Fundamental Financial Accounting Concepts -Myassignmenthelp.Com

Question: Discuss About The Fundamental Financial Accounting Concepts? Answer: Introduction Trial balance is the accounting report or bookkeeping that records the balances in each general ledger of the company. The credit balances are recorded in a column with the name as credit balance and the debit balances are recorded in another column that is named as credit balance. If total debit side of the trial balance does not match with the credit side there must have been some errors included (Edwards 2013). On the other hand, the adjusting entries are used for correcting the errors and shall be completed prior to the issuance of the financial statement of the company. Trial balance and its purpose Trial balance can be defined as the statement of the balances that is extracted from various economics of ledger for testing the arithmetical exactness of the account books. The trial balance has 2 sides debit side and credit sides. It is the accounting report or bookkeeping that records the balances in each general ledger of the company (Lee 2014). The credit balances are recorded in a column with the name as credit balance and the debit balances are recorded in another column that is named as credit balance. However, the summation of each of this column shall be same as other. Within the accounting period the trial balance can be prepared at anytime. However, it is not the part of double entry method of accounting but is prepared to check the posting accuracy. Under the manual process the trial balance is generally prepared by the accountant for discovering whether any error exists there on account of clerical mistake or calculation mistake (Year 2017). Trial balance is very crucial for the purpose of accounting and auditing. It is used to reveal the following The account balance of the general ledger prior to the adjustments All the balances after adjustments Details adjustments Preparation of trial balance for the company helps to detect the calculation errors that may have taken place under the double entry system of accounting. If total debit side of the trial balance does not match with the credit side there must have been some errors included. The reason may be the transactions have been wrongly classified or material errors related to accounts that may not have been detected in the trial balance procedure. The trial balance ensures That all transactions are recorded with same credit and debit balances Through identification of errors in books of accounts it assists in correcting the errors before preparing the final accounts (Wahlen, Baginski and Bradshaw 2014) It makes preparation of balance sheet, profit and loss account and trading account easy through making all the accounting balances available at single place. Adjustment journal entries and purpose of recording adjustment journal entries The adjustment journal entries are the accounting entries that are made under the journal accounts of the company at the closing of financial period. These entries allocate the expenses and income to actual period under which the expenses or incomes take place (Henderson et al. 2015). It follows the principle of revenue recognition in the accrual method of accounting as against the time of receiving the payment or under the cash method of accounting. The adjusting journal entries are prepared for allocating Unearned revenue from the prepayment receipt to the period under which it is actually earned. Prepayment of the expense to period while the expenses are actually incurred Accrued revenue that is earned but to be received later to period in which it is earned Accrued expenses that will be paid later to period while the expenses are actually incurred (Apostolou et al. 2013). The adjusting entries are further used for correcting the errors and shall be completed prior to the issuance of the financial statement of the company. Generally it includes the scenarios when When as per the company policy something like fixed asset is booked under the capital account but it should have been booked under the expenses account like the supplies expenses Any entry that is made under the accounting records of the company, however, the amount is required to move under the period in which the expenses actually incurred or the revenue is actually earned or segregated among 2 or more than 2 accounting periods. No entries are recorded in the accounting records of the company for few revenues and expenses however, the expenses or the revenues took place in that period and shall be include in the balance sheet and income statement of that period (Weil, Schipper and Francis 2013). Purpose of preparing the adjusted trial balance The extended trial balance or the adjusted trial balance is the working paper that is used as the basis for the preparation of statement of financial position and income statement at closing of financial period. It records the same as the name suggests. It is used to bring the ledger balances together in trial balance form and adding the columns thereafter for recording the corrections and adjustments. For the adjusting trial balance, the adjustment column, statement of financial statement and profit and loss column is added. Before preparing the financial statement the accounting balances shall be verified to ensure that the credit balance and the debit balances are same (Edmonds et al. 2013). This is done through preparation of trial balance, listing all the accounts that include revenue, liabilities, equity and expenses. Thereafter each column is summed up and if 2 columns do not matched there must be some errors. In case of accrual accounting method, the revenues are recorded while it is earned and not when it is paid. In the same way, the expenses are recorded at time when it is incurred and not when it is paid. Therefore, before closing of the accounting period the adjusting entries are recorded to make the accounts up to date (Needles, Powers and Crosson 2013). The reason behind preparing the adjusted trial balance is for assuring that adjusting entries are recorded appropriately. Preparing the adjusted trial balance is the last step before the preparation of financial statements that is used by the company, its creditors, investors, shareholders and auditors for measuring the performance of the business. If wrong balances are entered in the financial statement the statement will be inaccurate. Difference between adjusting journal entries and closing journal entries Adjusting entries are recorded at the closing of each accounting period and prior to preparation of the financial statement for recording the accounting transactions and making the financial statement up to date while the accrual method of accounting is followed (Edwards 2013). For instance, every day the firm incurs the expenses related to salaries of employees. However, the salaries under payroll for the last day of the month will not be recorded till the end of the period. Other entries for adjustment involves amount that are paid by the company prior to the amount actually turning into expenses. For instance, the company made the payment towards insurance premiums for 3 months even before the start of these 3 months. Further, the expenses may be deferred through recording of the amount under the asset account (Warren and Jones 2018). On the contrary, the closing entries are recorded on the last day of accounting period. However, they are entered in accounts after preparation of financial statement. For most of the part the closing entries includes the accounts related to income statement. The closing entries record the balances from all the expense accounts and revenue accounts to zero (Weygandt, Kimmel and Kieso 2015). This states that the expenses and revenues will start in the New Year with no balance which in turn will allow the company to report the expenses and revenues easily. Further, the net amount from all the balances from expenses and revenue accounts at the closing of the period will recorded as retained earnings for the companies and owners equity for the sole proprietorship. Conclusion From the above, it can be concluded that the Trial balance is very crucial for the purpose of accounting and auditing. It helps in preparation of balance sheet, profit and loss account and trading account easy through making all the accounting balances available at single place. The adjusted trial balance is used to bring the ledger balances together in trial balance form and adding the columns thereafter for recording the corrections and adjustments. The main difference of adjusting journal entries with the closing balance is that the closing entries record the balances from all the expense accounts and revenue accounts to zero. Reference Apostolou, B., Dorminey, J.W., Hassell, J.M. and Watson, S.F., 2013. Accounting education literature review (20102012).Journal of Accounting Education,31(2), pp.107-161. Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013.Fundamental financial accounting concepts. New York, NY: McGraw-Hill Irwin. Edwards, J.R., 2013.A history of financial accounting (RLE Accounting)(Vol. 29). Routledge. 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