Question

                               

Q1- Provide an example of each title here and then record the journal entries .

Following is the first given answer.

1-Purchasing Equipment for cash

Given answer:

ABC company purchased equipment for SAR20,000 cash .

Equipment 20,000

Cash                   20,000

2-Issuing common stocks receiving cash.

3-Providing service receiving cash.

4-Purchasing supplies on credit.

5-Borrowing money from a bank.

6-Paying employees their salaries.

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Q2- What is the accrual basis of accounting? When should revenue and expense be recognized in the accrual basis? Provide an example. (1 Mark).

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Q3- On your own words, explain the purpose and the importance of the income statement, and prepare the income statement for ABC company based on the following information taken from the trial balance in 2019

Consulting revenue		SAR70,000
Rental revenue		30,000
Supplies expense	5,000
Rent expense	20,000
Wages expense	30,000

Answer 1

Q1.

Ans .2.

XYZ Company issued 1000 Common shares at par at $5 per share in cash.

Cash Dr 5,000

Common Stock Cr 5,000

Ans 3.

Wise Consultancy provided Consuntancy service to XYZ Company worth $10,000 and received cash

Cash Dr 10,000

Service Revenue Cr 10,000

Ans 4.

Trident Inc purchased supplies of $15,000 on account from Big Market Inc.

Supplies Dr 15,000

Accounts Payable Cr 15,000

Ans 5.

Active Corp approached BOA for working capital Loan and obtained a Loan of $1 million for 2 years with 3.9% interest rate.

Cash Dr 1,000,000

Bank Loan Payable Cr 1,000,000

Q2.

Accrual method of accounting is the accouting method in which revenue is recognized when it is earned and expense is recognized when it is incurred

In accrual basis of accounting is the method of accounting , revenue is recognized when performance obligations related to sales are complete ( the title to goods are transferred) and the payment for it is assured irrespective of the fact whether cash is received or not. Also expense related to the revenue earned is recognized as incurred in the same period when the corresponing revenue is earned irrespective of the timing of the actual payment for the expense. Accrual method is different from cash method where revenue or expense are recognized when cash is earned or expensed.

As an example , assume , ABC company sold goods worth $12,000 to XYZ company on Dec 30,2020 on FOB shipping basis. That means the transfer of title  of goods to XYZ happened when the goods loaded at the shipping dock of ABC. ABC shall recignize the revenue on Dec 30,2020 itself though XYZ made the paymnet for the goods on Jan 15th next year.

Q3.

The purpose of Income statement to provide the information on the amount of Net Income/(Loss) ( Net Revenue less Net expenses and taxes ) that an organization makes during a specific period of time span (generally a year). The Income statement shows the Gross Revenue , Revenue Deductions, Net Revenue, Cost of Sales , Gross Profit, Opearting Expenses, EBIT, Interest and Other Income & expense, EBT, Income Tax expense, And Net Income/ Loss) in a sequential manner.

ABC Company
Income Statement
for the Year 2019
Accounts	Amt SAR	Amt SAR
Service Revenue		70,000
Less operating Expenses
Wages Expense	30,000
Supplies Expense	5,000
Rent Expense	20,000
Total Operating Expense		55,000
EBIT		15,000
Other Income & Expenses
Rent Revenue	30,000
Total Other Income & Expenses		30,000
EBT		45,000
Income Tax		-
Net Income/(Loss)		45,000