5.2 St John is a professional man who has hitherto produced his accounts on a cash basis (i.e. revenue is recognised when the cash is actually received and expenses are recognised when they are paid).

His income statement (on a cash basis)* for the year ended 30 June 20X3 is as follows:

£

Fees Rent 12,000 Rates 8,000 Wages (including National Insurance)

28,000 Sundry expenses 20,000 Surplus

£

180,000 68,000

£112,000 During the year St John withdrew £100,000 from his business bank account to pay his living expenses.

St John was persuaded by his accountant to change from cash to accrual accounting and it was decided that the new basis should be applied for the year ended 30 June 20X3. The following information as at 1 July 20X2 is relevant:
£
Debtors for fees 60,000 Business bank account (overdrawn)
40,000 PAYE and NI payable 200 Rent payable 2,000 Prepaid rates 3,000 Fee income (on an accrual basis) for the year ended 30 June 20X3: £210,000. Rent expense (on an accrual basis) for the year ended 30 June 20X3: £12,000. As at 30 June 20X3:
£
PAYE and NI payable 120 Prepaid rates 4,000 Required:

(a) Prepare (on the basis of the information provided) St John’s balance sheet as at 30 June 20X3 and his profit and loss account for the year ended on that date.

(b) Are there any other assets or liabilities which you might expect to find?

(c) What arguments might St John’s accountant use when persuading him to change from cash to accrual accounting? Are there any arguments against making the change? If so, what are they?