Week 4 - trial balance and balance day adjustments Flashcards
purpose of trial balances
Proves the mathematical equality of debits and credits after posting all journal entries.
List of all the accounts; in
order (ALORE); as they
appear in the General Ledger; and their
closing balances; at a ‘given time’
steps to prepare a trial balance
List all accounts, including
Names; and
Balances; on
The debit or credit side
Total debit and credit columns
Verify equality of debit and credit columns
complete the transaction analysis: Transaction analysis (Softbyte example)
Loc Nguyen starts “Softbyte” - a business offering computer programming services. He contributed $15,000 cash to the business
Softbyte purchased computer equipment for $7,000 in cash
Soft byte purchased supplies for $1,600 on credit
Softbyte provided programming services worth $1,200 to a customer and received all in cash.
Softbyte received a bill for $250 from The Asian Financial Times, for advertising in the newspaper. Assume that this amount has not been paid.
Softbyte provided services to customers, valued at $3,500. Only $1,500 has been paid by the customers.
Paid expenses for September, totalling $1,700. Paid in cash (all have been consumed in September).
Rent $600; Salaries $900; Utilities $200
Softbyte paid $250 to The Asian Financial Times for the advertising it purchased previously.
Softbyte received $600 from customers previously billed for services provided by the business.
Owner withdrew cash of $1,300.
see slide 8 week 4 for answers
what are balance day adjustments?
Balance day adjustments are journal entries which must be made at the end of the financial period.
explain balance day adjustments
Balance day adjustments are required to ensure that
Revenues are recorded when earned; and matched against
Expenses that have been incurred in the accounting period.
Balance day adjustments ensure that the financial statements portray a correct picture of the firm’s
financial performance; and
financial position.
If Balance Day Adjustments are not recorded,the end result would be:
a distorted profit picture because:
Revenue (income); and/or
Expenses may be understated or overstated.
If Balance Day Adjustments are not recorded,the end result would be:
a distorted financial position, due to
Assets and/or Liabilities of the firm being
overstated or understated.
Owner’s Equity may also be under/overstated, due to
mis-statement of assets or liabilities; and/or
a distorted profit (or loss).
4 types of adjustment entries associated with balance day adjustments
Expenses:
Prepaid Expenses
Expenses that have been paid in advance of being incurred
Accrued Expenses
Expenses that have been incurred but not yet paid (in cash)
Revenue:
Prepaid (unearned) Revenue
Cash that is received before revenue is earned
Accrued Revenue
Revenue that has been earned but not yet received in cash
explain depreciation
Depreciation allocates the cost of a non-current asset over its useful life.
Converts an asset into an expense
Acquisition of productive facilities is viewed as an upfront (once-off) payment for long-term service.
This payment needs to be recognised (i.e. allocated) over the service period
common method - divide cost of asset by useful life.
Depreciation operates in a manner consistent with other prepaid expenses.
explain an adjusted trial balance
After all adjusting entries have been made, another trial balance is prepared:
an “adjusted trial balance”.
Its purpose is to prove the equality of the total debit balances and the total credit balances in the ledger accounts
after all adjustments have been made.
The accounts in the adjusted trial balance contain all data that are needed for the preparation of financial statements.
