Question

PART 2.Angela Duffy, opens her own law office on July, 1 2018. During the first month of operations, the following transactions occurred. 1. Invested BHD10,000 in cash in the law practice. 2. Paid BHD800 for July rent on office space. 3. Purchased office equipment on account BHD3,000. 4. Provided legal services to clients for cash BHD1,500. 5. Borrowed BHD700 cash from a bank on a note payable. 6. Performed legal services for a client on account BHD2,000. 7. Paid monthly expenses: salaries BHD500, utilities BHD300, and telephone BHD100. Instructions 1. Use a tabular summary to record the previous transactions. Marking Scheme: 1 mark each X 7 entries= 7 Marks 2. Produce the income statement for the month of July. (5 marks) 3. Produce the balance sheet at July 31. (5 marks) 4. Demonstrate the usefulness of income statement and balance sheet in making decisions.( 5 marks)

Answer 1

1.

Transaction	Assets			=	Liabilities		+	Owner's Equity	Note
	Cash	Accounts Receivable	Equipment		Accounts Payable	Notes Payable		Capital
1	10000							10000
Balance	10000							10000
2	-800							-800	rent paid
Balance	9200	0	0		0	0		9200
3			3000		3000
Balance	9200	0	3000		3000	0		9200
4	1500							1500	fee earned
Balance	10700	0	3000		3000	0		10700
5	700					700
Balance	11400	0	3000		3000	700		10700
6		2000						2000	fee earned
Balance	11400	2000	3000		3000	700		12700
7	-900							-900	expenses paid
Balance	10500	2000	3000		3000	700		11800

2.

Income Statement
For the end of 31st July 2018
Revenue:
Fee earned	3500
Total Revenue		3500
Expenses:
Rent expense	800
Salary expense	500
Utilities expense	300
Telephone expense	100
Total Expenses		1700
Net Income		1800

3.

Balance Sheet
For the end of 31st July 2018
Assets		Liabilities
Cash	10500	Accounts Payable	3000
Accounts Receivable	2000	Notes Payable	700
Equipment	3000	Total Liabilities	3700
		Owner’s Equities
		Ending Capital	11800
Total assets	15500	Total L & OE	15500

4.

Balance sheet shows the assets, liabilities and equity of an entity. And it will help to make financial decision, such as borrowing loans. If the company having more debt, they don’t want to borrow more money. If a company has more cash balance, then the company can go for more projects to increase shareholders’ wealth.

In case of income statement, it would show the revenue and expenses, and the net profit or losses that the company is making from its operation. This would usually indicate whether a company is profitable or not. If they suffering losses for a year or even in the first few years, it may or may not mean the company can make it. If the company consistently on losses,there is a chance to close down the company.

Hope you understood. Thank you.