Importance of Trial Balance and Journal Entries in Preparing Financial Statements

This report explains the significance of trial balance and journal entries in preparing financial statements. It also includes steps for adjustment transactions journal entries, posting of adjusting journal entries, income statement, journal entries closing the entries, changes in equity statement, and balance sheet. The purpose of creating the trial balance, adjusting journal entries, and writing the adjusted trial balance is also discussed.

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

1BUSINESS ACCOUNTING
Executive summary
The main objective of the report is to state the importance of trial balance and journal entries
in preparing the financial statement of the company. The trial balance assists in posting the
transactions in appropriate statements like income statement and balance sheet. Further, the
journal entries assists in posting the adjustment that takes place after preparing the balance
sheet or for adjusting the prior period items.

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Table of Contents
Introduction................................................................................................................................3
Step 2 – Adjustment transactions journal entries.......................................................................3
Step 3 – Posting of adjusting journal entries and completion of the worksheet........................4
Step 4 – Income statement from worksheet...............................................................................5
Step 5 – Journal entries closing the entries................................................................................6
Step 6 – Changes in equity statement from worksheet..............................................................6
Step 7..........................................................................................................................................9
1) Trial balance and the purpose of creation....................................................................9
2) Adjusting journal entries and its purpose of recording.............................................10
3) Purpose of writing the adjusted trial balance............................................................11
4) Adjustment journal entries as against the closing journal entries.............................12
Conclusion................................................................................................................................13
References................................................................................................................................14

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Introduction
Trial balance is generally prepared at closing of the accounting period and assists in
drafting the financial statements. It assures that every recorded debit entry has a
corresponding credit entry and is recorded in the account as per double entry accounting
concept. A journal entry refers to the financial transactions that have been incurred by the
business unit during a particular financial year (Warren and Jones 2018). On the other hand,
the adjusting journal entry refers to those particular journal entries that have been included in
the financial report at the end of a particular financial year as because the revenue or
expenses associated with those journal entries have not been recognized at the time of
generation.
Step 2 – Adjustment transactions journal entries
Journal Entries under 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 18,920
Interest Payable 201 18,920
(To record interest accrued on mortgage)
30-Jun-16 Supplies Expense 201 1,417
Supplies 115 1,417
(To record supplies used during the period)
30-Jun-16 Insurance Expense 201 3,024
Prepaid Insurance 120 3,024
(To record prepaid amortisation)
30-Jun-16 Depreciation Expense - Furniture ((47300-7300)/5) 201 8,000
Acc. Depreciation. - Furniture 137 8,000
(To record depreciation expense for the period)

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30-Jun-16
Depreciation Expense - Office Equipment ((94600-
4600)/5) 201 18,000
Acc. Depreciation - Office Equipment 141 18,000
(To record depreciation expense for the period)
30-Jun-16
Depreciation Expense - Store Equipment ((141900-
1900)/10) 201 14,000
Acc. Depreciation - Store Equipment 146 14,000
(To record depreciation expense for the period)
30-Jun-16
Depreciation Expense - Automobile ((189200-
9200)/10) 201 18,000
Acc. Depreciation - Automobile 171 18,000
(To record depreciation expense for the period)
30-Jun-16 Unearned revenue 201 11,825
Revenue 201 11,825
(To record unearned revenue earned)
Step 3 – Posting of adjusting journal entries and completion of the worksheet
Accoun
t No
Account Name Unadjusted
Adjusting
entries Adjusted
Debit Credit Debit Credit Debit Credit
101 Cash at Bank 88,920 - - 88,920
105 Accounts Receivable 29,640 - - 29,640
115 Supplies 1,890 - 1,417 473
120 Prepaid Insurance 3,780 - 3,024 756
135 Office Furniture 47,300 - - 47,300
137 Acc. Depreciation. - Furniture 0 - 8,000 8,000
140 Office Equipment 94,600 - - 94,600
141 Acc. Depreciation - Equipment 0 - 18,000 18,000
145 Store Equipment
1,41,90
0 - - 1,41,900
146 Acc. Depreciation - Equipment 0 - 14,000 14,000
170 Automobile
1,89,20
0 - - 1,89,200
171 Acc. Depreciation - Automobile 0 - 18,000 18,000
201 Accounts Payable 59,280 - - 59,280
201 Interest Payable 88,920 - 18,920 1,07,840
201 Unearned revenue 23,650 11,825 - 11,825
201 Loan Payable 9,460 - - 9,460

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201 Mortgage Payable
1,89,20
0 - - 1,89,200
201 Paul's Capital 54,439 - - 54,439
201 Paul's Drawings 189 - - 189
201 Revenue
1,89,00
0 - 11,825 2,00,825
201 Advertising Expense 1,800 - - 1,800
201 Automobile Expense 5,775 - - 5,775
201 Depreciation Expense - Furniture 0 8,000 - 8,000
201 Depreciation Expense - Equipment 0 18,000 - 18,000
201
Depreciation Expense - Store
Equipment 0 14,000 - 14,000
201
Depreciation Expense -
Automobile 0 18,000 - 18,000
201 Insurance Expense 1,500 3,024 - 4,524
201 Maintenance Expense 6,300 - - 6,300
201 Miscellaneous Expense 1,155 - - 1,155
201 Rent Expense 0 - - 0
201 Supplies Expense 0 1,417 - 1,417
201 Utilities Expense 0 - - 0
201 Interest Expense 0 18,920 - 18,920
Total
6,13,94
9
6,13,94
9 93,186 93,186 6,90,869 6,90,869
Step 4 – Income statement from worksheet
Income Statement of Paul Services
For the Period on 30.06.2016
Particulars Amount ($) Amount ($)
Income:
Revenue 2,00,825
Less: Expenses:
Advertising Expense 1,800
Automobile Expense 5,775
Depreciation Expense - Furniture 8,000
Depreciation Expense - Equipment 18,000
Depreciation Expense - Store
Equipment 14,000
Depreciation Expense -
Automobile 18,000
Insurance Expense 4,524

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Maintenance Expense 6,300
Miscellaneous Expense 1,155
Rent Expense 0
Supplies Expense 1,417
Utilities Expense 0
Interest Expense 18,920
Total expenses 97,891
Net Profit 1,02,934
Step 5 – Journal entries closing the entries
Date Particulars
Account
No.
Amount(Dr.
)
Amount(Cr
.)
30-Jun-16 Revenue 201 2,00,825
Advertising Expense 201 1,800
Automobile Expense 201 5,775
Depreciation Expense - Furniture 201 8,000
Depreciation Expense -
Equipment 201 18,000
Depreciation Expense - Store
Equipment 201 14,000
Depreciation Expense -
Automobile 201 18,000
Insurance Expense 201 4,524
Maintenance Expense 201 6,300
Miscellaneous Expense 201 1,155
Rent Expense 201 0
Supplies Expense 201 1,417
Utilities Expense 201 0
Interest Expense 201 18,920
Retained earnings 1,02,934
(To record closing entry)
Step 6 – Changes in equity statement from worksheet
Statement of Changes in Equity of Paul services
For the year ended 30th June, 2016
Particulars Capital Retained Earnings Total
Opening balance 54,439 - 54,439
Drawings -189

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Profit for the year 1,02,934
Closing Balance 54,250 1,02,934 54,439
Balance sheet from worksheet
Balance Sheet of Paul Services
As on 30th June, 2016
Particulars Amount ($)
(I) Assets
Non-Current Assets
Office Furniture 47,300
Less: Accumulated Depreciation 8,000 39,300
Office Equipment 94,600
Less: Accumulated Depreciation 18,000 76,600
Store Equipment 1,41,900
Less: Accumulated Depreciation 14,000 1,27,900
Automobile 1,89,200
Less: Accumulated Depreciation 18,000 1,71,200
Current Assets
Cash at Bank 88,920
Accounts Receivable 29,640
Supplies 473
Prepaid Insurance 756 1,19,789
Total Assets 5,34,789
(II) Liabilities
Non-Current Liabilities
Loan Payable 9,460
Mortgage Payable 1,89,200 1,98,660
Current Liabilities
Accounts Payable 59,280
Interest Payable 1,07,840
Unearned revenue 11,825 1,78,945

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Equity
Paul's Capital 54,439
Less: Paul's Drawings -189
Profit for the period 1,02,934 1,57,184
Total Liabilities and Equities 5,34,789

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Step 7
1) Trial balance and the purpose of creation
Trial balance is the list for the closing ledger balances on a specific date and it is the
1st step towards preparation of the financial statements. Generally, it is prepared at closing of
the accounting period and assists in drafting the financial statements. The ledger balances are
segregated into the credit balance and debit balance. Expenses and assets are recorded under
the debit side and liabilities, incomes and capital accounts are recorded in the credit side
(Edwards 2013). When all the entries from the accounting transactions are correctly recorded
and all ledger balances are extracted accurately then the total debit balances will be equal to
the credit balances.
Purpose of creating the trial balance –
Trial balance is the internal report that runs at the closing of each accounting period
and lists the closing balance of each account. Primarily, the report is used for assuring that
total debit is equal to total credit balance. It is the 1st step in preparation of the financial
statement. It is the working paper that is used by the accountant as the basis at the time of
preparing the financial statement (Henderson et al. 2015). It assures that every recorded debit
entry has a corresponding credit entry and is recorded in the account as per double entry
accounting concept. If total of trial balance does not match then the difference shall be
investigated and errors shall be resolved before preparing the financial statement. Rectifying
the errors related to basic accounting can be lengthy procedure after preparation of the
financial statements as the required changes will demand rectification of the financial
statements. Further, the trial balance assists in rectification and identification of the errors
involved (Needles, Powers and Crosson 2013).

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2) Adjusting journal entries and its purpose of recording
A journal is a fundamental step in the preparation of the accounting statements for any
business concern. A journal entry refers to the financial transactions that have been incurred
by the business unit during a particular financial year. The issue that has been presented in
the question is in regards to the adjusting journal entries. An adjusting journal entry refers to
those particular journal entries that have been included in the financial report at the end of a
particular financial year as because the revenue or expenses associated with those journal
entries have not been recognized at the time of generation (Weygandt, Kimmel and Kieso
2015). An adjusting journal entry might also be passed when a particular financial
transaction that had been started in the previous accounting period ends in the current
accounting period. Accounting errors are a common occurrence on the part of the company
accountant as he or she has to deal with a huge volume of financial transactions. Therefore,
such accounting errors can also be rectified with the help of adjusting journal entries (Ijiri
2014).
The adjusting journal entries are recorded in order to ensure the fact that the
accounting statements that are further prepared on the basis of these journal entries reflect a
genuine and fair image of the concerned organization. The recording of the adjusting journal
entries also help in tracing the cash that flows in and out of business during a particular
financial year. To be more precise, the adjusting journal entry helps in the identification of
the exact instances as to when the money goes out of business and the instances when it flows
into business. Moreover, they also facilitate the conversion of the real time accounting entries
into entries that can be suited into the accrual accounting system. There are precisely three
common types of adjusting journal entries, which are accruals, estimates and deferrals
(Dennis 2014).

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3) Purpose of writing the adjusted trial balance
The issue that has been presented in the question is in regards to the purpose for
writing an adjusted trial balance. However, before understanding the purpose of an adjusted
trial balance, the meaning of a trial balance must be understood. A trial balance refers to the
financial statement that is prepared prior to the preparation of the significant accounting
statements like the income statement and the balance sheet. A trial balance is essentially
prepared in order to check whether the net balance in the credit, accounts match with the net
balance in the debit accounts (Warren and Jones 2018). The current balance in each of the
credit or the debit accounts is recorded and then the total amount of each credit and debit
column is matched so that they represent the same balance. However, in case the
corresponding balances do not match, it represents the fact that there has been a mistake,
either in the account balances or in the computation of the total credit or debit balance. The
need for an adjusted trial balance arises at this point. An adjusted trial balance incorporates
the adjusting entries and then attempts to match the total debit and credit columns. The sole
purpose of preparing the adjusted journal entries revolves around the fact that the accuracy of
the accounting statements that are further deduced from the trial balance depends on the
correctness of the adjusted trial balance. The primary motive behind the preparation of the
financial statements of a particular organization is that the users of these statements like the
investors and other stakeholders of business get a clarified view into the financial
performance of the firm in order to make proper financial decisions. Thus, in case of any
accounting error in the trial balance will result in the generation of faulty accounting
statements. Hence, the role of adjusted trial balance is very important for an accountant
(Adejare 2014).

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4) Adjustment journal entries as against the closing journal entries
At first glance the closing entries and adjustment entries are not easy to grasp. The
reason behind this is that the kind of transactions that requires adjustments that may not be
familiar. The main feature of this kind of transaction is the time of involvement. The
adjusting entries in other way are recorded through initial transaction (Apostolou et al. 2013).
However, for the subsequent events further entries required to be passed. Apart from this, the
adjustments are forced upon accountant as accounting cycle comes closure to end and
financial statements are required to be prepared. The adjustment entries are recorded at
closing of each accounting period and before the preparation of the financial statements.
Adjusting entries are the major part of the closing procedures as per the notes in accounting
cycle where the preliminary trial balances are transformed into the final trial balance.
Generally it is not possible to generate the financial statements that are fully complied with
the accounting standards without using the adjusting entries (Edmonds et al. 2013).
On the contrary, closing entries are the journal entries that are made at closing of the
accounting period for transferring the temporary to the permanent accounts. Permanent
accounts under which the balances get transferred depend on the business type. For example,
in case of sole proprietorship the balance is transferred to owner’s capital account and in case
of company the balance is transferred to retained earnings. The income summary account can
be used for showing balances among the expenses and revenues or they can be closed directly
against the retained earnings from where the payments for dividend will be deducted. This
procedure is used for resetting the temporary account balance to zero for the next period of
accounting.

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Conclusion
From the above discussion it is concluded that the trial balance and the journal entries
along with the adjusting journal entries play major role while preparing the financial
statements of the company. The trial balance assures that every recorded debit entry has a
corresponding credit entry and is recorded in the account as per double entry accounting
concept. On the other hand, the adjusted journal entries revolves around the fact that the
accuracy of the accounting statements that are further deduced from the trial balance depends
on the correctness of the adjusted trial balance.

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References
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performance of the small scale enterprises. International Journal of Academic Research in
Business and Social Sciences, 4(1), p.1.
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literature review (2010–2012). Journal of Accounting Education, 31(2), pp.107-161.
Dennis, S., 2014. Systems and methods for providing computer-automated adjusting entries.
U.S. Patent Application 14/046,921.
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.
Ijiri, Y., 2014. The beauty of double-entry bookkeeping and its impact on the nature of
accounting information. Economie Notes by Monte dei Paschi di Siena, 22(2-1993), pp.265-
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Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting.
Cengage Learning.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

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Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.