An owner of a business is confused when he saw the financial statements of his b

Question

An owner of a business is confused when he saw the financial statements of his business that was prepared by his accountant. For the last accounting period, he saw that he has a decrease in profit of £15,000 but the bank balance has increased by £55,000 during the accounting period. He had asked you for reasons that might explain this discrepancy. State the reasons that may explain the above discrepancy.

A the purchase of assets for cash during the period (for example, motorcars and stock), which were not all consumed during the period and therefore are not having an effect on expenses to the same extent as the effect on cash;

B the receipt of cash for revenues accrued for previous accounting period which will have an effect on cash and purchase of goods on credit which will have an effect on expenses in the profit and loss account.

C the generation of revenues on credit, where the cash has yet to be received. This will increase the sales for the period but will not have a beneficial effect on the cash balance until a later period.

D there are some mistakes in accounting records

Explanation / Answer

The Answer must be B. Receipt of cash for revenues accrued for previous accounting period which will have an effect on cash and purchase of goods on credit which will have an effect on expenses in the profit and loss account.

This case exactly affects the books of account as per the given conditions.

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