Preparation Of Financial Accounting Cycle For Paul Services
Aim and scope of report
A report has been prepared on the financial accounting cycle for Paul services as on 30 June 2016. It includes all the business concepts and all the steps for preparation and finalization of the books of accounts including the posting of the journal entries, posting them to the respective ledger accounts, preparing the unadjusted trial balance on the basis of the same, posting the adjustment entries at the end of the accounting period and preparing the adjusted trial balance based on the same (Bizfluent, 2017). Post all this done the income statement is being prepared and the closing journal entries is being passed for closing the books of accounts. Post all this, the balance sheet and the statement of changes in equity is being prepared at the end of the period and that marks the closure of books for an accounting period. (Grenier, 2017).
The aim of the report is to learn the financial statement preparation through the set of inputs lkike journal entries and the trial balance of the company. Towards the end, the reason for preparing each of the reports and passing journal entries has been mentioned. . It includes all the business concepts and all the steps for preparation and finalization of the books of accounts.
The initial unadjusted trial balance of the given company as on 30th June has been shown below:
|
Paul services Trial Balance As At 30 June 2016 |
|||
|
Acc |
Account Name |
Unadjusted |
|
|
Debit |
Credit |
||
|
101 |
Cash at Bank |
48,100 |
|
|
105 |
Accounts Receivable |
16,030 |
|
|
115 |
Supplies |
1,480 |
|
|
120 |
Prepaid Insurance |
2,960 |
|
|
135 |
Office Furniture |
37,000 |
|
|
137 |
Acc. Depreciation. – Furniture |
– |
|
|
140 |
Office Equipment |
74,000 |
|
|
141 |
Acc. Depreciation – Equipment |
– |
|
|
145 |
Store Equipment |
111,000 |
|
|
146 |
Acc. Depreciation – Equipment |
– |
|
|
170 |
Automobile |
148,000 |
|
|
171 |
Acc. Depreciation – Automobile |
– |
|
|
201 |
Accounts Payable |
32,060 |
|
|
201 |
Interest Payable |
48,090 |
|
|
201 |
Unearned revenue |
18,500 |
|
|
201 |
Loan Payable |
7,400 |
|
|
201 |
Mortgage Payable |
148,000 |
|
|
201 |
Paul’s Capital |
48,898 |
|
|
201 |
Paul’s Drawings |
148 |
|
|
201 |
Revenue |
148,000 |
|
|
201 |
Advertising Expense |
1,000 |
|
|
201 |
Automobile Expense |
5,775 |
|
|
201 |
Depreciation Expense – Furniture |
– |
|
|
201 |
Depreciation Expense – Equipment |
– |
|
|
201 |
Depreciation Expense – Store Equipment |
– |
|
|
201 |
Depreciation Expense – Automobile |
– |
|
|
201 |
Insurance Expense |
800 |
|
|
201 |
Maintenance Expense |
3,500 |
|
|
201 |
Miscellaneous Expense |
1,155 |
|
|
201 |
Rent Expense |
– |
|
|
201 |
Supplies Expense |
– |
|
|
201 |
Utilities Expense |
– |
|
|
201 |
Interest Expense |
– |
|
|
Total |
450,948 |
450,948 |
For the given year, the adjustment journal entries have been shown below:
|
Paul Services |
||||
|
Adjustment Journal Entries |
||||
|
Date |
Particulars |
Dr./Cr. |
Amt |
Amt |
|
30-Jun |
Interest Expense |
Dr. |
14,800 |
|
|
To Accrued Interest |
Cr. |
14,800 |
||
|
30-Jun |
Insurance Expense |
Dr. |
2,368 |
|
|
To Prepaid Insurance |
Cr. |
2,368 |
||
|
30-Jun |
Depreciation Expense – Furniture |
Dr. |
2,219 |
|
|
To Acc. Depreciation. – Furniture |
Cr. |
2,219 |
||
|
30-Jun |
Depreciation Expense – Equipment |
Dr. |
5,370 |
|
|
To Acc. Depreciation – Office Equipment |
Cr. |
5,370 |
||
|
30-Jun |
Depreciation Expense – Store Equipment |
Dr. |
4,370 |
|
|
To Acc. Depreciation – Store Equipment |
Cr. |
4,370 |
||
|
30-Jun |
Depreciation Expense – Automobile |
Dr. |
6,521 |
|
|
To Acc. Depreciation – Automobile |
Cr. |
6,521 |
||
|
30-Jun |
Revenue |
Dr. |
9,250 |
|
|
To Unearned Revenue |
Cr. |
9,250 |
The Trial balance post all the adjustments has been shown below:
|
Paul services Trial Balance As At 30 June 2016 |
|||||||
|
Acc |
Account Name |
Unadjusted |
Adjustments |
Adjusted |
|||
|
Debit |
Credit |
Debit |
Credit |
Debit |
Credit |
||
|
101 |
Cash at Bank |
48,100 |
48,100 |
||||
|
105 |
Accounts Receivable |
16,030 |
16,030 |
||||
|
115 |
Supplies |
1,480 |
1,480 |
||||
|
120 |
Prepaid Insurance |
2,960 |
2,368 |
592 |
|||
|
135 |
Office Furniture |
37,000 |
37,000 |
||||
|
137 |
Acc. Depreciation. – Furniture |
– |
2,219 |
2,219 |
|||
|
140 |
Office Equipment |
74,000 |
74,000 |
||||
|
141 |
Acc. Depreciation – Equipment |
– |
5,370 |
5,370 |
|||
|
145 |
Store Equipment |
111,000 |
111,000 |
||||
|
146 |
Acc. Depreciation – Equipment |
– |
4,370 |
4,370 |
|||
|
170 |
Automobile |
148,000 |
148,000 |
||||
|
171 |
Acc. Depreciation – Automobile |
– |
6,521 |
6,521 |
|||
|
201 |
Accounts Payable |
32,060 |
32,060 |
||||
|
201 |
Interest Payable |
48,090 |
14,800 |
62,890 |
|||
|
201 |
Unearned revenue |
18,500 |
9,250 |
27,750 |
|||
|
201 |
Loan Payable |
7,400 |
7,400 |
||||
|
201 |
Mortgage Payable |
148,000 |
148,000 |
||||
|
201 |
Paul’s Capital |
48,898 |
48,898 |
||||
|
201 |
Paul’s Drawings |
148 |
148 |
||||
|
201 |
Revenue |
148,000 |
9,250 |
138,750 |
|||
|
201 |
Advertising Expense |
1,000 |
1,000 |
||||
|
201 |
Automobile Expense |
5,775 |
5,775 |
||||
|
201 |
Depreciation Expense – Furniture |
– |
2,219 |
2,219 |
|||
|
201 |
Depreciation Expense – Equipment |
– |
5,370 |
5,370 |
|||
|
201 |
Depreciation Expense – Store Equipment |
– |
4,370 |
4,370 |
|||
|
201 |
Depreciation Expense – Automobile |
– |
6,521 |
6,521 |
|||
|
201 |
Insurance Expense |
800 |
2,368 |
3,168 |
|||
|
201 |
Maintenance Expense |
3,500 |
3,500 |
||||
|
201 |
Miscellaneous Expense |
1,155 |
1,155 |
||||
|
201 |
Rent Expense |
– |
– |
||||
|
201 |
Supplies Expense |
– |
– |
||||
|
201 |
Utilities Expense |
– |
– |
||||
|
201 |
Interest Expense |
– |
14,800 |
14,800 |
|||
|
Total |
450,948 |
450,948 |
44,897 |
44,897 |
484,227 |
484,227 |
Below shown is the income statement for the company for the year ended 30th June 2016:
|
Paul Services |
||
|
Income Statement |
||
|
For the period ended 30th June 2016 |
||
|
Particulars |
Amt ($) |
Amt ($) |
|
Revenue |
138,750 |
|
|
Less: Expenses |
||
|
Advertising Expense |
1,000 |
|
|
Automobile Expense |
5,775 |
|
|
Depreciation Expense – Furniture |
2,219 |
|
|
Depreciation Expense – Equipment |
5,370 |
|
|
Depreciation Expense – Store Equipment |
4,370 |
|
|
Depreciation Expense – Automobile |
6,521 |
|
|
Insurance Expense |
3,168 |
|
|
Maintenance Expense |
3,500 |
|
|
Miscellaneous Expense |
1,155 |
|
|
Supplies Expense |
1,110 |
|
|
Interest Expense |
14,800 |
48,987 |
|
Net Profit |
89,763 |
The journal entries at the time of closing of the books of accounts are mentioned below:
|
Paul Services |
||||
|
Closing Journal Entries |
||||
|
Date |
Particulars |
Dr./Cr. |
Amt |
Amt |
|
30-Jun |
Revenue Account |
Dr. |
138,750 |
|
|
To Profit and Loss Account |
Cr. |
138,750 |
||
|
30-Jun |
Profit and Loss Account |
Dr. |
48,987 |
|
|
To Advertising Expense |
Cr. |
1,000 |
||
|
To Automobile Expense |
Cr. |
5,775 |
||
|
To Depreciation Expense – Furniture |
Cr. |
2,219 |
||
|
To Depreciation Expense – Equipment |
Cr. |
5,370 |
||
|
To Depreciation Expense – Store Equipment |
Cr. |
4,370 |
||
|
To Depreciation Expense – Automobile |
Cr. |
6,521 |
||
|
To Insurance Expense |
Cr. |
3,168 |
||
|
To Maintenance Expense |
Cr. |
3,500 |
||
|
To Miscellaneous Expense |
Cr. |
1,155 |
||
|
To Supplies Expense |
Cr. |
1,110 |
||
|
To Interest Expense |
Cr. |
14,800 |
||
|
30-Jun |
Profit and Loss Account |
Dr. |
89,763 |
|
|
To Retained Earnings |
Cr. |
89,763 |
Below shown is the proft and loss account and the statement of changes in equity for the period 30th June 2016 (Fay & Negangard, 2017).
|
Paul Services |
||
|
Balance Sheet |
||
|
as on 30th June 2016 |
||
|
Particulars |
Amt ($) |
Amt ($) |
|
Assets |
– |
|
|
Non Current Assets |
||
|
Office Furniture |
37,000 |
|
|
Acc. Depreciation. – Furniture |
(2,219) |
|
|
Office Equipment |
74,000 |
|
|
Acc. Depreciation – Equipment |
(5,370) |
|
|
Store Equipment |
111,000 |
|
|
Acc. Depreciation – Equipment |
(4,370) |
|
|
Automobile |
148,000 |
|
|
Acc. Depreciation – Automobile |
(6,521) |
351,521 |
|
Current Assets |
||
|
Cash at Bank |
48,100 |
|
|
Accounts Receivable |
16,030 |
|
|
Supplies |
370 |
|
|
Prepaid Insurance |
592 |
65,092 |
|
Total Assets |
416,613 |
|
|
Equity & Liabilities |
||
|
Non Current Liabilities |
||
|
Loan Payable |
7,400 |
|
|
Mortgage Payable |
148,000 |
155,400 |
|
Current Liabilities |
||
|
Accounts Payable |
32,060 |
|
|
Interest Payable |
62,890 |
|
|
Unearned revenue |
27,750 |
122,700 |
|
Equity |
||
|
Paul’s Capital |
48,898 |
|
|
Paul’s Drawings |
(148) |
|
|
Proft for the year |
89,763 |
138,513 |
|
Total Equity and Liabilities |
416,613 |
|
Paul Services |
||
|
Statement of Changes in Equity |
||
|
As on 30th June 2016 |
||
|
Particulars |
Amt ($) |
Amt ($) |
|
Equity |
||
|
Paul’s Capital |
48,898 |
|
|
Less: Paul’s Drawings |
(148) |
|
|
Add: Profit for the year |
89,763 |
138,513 |
|
Total Equity at the end of year |
138,513 |
Trial Balance
A trial balance is the list of all the ledger accounts with the debit and credit balances listed alongside. It is prepared to check the arithmetical accuracy of the accounting being done throughout the year and in case the debit and the credit balances are not matching, it indicates that there is an error in accounting and the same needs to be revised. It is a prerequisite to the financial statement preparation and helps in the final closing of the books of accounts (Visinescu, et al., 2017).
Adjustment Journal Entries
Adjustment journal entries are being passed to accommodate for the accounting, compensating or period errors, which might have occurred in the books of accounts, during the normal accounting, cycle (Kuhn & Morris, 2016). The types of errors, which may be included here, are like prepaid expenses, which might have been paid earlier during the year, but then the adjustment is being done now or the depreciation has not been posted for the different assets and the same is being done now. The common types of transactions include accrual of incomes or accounting for outstanding liabilities or prepaid incomes (Linden & Freeman, 2017). For a business, there are always a few transactions, which may start in a given year, but the same is not completed in current year and may just be carried to New Year. There comes the need of the adjustment entries in the books.
Adjusted Trial balance is the final trial balance based on which the financial statements are being prepared (Sithole, et al., 2017). It is the trial balance post adjustment of all the adjusting entries. It shows the debit and credit balances of all the accounts reconciled and thereby helping in the preparation of financial statements. It is always an internal document of the company and reported nowhere in the annual report, however, the financial statements including balance sheet, profit and loss account and equity statement is prepared based on this (Félix, 2017).
Closing journal entries are the ones, which are passed post the final trial balance is ready and are very different from the adjusting journal entries (Boccia & Leonardi, 2016). These are passed to transfer the balances from the temporary accounts to the permanent accounts, thereby making them zero. Temporary accounts are nothing but the income statement accounts whereas the permanent accounts are the balance sheet accounts that are being carried forward to the next year (Das, 2017).
Conclusion
From the above report preparation there have been few key learnings like what are the steps in the financial report preparation and each of these steps are important and critical like teh passing of closing and the adjusting journal entries, preparation of final trial balance post all the adjustments and the initial trial balance.
References
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online] Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html [Accessed 07 december 2017].
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy: Markets, Taxation and Appropriate Economic Models. s.l.:Springer.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.