Welcome To The World Of Accounting At Efendi Company

Welcome To The World Of Accounting 21efendi Company H

Welcome to the task where Pat Morgan prepared an income statement, statement of retained earnings, and balance sheet for 21 Efendi Company. The assignment involves examining Pat’s work for errors, understanding the correct accounting rules for various accounts, evaluating Mo Lambert’s initial transactions and journal entries for his construction business, assessing revenue recognition in specific scenarios, analyzing the need for adjustments based on provided business documents, and ensuring proper accounting treatments for leases, utilities, supplies, and equipment purchases as of December 31, 20X1. The goal is to identify errors, provide corrections, and demonstrate understanding of fundamental accounting principles and practices in a comprehensive manner.

Paper For Above instruction

The task of reviewing and correcting financial statements and transactions is fundamental to maintaining accurate and reliable financial information within any business. In this case, the initial work presented by Pat Morgan offers a starting point but contains several errors that require careful analysis and correction. Additionally, understanding the correct accounting rules, as well as appropriate journal entries and adjustments based on real-world documents, is crucial for precise financial reporting.

Analysis of Pat Morgan’s Work and Identification of Errors

Pat Morgan’s financial statements demonstrate several inconsistencies, particularly within the income statement, statement of retained earnings, and balance sheet. First, the net income reported is $125,000, but the expenses listed are only $24,500, which appears incorrectly low relative to the revenues of $100,500, suggesting that expenses have been underreported or incorrectly classified. Moreover, in the statement of retained earnings, the beginning retained earnings are $45,000, but the ending retained earnings are negative $54,500, indicating inconsistency or calculation errors.

Specifically, the balance sheet shows total assets of $369,100; liabilities of $7,500 in accounts payable and $80,100 in notes payable, totaling $87,600. The stockholders’ equity, however, is shown as $25,600, which does not align with the accounting equation Assets = Liabilities + Equity. The statement of retained earnings indicates an ending balance of negative $54,500, which is impossible unless retained earnings are overdrawn or incorrectly calculated. Therefore, the errors primarily stem from the misclassification or omission of expenses and incorrect accounting of retained earnings.

To rectify these issues, Pat must re-express the income statement, ensuring all expenses are accurately captured, including wages, rent, and other relevant costs. In reconciling the statement of retained earnings, the formula should be: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. Based on the data given, the calculations do not align, indicating the need for correction.

Understanding Debit/Credit Rules and Normal Balances

For each account type, understanding the rules of increased and decreased amounts and the normal balance is vital for proper bookkeeping. Examples include:

• Cash: Increased by debits; decreased by credits; normal balance is debit.
• Capital Stock: Increased by credits; decreased by debits; normal balance is credit.
• Accounts Payable: Increased by credits; decreased by debits; normal balance is credit.
• Revenues: Increased by credits; decreased by debits; normal balance is credit.
• Rent Expense: Increased by debits; decreased by credits; normal balance is debit.
• Equipment: Increased by debits; decreased by credits; normal balance is debit.
• Dividends: Increased by debits; decreased by credits; normal balance is debit.
• Utilities Expense: Increased by debits; decreased by credits; normal balance is debit.
• Accounts Receivable: Increased by debits; decreased by credits; normal balance is debit.
• Loan Payable: Increased by credits; decreased by debits; normal balance is credit.

Understanding these rules is essential for maintaining accurate ledger accounts and ensuring debit and credit entries properly reflect the economic reality of transactions.

Evaluation of Mo Lambert’s Construction Business Transactions

Mo Lambert’s initial transactions reflect an organized approach to establishing his construction business. The journal entries made are appropriate, following the accrual basis of accounting. For instance, when Mo invests $10,000 in the business, the journal entry debits cash and credits capital stock, which is correct. The purchase of equipment on account is recorded by debiting equipment and crediting accounts payable, capturing the liability. Receipts from customers for services rendered are correctly recorded as debits to cash or accounts receivable and credits to revenue.

Similarly, expenses such as wages are accurately recorded as debits to wages expense and credits to cash. Payments made towards accounts payable and other payables are likewise correctly journalized, reflecting proper cash outflows and liability reductions. Purchasing supplies and using them in the same period is handled appropriately, with expense recognition matching the supplies used.

This process demonstrates correct application of double-entry accounting and ensures transparent financial records. Mo’s initial transactions set a positive foundation for consistent financial reporting, enabling the preparation of accurate financial statements at period-end.

Assessing Revenue Recognition and Timing

Revenue recognition is a critical principle, requiring that revenues are realized and earned before being recorded. The scenarios provided highlight common issues, such as shipping goods requiring installation, or goods produced but not yet shipped, which complicate recognition timing. Generally, revenue from goods shipped and delivered to customers should be recognized when ownership transfers and the business has substantially completed its performance obligations, except in cases where additional services such as installation are required.

In the example where goods are shipped but still require installation, revenue should generally be recognized only after installation is complete, aligning with the completion of performance obligations. Goods produced but not shipped should not be recognized as revenue until shipment occurs, consistent with the point of transfer of risks and rewards.

For sales made in prior periods but paid during the current period, revenue should be recorded in the period when the goods were shipped or the service was rendered, not when the payment was received, adhering to the accrual principle. Advances received for future services, such as in foreign countries, are initially recorded as unearned revenue until the services are performed.

Recognizing revenue prematurely can lead to overstatement of income, whereas deferring recognition may understate earnings. Therefore, applying the appropriate revenue recognition criteria per GAAP ensures that financial statements accurately reflect the company’s economic activities.

Adjustments and Accurate Financial Reporting

Proper adjustments are critical to ensure the financial statements mirror the true state of the company at year-end. Based on the provided documents, several adjustments are necessary, particularly concerning unearned revenue, supplies used, depreciation, accrued expenses, and utilities.

The deposit ticket indicates a prepayment for a six-month contract, initially recorded as unearned revenue, requiring an adjustment to recognize earned revenue proportionally over the contract period. Supplies purchased during the year must be adjusted for supplies actually used, calculated by deducting the ending inventory ($560) from the beginning inventory plus purchases during the year.

For the computer purchased on July 1, 20X1, depreciation expense must be recorded, assuming a four-year useful life with no salvage value; thus, half-year depreciation applies for the first year. Utilities incurred but unpaid by December 31, 20X1, should be accrued as an expense. Lease expenses, given the rent is payable annually in arrears, should be allocated accordingly.

By making these adjustments, the financial statements will present a clearer and more accurate financial picture, complying with relevant accounting standards and principles.

Conclusion

In conclusion, the given tasks underscore the importance of diligent financial analysis, adherence to accounting principles, and proper documentation. Correcting Pat Morgan’s errors involves re-evaluating expense and income classifications, accurately recording assets, liabilities, and equities, and applying proper revenue recognition policies. Mo Lambert’s initial journal entries illustrate sound understanding, but ongoing adjustments and accurate depreciation, accruals, and allocations ensure true financial reflection. Overall, meticulous attention to detail and adherence to GAAP principles are essential for reliable financial reporting, fostering trust and transparency with stakeholders.

References

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