd 
Cashflow Statement
for the month ended 31 January 2018 
 
 $
Cash flows from operating activities 
Cash receipts from customers 
Cash paid to suppliers and employees 
Net cash from operating activities 
  
Cash flows from investing activities 
  
Net cash from investing activities 
  
Cash flows from financing activities 
Borrowings 
Net cash from financing activities 
  
Net change in cash 
Cash at the beginning of the month 
Cash at the end of the month 
Darby’s Derbys Ltd 
Balance Sheet
as at 31 January 2018 
 $
Current assets 
Cash at bank 
Accounts receivable 
Inventory 
Shop supplies 
Prepayments 
Total Current Assets 
  
Non current assets 
Shop fittings 
Less Accumulated depreciation 
Total Non Current Assets 
Total Assets 
  
Current liabilities 
Accounts payable 
Accruals 
Unearned revenue 
Total Current Liabilities 
  
Non-current liabilities 
Loan 
Total Non Current Liabilities 
Total Liabilities 
  
Net Assets
  
Shareholders’ equity 
Share capital 
Retained profits 
Total Shareholders’ Equity 
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