Question

On 1st January 2020 Tom Shanks started trading as Shanks Real Estate, and completed the following transactions regarding the business in the first month:

1. Jan 1: Tom Shanks transferred cash from his personal bank account to the business bank account in order to start operations, $25,000.
2. Jan 4: The business paid a year’s rent in advance for office space, $11,880
3. Jan 5: The business purchased a motor vehicle, $22,000. A deposit of $6,000 was paid with the remainder financed by a bank loan.
4. Jan 14: Earned first sales commission and received cash, $16,500
5. Jan 18: Paid motor vehicle expenses, $55
6. Jan 20: Tom Shanks used $60 from the business’ account to buy flowers for his wife Rita
7. Jan 25: Earned sales commission and sent the client an invoice which will be paid in February, $27,500

1. Looking at the transactions a) – g) above, identify any adjusting entry which may be necessary to improve the financial reporting for January 2020. Explain why this entry may be necessary (you may wish to refer to the ‘matching’ concept or GAAP (generally Accepted Accounting Principle)).

Answer 1

Journal entries for January.

1. Bank account------Dr $25000. To capital account. $ 25000.

4#. Rent in advance .(assets) --Dr $11880. To cash account. ## $11880.

5. Motor vehicle Account -----Dr. $22000. To Bank account.(deposit). $6000 To Bank loan account. $14000.

14.Cash Account ---------Dr. $16500. To commission Account. $16500.  

18. Vehicle expenses---------Dr $ 55. To. Cash account. $55

20. @ Drawing Account-----Dr. $ 60. To Cash account. $60.   

25. Commission Receivable---Dr. $25700. To commission Account. $25700.  

In order to improve the financial reporting we can make some adjusting entries with respect to

# 1. Rent paid in advance for the year. For this we should credit the rent paid in advance and debit the rent for one month i.e $990 for January month.

@2. The drawing Account is reduced from capital account as it is the personal expenses from business account it will not impact p&l Account