Home sewing business
Lana Priest set up a home sewing business on 1 July 2016. Usually, Lana collects $20 per hour for sewing on the completion of each day's work and pays for the maintenance of her machine with cash. Lana did an accounting subject at secondary school and so has kept her own accrual-based accounting records. At the end of the first year, Lana produced the following unadjusted trial balance:
Unadjusted Trial Balance
as at 30 June 2017
| Account |
Debit |
Credit |
| Cash at bank |
$ 2 ?550 |
|
| Accounts receivable |
40 |
|
| Sewing machines |
3 ?000 |
|
| Motor vehicle |
24 ?000 |
|
| Lana Priest, Capital |
|
$19 ?000 |
| Lana Priest, Drawings |
17 ?570 |
|
| Sewing revenue |
|
38 ?400 |
| Sewing supplies expense |
4 ?840 |
|
| Insurance |
2 ?300 |
|
| Repairs to machines |
2 ?560 |
|
| Sundry expenses |
540 |
|
| |
$57 ?400 |
$57 ?400 |
The following adjustments were required at the year-end.
- Sewing supplies on hand at year-end, $230.
- An account was received for repairs done to machines before year-end but not recorded, $270. Ignore the GST in your answers.
Required
- Prepare an income statement for the year ended 30 June 2017 using accrual accounting.
- Prepare an income statement for the year ended 30 June 2017 using cash accounting.
- Lana was not sure whether she could use cash accounting rather than accrual accounting for her business records. From the information provided, decide whether Lana should use accrual or cash accounting, and explain to her the reasons for your decision
(Hoggett 180)
Hoggett, John, Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxf.Accounting 9E, 9th Edition. John Wiley & Sons Australia,. VitalBook file.