💣SUMMARIZING CHANGES IN FINANCIAL POSITION [PART : 6] 💣

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ALL ABOUT ACCOUNTING : 45th BLOG

         💎ACCOUNTING💎

★ Accounting exercise and practices : 
Lesson : 4 [Part : 6]

Hi friends 🙏

Today's discuss remaining part of summarizing changes in financial position 

                             So let's discuss ....


★ SUMMARIZING CHANGES IN FINANCIAL POSITION : 

Once the trial balance is completed (and balanced), adjustments are made to record transactions that have not previously been recorded, such as bank charges, depreciation, loan loss provision, etc. For example, after an adequate loan loss reserve has been determined (discuss in Finance module)  an entry must be made to record a loan loss provision. This is done periodically,  either monthly or annually. The same occurs with a depreciation charge.  When a capital asset is purchased, the entire cost does not immediately go on the income statement as an expense. It is depreciated over time so that each year, an amount equal to the portion of it's useful life is expensed. This entry must be made at the end of each year (or accounting period)  and is preferred to as an adjustment. 

For example :

Purchase Two-wheeler vehicle for ₹ 50,000 in cash. Depreciate on a straight line basis over five years :

ANALYSIS                     RULE                          ENTRY

* The asset equipment     * Increase in assets are       * Debit :
Was increased.                      recorded by debits.           Equipment : ₹ 50,00

* The asset cash was         * decrease in assets are       * Credit :
 Decreased.                              recorded by credits.            Cash :       ₹ 50,000


At end of year, record depreciation for one year :

ANALYSIS                        RULE                             ENTRY

* The expense  depreci-       * Increase in expense           * Debit :
ation was increased.                 are recorded debit.               Depreciation ;  10,000                                    

* The asset equipment           * Decreases in, assets are      * Credit :
Was decreased by record-        recorded by a credit.            Accumulated 
ing accumulated depreciat-                                                   depreciation : ₹ 10,000
ion.                                                                                                              


Once it has been determined what adjustment are recorded.  Journal entries must be prepared and transfer to the ledger accounts.  After all the adjustment have been made,  and final account balances have been calculated,  The financial statements can be prepared. 

The Final step in summarizing an organizations change in financial position over a period is recording closing entries. Closing entries are prepared after the trial balance, adjusting entries and financial statements are prepared after the Trial balance, adjusting entries and financial statements are completed. closing entries clear and close revenue and expense accounts at the end of each accounting period by transferring their balances to the net retained surplus/deficit account. this leaves them with a zero balance. These entries are necessary in order to transfer the net effect of increases and decreases out of the revenue and expense accounts and in to the net retained surplus / deficit account. in addition, closing entries cause the revenue and expense accounts to begin each new accounting period with zero balances.

To clear revenue accounts, which have normal credit balances, an entry debiting the account and crediting the Net Retained Surplus/(Deficit) account is required. Similarly, to clear expense accounts, which have normal debit balances, an entry crediting the account and debiting the Net Retained Surplus/(Deficit) account is required. The net effect on the Net Retained Surplus/(Deficit) account is equal to the Net Income for the period.

For example, the Revenue and Expense accounts reflected in the Sample Income Statement, which you can find in the document containing Sample Accounts attached to this study guide, would have following closing entries:

                                     
                                                                                   GENERAL JOURNAL

Date                          Account Title and Explanation                               Debit                          Credit

31-03-2020           Interest on Current and Past Due Loans                    15400

31-03-2020           Interest on Restructured Loans                                      100

31-03-2020           Interest on Investments                                                  500

31-03-2020           Loan Fees/Service Charges                                          5300

31-03-2020           Late fees on loans                                                           200

31-03-2020           Interest paid on long term debt                                                                         3700

31-03-2020           Provision for loan losses                                                                                   2500

31-03-2020           Salaries                                                                                                              8600

31-03-2020           Rent exp.                                                                                                           2500

31-03-2020           Travel                                                                                                                2500

31-03-2020            Depreciation exp.                                                                                               400

31-03-2020            Miscellaneous                                                                                                    300

31-03-2020            Retained net surplus / deficit                                                                           1000
 
                              (to close & clear expense & revenue acts)                   21500                         21500

The net effect on the Retained Net Surplus/(Deficit) account is a 1,000 credit, which is equal to the Excess of Income over Expenses (or Net Income) for the period.
                                     





Remaining part of  exercises and practices discuss in 46th blog... 

                        So wait my 46th blog... 
 
                                                                             
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