‘Step 4: PREPARING THE TRIAL BALANCE The Trial Balance ‘Trial Balance — is a summary of accounts with open balances. The equality of debit and credit balances in the ledger should be tested periodically by preparing trial balance. ‘Open account ~ account with a debit or credit balance. ‘Closed account -if the debits equal the credits. Procedures in preparing trial balance: 1. Determine the balance of each account inthe ledger/T-acoount. The debit and credit columns of the accounts are totaled, this process is called pencil footing, 2. List each ledger account that has @ balance, with the debit balances in the left column and the credit balance in the right column. Accounts are listed in the order they appear in the ledger. 3, Add each column 4, Compare the totals of each column. Normally, the two totals are equal. ‘An example of Trial Balance is provided below. MARASIGAN MEDICAL CLINIC TRIAL BALANCE For the Month Ended October 30,2004 Cash P 114,000 Account Receivable 204,000 Medical Supplies 56,000 Prepaid Insurance 20,000 land 250,000 Medical Building 1,000,000 Medical Equipment 465,000 Accounts Payable P 49,000 24% Notes Payable 400,000 20% Notes payable 1,200,000 Unearned Research Revenues 90,000 Marasigan, Capital 250,000 Marasigan, Withdrawals 200,000 Medical Revenues 434,000Salaries Expense 73,000 Repairs Expense 23,000 Association Dues Expense 15,000 ‘Telephone Expense 3,000 P__2,423,000 P 2,423,000 ‘What if the Trial Balance did not balance? 1. Columns of the trial balance may be incorrectly added. 2. Amounts from the ledger may be incorrectly entered on the trial balance. 3, Balance may be entered in the wrong column of the trial balance or may be omitted, 4, Balance may be incorrectly computed inthe ledger/T-aocount. 5. Balance is entered in the wrong column of the account in the ledger. 6. While posting, wrong amount may be posted to an account. 7. Credits posted as debit 8. Debit or credit posting may be omitted Errors that will not result to an unequal trial balance 41, Recording the same transaction more than once. 2, Failure to journalize a transaction. 3. Failure to post a transaction. 4, Posting a part of transaction correctly as a debit or credit but to the wrong account tl. 5, Recording the same transaction whose debit and credit amounts are erroneous more than once. Other Types of errors: Transposition - occurs when the order of the digits is changed mistakenly. Example 914 is written as 941 Side —the entire number is erroneously moved one or more spaces tothe right or othe left. Example, P914.00 as P91.40 or P9, 140.00Working Back Method The working back method proves effective in locating the error. If an errors not revealed by the trial balance, then the best approach is to work back. This means that you start rechecking the correctness of the accounting procedures you performed in reverse chronological order that is start with the trial balance and work backwards the entries in the journal. Exercises: Problem #1 Mr. Rogelio Mangiicmot, a computer technician, began his computer repair business (Rog's ‘Computer Repair) on August 1, 2012. Transactions are as follows: August Mr. Roger Manglicmot opened a bank account in the name of “Rog's Computer Repair’ in the amount of P240,000. 3. Acquired two (2) units of computers at P30,000 each from LJS Company, payable on Aug. 15, 2012 5 Went o Powerplus Company and purchased office furiture,P8,500 and office supplies, P1,500 cash. 7 Paid municipal and business taxes for P4,500. 8 Received P35,000 from Café Intemet for repair services rendered. 9 Billed Microhard Company for P50,000 forthe repair of various computers. 14 Paid salaries of office & technical staf for the 1* half of the month, P20,000. 15 Paid the entire amount due to LJS Company. 17 Received P40,000 as partial payment from Microhard Company. 18 Sent a bill to DEF Company, for repair services rendered amounting to P80,000. 19° Mr. Manglicmot withdrew 5,000 for personal use. 20 Paid for gas and oil expenses, P4,00025 Received P'19,000 from various walk-in clients. 27 Paid utilities for the month of August, P4,500. 30 Paid salaries of office & technical staff, for the 2" half of the month, P20,000. REQUIRED: Using the Chart of Accounts given below: 1. Using your journalicolumnar book, prepare journal entries to record the above transactions 2. Post the entries to the ledger. 3. Prepare a Trial Balance as of August 31, 2012 101 ‘Cash Accounts Receivable 102 Office Supplies 103 Office Equipments 104 Fumiture & Fixtures 105 ‘Accounts Payable 201 Mr. Manglicmot, Capital 301 Mr. Manglicmot, Drawing 302 Service Income 401 Taxes, Duties and Licenses 501 Gasoline, Oil and Lubricants 502 Utilities Expense 503 Salaries Expense 804 Problem #2 In December 2012, Dr. Hin D. Makagamot started his own medical practice (Or. D. Makagamot Medical Services) in Carmona, Cavite. Below are the transactions forthe first month of operations of Dr. D. Makagamot’s medical practice: 41-_Dr. D. Makagamot invested P'1,000,000 in the business +- Purchased land and building, amounting to P1,000,000 and P2,500,000 respectively, from the bank as follows: cash, P500,000 and issuance of a 4-year, 18% notes, P3,000,000. ‘1- Bought medical equipment, P300,000 on account from XYZ Corp. by issuing a 20% note payable due in 12 months. On the same date, Dr. D. Makagamot bought medical supplies, 50,000. 1- Additional medical equipment was purchased, worth P52,000 on account (not secured by a promissory note) 2. Purchased office supplies, P3,000 for cash 3. Payment of one year insurance premium for the building, P28,000. 4- Received P'132,000 from clients for medical services rendered. 6- Additional medical supplies purchased on account, P42,000., 410- Salaries for medical staffs, P90,000 415- Received P20,000 as payment for seminar fees. 17- Rendered medical services to clients on account, P180,000. 18- Payment for various minor repairs on building, P14,000. 420 Paid the telephone bil, Pé,500. 22- Collected P130,000 from clients on account. 23- Made partial payment of P30,000 forthe medical supplies purchased on December 6. 27- Personal withdrawals, P100,000. 29- Paid membership dues of P12,000 and subscriptions of P2,800. 28. Billed customers for medical services rendered, P280,000. REQUIRED: Using the Chart of Accounts given below: 4. Using your joumaicolumnar book, prepare journal entries to record the above transactions. 2. Post the entries tothe ledger/T-account 3. Prepare a Trial Balance. The chart of accounts for the business is as follows: ASSETS 401 Cash 402 Accounts Receivable 4103 Medical Supplies 4104 Office Supplies 105 Prepaid Insurance 406 Land 4107 Building 4107-A Accum, Depreciation — Bulding 408 Medical Equipment 408-A Accum. Depreciation - ME LIABILITIES 201 Accounts Payable 202 Notes Payable 203 Uneamed Revenues 204 Interest Payable 206 Ultities Payable 206 Salaries Payable EQUITY 301 Dr. D. Makagamot, Capital 302 Dr. D. Makagamot, Personal 303 income Summary INCOME 401 Professional Fees Income 402 Other Income — Training EXPENSES: 501 Salaries Expense502 Insurance Expense 503 Repairs Expense 504 Light and Water Expense 505 Communication Expense 506 Depreciation Expense - Building 507 Depreciation Expense - ME 508 Medical Supplies Expense $509 Office Supplies Expense 510 Interest Expense 511 Dues and Subscriptions ‘Step 5: ADJUSTING ENTRIES 1. Accrued Revenues If you perform a service for a customer in one month, but dont bill the customer until the next ‘month, you would make an adjusting entry showing the revenue in the month you performed the service. You would debit accounts receivable and credit service revenue. Example: a. On December 31, 3,000 worth of service has been provided to the customer but still unbilled. . Joumal Entry: Date Particulars PR Debit Credit Dec [31 | Accounis Receivable P3000 Service Revenue P___ 3,000 To record unbilled service. 2. Accrued Expenses‘When a business firm owes to creditor/employees at the end of an accounting period, they make an agjusting journal entry by debiting expense and crediting payable. Examples: a. Three days’ salaries are unpaid as of December 31, P75, 000. Journal Enty: Date Particulars PR Debit Credit Dec | 31 | Salaries Expense P_75,000 Salaries Payable P 75,000 To record salaries payable. b. The interest rate on P20, 000 note payable is 9%. Accrue the interest for one month. Joumal Entry: Date Particulars PR Debit Credit Dec. | 31 | Interest Expense P_ 1,800 Interest Payable P_ 1,800 To record interest payable. c. Taxes at the month end had accrued, P2,000. Joumal Entry: Date Particulars PR Debit Credit Dec. | 31 | Taxes & Licenses P2000 Taxes and licenses Payable P2000 To record Taxes and licenses payable. 3. Uneamed Revenues ‘Uneamed revenues refer to payments for goods to be delivered in the future or services 0 be performed. If you place an order for an item from a company on the Intemet in February and that item does not arive (and you don't pay for it) until March, the company from which you placed the order would record the cost of that item as uneamed revenue. During the month which you made the purchase, the company would make an adjusting entry debiting uneamed revenue and crediting revenue. Examples: ‘a. 5,000 worth of service has been provided to the customer who paid advance amount of 7,000.Joumal Entry: Date Particulars PR Debit Credit Uneamed Service Revenue P5000 Service Revenue P5000 To adjust uneamed service revenue. ). On the trial balance as of November 31 20’ 12, the balance of uneamed service revenue was 13,000. On December 31, 2012 % of the uneamed revenue had been eared. Journal Entry: Date Particulars PR Debit Credit Uneamed Service revenue P6500 Service Revenue P6500 To adjust uneamed service revenue. i 4. Prepaid Expenses Prepaid expenses is a very descriptive title. Prepaid expenses are assets that are paid for and gradually get used up during the accounting period. A common example of prepaid expenses is office supplies. A company buys and pays for office supplies. Gradually, during the accounting period, the supplies are used up. As they are used up, they become an expense. During the month when the office supplies are used, an adjusting entry is made to debit office supply expense and credit prepaid office supplies. a. On May 31, ofice supplies expense is amounting to P2,500, Journal Entry: Date Particulars PR Debit Credit Office Supplies Expense P2500 Office Supplies P_ 2500 To adjust office supplies. b. Prepaid rent of P36,000 was paid for the 6 ‘months. Accrue the rent for two months. Journal Entry Date Particulars PR Debit Credit Rent Expense P__ 12,000 Prepaid Rent P_ 12,000 To adjust prepaid rent. >. On August 1, 2 P18,000 premium was paid on a the premium was debited to Prepaid Insurance. Adjust the insurance Journal Entry: ‘one-year insurance policy. The amount of atthe year end. Date Particulars PR Debit CreditInsurance Expense P_ 7,500 ] Prepaid Insurance P 7,500 | To adjust prepaid insurance. d. Office supplies costing P4,320 were unused till the end of the period. Office supplies having original cost of P22,800 are shown on unadjusted trial balance. Journal Enty: Date Parficulars PR Debit Credit] Office Supplies Expense P_ 16,480 | Office Supplies P 18,480 To adjust office supplies. 5. Depreciation Depreciation is the process of allocating the cost of an asset, such as a building or a piece of ‘equipment, over the serviceable or economic life ofthe asset. Adjusting entries are a litle diferent for depreciation. Business owners have to take accumulated depreciation into account ‘Accumulated depreciation is just what it says - the accumulated depreciation of a company's assets over the lif ofthe company. The accumulated depreciation acoount on the balance sheet is called a contra-asset account and it is used to record depreciation expense. Increases are recorded as credits in contra-asset accounts. When an asset is purchased, it depreciates by some amount every month. For that month, an adjusting entry is made to debit depreciation expense - equipment and credit accumulated depreciation-equipment by the same amount. Formula: Cost - Salvage Value Depreciation = Life in Number of Periods Examples: 2+, The equipment costing P80,000 ha ue fe ofS years and its estimated savage value is P14,000. Compute the depreciation expense for a year. Journal Entry: Date Particulars PR| Debit Credit | Depreciation Expense- Equipment P_13,200 Accumulated depreciation- Equipment P_ 13,200 To record depreciation expense computed as follows: Depreciation=P80,000-P14,000/5 years=P13,200 1b. Office Equipment was purchased on March 1 for P270,000. The expected life of the ‘equipment is eight years. Determine the depreciation at the year end. Joumal Entry: Date Particulars PR Debit Credit | | Depreciation Expense ~ Office Equipment P 28,125 Accumulated Depreciation - Office Equipment P 28,125 To record depreciation expense computed as follows: Depreciation=(270,000/8)(10/12)=P28,125 6. {f you extend credit o numerous customers, and your experience is that a certain number of your sales on account will be uncollectable, you should probably set up a reserve for bad debts. That way, your books and financial statements will more accurately reflect your true financial picture. At the end of every year, you should evaluate your accounts receivable and adjust your allowance for bad_debts accordingly. An adjusting entry is made to debit bad debts expense and credit Bad Debts allowance for bad debts. Exampl a. le: ‘On December 31, 2002, you estimated that P8,000 of your receivables at that time were uncollectable and your reserve for bad debts account in the general ledger currently reflects that P8,000 balance. You need to make the following adjusting entry to record this P2,000 increase in estimated bad debts: Joumal Entry: {Date Particulars PR Debit Credit [ Bad Debis Expense P2000 ‘Alowance for Bad Debis P2000 To record bad debts expense. j 10Exercises: Problem #1 The folowing information was gathered from the records of Dr. D. Makagamot Medical Services as ‘of December 31, 2012: (Note: refer other information on page 31) 1. Salaries of employees, incurred but not yet paid, amounted to P110,000. 2. The following December bills were received and unpaid as of December 31, 2012: Electricity P19,000 Water P 2,500 ‘3. P10,000 worth in medical services were rendered but not yet collected. This transaction pertains to emergency medical services on December 31 4. A count was made of supplies on hand at Dacember 31. Details follow: Unused medical supplies P48,000 Unused office supplies 2,000 5. The building and equipment had the following estimated useful lives: Building. 20 yrs Medical Equipment. 3 yrs Required: 41. Prepare the necessary adjusting entry atthe period-end. aProblem #2 Selected account balances before adjustment for Baguio Pine Company at December 31, 2012 are as follows: DEBITS: ‘Accounts Receivable — P4,625 Supplies- P1,375 Prepaid Rent ~ P15,000 Equipment - P16,225 Wages Expense - P19,700 Rent Expense ~ P0.00 Depreciation Expense - P0.00 Supplies Expense ~ PO.00 CREDITS: ‘Accumulated Depreciation — P4450 Wages Payable - PO.00 Uneamed Fees - P3,500 Fees Eamed — P48,975 Data needed for year end adjustments are as follows: a. Unbilled fees at December 31, 1,575. b. Supplies on hand at December 31, P278 . Rent expired during the year, P9,000. 4. Depreciation of equipment during the year, P788. . Uneamed Fees at December 31, P2,700. f. Wages accrued but unpaid at December 31, P438 REQUIRED: a. Prepare the necessary adjusting journal entries at period-end b. Prepare a revised trial balance at December 31, 2012 fr the company. 12