Trial balance provided by the accountant reflects the closing balances of ledger accounts on 30 September 2017. The ledger account balances are divided into credit balances and debit balances. In order to know if the financial entries are made correctly, the debit balances should equal the credit balances. In this case, the debit balance is £601,260 and the corresponding credit balance is £601,260 and thus means that the accountant recorded the ledger balances correctly.
In preparation for the Trial Balance, the accountant utilised five basic steps of the Accounting Cycle which include: recording transactions in Journal, posting information from journal to ledger, preparation of unadjusted trial balance, preparation of adjusting entries and lastly prepared the adjusted trial balance. Transaction recording in the journal included listing transactions chronologically in debit entry and credit terms in the correct account (Atrill & McLaney, 2016). Preparation of unadjusted trial balance was prepared on 31 August 2017 before adjusted entries where created on the financial statements. Below is an analysis of the accounting records provided by the accountant.
The Day Books
Day book in accounting contains a record of all days business transaction.
Toff Sales Day Book September 2017
It includes each individual credit sales provided to a customer. Each credit sales are recorded on the day it was offered to the customer and the exact amount of the credit sales issued. The total daily total of credit sales is then recorded on the sales ledger as credit sales. In the month of September, Toff had total credit sales of 10,360.
Toff Sales Returns Day Book September 2017
Also referred to Sales Inward Book, contains detailed information of the goods returned by customers to Toff due to either poor quality, or any other business-related reasons. All returned merchandise are recorded at the end of the business day.
Toff Purchase Day Book September 2017
Refers to an accounting ledger of Toff where purchasing transactions are recorded with their corresponding date. The September purchases of Toff totaled to £10,020.
Toff Purchase Returns Day Book September 2017
It shows the goods returned by Toff to its suppliers for certain reasons. On the purchase contract, the buyer is expected to return goods which are unsatisfactory accompanied by a debit note to the seller for compensation.
Toff Cash Receipts Book September 2017
This book represents a record of all cash receipts. In other words, it is a record of cash collections and payments from sales transactions and banks. A cash receipts book keeps track of all cash received by Toff from any source in September 2017
Toff Cash Payments Book September 2017
Cash Payment Book records all cash payments made by Toff. It contains major cash payments made by Toff. For instance, payments to creditors, cash payments to cover expenses such as rent, wages and salaries, electricity bills etc., and personal drawings of the proprietor as well as other cash payments.
Toff Journals September 2017:
Journal 1: this journal entry was made to correct the electricity expense of £1,000 which was wrongly recorded as drawings. This was done by debiting the amount in the electricity account and crediting the exact amount in the drawings account.
Journal 2: the entry was made to add the incurred September wage expense of £500 to the accrued wage expense in order to obtain the total wage expense for the financial year.
Journal 3: it is a record of the prepaid amount of rent by Toff to its landlord which is to be used to cover the rent expense owed.
Journal 4: this journal entry indicates the amount required as a provision for depreciation of the assets owned by Toff.
Journal 5: indicates the total amount which Toff have set aside as a provision for doubtful debts. Doubtful debts cover the debtors which are not likely to meet their debt payment obligations.
The closing inventory of £62,000 which was prior to be recorded is to be included as the ending inventory balance for 30th September 2017.
This account contains all sales transaction in the month of September 2017. It includes both cash (retrieved from cash receipts day book) and credit sales (from Sales Day Book) and is summed up with the balance carried forward from the trial balance as at 31 August 2017. The total is subtracted from the return-inward amount (from the Sales Return Day Book) to obtain net sales for the financial year ended 30 September 2017.
It is a general ledger account which records the inventory purchases of Toff. It reflects the amount of inventory available for sale in the fiscal year ended 30 September 2017. In the calculation of the total inventory for, the accountant added the closing inventory as at 31 August 2016 to the purchases made in October both in credit (from the purchase day book) and cash purchases (from the cash receipts day book).
Carriage inwards Account
This account the amount which is received from customers as transportation costs associated with the purchase of furniture at Toff.
Returns Outwards Account
Entails the total amount of goods returned to suppliers by Tuff. The amount is obtained from the Purchase returns the book and added to the balance from 31 August 2016 to get the total to be included in the income statement.
Wages Expense Account
This account includes the total amount of wage expense as at 30 September 2017. It includes the total wage expense as at 31 August 2016 added to the wage paid in cash in September and the accrued wages as stated in journal 2.
Rent expense Account
It shows the total amount of rent owed by the business. In this case, the rent expense is £38,480 which is a balance as at 31 August 2016 added to £4,100, being a cash payment for rent. The total rent expense is subtracted from the prepaid rent to attain the net rent expense to be included in the income statement.
Electricity Expense Account
It sums up the total electricity expense for the year ended 30 September 2017. It indicates the balance brought down as on September 1st, the electricity expense paid in September and the corrected amount which was wrongly recorded as drawings. The total electricity expense is to be carried forward to the income statement.
It represents the Inventory at 1 October 2016 which is to be included in the trial balance.
Loan Liability Account
It shows the amount which creditors has lend to Toff and it is supposed to be paid within a specified timeframe. The total amount due is transferred to the year starting 1st October 2017.
Trade Receivables Account
Trade receivables refer to the amount of money to be received for services and goods sold to customers. The goods sold on credit in the year ended 30 September 2017 is 45,860 while the credit sales on September is 10,360 (from the Sales Day Book). The balance transferred to the year starting 1st October 2017 is 47,120 being the difference between total credit sales and the total of (return inwards+ discount allowed +cash sales).
Discount Allowed Expense Account
It incorporates the amount of discount allowed by Toff to its customers.
Allowance for Receivables Account
It shows the increase in the amount which Toff has set aside to cater for debts which might not be paid. The total provision for doubtful debts (balance as at 1 september 2017 plus the increase) is transferred to the next fiscal year.
Allowance Expense Account
It represents the amount which Toff has increase as a provision for doubtful debts.
Trade Payables Account
It represents the amount which is to be paid to suppliers of Toff as at 1st October 2017.
Discount Received Income Account
It indicates the amount in discount which Toff received from suppliers. The business received a total of 210 for the purchases it made.
It indicates the value of equipment which Toff owns as fixed assets as at 1st October 2017.
Provision for Depreciation Account
This account indicates the total depreciation value of all assets owned by the business.
Bank Account it represents all bank transactions with Toff for the month of September 2017. It indicates the total bank balance which Toff has in its bank account.
It’s an accounting record which shows the distributions made by Toff to the owner. This amount represents a reduction in Toff owner’s equity.
It represents the amount of money that was paid to Toff by its owner. This account indicates that the business owes the owner £165,000
It represents the wage expense incurred in September 2017
It indicates the amount of rent which was paid in advance.
Double entry accounting system
Toff utilises the double entry accounting model to record all transactions in at least two accounts. In this system, there exist two columns in every account which has debit entries and credit entries. This model is grounded in the principle which highlights that for every debit entries there must be an equal credit entry. This system dictates that the total debit entries must match the corresponding total credit entries (Alan, 2016, p. 299).
Debit entry is positioned on the right while credit entry is positioned in the right column. Regarding the nature of the transaction, the outflows and inflows values are recorded on the corresponding account. The major account classification in accounting includes equity, revenue, liability, expense and asset accounts. Additionally, this method applies a general accounting equation (Assets=liabilities+equity) to ensure a systematic and complete recording of each aspect of the transaction. For instance, when Toff borrowed a £50,000 loan from the bank, the company increased its cash account by £50,000 and subsequently, its loans payable account increased by the equal amount of £50,000.
Toff accountant has employed all the basic principles to accurately record and document financial transactions since the records indicate correct and balanced entries. The value in the debit entries equals to the value in the credit entry column, and hence this indicates the accurate professional application of the double entry method. This method ensures that there exist mathematical accuracy based on the double-entry book-keeping principles and that correspond the reliability of the document for the owner to base his/her decisions.
The Daybooks and Journals
The Daybooks are books which record all transactions in a business day chronologically. They provide records depending on the original transaction. Firms like Toff have different types of transaction and records are kept according to their specific categories depending on the financial activity which took place. The types of Day Books in Toff include sales daybook which records daily credit sales, purchase daybook which records all credit purchases chronologically, return daybook inwards to record all goods return by customers on specific days and lastly, return outwards daybook which records all merchandise returned back to suppliers. Transactions are first recorded on the daybook and then transferred to the journal. Toff uses daybooks as the first data entry point for a business transaction. Daybooks are useful in pinpointing accounting transactions and aid in transaction verification for a financial transaction to ensure accurate records.
Journal is a record of financial transactions which are recorded as soon as they are conducted. Journals act as the second step of recording information from business financial transactions after daybooks. Journals have debit and credit entries, and financial information is balanced in pairs; that is every debit journal entry matches the corresponding credit journal entry in order to maintain the accounting equation. This type of recording ensures that errors are minimised and corrected in the initial stages of the recording of the transaction. Transactions are formally recorded in the journal and then transferred to the ledger for permanent documentation and official usage.
The General Ledger
A general ledger is defined as a set of accounts which summarise all business financial transactions. The general ledger is used to aggregate the information collected from business transaction and results to the formulation of financial statements such as a statement of income and comprehensive income statements as well as a statement of financial positions. The general ledger is summarized into ending balances in the trial balance. Since the general ledger is recorded using the double-entry method, it contains credit and debits entry through which each transaction is detailed within it. The total ending balances are required to be equal in both the credit and debit columns. This is due to the principle which requires every book-keeping entry to debit one account and credit a corresponding equal amount. This ensures that the general ledger maintains the accounting equation and be in balance. For instance, if a customer pays £500 for furniture, the accountant records the amount in the cash account and correspondingly records the equal amount of the accounts receivables. This means that the amount is debited in the cash account and credited in the account receivables. All the major accounts: revenue, equity, liabilities, expense, assets, loss and gain transactions accounts (Wood, 2001). All detailed business transactions are recorded in their specific major accounts. Information from these accounts is necessary for the preparation of all financial statements of the business.
Trial balance and annual reports
The trial balance is prepared after all transactions are posted in the journal and then to the general ledger. Trial balance report is prepared at the end of every financial year indicating the ending balances in each account. It is used to indicate whether the total credits entries equal the total debit entries in the accounting system (Dyson, 2017). This report is generated from the business transactions recorded in the general ledger. Since the first trial balance report (referred as unadjusted trial balance) is subjected to adjusting entries, it gives the need to generate adjusted trial balance based on the adjusting entries.
Annual reports refer to a comprehensive report which entails all transaction of the business throughout the financial year. These reports aim at analysing the financial health of the business and also to give financial insight to all shareholders in relation to financial and overall company operations. In legal perspective, it is the responsibility of the business to produce accurate annual reports. Additionally, the reports provide current and future financial position of the business. They are prepared based on applicable laws in specific countries and according to the GAAP and IFRS principles.
Profit and Loss statement For
The Year Ended 30 September 2017
Less: sales discount 500
Sales returns 2,700
Net sales 288,740
Cost of goods:
ADD: Beginning inventory 51,600
Carriage inwards 1,300
Less: purchase outwards 10,300
Ending inventory 62,000
Discount received 210
Cost of goods sold 123,810
Gross profit 164,930
Wage Expense 56,890
Rent Expense 37,230
Electricity expense 19,000
Allowance expense 770
Depreciation expense 18,000
NET PROFIT 33,040
Statement Of Financial Position
September 30, 2017
Allowance for doubtful debts (3,770)
Total current Assets 153,780
Less: Acc. Depreciation 52,000
Total Fixed Assets 138,000
Total Assets 291,780
Trade Payables 27,540
Total current liabilities 28,040
Bank loan 50,000
Total long-term liabilities 50,000
Total liabilities 78,040
Retained earning 33,040
Total equity 205,040
Total equity and liabilities 283,080
Atrill, P and McLaney, E (2016) Accounting and Finance for Non-Accounting Specialists (10th edition), Pearson,
Dyson, J (2017). Accounting for Non-Accounting Students (9th edition), Pearson
Sangster, Alan and Wood, Frank (2015) Business Accounting 1 (13th edition), Pearson.
Alan, S. (2016). The genesis of double-entry bookkeeping. Accounting Review, 2016, Vol 91 (issue1), p. 299 – 277
Wood, Frank (2001). Book-keeping and Accounts, FT Prentice Hall Retrivied from https://primo.anglia.ac.uk/primo explore/fulldisplay?docid=44APU_ALMA2120516590002051&context=L&vid=ANG_VU1&lang=en_US&search_scope=CSCOP_APU_DEEP&adaptor=Local%20Search%20Engine&tab=default_tab&query=any,contains,Bookkeeping&sortby=rank&offset=0