Accounting principles and practices

Accounting

Maryville Online Company

Trial Balance

Debit

Credit

Cash

Accounts Receivable

Equipment

Accounts Payable

K. Jacobson, Capital

K. Jacobson, Withdrawal

Service Fees

Salaries Expense

Rent Expense trial balance is a list of a business entity's accounts with their ledger balances. The purpose of preparing a trial balance is to test the accuracy of the journalizing and posting process. The account titles are arranged according to the Assets, Liabilities, Owner's Equity, Revenue and Expenses and only accounts with balances appear in the trial balance. The accounts should be in their normal balances, Assets, Withdrawals and Expenses under the Debit side and Liabilities, Capital and Revenues under the Credit side. The total amount under the debit column should be equal with the total amount under the credit column. A difference would signify an error has occurred either in the journalizing or posting process.

One of the qualitative characteristics of financial statement reports is Reliability. Reliability pertains to the degree of confidence the users have on the financial statements because they represent faithfully the economic substance of the transactions. Simply stated, that the figures as represented in the reports is not misstated or manipulated. In order to secure that the accounts represent what they are suppose to be, adjusting entries are made as part of the accounting cycle of a business entity. Adjusting entries are those made in order to update the accounts to their proper balances and ensure their accuracy as of the date of the report. Generally, it is the timing issues of a particular account that needs to be adjusted in order to conform to its appropriate accounting period. The adjusting entries depend on the nature of the account to be adjusted, whether the account is an asset, liability, capital, revenue or expense.

Absence of these adjustments, the financial report for a particular period is misstated and may not lead to an informed judgment to its users for effective decision making.

Adjusting entries are made along with the worksheet which aids in the preparation of the financial statements.

In analyzing the account transactions to make the necessary adjustments, the Revenue and Expense Recognition Principles or otherwise called the Accrual Basis of Accounting is considered. Under this principle, it is recognized that some of the ledger accounts does not reflect the accurate amounts and should be adjusted because some income earned or expenses incurred have not yet been recorded in the books of accounts, included in the accountant's book are some income which are not yet earned or some expenses which are not yet expired, some assets included in the books of accounts should already be expired or used up, or some advances from customers or clients included in the books of accounts are already earned. Various users use the financial statements to judge the financial position and operating performance of the business therefore it is important that the financial statements be properly prepared in a manner as to reflect the substantial transactions pertaining to the particular reporting period.

Accrued income and accrued expenses, unearned or deferred income, prepaid expenses, bad debts or doubtful accounts and depreciation are the accounts usually adjusted. Absence of adjusting entries would most likely to either understate or overstate the accounts in the period of reporting and will have an adverse effect on the following reporting period. This is true except for bad debts or doubtful accounts and depreciation. Being in nature of an expense accounts and valuation accounts, absence of adjustments would overstate the operational performance of the business and at the same time overstate valuation of the particular asset it is supposed to reduce to its realizable value. Such absence would affect only the particular period where adjustment was omitted. To illustrate, salaries and wages of workers should be recorded as expense for the period, even if the actual payment falls on the following period. Failure to record the expense would understate salaries and wages for the year as well as understatement or omission of a liability regarding the same. The effect is an overstated operating income, specially when the object of the business is service and salaries is a direct cost of operations.

A petty cash fund is an operating cash fund used for petty or small disbursements where an issuance of check is not considered practical and convenient. Such fund is usually under the charge of the cashier or to a particularly designated petty cash custodian. The establishment and replenishment of the petty cash fund are recorded in the Book of Accounts of the company. The actual disbursements from such fund are recorded in a separate petty cash book with reference to the amount taken, purpose and the requesting party.

In the problem before us, the entry to establish the petty cash fund as well as the replenishment for the month of August is as follows: