Question

Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Accounts	Debits	Credits
Cash	24,500
Accounts Receivable	10,000
Inventories / Supplies	3.500
Equipment	50,000
Accounts Payable		1,500
Notes Payable		50,000
Capital		15,000
Withdrawals	10,000
Sales		50,000
Salaries	15,000
Advertising	2,000
Accountants Fees	1,500
Total	116,500	116,500

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions

1. Stare two accounting principles that are the most relevant to the owner.

Answer 1

Two accounting principles that are most relevant to the owner are :

1) Revenue Recognition Principle : The revenue recognition principle states that revenue is recognized when the business has substantially completed the earning process.

2) Accrual Principle - This pribnciple states that accounting transaction to be recorded in the accounting period when the transaction actually occured, instead of the period in which cash flows occured. This helps in actual recording of transactions that happens in certain period.