You have just joined Queenie Limited, which is a small merchandising company, as an accountant. Queenie Limited was set up on January 1, 2020.

You have recently asked the bookkeeper to prepare the draft of the financial statements for the first year of operations ended December 3 1, 2020 for your review.

The bookkeeper said that she only knew how to prepare a trial balance and below was the trial balance submitted by the bookkeeper.

Queenie Limited

Trial Balance

December 31, 2020

	DR	CR
Truck	280,950
Office equipment	102,ooo
Cash	30,750
Share capital		240,000
Sales revenue received		577,080
Salaries paid	181,500
Utilities paid	12,000
Rent paid	195,000
Insurance paid	14,880

817,080 817,080

In discussing the trial balance with the bookkeeper, you asked whether adjusting entries have been prepared to get the accounts up to date for the trial balance. The bookkeeper said that there was no need to make adjusting entries as Queenie Limited was a small company.

Required:

1. Explain why the accountant suspected that the accounts had not been adjusted prior to the preparation of the trial balance. (3 marks)
2. Explain to the bookkeeper the importance of adjusting entries and the potential misstatements that can result from their exclusion. (7 marks)