You have recently been hired by Jones & Co, a small public accounting firm as an internal auditor. One of the firm’s partners, Joe Jones, has asked you to deal with an unhappy client. The client, Susan Swan, is the owner of the city’s largest jewelry store, DiamondsRUs.

Ms Swan wants to remodel her store and is applying for $80,000 loan with Planters National Bank. The bank requires the use of accrual basis accounting for financial statements.  Ms Swan insists that she has always used cash basis accounting for her jewelry store. She does not see the purpose of using accrual basis accounting and refuses to make year-end adjusting entries.

Required:

Write a (friendly) email to Ms Swan to include the following:

1. Explain the main differences between cash basis and accrual basis accounting.

2. Explain why the FASB requires the use of the accrual basis accounting for financial external reporting.

3. Explain why adjusting entries are necessary in accrual accounting.

Please use proper format. Your email should include an introduction and proper closing along with 2-3 paragraphs to explain the main points (1-3) above.   

Other requirements:

a. Be sure to use your own words.  Do not “copy and paste” your answers directly from the internet.

b. Reply to two other students by name. Each reply should include at least one meaningful (helpful) comment, a question or (gentle) criticism.

c. Please cite any references (including the textbook) used at the end of your post. Reference should include the Title, Author and specific URL or page numbers.