Monday, April 26, 2010

Journalizing and posting adjusting entries


At the end of the accounting period the adjusting entries appearing in the work sheet are recorded in the journal and posted to the ledger; bringing to the ledger into agreement with the data reported on the profit and loss account and balance sheet. The adjusting entries are dated as on the last day of the accounting period, even through they are usually recorded some time later. Each entry may be supported by an explanation, but a suitable caption above the first adjusting entry, as in the illustration of the adjusting entries is sufficient. A brief explanation of each separate entry serves no useful purpose, and on the other hand, a detailed explanation would needlessly duplicate working papers and other basic documents available in the files.

The adjusting entries in the journal of XYZ, Company are presented on illustration below. The accounts to which they have been posted appear in the ledger. To facilitate identification, each adjusting entry is identified in the item section of the accounts. It is not necessary that this be done in actual practice.
Date
Description
Post. Ref.
Debit
Credit

31

31

31

31
  Adjusting Entries
Supplies Expense
    Supplies
Rent Expense
   Prepaid Rent
Depreciation Expense
    Accumulated Depreciation
Salary Expense
    Accumulated Depreciation

52
14
53
15
54
19
51
22
$
520.00

200.00

50.00

708.00
$

520.00

200.00

50.00

708.00

           

Saturday, April 24, 2010

What is the Capital Statement


Capital statement is the document which presents the opening balance of the capital at the first line, and then any kind of addition in shape of investment or profit earned during the accounting period is added in the next line arriving at the total balance of capital. Deductions in form of withdrawals or loss of the business are then subtracted from the total balance of the capital arriving at the final balance of capital at the end of the accounting period.


Capital Statement
                                                                 
            Capital, 1st July, 2008……………………….              35,000.00
            Additional investment during the year………       6,000.00
                        Total…………………………………                                    41,000.00
            Net loss for the year…………………………   8,000.00
            Withdrawals….......................……………….   3,600.00       
            Decrease in capital…………………………..                          11,600.00
            Capital, 30th June, 2009……………………..                                      29,400.00

Profit and loss account and balance sheet


The profit and loss account and balance sheet prepared from the work sheet of XYZ, Company, it will be noticed here that the profit and loss account has been prepared in two different forms; in statement form and in account form. Profit and loss accounts in both the forms give the same information. The account form of the profit and loss account is traditional and is still being used widely; but in recent years many business houses prefer to present the profit and loss account in the statement form.

The work sheet is the source of all of the data reported on the profit and loss account. Similarly, it is the source of all basic data reported on the balance sheet.

In presenting the item of capital in the balance sheet, it is necessary to refer to the capital account in the ledger to determine the balance at the beginning of the period and the amount of any additional investments that may have been made during the period. The amounts of net profit and withdrawals for the period are taken from the balance sheet columns of the work sheet, and the balance of capital at the end of the period is determined arithmetically.

The form for presentation of the capital in the balance sheet can be modified to meet the circumstances of any particular case in the illustration on above work sheet; the amount withdrawn by the owner was less than the net profit. If the withdrawals had exceeded the net profit, the order of the two items could have been reversed and the difference between the two deducted from the beginning capital. Other factors, such as additional investments or a net loss, also necessitate modifications in for, as in the following capital statement

Capital Statement
                                                                 
            Capital, 1st July, 2008……………………….              35,000.00
            Additional investment during the year………       6,000.00
                        Total…………………………………                                    41,000.00
            Net loss for the year…………………………   8,000.00
            Withdrawals….......................……………….   3,600.00       
            Decrease in capital…………………………..                          11,600.00
            Capital, 30th June, 2009……………………..                                      29,400.00
 


XYZ, COMPANY
Profit and Loss Account
For Month Ended 30th June, 2009

Sales

Operating Expenses:
          Salary expense
          Supplies expense
          Rent expense
          Depreciation expense
          Miscellaneous expense
                 Total operating expenses

Net Profit from operations

$



708.00
520.00
200.00
  50.00
103.00
$
2,540.00







1,581.00
 

959.00
Profit and loss account---------statement form

XYZ, COMPANY
Profit and Loss Account
For Month Ended 30th June, 2009
                                                                             $
Operating Expenses:
          Salary expense………………………..708.00
          Supplies expense……………………..520.00
          Rent expense…………………………200.00
          Depreciation expense………………..  50.00
          Miscellaneous expense………………103.00
          Net Profit ……………………………959.00
                                                              2,540.00
                                $
Sales…………………   2,540.00






                                     2,540.00
Profit and loss account---------account form


XYZ, COMPANY
Profit and Loss Account
For Month Ended 30th June, 2009
        
    Liabilities
                                      $                $
Current Liabilities:
   Creditors…………    1,400
   Accrued salaries…        708         2,108
 

           Capital

XYZ, Capital,
  1st July, 2008                6,300
  Net profit for
  The month            959
Less: withdrawals  500     459        6,759
 

                                                       8,867
 


  
           Assets
                                    $                  $         
Current Assets:
   Cash…………… 1,702
   Debtors…………   585
   Supplies………...   230
   Prepaid Rent……   400           2,917

Fixed Assets:

  Office equipment   6,000
  Less accumulated
  Depreciation              50          5,950
 
                                                  8,867

Balance Sheet

Thursday, April 22, 2010

Details and Illustration of Work Sheet


XYZ, COMPANY
Work Sheet
For Month Ended 30TH June, 2009

ACCOUNT TITLE
TRIAL BALANCE
ADJUSTMENT

PROFIT & LOSS
ACCOUNT
BALANCE SHEET
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
ASSETS

LIABILITIES AND CAPITAL

Cash
Debtors
Supplies
Prepaid Rent
Office Equipment
Creditors
XYZ, Capital
XYZ, Drawing
Sales
Miscellaneous Expense





Supplies Expense
Rent Expense
Depreciation Expense
Accumulated Depreciation
Salary Expense
Accrued Salaries




Net Profit

1,702.00
   585.00
   750.00
   600.00
6,000.00


   500.00

   103.00






1,400.00
6,300.00

2,540.00

















a) 520.00
b) 200.00
c)  50.00

d) 708.00



a) 520.00
b) 200.00














c)  50.00

d) 708.00










 103.00





 520.00
 200.00
   50.00

708.00









2,540.00

 1,702.00
    585.00
    230.00
    400.00
 6,000.00


    500.00



















 1,400.00
 6,300.00











      50.00

    708.00
10,240.00
10,240.00





1,478.00

1,478.00

1,581.00


959.00

2,540.00

 9,417.00



8,458.00


959.00



2,540.00

2,540.00
9,417.00

9,417.00






The work sheet for XYZ, Company is presented above. Note that there are three parts to the heading: (1) the name of the enterprise, (2) the title, and (3) the period of time covered. It has a column for account and eight money column, arranged in three pairs of debit and credit columns. The last tow money columns are for the balance sheet and are headed as Assets, and Liabilities and Capital. The principal headings of the four sets of money columns are as follows:

            1.         Trial Balance                3.         Profit and Loss Account
            2.         Adjustments                 4.         Balance Sheet

Trial Balance Columns. Trial balance data may be assembled directly on the work sheet form or it may be prepared on another sheet first and then copied on the work sheet form.

Adjustments Columns. Both the debit and the credit portions of an adjustment should be inserted on the appropriate line before proceeding to another adjustment. Cross-referencing the related debit and credit of each adjustment by letters is useful to anyone who may have occasion to review the work sheet; it is also helpful later when recoding the adjusting entries in the journal. The sequence of adjustments is immaterial except that there is a time and accuracy advantage in following the order in which the adjustment data are assembled. If titles of accounts to be adjusted do not appear in the trial balance, they should be inserted below the trail balance totals as needed.

The adjustment entries for XYZ Company were explained and illustrated by T accounts earlier in the above section. In practice the adjustments are inserted directly on the work sheet on the basis of the data assembled by the accounting department.

Explanatory notes for the entries in the adjustments columns of the work sheet are as follows:

(a)                Supplies. The supplies account has a debit balance of $750; the cost of the supplies on hand at the end of the period in $230; therefore, the supplies expense for June is the difference between the two amounts, or $520. The adjustment is entered by writing (1) Supplies Expense in the Account Title column, (2) $520 in the Adjustments Debit column on the same line, and (3) $520 in the Adjustments Credit column on the line with Supplies.

(b)               Rent.      The prepaid rent account has a debit balance of $600, which represents a payment of three months beginning with June; therefore, the rent expense for June is $200. The adjustment is entered by writing (1) Rent Expense in the Account. Title column, (2) $200 in the Adjustments Debit column on the same line, and (3) $200 in the Adjustments Credit column on the line with Prepaid Rent.

(c)                Depreciation.    Depreciation of the office equipment for the month is estimated at $50. This expired portion of the cost of the equipment is both an expense and a reduction in the asset. The adjustment is entered by writing (1) Depreciation Expense in the Account Title column, (2) $50 in the Adjustments Debit column on the same line, (3) Accumulated Depreciation in the Account Title column, and (4) $50 in the Adjustments Credit column on the same line.

(d)               Salaries.             Salaries accrued but not paid at the end of June amount to $708. This is an increase in expense and an increase in liabilities. The adjustment is entered by writing (1) Salary Expense in the Account Title column, (2) $708 in the Adjustments Debit column on the same line, (3) Accrued Salaries in the Account Title column, and (4) $708 in the Adjustments Credit column on the same line.

The final step in completing the Adjustments columns is to prove the equality of debits and credits by totaling and ruling the two columns.
Profit And Loss Account and Balance Sheet Columns.       The data in the trial balance columns are combined with the adjustments data and extended to one of the remaining four columns. The amounts of assets, liabilities, capital and drawing are extended to the balance sheet columns, and the income and expenses are extended to the profit and loss account columns. This procedure must be applied to the balance of each account listed, beginning at the top and processing down the page in sequential order.

In the illustrative work sheet, the first account listed is Cash and the balance appearing in the trial balance is $1,702. Since there are no adjustments to Cash, the trial balance amount is to be extended to the appropriate column. Cash is an asset, it is listed on the balance sheet, and it has a debit balance. Accordingly, the amount of $1,702 is extended to the asset column of the balance sheet section. The balance of Debtors is extended in similar fashion. Supplies have an initial debit balance of $750 and a credit adjustment (decrease) of $520. The amount to be extended is, therefore, the remaining debit balance of $230. The same procedure is continued until all account balances, with or without adjustment as the case may be, have been all account balance, with or without adjustment as the case may be, have been extended to the appropriate commune. The balance of the capital and drawing accounts are extended to the balance sheet section. Note that for accounts listed below the trial balance total, the account balance is the amount of the adjustment. For example, Supplies Expense has no initial balance and a debit adjustment of $520 which is the amount extended to the debit column of the profit and loss account section.

After all of the balances have been extended, each of the four columns is totaled. The amount of the net profit or the net loss for the period is then determined by ascertaining the amount of the difference between the totals of the two profit and loss account columns. If the credit columns total is greater than the debit column total, the excess is the net profit. For the work sheet presented above, the computation of net profit is as follows:

            Total of credit column (income)………………..           $          2,540
            Total of debit column (expenses)………………           $          1,581
                                                                                           _________________      
            Net profit (excess of income over expenses)…..            $          959
                                                                                          ================

Income and expenses accounts, which are in reality subdivisions of the capital account, are temporary in nature. They are used during the accounting period to facilitate the accumulation of detailed operating data in order to determine the net profit or net loss for the period after they have served their purpose, the net balance, which in the illustration is a credit or net profit of $959, will be transferred to the capital account in the ledger. This transfer is accomplished on the work sheet by entries in the profit and loss account debit column and the balance sheet liabilities and capital column, as illustrated in work sheet report. If there had been a net loss instead of a net profit, the amount would have been entered in the profit and loss account credit column and the balance sheet assets column.

After the final entry on the work sheet, each of the last four columns is totaled to verify the arithmetic accuracy of the amount of net profit or net loss transferred from the profit and loss account to the balance whet. The total of the two profit and loss account columns must be equal, as must the totals of the two balance sheet columns. If there are great many adjustments, it may be advisable to inset a section and the profit and loss account section. The arithmetic of combing the data may then be verified before extending balances to the profit and loss account and the balance sheet sections. Other variations in form may be introduced to meet special requirements or to accord with the preferences of the particular user.BlackBerry Bold 9700 Phone (AT&T)