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QUESTION
CASE #2: Assume you are the accounting manager for Logan’s Landscaping & Design. On December 1, 2013, Logan Karver, the owner, presents you with a check for $15,000 from a customer, Anna DeJuliet, to do a landscape design at her residence as soon as the ground thaws in the spring of 2014. No work on this project can be done until then. Logan wants you to deposit the check and include the $15,000 in the 2013 income statement. He is expecting to include the $15,000 in his 2013 net income in order to secure a loan from the bank in January 2014 for some new equipment. Write a Business Memo in proper format to Logan explaining how this check should be accounted for and why.
ANSWER
Business Memorandum
Logan’s Landscaping & Design
To: Logan Karver
From: Your Name
Date: December 2, 2013
Subject: Accounting for Anna’s $15,000 Check in the 2013 Accounting Statement
As you are aware, we received a $15,000 check for a service that will be delivered in another financial year. As per your request to deposit the check and include it in the 2013 income statement, I hereby wish to notify you of how this check will be accounted for and the reason for the action.
Anna’s payment to Logan’s Landscaping & Design is categorized as income received in advance. Therefore, it will be recorded in the liabilities side of the Balance Sheet because of our obligation to deliver the service. Simply put, we will have to deduct the $15,000 when preparing for the trading and profit and loss account.
Given the nature of the income received, we are obligated to debit the liability account and credit the revenue account for the amount earned. Compared to unearned or accrued income, we can include the advance payment in revenue. Therefore, we have to use the cash accounting method to retain the payment as revenue. Using this method will allow us to include the $15,000 check in the net income for the year.
To ensure accuracy in the accounting for the expenses and income, I have chosen to do a separate accounting using the accrual method of accounting to note the check as a liability for future consideration. Thus, the check needs to be accounted for in case the terms of the business change, and we have to go back to deduct it in the next financial year.
Thank you,
Your Name
Contact Details
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