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Travel Wise Accounting Case

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Chamuel Michael Santiago
Chamuel Michael Santiago

1. Alice established Travel Wise in January 2014 but noticed errors in the income statement she prepared for the quarter ending March 31, 2015. She failed to recognize key accounting principles like revenue recognition, matching, and accrual basis of accounting. 2. The consulting accountant will identify the principles Alice missed, such as unearned revenue that was incorrectly included as income. Adjusting entries will be made to record expenses incurred during the period but not paid. 3. It is recommended that Alice attend an accounting refresher course to learn the principles of adjusting and closing entries. This will allow her to correctly prepare financial statements going forward.

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A Case Study on Travel Wise ADJUSTING THE ACCOUNTS SUBMITTED BY: MICHAEL CORUA MIKE HAROLD NARIO ANNA DOMINIQUE ORTIZ CHAMUEL MICHAEL JOSEPH SANTIAGO BUS520M, Section KTC Term 2, A. Y. 2015-2016 Submitted to: Ms. Carmelita C. Clerigo
Synthesis Alice HoestablishedTravel Wise onJanuary2014. Alice preparedanincome statementforthe quarterended31 March 2015 from the trial balance preparedbya part-time bookkeeper.She noticedsomethingwaswrongwiththe statementbecause profithadneverexceeded$20,000.00 in any one quarterbefore.She isnowconsultingtofigure outwhatshe didwronginpreparingher income statement. Statement of the Problem What generallyacceptedaccountingprinciplesdidAlice notrecognize inpreparingTravel Wise income statement? Point of View We are takingthe pointof viewof the consultingaccountant. Statement of the Objectives 1. Identifythe generallyacceptedaccountingprinciplesthatAlice failedtoconsider. 2. Prepare a correct income statement forthe quarterended31March 2015. Areas of Consideration Time PeriodAssumption The time periodor periodicityassumptionassumesthatthe economiclife of abusinesscanbe dividedintoartificial timeperiods generallyamonth,aquarter,or a year.In thiscase,Travel Wise income statementispreparedquarterly. Revenue RecognitionPrinciple The revenue recognitionprinciplestatesthatrevenue shouldbe recognizedinthe accountingperiod inwhichit isearned.Ina service business,suchasin thiscase,revenue isusuallyconsideredtobe earnedat the time the service isperformed. The Matching Principle The matchingprinciple dictatesthatefforts(expenses)be matchedwith accomplishments(revenues).Itisalsoreferredasthe practice of expense recognition. The Accrual Basis of Accounting The accrual basisof accountingisthe conceptof recordingrevenueswhen earnedandexpensedasincurred.Itadherestothe revenue recognition principle andmatchingprinciple.Revenue isrecordedwhenearned,notonlywhencashisreceived.
Expensesare recordedwhenservicesorgoodsare usedor consumedinthe generationof revenue, not onlywhencashispaid. GAAP relationships in revenue and expense recognition AdjustingEntries Adjustingentriesmake itpossible toreportcorrectamountson the financial statements.Theseare made to ensure that:a) expensesare recognizedinthe periodwhichtheyare incurred,b) revenues are recordedinthe periodinwhichtheyare earned,andc) balance sheetandincome statement accounts have correctbalancesat the endof an accountingperiod. Types ofAdjusting Entries Deferrals 1. PrepaidExpenses expensespaidincashandrecordedas assetsbefore theyare usedor consumed. 2. UnearnedRevenues cash receivedandrecordedasliabilitiesbeforerevenue isearned. Accruals 1. Accrued Revenues revenuesearnedbutnotyetreceivedincash or recorded. 2. Accrued Expenses expensesincurredbutnotyetpaidincash or recorded.
Adjustments 1. Bookingrevenue totaledto$90,000. Bookingfeesinclude advance rentalsforsummer monthoccupancy $20,000. The adjustmentmade is forthe unearnedrevenue inorderto record revenue forservicesperformed. The advance rental fee cannotbe included inthe revenue because the clientshave notyetutilizedwhateverisbeingrented. Booking Revenue Unearned Revenue Debit Credit Debit Credit $90,000 Adj. $20,000 Adj. $20,000 $70,000 2. In the ledger,there was$6,200 worthof supplies. Therewere $1,300 of suppliesonhandas at 31 March. The adjustmentmade isdue to the consumptionof supplies. Supplies (Asset) Supplies Expense Debit Credit Debit Credit $6,200 Adj. $4,900 Adj. $4,900 $1,300 3. In the ledger, prepaidinsurance amountsto $7,200. Prepaidinsurance resultedfromthe paymentof a 1-year policyon1 January 2015. The adjustmentmade is forthe prepaid insurance torecognize insurance expiredduringthe period. Prepaid Insurance Insurance Expense Debit Credit Debit Credit $7,200 Adj. $1,800 Adj. $1,800 $5,400 4. The mail on 1 April 2015 broughtthe followingbills: advertisingforweek24March, $110; repairsmade 10 March, $260; andutilities,$180. The adjustmentsmade isforthe accrued expenses torecognize expensesincurredduringthe period. Advertising Expense Repair Expense Debit Credit Debit Credit $5,200 $4,000 Adj. 110 Adj. 260 $5,310 $4,260 Utilities Expense Liabilities Debit Credit Debit Credit $900 $110 Adj. 180 260 $1,080 180 $550 5. There are fouremployees,whoreceive wagestotaling$350 perday. Asat 31 March, 2 days wageshave beenincurredbutnotpaid. The adjustmentmade isforthe 2 daysunpaidof the 4 employees.
Wages Expense Wages Payable Debit Credit Debit Credit $29,800 Adj. 700 Adj. $700 $30,500 6. In the ledger,notespayablecost$12,000. The note payable isa 3-month,10% note dated1 January2015. The adjustmentmade isforthe accrued expense orinterestpayable to recognize interestaccruedbutunpaidonnotespayable. Cash Notes Payable Debit Credit Debit Credit $12,000 $12,000 Face value of note * Annual Interest Rate * Time (in terms of one year) = Interest $12,000 * 10% * 3/12 = $300 Interest Expense Interest Payable Debit Credit Debit Credit Adj. $300 Adj. $300 Before adjustment Afteradjustment Travel Wise Travel Wise Income Statement Income Statement For the quarter ending 31 March 2015 For the quarter ending 31 March 2015 Income Income BookingRevenue 90,000.00 BookingRevenue 70,000.00 Expenses: Expenses: Advertising 5,200.00 Advertising 5,310.00 Wages 29,800.00 Wages 30,500.00 Utilities 900.00 Utilities 1,080.00 Depreciation 800.00 Depreciation 800.00 Repairs 4,000.00 40,700.00 Repairs 4,260.00 NetProfit 49,300.00 Supplies 4,900.00 Insurance 1,800.00 Interest 300.00 Total Expense 48,950.00 NetProfit 21,050.00 Alternative Courses of Action AftershowingAlice where she made errorsinmakingTravel Wiseincomestatement,Alice cantake three different coursesof actionstopreventcommittingthe same erroragain. 1) Alice shouldattendashortcourse or refreshercourse onaccounting.She shouldreview accountingprinciplesandpractice adjustingandclosingthe entriesof the accounts accordingly.She wouldbe able tolearnfromhererrors andcome upwitha correct financial
statement. Thisoptionis lesscostlythanhiringanotherstaff orbuyingacomputersystemto handle businessaccounts. 2) Alice shouldacquire acomputer-basedaccountingsystemforTravel Wise. Alice oraclerk can inputthe data intosystemwhichwouldautomaticallyrecordthem, thus,reducing accountingerrors.However,thismaybe costly,time consuming,andrequiresupgrading once the companygrows.Inaddition,the accountantshouldbe familiarwiththe system to be used. 3) Alice shouldhire afull time bookkeeperoraccountant to manage the accountsof Travel Wise.Thisisa more costlyoptionforthe businessbecause itincreaseswage expense; however,the accountantcanfocuson bookkeepingandtrackingthe financesof the businesswhile Alice canconcentrate onmanaging.Anotherdownsideisthattheymaystill fail to adjustandclose entries.If Alice will notbe able torecognize hererrorsonaccounting, she may endup beinghighlydependentonthe accountantand overlooksome accounting inaccuracies. Recommendation Alice shouldattendashortcourse or refreshercourse onaccounting.She shouldreview the accountingprinciplesandpractice adjustingandclosingentriespriortopreparingthe financial statement.Anthony,Hawkins,&Merchant(2004, p. 9) explainedthe importanceof adjustingand closingthe entriespriortopreparingthe financial statement: The purpose of the adjustingentriesistomodifyaccountbalancessothat theywill fairlyreflectthe situationasof the endof the period.Whereas,temporaryaccountsare closedtoretainedearningsinordertodetermine the neteffectof all the revenueand expense transactionsthe netincome orloss. Afterall adjustmenttoentriesare journalizedandpostedthe companyshouldprepare anothertrial balance fromthe ledgeraccountsto prove the equalityof debitbalancesandcreditbalances. Implementation Plan Action Plan Description Timeline Person Responsible Resource Requirement Attend short course/refresher course After consultation Alice Training fee Applying Basic Steps of the Accounting Cycle Determine the General Accounting Principleto be used After training Alice GAAP, Supplies used in accounting, accounting program Record transactions in thejournal Every time a transaction is made Analyze transactions and postto ledger Prepare trial balanceand assemble adjustment data Quarterly Prepare financial statements Journalizeand post adjustingentries Journalizeand post closingentries Prepare a post closingtrial balance Reversing entries
Learning Points Adjustmentsandclosingof entriesshouldbe done priortopreparingthe financial statements. The Income Statementdeterminesthe resultsof operationsandindicatesreasonsforthe companysprofitability. Applicationof basicaccounting conceptswillhelponescompanytodetermine the inconsistenciesinthe Income Statementtomake adjustmentsaccordingly.

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Travel Wise Accounting Case

  • 1. A Case Study on Travel Wise ADJUSTING THE ACCOUNTS SUBMITTED BY: MICHAEL CORUA MIKE HAROLD NARIO ANNA DOMINIQUE ORTIZ CHAMUEL MICHAEL JOSEPH SANTIAGO BUS520M, Section KTC Term 2, A. Y. 2015-2016 Submitted to: Ms. Carmelita C. Clerigo
  • 2. Synthesis Alice HoestablishedTravel Wise onJanuary2014. Alice preparedanincome statementforthe quarterended31 March 2015 from the trial balance preparedbya part-time bookkeeper.She noticedsomethingwaswrongwiththe statementbecause profithadneverexceeded$20,000.00 in any one quarterbefore.She isnowconsultingtofigure outwhatshe didwronginpreparingher income statement. Statement of the Problem What generallyacceptedaccountingprinciplesdidAlice notrecognize inpreparingTravel Wise income statement? Point of View We are takingthe pointof viewof the consultingaccountant. Statement of the Objectives 1. Identifythe generallyacceptedaccountingprinciplesthatAlice failedtoconsider. 2. Prepare a correct income statement forthe quarterended31March 2015. Areas of Consideration Time PeriodAssumption The time periodor periodicityassumptionassumesthatthe economiclife of abusinesscanbe dividedintoartificial timeperiods generallyamonth,aquarter,or a year.In thiscase,Travel Wise income statementispreparedquarterly. Revenue RecognitionPrinciple The revenue recognitionprinciplestatesthatrevenue shouldbe recognizedinthe accountingperiod inwhichit isearned.Ina service business,suchasin thiscase,revenue isusuallyconsideredtobe earnedat the time the service isperformed. The Matching Principle The matchingprinciple dictatesthatefforts(expenses)be matchedwith accomplishments(revenues).Itisalsoreferredasthe practice of expense recognition. The Accrual Basis of Accounting The accrual basisof accountingisthe conceptof recordingrevenueswhen earnedandexpensedasincurred.Itadherestothe revenue recognition principle andmatchingprinciple.Revenue isrecordedwhenearned,notonlywhencashisreceived.
  • 3. Expensesare recordedwhenservicesorgoodsare usedor consumedinthe generationof revenue, not onlywhencashispaid. GAAP relationships in revenue and expense recognition AdjustingEntries Adjustingentriesmake itpossible toreportcorrectamountson the financial statements.Theseare made to ensure that:a) expensesare recognizedinthe periodwhichtheyare incurred,b) revenues are recordedinthe periodinwhichtheyare earned,andc) balance sheetandincome statement accounts have correctbalancesat the endof an accountingperiod. Types ofAdjusting Entries Deferrals 1. PrepaidExpenses expensespaidincashandrecordedas assetsbefore theyare usedor consumed. 2. UnearnedRevenues cash receivedandrecordedasliabilitiesbeforerevenue isearned. Accruals 1. Accrued Revenues revenuesearnedbutnotyetreceivedincash or recorded. 2. Accrued Expenses expensesincurredbutnotyetpaidincash or recorded.
  • 4. Adjustments 1. Bookingrevenue totaledto$90,000. Bookingfeesinclude advance rentalsforsummer monthoccupancy $20,000. The adjustmentmade is forthe unearnedrevenue inorderto record revenue forservicesperformed. The advance rental fee cannotbe included inthe revenue because the clientshave notyetutilizedwhateverisbeingrented. Booking Revenue Unearned Revenue Debit Credit Debit Credit $90,000 Adj. $20,000 Adj. $20,000 $70,000 2. In the ledger,there was$6,200 worthof supplies. Therewere $1,300 of suppliesonhandas at 31 March. The adjustmentmade isdue to the consumptionof supplies. Supplies (Asset) Supplies Expense Debit Credit Debit Credit $6,200 Adj. $4,900 Adj. $4,900 $1,300 3. In the ledger, prepaidinsurance amountsto $7,200. Prepaidinsurance resultedfromthe paymentof a 1-year policyon1 January 2015. The adjustmentmade is forthe prepaid insurance torecognize insurance expiredduringthe period. Prepaid Insurance Insurance Expense Debit Credit Debit Credit $7,200 Adj. $1,800 Adj. $1,800 $5,400 4. The mail on 1 April 2015 broughtthe followingbills: advertisingforweek24March, $110; repairsmade 10 March, $260; andutilities,$180. The adjustmentsmade isforthe accrued expenses torecognize expensesincurredduringthe period. Advertising Expense Repair Expense Debit Credit Debit Credit $5,200 $4,000 Adj. 110 Adj. 260 $5,310 $4,260 Utilities Expense Liabilities Debit Credit Debit Credit $900 $110 Adj. 180 260 $1,080 180 $550 5. There are fouremployees,whoreceive wagestotaling$350 perday. Asat 31 March, 2 days wageshave beenincurredbutnotpaid. The adjustmentmade isforthe 2 daysunpaidof the 4 employees.
  • 5. Wages Expense Wages Payable Debit Credit Debit Credit $29,800 Adj. 700 Adj. $700 $30,500 6. In the ledger,notespayablecost$12,000. The note payable isa 3-month,10% note dated1 January2015. The adjustmentmade isforthe accrued expense orinterestpayable to recognize interestaccruedbutunpaidonnotespayable. Cash Notes Payable Debit Credit Debit Credit $12,000 $12,000 Face value of note * Annual Interest Rate * Time (in terms of one year) = Interest $12,000 * 10% * 3/12 = $300 Interest Expense Interest Payable Debit Credit Debit Credit Adj. $300 Adj. $300 Before adjustment Afteradjustment Travel Wise Travel Wise Income Statement Income Statement For the quarter ending 31 March 2015 For the quarter ending 31 March 2015 Income Income BookingRevenue 90,000.00 BookingRevenue 70,000.00 Expenses: Expenses: Advertising 5,200.00 Advertising 5,310.00 Wages 29,800.00 Wages 30,500.00 Utilities 900.00 Utilities 1,080.00 Depreciation 800.00 Depreciation 800.00 Repairs 4,000.00 40,700.00 Repairs 4,260.00 NetProfit 49,300.00 Supplies 4,900.00 Insurance 1,800.00 Interest 300.00 Total Expense 48,950.00 NetProfit 21,050.00 Alternative Courses of Action AftershowingAlice where she made errorsinmakingTravel Wiseincomestatement,Alice cantake three different coursesof actionstopreventcommittingthe same erroragain. 1) Alice shouldattendashortcourse or refreshercourse onaccounting.She shouldreview accountingprinciplesandpractice adjustingandclosingthe entriesof the accounts accordingly.She wouldbe able tolearnfromhererrors andcome upwitha correct financial
  • 6. statement. Thisoptionis lesscostlythanhiringanotherstaff orbuyingacomputersystemto handle businessaccounts. 2) Alice shouldacquire acomputer-basedaccountingsystemforTravel Wise. Alice oraclerk can inputthe data intosystemwhichwouldautomaticallyrecordthem, thus,reducing accountingerrors.However,thismaybe costly,time consuming,andrequiresupgrading once the companygrows.Inaddition,the accountantshouldbe familiarwiththe system to be used. 3) Alice shouldhire afull time bookkeeperoraccountant to manage the accountsof Travel Wise.Thisisa more costlyoptionforthe businessbecause itincreaseswage expense; however,the accountantcanfocuson bookkeepingandtrackingthe financesof the businesswhile Alice canconcentrate onmanaging.Anotherdownsideisthattheymaystill fail to adjustandclose entries.If Alice will notbe able torecognize hererrorsonaccounting, she may endup beinghighlydependentonthe accountantand overlooksome accounting inaccuracies. Recommendation Alice shouldattendashortcourse or refreshercourse onaccounting.She shouldreview the accountingprinciplesandpractice adjustingandclosingentriespriortopreparingthe financial statement.Anthony,Hawkins,&Merchant(2004, p. 9) explainedthe importanceof adjustingand closingthe entriespriortopreparingthe financial statement: The purpose of the adjustingentriesistomodifyaccountbalancessothat theywill fairlyreflectthe situationasof the endof the period.Whereas,temporaryaccountsare closedtoretainedearningsinordertodetermine the neteffectof all the revenueand expense transactionsthe netincome orloss. Afterall adjustmenttoentriesare journalizedandpostedthe companyshouldprepare anothertrial balance fromthe ledgeraccountsto prove the equalityof debitbalancesandcreditbalances. Implementation Plan Action Plan Description Timeline Person Responsible Resource Requirement Attend short course/refresher course After consultation Alice Training fee Applying Basic Steps of the Accounting Cycle Determine the General Accounting Principleto be used After training Alice GAAP, Supplies used in accounting, accounting program Record transactions in thejournal Every time a transaction is made Analyze transactions and postto ledger Prepare trial balanceand assemble adjustment data Quarterly Prepare financial statements Journalizeand post adjustingentries Journalizeand post closingentries Prepare a post closingtrial balance Reversing entries
  • 7. Learning Points Adjustmentsandclosingof entriesshouldbe done priortopreparingthe financial statements. The Income Statementdeterminesthe resultsof operationsandindicatesreasonsforthe companysprofitability. Applicationof basicaccounting conceptswillhelponescompanytodetermine the inconsistenciesinthe Income Statementtomake adjustmentsaccordingly.