9 Chapter From Trial Balance to Financial Statements
Learning objectives Trial Balance Adjustments Financial Statements Income Statement Balance Sheet Profit Assets Capital Liabilities
1. Purpose and limitations of trial balance Purpose: • Check total debit = Total credit • As first step in preparing the financial statements. Limitations: • Not identify errors such as mispostings to wrong account or double entries for wrong amount. • Not identify where and what are the errors .
2.Main adjustments • Closing inventory • Depreciation • Accruals • prepayments • irrecoverable debts • Allowance for receivables • Revaluation of non-current assets
Closing inventory Dr Inventory (closing bal ) Cr I/S (cost of sales)
Depreciation Dr Depreciation expense Cr Accumulated depreciation
Accruals Dr Expense account Cr Accrual (current liability) Dr Accrued income (current asset) Cr × × Income (I/S)
Prepayments Dr Prepayment(current asset) Cr Expense account (I/S) Dr ×× Income ( I/S) Cr Prepaid income (current liability)
Irrecoverable debt and allowance Dr Irrecoverable debt expense (I/S) Cr Receivables (B/S) Dr Irrecoverable debt expense (I/S) Cr Allowance for receivables (B/S)
Revaluation of non-current assets Dr non-current assets Cr revaluation reserve
e.g p177 • Test p184
10 chapter Books of Prime Entry and Control Accounts
Learning objectives Books of Prime Entry First/Original Entry Day Books Cash and Petty Cash Books Journal • Sale • Purchase • Sales return • Purchase returns Post to Ledger Accounts Control Accounts (general ledger) Individual ledger accounts Individual payables Receivables ledger control account Payables ledger control account Individual receivables
1.Business documentation • P 192 • Documents , contents, purpose
2. Accounting records-- prime entry • First/original entry for transactions • Avoid clutter and errors in ledger accounts. • Different types of prime entry p194 • Source for the ledger accounts. • Double entry will be recorded periodically based on the prime entry.
3. Ledger accounts and division of the ledger • General ledger contains all accounts necessary to produce the F/S. ---Receivables ledger control account ---Payables ledger control account • Subsidiary ledger individual accounts for memorandum purpose. • ---accounts receivable ledger • ---accounts payable ledger
4. Sales and purchases day books • Sales day book (p196) : records credit sales • Double entry: Dr Receivables (individual or sales ledger control account) Cr Sales Dr sales returns Cr Receivables (individual or sales ledger control account)
Purchase day book (p197) :records credit purchases • Double entry: Dr purchases Cr Payables(individual or control account) Dr Payables(individual or control account) Cr Purchase returns p197 expandable text p199 example
5. Sales tax in day book Dr Receivables (individual or control account) Cr sales tax (output) Cr sales Dr Purchases Dr sales tax (input) Cr Payables (individual or control account) P201 e.g p202 test1
6. Control accounts • Are ledger accounts that summarize a large number of transactions. • Receivables ledger control account • Payables ledger control account
Control Account Receivables Ledger Control Account（Receivables） 期初余额 期初余额 本期赊销额SDB 销售退回 回收款 拒付支票dishonored cheque 注销坏帐 贷方余额退回 销售折扣 与应付对消 期末余额(应收) 期末余额（预收）
Control Accounts Payables Ledger Control Account（Payables） 期初余额 X 期初余额 X 付款 X 赊购 (PDB) X 购货退回 (PRDB) X X X 借方余额退回 购货折扣 (CB) X 与应收对销 X X 期末余额 期末余额
Contra entries: Dr Payables ledger control account Cr Receivables ledger control account
Credit balance on the RLCA (liability): • The customer has overpaid. • Credit notes have been issued. • Payment is received in advance. Debit balance on the PLCA for similar reasons. p206 test2
7. The cash book • The cash payments book p207. • The cash receipts book p208. • P208 test3
8. The petty cash book • The petty cash system is design to deal with sundry small payments.
The imprest（定额备付制） system • Step1 decide the petty cash float and put it in petty cash box: Dr Petty cash Cr Bank • Step2 use petty cash and get expense voucher : No double entry. • Step3 Reimbursement Dr Expense Cr Bank • float= cash in petty cash box + total expense vouchers
Control over petty cash p210 • e.g p210
9. The journal A book of prime entry which records transactions which are not routine. • Year-end adjustments • Acquisitions and disposal of non-current assets. • Opening balances of B/S items. • Correction of errors. • P213 test 4
Books of Prime Entry and Control Accounts Books of Prime Entry First/Original Entry Day Books Cash and Petty Cash Books Journal • Sale • Purchase • Sales return • Purchase returns Post to Ledger Accounts Control Accounts (general ledger) Individual ledger accounts Individual payables Receivables ledger control account Payables ledger control account Individual receivables
11 chapter Control Account Reconciliations
Learning objectives Control Account Reconciliation Receivables and Payables Total of List of Individual ledger account Balances Total Control Accounts Adjust Adjust Reconcile
1. Control accounts • A means of providing the accuracy of the ledger account. • To compare the sum of individual ledger accounts (receivable and payable) with the balance on the SLCA and PLCA. • Both are updated using the same sources and therefore should agree.
2. Supplier statements The purpose is to : • Ensure the amount outstanding (未偿付余额)is accurate and agrees with underlying documents. • PLCA and individual list of payables balance should agree with the balance on the supplier statements.
3. Control account reconciliations • Compare the total amount of control account with the individual ledger account. • Receivables ledger reconciliation ——compare the RLCA with individual receivable ledger. • Payables ledger reconciliation ——compare the PLCA with individual payable ledger
Differences may arise due to: • Errors in receivables or payables ledger • Errors in RLCA or PLCA. • Errors in both
4. Preparing a control account reconciliation • Adjustment of control account ( use T account). • Adjustment of individual ledger account ( use reconciliation). • Both revised balances should agree after adjustments. • E.g 223 • Test 2,3 p226
12 Chapter Bank Reconciliations
Learning objectives Bank Reconciliation Statements Business Bank Cash Book Bank Statement Adjust Adjust Reconcile
1.The bank reconciliation • Reconcile the difference between business cash book balance and the bank statement balance. • Business has a debit balance in his cash book, meanwhile the bank has a credit balance in his bank statement. • Timing differences inevitable occur. • Reconciliation is usually carried out at monthly intervals.
2. Differences between bank and business （１）Unrecorded :Items in bank statement not in cashbook • Bank charges银行收费(- Cr) • Direct debits/Standing orders委托付款(- Cr) • Direct credits委托收款 (+ Dr) • Dishonoured cheques存款不足被退回的支票 (- Cr) • Bank interest存款利息(+ Dr)
（２）Timing differences: items in cashbook not in bank statement • Unpresented cheques/outstanding cheques (已开出未付款支票) (-) • Uncleared lodgements/outstanding deposits(已送存未划帐存款) (+)
(3) Errors in the cash book (4) Errors in the bank statement
3. Proforma bank reconciliation • Cash book adjustment (use T account p236) • Bank statement adjustment. • The balance on B/S is the revised balance of cash book.
Cash book adjustments Cash book Bal b/d X Adjustments X Adjustments X Revised bal c/d X X X Revised bal b/f X
Bank Reconciliation Statements Balance per bank statement X Less: Outstanding/unpresented cheques (X) Add: Outstanding/uncleared lodgements X Other adjustments X/(X) Revised balance per cash book X