Question

Adanna Ghany is the founder and manager of Ceramics Unlimited. Adanna has approached the local bank for a loan to expand her business. As part of the loan application, Adanna was asked to prepare Financial Statements for the business. She prepared the following balance sheet and income statement based on the first month of operations (see below).

Ceramics Unlimited.

BALANCE SHEET

November 30, 2018

Cash	$ 1,400		Equity	$ 1,400
	$ 1,400			$ 1,400

Ceramics Unlimited.

INCOME STATEMENT

For the Month Ended, November 30, 2018

Sales		$4,400
Rent	$300
Kiln	4,500	4,800
Net Income		($400)

Adanna stated that she was not pleased with the first month’s results. But she believes she will show a greater profit next month as she will not have large expenses for items such as purchasing a new Kiln (Oven).

In discussions with Adanna and by reviewing the accounting records of Ceramics Unlimited, you discover the following facts

1.    Adanna opened Ceramics Unlimited (a ceramic studio) on November 1st 2018 in leased office space, paying the first month's rent of $300 and a $1,000 security deposit with a check on her personal account.

1.    Ceramics Unlimited sells ceramic pieces as well as offers training courses that teach participants how to make their own ceramics pieces.

2.    Adanna had been making ceramic pieces as a hobby. She took molds and tools, worth about $7,500, from her home in order to start the studio.

3.    Adanna also bought a new firing kiln (oven) to start the business. The new kiln had a list price of $5,000. Adanna wrote a check on her personal checking account.

1.    The first customer of Ceramics Unlimited’s paid a total of $1,400 to attend classes for two months. Adanna opened a checking account in the company's name with the $1,400.

4.    Ceramics Unlimited has conducted classes for one month and has sold some ceramic pieces for $3,000 cash. Cost incurred in making the ceramic pieces was $1,000. Adanna paid these cost with her personal credit card.

As the person to decide whether or not to grant Adanna the requested loan. You have to decide if Adanna prepared the financial statements of Ceramics Unlimited correctly. You need to determine if she violated any accepted accounting principles, assumptions or concepts.

Required

a. Either justify Adanna’s treatment of each event and her preparation of the financial statements based on your understanding of the generally accepted accounting principles

or

b. Identify the generally accepted accounting principles, assumptions or concepts that were violated.

i. Explain how each event should have been handled in accordance with the generally accepted accounting principles.

ii. Prepare a corrected Classified balance sheet and income statement based on your understanding of the generally accepted accounting principles.

Answer 1

Generally acceted accounting principles, assumptions and concepts that were violated by Adanna are:-

a) Seperate Entity Concept : As per this concept, business is a Seperate from it's owner.

b) Accrual Concept : As per this concept, all expense and revenue should be accounted in books as and when they accur.

As per generally accepted accounting Principles, above events should be accounted in the books of accounts as follows:-

1) Security Deposit of $1000 paid from personal account should be accounted in books as -

Security Deposit A/c Dr. 1000.

To Capital A/c 1000.

2) Moulds and tools brought from home should be accounted as-

Moulds and tools A/c Dr. 7500

To Capital A/c 7500.

3) Purchase of new kiln and paid from personal checking account should be accounted as-

Kiln (Oven) A/c Dr. 5000

To Capital A/c 5000

4) Entry for opening new Bank account by paying cash should be accounted as -

Bank A/c Dr. 1400

To Cash A/c 1400

5) Sales of Ceramics should be accounted as-

Sales A/c Dr. 3000

To Cash A/c 3000

6) Expenses paid from personal account should be accounted as-

Expenses A/c Dr. 1000

To Capital A/c 1000

7) Rent paid should be accounted as-

Rent A/c Dr. 300

To Cash A/c 300.

Corrected Income Statement and Balance Sheet :-

Profit & Loss Account
Particulars	Amount		Particulars	Amount
To Rent	300		By Sales	4400
To Expenses	1000
To Profit	3100
	4400			4400
Balance Sheet
Liabilities	Amount		Assets	Amount
Capital	14500		Bank A/c	1400
Sundry Creditor	4500		Cash	2700
			Security Deposit	1000
Profit & Loss A/C	3100		Kiln	9500
			Moulds and Tools	7500
	22100			22100

NOTE: We have assumed that Kiln For $4500 shown above in the Income statement was purchased on Credit as no information provided.