Nybrostrand Company

NybrostrandCompany

Student’sname:

Dateof Submission:

NybrostrandCompany

Originalincome statement

Nybrostrand Company

The income statement as at 31/12/2014

$

$

Sales

586,000

Cost of goods sold

(307,000)

Gross profit

279,000

Less other expenses

Depreciation expense

24,350

Insurance

1,400

Marketing

4,500

Property taxes

16,900

Rent

28,000

Salaries

78,500

Utilities

6,700

(160,350)

Net profit / retained earnings

118,650

Adjustingaccounts

Thefollowing are the workings to adjust the appropriate accounts

(Adjustingfor the Revenue)

Revenue Account

Unrealized Revenue $42,500

Revenue $628,500

Bal c/d 586,000

628,500

628,500

Adjustingfor the cost of goods sold:

628,500= $307,000

586,000= = $286,240

Cost of Goods Sold Account

Bank $307,000

Unrealized Revenue$22,265

Balance c/d 284,735

307,000

307,000

Theadjusted income statement will be as shown below.

Nybrostrand Company

The income statement as at 31/12/2014

$

$

Sales

586,000

Cost of goods sold

(286,240)

Gross profit

299,760

Less other expenses

Depreciation expense

24,350

Insurance

1,400

Marketing

4,500

Property taxes

16,900

Rent

28,000

Salaries

78,500

Utilities

6,700

(160,350)

Net profit / Retained Earnings

139,410

Comparingthe income/loss with that of the original income statement

Theincome of the original income statement had been understated. This isbecause the cost of goods sold included part of the amount that wasassociated with unrealized revenue. The profit is therefore,understated by the full amount of the overstated cost of goods sold.The adjusted income statement shows a higher profit than the originalincome statement.

TheGenerally Accepted Accounting Principle (GAAP) provides that revenueshould only be recognized when it is realized or when the activitiesin which it arises from has been taken place (Edwards &ampHermanson, 2007). In this case of , the client hadshown the interest of purchasing goods worth of $42,500. However, theclient had not actually committed the purchase by the end ofaccounting period. The sale is therefore associated with lots ofuncertainties, and hence, it is against to recognize such revenuejust explained in the realization concept. The concept also providesthat revenue should be recognized after an invoice has been prepared(Edwards &amp Hermanson, 2007). It was a good decision for thebookkeeper to not include the $42,500 in the revenue account and inthe income statement of the company.

Thematching concept

Thematching concept provides that revenue should be matched or comparedwith the expenses incurred in earning that revenue for thatparticular accounting period (Collis &amp Hussey, 2007). The Conceptemphasize that revenue should be matched with the expenses incurredin generating it. For instance after proving that the sale of goodsworth $42,500, the bookkeeper adjusted the sales account but failedto adjust the cost of goods sold the account. This implied theunrealized revenue was charged for the expenses, and this is verycontrary with the matching concept. The concept states that all costsand expenses should be recognized after they have actually incurredor the transaction has taken place (Kieso &amp Weygandt, 2012). Itis, therefore, advisable for the bookkeeper to make necessaryadjustments to not only on the sales account but also to the cost ofgoods sold the account. The impact of this adjustment on the incomestatement will be on the gross profit as it will reduce by the fullamount of the overstated cost of goods.

Reference

Collis,J., &amp Hussey, R. (2007). Business Accounting: Introduction tofinancial and management accounting. Basingstoke: Palgrave Macmillan.

Kieso,D., &amp Weygandt, J. (2012). Intermediate Accounting (14th Ed.).Hoboken, NJ: Wiley.

Edwards,J.D. &amp Hermanson, R.H. (2007) Accounting Principles: A BusinessPerspective. First Global Text Edition