Question

Please help me understand the following!

1. Understand how to record capital contributions including those in excess of the par value.

2. Understand how to record dividends payable.

3. Understand the difference between temporary and permanent accounts.

4. Understand the purpose and use of subsidiaries. Understand how to post to subsidiary ledgers. Understand how to balance subsidiary ledger to the general ledger control account.

5. Understand the purpose and use of a trial balance.

6. Be able to prepare financial statements from a trial balance.

7. Understand the purpose for and be able to record closing entries

8. Be able to prepare a post-closing trial balance.

Answer 1

Solution. The above statements are explained by numbering them from 1 to 9.

1.Capital contribution comes under equity of an organization. It is also known as paid-in capital.

Capital contributions when excess of the par value are recorded under paid-in capital account and common stock account.

For example- A company issues 100 shares of $10 par value common stock at $20 per share.

Journal entry of the same is recorded as : Cash A/C Dr. 2000

Common Stock A/C 1000

Paid-in Capital A/C 1000

(Cash is debited(number of shares*per share value) and common stock is credited with(number of shares*par value), the excess amount is adjusted in paid-in capital account(cash-par)).

2.Dividends payable is a company or organizations current liability. It is the amount which the company or organization is to pay to its shareholders.

Firstly,when it is declared by the company, we pass the following journal entry:

Retained Earnings A/C Dr.

To Dividends Payable A/C

(Amount is determined as=Number of shares*market value of share)

Secondly,when dividends are paid during the financial year, following journal entry is passed:

Dividends Payable A/C Dr.

To Cash A/C

(Amount is calculated as=Number of shares*Dividend per share)

3.Both temporary and permanent accounts come under Impersonal accounts.

Temporary Account	Permanent Account
1.It is a general ledger account beginning with zero balance and balances are not carried over to next year rather transferred to real accounts.	1.It is a real account which doesn't closes at the ending and are carried over to next year.
2.Categorised mainly into Revenue, Expense and Drawings account.	2.Categorised into Assets, Liabilities and Owner's equity(Assets- Liabilities).
3.Temporary accounts are prepared in the beginning of a financial year and reflects profit or loss which is transferred to the capital account.	3.Permanent Accounts are prepared and balances are carried forward to next financial year.

4.Subsidiary ledgers are book of original or prime entry. No journal entries are passed and records day to day receipts and payments.

Use:a.It is prepared to record the entries in such a way as to get summarized totals for posting to general ledger account.

b.If an error in balancing occurs,one can get back to these one of the accounts and check whether all the records are recorded in the given manner.

Posting of subsidiary ledgers- Let us take the example of accounts payables a/c. While recording we generally focus on the amount but while maintaining subsidiary ledger accounts it give us a picture of how different seller or creditors amount to the total and their date of transactions seperately. It helps businesses calculating and evaluating their detailed structure of accounts payables.

5.Amount which we get while creating subsidiary account get transferred to general ledger control account.

General ledger control account is nothing but the summary account,whereas subsidiary details are provided by subsidiary ledger account.Control account details make information readily available for company's financial statements.

6.Trial balance is prepared after passing necessary journal entries and posting into ledger accounts.

Three columns of Particulars, Debit($), Credit($) are made. All the transaction are recorded in both the side and balance is checked whether it equals or not.

Use:It helps in detecting if any error in double entry recording system is there or not while preparing financial statements.

7.After preparing a company's trial balance after passing journal entries and ledger accounts, the next step is to determine company's Income statement for the year ending which is Revenues - Expenses = Net Income/Loss.

Then,we prepare Balance Sheet while taking into account total assets and total liabilities.

8.During the end of a financial period, we prepare profit and loss account, in which nominal accounts are transferred to closing account through journal entries, so as to record them.

9.After passing closing entries one prepares trial balance to check the total debit and credit amount equals or not as all temporary accounts are closed by transferring them into real accounts.

We prepare trial balance while transferring the total closing amount to respective account heads and categorising them into debit and credit columns.