Ip Accounting
Accounting equation, Assets= Capital + Liabilities
The transactions effect on the accounting equation for the business will be as follows:
Dr: Cash with $ 6,000. This is an increase in assets.
Cr: Capital with $ 6,000. This is an increase in capital.
Dr: Cash with $ 2,000. This is an increase in assets.
Cr: Borrowing/ debt. This is an increase in liabilities.
Assuming all sales revenues were received in cash, the revenue would be recorded as follows:
Dr: Cash with $ 900. This is an increase in assets
Cr: Sales revenue with $ 900.
Dr: Expenses with $ 650
Cr: Cash with $ 650.
Dr: Drawings with $ 25.
Cr: Cash with $ 25.
Dr: Interest expenses $ 20
Cr: Interest payable $ 20
This is a representation of the interest expense owing but not yet paid on the borrowed funds.
At the end of the year, the business had an outstanding liability to pay the interest of $ 240. (12%*2,000)- This amount will be prorated and presented in each month.
2. Subsequent events are important business activities that occur in the period between the balance sheet date and the date of issuing the financial reports. The transactions are however not included in the financial statements but disclosed in the notes section. The information is disclosed by the virtue of its great significance in the financial reports such that its non disclosure would render the annual reports misleading. (Elliott & Elliott, 2008)
3.
The four basic financial statements are:
Income statements
Balance sheet
Cash flow statement
Statement of changes in shareholders’ equity
Income statement
Assumption: Since the interest is an annual expense, I have prorated it for 12 months.
Balance sheet
Statement of cash flows
Statement of owners’ equity
References
Elliott, B. & Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.
Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial accounting. Hoboken, NJ: John Wiley.
