The Role And Impact Of Journal Entries, Ledger Accounts, Trial Balance And Financial Statements.

Introduction
With changing accounting policies, it has become imperative for management to adapt accordingly to market environment. However, the basics of accounting policies remain the same. A detail study has been conducted to find out the role and impact of journal entries, ledger accounts, trial balance and financial statements.

The Role And Impact Of Journal Entries, Ledger Accounts, Trial Balance And Financial Statements.

1. Transferring opening balance into the respective account
In the stage, opening balance of the account would be transferred to their respective account. This helps to maintain the account in an appropriate manner. This also helps the management helps the management to maintain account so that it reflects true transaction within the organisation (Carlberg, 2011). Opening balance refers to considering carried forward balance in the previous financial year. In this context, it is to be noted that opening balance is to be included first while preparing any ledger account.

Cash, inventory, office equipments, accounts receivable and many other accounts have been considered.

Cash at bank – 101

23,784  


Account receivable – 110

36,518  

Office Supplies Inventory

1,520  

Office equipment – 130

22,681  


Accumulated Depreciation Office Equipment – 130

  16,250


Computer equipment – 135

18,160  

 

Accumulated Depreciation Computer Equipment – 136

  11,929

 

GST Clearing

  9,470

Accounts Payable – 201

  5,670

Wages Payable – 203

  2,685

PAYG Tax Payable – 205

  8,640

 

Loan Payable – Current Liability – 209

  3,590

Loan Payable – Non Current – 250

  12,922

 Capital – 301

  31,507

From the above data provided, opening balances of different ledger accounts have been included. The opening balances would help the management in recording all transaction in the business and therefore, it would facilitate the management in proper decision making (Chandra, 2009).

2. Recording transaction in the journal entries
Journal entries refer to analysing business transaction and recording in the journal books of the company. Journal entries are the first official entries of any business transaction recorded in the business (Weetman, 2008). Journal entries starts at the start of the financial year and continuous till the end of the same financial year. Journal entries are process of analysing assets, liabilities, or equity of the business. After duly recording all the transactions, managers or accountants classify and record the events according to debit and credit rules (Benedict and Elliot, 2011). For this purpose, accounting policies and procedures are followed namely Accounting Standards which are set by respective government agencies.

Advantages of journal entries:

Journal entries set the foundation for the business. With the help of journal entries and other documents, one can understand how the business operates and how it deals with its customers and suppliers (Abdel-Kader and Luther, 2008). Proper journal entries also help company in finding better solution for their business and at the same time being more transparent in their operation.

Journal entries also play an important role in developing ledger accounts and ultimately uses of financial statement. In this context, it is important for managers to develop and follow journal entries in accordance with accounting rules and regulations (Alawattage et al. 2009). Therefore, it is clear that journal entries need to be prepared in an effective manner.

Disadvantages of journal entries:

Journal entries are done by after analysing and verifying different documents that support transactions. In this context, it becomes difficult for managers and consumes lot of time in order to prepare and record u journal entries (Drumm, 2008). Difference in accounting standards in different countries also makes difficult for managers to reconcile these changes so that true position of financial statement can be prepared. It is also to be noted that managers also needs to have better understanding and lack knowledge may leads to incorrect preparation of ledger account (Drury, 2009). As all financial information are dependent on journal entries, any wrong step taken by the account May results in huge chaos for the company. It is also difficult to trace mistakes made in journal entries as numerable journal entries are made every day.

Post
Date Account Details Ref Debit Credit
April 1 Rent A/c Dr. 3,025
To Cash A/c 3,025
April 1 Cash A/c Dr. 5,115
To Sales A/c 5,115
April 1 Office equipment A/c Dr. $2,365
To Purchase A/c $2,365
April 2 Prepaid insurance A/c Dr. $1,254
T o Cash A/c $1,254
April 2 Office Supplies Inventory Account A/c Dr. $660
To Cash A/c $660
April 3 Cash A/c Dr. $9,570
To Sales A/c $9,570
April 5 Capital A/c Dr. $3,250
To Drawings A/c $3,250
April 9 Wages A/c Dr. $9,665
To Cash A/c $9,665
April 10 Allure Beauty A/c Dr. R111 $16,060
To Sales A/c $16,060
April 11 Invoiced Fashion Foods Ltd A/c Dr. $1,254
To Sales A/c $1,254
April 14 Alpha Accountants A/c Dr. $2,670
To Cash A/c $2,670
April 17 Purchase A/c Dr. $5,390
To Bills payable A/c $5,390
April 18 Cam force Catering A/c Dr. $2,300
To Cash A/c $2,300
April 21 Tax A/c Dr $9,470
To Cash A/c $9,470
April 22 Cash A/c Dr. $12,700
To Sales A/c $12,700
April 23 Wages A/c Dr. $8,350
To Cash A/c $8,350
April 24 Telephone and internet expense A/c Dr. $2,145
To Cash A/c $2,145
April 25 Fashion Foods Ltd A/c Dr. R113 $15,180
To Sales A/c $15,180
April 28 Bare Training A/c Dr. $700
To Cash A/c $700
April 28 Solid Communications A/c Dr. R114 $3,410
To Sales A/c $3,410
April 28 Cash A/c Dr. $8,000
To Allure Beauty $8,000
April 28 Cash A/c Dr. $2,860
To Sales A/c $2,860
April 30 Watch This Office Space A/c Dr. $2,365
To Cash A/c $2,365
April 30 Loan A/c Dr. $583
To Cash A/c $583
April 30 Wages expense A/c Dr. $3,690
To PAYG Tax Payable $3,690

The above journal entries have been prepared in accordance to transactions incurred in the business at the month of April. Journal entries have been in accordance to accounting standards so that it would facilitate the management in preparing effective and correct ledger accounts (Ismail, 2008).

3. Preparation of ledger account
Ledger account refers to the company’s main recording accounting records. A ledger records all the transaction relating to particular items till the tenure of the business. Ledger accounts hold different types of information that are needed to be carried by management in taking financial decisions. Ledgers accounts are maintained where business follow double-entry system (Lambert and Larker, 2008).

And therefore, any transaction having both debit and credit impact on the business. Under this method, one account is debited and the other account is credited with the same amount. This helps the management to keep proper records of their transaction and at the same time effectively presenting proper information (Cadle and Paul, 2010).

With changing business environment, maintenance of ledger accounts has transferred from physical book to accounting computer programme. The double entry system is very effective in nature and ensures that transaction is recorded as per accounting standards.  After preparing ledger accounts, they are used for preparing trial balance and thus help accountants to find out any loopholes in the business (Bebbington et al. 2010). The ledger accounts are also important in preparing balance sheet for the company. Therefore, ledger accounts serve different purposes and thus it is important for managers to have better understanding about preparation of ledger accounts and their subsequent transfer in other financial statements.

Cash at bank – 101

23,784

5115

9570

12700

8000

2860

 

 

3025

1254

660

9965

2670

2300

9470

8350

2145

700

2365

583

3696

Balance carried forward 14,846

62,029 $62,029

 

Account receivable – 110

36,518

16,060

$15,180

$3,410

$8,000

                   Balance carried forward  63,168

 

$71,168 $71,168

 

 

 

Office Supplies Inventory

1,520

$660

Balanced carried forward                     2180
$2180 $2180

 

Office equipment – 130

22,681

$2,365

Balanced carried forward                    25046
$25046 $25046

 

GST Clearing

2251

Balance being carried forward               7291

9,470
$9470 $9470

 

Accounts Payable – 201

Balance carried forward                     11060 5,670

5,390

$11060 $11060

 

Wages Payable – 203

$9,665

$8,350

2,685

  Balance carried forward                      15330  

 

$18015 $18015

 

PAYG Tax Payable – 205

$3,690

Balance carried forward                         4950

8,640
$8640 $8640

 

Loan Payable – Current Liability – 209

$583

Balance carried forward                         3007

3,590
$3590 3590

 

\Capital – 301

$3,250

Balance carried forward                     $28257

31,507
$31507 $31507

 

Drawings – 302

$3,250

 

Balance carried forward                       $3,250

 

$3,250  $3250

 

Insurance Expense – 520

Balance carried forward                       1,254 1,254
$1,254 $1,254

 

 

Office Supplies Expense – 542

Balance carried forward                          $660 $660
$660 $660

 

Telephone and Internet Expense – 580

$2,145

Balance carried forward                     $2,145

 
$2,145 $2,145

 

 

Wages Expense -585

Balance being carried forward            $9,665 $9,665
$9,665 $9,665

 

The entire above mentioned ledger accounts have been prepared by considering journal entries made in the above section. Some ledger accounts had opening balances and some did not. Excess or deficit of ledger balances has been carried forward to the next month. This would ensure that ledgers at the end of the financial years reflect the true financial strengths of the company (Ingram and Albright, 2009).

REVENUE JOURNAL                 Page 34

Date (April) Invoice

No.

Account Debited Post

Ref

Accounts Receivable

DR

GST  Clearing CR Revenue CR
1 Cash A/c Sales A/c 5,115
3 Cash A/c Sales A/c $9,570

 

CASH RECEIPTS JOURNAL               Page 22

Debit Credit
Date (April) Account Credited Post Ref Cash Bank Revenue Accounts

Receivable

Other GST Clearing
1 Rent A/c 3,025
1 Sales A/c 5,115
3 Sales A/c $9,570
22 Sales A/c $12,700
28 Allure Beauty $8,000
28 Sales A/c $2,860

 

CASH PAYMENTS JOURNAL        Page 18

Debit Credit
Date (April) Account Debited Chq.

No.

Post

Ref

Accounts

Payable

Wages

Expense

Other

Accounts

GST

Clearing

Cash at

Bank

1 Rent A/c 232 ·
2 Prepaid insurance A/c 214 ·
2 Office Supplies Inventory Account A/c 124
9 Wages A/c ·
14 Alpha Accountants A/c 325 ·
18 Cam force Catering A/c 237 ·
21 Tax A/c 532 ·
23 Wages A/c 415 ·
24 Telephone and internet expense A/c ·
28 Bare Training A/c ·
30 Watch This Office Space A/c ·
30 Loan A/c ·

 

Accounts Receivable Subsidiary Ledger

ACCOUNT                   Allure Beauty
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 10 $16,060 $16,060
April 28 $8,000 8060

 

ACCOUNT                   Fashion Foods Ltd
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 11 $1,254 $1,254
April 25 15,180 16434

 

 

ACCOUNT                   Solid Communications
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 28 3,410 3,410

 

 

Accounts Payable Subsidiary Ledger

ACCOUNT                   Alpha Accountants
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 14 $2,670 $2,670

 

ACCOUNT                   Cam force Catering
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 18 $2,300 $2,300

 

ACCOUNT                   Watch This Office Space
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 30 $2,365 $2,365

 

ACCOUNT                   Bare Training
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 28 $700 $700

4. Schedules of accounts payable and accounts receivable

Accounts Receivable Ledger

Balances as at 1 April

Accounts Payable Ledger

Balances as at 1 April

Allure Beauty Fashion Foods Ltd Solid Communications $7,448

$23,120

$5,950

Alpha Accountants Cam force Catering Watch This Office Space Bare Training $2,670

$2,300

 

$700

Total $36,518 Total $5,670

 

When from the above figure, it is clear that both the accounts reconcile with their subsidiary ledgers thereby authenticating the correctness of their ledger accounts.

5. Unadjusted and adjusted trial balance
Unadjusted trial balance refers to the trial balance that is prepared by the company without considering any adjustment during the same time. This is prepared mainly to get primary data and early data so the management can have primary information before the inclusions of any adjustments (Woelfel, 2009). Unadjusted trail balance in an initial stage of preparing effective trial balance and it helps the management in having better financial statement in a better and effective manner.

Adjusted trial balance is the trial balance that is prepared after considering different adjustments during the same period for which the financial statement is being prepared. Since it incorporates all adjustments within a specific period, thus the data in adjusted trial balance is reliable and is used by management for different purpose (Albrecht, 2009). After preparing adjusted trial balance, uses the same for preparing financial statements.
6. Income statement and Balance sheet
Income statement refers to the statement that is prepared by the company during a particular financial year. Income statement records both expenses and incomes earned during the same financial year. It enables the management to different sauces of costs and revenues and determining whether the company have made loss or profit (Weiss et al. 2008).

Balance sheet is a statement that is prepared by the company in order to find the current level of assets and liabilities in the business. Balance sheet also enables company to find out what is the amount of debt the company owes to its internal and external parties. Balance sheet consists of assets and liabilities and their respective figures and therefore, balance sheet is imply and representation of assets and liabilities (Kyriazis and Anastassis, 2007). In this context, it is important that journal entries and ledger accounts are prepared in an effective manner.

Unadjusted trial balance, adjusted trial balance, income statement and balance sheet have been prepared in Excel sheet

Conclusion:

Account receivable – 110

36,518

16,060

$15,180

$3,410

$8,000

                   Balance carried forward  63,168

 

$71,168 $71,168

 


Office Supplies Inventory

1,520

$660

Balanced carried forward                     2180
$2180 $2180

 

Office equipment – 130

22,681

$2,365

Balanced carried forward                    25046
$25046 $25046

 

GST Clearing

2251

Balance being carried forward               7291

9,470
$9470 $9470

 

Accounts Payable – 201

Balance carried forward                     11060 5,670

5,390

$11060 $11060

 

Wages Payable – 203

$9,665

$8,350

2,685

  Balance carried forward                      15330  

 

$18015 $18015

 

PAYG Tax Payable – 205

$3,690

Balance carried forward                         4950

8,640
$8640 $8640

 

Loan Payable – Current Liability – 209

$583

Balance carried forward                         3007

3,590
$3590 3590

 

\Capital – 301

$3,250

Balance carried forward                     $28257

31,507
$31507 $31507

 

Drawings – 302

$3,250

 

Balance carried forward                       $3,250

 

$3,250

 

$3250

 

Insurance Expense – 520

Balance carried forward                       1,254 1,254
$1,254 $1,254

 

 

Office Supplies Expense – 542

Balance carried forward                          $660 $660
$660 $660

 

Telephone and Internet Expense – 580

$2,145

Balance carried forward                     $2,145

 
$2,145 $2,145


Wages Expense -585

Balance being carried forward            $9,665 $9,665
$9,665 $9,665

 

The entire above mentioned ledger accounts have been prepared by considering journal entries made in the above section. Some ledger accounts had opening balances and some did not. Excess or deficit of ledger balances has been carried forward to the next month. This would ensure that ledgers at the end of the financial years reflect the true financial strengths of the company (Ingram and Albright, 2009).

REVENUE JOURNAL                 Page 34

Date (April) Invoice

No.

Account Debited Post

Ref

Accounts Receivable

DR

GST  Clearing CR Revenue CR
1 Cash A/c Sales A/c 5,115
3 Cash A/c Sales A/c $9,570

 

CASH RECEIPTS JOURNAL               Page 22

Debit Credit
Date (April) Account Credited Post Ref Cash Bank Revenue Accounts

Receivable

Other GST Clearing
1 Rent A/c 3,025
1 Sales A/c 5,115
3 Sales A/c $9,570
22 Sales A/c $12,700
28 Allure Beauty $8,000
28 Sales A/c $2,860

 

CASH PAYMENTS JOURNAL        Page 18

Debit Credit
Date (April) Account Debited Chq.

No.

Post

Ref

Accounts

Payable

Wages

Expense

Other

Accounts

GST

Clearing

Cash at

Bank

1 Rent A/c 232 ·
2 Prepaid insurance A/c 214 ·
2 Office Supplies Inventory Account A/c 124
9 Wages A/c ·
14 Alpha Accountants A/c 325 ·
18 Cam force Catering A/c 237 ·
21 Tax A/c 532 ·
23 Wages A/c 415 ·
24 Telephone and internet expense A/c ·
28 Bare Training A/c ·
30 Watch This Office Space A/c ·
30 Loan A/c ·

 

Accounts Receivable Subsidiary Ledger

ACCOUNT                   Allure Beauty
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 10 $16,060 $16,060
April 28 $8,000 8060

 

ACCOUNT                   Fashion Foods Ltd
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 11 $1,254 $1,254
April 25 15,180 16434

 

 

ACCOUNT                   Solid Communications
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 28 3,410 3,410

 

 

Accounts Payable Subsidiary Ledger

ACCOUNT                   Alpha Accountants
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 14 $2,670 $2,670

 

ACCOUNT                   Cam force Catering
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 18 $2,300 $2,300

 

ACCOUNT                   Watch This Office Space
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 30 $2,365 $2,365

 

ACCOUNT                   Bare Training
 

DATE

 

ITEM

JRNL.

REF.

 

DEBIT

 

CREDIT

 

BALANCE

April 28 $700 $700

4. Schedules of accounts payable and accounts receivable

Accounts Receivable Ledger

Balances as at 1 April

Accounts Payable Ledger

Balances as at 1 April

Allure Beauty Fashion Foods Ltd Solid Communications $7,448

$23,120

$5,950

Alpha Accountants Cam force Catering Watch This Office Space Bare Training $2,670

$2,300

 

$700

Total $36,518 Total $5,670

When from the above figure, it is clear that both the accounts reconcile with their subsidiary ledgers thereby authenticating the correctness of their ledger accounts.

5. Unadjusted and adjusted trial balance
Unadjusted trial balance refers to the trial balance that is prepared by the company without considering any adjustment during the same time. This is prepared mainly to get primary data and early data so the management can have primary information before the inclusions of any adjustments (Woelfel, 2009). Unadjusted trail balance in an initial stage of preparing effective trial balance and it helps the management in having better financial statement in a better and effective manner.

Adjusted trial balance is the trial balance that is prepared after considering different adjustments during the same period for which the financial statement is being prepared. Since it incorporates all adjustments within a specific period, thus the data in adjusted trial balance is reliable and is used by management for different purpose (Albrecht, 2009). After preparing adjusted trial balance, uses the same for preparing financial statements.

6. Income statement and Balance sheet
Income statement refers to the statement that is prepared by the company during a particular financial year. Income statement records both expenses and incomes earned during the same financial year. It enables the management to different sauces of costs and revenues and determining whether the company have made loss or profit (Weiss et al. 2008).

Balance sheet is a statement that is prepared by the company in order to find the current level of assets and liabilities in the business. Balance sheet also enables company to find out what is the amount of debt the company owes to its internal and external parties. Balance sheet consists of assets and liabilities and their respective figures and therefore, balance sheet is imply and representation of assets and liabilities (Kyriazis and Anastassis, 2007). In this context, it is important that journal entries and ledger accounts are prepared in an effective manner.

Unadjusted trial balance, adjusted trial balance, income statement and balance sheet have been prepared in Excel sheet.

Conclusion:
Basics of accounting like journal entries, preparation of ledger account and trial balance is very important and it ensures that data represented in the financial statement are valid and authentic. From the above study, it is clear that management needs to adopt such accounting policies that are effective and at par with industry norms. This would help the management in having better understanding of their financial position in the current business environment.