Valley Company is a small business with a small team that maintains the company’s accounting. Due to the size of the team and workload, it is difficult to keep up with everything.
Keeping track of all accounting elements, like assets, liabilities, revenue, and expenses, is important. Doing so can help with getting an idea of what the company is worth and how well it did financially.
Valley Company’s balance sheet was taken on August 31, 2017, its fiscal year-end. This date is when the company should have all its accounts balanced out to show what the company is worth.
There are two types of accounts: nominal and direct. Nominal accounts represent values rather than specific amounts. Direct accounts are linked to specific amounts or facts (like how many items were sold for what price).
This article will go into more detail about nominal and direct accounts and how they relate to each other.
Make adjustments for the end of the year
The adjusted trial balance gives you an idea of what your annual report will look like, so now it’s time to make some adjustments.
Any transactions that occurred after the company’s fiscal year end should be recorded in the accounts. These transactions are called deferred expenses and revenues.
For instance, if the company paid for a service on August 31, but the service was provided in September, then that is a deferred expense.
The same goes for if they received money for something on August 31, but the service was provided before then, so that is considered a revenue that should have been recorded at the end of their fiscal year.
These must be corrected by going back into the records and finding where these occurred and re-posting them.
Reconcile the bank statement
After you’ve checked the bank statement for accuracy, it’s time to reconcile it. Reconciliation is the process of comparing two accounts to determine if there are any differences and, if so, why they exist.
Most companies have policies in place for recording cash receipts and disbursements, so the amounts on the bank statement should be accurate. Nevertheless, there may be a few discrepancies that need investigation.
For instance, the bank might have recorded a deposit that you already made via an electronic transfer. Or perhaps someone mistakenly withdrew money from your account using an ATM machine. These differences would show up on your company’s bank statement, not just on its balance sheet.
Reconcile your company’s bank statement at least once a year to ensure accuracy and prevent any errors from creeping into your financial statements.
Prepare an income statement and a balance sheet
Once you have your trial balance, you can prepare the company’s income statement and balance sheet. The income statement shows the company’s revenues and expenses for the period.
Revenues are typically sales revenue, but may also include gains or profits from other sources. Expenses are costs to operate the business such as materials used, salaries paid, taxes paid, etc.
The balance sheet shows the company’s assets, liabilities, and equity at a given date or time. Assets include things that are worth something (have value) such as cash, inventory, property and equipment, etc. Liabilities are things that need to be paid or given value in order for the business to operate such as loans and notes payable. Equity is owned by the owners of the business in the form of stock shares or dividends paid.
Preparing these documents will show how your company did for the fiscal year and what needs to be done moving forward.
Record depreciation for assets using the straight-line method
In the third line of the asset account, you will see a new asset called Depreciation. This is the account that is used to track the value of assets over time as they are used.
When an asset is purchased, its full cost must be recorded in its own asset account. Then, as it is used and wears out over time, its value decreases in what is called depreciation.
How much an asset depreciates depends on two things: 1) the type of asset and 2) whether it’s brand new or used.
The first factor depends on what kind of use the asset has (i.e., whether it’s a carpentry tool or a computer). The second factor depends on whether it was purchased brand new or used.
For example, if you buy a computer for $1,000 but then find out that it was only worth $500 when it was sold at retail stores, then you would have to record $500 of depreciation each year that you use it until you get to zero.
Prepare any non-profit adjustments to income and balance sheet items
Once you have the non-profit organization’s financial information, you can begin to adjust items on the statements.
Typically, items such as expenses for fundraising events or investments in assets are reported separately on the financial statements. You will need to adjust these figures to get the correct total income and asset figures.
For example, if the organization had $5,000 in fundraising event expenses, you would need to subtract this amount from its total assets to get its accurate net asset balance.
Additionally, if the organization had $100,000 invested in securities, you would need to subtract this amount from its total assets and liabilities to get its accurate net asset balance.
Check for omissions or errors in calculations or entries
Once you’ve confirmed that the balance is correct, you should check to make sure there are no omitted or incorrect entries. For example, you should check the balance of each account to ensure that all accounts have been entered correctly.
If there are any outstanding liabilities or obligations, you should also check that they have been correctly accounted for. For example, if the company has promised to pay someone $5,000 on a certain date, you should confirm that this liability has been included in the accounting balance.
This is an important step because if there are omissions or incorrect entries, then the financial statements may be misleading. For example, if the cash balance appears correct but there is actually no cash on hand, then the company may be falsely appearing to be financially stable.
Post entries to respective accounts using debit/credit rules
The next step in completing the adjusted trial balance is to post all of the August transactions to the appropriate accounts. For example, all expenses are credited to the expense account and then debited from the cash account.
All revenues are credited to the revenue account and then debited from the cash account. All assets are increased by investments and liabilities by disbursements, and so on.
Posting is completed by using what are called debit/credit rules. A debit entry increases a balance on a left-hand side (LHS) account and thus is recorded as a credit on a right-hand side (RHS) account. A credit entry decreases a balance on the LHS account and thus is recorded as a debit on an RHS account.
The reason for this is because when you record an entry on the RHS, you are recording something that leaves the account. When something leaves an account, it is recorded as a debit.
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