Mac Ltd. provides legal advice to customers for fees. On 30 June 2020, Mac Ltd. completed its first year of operations. Some of the ledger account balances of the business, before any financial year end (30 June) adjustments, are provided below:

$

Fees Revenue

295,000

Rent Expense

14,640

Electricity Expense

5,640

Wages Expense

108,800

Advertising Prepaid

1,800

No adjusting entries have been made to these accounts at any time during the year. An analysis of the business records reveals the following.

1.The total Fees Revenue recorded includes $1,500 that was prepaid by a client as a deposit for legal advice to be provided in July 2020.

2.The balance in Advertising Prepaid represents the amount paid for an advertising on a legal magazine for 6 months. The agreement with the publisher of the magazine covers the period 1 May 2020 to 31 October 2020.

3.The Electricity Expense ledger balance does not include the amount for June 2020. The account amounted to $1,050 and was received and paid during July.

4.The firm's lease agreement for the office premises commenced from 1 July 2019. The agreement indicates a rent of $1,220 per month is to be paid on the first day of each month. In addition, an annual amount equal to 0.2% of the entity's total fees revenue earned each year should be paid. This extra rental is payable within 15 days of the end of the reporting period.

5.The entity hired part-time employees. Wages are paid fortnightly on Fridays (5 working day each week and each pay period covers Monday from preceding week to Friday in the pay week). In 2020, 30 June falls on a Tuesday and the wages for the two-week pay period ended on Friday 3 July 2020 is $7,800. All employees worked the normal office hours during the two--week pay period.

Required:

a)Journalise the necessary adjusting entries at the end of the period. (6 marks)

b)Using an example to explain the differences between cash basis and accrual basis accounting, and further discuss why adjusting entries are necessary. (4 marks)