Question

In your own words...

1. Explain the purpose and timing of “adjusting journal entries”.
2. Explain the purpose and timing of ‘closing journal entries”.
3. Explain each section of the classified balance sheet .
4. Explain the “current ratio” and the “debt to equity ratio”.
5. Explain the purpose of internal controls. Identify and explain 5 common internal controls that are used in business.
6. Explain the purpose and timing of the process of bank reconciliation.

Answer 1

As per policy, only four parts of any question is only allowed to answer at a time, so answering first four parts of the entire question here:

1) The purpose and timing of “Adjusting journal entries”: The Adjusting journal entries are done at the end of the financial year or whenever required and includes the provisions and periodical expenses which are calculated after the services of those assets and resources are availed. These expenses are interest on finances and depreciation on assets and provisions like insurances availed and expenses payable in the coming period ie. accrued expenses.

2) The purpose and timing of “Closing journal entries”: The Closing journal entries will be taken up whenever the accounts are finalized and financial statements like Income Statement, Statement of Shareholder’s Equity and Balance Sheet is prepared.

3) A classified balance sheet includes:

a) Current assets: The liquid assets which can be converted into cash or equivalent within one year of operations. These are maintained to tackle the immediate payments and unexpected investment purpose.

b) Non-current assets or Fixed Assets: The long term assets which are procured to have long term benefits/use.

c) Current liabilities: The obligations which are payable in next one year of operations from the current assets.

d) Long term liabilities: The obligations which are payable over the period of a year out of periodical cash accruals.

e) Shareholders’ Equity : The portion of owner’s investments and accumulated business earnings over the years are put under this Shareholders’ Equity section of balance sheet.

5) The “Current ratio” is the ratio which provides information regarding the fulfillment of the current obligations out of current liquid assets carried on by the business.

The “Debt to Equity ratio” is the ratio which shows the use of leverage by the company over the equity investment. It shows the content of debt capital in comparison of equity content in the capital.