Trial Balance, Adjusting & Closing Entries

The assignment explores the concepts of Trial Balance, Adjusting Entries, and Closing Entries in accounting. It delves into the purpose of each entry type, highlighting how they contribute to accurate financial reporting. The document differentiates between adjusting entries, which rectify timing discrepancies and deferred expenses, and closing entries, which reset revenue and expense accounts to zero at the end of an accounting period. Additionally, it emphasizes the significance of Trial Balance as a foundational tool for preparing key financial statements.

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

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Executive summary
The main objective of this report is to focus on the importance of trial balance and journal
entries for preparation of the balance sheet and income statement. It will present the journal
entries for the adjusted transactions. Further, the report will also present the preparation of
balance sheet, income statement and changes in equity through the adjusted trial balance.
Moreover, the report will focus on the purpose of preparing the trial balance and adjusting
journal entries.

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Table of Contents
Introduction................................................................................................................................3
Step 2 – Journal entries for the adjustment transactions............................................................3
Step 3 – Completion of worksheet.............................................................................................4
Step 4 – Income statement from completed worksheet.............................................................5
Step 5 – Closing entries journals................................................................................................6
Step 6 – Changes in equity.........................................................................................................6
Step 7..........................................................................................................................................8
1) Trial balance and its purpose.......................................................................................8
2) Adjustment journal entries and purpose of recording adjustment journal entries.......9
3) Purpose of preparing the adjusted trial balance.........................................................10
4) Difference between adjusting journal entries and closing journal entries.................11
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

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Introduction
Trial balance is the accounting report or bookkeeping that records the balances in
each general ledger of the company. The credit balances are recorded in a column with the
name as credit balance and the debit balances are recorded in another column that is named as
credit balance. If total debit side of the trial balance does not match with the credit side there
must have been some errors included (Edwards 2013). On the other hand, the adjusting
entries are used for correcting the errors and shall be completed prior to the issuance of the
financial statement of the company.
Step 2 – Journal entries for the adjustment transactions
Journal Entries in the books of Paul services
For the period ended on 30th June, 2016
Date Particulars
Acc
No.
Amount
(Dr.)
Amount
(Cr.)
30-Jun-
16 Interest Expense 201 29,600
Interest Payable 201 29,600
(To record accrued interest on mortgage)
30-Jun-
16 Supplies Expense 201 2,220
Supplies 115 2,220
(To record supplies used during the period)
30-Jun-
16 Insurance Expense 201 4,736
Prepaid Insurance 120 4,736
(To record prepaid amortisation)
30-Jun-
16 Depreciation Expense - Furniture ((74000-4000)/5) 201 14,000
Acc. Depreciation. - Furniture 137 14,000
(To record depreciation expense for the period)
30-Jun-
16 Depreciation Expense - Office Equipment ((148000-8600)/5) 201 28,000

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Acc. Depreciation - Office Equipment 141 28,000
(To record depreciation expense for the period)
30-Jun-
16 Depreciation Expense - Store Equipment ((222000-2000)/10) 201 22,000
Acc. Depreciation - Store Equipment 146 22,000
(To record depreciation expense for the period)
30-Jun-
16 Depreciation Expense - Automobile ((296000-6000)/10) 201 29,000
Acc. Depreciation - Automobile 171 29,000
(To record depreciation expense for the period)
30-Jun-
16 Unearned revenue 201 18,500
Revenue 201 18,500
(To record unearned revenue earned)
Step 3 – Completion of worksheet
Ac
c
No
Account Name Unadjusted Adjusting entries Adjusted
Debit Credit Debit Credit Debit Credit
101 Cash at Bank 196,430 - - 196,430
105 Accounts Receivable 65,480 - - 65,480
115 Supplies 2,220 - 1,480 740
120 Prepaid Insurance 5,920 - 4,736 1,184
135 Office Furniture 74,000 - - 74,000
137 Acc. Depreciation. - Furniture 0 - 14,000 14,000
140 Office Equipment 148,000 - - 148,000
141 Acc. Depreciation - Equipment 0 - 28,000 28,000
145 Store Equipment 222,000 - - 222,000
146 Acc. Depreciation - Equipment 0 - 22,000 22,000
170 Automobile 296,000 - - 296,000
171 Acc. Depreciation - Automobile 0 - 29,000 29,000
201 Accounts Payable 130,960 - - 130,960
201 Interest Payable 196,440 - 29,600 226,040
201 Unearned revenue 37,000 18,500 - 18,500
201 Loan Payable 14,800 - - 14,800
201 Mortgage Payable 296,000 - - 296,000
201 Paul's Capital 67,666 - - 67,666
201 Paul's Drawings 296 - - 296
201 Revenue 296,000 - 18,500 314,500
201 Advertising Expense 3,900 - - 3,900
201 Automobile Expense 5,775 - - 5,775

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201 Depreciation Expense - Furniture 0 14,000 - 14,000
201
Depreciation Expense -
Equipment 0 28,000 - 28,000
201
Depreciation Expense - Store
Equipment 0 22,000 - 22,000
201
Depreciation Expense -
Automobile 0 29,000 - 29,000
201 Insurance Expense 3,300 4,736 - 8,036
201 Maintenance Expense 13,650 - - 13,650
201 Miscellaneous Expense 1,155 - - 1,155
201 Rent Expense 0 - - 0
201 Supplies Expense 0 2,220 - 2,220
201 Utilities Expense 0 - - 0
201 Interest Expense 0 29,600 - 29,600
Total 1,038,126
1,038,86
6 148,056 147,316
1,161,46
6 1,161,466
Step 4 – Income statement from completed worksheet
Income Statement of Paul Services
For the Period on 30.06.2016
Particulars Amount ($) Amount ($)
Income:
Revenue 314,500
Expenses:
Advertising Expense 3,900
Automobile Expense 5,775
Depreciation Expense - Furniture 14,000
Depreciation Expense - Equipment 28,000
Depreciation Expense - Store Equipment 22,000
Depreciation Expense - Automobile 29,000
Insurance Expense 8,036
Maintenance Expense 13,650
Miscellaneous Expense 1,155
Rent Expense 0
Supplies Expense 2,220
Utilities Expense 0
Interest Expense 29,600
Total expenses 157,336
Net Profit 157,164

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Step 5 – Closing entries journals
Date Particulars Account No.
Amount
(Dr.)
Amount
(Cr.)
30-Jun-16 Revenue 201 314,500
Advertising Expense 201 3,900
Automobile Expense 201 5,775
Depreciation Expense - Furniture 201 14,000
Depreciation Expense - Equipment 201 28,000
Depreciation Expense - Store
Equipment 201 22,000
Depreciation Expense - Automobile 201 29,000
Insurance Expense 201 8,036
Maintenance Expense 201 13,650
Miscellaneous Expense 201 1,155
Rent Expense 201 0
Supplies Expense 201 2,220
Utilities Expense 201 0
Interest Expense 201 29,600
Retained earnings (b.f.) 157,164
(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 67,666 - 67,666
Drawings -296
Profit for the year 157,164
Closing Balance 67,370 157,164 67,666
Balance sheet
Balance Sheet of Paul Services
As on 30th June, 2016
Particulars Amount ($) Amount ($)
(I) Assets

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Non-Current Assets
Office Furniture 74,000
Less: Acc. Depreciation. - Furniture 14,000 60,000
Office Equipment 148,000
Less: Acc. Depreciation - Equipment 28,000 120,000
Store Equipment 222,000
Less: Acc. Depreciation - Equipment 22,000 200,000
Automobile 296,000
Less: Acc. Depreciation - Automobile 29,000 267,000
Current Assets
Cash at Bank 196,430
Accounts Receivable 65,480
Supplies 740
Prepaid Insurance 1,184 263,834
Total Assets 910,834
(II) Liabilities
Non-Current Liabilities
Loan Payable 14,800
Mortgage Payable 296,000 310,800
Current Liabilities
Accounts Payable 130,960
Interest Payable 226,040
Unearned revenue 18,500 375,500
Equity
Paul's Capital 67,666
Less: Paul's Drawings -296
Profit for the period 157,164 224,534
Total Liabilities and Equities 910,834

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Step 7
1) Trial balance and its purpose
Trial balance can be defined as the statement of the balances that is extracted from
various accounts of ledger for testing the arithmetical exactness of the account books. The
trial balance has 2 sides – debit side and credit sides. It is the accounting report or
bookkeeping that records the balances in each general ledger of the company (Lee 2014). The
credit balances are recorded in a column with the name as credit balance and the debit
balances are recorded in another column that is named as credit balance. However, the
summation of each of this column shall be same as other. Within the accounting period the
trial balance can be prepared at anytime. However, it is not the part of double entry method of
accounting but is prepared to check the posting accuracy.
Under the manual process the trial balance is generally prepared by the accountant for
discovering whether any error exists there on account of clerical mistake or calculation
mistake (Year 2017). Trial balance is very crucial for the purpose of accounting and auditing.
It is used to reveal the following –
 The account balance of the general ledger prior to the adjustments
 All the balances after adjustments
 Details adjustments
Preparation of trial balance for the company helps to detect the calculation errors that
may have taken place under the double entry system of accounting. If total debit side of the
trial balance does not match with the credit side there must have been some errors included.
The reason may be the transactions have been wrongly classified or material errors related to

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accounts that may not have been detected in the trial balance procedure. The trial balance
ensures –
 That all transactions are recorded with same credit and debit balances
 Through identification of errors in books of accounts it assists in correcting the errors
before preparing the final accounts (Wahlen, Baginski and Bradshaw 2014)
 It makes preparation of balance sheet, profit and loss account and trading account
easy through making all the accounting balances available at single place.
2) Adjustment journal entries and purpose of recording adjustment journal entries
The adjustment journal entries are the accounting entries that are made under the
journal accounts of the company at the closing of financial period. These entries allocate the
expenses and income to actual period under which the expenses or incomes take place
(Henderson et al. 2015). It follows the principle of revenue recognition in the accrual method
of accounting as against the time of receiving the payment or under the cash method of
accounting. The adjusting journal entries are prepared for allocating –
 Unearned revenue from the prepayment receipt to the period under which it is
actually earned.
 Prepayment of the expense to period while the expenses are actually incurred
 Accrued revenue that is earned but to be received later to period in which it is earned
 Accrued expenses that will be paid later to period while the expenses are actually
incurred (Apostolou et al. 2013).
The adjusting entries are further used for correcting the errors and shall be completed
prior to the issuance of the financial statement of the company. Generally it includes the
scenarios when –

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 When as per the company policy something like fixed asset is booked under the
capital account but it should have been booked under the expenses account like the
supplies expenses
 Any entry that is made under the accounting records of the company, however, the
amount is required to move under the period in which the expenses actually incurred
or the revenue is actually earned or segregated among 2 or more than 2 accounting
periods.
 No entries are recorded in the accounting records of the company for few revenues
and expenses however, the expenses or the revenues took place in that period and
shall be include in the balance sheet and income statement of that period (Weil,
Schipper and Francis 2013).
3) Purpose of preparing the adjusted trial balance
The extended trial balance or the adjusted trial balance is the working paper that is
used as the basis for the preparation of statement of financial position and income statement
at closing of financial period. It records the same as the name suggests. It is used to bring the
ledger balances together in trial balance form and adding the columns thereafter for recording
the corrections and adjustments. For the adjusting trial balance, the adjustment column,
statement of financial statement and profit and loss column is added. Before preparing the
financial statement the accounting balances shall be verified to ensure that the credit balance
and the debit balances are same (Edmonds et al. 2013). This is done through preparation of
trial balance, listing all the accounts that include revenue, liabilities, equity and expenses.
Thereafter each column is summed up and if 2 columns do not matched there must be some
errors.
In case of accrual accounting method, the revenues are recorded while it is earned and
not when it is paid. In the same way, the expenses are recorded at time when it is incurred

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and not when it is paid. Therefore, before closing of the accounting period the adjusting
entries are recorded to make the accounts up to date (Needles, Powers and Crosson 2013).
The reason behind preparing the adjusted trial balance is for assuring that adjusting entries
are recorded appropriately. Preparing the adjusted trial balance is the last step before the
preparation of financial statements that is used by the company, its creditors, investors,
shareholders and auditors for measuring the performance of the business. If wrong balances
are entered in the financial statement the statement will be inaccurate.
4) Difference between adjusting journal entries and closing journal entries
Adjusting entries are recorded at the closing of each accounting period and prior to
preparation of the financial statement for recording the accounting transactions and making
the financial statement up to date while the accrual method of accounting is followed
(Edwards 2013). For instance, every day the firm incurs the expenses related to salaries of
employees. However, the salaries under payroll for the last day of the month will not be
recorded till the end of the period. Other entries for adjustment involves amount that are paid
by the company prior to the amount actually turning into expenses. For instance, the company
made the payment towards insurance premiums for 3 months even before the start of these 3
months. Further, the expenses may be deferred through recording of the amount under the
asset account (Warren and Jones 2018).
On the contrary, the closing entries are recorded on the last day of accounting period.
However, they are entered in accounts after preparation of financial statement. For most of
the part the closing entries includes the accounts related to income statement. The closing
entries record the balances from all the expense accounts and revenue accounts to zero
(Weygandt, Kimmel and Kieso 2015). This states that the expenses and revenues will start in
the New Year with no balance which in turn will allow the company to report the expenses
and revenues easily. Further, the net amount from all the balances from expenses and revenue

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accounts at the closing of the period will recorded as retained earnings for the companies and
owner’s equity for the sole proprietorship.
Conclusion
From the above, it can be concluded that the Trial balance is very crucial for the
purpose of accounting and auditing. It helps in preparation of balance sheet, profit and loss
account and trading account easy through making all the accounting balances available at
single place. The adjusted trial balance is used to bring the ledger balances together in trial
balance form and adding the columns thereafter for recording the corrections and
adjustments. The main difference of adjusting journal entries with the closing balance is that
the closing entries record the balances from all the expense accounts and revenue accounts to
zero.

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Reference
Apostolou, B., Dorminey, J.W., Hassell, J.M. and Watson, S.F., 2013. Accounting education
literature review (2010–2012). Journal of Accounting Education, 31(2), pp.107-161.
Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial
accounting concepts. New York, NY: McGraw-Hill Irwin.
Edwards, J.R., 2013. A history of financial accounting (RLE Accounting) (Vol. 29).
Routledge.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Lee, T.A., 2014. Evolution of Corporate Financial Reporting (RLE Accounting). Routledge.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting.
Cengage Learning.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement
analysis and valuation. Nelson Education.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.
Year, B.C.S., 2017. Advanced accounting. Journal Entries in the books of Company, 12,
pp.12-750.

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