QUESTION 3: Accounting Concepts (12 marks), Communication (6 Marks)

Part 1: The Business Letter

You are an accountant at Shopsies. Previously the owner, Mr Know Better did all the accounting himself. However, as he does not have an accounting background he realised that it would be beneficial to appoint an accountant. Mr Know Better has got some queries that he would like you to address.

REQUIRED:

On the following page, you are required write a formal business letter in your own words to Mr Know Better to explain the following to him:

1. Mr Know Better is not sure what the difference between a perpetual and periodic inventory system is. He would like you to explain this to him in detail, including the necessary journal entries that you make when Shopsies: a) buys inventory and b) sells inventory, depending on whether a perpetual or periodic inventory system is used by the business. (5 marks)

2. Mr Know Better knows that adjusting journal entries are done at the end of the financial year. He is however not sure what the purpose of adjusting entries are. You need to explain this to him. In addition, you need to explain to Mr Know Better what the impact on the Income Statement and Balance Sheet for Shopsies will be if he does not post or enter the journal entry below on 30 June 2020: (5 marks)

30 June 2020 Insurance Expense 3,000

Prepaid Insurance 3,000

**Insurance for April June 2020 paid on 1 April 2020 expired by June, 30.