“The users of financial statements must understand that accounting is a process. There are books of prime entries followed by posting to the General Ledger all of which are based on sound accounting convention. When balances are extracted there is a test of the entries so that various errors can be identified and corrected. Adjustments are then made and these are based on accounting principles so that the financial statements would better represent economic reality with information relevant to the needs of the users of such statements.”
Explain with reasons and the use of examples whether the above statement is a correct description of the accounting process. (Word limit-1,200 words)
On December 1, 2014, Mr. Ramesh Garcia, an attorney-at-law, opened his legal practice, Carolina Legal Office. He is a sole practitioner acting mainly as an advocate attorney.
His accountant, Miss Leslie Carrington, has prepared the following trial balance on December 31, 2014, after one month of operation.
Legal Fees Receivable/Debtors 3,200
Prepaid Rent 1,500
Office Supplies 650
Office Equipment 47,890
Accounts Payable/Creditors 12,000
Unearned Retainers Fees 1,320
Loan Payable 14,000
Ramesh Garcia, Capital
Ramesh Garcia, Drawings 5,000
Legal Fees earned
Computer Service Expense 950
Wages Expense 12,400
Miscellaneous Expense 300
1. As of December 31, 2014 accrued interest on the loan amounted to $400, while accrued wages totaled $600. ?
2. Since the last billing to clients on December 15, 2014 Mr. Garcia got a brief and rendered legal services worth $189,000. ?
3. Many clients are asked to make an advance payment for the legal services to be rendered in future months. The advance payments are credited to the Unearned Retainer Fees account. During December 2014, $1,200 of these advances was earned by the practice but no entry has yet been made to reflect this. ?
4. Office supplies on hand at December 31, 2014 amounted to $600. ?
5. Mr. Garcia must pay $2,000 of the bank loan within the next year. ?
6. On December 1, 2014 office equipment was valued at $47,890 and Leasehold Improvements at $150,000. The service life of the office equipment is 5 years and that of the Leasehold Improvements is 25 years. ?
7. The rent is $750 per month and insurance is $240 per month both payable 2 months in advance.
. a) Prepare Mr. Garcia’s adjusting entries in General Journal form. ?
. b) Prepare a worksheet for the month ended December 31, 2014. ?
. c) Prepare an Income Statement for the month ending December 31, 2014, a Statement of Owner’s Equity and a Balance Sheet as at December 31, 2014.