Essentials Of Finance And Accounting For Nonfinancial Managers

Journal entries for adjustment entries

Aim of the report is to concentrate on the significance of journal entries and preparation of trial balance for preparing the income statement as well as the balance sheet. This report will present journal entries with regard to the given adjusting entries and from the adjusted trial balance it will prepare the profit and loss statement and balance sheet for the concerned period. Trial balance is the preparation of account that represents balances from the entire general ledger with regard to the transactions taken place during the concerned period. Under the trial balance, total debit amount must be equal to total credit amount. Adjusting journal entries on the other hand, are used as the tool for correction of errors and these shall be completed before preparing the final financial statements for the year (Edwards 2013).

In the books of Paul services journal entries for the period ended 30th June 2016
Date	Particulars	Acc No. Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Debit	Credit
30th June 2016
	Interest Expense	201	$ 12,800.00
	Interest Payable	201		$ 12,800.00
	(Interest accrued on mortgage)
	Supplies Expense	201	$ 960.00
	Supplies	115		$ 960.00
	(using supplies for the period)
	Insurance Expense	201	$ 2,048.00
	Prepaid Insurance	120		$ 2,048.00
	(To record prepaid amortisation)
	Depreciation Expense – Furniture ((32000-2000)/5)	201	$ 6,000.00
	Accmulated Depreciation. – Furniture	137		$ 6,000.00
	(depreciation expense transferred to accumulated depreciation)
	Depreciation Expense – Office Equipment ((64000-4000)/5)	201	$ 12,000.00
	Acc. Depreciation – Office Equipment	141		$ 12,000.00
	(depreciation expense transferred to accumulated depreciation)
	Depreciation Expense – Store Equipment ((96000-6000)/10)	201	$ 9,000.00
	Acc. Depreciation – Store Equipment	146		$ 9,000.00
	(depreciation expense transferred to accumulated depreciation)
	Depreciation Expense – Automobile ((128000-8000)/10)	201	$ 12,000.00
	Acc. Depreciation – Automobile	171		$ 12,000.00
	(depreciation expense transferred to accumulated depreciation)
	Unearned revenue	201	$ 8,000.00
	Revenue	201		$ 8,000.00
	(Unearned revenue earned)

Acc No	Account Name	Unadjusted amount	Adjusting entries	Adjusted amount
Debit	Credit	Debit	Credit	Debit	Credit
101	Cash at Bank	$ 27,560.00		–	–	$ 27,560.00
105	Accounts Receivable	$ 9,190.00		–	–	$ 9,190.00
115	Supplies	$ 1,280.00		–	$ 960.00	$ 320.00
120	Prepaid Insurance	$ 2,560.00		–	$ 2,048.00	$ 512.00
135	Office Furniture	$ 32,000.00		–	–	$ 32,000.00
137	Acc. Depreciation. – Furniture		$ –	–	$ 6,000.00		$ 6,000.00
140	Office Equipment	$ 64,000.00		–	–	$ 64,000.00
141	Acc. Depreciation – Equipment		$ –	–	$ 12,000.00		$ 12,000.00
145	Store Equipment	$ 96,000.00		–	–	$ 96,000.00
146	Acc. Depreciation – Equipment		$ –	–	$ 9,000.00		$ 9,000.00
170	Automobile	$ 1,28,000.00		–	–	$ 1,28,000.00
171	Acc. Depreciation – Automobile		$ –	–	$ 12,000.00		$ 12,000.00
201	Accounts Payable		$ 18,380.00	–	–		$ 18,380.00
201	Interest Payable		$ 27,570.00	–	$ 12,800.00		$ 40,370.00
201	Unearned revenue		$ 16,000.00	$ 8,000.00	–		$ 8,000.00
201	Loan Payable		$ 6,400.00	–	–		$ 6,400.00
201	Mortgage Payable		$ 1,28,000.00	–	–		$ 1,28,000.00
201	Paul’s Capital		$ 46,498.00	–	–		$ 46,498.00
201	Paul’s Drawings	$ 128.00		–	–	$ 128.00
201	Revenue		$ 1,28,000.00	–	$ 8,000.00		$ 1,36,000.00
201	Advertising Expense	$ 600.00		–	–	$ 600.00
201	Automobile Expense	$ 5,775.00		–	–	$ 5,775.00
201	Depreciation Expense – Furniture	$ –		$ 6,000.00	–	$ 6,000.00
201	Depreciation Expense – Equipment	$ –		$ 12,000.00	–	$ 12,000.00
201	Depreciation Expense – Store Equipment	$ –		$ 9,000.00	–	$ 9,000.00
201	Depreciation Expense – Automobile	$ –		$ 12,000.00	–	$ 12,000.00
201	Insurance Expense	$ 500.00		$ 2,048.00	–	$ 2,548.00
201	Maintenance Expense	$ 2,100.00		–	–	$ 2,100.00
201	Miscellaneous Expense	$ 1,155.00		–	–	$ 1,155.00
201	Rent Expense	$ –		–	–	$ –
201	Supplies Expense	$ –		$ 960.00	–	$ 960.00
201	Utilities Expense	$ –		–	–	$ –
201	Interest Expense	$ –		$ 12,800.00	–	$ 12,800.00
	Total	$ 3,70,848.00	$ 3,70,848.00	$ 62,808.00	$ 62,808.00	$ 4,22,648.00	$ 4,22,648.00

Income Statement of Paul Services for the period ended 30th June 2016
Particulars		Amount
Income:
Revenue		$ 1,36,000.00
Less: expenses
Advertising Expense	$ 600.00
Automobile Expense	$ 5,775.00
Depreciation Expense – Furniture	$ 6,000.00
Depreciation Expense – Equipment	$ 12,000.00
Depreciation Expense – Store Equipment	$ 9,000.00
Depreciation Expense – Automobile	$ 12,000.00
Insurance Expense	$ 2,548.00
Maintenance Expense	$ 2,100.00
Miscellaneous Expense	$ 1,155.00
Rent Expense	$ –
Supplies Expense	$ 960.00
Utilities Expense	$ –
Interest Expense	$ 12,800.00
Total expenses		$ 64,938.00
Net Profit		$ 71,062.00

Date	Particulars	Account No.	Amount (Dr.)	Amount (Cr.)
30-Jun-16	Revenue	201	$ 1,36,000.00
	Advertising Expense	201		$ 600.00
	Automobile Expense	201		$ 5,775.00
	Depreciation Expense – Furniture	201		$ 14,000.00
	Depreciation Expense – Equipment	201		$ 28,000.00
	Depreciation Expense – Store Equipment	201		$ 22,000.00
	Depreciation Expense – Automobile	201		$ 29,000.00
	Insurance Expense	201		$ 8,036.00
	Maintenance Expense	201		$ 13,650.00
	Miscellaneous Expense	201		$ 1,155.00
	Rent Expense	201		$ –
	Supplies Expense	201		$ 2,220.00
	Utilities Expense	201		$ –
	Interest Expense	201		$ 29,600.00
	Retained earnings			$ 71,062.00
	[Recording the closing entries]

Statement of Changes in Equity of Paul services For the year ended 30th June, 2016
Particulars	Capital	Retained Earnings	Total
Opening balance	$ 46,498.00	–	$ 46,498.00
Drawings	$ (128.00)
Profit for the year		$ 71,062.00

Closing Balance	$ 46,370.00	$ 71,062.00	$ 46,498.00

Balance Sheet of Paul Services as on 30th June, 2016
Particulars	Amount	Amount
Assets
Non-Current Assets
Office Furniture	$ 32,000.00
Less: Accumulated Depreciation. – Furniture	$ 6,000.00	$ 26,000.00
Office Equipment	$ 64,000.00
Less: Accumulated. Depreciation – Equipment	$ 12,000.00	$ 52,000.00
Store Equipment	$ 96,000.00
Less: Accumulated Depreciation – store Equipment	$ 9,000.00	$ 87,000.00
Automobile	$ 1,28,000.00
Less: Accumulated Depreciation – Automobile	$ 12,000.00	$ 1,16,000.00
Current Assets
Cash at Bank	$ 27,560.00
Accounts Receivable	$ 9,190.00
Supplies	$ 320.00
Prepaid Insurance	$ 512.00	$ 37,582.00
Total Assets		$ 3,18,582.00
Liabilities
Non-Current Liabilities
Loan Payable	$ 6,400.00
Mortgage Payable	$ 1,28,000.00	$ 1,34,400.00
Current Liabilities
Accounts Payable	$ 18,380.00
Interest Payable	$ 40,370.00
Unearned revenue	$ 8,000.00	$ 66,750.00
Total liabilities		$ 2,01,150.00
Equity
Paul’s Capital	$ 46,498.00
Less: Paul’s Drawings	$ (128.00)
Profit for the period	$ 71,062.00	$ 1,17,432.00
Total Liabilities and Equities		$ 3,18,582.00

Trial balance is considered as the heart of business and is the summary for the business activities. It indicates the financial health of business and helps the investors to take decisions regarding investment in the company. Various entries for various accounts are prepared through ledger. Trial balance is presenting all ledger balances in single worksheet as on particular date (Fields 2016). Credit balances are reported in the credit column and the debit balances are reported in the debit column. Sum of the debit column shall be matched with the sum of credit balance. Trial balance can are prepared for checking the accuracy of ledger accounts and ensuring that all transaction taken place during the concerned period has been recorded in appropriate manner. As per the manual procedure of preparing the trial balance the accountant generally prepares the trial balance for analysing the errors exists in the accounts, if any (Henderson et al. 2015). Main purposes of creating the trial balance are revealing –

Details adjustments for all transactions
all balances after making the required adjustments
Account balances of all the ledger account s before making the adjustments.

Trial balance assists in detecting the errors involved in the calculation, if any that will have impact on the final accounts of the business. Various reasons for error in the general ledger are material errors, misclassification of items or recording the entry in wrong amount (Wahlen, Baginski and Bradshaw 2014). Trial balance is created for –

assuring that arithmetical accuracies are there with regard to the accounts books taken place with the adjustments and recording the entries as per double entry bookkeeping
It is represented as the summary sheet for listing all balances related to ledger accounts. Therefore, it offers bird eye view for accounting transactions of the business
As the pre-requisite for preparing the financial statements as tallied trial balance helps in preparing the financial statements (Warren and Jones 2018)
It can also be provided to the bank while applied for any loan or borrowings to provide details regarding its credibility and capacity to take loan.

Adjusting entries are the accounting journal entries those are used to convert the accounting records of the firm on the basis of accrual basis of the accounting. Adjusting journal entries are generally made prior to the issuance of annual statements of the company (Apostolou et al. 2013). Adjusting journal entries are prepared for assigning –

Prepayments of expenditures to the period when actually the expenses are incurred
Unearned revenue received from prepayment to period under which the income earned
Accrues expenses to be paid in future when the expenses will actually be incurred
Accrued revenue those are already earned but will be received in future period (Weil, Schipper and Francis 2013)

Further, adjusting entries are used to correcting errors and are required to be completed before issuing the entity’s financial report. It includes the following events –

When the company has not recorded any entries for some of the expenses and revenues but the expenses and revenues have been taken place during the concern period and shall have been included in the profit and loss statement and balance sheet for the same period.
Entry is made by the entity under one accounting period but it shall have been required to e recorded in the period during which the revenues is actually earned or expenses actually incurred or the expenses or revenues is to be separated for 2 or more accounting period (Weygandt, Kimmel and Kieso 2015).
While in accordance with the entity’s policy item like fixed asset is reported as capital account but that shall have been reported as expenses under the income statement.

Adjusted trial balance involves list down of all account balances and titles included in the general ledger after preparing the adjusting entries for particular accounting period those have been posted to accounts. It is considered as the internal rather than as the financial statement. Main purpose of preparing the adjusted trial balance is becoming certain that the total value of the debit balances in general ledger is equal to the total value of the credit balances in general ledger (Hoyle, Schaefer and Doupnik 2015). Reason behind preparation of adjusted trial balance is assuring that the adjusting entries have been posted correctly. This is considered as the last step before preparation of the financial reports intended for the external as well as internal users. If the balances reported under financial statements are not correct, the statements will not be accurate. For the purpose of preparing the adjusted trial balance different columns such as adjustment columns, profit and loss column and balance sheet column is added (Gitman, Juchau and Flanagan 2015). Before preparing the financial statement it shall be assured that the debit amount equal to the credit amount. This is conformed through preparation of trial balance including all the expenses, revenues, assets, liabilities and equities.

Worksheet completion

While the accrual method is followed by the entity, revenues are reported in the books while they are earned rather than recording it when it is received. In same way, expenses are reported in the period when it is incurred rather than when the payment has been made. Hence, prior to accounting period end, adjusting entries prepared to update all the accounts (Year 2017).

Closing entries are considered as the journal entries passed at closing of the financial period for shifting the temporary account to the permanent accounts. On the other hand, adjusting journal entries are associated with the accounts for prepaid expenses, accrued revenues, unearned revenues and accrued expenses (Needles, Powers and Crosson 2013).

Closing entries are prepared on last day of financial period but are reported in accounts after the preparation of financial statements. Generally, the closing entries involve profit and loss account. The closing entries set balances of expenses accounts and revenue accounts to zero. It means the expenses account and revenue account will start with zero balance in the new accounting period which in turn will enable the entity to to report the amount of revenues as well as expenses easily in the account (Lee 2014). However, the net amount of revenues and expenses at the closing of the accounting period are reported as owner’s equity or retained earnings.

On the contrary, adjusting entries are passed at the closing of the accounting period however are made prior to the preparation of financial statements. It is passed for making the financial statements of the entity updated on accrual approach of accounting. For example, the electricity is used by the entity each day however the bill is received after one month. Similarly, the wage expenses are incurred by the entity each day however payroll including the wages of the employees for last day of month is not entered in accounting records till the closing of the accounting period. In addition to those, adjusting entries includes the amount paid by the entity before they become the expenses (Edmonds et al. 2013). For instance, insurance premium paid by the entity for the period of 3 months have been paid before commencement of those 3 months. The expenses may be deferred by the entity through reporting it prior to start of 3 months period.

Conclusion

From the above conversation it is concluded that trial balance is an important part in accounting. Using the trial balance, the entity can prepare income statement, trading account and balance sheet as the account balances are available at the single place. Further, the adjusted trial balances are used for assuring that the adjusting entries have been posted correctly. It is the last step before preparation of the financial reports intended for the external as well as internal users. Main purpose behind preparation of adjusted trial balance is becoming certain that the total value of the debit balances in general ledger is equal to the total value of the credit balances in general ledger. Adjusting entries as well as closing entries both are prepared on last day of financial period however closing entries are reported in accounts after the preparing annual statements and adjusting entries are passed prior to the preparation of financial statements.

Reference

Apostolou, B., Dorminey, J.W., Hassell, J.M. and Watson, S.F., 2013. Accounting education literature review (2010–2012). Journal of Accounting Education, 31(2), pp.107-161.

Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial accounting concepts. New York, NY: McGraw-Hill Irwin.

Edwards, J.R., 2013. A history of financial accounting (RLE Accounting) (Vol. 29). Routledge.

Fields, E., 2016. The essentials of finance and accounting for nonfinancial managers. Amacom.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Lee, T.A., 2014. Evolution of Corporate Financial Reporting (RLE Accounting). Routledge.

Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting. Cengage Learning.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Year, B.C.S., 2017. Advanced accounting. Journal Entries in the books of Company, 12, pp.12-750.

Adjusting journal entries and purpose of recording it

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