Question

1. List 3 accounts that you may see on an Unadjusted Trial Balance that might require an adjusting journal entry, and explain why each account may need to be adjusted.

           2. Define accruals and give an example of an accrued revenue and an accrued expense. Your answer should include the necessary adjusting journal entry for each example.

           3. Here are the balances of the following equity accounts for ABC Company and year end Dec. 31, 20xx.

Retained Earnings $1,000

Service Revenue $5,000

Salaries Expense $2,000

Rent Expense $600

Utilities Expense $300

Prepare the necessary closing journal entries at Dec. 31st in proper format. Calculate the correct ending balance in Retained Earnings after the closing entries are posted.

Answer 1

1. Some accounts that can be seen in an unadjusted trial balance would be as follows-

i) Employees' personal A/cs - These will have to be transferred to other payale/salary payable A/c at the month/quarter/year end preparation of financial statements.

ii) Various security deposits/even fixed deposits

iii) Accumulated depreciation account - This will have to be adjusted along with the original asset cost to reflect it's true/fair value.

2. Accruals refer to an entry made in the books of accounts related to the recording of revenue/expense paid without an exchange of consideration.

=> Accrued revenue is something that has been earned by providing goods/services but for which consideration has not been received (asset).

Eg- Journal entry

Debtors' A/c Dr XXX

To Revenue A/c XXX

=> Accrued Expenses - It refers to expenses which are incurred before it has been paid (Liability).

Eg- Journal Entry

Staff expense A/c Dr XXX

To Salary/bonus payable XXX

3. Closing Journal entries -

In the books of ABC Company

As on Dec 31st, 20xx

S No	Particulars		Dr($)	Cr($)
1	Salary expense A/c	Dr	2000
	Rent expense A/c	Dr	600
	Utility expense A/c	Dr	300
	To Creditors A/c			2900
2	Debtors A/c	Dr	5000
	To Service revenue			5000
3	Revenue	Dr	5000
	To salary A/c			2000
	To rent expense A/c			600
	To utility expense A/c			300
	To P&L A/c			2100
4	P&L	Dr	2100
	To retained Earnings			2100

Thus, retained earning at the year end would be -

Opening balance $1,000

Add: Profit for the year $2,100

Total $3,100