Question

Question 1 During April 20x1, Armidale Cleaners provided 100 hours of cleaning series for the Large Mart store in Armidale. One month later, on 31 May 20x1, Large Mart paid Armidale Cleaners for the 100 hours of cleaning services that were provided during the month. Required: A) State whether the provision the cleaning services that occurred during April 20x1 creates an asset, a liability, income, an expense or equity in the financial accounts of Large Mart. (1 mark) B) Explain your decision based on the criteria that the conceptual framework uses to define the item that is created by the provision of the cleaning services during April 20x1, and describe how each criterion is fulfilled by the outlined situation.

Answer 1

During April 20x1, Armidale Cleaners provided 100 hours of cleaning series for Large Mart store in Armidale.

At this point, the services were rendered but not paid. Hence, we follow accrual system of accounting.

Cleaning service will be booked as an expense in Profit & Loss Account and the double entry will create a liability in the Balance Sheet which needs to be settled by paying for the services to Armidale Cleaners.

During April 20x1, the journal entry will be as follows:

Cleaning Expenses A/c Dr. xxxx

To P&L A/c xxxx

(Being cleaning expense booked in P&L)

Armidale Cleaners A/c Dr. xxxx

To Accounts Payable xxxx

(Being liability created for payment due to Armidale Cleaners towards services rendered)

On 31st May, the following entry will be passed to pay off Armidale Cleaners against liability created

Accounts Payable A/c Dr. xxxx

To Bank xxxx

Being payment made to Armidale Cleaners)