From “T” to TBFrom “T” to TB

Dr. Clive Vlieland-BoddyDr. Clive Vlieland-Boddy

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Objective 1 Objective 1

Prepare and use a trial balance (TB)Prepare and use a trial balance (TB)

““T” AccountsT” Accounts

Last Session we looked at Exercise 5.1.4Last Session we looked at Exercise 5.1.4 We posted the entries.We posted the entries.

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Bank Account Equity Account

Investors 100,000 100,000 Shares

N0 1 was to Dr Bank and Credit Equity with the money introduced by the shareholders.

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Vehicle Account Bank Loan

Car 20,000 20,000 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

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Bank Loan Bank Account

Repay Loan 5,0005,000 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 100,000 20,000 New Loan

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Inventories Accounts 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

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Accounts Receivable Sales of Widgets

Customer x 25,000 25,000 Sales

No 5 was to Dr Accounts Receivable and Cr Sales of Widgets with goods sold on credit to customers

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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.

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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

The Balances on the “T” AccountsThe Balances on the “T” Accounts

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

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Bank Loan Bank Account

Repay Loan 5,0005,000 Repay Loan

Firstly the bank loan with the two entries. Balancing & carrying forward the net figure. Like wise the bank account

Shares 100,000 20,000 New Loan

95,000 Balance c/f

Balance c/f 15,000

Balance b/d 95,000

100,000 100,000

20,000 20,000

15,000 Balance b/d

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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/f Balance c/f 100,000

100,000 Balance b/dBalance b/d 20,000

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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

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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 18,000 Balance b/d 42,000

60,000 60,000

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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 Widgets1,000 Balance c/f Balance c/f 61,000

61,00061,000

Balance b/d 1,000 61,000 Balance b/d

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Trial BalanceTrial Balance

Lists of all the “T” accounts with their Lists of all the “T” accounts with their balancesbalances

So…..So…..

The Trial BalanceThe Trial Balance

DebitsDebits Bank Balance 95,000Bank Balance 95,000 Vehicle 20,000Vehicle 20,000 Accounts Rec 25,000Accounts Rec 25,000 COGS 18,000COGS 18,000 Inventories 42,000Inventories 42,000 Telephone 1,000Telephone 1,000

Total 201,000Total 201,000

CreditsCredits Bank Loan 15,000Bank Loan 15,000 Equity 100,000Equity 100,000 Sales Sales

25,00025,000 Accounts Pay 61,000Accounts Pay 61,000

Total 201,000Total 201,000

The TB must balance!The TB must balance!

2020

See Page 26See Page 26

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Locating Trial Balance ErrorsLocating Trial Balance Errors

What if it doesn’t balance?What if it doesn’t 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?

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Locating Trial Balance ErrorsLocating Trial Balance Errors

Divide the difference by twoDivide the difference by two Is there a debit/credit balance for this amount Is there a debit/credit balance for this amount

posted in the wrong column?posted in the wrong column? Divide the difference by 9. If evenly Divide the difference by 9. If evenly

divisible, the error may be a slide or divisible, the error may be a slide or transposition errortransposition error

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Objective 2Objective 2

Appreciate the benefits of a work Appreciate the benefits of a work sheetsheet

Using a Using a

WorksheetWorksheetUsing a Using a

WorksheetWorksheet

Steps in Steps in preparationpreparation

Preparing Preparing financial financial statementsstatements

Preparing Preparing adjusting entriesadjusting entries

Closing the Closing the

BooksBooksClosing the Closing the

BooksBooks

Summary of Summary of

Accounting Accounting

CycleCycle

Summary of Summary of

Accounting Accounting

CycleCycle

Balance SheetBalance Sheet

& Income & Income

StatementStatement

Balance SheetBalance Sheet

& Income & Income

StatementStatement

Current assetsCurrent assets

Non Current Non Current AssetsAssets

Current liabilitiesCurrent liabilities

Non Current Non Current liabilitiesliabilities

Owner’s equityOwner’s equity

Revenues & Revenues & ExpensesExpenses

Reversing Reversing entries entries

Correcting Correcting entriesentries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

Preparing Preparing closing entriesclosing entries

Posting closing Posting closing entriesentries

Preparing a Preparing a closing trial closing trial balancebalance

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 WorksheetUsing A WorksheetUsing A WorksheetUsing A WorksheetWorksheetWorksheet

Share Capital 1,000,000 Retained Reserves 736,580 Plant & Eq (Cost) 1,250,000 Dep of P & Eq to 31/12/08 250,000 Goodwill 215,000 Investments 800,000 Accounts Receivable 710,040 Inventories (at 31/12/08) 375,600 Bank Balance 175,590 Accounts Payable 328,050 Tax Payable 81,000 Dividends Payable 70,000 Deferred Tax 125,600 Long Term Loan 675,000 Sales 6,050,000 Cost Of Sales 3,120,000 Overheads 2,519,000 Tax on Profits 81,000 Dividends 70,000

Totals 9,316,230 9,316,230

ExampleThe 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!

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Share Capital 1,000,000 Retained Reserves 736,580 Plant & Eq (Cost) 1,250,000 Dep of P & Eq to 31/12/08 250,000 Goodwill 215,000 Investments 800,000 Accounts Receivable 710,040 Inventories at 31/12/08 375,600 Bank Balance 175,590 Accounts Payable 328,050 Tax Payable 81,000 Dividends Payable 70,000 Deferred Tax 125,600 Long Term Loan 675,000 Sales 6,050,000 Cost Of Sales 3,120,000 Overheads 2,519,000 Tax on Profits 81,000 Dividends 70,000

Totals 9,316,230 9,316,230

Balance SheetTrial Balance Adjustments Closing Trial Balance Income Statement

Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet

1. Prepare a Trial Balance on a Worksheet1. Prepare a Trial Balance on a Worksheet

Trial balance amounts come directly from ledger accounts.

Include all accounts with balances.

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Objective 3Objective 3

Understand The difference between Understand The difference between Assets and ExpenditureAssets and Expenditure

Corporations Have Indefinite LivesCorporations Have Indefinite Lives

They are born with a Certificate of They are born with a Certificate of Incorporation.Incorporation.

They have “Statutes” – A book of the rules They have “Statutes” – A book of the rules and regulations on how the enterprise will be and regulations on how the enterprise will be managed.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 However, we need to evaluate them and for

this reason we divide up their lives into this reason we divide up their lives into accounting cycles normally 12 months.accounting cycles normally 12 months.

IncomeIncome IncomeIncome IncomeIncome IncomeIncome IncomeIncome

ExpenditureExpenditure ExpenditureExpenditure ExpenditureExpenditure ExpenditureExpenditure ExpenditureExpenditure

2006 2007 2008 2009 2010

Income Statement

Income Statement

Income Statement

Income Statement

Income Statement

Accounting Cycles – Normally 12 months

Income Statement & Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

What is consumed in the year is in the Income Statement

Unconsumed is in the Balance Sheet

Consumption – Pizza RestaurantConsumption – Pizza Restaurant

At the beginning of an accounting period At the beginning of an accounting period they will have pizzas in the Freezer ready they will have pizzas in the Freezer ready to sell. (Opening Inventories)to sell. (Opening Inventories)

During the period they will sell and buy During the period they will sell and buy more. more.

We need to match sales with the cost of We need to match sales with the cost of those sold.those sold.

At the end of the accounting period there At the end of the accounting period there will again be pizzas in the freezer available will again be pizzas in the freezer available to sell which have NOT been consumed!to sell which have NOT been consumed!

Incomes & ExpendituresIncomes & Expenditures

Incomes represent sales generatedIncomes represent sales generated Expenditures are incurred in generating Expenditures are incurred in generating

the revenues.the revenues. The matching concept requires us to The matching concept requires us to

match income with expenditure in the match income with expenditure in the relevant accounting period.relevant accounting period.

There are issues at the end and the There are issues at the end and the beginning of accounting periods.beginning of accounting periods.

An overlap that often requires adjustment.An overlap that often requires adjustment.

AdjustmentsAdjustments

Expenses may have been incurred but the Expenses may have been incurred but the invoice may appear several weeks after the invoice may appear several weeks after the accounting year end.accounting year end.

Sales may have been made at or before the Sales may have been made at or before the year end but invoiced after.year end but invoiced after.

An event may have occurred before the year An event may have occurred before the year end but only comes to light after.end but only comes to light after.

The picture taken at the year end may therefore The picture taken at the year end may therefore be slightly out of focus and need adjustment.be slightly out of focus and need adjustment.

Study Pack 1 aStudy Pack 1 a

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Revenue = Equity AccountRevenue = Equity Account

This represents an increase in the Equity This represents an increase in the Equity account which is a Credit entry, as this account which is a Credit entry, as this creates profits which belongs to the creates profits which belongs to the shareholders.shareholders.

So as the company has generated So as the company has generated incomes of €25,000, we need to increase incomes of €25,000, we need to increase the Equity account by that sum.the Equity account by that sum.

So Credit (CR) the Equity by €25,000.So Credit (CR) the Equity by €25,000.

The EndThe End