- i.Explain the role of accruals and prepayments in order to determine the profit for a period on an accrual accounting basis. Use an example of an accrual and an example of a prepayment to demonstrate the difference between profit on an accrual basis and profit on a cash basis.
- ii.Mick is a greengrocer sole trader. At his recent year-end of 31 March 2020, he wishes to include all relevant insurance charges in his business expenses. On 5 March 2020 he paid the quarterly bill of £360 for the months February, March, and April 2020.
What is the amount of the insurance expense to be included in the income statement for each of the two accounting periods, ending 31 March 2020 and 31 March 2021, with respect to this bill? Show and explain your workings.
- b.Katy started trading on 1 January 2020. Her first set of accounts will cover the year to December 2020. She immediately entered into an 18-month lease for rent and had to pay the whole amount of £45,000 on 1 January 2020. She also entered into an agreement with an advertising agency who will provide her with promotional materials for a cost of £8,800 per year. This amount is to be paid in arrears in two equal instalments on 1 July 2020 and 1 January 2021.
Prepare ledger accounts for rent and advertising for the year ending 31 December 2020 clearly showing the income statement charges for these expenses.
Type of assignment: Essay