Volume – II

YEAR 2015

WRITTEN BY: SYED AQEEL RAZA

The ledger accounts show the position of each account and the balances of accounts at the end of specified period and to known the correctness of accounts require making equal debit and credit balances.

Another device or to trial balances, we need trial balance having column title of Accounts, account number, debit and credit where we put balance debit in debit column and credit in credit column as accounts sequence as assets, liabilities, proprietorship, income and expenses.

There will be following steps of accounts summary or trial balance;

Trial Balance – unadjusted

Trial balance – adjusted

Post closing Trial balance

TRIAL BALNACE - UNADJUSTED

Trial balance unadjusted means a trial balance which was created before adjustment in accounts for seeing the equality of balances in debit and credit. If the sum of debit and the sum of credit have no difference, the posting is considered correct otherwise the difference is ascertained by checking accounts.

Illustration 1-1.6

If we are maintaining Expense and Revenue ledger, the general ledger and expense and revenue ledger is over viewed as illustration 1-1.6.

TRIAL BALNACE ADJUSTED

After journalizing and posting in respective accounts of all adjusting entries, an adjusted trial balance is prepared. The adjustment or settlement of an account is made at the end of the period like accrued expense, bad debts or uncollectible, unused supplies or merchandise, accrued income, unearned revenue etc. The same contents as trial balance are used herein but with the replacement of balance amount in account.

The adjustment, reversal and correction of errors are made before making adjusted trial balance.

An adjusting entry is the entry that updates the balance of an account at the end of the period; financial period or month like below;

Accrued expenses or accrual of expenses

Accrued expenses means recording of expenses in accounts of the period to be settled in next month or financial period like salaries, wages, rent, interest on loan, advertising expenses, telephone charges, electricity charges, insurance expenses etc. which are debited and payable of each account or accrued expense account credited.

The expense, which has been made or to be made but not recorded in accounts are recorded by adjusting entries like adjusting entries of (A);

a) Salaries Rs.10, 000/= for the last month not yet paid.b) Wages Rs.2, 000/= for the last 5 days are remained unpaid.

Salaries Expenses 10,000/=Salaries Payable 10,000/=

Wages Expenses 5, 000/=

Wages payable 5, 000/=

(B) Interest on notes payable Rs.10 for 15 days is accrued as;

Suppose that a firm signed on 6% interest bearing promissory note of Rs.4, 000/= for 60 days on June 16 and June 30 is ending accounting period, the calculation will be;

Computation on 60 days @ 6% note of Rs. 4, 000/=

Signed Date June 16Ending Accounting Date June 30Maturity Date August 15

6% of Rs.4, 000 makes 120 one month Rs.240 for 12 monthsRs.240 divided by 12 months Rs.20 for 30 daysRs.20 is divided by 30 days Rs.0.666667 for 1 dayInterest from June 16 to June 30 Rs.0.666667 x 15 days = Rs.10/=Interest from July 1 to June 30 Rs.0.666667 x 45 days = Rs.30/=Total 60 days interest Rs.0.666667 x60 days = Rs.40/=

Journal Entry;Dr. Interest ExpensesCr. Interest payable on notes payable

The accrual of expenses will increase both liabilities and expenses.

Accrued revenue or accrual of revenue

The revenue, which has been earned but not received or recorded in accounting period, will be recorded in accounts by adjusting entries such as; services rendered but not received, rent for the last three months not received, commission due but not received.

The adjusting entries will be service revenue receivable debit and services revenue credit, accrued rent revenue receivable debit and rent revenue credit and commission revenue receivable debit and commission credit.

Examples:

- Services rendered but not billed.- Commission receivable.- Interest receivable on note receivable

Adjustments;

Services revenue receivable Service revenue

Commission revenue receivable Commission Income

Accrued Interest receivableInterest Income

Interest on notes bearing Rs.8000/= receivable as calculated below;

Suppose that a firm had received interest 10% of Rs.8000/= for three months on May 1 and closed accounts on June 30. It means it earned two months interest Rs.133/= as per following calculation.

Computation on 3 months interest @ 10% on Rs.8000/=

8000x10/100 = Rs.800 for one year; 800x3/12 = Rs.200/= interest revenue will be earned after 3 months.Rs.200 = 3 months interest200/3 = 66.66667 one month interest revenue66.66667x2 = Rs.133/= two months interest revenue.Journal Entry;I June 30, Interest receivable on Notes receivable 133/=

Interest revenue 133/=

The accrued revenues or unrecorded revenues increases in assets (to be received) and increases in revenue (to be received).

Prepaid Expenses

Which expenses paid in advance e.g. insurance, rent, advertising etc. may be adjusted at the end of the period against a portion of the period expired or consumed by making adjusting entries as; Insurance Expense debit and prepaid insurance credit, rent expense debit and prepaid rent credit, advertising expense debit and prepaid advertising credit.

For example on May 1, 2014, paid cash Rs.3, 000/= to Radio Pakistan for advertising for a period of three month and passed entry as;

Prepaid Advertising 3,000/=

Cash 3, 000/=

At the end of the accounting period June 30, 2015, a portion of the period services expired i.e. May 1, 2014 to June 30, 2015 for two months Rs.2, 000/= and another period of services i.e. July 1, 2015 to July 30, 2015 remained unexpired Rs.1, 000/= will remain in asset.

The portion of expired period will be treated in expense as

Advertising Expense 2000

Prepaid Advertising 2000

The Prepaid expenses are record in assets.

Unearned Revenue

Such revenues are received in advance against merchandise to be supplied or services to be rendered. At the end of the accounting period, the earned revenue is recorded, and the balance is treated as liability and referred to as a deferred revenue account.

For example;

On May 1, ABC Company received Rs. 3, 000/= for the fees revenue of services to be given from May 1 to July 30 and recorded it;

May 1, Cash 3,000.-

Advance fees revenue 3,000.-

Since the receipt against fees is for three months i.e. 3000/3 = Rs.1000/month income and on closing at June 30, the revenue will be Rs.2000/= for two months (May 1 to June 30, the entry will be;

June 30, Unearned fees revenue 2,000/=

Fees Revenue (earned) 2,000/=

And if, On May 1, ABC Company services rendered but not billed for Rs.2, 500/= will pass journal entry as accrual;

May 1, Fee Revenue Receivable 2,500/=

Fees Revenue 2,500/=

Depreciation

The allocation of the cost of fixed assets to the period the services are receivable may call depreciation neither the physical deterioration nor decrease in market value. The expired cost of tangible asset is also referred to depreciation.

There are many methods for calculation of depreciation on tangible assets especially straight line method, declining balance method and sum of the year digit method on time basis and depreciation on tangible asset used basis.

A new account named “accumulated depreciation” is generated as contra asset of particular asset account.

For example, a firm purchased office equipment Rs.30, 000/= and given it life for 10 years and after ten year, it will be sold at Rs.3000/= at salvage cost as computed under constant annual depreciation under straight light method below;

Depreciation per year = Cost – Salve Value Useful life years

Depreciation per year = 30,000-3000 = 27,000 = Rs.2, 700 per year10 years 10

Depreciation per year x 100 = 2700 x 100 = 27 = 9% Cost 30,000 3

The portion of the depreciated period will be treated as depreciation under accumulated depreciation (O.E.) as;

Depreciation Expense 2700

Accumulated Depreciation (O.E.) 2700

The allowance on depreciation on the cost of fixed asset over its expected useful life is written off as “allowance for depreciation” and charged in expense account.

Bad debt/Uncollectible

Bad debt is the amount that is uncollectable because of certain reasons such as death of the customer, bankruptcy, lack of cash flow, poor management and unforeseen causes which have to write off at the end of the period by adjusting entry as bad debt expense debit and account receivable credit.

If businessman has an idea of credit sales which will remain uncollectable because of the reason above, he estimates the portion of the amount uncollectable and allocates the amount estimated uncollectible at the end of accounting period by adjusting entry Uncollectible/Bad Debt expenses debit and allowance for uncollectible/Bad Debts credit.

The account allowance for uncollectible/Bad Debts is known as contra assets account against account receivable account.

Suppose that on June 30, ABC & Company estimated uncollectable Rs.2, 000/= of 1% on credit sales or on accounts receivable Rs.200, 000/=

Dr. Uncollectable/Bad Debts Expenses

Cr. Allowance for uncollectable/Bad Debts

Merchandise Inventory

Merchandise inventory means the goods or materials for business remains unsold at the end of the period and the market cost of merchandise inventory is recorded as merchandise inventory opening of the period in general ledger account transferred by expense and revenue accounts closing as Merchandise inventory debit and expense and revenue summary credit.

The opening inventory in general accounts is transferred to expense and revenue accounts for calculating income or loss as expense and revenue accounts debit and merchandise inventory account credit.

Closing Entries;

Closing entries are the process of transferring balances of expense and revenue accounts and the net income or loss to capital account from expense and revenue summary for the next period. All expense and revenue relating accounts become the part of making profit or loss and profit or loss, unsold merchandise, unearned revenue, etc remain to go for the next period.

Reversing Entries

Some entries like un-recorded expenses, un-recorded income, prepaid expenses, un-earned revenues, etc. need reversal optionally to simplify bookkeeping in the New Year which erases the prior year’s accrual.

The reversing entry will create balance in reverse account which on payment and receipt in New Year will clear the affect of payable or receivable as wages expense debit and accrued wages payable in previous period and reversing entry in new period accrued wages payable debit and wages expenses credit shows the balance of wages payable moves to wages expenses and on payment wages expenses will clear by cash or bank.

There is no need to record reversing entries if transactions were originally transactions were originally recorded in assets or liabilities.

Correction of errors

The erasing, omitting and rubbing of any mistake in transaction make accounts doubtful. The cause of mistakes may occur in journal or ledger such as wrong posting, wrong head of account, wrong amount, missing of one account in ledger, errors in balancing or transferring balances and many other reasons may come in accounting process. Therefore, the correction of errors by making entries is made such as;

1- Plant repaired Rs.900/= and debited to account Repair & Maintenance plant by Rs.700 wrongly.

Repair & Maint. (Plant) 200

Suspense Account 200

2- Purchase of stationery for Rs.1000/= but recorded in purchase account.

Stationery 1000

Purchases 1000

3- Wages Rs.500/= paid for repair building but debited to wages account.

Building Repair 500/=

Wages 500/=

Illustration i

Adjustments:

The following adjustments of ABC & Co. rendering services business are made at the end of the period 30th June 2015;

Adjustments:1 Rs. 2700 of depreciation on office equipment. 2 Rs.1350 of depreciation on furniture.3 Rs. 2000/= of prepaid advertisement expired.4 Rs.1000/= of unexpired insurance expired.5 Salaries Rs.10, 000/= for the last month not yet paid.6 Wages Rs.2000/= for the last 5 days are remained unpaid.7 Interest on notes payable Rs. 10/= for 15 days is accrued.8 Unearned concession revenue earned Rs.5000/=.9 Unearned fees revenue Rs.2000/= earned.

10 Fee revenue earned but not yet received Rs.2500/=.

Adjusting Entries:

1. Depreciation Expense 2,700/= Accumulated Depreciation (O.E.) 2,700/=

2. Depreciation Expense 1,350/=Accumulated Depreciation (F) 1,350/=

3. Advertising Expense 2,000/= Prepaid Advertising 2,000/=

4. Insurance Expense 1,000/=Prepaid Insurance 1,000/=

5. Salaries Expense 10,000/=Salaries Payable 10,000/=

6. Dr. Wages Expense 2,000/=

Cr. Wages Payable 2,000/=

7. Interest Expense 10/=Interest on notes payable 10/=

8. Unearned concession revenue 5,000/=Concession revenue 5,000/=

9. Unearned fees revenue 2,000/=Fees Revenue 2,000/=

10. Fees Revenue Receivable 2,500/=Fees Revenue 2,500/=

An adjusted trial balance from the above adjusting entries has been prepaid along with trial balance and adjustments below;

Illustration ii

Adjustments:

Rs.2700/= depreciation on Office Furniture.Rs.900/= depreciation on Office Equipment.Rs.2000/= prepaid rent expired.Rs.133/= interest on notes receivable.Rs.2000/= prepaid advertising expired.Rs.3000/= unearned subscription revenue earned.Rs.1000/= rent for the last month not yet received.Rs.4000/= commission receivable.Rs.5000/= services rendered but not yet received.

Adjusting Entries

Depreciation Expense 2700/=Accumulated Depreciation (O.F.) 2700/=

Depreciation Expense 900/=Accumulated Depreciation (O.E.) 900/=

Rent Expense 2000/=Prepaid Rent 2000/=

Interest Receivable on notes receivable 133/=Interest Income 133/=

Advertising Expense 2000/=Prepaid Advertising 2000/=

Unearned subscription revenue 3000/=Subscription revenue 3000/=

Accrued Rent Revenue receivable 1000/=Rent Revenue 1000/=

Commission revenue receivable 4000/=Commission Income 4000/=

Services revenue receivable 5000/=Service revenue 5000/=

The above adjustments and entries related to the account of M/s. Helping- Hands are made at the end of the period at 30 th June 2015 and on the basis of adjustments the following adjusted trial balance has been made showing complete picture of trial balance, adjustment and adjusted trial balance;

Illustration iii

Adjustments:

Rs.2700/= estimated accumulated depreciation on Office Furniture.Rs.2700/= estimated accumulated depreciation on Office Equipment.Rs.5000/= estimated accumulated depreciation on Plant & Machinery.Rs.500/= of prepaid rent expired.Rs.200/= interest due on notes receivable.Rs.1000/= of prepaid insurance expired. Rs.5000/= of prepaid advertising expired.Rs.2000/= estimated allowance for uncollectable on accounts receivable.Rs.1500/= office supplies used.

Depreciation Expense 2700/=Accumulated Depreciation (O.F.) 2700/=

Depreciation Expense 2700/=Accumulated Depreciation (O.E.) 2700/=

Depreciation Expense 5000/=Accumulated Depreciation (P&M) 5000/=

Rent Expense 500/=Prepaid Rent 500/=

Interest on notes receivable 200/=

Interest Income 200/=

Insurance Expense 1000/=

Prepaid Insurance 1000/=

Advertising Expense 5000/=Prepaid Advertising 5000/=

Bad Debt 2000/=Allowance for Uncollectable/Bad Debt 2000/=

Office Supplies Expense 1500/=Office Supplies 1500/=

The above adjustments and entries made at the end of the period are of M/s. Moon Enterprises as shown in trial balance, adjustments and adjusted trial balance below;

The ledger shows activity in accounts individually and the summary of accounts consists on ending balance may call trial balance by rectified by adjusting entries and correction of errors which ensures the equality of all debits and credits.

After moving balance of temporary accounts relating to income and expenses to Expense and Revenue summary, the rest of accounts are transferred under post closing trial balance to next accounting cycle.

WRITER