Accounting Report: Financial Statement Preparation and Analysis

This report details the step-by-step preparation of financial statements for Mr. Paul, starting with the initial trial balance and progressing through adjustment and closing entries. It includes a detailed analysis of the trial balance, adjusted trial balance, profit and loss account, statement of changes in equity, and the balance sheet. The report also addresses key accounting concepts such as the purpose of a trial balance, the importance of adjustment journal entries, and the differences between adjustment and closing entries. The analysis reveals that Mr. Paul's business is profitable, with a net profit of $86,757.5, and showcases the increase in his capital due to the business's profitability. The adjusted trial balance confirms the accuracy and balance of the accounts, ensuring a reliable foundation for the financial statements.

BUSINESS ACCOUNTING
EXECUTIVE SUMMARY
The report has been prepared with an intention to detail out various steps involved in the
preparation of Financial Statement of Mr. Paul. The report consist of 7 steps and has been
presented here-in-below:

Step -1
The same has been carried out and the question has been allotted. The question that has been
allocated on the basis of above has been detailed here-in-below:
Trial Balance of Paul
For June ended, 2016
Account No Account Name Debit Credit
101 Cash at Bank 55120
105 Accounts Receivable 18370
115 Supplies 1550
120 Prepaid Insurance 3100
135 Office Furniture 38800
137 Acc. Depreciation. - Furniture 0
140 Office Equipment 77600
141 Acc. Depreciation - Equipment 0
145 Store Equipment 116400
146 Acc. Depreciation - Equipment 0
170 Automobile 155200
171 Acc. Depreciation - Automobile 0
201 Accounts Payable 36740
201 Interest Payable 55110
201 Unearned revenue 19400
201 Loan Payable 7760
201 Mortgage Payable 155200
201 Paul's Capital 49865
201 Paul's Drawings 155
201 Revenue 155000
201 Advertising Expense 1100
201 Automobile Expense 5775
201 Depreciation Expense - Furniture
201 Depreciation Expense - Equipment
201 Depreciation Expense - Store Equipment
201 Depreciation Expense - Automobile
201 Insurance Expense 900
201 Maintenance Expense 3850
201 Miscellaneous Expense 1155
201 Rent Expense
201 Supplies Expense
201 Utilities Expense
201 Interest Expense
479075 479075

On the basis of above trial balance detailed analysis has been carried out and the adjustment
journal entries have been made on the basis of detailed provided. Further, closing entries have
been made, profit and loss account have been prepared, statement of changes in equity has
been prepared and the balance sheet of Mr. Paul has been prepared.
Step -2 &5
The adjustment journal entry and closing entry has been recorded in the books of Mr. Paul
has been detailed here-in-below:
Journal in the books of Mr. Paul
Sl
No Particulars
L
F
Amoun
t
Amoun
t
Adjustment Entry
1 Interest Expense A/c.Dr 15520
To Interest Payable A/c 15520
(Being interest accrued but not paid)
Closing Entry
Profit and Loss Account…Dr 15520
To Interest expense A/c 15520
(Being interest expensed)
Adjustment Entry
2 Supplies Expense A/c….Dr 1162.5
To Supplies A/c 1162.5
(Being supplies expensed)
Closing Entry
Profit and Loss A/c..Dr 1162.5
To supplies Expense Account 1162.5
(being Charged to P& L A/c)
Adjustment Entry
3 Insurance A/c..dr 2480
To prepaid Insurance A/c 2480
(being insurance utilised)
Closing Entry
Profit and Loss A/c.Dr 2480
To Insurance' 2480
(Being insurance expensed)
Adjustment Entry
4 Depreciation A/c..Dr 6000
To Accumulated Depreciation (Furniture) A/c 6000
(Being depreciation charged)
Closing Entry
Profit and Loss Account…Dr 6000
To Depreciation A/c 6000
(Being depreciation transferred)'
Adjustment Entry
5 Depreciation A/c..Dr 14000

To Accumulated Depreciation (Office Equipment) A/c 14000
(Being depreciation charged)
Closing Entry
Profit and Loss Account…Dr 14000
To Depreciation A/c 14000
(Being depreciation transferred)'
Adjustment Entry
6 Depreciation A/c..Dr 11000
To Accumulated Depreciation (Store Equipment) A/c 11000
(Being depreciation charged)
Closing Entry
Profit and Loss Account…Dr 11000
To Depreciation A/c 11000
(Being depreciation transferred)
Adjustment Entry
7 Depreciation A/c..Dr 15000
To Accumulated Depreciation (Automobile) A/c 15000
(Being depreciation charged)
Closing Entry
Profit and Loss Account…Dr 15000
To Depreciation A/c 15000
(Being depreciation transferred)'
Adjustment Entry
8 Unearned revenue A/c…Dr 9700
To Revenue A/c 9700
(Being sales made)
Closing Entry
Revenue A/c…Dr 9700
To profit and Loss A/c 9700
(Being sales transferred to Profit and Loss A/c)
Closing Entry
Profit and Loss A/c…Dr 10780
To Advertising Expense 1100
To Rent Expense
To Maintenance Expense 3850
To Miscellaneous Expense 1155
To Automobile Expense 5775
( Being expense transferred to Profit and Loss A/c)
Further, the closing entries have been provided along with adjustment entries for ease of
understanding. However, the same is made post preparation of profit and loss account on the
basis of adjusted trial balance. Accordingly, Step 2 and Step 5 has been merged together to
provide comparable analysis and ease of understanding.
Step -3

The details of ledger have been detailed here-in below:
Interest Expense A/c
Date Particulars Amount
Dat
e Particulars Amount
To Interest Payable A/c 15520 By Profit and Loss A/c 15520
Total 15520 Total 15520
Interest Payable A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To balance C/f 70630 By Balance B/f 55110
BY Interest Expense
A/c 15520
Total 70630 Total 70630
Supplies Expense A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To Supplies A/c 1162.5
By profit And Loss
A/c
1162.
5
Total 1162.5 Total
1162.
5
Supplies A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To balance B/f 1550
By Supplies Expense
A/c
1162.
5
By Balance C/f 387.5
Total 1550 Total 1550
Insurance A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To Prepaid Insurance
A/c 2480
By profit And Loss
A/c 2480
Total 2480 Total 2480
Prepaid Insurance A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To balance B/f 3100 By Insurance A/c 2480
By Balanc C/f 620
Total 3100 Total 3100
Depreciation A/c

Da
te Particulars Amount Date Particulars
Amou
nt
To Accumulated
Depreciation- Furniture
A/c 6000
By profit And Loss
A/c 46000
To Accumulated
Depreciation- Office
EquipmentA/c 14000
To Accumulated
Depreciation- Store
EquipmentA/c 11000
To Accumulated
Depreciation-
Automobile A/c 15000
Total 46000 Total 46000
Accumulated Depreciation A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To balance C/f 46000 By Balance B/f 0
By Depreciation A/c 46000
Total 46000 Total 46000
Unearned Revenue A/c
Da
te Particulars Amount Date Particulars
Amou
nt
To revenue A/c 9700
BY profit and Loss
A/c 9700
Total 9700 Total 9700
Trial Balance of Paul
For June ended, 2016

Account No Account Name Debit Credit
101 Cash at Bank 55120
105 Accounts Receivable 18370
115 Supplies 387.5
120 Prepaid Insurance 620
135 Office Furniture 38800
137 Acc. Depreciation. - Furniture 6000
140 Office Equipment 77600
141 Acc. Depreciation - Equipment 14000
145 Store Equipment 116400
146 Acc. Depreciation - Equipment 11000
170 Automobile 155200
171 Acc. Depreciation - Automobile 15000
201 Accounts Payable 36740
201 Interest Payable 70630
201 Unearned revenue 9700
201 Loan Payable 7760
201 Mortgage Payable 155200
201 Paul's Capital 49865
201 Paul's Drawings 155
201 Revenue 164700
201 Advertising Expense 1100
201 Automobile Expense 5775
201 Depreciation Expense - Furniture 6000
201 Depreciation Expense - Equipment 14000
201 Depreciation Expense - Store Equipment 11000
201 Depreciation Expense - Automobile 15000
201 Insurance Expense 3380
201 Maintenance Expense 3850
201 Miscellaneous Expense 1155
201 Rent Expense
201 Supplies Expense 1162.5
201 Utilities Expense
201 Interest Expense 15520
540595 540595
The adjusted trial balance has been prepared on the basis of adjustment entry stated in step 1
of the report. Further, the adjusted trial balance forms the 4th stage of accounting cycle and
marks the beginning of preparation of profit and loss account of the entity. Further, in the
present case the adjusted trial balance represents no suspense account and a perfect tally of
accounts. Hence, it can be said that is free of errors.

Step -4
The Statement of profit and Loss Account has been prepared here-in-below:
Profit and Loss Account
Sl No Particulars Amount Amount
1 Sales 164700
2 Insurance 3380
3 Supplies Expense 1162.5
4 Advertisement 1100
5 Maintenance 3850
6 Miscellaneous Expense 1155
7 Depreciation 46000
8 Interest Expense 15520
9 Automobile Expense 5775
10 Net profit 86757.5
On perusal of Profit and Loss account, it can be understood that the business of Mr. Paul is
running at a profit of $ 86,757.5. Further, details regarding purchase of raw material or any
other material which is sold to generate revenue. Hence, the same has not been taken into
consideration for analysis.
Step -6
The statement of changes in equity and Balance sheet has been prepared here-in-below:
Statement of Change in Equity
Sl No Particulars Amount Amount
1 Pauls Capital 49865
2 Add: Profit' 86757.5
3 Less Drawings 155
4 Closing Balance 136467.5
Balance Sheet
Sl No Particulars Amount Amount
Equity and Liability
1 Paul's Capital 136468

2 Mortgage Payable 155200
3 Interest Payable 70630
4 Accounts Payable 36740
5 Unearned Revenue 9700
6 Loan Payable 7760
7 Accumulated Depreciation 46000
Total 462498
Asset
1 Cash at Bank 55120
2 Accounts Receivable 18370
3 Supplies 387.5
4 Prepaid Insurance A/c 620
5 Office Furniture 38800
6 Office Equipment 77600
7 Store Equipment 116400
8 Automobile 155200
Total 462498
On perusal of balance sheet of the company, one can understand that the capital of Mr. Paul
has increased over the period on account of profitability of business.
Step -7
Question -1
What is a trial balance and why do we create it?
Answer -1
It is a statement of ending balances of a company, individual etc. The trial balance is prepared
at the end of the reporting period to aid in preparation of Profit and Loss Accounts and
Balance Sheet. The ledger balances are segregated into debit and credit accounts with bot
side tallying. Further under trial balance on the debit side appears expense and asset while on
the credit side both liability and income shall appear.(Accounting-Simplified.com, 2017)
The purpose of creation of Trial Balance has been summarised here-in-below:
(a) It assists in the preparation of financial statement and marks the inception towards the
same;
(b) Identification and Rectification of errors while journalising and posting;
(c) Ensuring correct and accurate Financial Statement;
Question -2
What are adjustment journal entries? Why do we record the adjustment journal entries?

Answer -2
Adjustment Journal entries are generally done in the books of accounts at the end of financial
year. The intention of such entry at the end of the period is to allocate income and expense of
a particular period to that reporting period based on matching principle and accrual basis.
(Shultz, 2018)
The intention of adjustment journal entry is detailed here-in-below:
(a) It ensures allocation of prepaid expenditure to the period it is incurred;
(b) Revenue which are unearned are to allocated in the year in which it is realised.
(c) Expenses which are accrued are to be allocated in the year in which it is spend.
(d) Revenue earned but not realised during the current year.
(e) Rectification of errors;
(f) Omission of entries etc.
(g) To allign with the concept of accrual the adjusting journal entries are passed
(h) It is a way to ensure that all the revenue and expenses are properly recorded in the
books of accounts.
(i) A company cannot record few of its income earned at the mid of the year but will
record the same at the end of the year by doing adjustment for the same.
Question -3
What is the purpose of writing an adjusted trial balance?
Answer-3
The motive behind preparation of adjusted trial balance has been detailed here-in-below:
(a) It is the last step in the accounting cycle before preparation of financial statement;
(b) It aids in preparation of financial statement;(MyAccountingCourse.com, 2018)
(c) It helps in presenting true and accurate figure;
(d) It assists in correct revenue recognition;
(e) It is in alignment with accounting principles;
(f) It eases the preparation of financial statement;
(g) It is also prepared to confirm that all the ledger accounts are properly balanced.
(h) All the end balances of the ledger is shown..
(i) The sum total of debit should match with the credit total.
Question -4
How adjustment journal entries are different from the closing entries?
Answer-4

Adjustment entries are made in books of account before preparation of financial statement
and aids in recording accounts up-to-date on the basis of accrual basis of accounting. The
adjustment entries are passed due to following reasons:The adjustment entries are passed due
to following reasons:
(a) It ensures allocation of prepaid expenditure to the period it is incurred;
(b) Revenue which are unearned are to be allocated in the year in which it is realised.
(c) Expenses which are accrued are to be allocated in the year in which it is spend.
(d) Revenue earned but not realised during the current year.
Closing entries are posted in the books of accounts on the last day of the company financial
year. Generally all the closing entries relate to the profit and loss account of the company .
The intention of passing such an entry is to sell all revenue and expense account to zero.
Thus, it shall ensure fresh start of all account at the beginning of each financial year.(Lofoya
Pvt Ltd., 2018) The balances of profit and loss account are transferred to retained earnings at
the end of reporting period.
References:
Accounting-Simplified.com, 2017. What is a Trial Balance?. [Online]
Available at: https://accounting-simplified.com/trial-balance.html
[Accessed 23 September 2018].
Lofoya Pvt Ltd., 2018. Permutation-Combination. [Online]
Available at: http://www.lofoya.com/Aptitude-Questions-and-Answers/Permutation-and-Combination/
l3p1
[Accessed 23 September 2018].
MyAccountingCourse.com, 2018. Adjusted Trial Balance. [Online]
Available at: https://www.myaccountingcourse.com/accounting-cycle/adjusted-trial-balance
[Accessed 23 September 2018].
Shultz, M., 2018. What Are Adjusting Journal Entries. [Online]
Available at: https://www.blackline.com/blog/account-reconciliations/adjusting-journal-entries/
[Accessed 23 September 2018].