Adjustment transactions
Financial statements of the organization are a mirror image of the financial performance of the organization during the financial period and financial position of the organization at the end of the financial period. This report is presented for preparation of financial statements of the organization and providing explanations for trail balance and adjusting entries.
This report will start with the preparation of adjustment entries for the Paul services at the end of year 30 June 2016. Continued with adjusted trial balance for the Paul services at the end of year 30 June 2016, income statement for the Paul services for the period ending 30 June 2016, closing entries for the Paul services at the end of year 30 June 2016, statement of changes in equity and balance sheet for the Paul services at the end of year 30 June 2016 and ends with explanation regarding trail balance, adjusting entries and differentiating then with closing entries.
Adjustment transactions
Adjusting journal entries are prepared by the organization for recognition of some transactions for complying with the accounting standards and accrual basis of accounting (Beams, Brozovsky, & Shoulders, 2017).
Journal entries for adjustment transactions for the Paul services at the end of year 30 June 2016,
|
Date |
Description |
Posting reference |
Debit |
Credit |
|
30-Jun |
Interest Expense |
201 |
$12,320.00 |
|
|
Interest Payable |
201 |
$12,320.00 |
||
|
(Interest expense recognized) |
||||
|
30-Jun |
Supplies Expense |
201 |
$ 307.50 |
|
|
Supplies |
115 |
$ 307.50 |
||
|
(Supplies expense recognized) |
||||
|
30-Jun |
Insurance Expense |
201 |
$ 492.00 |
|
|
Prepaid Insurance |
120 |
$ 492.00 |
||
|
(Insurance expense recognized) |
||||
|
30-Jun |
Depreciation Expense – Furniture |
201 |
$ 6,000.00 |
|
|
Acc. Depreciation. – Furniture |
137 |
$ 6,000.00 |
||
|
(Depreciation expense recognized) |
||||
|
30-Jun |
Depreciation Expense – Equipment |
201 |
$12,000.00 |
|
|
Acc. Depreciation – Equipment |
141 |
$12,000.00 |
||
|
(Depreciation expense recognized) |
||||
|
30-Jun |
Depreciation Expense – Store Equipment |
201 |
$ 9,000.00 |
|
|
Acc. Depreciation – Equipment |
145 |
$ 9,000.00 |
||
|
(Depreciation expense recognized) |
||||
|
30-Jun |
Depreciation Expense – Automobile |
201 |
$ 12,000.00 |
|
|
Acc. Depreciation – Automobile |
171 |
$ 12,000.00 |
||
|
(Depreciation expense recognized) |
||||
|
30-Jun |
Unearned revenue |
201 |
$ 7,700.00 |
|
|
Revenue |
201 |
$ 7,700.00 |
||
|
(Revenue income recognized) |
Trial balance worksheet
Trial balance worksheet is a statement which shows the account balances of the organization prior to making adjusting entries and after making those adjusting entries, it shows the direct impact of adjusting entries on various account balances (Wild, 2015).
Adjusted trial balance for the Paul services at the end of year 30 June 2016,
|
Paul services |
||||||
|
Trial balance worksheet |
||||||
|
For the year ends on 30 June 2016 |
||||||
|
Pre adjustment |
Adjustments |
Post Adjustments |
||||
|
Debit |
Credit |
Debit |
Credit |
Debit |
Credit |
|
|
Cash at Bank |
$ 22,750 |
$ 22,750 |
||||
|
Accounts Receivable |
$ 7,580 |
$ 7,580 |
||||
|
Supplies |
$ 1,230 |
$ 308 |
$ 923 |
|||
|
Prepaid Insurance |
$ 2,460 |
$ 492 |
$ 1,968 |
|||
|
Office Furniture |
$ 30,800 |
$ 30,800 |
||||
|
Acc. Depreciation. |
$ 6,000 |
$ 6,000 |
||||
|
Office Equipment |
$ 61,600 |
$ 61,600 |
||||
|
Acc. Depreciation |
$ 12,000 |
$ 12,000 |
||||
|
Store Equipment |
$ 92,400 |
$ 92,400 |
||||
|
Acc. Depreciation |
$ 9,000 |
$ 9,000 |
||||
|
Automobile |
$ 123,200 |
$ 123,200 |
||||
|
Acc. Depreciation |
$ 12,000 |
$ 12,000 |
||||
|
Accounts Payable |
$ 15,160 |
$ 15,160 |
||||
|
Interest Payable |
$ 22,740 |
$ 12,320 |
$ 35,060 |
|||
|
Unearned revenue |
$ 15,400 |
$ 7,700 |
$ 7,700 |
|||
|
Loan Payable |
$ 6,160 |
$ 6,160 |
||||
|
Mortgage Payable |
$ 123,200 |
$ 123,200 |
||||
|
Paul’s Capital |
$ 46,063 |
$ 46,063 |
||||
|
Paul’s Drawings |
$ 123 |
$ 123 |
||||
|
Revenue |
$ 123,000 |
$ 7,700 |
$ 130,700 |
|||
|
Advertising Expense |
$ 500 |
$ 500 |
||||
|
Automobile Expense |
$ 5,775 |
$ 5,775 |
||||
|
Depreciation Expense – Furniture |
$ 6,000 |
$ 6,000 |
||||
|
Depreciation Expense – Equipment |
$ 12,000 |
$ 12,000 |
||||
|
Depreciation Expense – Store Equipment |
$ 9,000 |
$ 9,000 |
||||
|
Depreciation Expense – Automobile |
$ 12,000 |
$ 12,000 |
||||
|
Insurance Expense |
$ 400 |
$ 492 |
$ 892 |
|||
|
Maintenance Expense |
$ 1,750 |
$ 1,750 |
||||
|
Miscellaneous Expense |
$ 1,155 |
$ 1,155 |
||||
|
Rent Expense |
||||||
|
Supplies Expense |
$ 308 |
$ 308 |
||||
|
Utility Expense |
||||||
|
Interest Expense |
$ 12,320 |
$ 12,320 |
||||
|
Total |
$ 351,723 |
$ 351,723 |
$ 59,820 |
$ 59,820 |
$ 403,043 |
$ 403,043 |
Income statement
It is one of the major financial reports of the organization; this statement is the indicator of financial performance of the organization. This statement concludes the net income earned or net loss made by the organization during the period for by performing various financial transactions (Weygandt, Kimmel, & Kieso, 2015).
The income statement for the Paul services for the period ending 30 June 2016,
|
Paul services |
||
|
Statement of comprehensive income |
||
|
For the year ends on 30 June 2016 |
||
|
Revenue |
$ 130,700.00 |
|
|
Less: Expenses |
||
|
Advertising Expense |
$ 500.00 |
|
|
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 |
$ 892.00 |
|
|
Maintenance Expense |
$ 1,750.00 |
|
|
Miscellaneous Expense |
$ 1,155.00 |
|
|
Supplies Expense |
$ 307.50 |
|
|
Interest Expense |
$ 12,320.00 |
|
|
Total expenses |
$ 61,699.50 |
|
|
Net income |
$ 69,000.50 |
Closing entries
Closing entries are prepared by the organization for transferring various income and expanse to the profit and loss account and transferring profit and loss account balance i.e. net income or net loss to the equity account (Weygandt, Kimmel, & Kieso, 2015).
Closing entries for the Paul services at the end of year 30 June 2016,
|
Date |
Description |
Posting reference |
Debit |
Credit |
|
30-Jun |
Profit and loss account |
201 |
$ 61,699.50 |
|
|
Advertising Expense |
201 |
$ 500.00 |
||
|
Automobile Expense |
201 |
$ 5,775.00 |
||
|
Depreciation Expense – Furniture |
201 |
$ 6,000.00 |
||
|
Depreciation Expense – Equipment |
201 |
$ 12,000.00 |
||
|
Depreciation Expense – Store Equipment |
201 |
$ 9,000.00 |
||
|
Depreciation Expense – Automobile |
201 |
$ 12,000.00 |
||
|
Insurance Expense |
201 |
$ 892.00 |
||
|
Maintenance Expense |
201 |
$ 1,750.00 |
||
|
Miscellaneous Expense |
201 |
$ 1,155.00 |
||
|
Supplies Expense |
201 |
$ 307.50 |
||
|
Interest Expense |
201 |
$ 12,320.00 |
||
|
(closing entry for expenses) |
||||
|
30-Jun |
Revenue |
201 |
$ 130,700.00 |
|
|
Profit and loss account |
201 |
$ 130,700.00 |
||
|
(closing entry for incomes) |
||||
|
30-Jun |
Profit and loss account |
201 |
$ 69,000.50 |
|
|
Paul’s Capital |
201 |
$ 69,000.50 |
||
|
(closing entry for income transferred to capital account) |
Statement of changes in equity
Statement of changes in equity shows a change in the various equity balances during the period due to reasons of drawings, new capital introduction, and adjustment of net profit and loss and other equity transactions occurred during the period.
Trial balance worksheet
Statement of changes in equity for the Paul services at the end of year 30 June 2016,
|
Paul services |
|
|
Statement of changes in equity |
|
|
at the end of year 30 June 2016 |
|
|
Paul’s Capital |
|
|
Opening balance |
$ 46,063.00 |
|
Less: Drawings |
$ 123.00 |
|
Add: income earned |
$ 69,000.50 |
|
Closing balance |
$ 114,940.50 |
Balance sheet
The balance sheet of the organization is a financial statement which shows the financial position of the organization at the end of the financial period (Deegan, 2016). It shows the total assets, liabilities, and equity of the organization at the end of the period.
Balance sheet for the Paul services at the end of year 30 June 2016
|
Paul services |
||
|
Balance sheet |
||
|
at the end of year 30 June 2016 |
||
|
Assets |
||
|
Current assets |
||
|
Cash at Bank |
$ 22,750.00 |
|
|
Accounts Receivable |
$ 7,580.00 |
|
|
Supplies |
$ 922.50 |
|
|
Prepaid Insurance |
$ 1,968.00 |
|
|
Total current assets |
$ 33,220.50 |
|
|
Noncurrent assets |
||
|
Office Furniture |
$ 30,800.00 |
|
|
Acc. Depreciation. – Furniture |
-$ 6,000.00 |
|
|
Office Equipment |
$ 61,600.00 |
|
|
Acc. Depreciation – Equipment |
-$ 12,000.00 |
|
|
Store Equipment |
$ 92,400.00 |
|
|
Acc. Depreciation – Equipment |
-$ 9,000.00 |
|
|
Automobile |
$ 123,200.00 |
|
|
Acc. Depreciation – Automobile |
-$ 12,000.00 |
|
|
Total non-current assets |
$ 269,000.00 |
|
|
Total assets |
|
$ 302,220.50 |
|
Liabilities |
||
|
Current liabilities |
||
|
Accounts Payable |
$ 15,160.00 |
|
|
Interest Payable |
$ 35,060.00 |
|
|
Unearned revenue |
$ 7,700.00 |
|
|
Total current liabilities |
$ 57,920.00 |
|
|
Noncurrent liabilities |
||
|
Loan Payable |
$ 6,160.00 |
|
|
Mortgage Payable |
$ 123,200.00 |
|
|
Total noncurrent liabilities |
$ 129,360.00 |
|
|
Total liabilities |
|
$ 187,280.00 |
|
Net assets |
|
$ 114,940.50 |
|
Equity |
||
|
Paul’s Capital |
$ 114,940.50 |
|
|
Total equity |
|
$ 114,940.50 |
Required explanations
Trial balance and reason of preparation of trial balance
It is an accounting schedule that shows a list of all ledger accounts at the end of the year which compares the total of all debit balances and a total of all credit balances (Wild, 2015). The trial balance is a statement which shows all account balances of the organization at the end of the financial period. It checks the correctness of debits and credits of all account balances by making a sum of all debit balances and the sum of all credit balances.
As per fundamental principle of accounting, at any point of time, all debits must be equal to all credits. Hence this statement ensures the arithmetical accuracy of account balances, however, two-sided errors cannot be detected by the trial balance, only one-sided errors can only defect by this statement.
In addition to checking arithmetically accuracy of all account balances, this statement also provides the information which required for preparation of financial statements i.e. income statement, balances sheet and statement of changes in equity.
Adjustment entries
Adjusting entries are the journal entries prepared at the end of the accounting period for converting closing account balances from the cash basis of accounting to the accrual basis of accounting. It prepares for recording noncash expanse like depreciation expense, expenses incurred but not paid during the year like wages payables or other expense, expenses paid but not incurred like prepaid expense, incomes received but not incurred like unearned revenues and incomes earned but not received like interest receivable (Beams, Brozovsky, & Shoulders, 2017).
These adjusting entries are recorded by the accountant at the end of the financial period after making the pre-adjusted trial balance for converting various account balances from cash basis accounting to the accrual basis of accounting. This also plays a significant role in the estimation of true financial performance during the period as well as estimation of the true financial position of the organization at the end of the period.
Purpose of writing adjusted trial balance
Adjusted trial balance is a statement which shows the all account balances of the organization after passing the adjusting entries. It helps in checking the impact of adjusting accounting entries on the various account balances. It provides a raw data for the financial statements of the organization.
Adjusted trial balance also make a check of the arithmetical accuracy of the account balances for the posting of all adjusting entries to the pre-adjusted account balance of the organization.
Difference between the adjustment journal entries and closing entries
Adjusting entries are the journal entries prepared at the end of the accounting period for converting closing account balances from the cash basis of accounting to the accrual basis of accounting. It prepares for recording noncash expanse like depreciation expense, expenses incurred but not paid during the year like wages payables or other expense, expenses paid but not incurred like prepaid expense, incomes received but not incurred like unearned revenues and incomes earned but not received like interest receivable.
However, closing entries are the accounting entries which prepared for transferring various nominal account balances to the profit and loss account. It also transfers the profit and loss accounts balances to the equity account o the balances sheet it may be owner’s capital account in proprietorship or partnership business or retained earnings account for the company (Deegan, 2016).
Adjusting accounting entries and closing entries are two different types of accounting entries; these are not connected to each other in any way. Adjusting entries are the entries for recording adjustment transactions at the end of the period and closing entries are the entries for closing all nominal accounts.
Beams, F., Brozovsky, J., & Shoulders, C. (2017). Advanced accounting. Pearson.
Deegan, C. (2016). Financial accounting. McGraw-Hill Education Australia.
Weygandt, J., Kimmel, P., & Kieso, D. (2015). Financial & Managerial Accounting. John Wiley & Sons.
Wild, J. (2015). Financial accounting fundamentals. McGraw-Hill Higher Education.
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