The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company. NELSON COMPANY Unadjusted Trial Balance January 31, 2019 Debit Credit 1,000 12,500 5,800 2,400 42,900 %2$ Cash Merchandise inventory Store supplies Prepaid insurance Store equipment Accumulated depreciation-Store equipment Accounts payable J. Nelson, Capital J. Nelson, Withdrawals Sales Sales discounts Sales returns and allowances $ 15,250 10,000 32,000 2,200 111,950 2,000 2,200 38,400 Cost of goods sold Depreciation expense-Store equipment Sales salaries expenses Office salaries expenses 17,500 17,500 Insurance expense Rent expense-Selling space Rent expense-Office space Store supplies expense Advertising expense 7,500 7,500 9,800 Totals $ 169,200 $169,200 Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Nelson Company uses a perpetual inventory system. Additional Information: a. Store supplies still available at fiscal year-end amount to $1,750. b. Expired insurance, an administrative expense, for the fiscal year is $1,400. c. Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year. d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,900 of inventory is still available at fiscal year-end.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Introduction
Adjusting entries:
Adjusting entries are prepared at the end of year to match expenses of the year with their respective revenue of that year. Adjusting entries are prepared to reflect correct value of expenses, revenue, assets and liabilities at the end of the financial year.
Depreciation is allocation of value of fixed asset over its useful life so that fixed asset can be replaced with new asset at the end of its useful life. Depreciation is a non-cash expense. Accumulated depreciation is contra asset. It has credit balance and it shown in negative amount and deducted from the book value of fixed asset.
Depreciation calculated during the year is journalized as below:
Depreciation expense A/c DR
To accumulated depreciation A/c
Supplies are amount of stationery items and other writing instruments as part of office and administrative items. When they are purchased they are treated as current assets. At the yearend they are used up, and the amount of used up is charged as expenses. . As on year end entry for supplies used up is as follows:
Supplies expenses A/c DR
To supplies A/c
Prepaid expense is the amount of expense paid in advance before due date. At the yearend when it becomes due, then such portion of prepaid expenses is recognized as expenses. As on year end adjustment entry for prepaid expenses are as follows:
Expense A/c DR
To prepaid expenses A/c
Inventory shrinkage is the reduction in the value of inventory due to theft or damage or any errors in accounting. In case of shrinkage, value of inventory decreases and reduction is recorded as inventory shrinkage expenses. Journal entry is as follows:
Shrinkage expenses A/c DR
To inventory A/c
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