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QUESTION
CASE #1: You were just hired by Bertha’s Bakery as their new accountant. Bertha Beckendorf, the owner, provided you with copies of invoices for the year for baking supplies (assume all baking supplies are used up the day they are delivered). You noticed that one particular invoice from Fred’s Flour was for a delivery of flour made to the Bakery on December 29, 2013, but is not due until January 10, 2014. There was no accrual of this expense in the Bakery’s December 31, 2013 Trial Balance. Write a Business Memo in proper format to Bertha Beckendorf explaining how the invoice should be accounted for and why.
ANSWER
Business Memorandum
Bertha’s Bakery
To: Bertha Beckendorf
Date: December 31, 2013
From: Your Name
Subject: Accounting for Fred’s Flour Invoice Due January 10, 2014, in the Trial Balance for the Period Ending December 31, 2013
Given the copies of invoices received for the year’s baking supplies, I noticed a gap in the invoices where Fred’s flour invoice was not accrued as an expense in the December 31, 2013 expense. Although I am aware that this invoice is not due until January 10, 2014, I suggest that Fred’s flour invoice be accounted for through a debit entry that will be recorded as a liability by increasing the payables to the invoice amount.
Considering Fred’s flour was used the day it was delivered, but the payment is due on January 10, 2014, we can account for it as a payable, which is not yet an expense. Therefore, I request we draft a debit entry for cash in the amount owed to Fred. We will then record it as a liability, whereby we can increase the bakery’s payables to the amount owed. Then, we can make a credit entry for payables in the same amount owed to Fred to balance it off.
While this expense does not affect the bakery, we need to ensure it is accounted for to avoid confusion when the next trial balance is done. An accrued expense like this is due with certainty, which means we can make a provision for it. Furthermore, accounting for this expense and similar ones in the future can contribute to the bakery’s financial statements’ accuracy and provide a complete measure of the business’s transactions.
I believe you will review this and give the go-ahead as we seek to ensure the business transactions are accurate and precise.
Thank you,
Your Name
Contact Information
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