Adjusting Journal Entries and Adjusted Trial Balance for Paul Services

This article explains the significance of trial balance, adjusting journal entries, and closing entries in accounting for Paul Services. It also discusses the process of preparing financial statements and the importance of accrual basis of accounting.

STEP – 1
The Student ID is 090153.
STEP -2
The journal entries of the adjustment transactions are being recorded hereunder :
Date Particulars Dr/Cr
Amount
(Dr)
Amount
(Cr)
30.06.2016 Interest A/c Dr $12,000
To Interest Payable A/c $12,000
(Being Interest accrued on Mortgage loan but not yet
paid)
30.06.2016 Insurance charged to P/L Dr $1,920
To Prepaid Insurance $1,920
(Being Prepaid Insurance charges charged to Profit and
loss account )
30.06.2016 Depriciation on office Furniture A/c Dr $6,000
To office furniture A/c $6,000
(Being Depriciation on Office Furniture Provided for the
year)
30.06.2016 Depriciation on office Equipment A/c Dr $12,000
To office equipment A/c $12,000
(Being Depriciation on Office Equipments Provided for
the year)
30.06.2016 Depriciation on store Equipment A/c Dr $9,000
To store equipment A/c $9,000
(Being Depriciation on Store Equipments Provided for
the year)
30.06.2016 Depriciation on Automobile A/c Dr $12,000
To Automobile A/c $12,000
(Being Depriciation on Automobiles Provided for the
year)
30.06.2016 Unearned Revenue A/c Dr $7,500
To Revenue A/c $7,500
(Being Unearned Revenue realised during the year)

The Journal entry for the closing supplies amounting to $300 is not journalised since the same does not
form the part of the trial balance and is shown separately in the income statement and the balance
sheet and no journal entry for the same is required .
STEP – 3
Worksheet after considering the adjustment entries
PAUL SERVICES
Worksheet
For the year ended 30th June, 2016
Account
Unadjusted Trial
Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Cash at Bank 19,890 19,890
Accounts Receivable 6,630 6,630
Supplies 1,200 1,200
Prepaid Insurance 2,400 1,920 480
Office Furniture 30,000 6,000 24,000
Office Equipment 60,000 12,000 48,000
Store Equipment 90,000 9,000 81,000
Automobile 120,000 12,000 108,000
Accounts Payable 13,260 13,260
Interest Payable 19,890 12,000 31,890
Unearned revenue 15,000 7,500 7,500
Loan Payable 6,000 6,000
Mortgage Payable 120,000 120,000
Paul's Capital 45,120 45,120
Paul's Drawings 120 120

Revenue 120,000 7,500 127,500
Advertising Expense 400 400
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 300 1,920 2,220
Maintenance Expense 1,400 1,400
Miscellaneous Expense 1,155 1,155
Interest Expense - 12,000 12,000
Grand Total 339,270 339,270 60,420 60,420 351,270 351,270

STEP – 4
INCOME STATEMENT
Particulars Amount in $ Particulars Amount in $
(DR) (CR)
To opening supplies 1,200 By Sales Revenue 127,500
By closing
supplies 300
To Gross Profit 126,600
127,800 127,800
To Interest 12,000 By Gross Profit 126,600
To Depriciation 39,000
To insurance expense 2,220
To maintainence
expenses 1,400
To Miscellaneous
Expense 1,155
To Advertising 400
To Automobile expense 5,775
To Net Profit 64,650
126,600 126,600
The income statement is an essential part of the financial statements and is prepared on accrual basis of
accounting system . It gives the clear picture of the business related informations operated by the entity
during the year .

STEP -5
The closing journal entries of the scenario given are being journalised hereunder :
Closing of all revenues and Gain Accounts
30.06.2016 Revenue A/c Dr $1,27,500
To Income Summary A/c $1,27,500
(Being the revenue account dbeited to income summary a/c at the end of the year)
Closing of all expenses and loss Accounts
30.06.2016 Income Summary A/c Dr $62,850
To Cost of Goods Sold $900
To Insurance A/c $2,220
To Miscelleaneous A/c $1,155
To Maintainance A/c $1,400
To Automobile A/c $5,775
To Advertisement A/c $400
To Interest A/c $12,000
To Depriciation A/c $39,000
(Being all the expenses debited in profit and loss a/c merged in the income summary A/c )
Transfer of Net Income to Retained Earnings
30.06.2016 Income summary A/c Dr $64,650
To Retained Earnings $64,650
(Being the balance of the Income summary A/c transferred to Retained earnings of the Firm)
STEP -6

BALANCE SHEET AS AT 30th June, 2016
Liabilities Amount in $
Amount in
$ Assets Amount in $ Amount in $
(Details) (Details)
Capital Account Fixed Assets
Opening Balance 45,120 Office Furniture 30,000
Add : Net Profit 64,650 Less : Depriciation 6,000 24,000
Less : Drawings 120 109,650
Office Equipments 60,000
Non Current
Borrowings Less : Depriciation 12,000 48,000
Mortgage Payable 120,000 Stores Equipment 90,000
Less : Depriciation 9,000 81,000
Current iabilities
Automobiles 120,000
Account Payables 13,260 Less : Depriciation 12,000 108,000
Interest payable 31,890
Uneraned Revenue 7,500 Current Assets
Loan Payable 6,000
Account
Receivables 6,630
Prepaid Insurance 480
Cash at Bank 19,890
Closing Supplies 300
288,300 288,300
Note: The Capital of the Paul Services have been increased by the amount of net profit earned by the
firm amounting to $64,650 and decreased by the amount of drawings of $ 120 which nets the revised

capital of the proprieter at the end of 30th June, 2016 to $1,09,650. The same calculation is being
showed above in the Balance sheet of the Proprieter.
STEP -7
1. Trial balance is basically a worksheet designed to collect all the ledger balances whether capital
or revenue in nature altogether at one sheet segregated under debit and credit columns
respectively according to the nature of the items recorded in the ledger . These are usually
prepared at the end of each reporting period of the enterprise. The trial balance shall have both
the debits and credits balances equal to ensure the correctness of the double entries recorded
in the books of account.Any discrepancies shall result in incorrect recording of the entries in the
nominal ledger accounts and these are to be detected before preparation of the Income
statement and the balance sheet of the entity. The trial balance is usually prepared by the junior
level accountant who is engaged in day to day accounting of the firm .The trial balance is
prepared to ensure that the entries recorded in the system is free from any mathematical errors
. The trial balance is said to be free from mathematical errors if the debit side of the trial
matches with the credit side and vice-versa.However, it does not mean that the accounts of the
entity is free from any errors. Trial balance is just the initial step to the preparation of the
financial statements of the firm. On the other hand, it has its own limitations associated with it.
These may include errors of omission meaning that the transaction has not been recorded at all
in the books.This will not cause any mathematical error but may endanger the accounts in
totality. Secondly, an error may occur when the amount recorded is incorrect on both the debit
and credit side. Thus,this error also shall not be detected by the trial balance. Errors in heads of
account may lead to serious consequences. For instance, postage expense debited to travelling
expense. This will not affect the accounts in numerical terms but may affect the decision of the
entity. Thus, the crux of preparing the trial balance is to detect the mathematical errors of the
transactions entered into and give a full view of the ledgers prepared in a single worksheet.
2. Adjusting Journal entry occurs at the end of each reporting period which are to be considered in
the accounts of the entity to record any unrecognized incomes or expenses during the reporting
period. Adjusted Journal entries are made on accrual basis and hence it does not deal with the
actual cash receipt or payment. These journals are recorded to give a true and fair view of the
accounts to the readers and the investors and make the accounts complete in all respects.
Adjusting Journal entries basically includes adjustments of accrued and prepaid incomes and
expenses, unearned revenue, closing stock in hand at the end of the year, depriciation and
amortization entries, provisions and estimation of several items also required to be adjusted and
and any rectification of any other errors and recording of missing transactions. These items are
segregated under three heads namely accurals, deferrals and estimates. Accruals refers to
incomes and expenses that is not yet being paid or received and deferrals is just the vice versa
of accrual. ie- incomes and expenses which have been paid / received in advance. Finally,
estimates relates to provision for bad and doubtful debts, inventory obsolences provision and
other items of similar nature. These adjustments are made keeping in mind the matching
concept rule of the accounts to match the incomes and the expenditures for the period to which
they relate. Finally, to conclude the same it would be important to understand that all the
journals recorded at the end of the accounting period is not regarded as an adjusting entries.

For example, an entry to record the purchases on the last day of the accounting period is not an
adjusting entry.
3. An adjusted trial balance is referred to combine all the accounts of the company altogether after
adjusting the journal entries at the end of the year. The financial statements are preprared just
after the preparation of the adjusted trial balance to give an effect to the groundwork for the
income statement and the balance sheet of the entity. The format of the adjusted trial is similar
to that of unadjusted. Similar to the unadjusted trial both the debit and credit column shall be
equal to ensure that the journals were correctly transferred to their respective ledger accounts.
Further, accounts having zero balance is not required to be reflected in the trial as the same
shall not be recognized in the financial statements. The primary purpose of writing an adjusted
trial balance is to test the equality between debits and credits post the adjusting entries are
recorded in the company books. An adjusted trial balance is prepared after passing the adjusted
journal entries to give an effect to the accrual basis of accounting for the preparation of financial
statements. The adjusted trial is prepared in step-3 of the question which considers the effect of
the adjusted journal entries in it and thus giving the fair picture of the trial at the end of the
accounting period.
4. Adjusting Journal entries are recorded at the end of the accounting period but before the
preparation of the financial statements in order to complete the recording of transactions for a
period in the financial statements followed by the accrual basis of accounting. For instance,
interest due but not yet paid will come under the purview of adjusting journal in which the
interest shall be debited to income statement as a part of expense of the business and the
interest payable account shall be created against such interest which will be recorded under the
liability in the balance sheet which signifies that the entity is liable to pay interest which is not
yet actually paid. On the other hand, closing entries are recorded at the last date of the
accounting period after the preparation of the financial statements. Closing entries generally
involve items of income statement whereas the journal entries are adjusted for the items of
both income statement and balance sheet. The closing entries set the balances of incomes and
expenditures to zero so as they start with Nil balance in the next year. It means the net amount
of all the income and expenses are transferred to retained earnings at the end of the year which
is adjusted in the capital of the entity. Both the adjusted journal entries and the closing entries
are performed in step-2 and step-5 respectively as per the question asked. Both the tasks are
performed to give a true and fair view of the financial statements prepared by an entity for its
investors and readers and the owner itself as the financial statements is regarded as a vital
document for decision making and strategic planning by the higher level management regarding
the future viability of the enterprise.