Significance of Journal Entries and Trial Balance in Business Accounting

This report discusses the significance of journal entries and trial balance in business accounting. It explains the purpose of creating a trial balance and how it helps in detecting errors. It also highlights the importance of journal entries in correcting errors and preparing financial statements. The report includes examples of journal entries and a sample income statement and balance sheet.

Running head: BUSINESS ACCOUNTING
Business accounting
Name of the student
Name of the university
Author note

1BUSINESS ACCOUNTING
Table of Contents
Introduction................................................................................................................................2
Step 2 – Journal entries for adjustment entries..........................................................................3
Step 3 – Worksheet completion.................................................................................................4
Step 4 – Income statement prepared from adjusted worksheet..................................................5
Step 5 – Journal entries for closing entries................................................................................6
Step 6 – Changes in equity.........................................................................................................6
Step 7..........................................................................................................................................8
1. Trial balance and purpose of its creation........................................................................8
2. Adjusting journal entries and purpose of recording it.....................................................9
3. Purpose of preparing the adjusted trial balance............................................................10
4. Difference between closing journal entries and adjusting journal entries....................11
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

2BUSINESS ACCOUNTING
Introduction
Aim of the report is to concentrate on the significance of journal entries and
preparation of trial balance for preparing the income statement as well as the balance sheet.
This report will present journal entries with regard to the given adjusting entries and from the
adjusted trial balance it will prepare the profit and loss statement and balance sheet for the
concerned period. Trial balance is the preparation of account that represents balances from
the entire general ledger with regard to the transactions taken place during the concerned
period. Under the trial balance, total debit amount must be equal to total credit amount.
Adjusting journal entries on the other hand, are used as the tool for correction of errors and
these shall be completed before preparing the final financial statements for the year (Edwards
2013).
Step 2 – Journal entries for adjustment entries
In the books of Paul services journal entries for the period ended 30th June 2016
Date Particulars
Acc
No. Debit Credit
30th June
2016
Interest Expense 201
$
12,800.00
Interest Payable 201
$
12,800.00
(Interest accrued on mortgage)
Supplies Expense 201
$
960.00
Supplies 115
$
960.00
(using supplies for the period)
Insurance Expense 201
$
2,048.00
Prepaid Insurance 120
$
2,048.00
(To record prepaid amortisation)
Depreciation Expense - Furniture ((32000-2000)/5) 201 $

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6,000.00
Accmulated Depreciation. - Furniture 137
$
6,000.00
(depreciation expense transferred to accumulated
depreciation)
Depreciation Expense - Office Equipment ((64000-4000)/5) 201
$
12,000.00
Acc. Depreciation - Office Equipment 141
$
12,000.00
(depreciation expense transferred to accumulated
depreciation)
Depreciation Expense - Store Equipment ((96000-6000)/10) 201
$
9,000.00
Acc. Depreciation - Store Equipment 146
$
9,000.00
(depreciation expense transferred to accumulated
depreciation)
Depreciation Expense - Automobile ((128000-8000)/10) 201
$
12,000.00
Acc. Depreciation - Automobile 171
$
12,000.00
(depreciation expense transferred to accumulated
depreciation)
Unearned revenue 201
$
8,000.00
Revenue 201
$
8,000.00
(Unearned revenue earned)

4BUSINESS ACCOUNTING
Step 3 – Worksheet completion
Ac
c
No
Account Name Unadjusted
amount
Adjusting entries Adjusted amount
Debit Credit Debit Credit Debit Credit
101 Cash at Bank $
27,560.0
0
- - $
27,560.0
0
105 Accounts Receivable $
9,190.00
- - $
9,190.00
115 Supplies $
1,280.00
- $
960.00
$
320.00
120 Prepaid Insurance $
2,560.00
- $
2,048.0
0
$
512.00
135 Office Furniture $
32,000.0
0
- - $
32,000.0
0
137 Acc. Depreciation. -
Furniture
$
-
- $
6,000.0
0
$
6,000.00
140 Office Equipment $
64,000.0
0
- - $
64,000.0
0
141 Acc. Depreciation -
Equipment
$
-
- $
12,000.
00
$
12,000.0
0
145 Store Equipment $ - - $

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96,000.0
0
96,000.0
0
146 Acc. Depreciation -
Equipment
$
-
- $
9,000.0
0
$
9,000.00
170 Automobile $
1,28,000
.00
- - $
1,28,000
.00
171 Acc. Depreciation -
Automobile
$
-
- $
12,000.
00
$
12,000.0
0
201 Accounts Payable $
18,380.0
0
- - $
18,380.0
0
201 Interest Payable $
27,570.0
0
- $
12,800.
00
$
40,370.0
0
201 Unearned revenue $
16,000.0
0
$
8,000.0
0
- $
8,000.00
201 Loan Payable $
6,400.00
- - $
6,400.00
201 Mortgage Payable $
1,28,000
.00
- - $
1,28,000
.00
201 Paul's Capital $
46,498.0
- - $
46,498.0

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0 0
201 Paul's Drawings $
128.00
- - $
128.00
201 Revenue $
1,28,000
.00
- $
8,000.0
0
$
1,36,000
.00
201 Advertising Expense $
600.00
- - $
600.00
201 Automobile Expense $
5,775.00
- - $
5,775.00
201 Depreciation Expense -
Furniture
$
-
$
6,000.0
0
- $
6,000.00
201 Depreciation Expense -
Equipment
$
-
$
12,000.
00
- $
12,000.0
0
201 Depreciation Expense -
Store Equipment
$
-
$
9,000.0
0
- $
9,000.00
201 Depreciation Expense -
Automobile
$
-
$
12,000.
00
- $
12,000.0
0
201 Insurance Expense $
500.00
$
2,048.0
0
- $
2,548.00
201 Maintenance Expense $
2,100.00
- - $
2,100.00

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201 Miscellaneous Expense $
1,155.00
- - $
1,155.00
201 Rent Expense $
-
- - $
-
201 Supplies Expense $
-
$
960.00
- $
960.00
201 Utilities Expense $
-
- - $
-
201 Interest Expense $
-
$
12,800.
00
- $
12,800.0
0
Total $
3,70,848
.00
$
3,70,848
.00
$
62,808.
00
$
62,808.
00
$
4,22,648
.00
$
4,22,648
.00
Step 4 – Income statement prepared from adjusted worksheet
Income Statement of Paul Services for the period ended 30th June 2016
Particulars Amount
Income:
Revenue
$
1,36,000.00
Less: expenses
Advertising Expense $ 600.00
Automobile Expense $ 5,775.00
Depreciation Expense - Furniture $ 6,000.00
Depreciation Expense - Equipment $ 12,000.00
Depreciation Expense - Store
Equipment $ 9,000.00
Depreciation Expense - Automobile $ 12,000.00
Insurance Expense $ 2,548.00
Maintenance Expense $ 2,100.00
Miscellaneous Expense $ 1,155.00
Rent Expense $ -
Supplies Expense $ 960.00
Utilities Expense $ -

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Interest Expense $ 12,800.00
Total expenses
$
64,938.00
Net Profit
$
71,062.00
Step 5 – Journal entries for closing entries
Date Particulars Account No.
Amount
(Dr.)
Amount
(Cr.)
30-Jun-16 Revenue 201
$
1,36,000.00
Advertising Expense 201
$
600.00
Automobile Expense 201
$
5,775.00
Depreciation Expense - Furniture 201
$
14,000.00
Depreciation Expense - Equipment 201
$
28,000.00
Depreciation Expense - Store
Equipment 201
$
22,000.00
Depreciation Expense - Automobile 201
$
29,000.00
Insurance Expense 201
$
8,036.00
Maintenance Expense 201
$
13,650.00
Miscellaneous Expense 201
$
1,155.00
Rent Expense 201
$
-
Supplies Expense 201
$
2,220.00
Utilities Expense 201
$
-
Interest Expense 201
$
29,600.00
Retained earnings
$
71,062.00
[Recording the closing entries]
Step 6 – Changes in equity
Statement of Changes in Equity of Paul services For the year ended 30th June, 2016
Particulars Capital Retained Earnings Total
Opening balance $ 46,498.00 - $ 46,498.00
Drawings $ (128.00)
Profit for the year $ 71,062.00
Closing Balance $ 46,370.00 $ 71,062.00 $ 46,498.00

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Balance sheet for the period ended 30th June 2016
Balance Sheet of Paul Services as on 30th June, 2016
Particulars Amount Amount
Assets
Non-Current Assets
Office Furniture $ 32,000.00
Less: Accumulated Depreciation. - Furniture $ 6,000.00 $ 26,000.00
Office Equipment $ 64,000.00
Less: Accumulated. Depreciation - Equipment $ 12,000.00 $ 52,000.00
Store Equipment $ 96,000.00
Less: Accumulated Depreciation - store
Equipment $ 9,000.00 $ 87,000.00
Automobile $ 1,28,000.00
Less: Accumulated Depreciation - Automobile $ 12,000.00 $ 1,16,000.00
Current Assets
Cash at Bank $ 27,560.00
Accounts Receivable $ 9,190.00
Supplies $ 320.00
Prepaid Insurance $ 512.00 $ 37,582.00
Total Assets $ 3,18,582.00
Liabilities
Non-Current Liabilities
Loan Payable $ 6,400.00
Mortgage Payable $ 1,28,000.00 $ 1,34,400.00
Current Liabilities
Accounts Payable $ 18,380.00
Interest Payable $ 40,370.00
Unearned revenue $ 8,000.00 $ 66,750.00
Total liabilities $ 2,01,150.00
Equity
Paul's Capital $ 46,498.00
Less: Paul's Drawings $ (128.00)
Profit for the period $ 71,062.00 $ 1,17,432.00
Total Liabilities and Equities $ 3,18,582.00

10BUSINESS ACCOUNTING
Step 7
1. Trial balance and purpose of its creation
Trial balance is considered as the heart of business and is the summary for the
business activities. It indicates the financial health of business and helps the investors to take
decisions regarding investment in the company. Various entries for various accounts are
prepared through ledger. Trial balance is presenting all ledger balances in single worksheet as
on particular date (Fields 2016). Credit balances are reported in the credit column and the
debit balances are reported in the debit column. Sum of the debit column shall be matched
with the sum of credit balance. Trial balance can are prepared for checking the accuracy of
ledger accounts and ensuring that all transaction taken place during the concerned period has
been recorded in appropriate manner. As per the manual procedure of preparing the trial
balance the accountant generally prepares the trial balance for analysing the errors exists in
the accounts, if any (Henderson et al. 2015). Main purposes of creating the trial balance are
revealing –
 Details adjustments for all transactions
 all balances after making the required adjustments
 Account balances of all the ledger account s before making the adjustments.
Trial balance assists in detecting the errors involved in the calculation, if any that will
have impact on the final accounts of the business. Various reasons for error in the general
ledger are material errors, misclassification of items or recording the entry in wrong amount
(Wahlen, Baginski and Bradshaw 2014). Trial balance is created for –
 assuring that arithmetical accuracies are there with regard to the accounts books taken
place with the adjustments and recording the entries as per double entry bookkeeping

11BUSINESS ACCOUNTING
 It is represented as the summary sheet for listing all balances related to ledger
accounts. Therefore, it offers bird eye view for accounting transactions of the business
 As the pre-requisite for preparing the financial statements as tallied trial balance helps
in preparing the financial statements (Warren and Jones 2018)
 It can also be provided to the bank while applied for any loan or borrowings to
provide details regarding its credibility and capacity to take loan.
2. Adjusting journal entries and purpose of recording it
Adjusting entries are the accounting journal entries those are used to convert the
accounting records of the firm on the basis of accrual basis of the accounting. Adjusting
journal entries are generally made prior to the issuance of annual statements of the company
(Apostolou et al. 2013). Adjusting journal entries are prepared for assigning –
 Prepayments of expenditures to the period when actually the expenses are incurred
 Unearned revenue received from prepayment to period under which the income
earned
 Accrues expenses to be paid in future when the expenses will actually be incurred
 Accrued revenue those are already earned but will be received in future period (Weil,
Schipper and Francis 2013)
Further, adjusting entries are used to correcting errors and are required to be
completed before issuing the entity’s financial report. It includes the following events –
 When the company has not recorded any entries for some of the expenses and
revenues but the expenses and revenues have been taken place during the concern
period and shall have been included in the profit and loss statement and balance sheet
for the same period.

12BUSINESS ACCOUNTING
 Entry is made by the entity under one accounting period but it shall have been
required to e recorded in the period during which the revenues is actually earned or
expenses actually incurred or the expenses or revenues is to be separated for 2 or
more accounting period (Weygandt, Kimmel and Kieso 2015).
 While in accordance with the entity’s policy item like fixed asset is reported as capital
account but that shall have been reported as expenses under the income statement.
3. Purpose of preparing the adjusted trial balance
Adjusted trial balance involves list down of all account balances and titles included in
the general ledger after preparing the adjusting entries for particular accounting period those
have been posted to accounts. It is considered as the internal rather than as the financial
statement. Main purpose of preparing the adjusted trial balance is becoming certain that the
total value of the debit balances in general ledger is equal to the total value of the credit
balances in general ledger (Hoyle, Schaefer and Doupnik 2015). Reason behind preparation
of adjusted trial balance is assuring that the adjusting entries have been posted correctly. This
is considered as the last step before preparation of the financial reports intended for the
external as well as internal users. If the balances reported under financial statements are not
correct, the statements will not be accurate. For the purpose of preparing the adjusted trial
balance different columns such as adjustment columns, profit and loss column and balance
sheet column is added (Gitman, Juchau and Flanagan 2015). Before preparing the financial
statement it shall be assured that the debit amount equal to the credit amount. This is
conformed through preparation of trial balance including all the expenses, revenues, assets,
liabilities and equities.
While the accrual method is followed by the entity, revenues are reported in the books
while they are earned rather than recording it when it is received. In same way, expenses are
reported in the period when it is incurred rather than when the payment has been made.

13BUSINESS ACCOUNTING
Hence, prior to accounting period end, adjusting entries prepared to update all the accounts
(Year 2017).
4. Difference in closing journal entries and adjusting journal entries
Closing entries are considered as the journal entries passed at closing of the financial
period for shifting the temporary account to the permanent accounts. On the other hand,
adjusting journal entries are associated with the accounts for prepaid expenses, accrued
revenues, unearned revenues and accrued expenses (Needles, Powers and Crosson 2013).
Closing entries are prepared on last day of financial period but are reported in
accounts after the preparation of financial statements. Generally, the closing entries involve
profit and loss account. The closing entries set balances of expenses accounts and revenue
accounts to zero. It means the expenses account and revenue account will start with zero
balance in the new accounting period which in turn will enable the entity to to report the
amount of revenues as well as expenses easily in the account (Lee 2014). However, the net
amount of revenues and expenses at the closing of the accounting period are reported as
owner’s equity or retained earnings.
On the contrary, adjusting entries are passed at the closing of the accounting period
however are made prior to the preparation of financial statements. It is passed for making the
financial statements of the entity updated on accrual approach of accounting. For example,
the electricity is used by the entity each day however the bill is received after one month.
Similarly, the wage expenses are incurred by the entity each day however payroll including
the wages of the employees for last day of month is not entered in accounting records till the
closing of the accounting period. In addition to those, adjusting entries includes the amount
paid by the entity before they become the expenses (Edmonds et al. 2013). For instance,
insurance premium paid by the entity for the period of 3 months have been paid before

14BUSINESS ACCOUNTING
commencement of those 3 months. The expenses may be deferred by the entity through
reporting it prior to start of 3 months period.
Conclusion
From the above conversation it is concluded that trial balance is an important part in
accounting. Using the trial balance, the entity can prepare income statement, trading account
and balance sheet as the account balances are available at the single place. Further, the
adjusted trial balances are used for assuring that the adjusting entries have been posted
correctly. It is the last step before preparation of the financial reports intended for the external
as well as internal users. Main purpose behind preparation of adjusted trial balance is
becoming certain that the total value of the debit balances in general ledger is equal to the
total value of the credit balances in general ledger. Adjusting entries as well as closing entries
both are prepared on last day of financial period however closing entries are reported in
accounts after the preparing annual statements and adjusting entries are passed prior to the
preparation of financial statements.

15BUSINESS ACCOUNTING
Reference
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literature review (2010–2012). Journal of Accounting Education, 31(2), pp.107-161.
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accounting concepts. New York, NY: McGraw-Hill Irwin.
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accounting. Pearson Higher Education AU.
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16BUSINESS ACCOUNTING
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