Accounting for Executives

Accounting for Executives

Week 2Lecture Hours: 2.5 hours18/3/2011 (Fri)

Closing Closing BalancesBalances and the and the

Trial BalanceTrial Balance

What’s Inside ?

Learning ObjectivesLearning Objectives

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Trial Balance

Balancing the accountTrial Balance

Balancing the account

Learning ObjectivesLearning Objectives

Close accounts at the end of a month.

Close accounts at the end of a financial year.

Prepare accounts using the running balance method.

Prepare a trial balance and state its uses and disadvantages.

No. We need to find the difference between the debit side and

the credit side to see how much is left. This procedure is called closing the accounts and the difference is called the balance. There are two stages of account closing:

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nswer

Up to this stage, all you see from the account is a list of entries. Take the bank account as an example, after entering ten debit entries and twenty credit entries in the account, do you know how much is left in the bank?

1. Month-end closing

2. Year-end closing

Month-end closing

Firms need to monitor the accounts regularly to see if there is any problem.

For example, owners need to know whether they have enough cash in the bank, whether debtors are slow in making payments or whether they owe creditors too much. Because of the above reasons, firms usually close the accounts at the end of each _____. After closing the accounts, the owners know the ______ of each account and they can make decisions accordingly.

month balanc

e

Month-end closing Take a bank account as an example. We now show how the account is closed at the end of a month:

20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000

Nov 3 Motor vehicles 60,000 “ 14 Rent 10,000 “ 22 Purchases 40,000

Sum up the debit side and the credit side separately.

Step 1

$110,000

If the total of the debit side and the total of the credit side differ, the difference is the balance of the account.

Step 2

$230,000


20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000


$230,000 $110,000

Difference between the debit side and the credit side= $230,000 - $110,000 = $120,000


20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000


Put this balance on the side with the smaller total. This closing balance is called balance carried down (abbreviated as balance c/d).

Step 3

“ 30 Balance c/d 120,000Closing balance


20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000

Nov 3 Motor vehicles 60,000 “ 14 Rent 10,000 “ 22 Purchases 40,000 “ 30 Balance c/d 120,000

Enter the totals on both sides at the same level. Now the debit-side total equals the credit-side total.

Step 4

230,000 230,000


The closing balance of the current month is the opening balance of the next month. This is called balance brought down (abbreviated as balance b/d).

Step 5

20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000


230,000230,000Dec 1 Balance b/d 120,000 Opening balance


20X7 $20X7 $

Bank

Nov 1 Capital 200,000 “ 25 Cash 30,000


230,000230,000Dec 1 Balance b/d 120,000

The balance of $120,000 means that there is $120,000 left in the bank at the end of November. At the beginning of December, the bank account will start with $120,000.

Month-end closing

From the above example, the balance c/d is on the credit side of the bank account. It means that the debit total is greater than the credit total. We call this balance a ___________.

When the credit total is greater than the debit total, the balance c/d would be on the debit side. This is a ___________.

$ $

debit balance

$$

credit balance

When the debit total is equal to the credit total, there would be no balance c/d. This is a __________.

Month-end closing

$ $

zero balance

Debit total > Credit total Debit balance

Debit total < Credit total Credit balance

Debit total = Credit total Zero balanceNote: Assets and expenses accounts usually have debit balances. Capital, liabilities and revenues accounts usually have credit balances.

uiz Corner Learning Objectives

Year-end closing

At the end of a financial year, businesses will close the accounts and prepare the ___________, including the ____________________________ and the ___________.

final accountstrading and profit and loss

accountbalance sheet

Final accounts

Trading and profit and loss account

Trading and profit and loss account Balance sheetBalance sheet

It allows owners to find out whether a profit or loss has been made.

It allows owners to know the financial situation of the business.

Year-end closing

______, _______ and ______ accounts will still have their balances carried forward to the next accounting year, and their balances will also appear on the ___________.

______ and _______ accounts will be closed at the year end. Balances will not be carried forward to the next accounting period. They will be transferred to the ____________________________.

Assets liabilities

capital

balance sheet

Revenues expenses

trading and profit and loss account

The method of closing the accounts at the year end is the same as that for the month end, except that some accounts will be _____ at the year end and their balances will not be _____________ to the next financial year.

closedcarried forward

Year-end closing

Year-end closing for revenues and expenses At the year end, the sales and purchases accounts will be closed and their balances will be transferred to the _____________, while the other revenues and expenses accounts will be closed and their balances transferred to the __________________.

trading account

profit and loss account

Example 1: JC Company’s financial year ended on 31 December 20X8. The sales account and the electricity account on that date would appear as:

Year-end closing

20X8 $20X8 $

Sales

Dec 1 Balance b/f 150,000Dec 31 Trading 150,000

20X8 $20X8 $

Electricity

Dec 1 Balance b/f 40,000 “ 21 Bank 20,000

Dec 31 Profit and loss 60,000

60,00060,000

You can see that the only difference between month-end closing and year-end closing is that the balances in the revenues and expenses accounts at the year end are ___ carried forward to the next period but are transferred to the ____________ or the ___________________.

not

trading account profit and loss account

Learning Objectives

Using this kind of account, the balance is calculated after each entry. Therefore, it is called ___________________.

Computerised account

When accounting records are kept on computers, the accounts are usually drawn up in three columns instead of in T form: one column for ___________, one for _____ ______, and the last one for the ______.

debit entries

creditbalance

running balance method

Example:

20X7 $20X7 $

Sally Tong

Sep 15 Bank 15,000 “ 18 Returns outwards 5,000

Sep 1 Purchases 10,000 “ 7 Purchases 20,000 “ 25 Purchases 10,000

40,00040,000 “ 30 Balance c/f 20,000

entries

Computerised account

Sally Tong

20X7 Debit Credit Balance$ $ $

Sep 1 Purchases 10,000 10,000 Cr “ 7 Purchases 20,000 30,000 Cr “ 15 Bank 15,000 15,000 Cr “ 18 Returns outwards 5,000 10,000 Cr “ 25 Purchases 10,000 20,000 Cr

The balance will be ________ using either method.

the same

Learning Objectives

When using the running balance method, it will appear as:

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After the year-end closing, businesses will prepare the final accounts. Should we do this immediately after closing the accounts? Or should we do something else before preparing the final accounts?

We should prepare a trial balance after closing the accounts at the year end and before preparing the final accounts. A trial balance is a list of all debit balances and credit balances in the books. It is used to check the accuracy of entries in the accounts and identify errors in the books.

Trial balance

We can use a trial balance to check whether any _____ has been made in the accounts by comparing the ________________ and the _________________. Recall the accounting equation, Assets = Capital + Liabilities. We have mentioned that assets usually have ____________, while capital and liabilities usually have ____________. To have the accounting equation remain in balance, total debit balances should be ______ total credit balances.

Assets = Capital + Liabilities

Total debit balances = Total credit balances

error

total debit balances

total credit balances

debit balancescredit balances

equal to

Trial balance Example: Record the following transactions of Margaret Wong for the month of June 20X8. Balance off the accounts at the end of the month, and then extract a trial balance as at 30 June 20X8.

“ 2 Bought goods on credit from Nicolas Tam for $50,000.“ 4 Bought a van by cheque for $60,000.“ 6 Returned defective goods of $1,000 to Nicolas

Tam.“ 9 Sold goods on credit to Benson Chow for $80,000.“ 11 Bought another van by cheque for $40,000.“ 15 Received a cheque from Benson Chow for

$80,000.“ 18 Paid rent of $20,000 in cash.“ 22 Bought goods with cash for $40,000.“ 25 Sold goods on credit to Daniel Ng for

$60,000.“ 27 Daniel returned good of $3,000 to Margaret. “ 30 Margaret took goods of $1,000 as a birthday gift for her husband.

Jun 1 Margaret Wong started business with $100,000 cash and $200,000 in bank.

Trial balance

Jun 1 Cash 100,00020X8 $20X8 $

Capital

Jun 1 Capital 100,00020X8 $20X8 $

Cash

“ 1 Bank 200,000

Jun 1 Capital 200,00020X8 $20X8 $

Bank

Trial balance

Jun 2 Nicolas Tam 50,00020X8 $20X8 $

Purchases

Jun 2 Purchases 50,00020X8 $20X8 $

Nicolas Tam

Trial balance

Jun 4 Van 60,000Jun 1 Capital 200,00020X8 $20X8 $

Bank

Jun 4 Bank 60,00020X8 $20X8 $

Van

Trial balance

Jun 6 Returns outwards 1,000 Jun 2 Purchases 50,00020X8 $20X8 $

Nicolas Tam

Jun 6 Nicolas Tam 1,00020X8 $20X8 $

Returns Outwards

Trial balance

Jun 9 Benson Chow 80,00020X8 $20X8 $

Sales

Jun 9 Sales 80,00020X8 $20X8 $

Benson Chow

Trial balance

“ 11 Van 40,000Jun 1 Capital 200,000 Jun 4 Van 60,000

20X8 $20X8 $

Bank

“ 11 Bank 40,000Jun 4 Bank 60,000

20X8 $20X8 $

Van

Trial balance

Jun 1 Capital 200,000 Jun 4 Van 60,000 “ 11 Van 40,000

20X8 $20X8 $

Bank

“ 15 Benson Chow 80,000

Jun 15 Bank 80,000Jun 9 Sales 80,00020X8 $20X8 $

Benson Chow

Trial balance

Jun 18 Rent 20,000Jun 1 Capital 100,00020X8 $20X8 $

Cash

Jun 18 Cash 20,00020X8 $20X8 $

Rent

Trial balance

“ 22 Purchases 40,000Jun 1 Capital 100,000 Jun 18 Rent 20,000

20X8 $20X8 $

Cash

“ 22 Cash 40,000Jun 2 Nicolas Tam 50,000

20X8 $20X8 $

Purchases

“ 25 Daniel Ng 60,000Jun 9 Benson Chow 80,00020X8 $20X8 $

Sales

Trial balance

Jun 25 Sales 60,00020X8 $20X8 $

Daniel Ng

Trial balance

Jun 27 Returns inwards 3,000Jun 25 Sales 60,00020X8 $20X8 $

Daniel Ng

Jun 27 Daniel Ng 3,00020X8 $20X8 $

Returns Inwards

Trial balance

Jun 30 Drawings 1,000 “ 22 Cash 40,000Jun 2 Nicolas Tam 50,000

20X8 $20X8 $

Purchases

Jun 30 Purchases 1,00020X8 $20X8 $

Drawings

Balance off all the accounts. Step 1

Jun 1 Cash 100,00020X8 $20X8 $

Capital

“ 1 Bank 200,000

“ 30 Balance c/f 40,000

Trial balance

Jun 30 Balance c/f 300,000

300,000300,000

Jun 1 Capital 100,000 Jun 18 Rent 20,000 “ 22 Purchases 40,000

20X8 $20X8 $

Cash

100,000100,000

Credit balance: $300,000

Debit balance: $40,000

Trial balance

“ 30 Balance c/f 89,000 “ 22 Cash 40,000Jun 2 Nicolas Tam 50,000 Jun 30 Drawings 1,000

20X8 $20X8 $

Purchases

90,000 90,000



“ 30 Balance c/f 180,000280,000280,000

Jun 1 Capital 200,000 Jun 4 Van 60,000 “ 11 Van 40,000

20X8 $20X8 $

Bank

“ 15 Benson Chow 80,000

Trial balance

“ 30 Balance c/f 49,000Jun 6 Returns outwards 1,000 Jun 2 Purchases 50,000

20X8 $20X8 $

Nicolas Tam

50,000 50,000

Crebit balance: $49,000

Jun 30 Balance c/f 100,000 “ 11 Bank 40,000Jun 4 Bank 60,000

20X8 $20X8 $

Van

100,000 100,000


Jun 30 Balance c/f 1,000 Jun 6 Nicolas Tam 1,00020X8 $20X8 $

Returns Outwards


Jun 30 Balance c/f 140,000 Jun 9 Benson Chow 80,000 “ 25 Daniel Ng 60,000

20X8 $20X8 $

Sales

140,000 140,000


Trial balance

Trial balance

Jun 9 Sales 80,000 Jun 15 Bank 80,00020X8 $20X8 $

Benson Chow

Zero balance

Jun 30 Balance c/f 20,000Jun 18 Cash 20,00020X8 $20X8 $

Rent


Jun 30 Balance c/f 3,000Jun 27 Daniel Ng 3,00020X8 $20X8 $

Returns Inwards


“ 30 Balance c/f 57,000Jun 25 Sales 60,000 Jun 27 Returns inwards 3,000

20X8 $20X8 $

Daniel Ng

60,000 60,000


Jun 30 Balance c/f 1,000Jun 30 Purchases 1,00020X8 $20X8 $

Drawings


Trial balance

Capital 300,000

List all debit balances and credit balances separately. Step 2

Trial balance

Dr Cr

Margaret WongTrial Balance as at 30 June 20X8

$ $

Cash 40,000Bank 180,000Purchases 89,000Nicolas Tam 49,000Van 100,000Returns outwards 1,000Sales 140,000Rent 20,000Daniel Ng 57,000Returns inwards 3,000Drawings 1,000

Find the total of debit balances and the total of credit balances and see if they are equal.

Step 3

Trial balance

Margaret WongTrial Balance as at 30 June 20X8

Dr Cr$ $

Capital 300,000Cash 40,000Bank 180,000Purchases 89,000Nicolas Tam 49,000Van 100,000Returns outwards 1,000Sales 140,000Rent 20,000Daniel Ng 57,000Returns inwards 3,000Drawings 1,000

490,000 490,000

Trial balance

Uses of a trial balance:

As a basis from which the final accounts are prepared.

To identify error(s) in the books.

To check whether the total debit balances and the total credit balances are equal.

Disadvantage of a trial balance:

Some errors may still exist even the trial balance agrees.

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Documents

Accounting for Executives