Objectives of this Lecture

 Adjusted Trial balance

 Income Statement
 Balance Sheet
 Closing Entries

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What is adjusted trial Balance
 An adjusted trial balance is a listing of the
ending balances in all accounts
after adjusting entries have been prepared.
 In the following few slides we will discuss an
example of how to adjust balances in an
adjusted trial balance.

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 Example
 Suppose we purchase office supplies worth
Rs. 3500 on 1st Oct, 2018.
 What are the general entries, t accounts
balances and trial balance accounts?
 Solve it before you move onto the next slide

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General Entries
 1) Office Supplies 3500
Cash 3500
You can now make its T accounts and trial
balance

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Adjusting entries
 At the end of accounting period office
supplies on hand are 600
OR
 We can also explain it as “office supplies
expense is 2900”
(because out of office supplies worth 3500, only
600 are left on hand and the rest have been
consumed. )

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adjusting entry
 Office supplies expense 2900
Office supplies 2900
 Since office supplies were first recorded as
assets, we will now record expired office
supplies with an amount that has been
expired i.e. 2900.
 In this way we have recorded that our office
supplies expense is 2900 and office supplies
remaining are 3500 minus 2900 = 600

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 Now consider, what was the balance in our
trial balance before adjustment
 Office supplies 3500
 What are the balances in our trial balance
after adjustment
 Office supplies 600
 Office supplies expense 2900

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Income statement
 After we understand adjusted trial balance
(as we have just discussed), we can now
move on to make an income statement

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INCOME STATEMENT
 An income statement is a one-page financial
statement which summarizes the profitability
of the business entity
 It has two major components
1, Revenue
2,Expenses
 Result of income statement will be net profit
or loss of the business activity.

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 Company Name
Income Statement (Service Industry)
for the period ended 31 Dec, xxxxx

 Revenue 50,000
 Less: Expenses
Rent expense 4000
Salaries expense 5000
Utilities expense 6000
total expense 15,000
Net income 35,000

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Class activity
 Service revenue Rs.65,000
 Rent expense 4500
 Salaries expense 8000
 Repair and maintenance expense 2500
 Office supplies expense 2000
 Telephone bill expense 2500
 Electricity expense 3000

 Find net income or loss

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BALANCE SHEET
 The balance sheet lists the amounts of the
company’s assets, liabilities, and owner’s
equity at the end of the accounting period.
 The balances of assets, liabilities and owner’s
equity are taken from trial balance.

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Class activity
 Cash Rs.3000
 supplies Rs.450
 Land Rs.5000
 A/c receivable Rs.500
 Office equipment Rs.6000
 A/c payable Rs.7500
 Note payable Rs.1500
 Capital Rs.5950

 Prepare Balance sheet

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 Company Name
Balance sheet
As on 30 May, xxxx
Assets Liabilities + Proprietorship

Cash 3000 A/c Payable 7500

Note payable 1500
A/c receivable 500
Supplies 450
Owner’s equity
Capital 5950
Land 5000
Office equipment 6000 14950
14950

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 ACCOUNTING EQUATION
 ASSETS = LIABILITIES +OWNER’S QUITY

 ASSETS - LIABILITIES = OWNER’S EQUITY

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DEPRECIATION
 Equipment, furniture are purchased and use
in business over the years.
 Each year value of these assets decline
because of their use.
 Usage of these assets are recorded as
depreciation.

What journal entry is required?

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JOURNAL ENTRY OF
DEPRECAITON
 Depreciation expense (debit) xxxx
Accumulated depreciation (credit) xxx
( to record depreciation )

Example:
Company purchased computer for Rs.45000
and expected useful life is 5 years.

What is annual depreciation?

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Computation of depreciation
 Cost/ life of asset

 Annual depreciation: 45,000/5 = Rs. 9000

 What is adjusting entry?

Dr Cr
 Dep. Expense(equipment) 9000
 Accumulated dep.(equipment) 9000

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Effect on Income statement AND Balance
sheet

 Depreciation expense is recorded as expense

in INCOME STATEMENT

 ACCUMULATED DEPRECIATION is
deducted from cost of asset in Balance sheet

 Equipment 45000
 Less: accumulated depreciation 9000
36,000
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 Playland
Adjusted Trial Balance
December 31, 1994
 Cash 13,500
 A/R 2,800
 Buildings 60,000
 Acc. Depreciation (Buildings) 12,000
 Golf Course Structures 90,000
 Acc. Depreciation (Golf Co.) 30,000
 Accounts Payable 7,700
 Salaries payable 2,300
 Capital 108,000
 Drawing 25,000
 Admissions Revenue 192,000
 Advertising Expense 15,000
 Rent Expense 36,000
 Repairs Expense 5,200
 Salaries Expense 79,000
 Light and power Expense 4,500
 Depreciation Expense (Buildings) 6,000
 Depreciation Expense (Golf Co.) 15,000
 352,000 352,000

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INCOME STATEMENT for the year ended
Dec.31,1994
Admission revenue 192,000
Less: expense
Advertising expense 15,000
Rent expense 36,000
Repairs expense 5200
Salaries expense 79000
Light and power expense 4500
Depreciation expense-building 6000
Depreciation-golf 15000 160700
Net Income 31300
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INCOME STATEMENT-trading
activities
 Suppose you purchased merchandise for
Rs.6000 and sold for Rs.8000.

 What is Gross Profit?

 Gross profit = Sales – cost of goods sold

 Gross profit = 8000 – 6000 = 2000

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INCOME STATEMENT-trading
activities( continue)
 Suppose you have opening stock in store
worth Rs.500 and you purchase goods for
Rs.6000. Now whole stock sold for Rs.8000.

 What is Gross profit ???????

 Sales 8000
 Less: cost of sales
 Op.stock 500
 Purchase 6000 6500
 Gross profit 1500 23
INCOME STATEMENT-trading
activities( continue)
 Suppose you had opening stock Rs.5000 and
you bought goods Rs.25000. Total sales for
the period is Rs. 43,000. Closing stock in
store is Rs. 7000.
 What is cost of goods sold??????
 What is Gross profit????????

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Activity solution
 COST OF GOODS SOLD
 Opening stock + purchases –ending stock
 = Cost of goods sold

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COST OF GOODS SOLD
 Opening stock Rs.5000
 Purchases 25,000
Goods available for sale 30,000
 Less: closing stock (7000)

 cost of goods sold 23,000

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 INCOME STATEMENT

SALES REVENUE 43,000

Opening stock Rs.5000
Purchases 25,000
Goods available for sale 30,000
Less: closing stock
(7000) cost of goods sold (23,000)
GROSS PROFIT 20,000

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INCOME STATEMENT-trading
activities( continue)
 Suppose sales revenue for the year is
Rs.56,500 and sales return Rs.600 and sales
discount Rs.2000.

 What is net sales????????????

 Net sales = sales revenue-sales return-sales

discount

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NET SALES
 SALES REVENUE 56,500
 LESS: SALES RETURN (600)

SALES
NET DISCOUNT
SLAES (2000)
53900

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INCOME STATEMENT-trading
activities( continue)
 Purchase of merchandise Rs. 26,000. Paid
transportation charges Rs.3000. return goods
to supplier Rs.500 and availed purchases
discount Rs.3200.

 What is net purchases?????????

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 NET PURCHASES

PURCHASES

+
TRANSPORTATION NET PURCHASES

-
PURCHASES RETURN

-
PURCHASES DISCOUNT 31
NET PURCHASES
 Purchases 26,000
 Add: transportation 3000
Less: Purchases return
(500)
 Purchases discount (3200)
 Net purchases 25300

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ACTIVITY
 Sales revenue 75,600
 Purchases 56000
 Sales return 200
 Purchases discount 1000
 Transportation 1500
 Sales discount 600
 Opening stock 12000
 Closing stock 7000
 Find Gross profit????????????
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 INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31,2004

Sales revenue 75600

Less: Sales return (200)
Sales discount (600)
Net Sales
Less: Cost of goods sold 74800
Opening stock 12000
purchases 56000
add: transportation 1500
less: purchases discount (1000)
Less: closing stock (7000)
61500 34
GROSS PROFIT 13300
ACTIVITY
 Sales revenue 86,600
 Purchases 66000
 Sales return 1200
 Transportation 5500
 Sales discount 1600
 Closing stock 6000
 Opening stock 8000

 Find Gross profit????????????

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 Examples of what may be included in Income
statement and balance sheet are following

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INCOME STATEMENT (trading
activities)
 Mds. Inventory-opening
 Mds.Inventory-ending (credit)
 Purchases, return, discount, transportation
 Sales revenue, return, discount
 All expenses
 Other income

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CURRENT ASSETS
 Cash
 A/c Receivable
 Note receivable
 Closing stock
 Marketable securities
 Short term investment
 Prepaid/ unexpired / unuse
 Office supplies

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FIXED / NON-CURRENT ASSETS
 Furniture 56000
 Less: Accumulated dep (6000)
50,000

Building, machinery, equipment, land

Motor-vehicle, plant, long-term investment

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CURRENT LIABILITY
 A/c Payable
 Bill payable
 Accrued expenses
 Unearned
 Bank overdraft
 Short-term loan

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FIXED / NON-CURRENT
LIABILITY
 Long-term loan
 Bonds payable
 Mortgage loan
 Debenture payable

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Owner’s equity
 Capital
 Add: Net profit
 Less: Net loss
 Less: Drawing
 Add: Additional investment

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 CLOSING ENTRIES-M&M#179
 Firm close all expenses and revenue accounts at
end of financial year.
 Difference of expense and revenue is transferred to
owner’s equity as profit or loss.

 Sales commission earned 15484

 Management fees earned 420
 Income summary a/c 15904
 (To close the revenue accounts)
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Closing entries -continue
 Income summary 12570
 Advertising expense 1275
 Salaries expense 9605
 Telephone expense 1195
 Insurance expense 50
 Office supplies expense 220
 Dep.expense-building 150
 Dep.expense-equipment 45
 Interest expense 30

To close all expenses accounts

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Closing entries -continue
 Income summary 3334
 James Roberts, capital 3334
 (to close the Income summary account)

If drawing is given
IF PROFIT

James Robert’s capital 1500

James Robert’s Drawing 1500

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 CLOSING ENTRIES

INCOME SUMMARY ACCOUNT ( DEBIT)

Mds. INVENTORY-OP
PURCHASES
TRANSPORTATION
SALES RETURN CREDIT
SALES DISCOUNT
ALL EXPENSES

To close all expenses accounts

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 CLOSING ENTRIES (continue)

SALES REVENUE
MDS. INVENTORY-ENDING
OTHER INCOME DEBIT
PURCHASES RETURN
PURCHASES DISCOUNT
INCOME SUMMARY ACCOUNT CREDIT

To close all credit accounts 47

 CLOSING ENTRIES (continue)

IN CASE OF NET PROFIT FROM COMPANY

INCOME SUMMARY ACCOUNT debit

CAPITAL ACCOUNT credit

To close drawing account

Capital account ------debit

Drawing account --------credit
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