Mr Soya, the owner of Natural Products, has just met with his accountant to discuss the preparation of the entity's financial statements for the 12-month reporting period ended 30 June 2013. The following issues were discussed:
1. Just Juice, a customer, owes $4000 for products purchased from Natural Products. Just Juice has not been invoiced for this purchase as yet and Natural Products has not recorded the sale in its accounting information system.
2. Natural Products has $1500 unpaid wages as at 30 June 2013 that are not recorded in the accounting information system.
3. Natural Products has unpaid utility expenses (telephone, gas and electricity) amounting to $500 for the three months ended 30 June 2013 that are not recorded in the accounting information system.
4. A customer, Healthy Delight, has ordered and paid for $800 of products that will not be available for delivery until the end of July 2013. The money has been banked and was recorded as sales revenue.
5. An annual membership fee of $300 was paid to the Retail Industry Association on 1 March 2013. This was initially recorded as a prepaid membership.
6. Natural Products has shop fittings and furniture with a cost price of $25 000 that are depreciated over five years using the straight-line method.
Required:
(a) Prepare the relevant general journal adjusting entries (narrations required) for each of the issues identified.
(b) State whether the profit would be understated, overstated or unaffected in the absence of the adjusting entry for each of the six issues above. Consider each issue individually.
(c) Explain the difference between cash accounting and accrual accounting for determining profit for a reporting period. Provide an example of a transaction that would appear as an expense for a reporting period under accrual accounting that would not appear under cash accounting.