I would like to communicate the following 2 misstatements found during the audit procedures and ask client to pass the following correcting entries :
Misstatement #1 : No accrual of utility expenses of December 2020 :
Since Utility expenses pertain to the month of December 2020, i.e., they fall within the period covered under financial statements ending 31st December, 2020, they should be recorded as an expense in the current year only irrespective of whether the invoice is received in the current or the next year.
In the current case, client has booked the invoice on 3rd January, 2021 which is incorrect as an accrual liability along with a corresponding debit to expense should have been booked in 2020. Hence the correcting journal entry to be passed in the financial statements ending 31st December, 2020 is as follows :
Date | Account | Dr. ($) | Cr. ($) |
31-12-2020 | Utility Expense a/c ..Dr | 1,000 | |
To Provision for Expenses a/c | 1,000 |
Misstatement #2 : Booking espresso machine as repair & maintenance expense instead of capitalizing the same :
Espresso machine is an asset for us which should be capitalized and shown in the Balance sheet under the head "Property, Plant & Equipment" and which should be depreciated over it's useful life. In the current scenario the client has mistakenly expensed it off in the income statement as repairs & maintenance expense which is incorrect. Hence correcting entries to be passed for the above are as follows :
Date | Account | Dr. ($) | Cr. ($) | ||||||
31-12-2020 | Asset (Espresso Machine) a/c ..Dr | 5,000 | |||||||
To Repairs & Maintenance Expense | 5,000 | ||||||||
Date | Account | Dr. ($) | Cr. ($) | ||||||
31-12-2020 | Depreciation a/c ..Dr | 1,000 | |||||||
To Asset (Espresso Machine) a/c | 1,000 | ||||||||
Note 1 : Since Espresso machine was purchased on 1st January, 2020, the whole year depreciation is to be charged on the same. | |||||||||
Note 2 : The above mentioned depreciation entry is to be passed in the next 4 years as well. |
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