Here are two parts to Question 1 (a and b). You are required to answer each part. (The word limit for Question 1 (a) is 300 wds.)

 

A) Explain the difference between financial statements prepared on the cash accounting basis and the accrual accounting basis. In your answer you must also use an example of each of the following, with relevant dates and amounts, to show the difference between profit on a cash basis and profit on an accrual basis:

• accruals
• prepayments
• accrued income
• income received in advance.

B) Andrea starts in business as a sole trader on 1 January 2021. He works as a landscape artist and publishes a gardening magazine. His financial year ends on 31 December. His first set of accounts will cover the year to 31 December 2021.

Andrea immediately enters into a 16-month lease for premises to be used as an office and workshop, and has to pay the whole amount of £28,000 on 1 January 2021.

On 31 July 2021, at a gardening fair, Andrea sells 50 annual magazine subscriptions worth a total of £3,000.

 

Required:

• i. Calculate the amounts for rent and magazine subscriptions to be included in the income statement for the year ended 31 December 2021. 
• ii. Calculate the amounts for rent and magazine subscriptions to be included in the balance sheet as at 31 December 2021 and indicate in which section/heading of the balance sheet the amounts you have calculated will be shown.