Question

Why is it necessary to prepare formal financial statements if all of the data are in the statement columns of the worksheet?

Identify the account(s) debited and credited in each of the four closing entries, assuming the company has net income for the year.

Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?

Indicate, in the sequence in which they are made, the three required steps in the accounting cycle that involve journalizing.

Identify, in the sequence in which they are prepared, the three trial balances that are often used to report financial information about a company.

Answer 1

1) Even though all of the data are in the statement columns of the worksheet, than also we require the same to be presented in a formal financial statements becaue

a) The law wants the accounts to be in a pre-defined format of statements

b) The analysis and interpretation of the results is convenient.

c) Because the law is applicable to each company or competitor, so the comparison become easy.

d) The inter period comparison of the data within the company is possible.

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2) The four closing entries where the accounts are debited and credited are:

1) Expenses accounts, where the Income Summary A/c is debited and all expenses accounts are credited.

2) Revenue accounts, where the all revenue accounts are debited and the Income summary a/c is credited.

3) Withdrawal account, where the capital account is debited and the withdrawal account is credited'

4) Net Income account, where the Income Summary accounts is debited and the Capital / Retained Earning account is credited.

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3) Reversing entry is the entry made when any error has been committed in accounts and the original entry is reversed down ie. all debited accounts are credited and all previously credited accounts are debited.

Adjusting entries are the entries which are recognised at the end day of the financial year and these are entries between the non-cash accounts like depreciation or the rectification or forgotten of transactions.

An adjusting entry could be a reversing entry but a reversing entry could not be a adjusting entry.

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4) The three trial balances that are often used to report financial information about a company are:

a) Unadjusted trial balance : This is prepared after making all the transactions posting to the T-Accounts of a financial year.

b) Adjusted trial balance : This is prepared after making all the adjusting entries on the last day of the financial year.

c) Closing trial balance : This is statement made after making the final accounts and carries all the opening account balances of the forthcoming financial year.

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