Posting to Ledger Accounts

The third step of accounting process is to post the journal entries to the ledger accounts. After posting all the journal entries, the balance of each account is calculated. The balance of an asset, expense, contra-liability and contra-equity account is calculated by subtracting the sum of its credit side from the sum of its debit side. The balance of a liability, equity and contra-asset account is calculated the opposite way i.e. by subtracting the sum of its debit side from the sum of its credit side.
The ledger account shown below are derived from the journal entries of  Company A

Unadjusted Trial Balance

A trial balance is a list of the balances of ledger accounts of a business at a specific point of time usually at the end of a period such as month, quarter or year. An unadjusted trial balance is the one which is created before any adjustments are made in the ledger accounts.

The preparation of a trial balance is very simple. All we have to do is to list the balances of the ledger accounts of a business.

Following is the unadjusted trial balance prepared from the ledger accounts of Company A.

Company A

Unadjusted Trial Balance

January 31, 2010

Particulars	Debit	Credit
Cash Accounts Receivable Office Supplies Prepaid Rent Equipment Accounts Payable Notes Payable Utilities Payable Unearned Revenue Common Stock Service Revenue Wages Expense Miscellaneous Expense Electricity Expense Telephone Expense Dividend Total	20,430 5,900 22,800 36,000 80,000 38,200 3,470 2,470 1,494 5,000 215,764	5,200 20,000 3,964 4,000 100,000 82,600 215,764

Adjusting Entries

Adjusting entries are recorded at the end of an accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not been recorded yet.

Most of the transactions which are recorded via adjusting entries are not spontaneous but are spread over a period of time. A common characteristic of all adjusting entries is that they involve at least one revenue or expense account.

Not all journal entries recorded at the end of a period are adjusting entries. For example, an entry to record a purchase on the last day of a period is not an adjusting entry. The main purpose of adjusting entries is to match revenues and expenses to the current period which is a requirement of the matching principle of accounting.

Adjusting entries are of following types:

Accruals
Accrual adjusting entries are used to record the accrual of revenue or expenses which should be matched to the current accounting period.
Examples: accrual of interest expense, depreciation expense, etc.

Prepayments
Adjusting entries for prepayments are recorded for adjustments to prepaid expenses and unearned revenue (i.e. revenue received in advance) so that the revenues and expense are matched with the respective accounting periods.
Examples: adjustments to prepaid insurance, office supplies, prepaid rent, etc.

This example is a continuation of the accounting cycle problem we have been working on. In the previous step we prepared an unadjusted trial balance. Here we will pass adjusting entries.

Relevant information for the preparation of adjusting entries of Company A

Office supplies having original cost $4,320 were unused till the end of the period. Office supplies having original cost of $22,800 are shown on unadjusted trial balance.

Prepaid rent of $36,000 was paid for the months January, February and March.

The equipment costing $80,000 has useful life of 5 years and its estimated salvage value is $14,000. Depreciation is provided using the straight line depreciation method.

The interest rate on $20,000 note payable is 9%. Accrue the interest for one month.

$3,000 worth of service has been provided to the customer who paid advance amount of $4,000.

                                                   Adjusting Entries

Date	Particulars	Debit	Credit
Jan 31	Supplies Expense Office Supplies Supplies Expense = 22,800 − 4,320 = 18,480	18,480	18,480
Jan 31	Rent Expense Prepaid Rent Rent Expense = 36,000 ÷ 3 = 12,000	12,000	12,000
Jan 31	Depreciation Expense Accoumulated Depreciation Depreciation Expense = (80,000 − 14,000) ÷ (5 × 12) = 1,100	1,100	1,100
Jan 31	Interest Expense Interest Payable Interest Expense = 20,000 × (9% ÷ 12) = 150	150	150
Jan 31	Unearned Revenue Service Revenue	3,000	3,000

Adjusted Trial Balance

An Adjusted Trial Balance is a list of the balances of ledger accounts which is created after the preparation of adjusting entries. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities. Adjusted trial balance can be used directly in the preparation of the statement of changes in stockholders' equity, income statement and the balance sheet. However it does not provide enough information for the preparation of the statement of cash flows. The format of an adjusted trial balance is same as that of unadjusted trial balance.

The following adjusted trial balance was prepared after posting the adjusting entries of Company A to its general ledger and calculating new account balances:

January 31, 2010
Office Supplies	4,320
Prepaid Rent	24,000
Equipment	80,000
Accumulated Depreciation		1,100
Accounts Payable		5,200
Utilities Payable		3,964
Unearned Revenue		1,000
Interest Payable		150
Notes Payable		20,000
Common Stock		100,000
Service Revenue		85,600
Wages Expense	38,200
Supplies Expense	18,480
Rent Expense	12,000
Miscellaneous Expense	3,470
Electricity Expense	2,470
Telephone Expense	1,494
Depreciation Expense	1,100
Interest Expense	150