Accounting theories
Describe the accounting principle used when the owner withdraws cash for personal use
Accounting entity, means that the actions of the owner are viewed separately from the actions of the business
Prepare a journal entry for when the business paid earlier for a service costing $15.32 million in cash
When the business pays for a service but has not yet used it, it opens a prepaid account which is considered as an asset. Hence the journal entry would be debit prepaid rent expense $15.32 Credit Cash $15.32
In the financial journal the accountant wrote Debit Cash $10,000 Credit Drawings $10,000 when the owner James Quincy withdrew $10,000 from the business bank to take his wife on vacation. Correct the entry.
Debit Drawings $20,000, Credit Cash $20,000
Name an internal user of financial information and what they use the information for
Employees, whether business is financially well to gauge their job security and their career advancement prospects in the company
The business forgot to record James Quincy’s drawings when he withdrew money from the business bank. Explain the impacts caused.
The shareowner’s equity will be overstated as the drawings are understated and the cash is also understated as it was not credited.
What theory is applied when a business prepays for a service
The Matching theory states that expenses incurred must be matched against income earned in the same accounting period to determine the profit for the year, hence we cannot include the prepaid services which have not been used as they have not provided benefits to the business yet.
Prepare the year-end entry adjustment after the deferred expense of $15.32 (million) is consumed
When the business uses the service that it had paid for in advance, the prepaid funds are used up and have to be adjusted so as to not overstate the businesses assets. Hence the entry would be Debit Rent expense $15.32 Credit Prepaid Rent $15.32
Name an external user of financial information and what they use the information for
Government, see if the business complies with tax regulations and how much tax can be collected, ensuring that the company pays its fair shares of taxes.
Correct the entry of when the business paid $15.32 million of rent service in advance for the year but is wrongly recorded as an expense.
Debit deferred rent expense $15.32, credit Rent expense $15.32
The business used up its prepaid rental expense of $15.32 million, explain why a year-end adjustment is needed.
In order for the business not to overstate its asset, it has to adjust the accounts that have already been paid for and used up, hence the prepaid rental expense of $15.32 million will be credited.
The business used up its prepaid rental expense of $15.32 million. Explain the impact on the business if the journal was not recorded.
The business would have overstated its assets as prepaid rental expense is considered an asset and their expense would have been understated since it was not adjusted. Thus, there would be an understatement of $15.32 million.