The Trial Balance and Adjusting Entries

Hi and welcome back to the introduction to financial accounting course. In this session we will look at adjusting entries. Adjusting entries are internal only transactions occurring at the end of the period to estimate periodic income, mainly at the end of the year. The key criterion is accrual accounting and the final outcome is the preparation of financial statements. As you may recall. There are deferred revenues and expenses and accrued revenues and expenses, which we have to deal with at the end of the fiscal year. As a means of signposting, We have gone through company transactions, recording using double entry and accounts, Then we looked at the Journal ledger, and we ended up here looking at the trial balance.

We know that the trial balance is not giving a full picture of how the company is doing or has been doing throughout the year. And our intention, our will, is moving up to financial statements. In order to do this. We have to use accrual accounting. If you remember this is the general ledger after the nine transactions that food on the go engaged with during the first year of its operations. These ledgers were actually the premise to get to the unadjusted trial balance. Now if you look at the unadjusted trial balance we estimated a net income of twenty six thousand four hundred. By comparing all the costs or expenses with revenues.

You may recall that such income would eventually flow as part of the reserves within equity.

What will be moving to the next phase: namely looking at adjusting transactions and using accrual accounting in order to get from the unadjusted trial balance to financial statements. In addition to the nine transactions Analysed in the previous videos let’s try to be a little bit more realistic and let’s add three transactions that further than go engaged with within the first year of its operations and the transactions are the following on September the 10th. Food on the go buys office supplies for 2000 and the payment is in six months on October the 1st for them to go obtains a five years loan of sixty thousand. Interest on the loan is 1800 per year.

The payment of interest and repayment of capital is postponed and will occur twice in a year. Last food on the go buys a property in the new hub near the harbour for eighty thousand. The payment easing two instalments of forty thousand each one at the time of the purchase. via bank, and one in one year from. Let’s have a look at how we handle these transactions first and then we will move to the just inventories.

Transaction 11: on September 10 food and a go buys office supplies for 2000. Payment is in six months. Let’s have a look at the journal entries and the T accounts only. So we leave aside the effects of the transaction on the accounting identity and let’s see what we have here. We have transaction eleven on the 10th of September and we see here that the raw materials which is office supply which is an asset go up by 2000. That’s why we debit. By the same token, we have payables that go up by the same amount two thousand. Payables are liability and we know that an increasing liability is recorded as credit.

This is also reflected into the accounts and in fact the raw material is debited for two thousand, and in the same fashion We see that the payables - a liability - go up by two thousand.

Transaction 12: on October 1 the 1st for them to go obtains a five year loan on sixty thousand. Interest on the loan is one thousand eight hundred per year. And remember that the interest on the loan represents the cost for having had access to funds which do not belong to the company. Payment of interest and capital is postponed and occurs twice a year. Let’s see how we account for these transactions using journal entries And T account.

Transaction twelve: on October the 1st there is an increase in bank because the bank obtains resources. There is an increase in asset for sixty thousand at the same time. The company faces an increase in liabilities which we call loans to signal that this is a longer term debt. Liabilities go up by crediting and in fact we credit for 60,000. And as we have seen before. It is also reflected into a t account the bank account goes up as it is debited by sixty thousand. Where has the loan account goes up. By being credited for the same amount. Transaction 13 Food on the Go buys a property in the new hub near the harbor for eighty thousand.

The payment is in two installments of forty thousand each of which forty thousand are paid on the spot at the time of the acquisition through a bank transfer whereas the remaining part is a longer term debt for 40000 in terms of the journal entry. We are now used to this. We have transaction number 13 on the 30th of November. There is an increasing property which is debited for eighty thousand. That corresponds to a decrease in asset which is a credit for forty thousand and an increase in liabilities because payables go up by 40,000. As we know now in the accounts we record exactly the same the property go up by thousand.

The bank goes down by forty thousand and the payables increase by 40,000. As you can see in each and all transactions The total amount of debits always equal the total amount of credit and we know that the double entry bookkeeping system works as a safeguarding mechanism to ensure that we have not done any mistake in recording the transaction.