Several accounting transactions occurred during the month of December 20X5 and were as follows:
A withdrawal was made at a value of £15,000 from the business for the personal use of the owner.
An existing retail store was purchased by the company for £150,000 on December 1.
10 desktops were purchased at a total cost of £3,500. The purpose of which is for the administrative and retail operations of the business.
10 printers totalling to £500 and miscellaneous computer accessories worth £275 were purchased. The purpose of which is to improve the purchase ordering as well as the selling operations of the business.
5 security cameras and other shop fittings worth £175 were also bought during the month in order to safeguard the store property and equipment. The additional benefit is to minimize stock losses from theft.
Furniture and fixtures worth £32,500 were purchased at the beginning of the business. This includes shopping trolleys and the display cases for the products.
Depreciation was calculated on straight line method for the desktops, printers and computer accessories, and on security cameras. The depreciation charges for the month of December were £97, £21.50 and £4.50 respectively.
Depreciation was calculated on a reducing balance method for the furniture and fixtures, which amounted to a total of £677.
A small warehouse was rented by the company for the purpose of storing the surplus inventory. The surplus inventory was primarily due to the volume required by the suppliers to maximize the merchandise discount. The rent for the month of December paid on December 1 and amounted to £550.
Customers were given late payment options under a sales related promotional scheme due to the holiday season. The purpose of the promotion is to attract and retain customers from its competitors. Due to the sales promotion, the company generated debts amounting to £10,500.
A loan of £250,000 was received from the bank in December for the purpose of financing several capital expenditures. An interest of £1,875 was paid on the loan during the month of December.
The company generated payables worth £56,500 but was not paid to the suppliers in December. This resulted to creditor balances in the ledger accounts.
Employees are given their salary at the 10th day of every month. A portion of the employee salary was paid and that the salary outstanding at the end of December amounted to £33,500.
Total sales generated in the month of December were worth £345,000.
Total purchases during the month of December were worth £224,500.
Additional direct expenses were incurred for the transfer of the purchased goods which amounted to £1,500 during the month of December.
Closing stock was valued at £56,500, which was at market value. This complied to the government requirement of valuing the inventory at the lower of cost or market.
Electricity and telephone bills generated and paid in December amounted to £1,200.
Transportation and other conveyance costs and was not considered as part of the inventory account amounted to £900.
Miscellaneous shop expenses generated during the month of December amounted to £4,250.
Transferring of the ending balances of December 31 20X5 to the beginning balance for January 1 20X6. The Ledger Accounts stood as:
The Trial Balance, Income Statement, Balance Sheet and Cash Flow Statement of the company are as follows:-
The trial balance is a statement showing the total balances of all the debit and credit accounts from the entity’s ledger accounts (Wood and Horner, 2010). All the debit accounts are added in one column while the credit accounts are added in another column disregarding the fact if the accounts are under assets, liabilities and equity (Wood and Horner, 2010). The purpose of the trial balance is to show whether the total value of the debit column is equal to the total value of the credit column (Wood and Horner, 2010). If the total value of the debit and credit columns is the same, then the double-entry bookkeeping activity was correctly done (Wood and Horner, 2010).
However, if the balance of the debit and credit columns are unequal, then it means that some transactions in the ledger accounts were incorrectly entered during the double-entry bookkeeping (Wood and Horner, 2010). Some of the most common mistakes done during the double-entry bookkeeping include (1) half of a transaction was entered and the other half was forgotten, (2) making 2 debit entries or 2 credit entries instead of a debit and a credit entry, and (3) unequal values are placed for the transaction entry (Wood and Horner, 2010).
Even though the trial balance has equal values for the debit and credit columns, it does not mean that there were no mistakes done for the double entry system of accounting. There are several limitations to a trial balance such as that (1) a transaction was not recorded, (2) an incorrect value was placed on both the debit and credit column, and (3) reversed entry for the debit and credit accounts. Therefore, the “trial balance is not a conclusive statement to verify the accuracy of the books of accounts maintained by a firm” (Trial Balance - Preparation, Limitations and Method of preparing trial balance, 2012) it is instead to check whether there are mistakes done during the recording of the entry (Wood and Horner, 2010).
The trial balance then only confirms whether the recorded accounts in the debit and credit columns are mathematically correct or not. The main disadvantage is that it will fail to show errors of omission or commission since such errors tend debit and credit entries are balanced with each other. Moreover, the trial balance also fails to disclose any posting errors or recording errors. This statement is merely an initial tool used in the preparation of the balance sheet and profit and loss statement.
There are three significant financial statements that are usually prepared by the company and these are the income statement, the balance sheet, and the statement of cash flows. The balance sheet or the financial position statement is a statement which gives “a snapshot of a business's financial condition at a specific moment in time, usually at the close of an accounting period” (Inc.com, 2000). The balance sheet reveals the financial position of the company with regarding to the assets that it owns and the obligations it has to pay as well as the funds invested by the owners (Wood and Horner, 2010). The balance sheet is also used to depict how the company sourced and used its funds during the period under consideration. The asset accounts depicted on the left side of the balance sheet is the uses of funds while the right side divided into the liabilities and equity accounts are the sources of the funds. It is considered to be a valuable document to be used by internal and external stakeholders of a company. Internal stakeholders are management, suppliers, creditors, and employees while the external stakeholders are shareholders, customers, government agencies, and investors.
The trading and profit and loss account or the income statement is an account which reveals how company is generating revenues, controlling costs and earning profits (Wood and Horner, 2010). “It's an accounting scorecard on the financial performance of your business that reflects quantity of sales, expenses incurred and net profit“ (Entrepreneur, 2016). This statement is considered to be as important as the balance sheet since it reveals the profitability of the company for a specific period of time. It is a useful tool that can be used by management how its prepared budget compares against the actual performance of the company in a specific period of time. Other significant accounts within the income statement are the cost of goods sold, income taxes paid, and earnings per share. The managerial remuneration paid to the company management may also be included within the income statement but are already included in the operating expenses or administrative expenses (Wood and Horner, 2010).
The statement of cash flows is another important financial statement since it reveals the entity’s cash inflows and outflows during a specific period of time. This statement reveals all of the sources of cash and all the uses of cash under three company activities, which are operating, financing, and investing activities (Wood and Horner, 2010). It reveals how much cash the entity has earned through its operations and how much of it was used or generated from investing and financing activities. This statement plays a vital role in determining the entity’s liquidity position with regards to the generation of cash and its cash equivalents (Wood and Horner, 2010). It also reveals the whether the entity is primarily using equity or debt financing and its repayment capabilities during a specific period of time. The statement of cash flow also reveals the level of capital expenditures the entity had incurred during the period and its capacity to utilize its assets, liabilities, and equity to generate cash.
Depending on the requirements of the country the company is operating, the dividends may be either included in the income statement after the net income or profit account. The payments of dividends are always included in the financing activities section of the statement of cash flows as deductions to the cash balance. These three statements can be used to reveal the company’s financial strength in terms of liquidity, profitability, solvency and financial leverage through the use of financial ratios (Wood and Horner, 2010).
Bibliography
Entrepreneur. (2016). Income Statement. [online] Available at: https://www.entrepreneur.com/encyclopedia/income-statement [Accessed 10 May 2016].
Inc.com. (2000). The Basics of Balance Sheets. [online] Available at: http://www.inc.com/articles/2000/05/18941.html [Accessed 10 May 2016].
Trial Balance - Preparation, Limitations and Method of Preparing Trial Balance. (2012). In: Financial Management & Cost Accounting, 1st ed. [online] Available at: http://ecoursesonline.iasri.res.in/mod/page/view.php?id=4614 [Accessed 10 May 2016].
Wood, F., & Horner, D. (2010). Business Accounting Basics. Harlow, England: Financial Times Prentice Hall.
