The following trial balance extract was prepared for Elena's business at 31 December 2024. Account Debit ($) Credit ($) Rent received 9 600 Insurance 5 400 ...
Question 1 Report
The following trial balance extract was prepared for Elena's business at 31 December 2024.
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Rent received | 9 600 | |
| Insurance | 5 400 | |
| Wages and salaries | 36 000 | |
| Rates | 4 000 | |
| Commission received | 7 200 |
The following adjustments are required at 31 December 2024:
| Item | Adjustment |
|---|---|
| Rent received | $800 received in advance (relates to January 2025) |
| Insurance | $900 prepaid |
| Wages and salaries | $2 800 accrued |
| Rates | $500 prepaid |
| Commission received | $1 200 still due (earned but not yet received) |
(a) Calculate the adjusted figure for each of the five items to be shown in the income statement. [10]
(b) For each adjustment, state whether it creates an other receivable or an other payable and the amount. [5]
(c) Explain the difference between rent received in advance and commission receivable (still due). [3]
(d) State the accounting concept that requires these year-end adjustments. [2]
Answer Details
(a) Adjusted figures for the income statement
Rent received: $9 600 - $800 (received in advance) = $8 800 [1]
The $800 received for January 2025 does not belong in the 2024 income statement because it relates to the next period. [1]
Insurance: $5 400 - $900 (prepaid) = $4 500 [1]
The prepaid amount covers a future period and is excluded from this year's expense. [1]
Wages and salaries: $36 000 + $2 800 (accrued) = $38 800 [1]
The accrued wages were earned by employees in 2024 but not yet paid, so they must be included as an expense. [1]
Rates: $4 000 - $500 (prepaid) = $3 500 [1]
The prepaid portion relates to the next period. [1]
Commission received: $7 200 + $1 200 (still due) = $8 400 [1]
The commission was earned in 2024 even though the cash has not yet been received. Under the accruals concept, income is recognised when earned. [1]
(b) Other receivable or other payable for each adjustment
| Item | Classification | Amount ($) |
|---|---|---|
| Rent received in advance | Other payable / current liability [1] | 800 |
| Insurance prepaid | Other receivable / current asset [1] | 900 |
| Wages accrued | Other payable / current liability [1] | 2 800 |
| Rates prepaid | Other receivable / current asset [1] | 500 |
| Commission receivable | Other receivable / current asset [1] | 1 200 |
(c) Difference between rent received in advance and commission receivable
Rent received in advance is income that has already been received in cash but relates to the next accounting period. [1] It is a liability because the business has an obligation to provide the service (the use of the premises) in the future. [1]
Commission receivable (still due) is income that has been earned in the current period but the cash has not yet been received. [1] It is an asset because the business has a right to receive the payment.
(d) Accounting concept
The accruals concept / matching concept. [1] Income and expenses must be recorded in the period to which they relate, regardless of when cash is received or paid. [1]
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