1) In the Accounting Equation, Assets are equivalent to the total sum of Liabilities and

Equity and is reflected as follows:

Assets=Liabilities+ Equity

 Assets are the resources owned by the organisation such as cash, building and

property, Inventory, etc. and is used to carry out the transactions of the

organisation.

 Liabilities are the debts and obligations the organisation owes to external

organisations or persons who would have provided resources and or services on

credit, usually for a fixed term. These are claimed against assets as the

organisation will use this to clear the liability when their terms come to a close.

 Equity is another source of funds for the organization and this comes from two

(2) sources: (i) Total Paid-In Capital which is provided directly by the

owner(s)/investors which is used to obtain its assets; and (ii) Retained Earnings

which is the amount the organisation keeps from its profits/earnings.

2) Although used interchangeably, there is a difference between Bookkeeping and

Accounting and in order to understand this fully one must first define the two terms.

According to the Oxford Dictionary, Bookkeeping is defined as “the job or activity of

keeping an accurate record of the accounts of a business” while Accounting is defined as

the “the process or work of keeping financial accounts.”

Simply put, bookkeeping is the recording of daily financial transactions in a manner

which is easily understood. Some of the activities involved are posting of debits and

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 credits, generating invoices and maintenance of ledgers, accounts, etc. Accounting on the

other hand is the all-encompassing term used to describe the entire process of identifying,

recording, and communicating the organization’s economic events to stakeholders,

internal and external, as well as other interested parties.

As such, it can be understood that bookkeeping is an integral part of the accounting

process as it covers the identification and recording portions of the process. The

information gathered by the bookkeeper is then verified, analysed resulting in the

generation of a wide range of reports, statements and other related documents which are

all later used in decision making, management and even forecasting.

3) Current assets are those which an organisation expects will be converted to cash or

consumed within one year or its operating cycle. Accounts normally classified as “

Current Assets include:

 pre-paid expenses/liabilities (e.g. insurance, supplies, etc.);

 inventories;

 receivables (notes, accounts, interest);

 short-term investments;

 marketable securities; and

 cash.

4) When an initial trial balance is prepared, it is at times incomplete as there may still be

outstanding and incomplete data. This occurs for many reasons including:

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  For some events which may affect accounts, it would be inefficient to record

the day to day economic impact. As such, its effects are recorded at the end of

the accounting period via adjusting entries which modify account balances

so as to reflect the true situation at the end of the period. (Example: use of

office supplies, daily gas consumption, daily wages earned by employees.);

 Some costs lessen over time instead of as a result of recurring daily

transactions. (Example: depreciation from the use of buildings and equipment,

insurance, etc.); and

 Some items as simply not yet recorded. (Example: a utility bill not yet

received for the period, Salaries to be paid, etc.)

Some of these adjustments to be made are:

 Deferrals

o Prepaid expenses which are paid in cash before use or consumption.

(e.g. Rent, Insurance, etc.)

o Revenues which are received in advance of goods/services

supplied/performed.

 Accruals:

o Outstanding revenues which are still to be received for goods/services

already provided/performed.

o Expenses sustained which have not yet paid for or recorded.

5) Using the adjusted Trial Balance for Milestones Inc as of December 31, 2019 provided,

prepared below are:

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(a) Milestones Inc. Income Statement for the Year ended December 31, 2019

Milestones Inc
Income Statement
For the Year Ended December 31, 2019

Revenue
Service Revenue $25,400.00

Expenses
Salaries and Wages Expense $5,200.00
Depreciation Expense $4,200.00
Insurance Expense $5,000.00
Total Expenses $14,400.00
Total Income Before Tax $11,000.00
Income Tax Expense $3,500.00
Net Income $7,500

(b) The Retained Earnings Statement and Statement of Financial Position

Milestones Inc
Retained Earnings Statement
For the Year Ended December 31, 2019

Retained Earnings $26,000

Add: Net Income $7,500
Total Retained $31,500
Earnings

Milestones Inc
Statement of Financial Position
as at December 31, 2019
Assets
Property, plant & Equipment
Equipment $67,500.00
Total Fixed Assets $67,500.00

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Current Assets
Supplies $4,500.00
Accounts Receivable $6,000.00
Prepaid Insurance $7,000.00
Cash $15,000.00
Total Current Assets $32,500.00
Total Assets $0

Equity & Liability

Equity
Share Capital-Ordinary $25,000.00
Retained Earnings $33,500.00
Total Equity $58,500.00

Non-Current Liabilities
Accounts Payable $23,500.00
Total Non-Current $23,500.00
Liabilities
Current Liabilties
Notes Payable (due 2021) $18,000.00
Total Current Liabilities $18,000.00
Total Liabilities $41,500.00
Total Equity & Liabilities $100,000