Review the company’s year-end listing of accounts’ balances shown below.
a. How can you tell from this listing of accounts that the business has not recorded its following three expenses for the year?
• Bad debts expense: Caused by uncollectible accounts receivable
• Cost of goods sold expense: For the cost of products sold; the revenue from these sales has been recorded in the sales revenue account
• Depreciation expense: For the use of fixed assets (property, plant, and equipment) during the year
b. Also, did you notice that there is no income tax expense account? What is the explanation for this omission?
|
End of First Year |
||
|
Debits |
Credits |
|
|
Cash |
$559,750 |
|
|
Accounts Receivable |
$645,000 |
|
|
Allowance for Doubtful Accounts |
$0 |
|
|
Inventory |
$3,725,000 |
|
|
Prepaid Expenses |
$185,000 |
|
|
Property, Plant & Equipment |
$1,150,000 |
|
|
Accumulated Depreciation |
$0 |
|
|
Accounts Payable |
$309,500 |
|
|
Accrued Expenses Payable |
$108,500 |
|
|
Short-term Notes Payable |
$350,000 |
|
|
Long-term Notes Payable |
$500,000 |
|
|
Owners’ Equity – Capital Stock |
$1,500,000 |
|
|
Owners’ Equity – Retained Earnings |
$0 |
|
|
Sales Revenue |
$4,585,000 |
|
|
Cost of Goods Sold Expense |
$0 |
|
|
Depreciation Expense |
$0 |
|
|
Bad Debts Expense |
$0 |
|
|
Selling & General Expenses |
$1,033,000 |
|
|
Interest Expense |
$55,250 |
|
|
Totals |
$7,353,000 |
$7,353,000 |
At this point the chief accountant sits down with top management to decide which accounting methods the business should use to record cost of goods sold expense, depreciation expense, and bad debts expense. The financial statements for the first year cannot be prepared until these accounting choices are made and the three expenses are recorded.