Company Trial Balance and Financial

Statements Question
by Anonymous

The trial balance of Palicio Security Services Inc. as of January 1, 2016 had the
following normal balances:
Cash 74,210
Accounts receivable 13,500
Supplies 200
Prepaid rent 3,200
Merchandise inventory (24 @ $265; 1 @ $260) 6,620
Land 4000
Accounts payable 1,950
Unearned revenue 980
Salaries payable 1,000
Common stock 50,000
Retained earnings 47,800

The following transactions took place during 2016 for Palicio Security Services:
1. Paid the salaries payable from 2015.
2. On March 1, 2016, Palicio established a $100 petty cash fund to handle small
expenditures.
3. Paid $4,800 on May 1, 2016, for one year's lease on the company van in advance.

4. Paid $7,200 on May 2,2016 for one year's office rent in advance.
5. Purchased $400 of supplies on account.
6. Purchased 100 alarm systems for $28,000 cash during the year.
7. Sold 102 alarm systems for $57,120. All sales were on account.
(Compute cost of goods sold using the FIFO cost flow method)
8. Paid $2,100 on accounts payable during the year.
9. Replenished the petty cash fund on August 1. At this time, the petty cash fund had
only $7 of currency left. It contained the following receipts: office supplies expense
$23, cutting grass $55, and miscellaneous $14.
10. Billed $52,000 of monitoring services for the year.
11. Paid installers and other employees a total of $25,000 cash for salaries.
12. Collected $89,300 of accounts receivable during the year.
13. Paid $3,600 of advertising expense during the year.
14. Paid $2,500 of utilities expense for the year.
15. Paid a dividend of $10,000 to the shareholders.

Required:
1. Prepare the trial balance as at Dec 31, 2016 for Palicio Security Services Inc.
2. Prepare the income statement, statement of changes in equity and balance sheet
for Palicio Security Services Inc.
A: This is actually a pretty tricky and advanced accounting question. I would recommend
not to try it unless you have a pretty good understanding of the following topics (click for a
tutorial on each):

 The Trial Balance,

 Financial Statements and

 Inventory (including the FIFO Method and Cost of Goods Sold).

Additionally, this question also deals with prepaid expenses and income received in
advance, which are concepts I don’t go into detail about on this website (I only cover these
topics in detail in my basic accounting books).

Here are some brief explanations though: Prepaid expenses are expenses you paid too
early. Because it is paid too early it is as if you are owed the amount you paid, and the
prepaid expense essentially is a debtor/receivable (an asset account).

In a similar way, income earned in advance means you have been paid money

before delivering the services/products, and so it is as if you owe this amount. Thus,
income earned in advance is a creditor/payable.

Note also that in this exercise we are dealing with a company or corporation, not a simple sole
proprietor. With a corporation there are some new terms and concepts.

First of all there are many owners in a corporation and these owners are
called shareholders.

Also, each of the shareholders owns shares in the corporation, which is also known
as common stock.

Finally, instead of “drawings,” we have dividends that are paid to all the shareholders from the
accumulated profits (AKA retained earnings).

Okay, so now that we’ve cleared up all those terms, here’s the solutions, starting with the trial
balance:

Notes:

** Cash includes $100 petty cash. Calculation of cash balance:

74,210 - 1,000 - 4,800 - 7,200 - 28,000 - 2,100 - (100 - 7) - 25,000 + 89,300 - 3,600 - 2,500
- 10,000
= 79,217

The opening balance of prepaid rent ($3,200) has been expensed out during 2016 as we
have assumed this rent (that was paid the previous year) applies to the 2016 year. This is a
likely assumption as there was a new prepaid rent cash payment on 2 May, 2016.

It is not stated in the question whether the unearned revenue of $980 at the beginning of
2016 was actually earned during the year. In this solution we have assumed that the
unearned revenue still remains unearned at the end of 2016. However, it is quite
acceptable to treat this as having been earned during 2016. If treating it as earned during
2016 one would add $980 to revenue and remove the unearned revenue account ($980 -
$980).
Calculation of Cost of Sales and Closing Inventory (FIFO Basis):

Opening Balance of Merchandise Inv. (24 Units @ $265 + 1 Unit @ $260) $6,620
Purchased during the year 100 Units @ $280 $28,000
Total available for sale 124 + 1 Units (125 Units) $34,620
Sold*(Cost of Sales) 102 Units $28,180
Closing Balance of Merchandise Inv. 23 Units @ $280 $6,440

*Cost of Sales 102 Units (24 Units @ $265) + (1 Unit @ $260) + (77 Units @ $280)
= $28,180
Note that the prepayments (prepaid office rent and prepaid motor lease) have been
included under debtors/receivables. Likewise, the income received in advance (“unearned
revenue” of $980) has been included under creditors/payables.

Hope you enjoyed this and got some good practice with the Company Trial Balance and
Financial Statements Question!

Best,
Michael Celender

For more free exercises return to the Full Accounting Questions and Answers page.

And for exercises you can do at home get one of our official books: Accounting Basics:
Workbook or Accounting Basics: Complete Guide!
 Debtors and Creditors Ledger Question
Q: Please prepare the debtors and creditors ledger control account for the following:
Balances:
Debtors (1/1/10) 150,000
Creditors (1/1/10) 45,000
Bad debt 2,200
Discount Received 2,500
Cash Received from debtors 115,000
Cheque Receipt from debtors 5,000
Set off 1,200
Discount Allowed 1,150
Credit Sales 25,000
Credit Purchases 12,000
Cash payment to creditors 18,000
Cheque payment to creditors 11,200
Understated Credit sales 1,500
Overstated cash receipt from debtors 2,000
Return Inward 1,300
Return Outwards 1,600
Overstated Cheque payment to creditors 1,000
A: Here are the debtors and creditors control accounts:
 Debtors and Creditors
Control Accounts
Introduction
As previously mentioned, we not only have the general ledger, but also two other ledgers:

- The Debtors Ledger

- The Creditors Ledger

We also learned that all individual debtor T-accounts go in the debtors ledger and all
individual creditor T-accounts go in the creditors ledger.

For example, here is a debtor's ledger with a number of individual debtor T-accounts:

16Сохранить

Now, as far as we know, debtor and creditor T-accounts only go in the debtor and
creditor ledgers, right?

None of the information about debtor or creditor T-accounts goes in the general ledger,
right?
Well... no, not exactly.

The general ledger does contain information about debtors and creditors.

In fact, it contains two special accounts relating to the above, called control accounts.

There is one control account for debtors and another for creditors:

There is one control account for debtors and another for creditors:

16Сохранить

Why Are These Called "Control Accounts?"

And What Are They Used For?
The reason these accounts are called control accounts is because one uses them to
ensure there are no errors or mistakes in our records relating to debtors and creditors.
Thus one gets more control. I will show you exactly how this is done shortly.

Control accounts are essentially summary accounts in the general ledger. They
contain totals instead of amounts relating to individual debtors or creditors. They allow one
to see the totals, without getting into too much details from individual accounts.
Where Do the Totals for the Control Accounts Come
From?
Entries in the control accounts such as "total sales", "total purchases" as well as "bank"
come from the relevant accounting journals.

For example, the "total sales" figure of $16,300 in the debtors control account above
comes from the total in the sales journal below (which shows sales on credit).

16Сохранить

Also, the "bank" figure of $7,400 in the debtors control account would come from
the total of the "debtors" column in the cash receipts journal:

16Сохранить

Similarly, the "total purchases" figure of $3,900 in the creditors control account could be
traced back to the purchases journal (which shows purchases on credit).

And the "bank" figure of $6,000 in this same account could be traced back to the cash
payments journal (which shows all payments of cash).
 Balancing T-Accounts
T-Account Opening and Closing Balances
The last element of the T-account that we need to cover is its balance.

An account’s balance is the amount of that item at a particular point in time.

In a T-account we show the balance of the item at the start of the period (month or year)
and at the end of the period.

The balance at the beginning of a period is called the opening balance.

The balance at the end of a period is called the closing balance

Let’s say that for our examples regarding George's Catering, the business had actually
been operating for 3 years before this year, and that the bank account had an opening
balance of $4,300.

This would be shown as follows:

At the end of each accounting period (month or year) a brief calculation is done to work out
the closing balance of the account.

How do we work out this closing balance?

It's done like this:

How to Balance a T-Account
1. Quickly look over the account to find the side which has
the bigger total.

It should be fairly apparent in this example that the debit side is the bigger side.

2. Now add up the total of all the individual entries on this

side and put it as a total below all the other amounts on this
side.

3. Put the same total on the other side below all the entries.

4. Add up all the individual amounts on the smaller side.

This comes to $20,700 in this example.
5. Work out the difference between this amount and the total
inserted at the bottom.
$39,800 – $20,700 = $19,100

6. Put this amount on the smaller side just above the total
and describe it as "Balance c/f" or "Balance c/d," together
with the date.

This will ensure that the smaller side also adds up to the total.

7. Take this same amount ($19,100) and insert it on the

opposite side below the total, and describe this as "Balance
b/f" or "Balance b/d".

The Balance b/f is the actual closing balance of the bank account (a debit balance).

Balance c/f is just an entry used in calculating that the closing balance is $19,100 on the
debit side.

The "Balance b/f" indicates that the debit side is greater than the credit side by $19,100,
and that we have $19,100 in our bank account at the end of May (the closing balance of
the account).
Indeed, one could merely have taken the total of the debit side ($39,800) and subtracted
the total of the credit side ($20,700) from this. We would arrive at the same answer: the
bank account has a balance of $19,100 on the debit side.

However, the steps taken above represent the system that is used in accounting to work
out and show the closing balance, and thus should be learned and practiced.

So, we have our opening balance (debit) of $4,300 and our closing balance (debit) of
$19,100. Both these balances can be determined by a quick examination of the T-account.

One More T-Account Example

Let’s try another account from our sample business, George's Catering – the account
"loan."

There were two transactions and journal entries involving the loan account:

So, what would the T-account look like?

Before going any further, get a piece of paper and try construct the T-account for loan.
Then look just below here and compare your answers.

From this account we can determine that $5,000 was loaned on the 7th of April (a credit to
the loan, meaning more of a liability), then $4,000 was repaid on the 13th of May (a debit,
meaning less of the liability), leaving us with an outstanding balance (credit) of $1,000.

Remember, we can easily cross-reference between two accounts because of the contra
account being used as the description of the transaction.
For example, in the "loan" account, "bank" is used as the description for the credit on the
7th of April.

And if you look in the "bank" account above, "loan" is inserted on the debit side of the T-
account on the same date. We thus have an easy cross-reference.

T-Accounts with Single Entries

With an account with one entry on one side, we do the following to show the closing
balance:

We do not make any further entries to work out the closing balance – the $4,000 balance is
self-evident from the single entry.

T-Account Codes (Folio Numbers)

Remember, each account has its own code or number (called a folio number), and this
would normally be inserted next to the account name.

So the final prepared T-account would look like this:

"Sal-1" is the individual code for the account "salaries" and would also be referred to in the journal
entries relating to salaries. "J-1" is the code for "journal page 1". The folio number or code thus
helps with tracing information from the journal entry to the individual T-accounts, or from the ledger
(T-accounts) back to the journal entries.
 T-Accounts, Journal Entry and Trial Balance
Question
Q: Juan de la Cruz began professional practice as a system analyst on July 1. He plans to
prepare a monthly financial statement. During July, the owner completed these transactions
(PHP = Philippine Peso, currency of Philippines):

July 1. Owner invested PHp 500,000 cash along with computer equipment that had a
market value of php. 120,000 two years ago but was now worth Php. 100,000 only.
July 2. Paid php. 15,000 cash for the rent of office space for the month.
July 4. Purchased php. 12,000 of additional equipment on credit (due within 30
days).
July 8. Completed awork for a client and immediately collected the php. 32,000 cash.
July 10. Completed work for a client and sent a bill for php. 27,000 to be paid within
30 days.
July 12. Purchased additional equipment for php. 8,000 in cash.
July 15. Paid an assistant php. 6,200 cash as wages for 15 days.
July 18. Collected php. 15,000 on the amount owed by the client.
July 25. Paid php. 12,000 cash to settle the liability on the equipment purchased.
July 28. Owner withdrew php. 500 cash for personal use.
July 30. Completed work for another client who paid only php. 40,000 for 50% of the
system design.
July 31. Paid salary of assistant php. 700.
July 31. Received PLDT bill, php. 1,800 and Meralco bill php. 3,800.

Required:
Prepare the journal entries, T accounts and trial balance for this business.

A: This is a really good question to practice.

Journal entries for the above transactions:

July 1 Dr Cash 500,000

Dr Computer Eqpt 100,000
Cr Capital 600,000
Owner started business with cash and computer Eqpt.

2 Dr Rent Exp 15,000

Cr Cash 15,000
Paid rent of office for the month of July.

4 Dr Equipment 12,000
Cr Creditors 12,000

Equipment purchased for business use.

8 Dr Cash 32,000
Cr Services rendered (income) 32,000
Services rendered for a client.

10 Dr Debtors 27,000
Cr Services rendered (income) 27,000
Services rendered for a client.

12 Dr Equipment 8,000
Cr Cash 8,000
Additional equipment purchased.

15 Dr Salaries & Wages 6,200

Cr Cash 6,200
Paid wages to assistant for 15 days.

18 Dr Cash 15,000
Cr Debtors 15,000
Received cash from debtor.

25 Dr Creditors 12,000
Cr Cash 12,000
Creditors of Eqpt purchased, settled.

28 Dr Drawings 500
Cr Cash 500
Owner withdrew cash for personal use.

30 Dr Cash 40,000
Dr. Debtors 40,000
Cr Services rendered (income) 80,000
50% amount received by a client on a/o work completed.

31 Dr Salaries & Wages 700

Cr Cash 700
Paid salary to the assistant.

31 Dr Utilities Exp (PLDT) 1,800

Dr Utilities Exp (Meralco) 3,800
Cr Creditors 5,600
PLDT and Meralco have been assumed to be the utility companies.
Note: In this example we have combined salaries and wages into one account, but
sometimes in real life these are kept separate - one account for wages and another
account for salaries.

T-ACCOUNTS:
TRIAL BALANCE:
 Expenses Example
h) In order to be able to successfully pull off the catering job for the wedding and for
future jobs, George decides to hire an assistant. He paid the assistant a $4,000
salary. What happens with this?

0Сохранить

$4,000 cash paid means that our bank account will decrease by $4,000. Bank increases on
the debit side (left), and decreases on the credit side (right). So we credit the bank account
of the business.

The salary paid to the assistant is an expense, and this amounts to $4,000.

Expenses take place (or increase) on the left, because it is the opposite of income and
means less for the owner (owner’s equity). We debit the expense, and we call it salaries.

Our accounting entry is:

This salaries expense will result in $4,000 less for the owner.
 Equity Example
We are now going to return to the transactions undertaken by George Burnham
for George’s Catering in our previous lessons, and work out how and what
we debit and credit.

Let's start with the equity example:

a) George decides to start a catering business and invests $15,000 of his personal
funds into the bank account of the business. What happens to our equation?

0Сохранить

Remember, the investment of assets in a business by the owner or owners is

called capital. The owner’s stake in the business (owner’s equity) increases when he
invests assets in the business, because it is his assets.

George’s Catering now consists of assets (cash) of $15,000, and the owner owns all
$15,000 of these assets.

Assets (money) increase (from $0 to $15,000).

On what side do assets increase? The debit side (left). So, assets are debited.

The owner’s equity (capital) also increases. On what side does the owner’s
equity increase? The credit side (right). So, the owner’s equity is credited.

The accounting entry is as follows:

The Dr, as shown above, stands for debere, a Latin word meaning "to owe", and from
which we get the term debit.

The Cr above stands for credere, a Latin word meaning "to trust", and from which we get
the term credit.

This is the origin of the words Debit and Credit.

By the way, feel free to return to our summary of debits and credits if you can't remember
what gets debited and what gets credited...

The entry of a debit and a credit is what is known in accounting as the double-entry
system.

Double entry literally means two entries.

The double-entry system means that, for each transaction, two entries are made by the
accountant. These two entries enable us to show that the total assets of the
business belong to the people you owe money to (liabilities) and to the owner himself
(owner’s equity).

The two entries ensure that the two sides of this equation always balance. The double-
entry system, and accounting as a whole, is all based on the equation above.

Drawings Example:
Journal Entry
Capital vs Drawings
Just as the owner can invest assets in the business from his personal possessions – so
too can he remove assets from the business for personal use.

Remember that the investment of assets in a business by the owner is called capital.

When the owner removes assets from his business, we call this by another name. We call
this drawings.

This is because the owner withdraws assets.

Drawings are the exact opposite of capital.

Drawings Example and Journal Entry
d) George Burnham is running short of cash at home. He needs some money to buy
his daughter a bicycle for her birthday (i.e. for personal use). He decides to withdraw
$500 from the business bank account. What is the impact on the equation for
George’s Catering?

So, what has happened here?

First of all, bank has now decreased by $500.

As with the previous example, when an asset decreases, that asset is credited, as
assets increase on the debit side and decrease on the credit side.

The owner‘s stake in the assets (owner's equity) has also decreased.

The owner’s equity increases on the credit side. Therefore, the owner’s
equity decreases on the debit side.

So what do we do with the owner’s equity? We debit it.

The accounting entry is:

By the way, in the entry above we theoretically could have debited capital (this would
show that it is decreasing).

However, drawings is the account used and debited when assets are taken out by the
owner.

We keep the capital account as one account for investments in the business by the owner,
and drawings as a separate account - for disinvestments or withdrawals by the owner.
 Drawings Example
d) George Burnham is running short of cash at home. He needs some money to buy
his daughter a bicycle for her birthday (i.e. for personal use). He decides to withdraw
$500 from the business bank account. What is the impact on the equation for
George’s Catering?

Well, it's the exact opposite of our first example:

Just as the owner can invest assets in the business (from his personal possessions)
– capital – so too can he remove them from the business for personal use.

When the owner removes assets from his business, we call this drawings. This is because
the owner withdraws assets.

Drawings is the exact opposite of capital.

The assets of the business have decreased, and the owner‘s stake in the business assets
has decreased, so assets and owner’s equity both decrease.

Notice again that liabilities (debts to external parties) are unaffected. Their stake will be the
same as it was before this transaction ($5,000).

George’s Catering now consists of assets of $19,500. Bank has now decreased by $500.
So assets are now made up of baking equipment to the value of $12,000 and cash of
$7,500.
 Accrued Income
(Part 1)
f) George’s Catering provides catering services for a funeral for the Smiths. The
services are provided on the 8th of April and the agreed fee is $5,000. As part of the
agreement, the Smiths will only make payment at the end of April.

Remember: income and expenses are recorded using the accrual basis of accounting.

Accrual describes amounts that have been accumulated and are still owed.

Accrued income is income that is owed to us.

The accrual basis of accounting means that if a sale is made in October, but cash is
received in January, the income is recorded in October (not when the cash is received
in January). Between October and January we record that cash is owed (a debtor is
recognized).

George’s Catering stood at:

Now we do the following:

 0Сохранить

The business has made income, and this is worth $5,000. Income increases on
the right (the same side as the owner’s equity). Thus, we credit the services rendered.

The income is recorded straight away on the 8th of April, as the event (the provision of
catering services for the funeral) has taken place.

As the $5,000 is not received in cash on this date, we record a debtor (the Smiths). A
debtor is an asset, as it will bring us future benefits in the form of getting paid. Assets
increase on the debit side, so we debit the debtors.

The accounting entry:

Okay, so that example was a little tricky.

 Accrued Income
(Part 2)
g) The Smiths pay the full amount owed to George’s Catering on the 30th of April.
What do we do?

Well, the easiest part of this transaction is that we receive cash of $5,000. So bank
goes up. And so we debit the business bank account.

But what happens with our debtor? Our debtor is an asset. It exists currently in our records
at $5,000. If the Smiths are now paying us, it means that they owe us less. Debtors are
decreasing (from $5,000 to $0).

0Сохранить

And the accounting entry is thus:

The debtor now amounts to zero dollars – in other words, we are showing that the debt
towards George’s Catering no longer exists.

Remember, we defined income as: The event that results in money flowing into the
business.

Well, the income did (eventually) result in more cash for the business – as it should.

We also said that income is different to cash received. That should be quite apparent in this
example.
 Accrued Expenses
(Part 1)
Income and expenses are recorded using the accrual basis of accounting.

And accrual describes amounts that have been accumulated and are still owed.

Thus accrued expenses are expenses that are owing.

i) George Burnham receives the telephone bill from the telephone company on the
30th of April. It says that George’s Catering owes $200 for the month of April. The
telephone company offers payment terms of 15 days from the date that the bill is
received. George intends to use these payment terms and pay after a week or two.
How does this transaction affect the equation on the 30th of April?

Has any cash moved at this point in time? Have we actually paid the telephone bill yet?

The answer is no. In fact, our assets do not change at all at this point.

The telephone bill is an expense – it is an event that results in money flowing out of the
business (immediately or at a later date). The expense (event) has occurred – the
telephone has been used in April. Remember that according to the accrual system, we
record the expense when it occurs, not later on when cash is paid.
As a result of receiving this bill, our liabilities increase. This liability is not a loan, but it is a
liability. This liability of $200 is included under creditors (various businesses and people we
owe). Liabilities increase on the credit side. So credit creditors.

The entry is:

The owner’s stake in the assets of the business (i.e. equity) decreases by $200 to $25,800.
The external parties’ stake in the assets of the business (i.e. liabilities) increases by $200
to $5,200.

Remember, if you're not feeling so good about this lesson (or any other), it is highly
recommended that you take a step back, and try find out which earlier concept you didn't
quite get the first time. When you find the earlier misunderstanding, roll forward again

Accrued Expenses
(Part 2)
Okay, so George Burnham, the owner of George's Catering, has an accrued expense - he
owes $200 to the telephone company for the telephone bill for April...

j) George Burnham pays the amount owing to the telephone company on the 13th of
May.

0Сохранить

Again the easiest part of this transaction is the cash component. Cash of $200 is definitely
paid. So bank decreases. Bank is an asset, and assets increase on the debit
side and decrease on the credit side. So we credit bank.
Our creditor (liability) exists currently in our records at $200, on the credit side. If we are
now paying the telephone company, this means that we owe
them less. Creditors decrease. Creditors are a type of liability, and liabilities increase on
the credit side and decrease on the debit side. So creditors are debited.

Here's the entry:

Note that the debit of $200 to the creditor account causes it to amount to zero – in other
words, we are showing that the debt towards the telephone company no longer exists.

Let's go over one more example:

k) George sees that he has quite a bit of spare cash, and so decides to pay back
some of the loan from the bank. He writes out a check for $4,000. What happens to
our equation?

The answer is identical to what happens when we pay off a creditor (as in the first example
above), in that both our bank as well as the liability are going to decrease. Obviously the
only difference is that this time our loan will decrease, not the creditor.

0Сохранить

Bank is an asset and decreases on the credit side.

Creditors is a liability and decreases on the debit side.

The accounting entry is thus:

The loan is not reduced to zero (as with the creditor) but to $1,000. In other words, we are
showing that we still owe $1,000.

Once again, in summary, you can see that:

For every transaction there are two entries.
For every transaction there is a debit.
For every transaction there is a credit.
There are no exceptions.

It bears repeating: The debits and credits are based wholly on the accounting equation:

Not simple? Okay, not to worry - just go back and restudy the lessons you didn't fully feel
good about. Troubled with this monster called debits and credits? Go back to the lesson
called Debits and Credits: What They Really Mean, or even to an earlier lesson (if needed).

In our next section we are going to take a step back and look at the big picture in
accounting, the Accounting Cycle - the series of actions a bookkeeper or accountant takes
to record, categorize and present the financial information of a business.

Sorry to tell you, but that does not, however, mean we're done with debits and credits. We'll
be covering them here and there throughout the remainder of the online lessons. Not that
there's anything wrong with debits and credits, right? Right. The monster has been slain...
okay, not quite... but he's definitely hurting...

If you have come this far and really get what we did, then you know enough right now
about debits and credits to debit or credit virtually anything in the subject (well almost)! And
that's a lot more than most accounting students!
 The Accounting Cycle

What is the Accounting Cycle?

The accounting cycle is the various steps or stages of work or activity that we go through
each year in accounting.

The cycle is depicted diagrammatically below:

The cycle above is a cycle of action we go through when accounting for any business.

Steps in the Accounting Cycle

1. Source Documents
Source documents are documents, such as cash slips, invoices, etc. that form
the source of, and serve as proof for, a transaction.

In other words, they are the first documents that exist relating to a transaction.
Bookkeepers and accountants need to keep source documents for each transaction.

In my full lesson on source documents you'll learn about invoices, cash slips, receipts,
check counterfoils, bank deposit slips and more.

2. Journals
Journal entries are that first basic entry of debit and credit for each transaction,
chronological (date-order) records of transactions entered into by a business.

In the examples we have been doing in previous chapters, where we debited one account
and credited another, we have been doing journal entries.

Read through this first lesson on basic accounting journal entries for a review of the ten
most common journal entries.

Journals also refer to the books of first entry, such as the cash receipts
journal, the general journal and more.

We'll run through each of these in the second lesson on accounting journals, where you'll
get a good idea of what each one is for, its format and how it works.

3. Ledger (T-Accounts)
The ledger is a grouping of the accounts of a business.

The accounts are in the shape of a "T" and thus are often referred to as T-accounts.

In this step we take all the journal entries (debits and credits) relating to one account (in
this example, bank) and draw up an account with all the transactions relating to it.

There a few lessons on T accounts:

 1. In the first lesson we'll look at the format of a T-account and how to draw one up.
2. In the second lesson we'll learn how to balance a T-account.
3. Next we'll look at how to post journals to the T-accounts (posting means transferring
information from the journals to the T accounts).
4. And, in our final lesson on T accounts, we'll go over control accounts and take a closer look
at the debtors and creditors ledgers.

4. The Trial Balance

The trial balance is a sheet or report displaying all the accounts of a business, drawn up
as a trial (test) of whether the total of all the debit balances equal the total of all the credit
balances.

(A balance is the amount of an item at a point in time. For example, The balance in the
bank account on the 1st of January was $5,000.)

The trial balance is prepared as a final check before drawing up the financial
statements. When errors are shown up in the trial balance, we make corrections
through adjusting entries.

5. Financial Statements
The financial statements are the key reports of a business.

As mentioned, they are prepared from the information in the trial balance above.

The purpose of the financial statements is to show the reader the financial
position, financial performance and cash flows of a business.

Financial statements are usually prepared once a year, and consist of an income
statement, statement of changes in owners equity, balance sheet, cash flow statement and
where needed, an auditor’s report.

We will deal with these various financial statements in the next section on this site,
Financial Statements.

Closing Entries
There is a final step in the accounting cycle not shown above, which is the closing off of
accounts (or closing entries), which are done at the end of each year along with the
production of the financial statements.

This involves closing out temporary accounts (incomes and expenses), and transferring
their balances through a profit account into the owners equity (reserves).

Closing entries are not really covered on this site, but are covered in detail in our official
books - Accounting Basics: Study Guide or Accounting Basics: Complete Guide.

Manual vs Computerized Accounting Systems

It is important to note that these days many businesses use computerized accounting
systems, and so the accounting cycle is largely automated.

This means that the bookkeeper or accountant simply enters the basic data about a
transaction, and the posting is then automatically done to the relevant accounts and
through the trial balance to the financial statements. Temporary accounts are also
automatically closed off at the end of the period.

Additionally, errors occur less often with computerized systems, but even when these do
occur, the bookkeeper or accountant can make a quick adjusting entry and watch as the
correction is automatically carried through to the revised T-accounts, trial balance and
financial statements.

But even with this automation, it is still important that bookkeepers and accountants
understand the accounting cycle and its various stages.