There are two parts to Question 1 (a and b). You are required to answer each part. (The word limit for Question 1 is 400 words.)

a.

i. Using the example of an accrued electricity expense of £150, for which an invoice has not been received by the end of an accounting period, explain what is meant by the ‘reversal’ of such an accrued expense at the beginning of the next accounting period. Your answer should be 100 words or less.

ii. Explain the purpose of ‘reversing’ the accrued electricity account in (i) at the beginning of the next accounting period. Your answer should be 100 words or less.

(6 marks)

b. Sandie starts in business as a sole trader on 1 July 2021. She works as a dog groomer and nutritionist and offers a subscription-based dog club with several benefits for members. Her financial year ends on 30 June. Her first set of accounts will cover the year to 30 June 2022.

Sandie immediately enters into an 18-month lease for premises to be used as an office, grooming facility and store room. She pays the whole amount of £36,000 on 1 July 2021.

On 30 September 2021, in response to a successful advertising campaign, Sandie sells 40 annual club memberships worth a total of £2,000.

Required:

i. Calculate the amounts for rent and club memberships to be included in the income statement for the year ended 30 June 2022. (4 marks)

ii. Calculate the amounts for rent and club memberships to be included in the balance sheet at 30 June 2022 and indicate as to which section/heading of the balance sheet the amounts you have calculated will be shown. (4 marks)

iii. Explain why a cash accounting of Sandie’s club membership sales, if used in place of an accruals accounting approach, would not provide a true and fair view of profit for the relevant accounting period. Your answer should show the difference in profit and be 100 words or less. (3 marks)

iv. Describe two inappropriate financial consequences that may result from using cash accounting for her membership sales. Your answer should be 100 words or less. (3 marks)