Aspects of Financial Accounting

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📝 Subject:	Accounting
📑 Pages:	4
✍️ Type:	Essay

Journal entries are used in accounting to enter business transactions into records. (Albrecht, Stice and Stice 72). Adjusting the journal entries at the year end is done in order to reflect all the transactions that relate to the just concluded financial year so that the final accounts comply with the accrual accounting principles (Warren, Reeve and Duchac 110). The following are the adjustments to the journal entries of Silver Lining Inc on 31^st December, 2011:

Consulting services revenue account
	$		$
Balance c/d	64000	Balance b/f Accounts receivable Unearned consulting revenue	60000 1500 2500
	64000		64000

Accounts Receivable account
	$		$
Balance b/f Consulting services revenue	2000 1500	Balance c/d	3500
	3500		3500
Unearned consulting services revenue
	$		$
Consulting services revenue Balance c/d	2500 1000	Balance b/f	3500
	3500		3500

Office supplies account
	$		$
Balance b/f	205	Office supplies expense Balance c/d	95 110
	205		205

Office supplies expense
	$		$
Balance b/f Office supplies account	605 95	Balance c/d	700
	700		700

Provision for depreciation-Office equipment
	$		$
Balance c/d	36000	Balance b/f Depreciation expense-office equipment	35250 750
	36000		36000

Depreciation expense account – Office equipment
	$		$
Balance b/f Provision for depreciation – office equipment	8250 750	Balance c/d	9000
	9000		9000

Prepaid Rent account
	$		$
Balance b/f	1200	Rent expense Balance c/d	600 600
	1200		1200

Rent expense Account
	$		$
Balance b/f Prepaid rent account	3525 600	Balance c/d	4125
	4125		4125

Unexpired insurance account
	$		$
Balance b/f	270	Insurance expense Balance c/d	225 45
	270		270

Insurance expense account
	$		$
Balance b/f Unexpired insurance account	1010 225	Balance c/d	1235
	1235		1235

Salaries expense account
	$		$
Balance b/f Salaries payable	27100 1900	Balance c/d	29000
	29000		29000

Salaries payable account
	$		$
Balance c/d	1900	Salaries account	1900
	1900		1900

Interest expense account
	$		$
Balance b/f Interest payable	360 60	Balance c/d	420
	420		420

Interest payable account
	$		$
Balance c/d	420	Balance b/f Interest expense	360 60
	420		420

Income tax expense account
	$		$
Income taxes expense Income tax payable account	6900 600	Balance c/d	7500
	7500		7500

Income tax payable account
	$		$
Balance c/d	2350	Balance b/f Income tax expense account	1750 600
	2350		2350

Silver Lining Inc Adjusted Trial Balance 31^stDecember 2011
Details	Debit $	Credit $
Cash Account receivable Office supplies Prepaid rent Unexpired insurance Office equipment Accumulated depreciation: Office equipment Accounts payable Interest payable Income taxes payable Notes payable Unearned consulting services revenue Capital stock Retained earnings Dividends Consulting services revenue Office supplies expense Depreciation expense: Office equipment Rent expense Insurance expense Salaries expense Salaries payable Interest expense Income taxes expense	42835 3500 110 600 45 54000 1000 700 9000 4125 1235 29000 420 7500	36000 1400 420 2350 9000 1000 30000 8000 64000 1900
Totals	154070	154070

The income statement of a company is used to indicate the financial performance of the company by offsetting the business expenses from the revenues generated during the financial year (Gibson 56). The statement of retained earnings is usually a part of the income statement that shows the amount of undistributed profits held by the company (Banerjee 169). Below is the statement of incomes and the statement of retained earnings of Silver Lining Inc. for the 2011 financial year.

Silver Lining Inc Income Statement and Statement of Retained Earnings For the Year Ended 31^stDecember, 2011
	$	$
Consulting services revenue		64000
Less Operating Expenses
Office supplies expense Depreciation expense: Office equipment Rent expense Insurance expense Salaries expense	700 9000 4125 1235 29000	(44060)
Operating profit Less: Interest expense		19940 (420)
Profit before tax Less: Income tax expense		19520 (7500)
Profit after tax Less: Dividends		12020 (1000)
Retained earnings for the year Add: Retained earnings balance b/f		11020 8000
Retained earnings balance c/d		19020

The balance sheet shows the assets held in the company and liabilities owing to outside parties at the close of the financial period (Elliott and Elliott 113). The balance sheet of Silver Lining Inc. for the financial year 2011 is as shown below:

Silver Lining Inc Balance Sheet As at 31^stDecember, 2011
Non-current assets	$	$	$
Office equipment Less: Accumulated depreciation			54000 (36000)
Net book value			18000
Current Assets
Office supplies Account receivable Unexpired insurance Prepaid rent Cash		110 3500 45 600 42835
		47090
Less: Current Liabilities
Account payable Interest payable Income taxes payable Notes payable Salaries payable Unearned consulting services revenue	1400 420 2350 9000 1900 1000
Working capital		(16070)	31020
Net assets			49020
Financed by
Capital stock Retained earnings			30000 19020
			49020

Closing entries refers to the transfer of accounting items or entries from the temporary accounts to permanent accounts (Albrecht, Stice and Stice 144). Temporary accounts are usually the revenue and the expense accounts (Gilbertson, Lehman and Harmon-Gentene 494). The closing entries for Silver Lining Inc is as shown below:

Account	Debit $	Credit $
Consulting services revenue account	64000
Income summary		64000
To close the revenue account
Income summary	51980
Office supplies expense Depreciation expense: office equipment Rent expense Insurance expense Salaries expense Interest expense Income taxes expense		700 9000 4125 1235 29000 420 7500
To close the expense items
Income summary	12020
Retained earnings		12020
To close the income summary account to the retained earnings account
Retained Earnings	1000
Dividend account		1000
To close the dividend account to the retained earnings account

An after-closing trial balance is a list of balances that remain after closing entries have been made (Kieso, Weygandt and Warfield 106). The following is the after-closing trial balance of Silver Lining Inc. on 1^st January 2012:

Details	Debit $	Credit $
Cash Account receivable Office supplies Prepaid rent Unexpired insurance Office equipment	42835 3500 110 600 45 54000
Accumulated depreciation: Office equipment Accounts payable Interest payable Income taxes payable Notes payable Salaries payable Unearned consulting services revenue Capital stock Retained earnings		36000 1400 420 2350 9000 1900 1000 30000 19020
Total	101090	101090

Insurance

	$
Insurance expense for the year Less: insurance expense for 10 months	1235 (225)
Insurance expense for January and February	1010
Average insurance expense	505

Average monthly rent expense for January to September

	$
Rent expense for the year Less: Rent for three months (October, November, December)	4125 (600)
Rent expense for January to September	3525
Average rent for the period	391.67

The office equipment had an economic life of six years. The assumption here is that the straight-line method of depreciation is used by the company. For the straight line method:

Depreciation (Per annum) = Cost of the asset ÷ Economic life (Coles 93).

The annual depreciation of the office equipment is $9000 (54000÷6). Given that the provision for depreciation account has a balance carried down of $36000, it is then clear that the office equipment was in the company for four years (36000÷9000=4).

Works Cited

Albrecht, W Steve, Earl K Stice and James D Stice. Financial accounting. Mason: South-Western/Cengage Learning, 2011. Print.

Banerjee, Birendra Krishna. Financial Accounting : Concepts, Analyses, Methods and Uses. New Delhi: PHI Learning Private Limited, 2010. Print.

Warren, Carl, James Reeve, Jonathan Duchac. Financial & Managerial Accounting. Ohio: South-western Cengage Learning, 2014. Print.

Coles, Martin. Financial management for higher awards. Oxford: Heinemann, 1997. Print.

Elliott, Barry and Jamie Elliott. Financial accounting and reporting. Harlow: Financial Times Prentice Hall, 2008. Print.

Gibson, Charles H. Financial Reporting and Analysis + Thomsonone Printed Access Card. Mason: South-Western Publishing, 2012. Print.

Gilbertson, Claudia, Mark W. Lehman and Debra Harmon-Gentene. Fundamentals of Accounting: Course 1. Mason: South-Western Cengage Learning, 2014. Print.

Kieso, Donald E, Jerry J Weygandt and Terry D Warfield. Intermediate accounting. Vol. 1. Hoboken: John Wiley & Sons, 2011. Print.

Works Cited

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