From T to TB Dr. Clive Vlieland-Boddy

2 Objective 1 Prepare and use a trial balance (TB)

T Accounts Last Session we looked at Exercise Last Session we looked at Exercise We posted the entries. We posted the entries.

4 Bank AccountEquity Account Investors 100,000100,000 Shares N0 1 was to Dr Bank and Credit Equity with the money introduced by the shareholders.

5 Vehicle AccountBank Loan Car 20,00020,000 New Loan No 2 was to Dr an asset account called Vehicles and Cr the bank loan account with the loan provided to buy the vehicle

6 Bank LoanBank Account Repay Loan 5,000 5,000 Repay Loan No 3 was to Dr the bank Loan Account with the Repayment of this and Cr the bank account as this was where the funds came from. Shares 100,00020,000 New Loan

7 InventoriesAccounts Payable Widgets 60,000 60,000 Supplier of Widgets No 4 was to Dr Inventories and Cr Accounts Payable with goods purchased on credit from a supplier

8 Accounts ReceivableSales of Widgets Customer x 25,00025,000 Sales No 5 was to Dr Accounts Receivable and Cr Sales of Widgets with goods sold on credit to customers

9 Cost of Goods Sold (COGS) Inventories Cost of 6 Widgets 18,000 18,000 Widgets SoldWidgets 60,000 No 6 was to Dr COGS and Cr Inventories with the COGS = 6 times 3,000.

10 TelephoneAccounts Payable Phone Bill 1,000 1,000 Phone Co No 7 was to Dr Telephone and Cr Accounts Payable with the cost of calls. 60,000 Supplier of Widgets

The Balances on the T Accounts We balance the T accounts by adding up each side and carrying forward (c/f) the resulting balance and bringing it down as the balance brought down (b/d) We balance the T accounts by adding up each side and carrying forward (c/f) the resulting balance and bringing it down as the balance brought down (b/d)

12 Bank LoanBank Account Repay Loan 5,000 5,000 Repay Loan Firstly the bank loan with the two entries. Balancing & carrying forward the net figure. Like wise the bank account Shares 100,00020,000 New Loan 95,000 Balance c/f Balance c/f 15,000 Balance b/d 95, ,000 20,000 15,000 Balance b/d

13 Vehicle Account Car 20,000 The Vehicle Account and the Equity Account. These are balanced and the net is carried forward….. Brought down. 100,000 Shares Equity Account 20,000 Balance c/fBalance c/f 100, ,000 Balance b/d Balance b/d 20,000

14 Accounts Receivable Sales of Widgets Customer x 25,000 25,000 Sales Accounts Receivable and Sales of widgets 25,000 Balance c/f 25,000 Balance b/d Balance c/f 25,000 Balance b/d 25,000

15 Cost of Goods Sold (COGS) Inventories 6 sold 18,000 18,000 Widgets SoldWidgets 60,000 The COGS and the Inventories. Note the Inventories were reduced but the COGS. 18,000 Balance c/f 42,000 Balance c/f Balance b/d 18,000Balance b/d 42,000 60,000

16 Telephone Accounts Payable Phone Bill 1,000 1,000 Phone Co No 7 was to Dr Telephone and Cr Accounts Payable with the cost of calls. 60,000 Supplier of Widgets 1,000 Balance c/fBalance c/f 61,000 61,000 Balance b/d 1,000 61,000 Balance b/d

17 Trial Balance Lists of all the T accounts with their balances Lists of all the T accounts with their balances So….. So…..

The Trial Balance Debits Bank Balance 95,000 Bank Balance 95,000 Vehicle 20,000 Vehicle 20,000 Accounts Rec 25,000 Accounts Rec 25,000 COGS 18,000 COGS 18,000 Inventories 42,000 Inventories 42,000 Telephone 1,000 Telephone 1,000 Total 201,000 Credits Bank Loan 15,000 Bank Loan 15,000 Equity 100,000 Equity 100,000 Sales 25,000 Sales 25,000 Accounts Pay 61,000 Accounts Pay 61,000 Total 201,000

The TB must balance!

20 See Page 26

21 Locating Trial Balance Errors What if it doesnt balance? Is the addition correct? Is the addition correct? Are all accounts listed? Are all accounts listed? Are the balances listed correctly? Are the balances listed correctly?

22 Locating Trial Balance Errors Divide the difference by two Divide the difference by two Is there a debit/credit balance for this amount posted in the wrong column? Is there a debit/credit balance for this amount posted in the wrong column? Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error

23 Objective 2 Appreciate the benefits of a work sheet

Using a Worksheet Steps in preparation Preparing financial statements Preparing adjusting entries Closing the Books Summary of Accounting Cycle Balance Sheet & Income Statement Balance Sheet & Income Statement Current assets Non Current Assets Current liabilities Non Current liabilities Owners equity Revenues & Expenses Reversing entries Correcting entries Completing the Accounting Cycle Preparing closing entries Posting closing entries Preparing a closing trial balance

A multiple-column form used in preparing financial statements. (Often an Excel Spreadsheet) Not a permanent accounting record. Five step process. Use of worksheet is optional. Using A Worksheet Worksheet

Example The trial balance for The Trendy Corp for the Year Ended December 31, 2009, is as follows. This is before some final adjustments have to be done!

Steps in Preparing a Worksheet 1. Prepare a Trial Balance on a Worksheet Trial balance amounts come directly from ledger accounts. Include all accounts with balances.

28 Objective 3 Understand The difference between Assets and Expenditure

Corporations Have Indefinite Lives They are born with a Certificate of Incorporation. They are born with a Certificate of Incorporation. They have Statutes – A book of the rules and regulations on how the enterprise will be managed. They have Statutes – A book of the rules and regulations on how the enterprise will be managed. If it does die it is only by way of bankruptcy!. If it does die it is only by way of bankruptcy!. However, we need to evaluate them and for this reason we divide up their lives into accounting cycles normally 12 months. However, we need to evaluate them and for this reason we divide up their lives into accounting cycles normally 12 months.

Income IncomeIncomeIncomeIncomeIncome ExpenditureExpenditureExpenditureExpenditureExpenditure Income Statement Accounting Cycles – Normally 12 months Income Statement & Balance Sheet Balance Sheet What is consumed in the year is in the Income Statement Unconsumed is in the Balance Sheet

Consumption – Pizza Restaurant At the beginning of an accounting period they will have pizzas in the Freezer ready to sell. (Opening Inventories) At the beginning of an accounting period they will have pizzas in the Freezer ready to sell. (Opening Inventories) During the period they will sell and buy more. During the period they will sell and buy more. We need to match sales with the cost of those sold. We need to match sales with the cost of those sold. At the end of the accounting period there will again be pizzas in the freezer available to sell which have NOT been consumed! At the end of the accounting period there will again be pizzas in the freezer available to sell which have NOT been consumed!

Incomes & Expenditures Incomes represent sales generated Incomes represent sales generated Expenditures are incurred in generating the revenues. Expenditures are incurred in generating the revenues. The matching concept requires us to match income with expenditure in the relevant accounting period. The matching concept requires us to match income with expenditure in the relevant accounting period. There are issues at the end and the beginning of accounting periods. There are issues at the end and the beginning of accounting periods. An overlap that often requires adjustment. An overlap that often requires adjustment.

Adjustments Expenses may have been incurred but the invoice may appear several weeks after the accounting year end. Expenses may have been incurred but the invoice may appear several weeks after the accounting year end. Sales may have been made at or before the year end but invoiced after. Sales may have been made at or before the year end but invoiced after. An event may have occurred before the year end but only comes to light after. An event may have occurred before the year end but only comes to light after. The picture taken at the year end may therefore be slightly out of focus and need adjustment. The picture taken at the year end may therefore be slightly out of focus and need adjustment.

Study Pack 1 a

35 Revenue = Equity Account This represents an increase in the Equity account which is a Credit entry, as this creates profits which belongs to the shareholders. This represents an increase in the Equity account which is a Credit entry, as this creates profits which belongs to the shareholders. So as the company has generated incomes of 25,000, we need to increase the Equity account by that sum. So as the company has generated incomes of 25,000, we need to increase the Equity account by that sum. So Credit (CR) the Equity by 25,000. So Credit (CR) the Equity by 25,000.

The End