Bookkeeping Extended Trial Balance

BookkeepingExtended Trial Balance

Self Study Manual – Online Version – 0013858

Contents Page

Introduction 3

Chapter 1 Trial Balance Errors 7

Chapter 2 Journals and the ETB 53

Chapter 3 Limited Records and the ETB 123

Pre-assessment

To check whether you need to study this unit you can use the quick links below to

access the learning checks. If you get any questions wrong, we suggest you study

this material.

Chapter 1 – Learning Check Chapter 2 – Learning Check

Chapter 3 – Learning Check

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Produced by Enforcement & Compliance Learning Learning & Leadership Development

© Crown Copyright Version 2.1

February 2014

Unless they are referred to as a formal tax case in the public domain, all public names used within this training are intended to be fictional

and solely for the purposes of assisting activities, exercises or scenarios.

Any similarity to any real person or corporate body is entirely coincidental.

This document is the property of the Commissioners for HMRC.

It is supplied in confidence for official use only.

Bookkeeping – Extended Trial Balance Introduction

23-Jan-14 3

About this Manual

This introduction is designed to help you get the most out of

the self-study manual (SSM) on Bookkeeping – Extended

Trial Balance. It includes notes on the content and some

suggestions on how you can maximise your learning from

the material.

Prior learning

This manual assumes that you have completed, or have

knowledge equivalent to, the learning in Bookkeeping –

Introduction to Bookkeeping, Bookkeeping – Accounting

Standards and Year-end Adjustments, and Bookkeeping –

Reconciliations and Controls.

Assessment

All of the material in this manual is assessable. You can

assume material outside this manual, or only given as a

margin note or in an appendix, is not assessable unless we

say otherwise.

You can find more details on the particular criteria you'll be

assessed on in the catalogue entry for the product.

You may have some prior knowledge and experience, which

means that some topics covered are already familiar to you.

If you think you can already meet the chapter's objectives

you can assess yourself by working through the

learning check at the end of the chapter. If you get any of

the answers wrong, or are unsure about any points, we

strongly advise you to study the chapter. If you get all the

answers correct and feel you can meet the assessment

criteria you may go straight to the assessment.

Introduction Bookkeeping – Extended Trial Balance

4 23-Jan-14

Content of this manual

In this manual, you'll look at the following.

Chapter 1 – Trial Balance Errors

Explains how suspense accounts are used as part of the

double entry system.

You will consider what errors can cause an imbalance in a

trial balance and how a suspense account is used to deal

with the imbalance.

You will also consider the types of errors which do not cause

an imbalance in the trial balance and how such errors are

corrected.

Knowing what types of errors may occur, and how the

accountant will go about correcting them, will help your

understanding if you are reviewing the underlying records of

a business as part of a compliance check.

Chapter 2 – Journals and the ETB

Shows how year end adjustments or journals (such as

accruals or prepayments, depreciation and indeed errors)

would be processed using an extended trial balance (ETB).

You need to understand the construction of an ETB as it can

be crucial to your understanding of how the figures in the

financial accounts have been arrived at. It is also possible

that the accountant may respond to any request for

information on how figures have been arrived at by

providing an ETB.

Bookkeeping – Extended Trial Balance Introduction

23-Jan-14 5

Chapter 3 – Limited Records and the ETB

You will look at how an ETB can be used to construct

financial accounts where a business has limited accounting

records.

Where a business does not maintain a full double entry

system the accountant will use an ETB as the 'vehicle' to

transform single entry records into financial accounts

(in other words the full double entry system). This then

allows the accountant to produce balanced financial

accounts.

Time to complete

We estimate it should take you between 8 and 10 hours to

read the manual, including completing all the activities and

learning checks. However, make sure you take the time you

need to achieve the objectives for each chapter. This timing

doesn't include any additional time you may take to revise

for the assessment or complete the assessment-standard

questions.

Known issues

Whilst we try to ensure that all our products are free from

errors, mistakes can creep in from time to time.

Before you start studying this manual, please look at the

entry for the module in the TPLP catalogue and click on the

'known issues' link. This will give you a list of any known

errors so you can make the necessary corrections yourself.

Please continue to feed back any other errors you spot to

the Maintenance team mailbox.

Introduction Bookkeeping – Extended Trial Balance

6 23-Jan-14

Feedback

We value your feedback. The TPQ Maintenance team would

like to hear from you if you have any comments to make

about the manual you have just studied, or can suggest how

it could be improved. Please send your feedback to the

dedicated Maintenance team mailbox address:

TPQ, Maintenance Team (E&C HR – Learning)

Bookkeeping – Extended Trial Balance Chapter 1 – Trial Balance Errors

23-Jan-14 7

Contents

Page

Introduction 9

Learning outcomes and study objectives 9

Study advice 10

1.1 Suspense Accounts 11

1.1.1 What is a suspense account? 11

1.1.2 Equal and opposite entry can't be located or is unknown 11

1.1.3 Debits don't equal credits 15

1.2 Errors That Cause Imbalances in the Trial Balance 21

1.2.1 Types of errors that cause imbalances in a

trial balance 21

1.2.2 Locating errors 22

1.2.3 Using a suspense account to correct discrepancies 25

1.3 Errors That Don't Cause Imbalances in the Trial Balance 34

1.3.1 Types of errors 34

1.3.2 Correcting the errors 35

Review 41

Learning check 43

Learning check – answers 47

Before moving on 51

Chapter 1 – Trial Balance Errors Bookkeeping – Extended Trial Balance

8 23-Jan-14


23-Jan-14 9

Introduction

In this chapter you'll look at how you can put right errors in

a trial balance.

You will look at how to use a suspense account as part of

the double entry bookkeeping system.

You will then consider what errors can cause an imbalance

in a trial balance and see how to use a suspense account to

deal with the imbalance.

Finally, in this chapter you will also discover the types of

error which will not cause an imbalance in the trial balance

and how you can correct these errors.

Learning outcomes and study objectives

The following table sets out what you will be able to achieve

after you have successfully studied this chapter.

Learning outcomes Study objectives

You will To achieve this you need to be

able to

know how to correct the

errors in a trial balance.

describe why you need to

open a suspense account

describe the errors that

cause an imbalance in a

trial balance and how you

can correct them using a

suspense account


don't cause an imbalance in

a trial balance and how you

can correct them.


10 23-Jan-14

Study advice

We think it will take you approximately 3 to 3½ hours to

finish this chapter. This is only a guide. The important

thing is for you to make sure you understand all the

material in the chapter.


23-Jan-14 11

1.1 Suspense Accounts

In this subchapter you'll look at what a suspense account is,

why you may prepare one and what you do with the

year end balances on the suspense account when preparing

financial accounts.

1.1.1 What is a suspense account?

If you have an imbalance in a trial balance and you can't

immediately spot the cause, you may temporarily record the

shortfall in a suspense account whilst you find out what

caused it. You may also draw up a suspense account

whenever you're not sure about something in the books and

records.

Once you know what's caused the imbalance, you clear the

entry from the suspense account and record it in the correct

account. A suspense account acts as a temporary 'holding'

account and it follows double entry bookkeeping principles

in the same way as any other account.

So there are two main situations when it would be

appropriate to open up a suspense account.

1. When the equal and opposite entry can't be located or is

unknown.

2. When the debits don't equal credits so there's an

imbalance in the trial balance.

1.1.2 Equal and opposite entry can't be located or is unknown

F & V Suppliers Ltd receives a cheque payment for £495

from an unknown source. The company debits the receipt

to the bank account and makes a credit entry in the

suspense account whilst it traces the payer.

Example


12 23-Jan-14

Bank

Dr Cr

£ £

Suspense account 495

Suspense

Dr Cr

£ £

Bank 495

Enquiries reveal that the payment was from the proprietor

of the Del Vecchio restaurant. F & V Suppliers Ltd can now

clear the suspense account and post the payment in the

correct account.

Debtor – Del Vecchio

Dr Cr

£ £

Balance b/d 495 Suspense

account (1)

495

Suspense

Dr Cr

£ £

Del Vecchio (1) 495 Bank 495

Del Vecchio's account is now clear, as is the suspense

account. The end result is exactly the same as it would

have been if the company had debited the payment to bank

and credited to Del Vecchio's debtor account in the first

place.

Now try the activity that follows.


23-Jan-14 13

Activity one a) At the end of the month, Tony reviews his bank

statements. He notices that the bank has cleared a

cheque for £126. He can't remember what this payment

was for and he can't locate his cheque book to find out.

He decides to record the payment in a suspense account

until he identifies where the payment should go.

Record the relevant entries in the suspense account.

b) After several phone calls and a letter, his bank finally

confirms that Tony made the cheque out to the local

garage. Tony remembers he had some repairs carried

out on the business van.

Prepare the necessary bookkeeping entries to clear the

suspense account.


14 23-Jan-14

Response a) At this stage, the only entry required in the suspense

account is a debit entry of £126.

Suspense

Dr Cr

£ £

Bank 126

The corresponding credit entry of £126 will be recorded in

the bank 'T' account.

b) Once Tony has identified what the payment was for he

needs to clear the suspense account as follows.

Suspense

Dr Cr

£ £

Bank 126 Motor

expenses (1)

126

Motor Expenses

Dr Cr

£ £

Suspense (1)

126


23-Jan-14 15

1.1.3 Debits don't equal credits

When you extract a trial balance, you check that it balances

– that the total debit balances are the same as the total

credit balances. If they're not, the first thing you need to do

is check that there are no errors in the way the trial balance

has been drawn up. For example, figures may have been

put on the wrong side of the trial balance, such as the

Sales 'T' account included in the debit column.

Once you've corrected any errors like this, if there's still an

imbalance you need to check the individual entries, starting

with the cash and bank accounts and you should consider

opening a suspense account.

Have a go at this activity.


16 23-Jan-14


23-Jan-14 17

Activity two Nitin has drawn up his trial balance for the year ending 31 March

but there's an imbalance. Check Nitin's trial balance to identify

the errors and correct the trial balance.

Trial balance at 31 March

Dr Cr

Cash 50

Bank 2,240

Equipment 2,300

Trade creditors 700

Capital 2,980

Drawings 22,000

Sales 35,750

Purchases 4,620

Opening stock 485

Light and heat 1,135

Rent and rates 6,600

39,595 39,265


18 23-Jan-14

Response The corrected trial balance is shown below.

Corrected trial balance at 31 March

Dr Cr

Cash 50

Bank 2,240

Equipment 2,300

Trade creditors 700

Capital 2,980

Drawings 22,000

Sales 35,750

Purchases 4,620

Opening stock 485

Light and heat 1,135

Rent and rates 6,600

39,430 39,430

In this case the errors were in the way the trial balance had

been drawn up and it now balances. If there was still an

imbalance you would need to consider drawing up a

suspense account.

After you have checked that there are no errors in the way

that the trial balance was prepared, there may still be an

imbalance between debits and credits. If so, then you will

have to look further at the reasons for the imbalance.


23-Jan-14 19

Suppose that the total on the credit side of a trial balance is

£140 more than on the debit side, the trial balance would

look like this.

Trial balance as at 31 December

Dr Cr

£ £

Totals from the 'T' accounts 50,000 50,140

In this situation, you haven't complied with the dual effect

because the debit entries in the 'T' accounts don't equal the

same amounts as the credit entries.

A shortfall on the debit column is recorded as a debit entry

in the suspense account and a shortfall on the credit column

is recorded as a credit entry in the suspense account. The

trial balance would look as follows.

Trial balance as at 31 December

Dr Cr

£ £

Totals from the 'T' accounts 50,000 50,140

Suspense account 140

50,140 50,140

If the shortfall in the trial balance is in the credit column,

the suspense account entry in the trial balance has to be in

the credit column to make up the deficit.

Simply making an entry in the trial balance is not enough.

All entries in the trial balance relate to balances in

'T' accounts so you have to open up a 'T' account for the

suspense account. In the example above, the debit entry of

£140 will appear in the suspense 'T' account as follows.

Suspense

Dr Cr

£ £

31 Dec Trial balance

difference

140

It might look as if this debit entry doesn't have an equal and

opposite credit entry. But this isn't the case. There is a

credit entry but you don't know where it is.


20 23-Jan-14

Treatment in financial accounts

This isn't the end of the matter. The suspense account

simply allows you to balance the trial balance whilst you

continue to try to discover the cause of the discrepancy.

You'll look at how to identify the errors and how you clear

the suspense account in subchapter 1.2.

If you don't find the reasons for the imbalance before you

prepare the financial accounts, or it's not cost effective to

continue looking for explanations, then you need to consider

how you should reflect the suspense account balance in the

final accounts.

In smaller businesses, you might treat the balance as

drawings or capital introduced, depending upon whether the

amount in suspense is a debit or credit balance.

In larger businesses, you might include the suspense

account in the balance sheet as a current asset or liability in

its own right depending on whether the suspense account

has a debit or credit balance.

You may also debit or credit unexplained suspense account

balances to the trading and profit and loss account.

Whilst this may be acceptable for accountancy purposes,

there may be tax implications arising from this.

For example, if the suspense account balance is debited to

the trading and profit and loss account, this reduces the

overall profits assessable for income or corporation tax

purposes.

HMRC would require evidence that the amount in question

relates to genuine business expenditure.

If the suspense account balance is credited to the trading

and profit and loss account, this increases the overall profits

assessable for income or corporation tax purposes.


23-Jan-14 21

1.2 Errors That Cause Imbalances in the Trial Balance

In this subchapter you'll look at the main errors that cause

imbalances in a trial balance and some ways in which you

may identify them. You'll also consider how to correct these

discrepancies using a suspense account.

1.2.1 Types of errors that cause imbalances in a trial balance

The purpose of the trial balance is to check whether you

have complied with the dual effect. That is, that for every

debit entry you have made an equal and opposite credit

entry. If the sum of all of the debit entries doesn't equal

the sum of all of the credit entries, then there's an


An imbalance in a trial balance won't tell you what or where

the problem is, but at least you know that there may be

mistakes in the 'T' account entries. You will also know the

net size of any errors.

However, you need to be aware that there are some errors

which don't cause an imbalance in the trial balance. They

are impossible to detect from a review of the trial balance.

You'll consider these errors in subchapter 1.3.

For now, let's start by looking at the type of errors that do

affect the trial balance.

There are many types of error that cause the trial balance

not to balance. The most common are as follows.

1. Posting two debits instead of one debit and one credit, or

two credits instead of one credit and one debit.

2. Posting a different amount to the debit and credit.

3. Omitting one part of the double entry altogether.

4. Posting one leg of the double entry more than once.


22 23-Jan-14

1.2.2 Locating errors

Any of the errors listed above will mean that the trial

balance won't balance. They all create unequal debit and

credit entries. But the imbalance won't identify what the

error was. What's more, the imbalance can be due to more

than one error, meaning that the discrepancy in the trial

balance is the result of a number of errors.

Accountants are aware of this and may spend hours looking

for the mistake(s) that caused a small difference of, say, £2.

This is because they know that this could be due to more

than one major error, perhaps one of £5,000 and one of

£5,002.

In principle, a search involves checking every entry made

since the last successful trial balance. Fortunately, over the

years, accountants have developed some short cuts.

People often inadvertently transpose numbers. When

this happens you will find that the difference is always

divisible by 9. Whenever the difference you have found

can be divided by 9, it's worth checking for transposition

errors.

If the credit column exceeds the debit column, it's worth

checking every credit entry that's the same amount as

the discrepancy, to see if there's a corresponding debit

entry.

Similarly, if the debit column exceeds the credit column

it's worth checking every debit entry that's the same

amount as the discrepancy, to see if there's a

corresponding credit entry.

It is also worth dividing any discrepancy by two and

checking that an entry for that amount hasn't been made

twice.

Have a go at the next activity.


23-Jan-14 23

Activity three Imagine that you are faced with a trial balance in which the

total of the debit column is £36 more than the credit

column. The problem may arise in recording transactions in

the 'T' accounts.

List three possible causes of this. For each cause suggest a

way of locating the difference.


24 23-Jan-14

Response You may have listed the following possibilities.

1. You could look for a £36 transaction entered on the debit

side, but not the credit side, by checking the debit

entries for £36 and checking that there's a credit entry in

each case. This could be quicker than checking every

double entry of any amount.

2. There may be two entries for a transaction of £18 on the

debit side. You should be looking for half the difference

of £36, checking that each £18 debit is matched by a

credit.

3. The discrepancy is divisible by 9 so one side of the entry

may have been correct, but the other side entered as a

different figure. For example, you could have entered a

transaction of £95 correctly on the debit side, but as £59

on the credit side.

Unfortunately if you don't successfully locate the error, then

you will have to start checking every entry.

All the errors you've looked at so far result in a difference in

the trial balance. It may take time to find them, but at least

you'll be aware that one or more differences must exist. An

imbalance may also indicate that you can't rely on the

accounting records until you've found and corrected the

reason for the difference.


23-Jan-14 25

1.2.3 Using a suspense account to correct discrepancies

If there's an imbalance in the trial balance, you usually open

a suspense account whilst you investigate the cause of the

imbalance. If you do, there are four simple steps to follow.

1. Open a suspense account with the amount of the

imbalance and investigate the cause of the discrepancy.

2. Once you've found it, identify the accounting entries

actually made.

3. Identify the accounting entries that should have been

made.

4. Identify the accounting entries needed to correct the

error.

We will illustrate these steps using an example.

Ranjit prepares his trial balance at the end of the accounting

period. He identifies that the sum of the credit entries

exceeds the sum of the debit entries by £1,000.

1. Open a suspense account and investigate the cause of

the discrepancy

The credit entries exceed the debit entries by £1,000 so

there's a shortfall on the debit side. Ranjit needs to include

a suspense account balance of £1,000 on the debit side of

the trial balance to make it balance.

He should also include a debit entry in a suspense

'T' account as shown below.

Suspense account

Dr Cr

£ £

Year

end

TB

difference

1,000

Example


26 23-Jan-14

Identifying the cause of the imbalance can be a laborious

task. However, in practice, experience will help you decide

where to start looking.

Ranjit identifies that, when he took drawings of £1,000 from

the business bank account, he made the correct entry in the

bank 'T' account but he didn't make an entry in the

drawings account.

2. Identify the accounting entries actually made

Now that Ranjit has identified the cause of the discrepancy,

he knows that the only accounting entry made to account

for this transaction was

Credit Bank £1,000

There was no corresponding debit entry. He makes a debit

entry of £1,000 against suspense account to balance the

trial balance.

Trial balance Dr Cr

Bank 1,000 Drawings 0 1,000 Suspense 1,000 1,000 1,000


made

The correct accounting entries for drawings of £1,000 from

the bank should have been

Debit Drawings £1,000

Credit Bank £1,000


23-Jan-14 27


error

The entries to correct the error are

Debit Drawings £1,000

Credit Suspense £1,000

The transaction is now recorded correctly. This is reflected

in the 'T' accounts below.

Suspense account

Dr Cr

£ £

Year

end

TB

difference

1,000 Year

End

Drawings 1,000

Drawings

Dr Cr

£ £

Year

end

Suspense 1,000

As you can see the suspense account has now been cleared

and there's a debit entry in the drawings account.

You can now adjust the trial balance to include the corrected

figures.

Try the following activity.

You will need a separate piece of paper for this

activity.


28 23-Jan-14


23-Jan-14 29

Activity four Read the information below and

a) draw up a suspense account to reflect the initial

imbalance in the trial balance

b) identify the accounting entries required to correct the

errors listed above and clear the suspense account as

appropriate.

Susan's end of year trial balance doesn't balance because

the credits exceed debits by £21,487. Her accountant can't

locate the reason for the discrepancy, so they transfer the

balance to a suspense account.

Susan has made the following bookkeeping errors.

1. She has correctly shown a sale on credit as £7,100 in the

sales account, but has recorded it as £1,700 in the

debtors account.

2. An advertising company lost a cheque payment for

advertising of £2,492 so Susan sent a replacement.

When reconciling the bank statements to the bank

'T' account, the accountant noticed that Susan's

accounting records showed both cheques as payments in

the bank 'T' account, even though only one cheque had

been cashed. Susan had recorded the amount correctly

in the advertising account.

3. Susan had purchased a new computer system during the

period costing £7,195. Although she had correctly

shown the purchase in the bank 'T' account, she had not

opened an account to record the asset.

4. Susan paid her accountants' bill for £3,950 and entered

it as a credit in the bank account, but also as a credit in

the professional expenses account.

5. Susan had received a £1,500 cheque for rental income.

This was entered as a debit in the bank 'T' account but

no rental income 'T' account was opened.


30 23-Jan-14

Response Suspense account

Dr Cr

£ £

End of

year

Trial

balance

21,487 End of

year

Debtor (1) 5,400

End of

year

Rental

inc (5)

1,500 End of

year

Bank (2) 2,492

End of

year

Computer

(3)

7,195

End of

year

Prof exp

(4)

7,900

22,987 22,987

As the credits on the trial balance exceeded the debits by

£21,487, then an entry of £21,487 needs to be made on the

debit side of the suspense account to achieve a balance.

1. Debtor

The accounting entries made were

Dr Debtors £1,700

Cr Sales £7,100

Dr Suspense £5,400 (included within £21,487)

As the original entries made didn't result in debits equalling

credits, the missing leg of the entry was included within the

suspense account entry to achieve the balance in the trial

balance above.

The correct accounting entries should have been

Dr Debtors £7,100

Cr Sales £7,100

The entries required to correct the error should

therefore be

Dr Debtors £5,400

Cr Suspense £5,400


23-Jan-14 31

Response (cont) 2. Advertising


Dr Advertising £2,492

Cr Bank £4,984

Dr Suspense £2,492 (in £21,487)




balance above.


Dr Advertising £2,492

Cr Bank £2,492


therefore be

Dr Bank £2,492

Cr Suspense £2,492

3. Computer system


Dr Suspense £7,195 (in £21,487)

Cr Bank £7,195



suspense account entry to achieve the balance in the

trial balance above.


Dr Fixed assets £7,195

Cr Bank £7,195


therefore be

Dr Fixed assets £7,195

Cr Suspense £7,195


32 23-Jan-14

Response (cont) 4. Accountants' bill


Dr Suspense £7,900 (in £21,487)

Cr Bank £3,950

Cr Professional expenses £3,950




balance above.


Dr Professional expenses £3,950

Cr Bank £3,950


therefore be

Dr Professional expenses £7,900

Cr Suspense £7,900

Be careful here. The professional expenses account should

have shown a debit entry of £3,950. However, Susan made

a credit entry of £3,950 to this account. To correct this

error the entries required will be double the amount of the

balance and you need a total debit entry of £7,900; firstly to

remove the credit of £3,950 and secondly to record the

actual debit entry of £3,950.

5. Rental income.


Dr Bank £1,500

Cr Suspense £1,500




balance above.


Dr Bank £1,500

Cr Rental income £1,500


23-Jan-14 33

There is now no balance remaining on the suspense account

as the errors identified have cleared the trial balance

discrepancy. However, that doesn't mean there aren't other

errors in the bookkeeping that the trial balance hasn't

highlighted.

You'll go on to consider these types of errors in more detail

in the next subchapter.


34 23-Jan-14

1.3 Errors That Don't Cause Imbalances in the Trial Balance

You're now going to look at the main errors that don't

cause an imbalance in a trial balance. You'll find that these

are more difficult to detect.

What these errors have in common is that the debits and

credits still equal each other. As there's no discrepancy in

the total of the debits and credits, the trial balance won't

detect these errors.

1.3.1 Types of errors

The following is a list of accounting terms used to describe

the types of errors where the bookkeeping entries are wrong

but the debits in the trial balance still equal the credits.

Error of omission – a completely omitted transaction, so

neither the debit or the credit entry appears in the accounts.

Duplication of entry – a transaction entered twice. The

total of debits and credits will still be equal.

Error of original entry – both debit and credit entries made

incorrectly. For example, the business records include credit

sales of £500 in both the debtors account and the sales

account, but the correct amount is £400.

Compensation error – two errors cancel each other out.

Reversal of entry – occurs when the business records

show the debit posted to the account that should have been

credited and the other way around.

Error of commission – the inclusion of the debit or credit

in an incorrect account.


23-Jan-14 35

The business records correctly show cash paid for rent of

£1,000 on the credit side of the cash account but record the

corresponding debit entry as £1,000 on the debit side of the

motor expenses account. This is an error of commission.

Error of principle – similar to an error of commission,

except that the business has recorded the error in the wrong

class of account.

The records show that cash paid for a van to use in the

business has been credited to the cash account, but the

debit entry has been incorrectly posted to motor expenses

in the trading and profit and loss account instead of fixed

assets in the balance sheet. In other words, it's been

debited to an expense account rather than an asset account.

This is an error of principle.

As none of these errors result in an imbalance in the trial

balance, there's no need to open up a suspense account.

However, you still need to correct the errors.

1.3.2 Correcting the errors

The process of correcting the errors is the same as you saw

earlier in subchapter 1.2.

1. Investigate the cause of the discrepancy.


actually made.


made.


error.

The only difference is that there's no suspense account.

Now try the following activity.

Example

Example


36 23-Jan-14


23-Jan-14 37

Activity five Jennifer is preparing her financial accounts and has

extracted a trial balance. Although the trial balance does

balance, she discovers that she has made the following

errors.

1. She has failed to record cash sales of £1,000 in the

accounts.

2. She has debited a bank loan received of £5,000 to the

loan account and credited it to the bank 'T' account.

3. She has correctly posted cash paid for insurance of £200

to the cash account, but has debited it to the general

expenses account.

4. She has recorded credit purchases of £900 as £90.

5. She has correctly posted a cheque payment for £3,500

for a business vehicle in the bank 'T' account, but has

debited it to the stationery account.

Identify the accounting entries which will correct the errors

listed above.


38 23-Jan-14

Response 1. Cash Sales

There are no accounting entries for this transaction.


Dr Cash £1,000

Cr Sales £1,000


therefore be

Dr Cash £1,000

Cr Sales £1,000

This is an error of omission.

2. Bank loan


Dr Bank loan £5,000

Cr Bank £5,000


Dr Bank £5,000

Cr Bank loan £5,000


therefore be

Dr Bank £10,000

Cr Bank loan £10,000

This is a reversal of entry error.


23-Jan-14 39

Response (cont) 3. Insurance


Dr General expenses £200

Cr Cash £200


Dr Insurance £200

Cr Cash £200


therefore be

Dr Insurance £200

Cr General expenses £200

This is an error of commission.

4. Purchases


Dr Purchases £90

Cr Trade creditors £90


Dr Purchases £900



therefore be

Dr Purchases £810


This is an error of original entry.


40 23-Jan-14

Response (cont) 5. Vehicle


Dr Stationery £3,500

Cr Bank £3,500


Dr Motor vehicles £3,500

Cr Bank £3,500


therefore be

Dr Motor vehicles £3,500

Cr Stationery £3,500

This is an error of principle.

That's the end of the material in this chapter. Now read the

review and try the learning check that follows it.


23-Jan-14 41

Review

A suspense account is an account in which entries are

temporarily recorded whilst you find out where the entries

should have been recorded.

There are two main situations when it would be appropriate

to open up a suspense account

when you can't locate the equal and opposite entry or it's

unknown

when the debits don't equal the credits so there's an


If debits exceed credits on the trial balance, you create a

credit balance in a suspense account. If credits exceed

debits, you create a debit balance in a suspense account.

When there's an imbalance in the trial balance, an

accountant will try to identify all the errors so that there will

be no balance left in the suspense account. This process

involves four simple steps.

1. Open up a suspense account with the amount of the

imbalance and investigate the cause of the discrepancy.


actually made.


made.


error.

If you can't identify the cause of the discrepancies, then you

can include the suspense account balance on the balance

sheet as a current asset or liability as appropriate, or in the

trading and profit and loss account as an expense or income

as appropriate, although this may have tax implications.

In smaller businesses, you may decide to treat any balance

remaining on the suspense account as either drawings or

capital introduced. This will clear the balance on the

suspense account.


42 23-Jan-14

There are four main bookkeeping errors that lead to

imbalances in a trial balance. These are

posting two debits or credits instead of one of each

posting different amounts of debit and credit

omitting one part of the double entry

posting one leg of the double entry more than once.

Some bookkeeping errors don't cause an imbalance in a trial

balance. These are

errors of omission

duplication of an entry

error of original entry

compensation error

reversal of an entry

error of commission

error of principle.

As these errors don't cause an imbalance in the trial

balance, there's no need to open up a suspense account.

However, the errors still need to be corrected once the

cause has been identified.

Now try the learning check that follows.


23-Jan-14 43

Learning check

1. What is the purpose of a suspense account?

2. Describe the two main situations when it would be



44 23-Jan-14

3. List four bookkeeping errors that would cause an imbalance

in a trial balance.

4. You have opened a suspense account because of an

imbalance in the trial balance. You identify the cause of the

imbalance. What should you do next?


23-Jan-14 45

5. The suspense account has a debit balance of £984. You

discover an entry for cash purchases of £492 on the credit

side of the cash account and on the credit side of the

purchases account. Will the correction of this error clear the

balance on the suspense account? Give the reason for your

answer.


46 23-Jan-14

6. List five bookkeeping errors that would not cause an

imbalance in a trial balance.


23-Jan-14 47

Learning check – answers

1. What is the purpose of a suspense account?

A suspense account is an account in which entries are

temporarily recorded whilst you find out what the entries

should be.

Once you know the nature of the transaction, you clear the

entry from the suspense account and record it in the correct

account. So a suspense account acts as a temporary

'holding' account and it follows double entry bookkeeping

principles in the same way as any other account.

This was covered in subchapter 1.1.

2. Describe the two main situations when it would be


There are two main situations when it would be appropriate

to open up a suspense account.

a) When you can't locate the equal and opposite entry or it's

unknown.

b) When the debits do not equal credits so there's an




48 23-Jan-14

3. List four bookkeeping errors that would cause an imbalance

in a trial balance.

Posting two debits or two credits instead of one debit

and one credit.

Posting a different amount to the debit and credit.

Omitting one part of the double entry altogether.

Posting one leg of the double entry more than once.

Basically the trial balance will highlight errors which haven't

resulted in equal and opposite debit and credit entries.


4. You have opened a suspense account because of an

imbalance in the trial balance. You identify the cause of the

imbalance. What should you do next?


actually made.


made.


error.



23-Jan-14 49

5. The suspense account has a debit balance of £984. You

discover an entry for cash purchases of £492 on the credit

side of the cash account and on the credit side of the

purchases account. Will the correction of this error clear the

balance on the suspense account? Give the reason for your

answer.

Yes this clears the balance on the suspense account. The

initial accounting entries were

Cr Purchases £492

Cr Cash £492

As the initial entries made would have resulted in an

imbalance in the trial balance, you would have made a debit

entry of £984 to suspense in order to balance the trial

balance.

Dr Suspense £984


Dr Purchases £492

Cr Cash £492

So, in order to correct this situation, you need to make the

following accounting entries.

Dr Purchases £984

Cr Suspense £984

The debit entry of £984 represents £492 to cancel out the

original incorrect credit entry and a further debit of £492 to

record the correct purchase.

The double-entry above therefore clears the debit balance of

£984 on the suspense account.



50 23-Jan-14

6. List five bookkeeping errors that would not cause an

imbalance in a trial balance.

You could have chosen any five from the following.

Error of omission.

Duplication of entry.

Error of original entry.

Compensation error.

Reversal of entry.

Error of commission.

Error of principle.



23-Jan-14 51

Before moving on

If you have answered the learning check correctly, you will

have successfully completed the learning outcomes and

study objectives for this chapter, which you can see in the

table below.



able to

know how to correct the

errors in a trial balance.

describe why you need to

open a suspense account


cause an imbalance in a

trial balance and how you

can correct them using a

suspense account


don't cause an imbalance in

a trial balance and how you

can correct them.

If you had difficulty in achieving any of these objectives,

have another look at the relevant part(s) of the chapter and

try the learning check again. You should be confident that

you have achieved them before moving on. There is also a

space for you to note any points you might want to discuss

with your line manager or tutor.


52 23-Jan-14

Notes

Bookkeeping – Extended Trial Balance Chapter 2 – Journals and the ETB

17-Feb-14 53

Contents

Page

Introduction 55


Study advice 56

2.1 The Journal 57

2.2 Extended Trial Balance 59

2.3 Preparing ETBs in Subsequent Periods of Account 77

2.3.1 Capital account 77

2.3.2 Adjustments for stock 81

2.3.3 Accruals and prepayments 85

2.3.4 Adjustments for depreciation 93

2.3.5 Adjustments for bad and doubtful debts 97

Review 109

Learning check 111


Before moving on 121

Chapter 2 – Journals and the ETB Bookkeeping – Extended Trial Balance

54 17-Feb-14


17-Feb-14 55

Introduction

In this chapter you'll learn that after you've extracted the

initial trial balance, you may need to make some

adjustments before you can prepare the final accounts.

These may include adjustments for accruals, prepayments,

bad debts, depreciation and also errors.

You know about the bookkeeping for these adjustments and

how to account for them in the relevant 'T' accounts.

However, in practice, it's more usual to make these

adjustments directly to the trial balance. This chapter

shows you to how to make these adjustments using an

extended trial balance (ETB).

These adjustments are commonly referred to as 'journals' or

'journal entries'. You'll look at how to make journal entries.

You'll also see how to make the adjustments using the

relevant balances from the previous year's accounts.

You need to understand the construction of an ETB because

it can be crucial to your understanding of how the figures in

the financial accounts are arrived at. Also, if you ask an

accountant how they have arrived at figures in the financial

accounts, they may send you the ETB.


56 17-Feb-14






able to

know how to make account

adjustments using an

extended trial balance.

explain the purpose of a

journal and how to prepare

journal entries

prepare an extended trial

balance by extending the

initial trial balance to show

any adjustments


balance for subsequent

years.

Study advice

We think it will take you approximately 2½ to 3½ hours to





17-Feb-14 57

2.1 The Journal

In this subchapter you'll look at the purpose of a journal and

how to make journal entries.

You're already familiar with a number of year end

adjustments and how they're recorded in the relevant

'T' accounts.

However, this isn't the only way of dealing with year end

adjustments or correcting errors. In fact, most accountants

process the adjustments through the trial balance as part of

the double entry system and create an extended trial

balance (ETB).


'journal entries'. Accountants usually record the journals in

a book or file so that there's a record of all adjustments

made. A journal shows the actual double entries made,

along with an explanation as to what each double entry

represents. An example of a journal book is shown below.

Date Reference Dr

£

Cr

£

31/12/13 J/E 1

Account to be debited Prepayments (Balance sheet) 165

Account to be credited Motor expenses (P & L) 165

Narrative description Prepayment of vehicle insurance at year

end

31/12/13 J/E 2

Account to be debited Stock (Balance sheet) 150

Account to be credited Trading account 150

Narrative description Year end adjustment for closing stock

31/12/13 J/E 3

Account to be debited Depreciation expense (P & L) 2,500

Account to be credited Motor vehicles – Acc dep'n (Balance sheet) 2,500

Narrative description Annual depreciation charge


58 17-Feb-14

The references given to the entries, such as J/E 1, are

important as they enable you to follow the adjustments

through the trial balance. This referencing and tracking of

adjustments is known as an audit trail. If you want an

accountant to send you this information, you should ask for

the 'link papers' or journal adjustments.

You can't ask for any documents or working papers on audit

work or tax advice as these are the property of the

accountant. But anything that links (or reconciles) the

figures in the accounting records to the figures in the

financial accounts is part of the books and records of the

business. So, you can ask for this information, even if an

accountant has prepared it.

The journal on the previous page is a manual paper journal.

These are becoming rarer as many businesses and most

accountants use computer software to prepare accounts. It

is likely that a computer generated journal entry will contain

the same information and look very similar to the example

of the paper journal entry above. Whether the journal is on

computer or on paper, the principles and accounting entries

are exactly the same.

Once an accountant has prepared the journal entries, the

next step is to process these adjustments (or journals)

using the trial balance. This is why you call it an

extended trial balance (ETB). You will look at this next.


17-Feb-14 59

2.2 Extended Trial Balance

In this subchapter you'll look at how to start preparing an


An ETB is created by extending the initial trial balance to

show any adjustments. It will usually look like this.

Extended trial balance as at 31 December 2013

Initial TB Adjustments Adjusted TB

1 2 3 4 5 6

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 2,000 2,000

Purchases 18,200 18,200

Bank overdraft 325 325

Sales 34,265 34,265

Motor vehicles (cost) 15,000 15,000

Equipment (cost) 1,000 1,000

Debtors 260 260

Motor expenses 1,080 75 1,005

Telephone 50 35 85

Drawings 1,000 1,000

Prov'n for dep'n – MV 2,500 2,500

Prov'n for dep'n – Equip't 200 200

Accruals 35 35

Prepayments 75 75

Closing stock (BS) 1,500 1,500

Closing stock ( T P & L) 1,500 1,500

Depreciation – MV 2,500 2,500

Depreciation – Equipment 200 200

36,590 36,590 4,310 4,310 40,825 40,825

The adjusted trial balance figures in columns 5 and 6 are

then used to prepare the financial accounts.


60 17-Feb-14

The process can be split into the following stages.

1. Extract the initial trial balance (from 'T' accounts) –

columns 1 and 2.

2. Record the year end adjustments in the journal book.

3. Post the adjustments (journals) onto the ETB –

columns 3 and 4.

4. Add the figures across and down to give the adjusted

trial balance – columns 5 and 6.

5. Draw up the trading and profit and loss account and

balance sheet – using the figures from columns 5 and 6.

You will now follow this process using an example.

Stage 1 – Extract the initial trial balance

You looked at Lance's trial balance for his first year of

trading in chapter 5 of Bookkeeping – Introduction to

Bookkeeping. His trial balance balanced. But let's see what

would happen if his trial balance didn't balance and it looked

like this, including an entry from a suspense account.

Dr Cr

£ £

Capital 5,000

Bank 2,075

Van 2,700

Equipment 500

Cash 25

Purchases 1,750

Sales 5,200

Cash & Carry Ltd 300

Readstone FC 750

Advertising 250

Motor expenses 80

Insurance 120

Drawings 1,000

Suspense 1,250

10,500 10,500

Example


17-Feb-14 61

Stage 2 – Record the year end adjustments in the journal book

After extracting the trial balance, Lance identifies that the

following year end adjustments (journals) are required.

1. The annual depreciation charge is £540 for the van and

£40 for the equipment.

2. Lance thinks Readstone FC are unlikely to pay £50 that they

owe him. As this is a bad debt, he wants to write it off.

3. Lance has prepaid £20 of the insurance payment as it

relates to the following financial year.

4. He needs to make an accrual of £15 for motor expenses.

5. Closing stock is £250.

6. The initial trial balance didn't balance so Lance had

created a suspense account. He discovers that he failed

to record purchases of £1,250 paid for by cheque. The

cheque payment had been correctly recorded in the bank

account but it wasn't recorded in Purchases.

Lance would record these items in the journal book using

double entry bookkeeping principles. The journal book

would look as follows.

Date Ref Dr

£

Cr

£

30 April J/E 1

Account to be debited Depreciation expense (P & L) 540

Account to be credited Van – Acc dep'n (Balance sheet) 540

Narrative description Annual depreciation charge for van

Account to be debited Depreciation expense (P & L) 40

Account to be credited Equipment – Acc dep'n (Balance sheet) 40

Narrative description Annual depreciation charge for equipment

30 April J/E 2

Account to be debited Bad debt expense (P & L) 50

Account to be credited Readstone FC – Debtor (Balance sheet) 50

Narrative description Bad debt write off


62 17-Feb-14

Date Ref Dr

£

Cr

£

30 April J/E 3

Account to be debited Prepayments (Balance sheet) 20

Account to be credited Insurance (P & L) 20

Narrative description Prepayment of insurance at year end

30 April J/E 4

Account to be debited Motor expenses (P & L) 15

Account to be credited Accruals 15

Narrative description Accrual for motor expenses at year end

30 April J/E 5

Account to be debited Stock (Balance sheet) 250

Account to be credited Trading account 250

Narrative description Year end adjustment for closing stock

30 April J/E 6

Account to be debited Purchases 1,250

Account to be credited Suspense 1,250

Narrative description Adjustment to clear suspense account


17-Feb-14 63

Stage 3 – Post the adjustments (journals) onto the ETB

Once the journals are posted to columns 3 and 4, the ETB

will look as follows.

Extended trial balance for Lance as at 30 April

Trial balance Adjustments Reference

1 2 3 4

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,000

Bank 2,075

Van – cost 2,700

Equipment – cost 500

Cash 25

Purchases 1,750 1,250 J/E 6

Sales 5,200

Cash and Carry Ltd 300

Readstone FC 750 50 J/E 2

Advertising 250

Motor expenses 80 15 J/E 4

Insurance 120 20 J/E 3

Drawings 1,000

Suspense 1,250 1,250 J/E 6

Acc dep'n – Van 540 J/E 1

Acc dep'n – Equipment 40 J/E 1

Accruals 15 J/E 4

Prepayments 20 J/E 3

Closing stock (BS) 250 J/E 5

Closing stock ( T P & L) 250 J/E 5

Depreciation – Van 540 J/E 1

Depreciation – Equipment 40 J/E 1

Bad debt expense 50 J/E 2

10,500 10,500 2,165 2,165


64 17-Feb-14

Stage 4 – Add the figures across and down to give the adjusted trial balance

The completed ETB will now look as follows.

Extended trial balance for Lance as at 30 April

Trial balance Adjustments Adjusted TB

1 2 3 4 5 6

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,000 5,000

Bank 2,075 2,075

Van – cost 2,700 2,700

Equipment – cost 500 500

Cash 25 25

Purchases 1,750 1,250 3,000

Sales 5,200 5,200

Cash and Carry Ltd 300 300

Readstone FC 750 50 700

Advertising 250 250

Motor expenses 80 15 95

Insurance 120 20 100


Suspense 1,250 1,250

Acc dep'n – Van 540 540

Acc dep'n – Equipment 40 40

Accruals 15 15

Prepayments 20 20

Closing stock (BS) 250 250

Closing stock ( T P & L) 250 250

Depreciation – Van 540 540

Depreciation – Equipment 40 40

Bad debt expense 50 50

10,500 10,500 2,165 2,165 11,345 11,345


17-Feb-14 65

You should note that the entries in columns 1 and 2 balance,

as do those in columns 3 and 4 and columns 5 and 6. This is

very important. If they don't agree then the dual effect

hasn't been complied with and the final accounts won't

balance.

Stage 5 – Prepare the financial accounts

The final stage is to prepare the trading and profit and loss

account and balance sheet using the figures from the ETB.

You should already know how to produce financial accounts

from financial information. (This is covered in

Bookkeeping – Introduction to Bookkeeping.)

Now try the next activity.


66 17-Feb-14


17-Feb-14 67

Activity one Prepare the trading and profit and loss account and balance

sheet for Lance as at 30 April using the adjusted figures

from the ETB above.

You will need a separate piece of paper for this

activity.


68 17-Feb-14

Response Lance's completed trading and profit and loss account should

look like this.

Trading and profit and loss account

£ £

Sales 5,200

Less Cost of sales

Opening stock 0

Add Purchases 3,000

3,000

Less Closing stock (250)

(2,750)

Gross profit 2,450

Advertising 250

Motor expenses 95

Insurance 100

Depreciation (540 + 40) 580

Bad debt expense 50

(1,075)

Net profit 1,375


17-Feb-14 69

Response (Cont) Lance's completed balance sheet should look as follows.

Balance sheet

£ £

Fixed assets

Van (2,700 – 540) 2,160

Equipment (500 – 40) 460

2,620

Current assets

Stock 250

Debtor (Readstone FC) 700

Prepayments 20

Bank 2,075

Cash 25

3,070

Less Current liabilities

Creditors (Cash & Carry Ltd) (300)

Accruals (15)

Net current assets 2,755

Net assets 5,375

Capital account

Balance b/f 0

Add Net profit for the period 1,375

Add Capital introduced 5,000

6,375

Less Drawings (1,000)

Closing capital 5,375

As this is Lance's first period of trading, you know that the

balance on the capital account of £5,000 must all relate to

capital introduced in the period.


70 17-Feb-14

There is an alternative way of presenting the extended trial

balance so that it is easier to prepare the trading and

profit and loss accounts and balance sheet. To do this you

split the adjusted trial balance between items that would

appear in the trading and profit and loss account and items

that would appear in the balance sheet.

Using Lance's extended trial balance, the figures would look

like this.

Trial balance Adjustments T&P&L a/c Balance sheet

1 2 3 4 5 6 7 8

Dr Cr Dr Cr Dr Cr Dr Cr

Capital 5,000 5,000

Bank 2,075 2,075

Van – cost 2,700 2,700


Cash 25 25

Purchases 1,750 1,250 3,000

Sales 5,200 5,200

Cash and Carry Ltd 300 300

Readstone FC 750 50 700

Advertising 250 250

Motor expenses 80 15 95





Acc dep'n – Equip't 40 40

Accruals 15 15

Prepayments 20 20

Clsg stock (BS) 250 250

Clsg stock (T P & L) 250 250

Dep'n – Van 540 540

Dep'n – Equipment 40 40

Bad debt expense 50 50

Net profit 1,375 1,375

10,500 10,500 2,165 2,165 5,450 5,450 7,270 7,270


17-Feb-14 71

Using this method, you can prepare the trading and profit

and loss accounts and the balance sheet directly using the

figures in columns 5, 6, 7 and 8. You can see that the only

additional line needed is for 'net profit' (or 'net loss'). You

calculate this by putting a balancing figure into either

column 5 (net profit) or column 6 (net loss) so that

columns 5 and 6 are equal. You maintain the dual entry

effect by putting the corresponding debit or credit in either

column 7 or 8.



72 17-Feb-14

Activity two Raj has just started a motor vehicle repair business. This is

his initial trial balance for the year ended 31 December 2013.

Dr Cr

£ £

Capital 5,000

Bank 2,570

Cash 3,050

Van 2,500

Tools and equipment 3,760

Purchases 33,345

Sales 41,015

Creditors 3,215

Rent 1,650

Rates 1,205

Insurance 650

Drawings 1,500

Suspense 1,000

50,230 50,230

Raj makes all of the end of year adjustments through an ETB

and he identifies that he needs the following adjustments.

Stock on hand at the year end was £3,750.

He had prepaid £350 of the rental expenditure as it

relates to 2013.

He needs to make an accrual of £200 for insurance.

He needs to provide for annual depreciation of £500 for

the van and £470 for tools and equipment.

He failed to record a sale of £1,000 although the correct

entry had been made in the bank 'T' account.

Use the ETB on the following page to show the year end

adjustments, and then prepare the trading and profit and

loss account and balance sheet. (You will need a

separate piece of paper for this part of the activity.)


17-Feb-14 73


Trial balance Adjustments T&P&L Balance sheet

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 5,000

Bank 2,570

Cash 3,050

Van 2,500

Tools and Equip't 3,760

Purchases 33,345

Sales 41,015

Creditors 3,215

Rent 1,650

Rates 1,205

Insurance 650

Drawings 1,500

Suspense 1,000

50,230 50,230


74 17-Feb-14

Response


Trial balance Adjustments T&P&L Balance sheet

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 5,000 5,000

Bank 2,570 2,570

Cash 3,050 3,050

Van 2,500 2,500

Tools and Equip't 3,760 3,760

Purchases 33,345 33,345

Sales 41,015 1,000 42,015

Creditors 3,215 3,215

Rent 1,650 350 1,300

Rates 1,205 1,205




Clsg stock (BS) 3,750 3,750

Clsg stock (TP&L) 3,750 3,750

Prepayments 350 350

Accruals 200 200

Dep'n exp – Van 500 500

Dep'n exp – Tools 470 470


Acc dep'n – Tools 470 470

Net profit 8,095 8,095

50,230 50,230 6,270 6,270 45,765 45,765 17,480 17,480


17-Feb-14 75

Response (Cont) Raj's completed trading and profit and loss account should

look like this.

Trading and profit and loss account

Year ended 31 December 2013

£ £

Sales 42,015

Less Cost of sales

Opening stock 0

Add Purchases 33,345

33,345

Less Closing stock (3,750) (29,595)

Gross profit 12,420

Rent 1,300

Rates 1,205

Insurance 850

Depreciation (500 + 470) 970

(4,325)

Net profit 8,095


76 17-Feb-14

Response (Cont) Raj's completed balance sheet should look as follows.

Balance sheet

as at 31 December 2013

£ £

Fixed assets

Van (2,500 – 500) 2,000

Tools & Equipment (3,760 – 470) 3,290

5,290

Current assets

Stock 3,750

Prepayments 350

Bank 2,570

Cash 3,050

9,720

Less Current liabilities

Trade creditors (3,215)

Accruals (200)


Net assets 11,595

Capital account

Balance b/f 0

Add Capital introduced 5,000

Add Net profit for the period 8,095

13,095



Now you'll look at preparing the ETB in subsequent

accounting periods.


17-Feb-14 77

2.3 Preparing ETBs in Subsequent Periods of Account

So far all of the examples you have seen are in the first year

of trading so there are no opening balances to consider

relating to year end adjustments.

In this subchapter you'll look at how to prepare ETBs in

subsequent periods of account and how you deal with

opening balances for the year end adjustments using the

ETB.

2.3.1 Capital account

Accumulated profits

The trading and profit and loss account is a summary of the

trading transactions over a period of time. At the end of the

period, you transfer the profit or loss for the year from the

trading and profit and loss account to the capital account.

The accounting entries are as follows.

If a profit is made the accounting entries are

debit trading and profit and loss account

credit capital.

If a loss is made the accounting entries are

credit trading and profit and loss account

debit capital.

Drawings

At the end of the period, you transfer any balance on the

drawings account from the drawings account to the

capital account. The accounting entries are

debit capital

credit drawings.


78 17-Feb-14

We have used Lance's ETB from subchapter 2.2 to show

Let's see how this would be reflected in Lance's trial balance

as at 1 May. (We have removed all of the income and

expenditure categories from the ETB you prepared in

subchapter 2.2.)

Lance's trial balance as at 1 May

Dr Cr

£ £

Capital 5,375

Bank 2,075

Van – cost 2,700


Cash 25

Cash & Carry Ltd 300

Readstone FC 700

Acc dep'n – Van 1 May 540

Acc dep'n – Equipment 1 May 40

Accruals 1 May 15

Prepayments 1 May 20

Stock (BS) 1 May 250

6,270 6,270

Lance made a net profit of £1,375 for the first trading period

to 30 April. The overall accounting entries to close off the

trading and profit and loss account in order to start the next

accounting period are

Debit Trading and profit and loss account £1,375

Credit Capital account £1,375

We have removed the drawings account from the ETB you

prepared at subchapter 2.2.

Lance took drawings of £1,000 in the period to 30 April.

Example


17-Feb-14 79

The overall accounting entries to close off the drawings

account in order to commence the next accounting period are

Debit Capital £1,000

Credit Drawings £1,000

As we have complied with the dual effect, then the

trial balance will still balance. The capital account now

shows a balance of £5,375 which represents the capital

figure of £5,000 plus the profit of £1,375 for the period to

30 April less the drawings of £1,000.

You may see this presented slightly differently in practice.

However, the principles you have just learned are the same

whichever method an accountant uses.

Lance is now ready to start recording his transactions for

the period 1 May onwards.


80 17-Feb-14

Lance prepares his next accounts for the 6 month period to

31 October. He registered for VAT on 1 May as he expected

his sales to exceed the VAT threshold in the second year of

trading. He extracts an initial trial balance as at 31 October

which shows the following.

Trial balance as at 31 October

Dr Cr

£ £

Capital 5,375

Bank 5,100

Van – cost 2,700


Cash 75

Purchases 32,308

Sales 47,426

VAT 1,350

Debtors 6,547

Creditors 3,654

Advertising 3,000

Motor expenses 960

Insurance 1,440

Drawings 5,500

Acc dep'n – Van 1 May 540

Acc dep'n – Eqp't 1 May 40

Accruals 1 May 15


Stock (BS) 1 May 250

58,400 58,400

Example


17-Feb-14 81

2.3.2 Adjustments for stock

Closing stock appears both in the balance sheet and the

trading account. The closing stock on hand at the end of

period 1 will become the opening stock at the beginning of

period 2.

There are two ways of dealing with adjustments on an ETB

for opening and closing stock.

Method 1

Opening stock

Debit Trading account (opening stock)

Credit Balance sheet entry (stock).

Closing stock

Debit Balance sheet entry (stock)

Credit Trading account (closing stock).

Method 2

Alternatively, the amounts may have been netted off

purchases on the ETB to give the cost of goods sold figure.

Opening stock

Debit Purchases

Credit Balance sheet entry (stock).

Closing stock

Debit Balance sheet entry (stock)

Credit Purchases.

You'll see both of these methods in your work so we use

both in this manual and also in the resource pack that goes

with it.


82 17-Feb-14

Lance carries out a stock take at 31 October and values his

stock on hand at £2,350.

Lance removes the opening stock of £250 from the

balance sheet and transfers it to the trading account. The

closing stock figure of £2,350 needs to be recorded in both

the balance sheet and the trading account.

Using method 1, these adjustments would be shown in the

ETB as follows.

Example


17-Feb-14 83

Extended trial balance for Lance as at 31 October Trial balance Adjustments TP&L account Balance sheet

1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,375 Bank 5,100

Van – cost 2,700


Cash 75

Purchases/CoGs 32,308

Sales 47,426

VAT 1,350

Debtors 6,547

Creditors 3,654

Advertising 3,000

Motor expenses 960

Insurance 1,440

Drawings 5,500

Acc. dep'n – Van 1 May 09 540

Acc. dep'n – Equip 1 May 09 40

Accruals 1 May 15


Stock (BS) 1 May 250 2,350 250

Closing stock ( T P & L) 2,350 2,350 2,350

Opening stock (T P & L) 250 250

58,400 58,400 2,600 2,600

The adjusted TP&L account and balance sheet columns now

show closing stock of £2,350 in both the balance sheet and

the trading, profit and loss account. Lance has transferred

the opening stock figure of £250 to the trading, profit and

loss account.

It may appear at this stage that the figures in the adjusted

columns don't balance. This is because Lance hasn't yet

added/subtracted all of the account balances across each

row.


84 17-Feb-14

Let's now look at Lance's ETB using method 2.

Closing stock is £2,350.

Trial balance Adjustments TP&L account Balance sheet

1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,375

Bank 5,100

Van – Cost 2,700


Cash 75

Purchases/CoGs 32,308 250 2,350 30,208

Sales 47,426

VAT 1,350

Debtors 6,547

Creditors 3,654

Advertising 3,000

Motor expenses 960

Insurance 1,440

Drawings 5,500



Accruals 1 May 15


Stock (BS) 1 May 250 2,350 250 2,350

58,400 58,400 2,600 2,600


17-Feb-14 85

2.3.3 Accruals and prepayments

You may need to make further adjustments to the ETB for

accruals and prepayments.

The double entry to create an accrual is

Debit expense

Credit accruals.

The double entry to create a prepayment is

Debit prepayments

Credit expense.

(Accruals and prepayments are considered in detail in

Bookkeeping – Accounting Standards and Year End

Adjustments.)

The next stage for Lance is to establish whether he needs to

make any further adjustments to these figures before

completing the ETB.

Lance identifies that the following accruals and prepayments

are required as at 31 October.

Advertising accrual £170 (net of VAT).

Motor expenses accrual £25 (net of VAT).

Insurance prepayment £150 (no VAT payable).

The first step is to reverse any balances for opening

accruals and prepayments.

There are no opening accruals or prepayments for

advertising expenditure so Lance doesn't need to make any

adjustments.

There is, however, an opening accrual for motor expenses of

£15.

Example


86 17-Feb-14

The accounting entries to reverse this accrual are the

opposite of the accounting entries required to create an

accrual. Therefore, the accounting entries would be

Debit accruals £15

Credit motor expenses £15.

There is also an opening prepayment for insurance of £20.

Again, the accounting entries to reverse the prepayment are

the opposite of the accounting entries required to create a

prepayment. Therefore, the accounting entries would be

Debit insurance £20

Credit prepayments £20.

The next step would be to adjust for the

closing accruals and prepayments.

These are processed in exactly the same way as you saw in

subchapter 2.2. You always adjust the figures net of VAT.

For accruals, as VAT is not payable until the actual expense

is paid, the correct method is to adjust for the accrual net of

VAT. For prepayments, any VAT will have been due when

the expense was met so you need only adjust for the

prepayment net of VAT.

The ETB would look as shown on the following page.

(Stock adjustments are shown using method 1.)


17-Feb-14 87

Extended trial balance for Lance as at 31 Oct 2013


1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,375

Bank 5,100

Van – cost 2,700


Cash 75

Purchases/CoGs 32,308

Sales 47,426

VAT 1,350

Debtors 6,547

Creditors 3,654

Advertising 3,000 170 3,170

Motor expenses 960 25 15 970

Insurance 1,440 20 150 1,310

Drawings 5,500



Accruals 1 May 15 15 170 195

25

Prepayments 1 May 20 150 20 150

Stock (BS) 1 May 250 2,350 250

Closing stock ( T P & L) 2,350 2,350 2,350

Opening stock (T P & L) 250 250

58,400 58,400 2,980 2,980

Again, at this stage, it appears that the figures in the

adjusted columns don't balance. This is because all of the

account balances have not been added/subtracted across

the rows.


88 17-Feb-14

This debits and credits for accruals and prepayments are the

same as in a 'T' account. The relevant 'T' account for

insurance would have looked as follows.

Insurance

Dr Cr

£ £

Opening prepay b/d 20

Bank 1,440 Profit and loss (bal) 1,310

Closing prepay c/d 150

1,460 1,460

b/d 150

The closing prepayment of £150 and the profit and loss

charge of £1,310 are both shown in the adjusted

ETB columns.



17-Feb-14 89

Activity three Jenny trades as a surveyor. This is her initial trial balance

for the year ended 30 September 2013.

Dr Cr

£ £

Capital 20,000

Fee income 77,831

VAT 3,659

Subcontractors' fees 19,388

Motor expenses 5,211

Subscriptions 1,119

Rent 14,400

Electricity 1,235

Telephone 1,765

Insurance 1,498

Equipment 6,000

Car 14,999

Prepayments 1 Oct 2012 4,050

Bank 10,086

Debtors 7,339

Acc dep'n 1 Oct 2012 2,500

Drawings 17,000

Accruals 1 Oct 2012 100

104,090 104,090

Jenny's accountant makes all of the end of year adjustments

through an ETB.

The opening prepayment of £4,050 in the trial balance

relates to rent £3,300, insurance £500 and subscriptions

£250. The opening accrual of £100 relates to the telephone.

Prepaid expenses (net of VAT) at 30 September 2013 are

£

Rent 3,600

Insurance 650

Subscriptions 275

Telephone 25

There are no accruals required as at 30 September 2013.

Use the following template to draw up the extended

trial balance to reflect the end-of-year adjustments.


90 17-Feb-14


17-Feb-14 91

Extended trial balance as at 30 September 2013



£ £ £ £ £ £ £ £

Capital 20,000

Fee income 77,831

VAT 3,659

S/Con fees 19,388

Motor exps 5,211

Subs 1,119

Rent 14,400

Electricity 1,235

Telephone 1,765

Insurance 1,498

Equipment 6,000

Car 14,999

Prepayments 4,050

Bank 10,086

Debtors 7,339

Acc dep'n 01/10/12 2,500

Drawings 17,000

Accruals 100

Net profit

Total 104,090 104,090


92 17-Feb-14

Response




£ £ £ £ £ £ £ £

Capital 20,000 20,000

Fee income 77,831 77,831

VAT 3,659 3,659

S/Con fees 19,388 19,388

Motor exps 5,211 5,211

Subs 1,119 250 275 1,094

Rent 14,400 3,300 3,600 14,100

Electricity 1,235 1,235

Telephone 1,765 25 1,640

100

Insurance 1,498 500 650 1,348

Equipment 6,000 6,000

Car 14,999 14,999

Prepayments 4,050 3,600 3,300 4,550

650 500

275 250

25

Bank 10,086 10,086

Debtors 7,339 7,339

Acc dep'n 01/10/12 2,500 2,500

Drawings 17,000 17,000

Accruals 100 100

Net profit 33,815 33,815

Total 104,090 104,090 8,700 8,700 77,831 77,831 59,974 59,974


17-Feb-14 93

2.3.4 Adjustments for depreciation

The dual effect for depreciation is to

Increase Expenses

Decrease Fixed assets.

You can present fixed assets and depreciation in two

different ways. The first is using the net book value (NBV)

approach. With this approach, you include both the cost of

the asset and any accumulated depreciation in the same

account. The accounting entries are

Debit Depreciation expense

Credit Fixed assets – NBV.

The second way is to use the cost and provision approach.

With this approach, there are two separate accounts – one

for the asset cost and one for the accumulated depreciation.

You may see this described as the 'provision for

depreciation' or 'accumulated provision for depreciation'

account. In this instance the accounting entries would be

Debit Depreciation expense

Credit Accumulated provision for depreciation.

The double entry principles are exactly the same whichever

approach is used. The only difference is in presentation.

As the name suggests, the accumulated provision for

depreciation accumulates in the balance sheet year on year,

so that the value of the asset in the balance sheet will be

the net amount (cost less depreciation accumulated to

date).

(Bookkeeping – Accounting Standards and Year End

Adjustments considers fixed assets and depreciation in

detail.)


94 17-Feb-14

Lance depreciates his assets on a reducing balance basis.

He calculates that the depreciation charge for the 6 month

period ended 31 October is £430 for the van and £37 for the

equipment. Once this has been processed, there are no

further adjustments to make and so the ETB can be

finalised. The ETB will now look as follows.

Extended trial balance for Lance as at 31 Oct


1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,375 5,375

Bank 5,100 5,100

Van – cost 2,700 2,700


Cash 75 75

Purchases/CoGs 32,308 32,308

Sales 47,426 47,426

VAT 1,350 1,350

Debtors 6,547 6,547




Insurance 1,440 20 150 1,310


Acc. dep'n – Van 540 430 970

Acc. dep'n – Equip 40 37 77

Accruals 1 May 15 15 170 195

25

Prepay'ts 1 May 20 150 20 150

Stock (BS) 1 May 250 2,350 250 2,350

Clg stock ( TP& L) 2,350 2,350

Opg stock (TP& L) 250 250


Dep'n exp – Equip 37 37

Net profit 11,301 11,301

58,400 58,400 3,447 3,447 50,243 49,776 22,922 22,922

Example


17-Feb-14 95

Note that the accumulated provision for depreciation for the

van totals £970 credit. This represents the accumulated

depreciation of £540 for the period to 30 April and of £430

for the period to 31 October. This will be deducted from the

cost of the van in the balance sheet, so that it is recorded at

its net book value, which is £1,730 (£2,700 cost less £970

accumulated depreciation).


Activity four Jenny's accountant establishes that depreciation for the year

is £1,500 for the car and £1,000 for equipment.

Update the ETB, from your response to activity three, to

reflect the annual depreciation charge for the car and the

equipment.


96 17-Feb-14

Response




£ £ £ £ £ £ £ £

Capital 20,000 20,000

Fee income 77,831 77,831

VAT 3,659 3,659

S/Con fees 19,388 19,388


Subs 1,119 250 275 1,094

Rent 14,400 3,300 3,600 14,100


Telephone 1,765 25 1,640

100

Insurance 1,498 500 650 1,348


Car 14,999 14,999

Prepayments 4,050 3,600 3,300 4,550

650 500

275 250

25

Bank 10,086 10,086

Debtors 7,339 7,339

Acc dep'n 01/10/12 2,500 2,500 5,000

Drawings 17,000 17,000

Accruals 100 100

Dep'n exp 2,500 2,500

Net profit 31,315 31,315

Total 104,090 104,090 11,200 11,200 77,831 77,831 59,974 59,974


17-Feb-14 97

2.3.5 Adjustments for bad and doubtful debts

The dual effect for bad and doubtful debts is

Increase Expenses

Decrease Current assets.

The double entry to create a bad debt is to

Debit Bad debts expense

Credit Trade debtors.

The double entry to create a provision for a doubtful debt is

Debit Bad debts expense

Credit Bad debts provision.

You clear the opening balances on the bad debt provision

account by reversing the above entries

Debit Bad debts provision

Credit Bad debts expense.

In practice, it is likely that the accounts for a business will

show a net figure for trade debts after deduction of any bad

debts provision. You may also see the a bad debts provision

described as a bad debts reserve.

VAT

If a business is registered for VAT, you need to ensure that

both the bad debt expense and the trade debtors accurately

reflect the VAT position.

Maria sells goods on credit terms for £480, comprising net

cost £400 + VAT (at 20 per cent) £80. The debtor is unable

to pay and Maria decides to write off the whole debt. The

usual accounting entries will be

Debit Bad debts expense £400

Debit VAT £80

Credit Trade debtors £480

Example


98 17-Feb-14

The method of dealing with provisions for doubtful debts is

the same except that you need to make VAT adjustments to

both the opening and closing provisions.

Maria has another customer who has been struggling

financially for some time. The original debt was £2,400

(£2,000 + VAT £400). At the end of the previous financial

year, Maria thought that she would probably recover £1,800

of the debt so she made a provision for £600. This year she

thinks that she should increase the provision to £900. The

accounting entries for this will be as follows.

Reversal of opening provision

Debit Bad debts provision £600

Credit Bad debts expense £500

Credit VAT £100

Creation of closing provision

Debit Bad debts expense £750

Debit VAT £150

Credit Bad debts provision £900

(Bad and doubtful debts are in Bookkeeping – Accounting

Standards and Year End Adjustments.)

Lance reviews his debtors at 31 October and decides to

write off a debt of £240 (including VAT at 20 per cent). He

also decides to make a general provision of 5 per cent

against his remaining debts. He calculates the provision as

Debtors £6,547

Written off £240

Net debtors £6,307

5 per cent provision £315 (including VAT £53).

Example

Example


17-Feb-14 99

The finalised ETB will look like this.

Extended trial balance for Lance as at 31 Oct Trial balance Adjustments TP&L account Balance sheet

1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Capital 5,375 5,375

Bank 5,100 5,100

Van – cost 2,700 2,700

Eqp't – cost 500 500

Cash 75 75

Purchases/CoGs 32,308 32,308

Sales 47,426 47,426

VAT 1,350 40 1,257

53

Debtors 6,547 240 5,992

315




Insurance 1,440 20 150 1,310

Bad debts 200 462

262


Acc. dep'n – Van 540 430 970

Acc. dep'n – Equip 40 37 77

Accruals 1 May 15 15 170 195

25

Prepay'ts 1 May 20 150 20 150

Stock (BS) 1 May 250 2,350 250 2,350

Clg stock ( TP& L) 2,350 2,350

Opg stock (TP& L) 250 250


Dep'n exp – Equip 37 37

Net profit 10,839 10,839

58,400 58,400 3,447 3,447 50,243 49,776 22,367 22,367


100 17-Feb-14

The trading and profit and loss account and balance sheet for

Lance, for the 6 month period ended 31 October, can now be

prepared using the adjusted figures from the ETB.

The trading and profit and loss account looks as follows.

Trading and profit and loss account for Lance 6 month period ending 31 October

£ £ Sales 47,426 Less Cost of Sales Opening stock 250 Purchases 32,308 Closing stock (2,350) (20,208) Gross profit 17,218 Less Expenses Advertising 3,170 Motor expenses 970 Insurance 1,310 Bad debts 462 Depreciation – Van 430 Depreciation – Equipment 37 (6,379) Net profit 10,839


17-Feb-14 101

The balance sheet looks as follows.

Balance sheet for Lance as at 31 October

£ £ £ Fixed assets Van 2,700 (970) 1,730 Equipment 500 (77) 423 2,153 Current assets Stock 2,350 Debtors 5,992 Prepayments 150 Cash at bank 5,100 Cash in hand 75 13,667 Current liabilities Trade creditors 3,654 VAT 1,257 Accruals 195 (5,106) Net current assets 8,561 Net assets 10,714 Represented by Capital 5,375 Profit 10,839 Drawings (5,500) 10,714

(Note that £10,714 is the closing capital.)



102 17-Feb-14


17-Feb-14 103

Activity five Jenny made a provision of £600 (including VAT of £100) in

the previous year relating to a trade debt of £1,200

(including VAT of £200). She now decides to write off the

debt in full.

Update the ETB, from your response to activity four, to

reflect the write off of the debt.


104 17-Feb-14

Response




£ £ £ £ £ £ £ £

Capital 20,000 20,000

Fee income 77,831 77,831

VAT 3,659 200 100 3,559

S/Con fees 19,388 19,388


Subs 1,119 250 275 1,094

Rent 14,400 3,300 3,600 14,100


Telephone 1,765 25 1,640

100

Insurance 1,498 500 650 1,348

Bad debt exp 1,000 500 500


Car 14,999 14,999

Prepayments 4,050 3,600 3,300 4,550

650 500

275 250

25

Bank 10,086 10,086

Debtors 7,339 600 1,200 6,739

Acc dep'n 01/10/12 2,500 2,500 5,000

Drawings 17,000 17,000

Accruals 100 100

Dep'n exp 2,500 2,500

Net profit 30,815 30,815

Total 104,090 104,09 11,200 11,200 77,831 77,831 59,374 59,374


17-Feb-14 105

Activity six Use the results of Jenny's final ETB in activity five to prepare

her trading and profit and loss account and balance sheet as

at 30 September 2013.

You will need a separate piece of paper for this activity.


106 17-Feb-14

Response Trading and profit & loss account

for the year ended 30 September 2013

£ £

Fee income 77,831

Less

Subcontractor fees 19,388 (19,388)

Gross profit 58,443

Overheads


Subscriptions 1,094

Rent 14,100

Electricity 1,235

Telephone 1,640

Insurance 1,348

Bad debts 500

Depreciation 2,500 (27,628)

Net profit 30,815

Balance sheet as at 30 September 2013

£ £

Fixed assets

Motor car 14,999

Equipment 6,000

Accumulated depreciation (5,000)

15,999

Current assets

Prepayments 4,550

Bank 10,086

Debtors 6,739 21,375

Current liabilities

VAT 3,559 3,559


Net assets 33,815


17-Feb-14 107

Represented by

Capital b/f 20,000

Add Net profit 30,815

Less Drawings (17,000) 33,815

(Note that £33,815 is the closing capital.)

You have now looked at the basic application of the

extended trial balance. For larger businesses, accountants

usually prepare an ETB that contains more than the

two adjustment columns demonstrated in this chapter.

However, the principles you have just learned are exactly

the same.

This is the end of the material in this chapter. Now read the

review and try the learning check that follows.


108 17-Feb-14


17-Feb-14 109

Review

Some accounting entries are only identified at the end of the

business's financial year. These can require adjustments to

the initial trial balance. An accepted method of making

these adjustments is by using an extended trial balance

(ETB). You then use the final figures shown by the ETB to

prepare the financial accounts.

The first step is to record, and explain, all of the required

accounting entries in a journal. This can be a manual

journal but, nowadays, it's more often a computerised

version.

You then make the journal entry debits and credits in the

extended trial balance so that you adjust the initial trial

balance amounts to arrive at the figures used in the

financial accounts.

The ETB, journals and any other supporting notes are

commonly referred to as link documents.



110 17-Feb-14


17-Feb-14 111

Learning check

1. What is the purpose of a journal?

2. Joe's trial balance at 31 March 2013 is shown on the

template below.

Prepare the journal entries, extended trial balance and the

financial accounts to that date based on the information

provided below.

Required year end adjustments

£

Depreciation for the year

Computers 500

Plant 1,000

Prepayments

Insurance 1,050

Telephone rental 30

Accruals

Rent 2,500

Telephone calls 110

Electricity 340


112 17-Feb-14

Joe also wants to make a provision of £600 (including VAT

at 20 per cent) for a debt of £1,200 (including VAT of

20 per cent) outstanding at the end of the year.

The figures for telephone, rent and electricity are net of

VAT. Insurance is an exempt supply. The accruals and

prepayments are to be shown net of VAT in the financial

accounts. Closing stock is £1,750.

On investigation, Joe discovered that the suspense account

balance arose because he had recorded a cheque receipt of

£7,500 as a sale of £5,700 (sale £4,750, VAT £950).


17-Feb-14 113

Journal

Date Ref Dr Cr

£ £


114 17-Feb-14

Extended trial balance as at 31 March 2013 Trial balance Adjustments TP&L account Balance sheet

1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Plant – NBV 6,750

Computers - NBV 2,500

Stock 1 April 2012 1,250

Cash 125

Bank 1,200

Long term loan 10,000

Capital 2,375

Trade debtors 12,500

Trade creditors 2,500

Sales 130,000

Purchases 65,000

Bad debts 6,250

Insurance 1,800

Other expenses 12,320

Telephone 540

Electricity 640

VAT 3,175

Drawings 41,375

Suspense 1,800

Depreciation

Rent

Prepayments

Accruals

Op stock (TP&L)

Cl stock (TP&L)

Net profit

Totals 151,050 151,050


17-Feb-14 115


1. What is the purpose of a journal?

Most accountants process adjustments through a trial

balance as part of the double entry system and create an



'journal entries'. Accountants usually record the journals in

a book or file so that there's a record of all adjustments

made. A journal shows the actual double entries made,

along with an explanation as to what each double entry

represents.

This is covered in subchapter 2.1.


116 17-Feb-14

2. The required journal entries are as follows.

Date Ref Dr Cr

£ £

31/3/13 J/E 1

Name of account to be debited Annual depreciation Computer Plant

500

1,000

Name of account to be credited Computer – NBV Plant – NBV

500 1,000

Narrative description Depreciation on fixed assets J/E 2 Name of account to be debited Insurance prepayment 1,050

Name of account to be credited Insurance 1,050

Narrative description Prepayment of insurance J/E 3 Name of account to be debited Telephone rental prepayment 30

Name of account to be credited Telephone rental 30

Narrative description Prepayment of telephone rental J/E 4 Name of account to be debited Rent 2,500

Name of account to be credited Accrued rent 2,500

Narrative description Rent accrued J/E 5 Name of account to be debited Telephone 110

Name of account to be credited Accrued telephone 110

Narrative description Telephone accrued J/E 6 Name of account to be debited Electricity 340

Name of account to be credited Accrued electricity 340

Narrative description Electricity accrued

J/E 7

Name of account to be debited Bad debts 500

Name of account to be credited Debtors 500 Narrative description Doubtful debt provision J/E 8 Name of account to be debited VAT 100 Name of account to be credited Debtors 100 Narrative description VAT on doubtful debt


17-Feb-14 117

J/E 9 Name of account to be debited Trading a/c (opening stock) 1,250

Name of account to be credited Stock (BS) 1,250

Narrative description Transfer of opening stock J/E 10 Name of account to be debited Stock (BS) 1,750

Name of account to be credited Trading a/c (closing stock) 1,750

Narrative description Inclusion of closing stock

J/E 11

Name of account to be debited Suspense 1,500

Name of account to be credited Sales 1,500

Narrative description Clear suspense account

J/E 12

Name of account to be debited Suspense 300

Name of account to be credited VAT 300

Narrative description Clear suspense account

This is in subchapter 2.1.

2. The extended trial balance at 31 March 2013 is shown on

the following page.


118 17-Feb-14


1 2 3 4 5 6 7 8

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Dr

£

Cr

£

Plant – NBV 6,750 1,000 5,750

Computers – NBV 2,500 500 2,000

Stock 1 April 2012 1,250 1,750 1,250 1,750

Cash 125 125

Bank 1,200 1,200

Long term loan 10,000 10,000

Capital 2,375 2,375

Trade debtors 12,500 600 11,900

Trade creditors 2,500 2,500

Sales 130,000 1,500 131,500

Purchases 65,000 65,000

Bad debts 6,250 500 6,750

Insurance 1,800 1,050 750

Other expenses 12,320 12,320

Telephone 540 110 30 620

Electricity 640 340 980

VAT 3,175 100 300 3,375

Drawings 41,375 41,375


300

Depreciation 1,500 1,500

Rent 2,500 2,500

Prepayments 1,050 1,080

30

Accruals 2,500 2,950

110

340

Op stock (TP&L) 1,250 1,250

Cl stock (TP&L) 1,750 1,750

Net profit 41,580 41,580

Totals 151,050 151,050 10,930 10,930 133,250 133,250 63,980 63,980


17-Feb-14 119

The financial accounts are as follows.

Trading and profit & loss account

for the period ending 31 March 2013

£ £

Turnover 131,500

Less Cost of sales

Opening stock 1,250

Purchases 65,000

66,250

Less Closing stock (1,750) (64,500)

Gross profit 67,000

Less Overheads

Bad debts 6,750

Insurance 750

Loan interest 1,250

General expenses 3,570

Telephone 620


Depreciation 1,500

Rent 2,500

Electricity 980 (25,420)

Net profit 41,580


120 17-Feb-14

Balance sheet

as at 31 March 2013

£ £

Fixed assets

Motor van 1,750

Machinery 3,500

Fixtures 500

Computer 2,000 7,750

Current assets

Stock 1,750


Prepayments 1,080

Cash 125

14,855

Current liabilities

Bank overdraft (1,200)

Trade creditors (2,500)

Accruals (2,950)

VAT (3,375)

(10,025)


Total assets less current liabilities 12,580

Liabilities due after more than one year

Long-term loan (10,000)

Net assets 2,580

Capital brought forward 2,375


43,955



This is in subchapters 2.2 and 2.3.


17-Feb-14 121

Before moving on




table below.



able to

know how to make account

adjustments using an

extended trial balance.

explain the purpose of a

journal and how to prepare

journal entries


balance by extending the

initial trial balance to show

any adjustments


balance for subsequent

years.








122 17-Feb-14

Notes

Bookkeeping – Extended Trial Balance Chapter 3 – Limited Records and the ETB

10-Feb-14 123

Contents

Page

Introduction 125


Study advice 125

3.1 Limited Accounting Records 127

3.1.1 Record the opening balances on the ETB 128

3.1.2 Recording cash and bank transactions 129

3.1.3 Year end adjustments 145

3.1.4 Adjustments for transactions made on credit 149

3.1.5 Finalising the ETB from limited records 155

Review 169

Learning check 171


Before moving on 178

Chapter 3 – Limited Records and the ETB Bookkeeping – Extended Trial Balance

124 10-Feb-14


10-Feb-14 125

Introduction

In this chapter you will see that when a business has only

limited accounting records, the ETB becomes even more

important. It's the main way you can transform the limited

accounting records into a double entry system to produce

balanced financial accounts.






able to

understand how to prepare

an ETB in order to produce

financial accounts for a

business with limited

accounting records.

prepare an ETB from limited

accounting records in order

to produce financial

accounts.

Study advice

We think it will take you approximately 2½ to 3 hours to




You will need paper to complete the activities in this self-

study manual.


126 10-Feb-14


10-Feb-14 127

3.1 Limited Accounting Records

In this subchapter you’ll look at how to prepare an extended

trial balance when there are only limited accounting records.

In chapter 2 you learnt that you can use the information

from the business's records to create journals, and then

make adjustments directly to the trial balance. This allows

accurate financial accounts to be created.

However, when there are limited accounting records, you

may not even have enough information to extract an initial

trial balance.

This chapter explains how you can use an ETB to build up

the figures to include in the final accounts when a business

has limited accounting records.

You can split the process into the following stages.

1. Record the figures from the previous year's balance

sheet on the ETB – columns 1 and 2.

2. Record all cash and bank transactions onto the ETB –

columns 3 and 4.

3. Post any adjustments (journals) onto the ETB –

columns 5 and 6.

4. Record transactions made on credit – columns 7 and 8.

5. Add the figures across and down to give the trading and

profit and loss account entries – columns 9 and 10.

6. Add the figures across and down to give the balance

sheet entries – columns 11 and 12.


128 10-Feb-14

3.1.1 Record the opening balances on the ETB

When there are limited accounting records available you

complete the first two columns using information from the

previous year's balance sheet.

In this chapter, you'll prepare an ETB for a business with

limited accounting records for the year to 31 March 2013.

Take the opening figures in the ETB from the balance sheet

as at 31 March 2012.

Extended trial balance as at 31 March 2013

Description 1 2 3 4 5 6

Balance sheet

as at 31/3/2012

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900

Accruals 500

Bank 12,000

Motor car 35,000

Equipment 12,000

Stock 1 April 12 15,000

Cash on hand 100


Acc dep'n - Car 15,300

Acc dep'n - Equip 3,250

72,100 72,100

As you start the ETB based on the previous balance sheet

it's no surprise that the only entries made so far are balance

sheet items. You will also need to create rows to record the

entries that will eventually go into the trading and profit and

loss account, such as sales and purchases.


10-Feb-14 129

3.1.2 Recording cash and bank transactions

Columns 3 and 4 of the ETB deal with the money

transactions of the business – the payments in and out. You

enter cash and cheque sales and purchases, the payment of

expenses, the acquisition of new assets and the repayment

of liabilities such as loans in these columns. Don't record

any transactions made on credit in these columns.

Bank statements provide independent and accurate

information on business activities. Therefore, as the next

step in completing the ETB you will, generally, transfer

information from the bank statements and cash records.

However, you can only do this once you have prepared the

bank reconciliation, bank control account and

cash control account.


130 10-Feb-14


10-Feb-14 131

Activity one Using the following information, prepare the bank

reconciliation as at 31 March 2013.

£

Balance from bank statement (5,430)

Unpresented cheques 9,800

Bank lodgements not yet recorded 6,300


132 10-Feb-14

Response Bank reconciliation as at 31 March 2013

£

Balance from bank statement as at

31/3/2013

(5,430)

Less Unpresented cheques (9,800)

(15,230)

Add Uncleared lodgements 6,300

Reconciled bank balance (overdraft) (8,930)

This figure will appear in the balance sheet as a liability of

£8,930. So it will be in column 4 of the ETB.


10-Feb-14 133

The next step is to prepare a bank control account. To do

this you have to establish all bank transactions by

comparing the entries in the bank statements with those in

the cash book. Remember that the cash book contains cash

and bank entries. The completed bank control account

looks like this. The resulting balance should be the same as

the bank reconciliation figure.

Bank control account

Dr Cr

£ £

Sales 221,250 Balance at

1/4/2012

12,000

Closing balance

at 31/3/2013

8,930 Purchases 161,405

Car expenses 1,970

Wages 1,800

Rent 6,000

Telephone 1,080

Electricity 3,300

Insurance 1,700

General 6,640

VAT 8,505

Drawings 12,000

Cash 10,380

Bank charges 3,400

230,180 230,180

Bal b/d 8,930

You then prepare a cash control account. This will include

all known cash expenditure and receipts and looks like this.

Cash control account

Dr Cr

£ £

Balance at 1/4/2012 100 Car expenses 680

Bank 10,380 General expenses 390

Wages 9,200

Closing balance at

31/3/2013

210

10,480 10,480

Bal b/d 210


134 10-Feb-14

You have now reviewed the cash and bank information.

Transfer the details to columns 3 and 4 of the ETB using

double entry principles.

Within the cash and bank columns, every debit entry must

have an equal and opposite credit entry. So for purchases

paid for from the bank, you will make the following entries.

Dr Purchases (col 3)

Cr Bank (col 4)

Similarly for sales received in the bank, you will make the

following entries.

Dr Bank (col 3)

Cr Sales (col 4)

You treat cash transactions in exactly the same way, except

the entry will be made against the cash account rather than

the bank account.

Due to the volume of transactions, make the individual debit

entries against the relevant accounts, but total all the credit

entries for the payments made so that only one figure is

shown as a credit entry for the bank on the ETB. You can

also total the cheque and cash purchases and just show a

single figure for purchases.

The totals of columns 3 and 4 should balance if, for every

debit entry made, you post an equal and opposite credit

entry. All subsequent pairs of columns must also balance

with each other. This ensures that, for every adjustment

made, there is an equal and opposite debit and credit entry.


10-Feb-14 135

Activity two

Transfer the information from the Bank and Cash control 'T' accounts to columns 3

and 4 of the ETB below. Remember that each debit entry in column 3 must have a

corresponding credit entry in column 4.



Balance sheet

as at 31/3/2012

Cash and bank

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900

Accruals 500

Bank 12,000

Motor car 35,000

Equipment 12,000

Stock 15,000

Cash on hand 100



Acc dep'n – Eq’t 3,250

72,100 72,100


136 10-Feb-14

Response



Balance sheet

as at 31/3/2012

Cash and bank

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900 8,505

Accruals 500

Bank 12,000 221,250 218,180

Motor car 35,000

Equipment 12,000

Stock 15,000

Cash on hand 100 10,380 10,270




Purchases 161,405

Motor car exps 1,970

680

Wages 1,800

9,200

Rent 6,000

Telephone 1,080

Electricity 3,300

Insurance 1,700


390

Drawings 12,000

Bank charges 3,400

Sales 221,250

72,100 72,100 449,700 449,700


10-Feb-14 137

As you can see the credit entries for payments out of the

bank have been added together and shown as one figure in

column 4 against Bank. This includes the entry for cash

drawn out of the bank of £10,380. The credit entry to bank

of £218,180 corresponds to the sum of the debit entries to

the following accounts.

£

Purchases 161,405

Car expenses 1,970

Wages 1,800

Rent 6,000

Telephone 1,080

Electricity 3,300

Insurance 1,700


VAT 8,505

Drawings 12,000

Cash 10,380

Bank charges 3,400

218,180

The credit entries for cash payments of £10,270 correspond

to the sum of the debit entries to the following accounts.

£

Car expenses 680

General expenses 390

Wages 9,200

10,270


138 10-Feb-14

VAT and the ETB

In activity two, the figures transferred to the ETB were all

VAT inclusive. The trading and profit and loss account

entries are normally VAT exclusive and you will have to

make some adjustment for this. You could introduce more

columns to make these adjustments. However, it's common

practice to transfer the net figures to the ETB.

You still prepare a bank reconciliation and cash and bank

control accounts. However, as these will be VAT inclusive,

you will return to the cash book and the purchases day book

to obtain the net figures. If no records are available, then

you would have to take a pragmatic view of the VAT position

and estimate the net figure as accurately as you can. For

the purposes of our example, we will assume that the

cash book is available.

A summary of the entries in the cash book is shown on the

next page. You use this to record the net figures after VAT

in the ETB for cash and bank transactions.

Please note that you will not be able to reconcile these cash

book entries exactly. It's possible that not all purchases and

expenses will carry VAT, so the adjustment will not be a

straight 61 (assuming a 20 per cent VAT rate) in every case.

Furthermore, some expenses may carry different rates of

VAT.

You can assume that only the purchases, motor expenses,

telephone, general expenses, electricity and sales, in our

example, would carry VAT at 20 per cent. For ease of

calculation, we have rounded the figures in some

cases.


10-Feb-14 139

Cash book payments and receipts

Ban

k

chg

s

£

3,4

00

3,4

00

Drw

gs

£

12,0

00

12

,00

0

Ele

c £

2,8

00

2,8

00

W

ag

es

£

9,2

00

1,8

00

11

,00

0

Gen

£

330

5,6

50

5,9

80

HM

RC

VA

T

£

8,5

05

8,5

05

Ins £

1,7

00

1,7

00

Tel £

910

91

0

Ren

t

£

6,0

00

6,0

00

Mo

tor

£

580

1,7

20

2,3

00

Pu

rch

£

138,8

30

13

8,8

30

Sale

s

£

188,0

00

VA

T

£ 160

24,4

85

24

,64

5

VA

T

£

33,2

50

To

tal

£

10,2

70

207,8

00

21

8,0

70

To

tal

£

221,2

50

Paym

en

ts

Cas

h

Ban

k

Rece

ipts

Ban

k


140 10-Feb-14

After transferring the information the entries in the ETB will

look like this.

Extended Trial Balance as at 31 March 2013


Balance sheet

as at 31/3/2012

Cash and bank

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900 8,505

24,645 33,250

Accruals 500

Bank 12,000 221,250 218,180

Motor car 35,000

Equipment 12,000

Stock 15,000

Cash on hand 100 10,380 10,270




Purchases 138,830

Motor car

expenses

1,720

580

Wages 1,800

9,200

Rent 6,000

Telephone 910

Electricity 2,800

Insurance 1,700


330

Drawings 12,000

Bank charges 3,400

Sales 188,000

72,100 72,100 449,700 449,700


10-Feb-14 141

In practice, you may introduce more columns to process the

adjustments for VAT. However, this example shows the net

figures which you would have transferred to the ETB once

you had adjusted for the VAT. The adjusted figures are

shown in bold.

Now that VAT has been introduced

the entries for cash and bank remain the same as

before.

the totals remain the same as before.

some entries are now VAT exclusive. For example, the

sales figure is now £188,000. The only items attracting

output tax in this business are sales. Therefore, the

entry in the ETB for VAT output tax (the credit entry) of

£33,250 must all relate to the sales. The total of these

two figures is £221,250, which was the figure for sales in

the previous ETB.

Similarly, we have assumed that the only items which incur

input tax are purchases, motor expenses, telephone,

general expenses and electricity. The accounting entries are

therefore debit VAT £24,645 and credit the relevant expense

category, as shown below, to remove the VAT element.

VAT incl

figure

£

VAT excl

figure

£

Difference

(VAT)

£

Purchases 161,405 138,830 22,575

Motor car 1,970 1,720 250

680 580 100

Telephone 1,080 910 170

Electricity 3,300 2,800 500

Gen Expenses 6,640 5,650 990

390 330 60

175,465 150,820 24,645


142 10-Feb-14

Have a look at the entries on the line for VAT again. These

can be explained as follows.

Column 2 At the start of the year, the business owed

VAT of £900.

Column 3 During the year, the business will have made

VAT returns, probably quarterly. VAT paid

amounted to £8,505.

Column 3 The figure of £24,645 is the total input tax

incurred by this business in the year in

question.

Column 4 The figure of £33,250 is the total output tax

charged by this business in the year in

question.

You will see how to finalise the ETB later in this chapter.

However, if these are the only entries required in the ETB,

then it's relatively straightforward to work out the VAT

position.

The debit entries total £33,150 (£24,645 + £8,505). The

credit entries total £34,150 (£900 + £33,250).

The net position is a credit balance of £1,000. This is the

amount owed to HMRC at 31 March 2013.

Another way to look at this is.

VAT control account

Dr Cr

£ £

Balance at 1/4/2012 900

Bank 8,505 Output tax 33,250

Input tax 24,645

Closing balance at

31/3/2013

1,000

34,150 34,150

Bal b/d 1,000


10-Feb-14 143

Cash discrepancies

In subchapter 3.1.2 you saw how the preparation of a cash

control account forms part of the process of preparing the

ETB in a case when there are limited records. To complete

your understanding of ETBs in a limited records situation,

you will now look at the ETB entries needed to deal with an

imbalance on the cash control account.

Here is the cash control account from subchapter 3.1.2

again. However, when the customer physically counted the

cash in hand, there was only £100 rather than the £210 as

previously recorded. The cash control account therefore

looks like this.


Dr Cr

£ £

Balance at 1/4/2012 100 Car expenses 680

Bank 10,380 General expenses 390

Wages 9,200

Balancing figure 110

Balance at 31/3/2013 100

10,480 10,480

Balance at 1/4/2013 100

Imbalances on the credit side of the account mean that the

business has spent more cash than it has accounted for.

In this example the balance should be taken to the drawings

account.

The ETB that you have been studying throughout this

chapter will be affected as follows.


144 10-Feb-14



Balance sheet as at 31/3/2012

Cash and bank Adjustments

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900 24,645 33,250

8,505

Accruals 500

Bank 12,000 221,250 218,180

Motor car 35,000

Equipment 12,000

Stock 15,000

Cash on hand 100 10,380 10,270 110


Acc dep'n – Car 15,300 Acc dep'n – Equip 3,250

Purchases 138,830

Motor car expenses 1,720

580

Wages 1,800

9,200

Rent 6,000

Telephone 910

Electricity 2,800

Insurance 1,700


330

Drawings 12,000 110

Bank charges 3,400

Sales 188,000

Depreciation Clos stock (TP&L) Op stock (TP&L)

72,100 72,100 449,700 449,700

The imbalance is accounted for through the adjustments

columns of the ETB.


10-Feb-14 145

When you treat the unexplained cash deficit as drawings, it

doesn't affect the profit figure. If you had taken the

imbalance to expenses, then this would have reduced the

profit.

This is why HMRC would not accept an adjustment to

anything other than drawings in this situation without

supporting evidence.

Evidence can have a wider meaning than simply receipts or

a record of a transaction. So it's important to consider all of

the facts presented to you when establishing whether

expenditure has been incurred.

Imbalance not treated as drawings

If the customer produces evidence that the imbalance

relates to unrecorded cash expenditure rather than

drawings, you can make the appropriate debit against the

expense concerned. However, you need to adjust for VAT, if

appropriate.

If the balancing figure is on the debit side of the cash

account, the corresponding credit should be to sales unless

there is evidence to show that it's capital introduced. Again,

there will be an adjustment for VAT where appropriate.

3.1.3 Year end adjustments

The next columns to be completed in the ETB are called

the adjustment columns and perform exactly the same

purpose as those you saw in subchapters 2.2 and 2.3.

These normally involve year end adjustments such as

accruals, prepayments, depreciation, closing stock and bad

debts. They could also include adjustments for identified

errors.

In limited records situations, customers don't generally

make formal journal entries. They may keep notes of any

adjustments.

Generally, you should be aware of what can give rise to year

end adjustments, for example, telephone, insurance and

VAT.


146 10-Feb-14

As a first step, you normally establish the adjustments

made in the previous year. In this case, the customer has

made some calculations, noted in their diary, to show that in

2012 the year end adjustments for accruals were

£

Telephone 130


Motor expenses 80

Electricity 120

By referring to other records and speaking to the customer,

you can establish the year end adjustments for 2013 as

follows.

£

1. Telephone year end accrual 140

2. General expenses year end accrual 110

3. Electricity year end accrual 150

4. Wages year end accrual 200

5. Provision for depreciation

Car 4,925

Equipment 875

6. Closing stock 16,000

There are no prepayments required as at 31 March 2013.


10-Feb-14 147

Activity three We have entered the year end adjustments for telephone

and depreciation in the ETB. You should enter all the others

and total the columns to ensure that they balance.

Extended trial balance as at 31 March 2013 Description 1 2 3 4 5 6


Cash and bank Adjustments

Dr Cr Dr Cr Dr Cr £ £ £ £ £ £ Capital 18,700 Trade creditors 21,450 VAT 900 24,645 33,250 8,505 Accruals 500 130 140 Bank 12,000 221,250 218,180 Motor car 35,000 Equipment 12,000 Stock 15,000 Cash on hand 100 10,380 10,270 110 Trade debtors 10,000 Acc dep'n – Car 15,300 4,925 Acc dep'n – Equip 3,250 875 Purchases 138,830 Motor expenses 1,720 580 Wages 1,800 9,200 Rent 6,000 Telephone 910 140 130 Electricity 2,800 Insurance 1,700 General expenses 5,650 330 Drawings 12,000 110 Bank charges 3,400 Sales 188,000 Depreciation 5,800 Clos stock (TP & L) Op stock (TP & L) 72,100 72,100 449,700 449,700


148 10-Feb-14

Response




Cash and bank

Adjustments

Dr Cr Dr Cr Dr Cr

£ £ £ £ £ £

Capital 18,700


VAT 900 24,645 33,250

8,505

Accruals 500 130 140

170 110

120 150

80 200

Bank 12,000 221,250 218,180

Motor car 35,000

Equipment 12,000

Stock 15,000 16,000 15,000

Cash on hand 100 10,380 10,270 110


Acc dep'n – car 15,300 4,925

Acc dep'n – equip 3,250 875

Purchases 138,830

Motor expenses 1,720 80

580

Wages 1,800 200

9,200

Rent 6,000

Telephone 910 140 130

Electricity 2,800 150 120

Insurance 1,700

General expenses 5,650 110 170

330

Drawings 12,000 110

Bank charges 3,400

Sales 188,000

Depreciation 5,800

Clos stock (TP & L) 16,000

Op stock (TP & L) 15,000

72,100 72,100 449,700 449,700 38,010 38,010


10-Feb-14 149

3.1.4 Adjustments for transactions made on credit

The entries against sales and purchases are the amounts

received and paid. These figures are VAT exclusive where

appropriate. You have to adjust these to arrive at income

earned and expenditure incurred in accordance with the

accruals concept.

The first step is to remove the opening trade debtors and

creditors balances. The next step will then be to record the

closing trade debtors and creditors balances.

Generally, you will introduce new column headings for these

adjustments. However, sometimes they're included in the

existing adjustments columns.

When VATable sales are made on credit, the accounting

entries are

Dr Trade debtors – VAT inclusive amount

Cr Sales – VAT exclusive amount

Cr VAT – VAT amount

Similarly, when credit purchases are made the accounting

entries are

Dr Purchases – VAT exclusive amount

Dr VAT – VAT amount

Cr Trade creditors – VAT inclusive amount

Trade debtors

To reverse the opening debtors figure the adjustment will

be the reverse of the entries made to record the initial sale

Dr Sales – VAT exclusive amount


Cr Trade debtors – VAT inclusive amount


150 10-Feb-14

To record the closing debtors figure the adjustment will be

Dr Trade debtors – VAT inclusive amount

Cr Sales – VAT exclusive amount


Trade creditors

To reverse the opening trade creditors figure the

adjustment will be the reverse of the initial entries made to

record the purchase

Dr Trade creditors – VAT inclusive amount

Cr Purchases – VAT exclusive amount


To record the closing trade creditors figure the adjustment

will be

Dr Purchases – VAT exclusive amount


Cr Trade creditors – VAT inclusive amount


10-Feb-14 151

Activity four We have used the information from the bank statements and

other records to establish that

closing trade debtors are £12,000, including VAT of

£2,000

opening trade debtors included VAT of £1,667

closing trade creditors are £11,620, including VAT of

£1,937

opening trade creditors included VAT of £3,575.

The ETB on the next page has been adjusted for opening

and closing trade debtors. You should make the necessary

adjustments for opening and closing trade creditors.

Note that in this example we have introduced new columns

and you should total these to ensure that they balance.


152 10-Feb-14


10-Feb-14 153

Activity four (Cont)

12

Cr

£

11

Dr

£

10

Cr

£

9

Dr

£

8

Cr

£

2,0

00

10,0

00

10,0

00

7

Deb

tors

and c

reditors

Dr

£

1,6

67

12,0

00

8,3

33

6

Cr

£

600

15,0

00

110

4,9

25

875

80

130

120

170

16,0

00

38,0

10

5

Adju

stm

ents

Dr

£

500

16,0

00

200

140

150

110

110

5,8

00

15,0

00

38,0

10

4

Cr

£

33,2

50

218,1

80

10,2

70

188,0

00

449,7

00

3

Cas

h a

nd b

ank

Dr

£

24,6

45

8,5

05

221,2

50

10,3

80

138,8

30

1,7

20

580

1,8

00

9,2

00

6,0

00

910

2,8

00

1,7

00

5,6

50

330

12,0

00

3,4

00

449,7

00

2

Cr

£

18,7

00

21,4

50

900

500

12,0

00

15,3

00

3,2

50

72,1

00

1

Bal

ance

shee

t at

31/0

3/2

012

Dr

£

35,0

00

12,0

00

15,0

00

100

10,0

00

72,1

00

Exte

nd

ed

Tri

al

Bala

nce

as

at

31

Marc

h 2

01

3

D

escr

iption

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s

Ban

k

Moto

r ca

r

Equip

men

t

Sto

ck

Cas

h o

n h

and

Tra

de

deb

tors

Acc

dep

– c

ar

Acc

dep

– e

quip

Purc

hase

s

M

otor

exp

ense

s

Wag

es

Ren

t

Tel

ephone

Ele

ctri

city

Insu

rance

Gen

exp

ense

s

Dra

win

gs

Ban

k ch

arges

Sal

es

D

epre

ciat

ion

Clo

s st

ock

– TP

&L

O

p s

tock

– T

P &

L

Tota

ls


154 10-Feb-14

Response 12

Cr

£

11

Dr

£

10

Cr

£

9

Dr

£

8

Cr

£

11

,62

0

2,0

00

3,5

75

10,0

00

17

,87

5

10,0

00

55

,07

0

7

Deb

tors

and c

reditors

Dr

£

21

,45

0

1,6

67

1,9

37

12,0

00

9,6

83

8,3

33

55

,07

0

6

Cr

£

600

15,0

00

110

4,9

25

875

80

130

120

170

16,0

00

38,0

10

5

Adju

stm

ents

Dr

£

500

16,0

00

200

140

150

110

110

5,8

00

15,0

00

38,0

10

4

Cr

£

33,2

50

218,1

80

10,2

70

188,0

00

449,7

00

3

Cas

h a

nd b

ank

Dr

£

24,6

45

8,5

05

221,2

50

10,3

80

138,8

30

1,7

20

580

1,8

00

9,2

00

6,0

00

910

2,8

00

1,7

00

5,6

50

330

12,0

00

3,4

00

449,7

00

2

Cr

£

18,7

00

21,4

50

900

500

12,0

00

15,3

00

3,2

50

72,1

00

1

Bal

ance

shee

t at

31/0

3/2

012

Dr

£

35,0

00

12,0

00

15,0

00

100

10,0

00

72,1

00

E

xte

nd

ed

Tri

al B

ala

nce

as

at

31

Marc

h 2

01

3

D

escr

iption

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s

Ban

k

Moto

r ca

r

Equip

men

t

Sto

ck

Cas

h o

n h

and

Tra

de

deb

tors

Acc

dep

– c

ar

Acc

dep

– e

quip

Purc

hase

s

M

oto

r ex

pen

ses

W

ages

Ren

t

Tel

ephone

Ele

ctri

city

Insu

rance

Gen

exp

ense

s

Dra

win

gs

Ban

k ch

arges

Sal

es

D

epre

ciat

ion

Clo

s st

ock

– TP

&L

O

p st

ock

– T

P &

L

Tota

ls


10-Feb-14 155

3.1.5 Finalising the ETB from limited records

All that remains is to use the information in columns 1 to 8

to arrive at the figures which will appear in the trading and

profit and loss account (columns 9 and 10) and the

balance sheet (columns 11 and 12).

You will work through each row in the ETB, add together all

debit entries, and deduct from these all credit entries, or the

other way round. The difference is the figure that will

appear in either the trading and profit and loss account or

the balance sheet.

For example, if you look at the entries in the ETB for

electricity you will see that the debit entries are £2,800 and

£150. These total £2,950. There is only one credit entry

and that is for £120. By deducting the credit entry from the

total entries for debit, you arrive at the figure that will

appear in the trading and profit & loss account, which is

£2,830.

Alternatively, if you had prepared a 'T' account this would

have shown the following.

Electricity

Dr Cr

£ £

Bank 2,800 Opening accrual 120

Closing accrual 150 Profit & loss 2,830

2,950 2,950

B/d 120


156 10-Feb-14


10-Feb-14 157

Activity five Using the response from activity four establish the closing

figure for VAT. State whether the figure would be a creditor

or debtor on the balance sheet.


158 10-Feb-14

Response £

Total credits (900 + 33,250 + 2,000 + 3,575) 39,725

Less

Total debits (24,645 + 8,505 + 1,667 + 1,937)

(36,754)

Therefore closing VAT creditor 2,971

If you did not get to the correct answer above, check your

calculations to see where you went wrong and make sure

you understand how we arrived at the answer before you go

on.


10-Feb-14 159

Activity six Following on from the last activity, we have introduced

additional column headings in the ETB for the trading and

profit & loss account and balance sheet. We have entered

details in these columns for electricity, VAT and some

others.

Complete the other entries in these columns on the next

page.

By totalling each column you should find that columns 9 and

10 do not balance and that columns 11 and 12 have an

equal and opposite imbalance. The difference is the

net profit if the shortfall is in column 9 (debit) or the

net loss if it is in column 10 (credit). The equal and

opposite double entry in the ETB for the net profit or loss

will be in either column 11 or column 12 as appropriate to

reflect the increase or decrease in capital depending on

whether a profit or loss is made.


160 10-Feb-14


10-Feb-14 161

Activity six (Cont)

12

Cr

£

18,7

00

2,7

60

11

Bal

ance

shee

t

Dr

£

12,0

00

16,0

00

12,1

10

10

Cr

£

9

Tra

din

g a

nd P

& L

Dr

£

130,4

60

2,8

30

5,8

00

8

Cr

£

11,6

20

2,0

00

3,5

75

10,0

00

17,8

75

10,0

00

55,0

70

7

Deb

tors

and c

reditors

Dr

£

21,4

50

1,6

67

1,9

37

12,0

00

9,6

83

8,3

33

55,0

70

6

Cr

£

600

15,0

00

110

4,9

25

875

80

130

120

170

16,0

00

38,0

10

5

Adju

stm

ents

Dr

£

500

16,0

00

200

140

150

110

110

5,8

00

15,0

00

38,0

10

4

Cr

£

33,2

50

218,1

80

10,2

70

188,0

00

449,7

00

3

Cas

h a

nd b

ank

Dr

£

24,6

45

8,5

05

221,2

50

10,3

80

138,8

30

1,7

20

580

1,8

00

9,2

00

6,0

00

910

2,8

00

1,7

00

5,6

50

330

12,0

00

3,4

00

449,7

00

2

Cr

£

18,7

00

21,4

50

900

500

12,0

00

15,3

00

3,2

50

72,1

00

1

Bal

ance

shee

t at

31/0

3/2

012

Dr

£

35,0

00

12,0

00

15,0

00

100

10,0

00

72,1

00

Exte

nd

ed

Tri

al

Bala

nce

as

at

31

Marc

h 2

01

3

D

escr

iption

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s

Ban

k

Moto

r ca

r

Equip

men

t

Sto

ck

Cas

h o

n h

and

Tra

de

deb

tors

Acc

dep

– c

ar

Acc

dep

– e

quip

Purc

hase

s

M

oto

r ex

pen

se

W

ages

Ren

t

Tel

ephone

Ele

ctri

city

Insu

rance

Gen

exp

ense

s

Dra

win

gs

Ban

k ch

arges

Sal

es

D

epre

ciat

ion

Clo

s st

ock

– TP

&L

O

p st

ock

– TP

&L

N

et p

rofit

Tota

ls


162 10-Feb-14

Response In the answer we have included the figure for net profit and

totalled each of the columns.

12

Cr

£

18,7

00

11

,62

0

2,9

71

60

0

8,9

30

2

0,2

25

4

,12

5

20

,03

9

87

,21

0

11

Bal

ance

shee

t

Dr

£

35

,00

0

12,0

00

16,0

00

10

0

12

,00

0

12,1

10

87

,21

0

10

Cr

£

1

89

,66

7

16

,00

0

20

5,6

67

9

Tra

din

g a

nd P

& L

Dr

£

130,6

38

2,2

20

1

1,2

00

6

,00

0

92

0

2,8

30

1,7

00

5

,92

0

3,4

00

5,8

00

15

,00

0

20

,03

9

20

5,6

67

8

Cr

£

11,6

20

2

,000

3,5

75

10,0

00

17,8

75

10,0

00

55,0

70

7

Deb

tors

and c

reditors

Dr

£

21,4

50

1,6

67

1,9

37

12,0

00

9,6

83

8,3

33

55,0

70

6

Cr

£

600

15,0

00

110

4,9

25

875

80

130

120

170

16,0

00

38,0

10

5

Adju

stm

ents

Dr

£

500

16,0

00

200

140

150

110

110

5,8

00

15,0

00

38,0

10

4

Cr

£

33,2

50

218,1

80

10,2

70

188,0

00

449,7

00

3

Cas

h a

nd b

ank

Dr

£

24,6

45

8,5

05

221,2

50

10,3

80

138,8

30

1,7

20

580

1,8

00

9,2

00

6,0

00

910

2,8

00

1,7

00

5,6

50

330

12,0

00

3,4

00

449,7

00

2

Cr

£

18,7

00

21,4

50

900

500

12,0

00

15,3

00

3,2

50

72,1

00

1

Bal

ance

shee

t at

31/0

3/2

012

Dr

£

35,0

00

12,0

00

15,0

00

100

10,0

00

72,1

00

Exte

nd

ed

Tri

al

Bala

nce

as

at

31

Marc

h 2

01

3

D

escr

iption

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s

Ban

k

Moto

r ca

r

Equip

men

t

Sto

ck

Cas

h o

n h

and

Tra

de

deb

tors

Acc

dep

– c

ar

Acc

dep

– e

quip

Purc

hase

s

M

oto

r ex

pen

ses

W

ages

Ren

t

Tel

ephone

Ele

ctri

city

Insu

rance

Gen

exp

ense

s

Dra

win

gs

Ban

k ch

arges

Sal

es

D

epre

ciat

ion

Clo

s st

ock

– TP

&L

O

p st

ock

– TP

&L

N

et p

rofit

Tota

ls


10-Feb-14 163

Response (Cont) The net profit for the year is £20,039 (£205,667 – £185,628).

At the period end, this will be transferred to the capital account

in the balance sheet to clear the profit and loss account ready

to start the next accounting period.



164 10-Feb-14


10-Feb-14 165

Activity seven Use the completed ETB in activity six to draw up the trading

and profit & loss account and balance sheet for the year

ended 31 March 2013.


166 10-Feb-14

Response Trading and profit & loss Account

Year Ended 31 March 2013

£ £

Sales 189,667

Less Cost of goods sold

Opening stock 15,000

Purchases 130,638

Closing stock (16,000)

(129,638)

Gross profit 60,029

Less


Wages 11,200

Rent 6,000

Telephone 920

Electricity 2,830

Insurance 1,700


Bank charges 3,400

Depreciation 5,800 (39,990)

Net profit 20,039


10-Feb-14 167

Response (Cont) Balance sheet as at 31 March 2013

£ £

Fixed assets

Car 35,000

Accum dep'n (20,225) 14,775

Equipment 12,000

Accum dep'n (4,125) 7,875

22,650

Current assets

Stock 16,000


Cash on hand 100

28,100

Current liabilities


Other creditors 3,571

Bank overdraft 8,930 (24,121)


Net assets 26,629

Represented by

Capital 18,700




This is the end of the material in this chapter. Now read the

review and try the learning check that follows.


168 10-Feb-14


10-Feb-14 169

Review

When a business has limited accounting records, you may

not have enough information to extract an initial trial

balance.

In these circumstances, you can use an ETB to build up

figures to include in the final accounts. You will then use

the completed ETB figures to prepare the trading and profit

and loss account and balance sheet.

The stages are as follows.

Record the opening balances from the previous year's

balance sheet.

Record all cash and bank transactions.

Record any adjustments.

Record transactions made on credit.

Add the figures down and across to give the final ETB

figures.

Prepare the trading and profit and loss account and

balance sheet.

In summary, the ETB is the main way you can turn limited

accounting records into the double entry system to prepare

balanced financial accounts.



170 10-Feb-14


10-Feb-14 171

Learning check

1. What is the purpose of an extended trial balance for a

business with limited accounting records?


172 10-Feb-14

2. Using the following information, complete the ETB provided

for the year ended 31 December 2013.

Cash book (payments)

Date

2013

Details

Total

£

VAT

£

Purch.

£

Motor

exps

£

Rent

£

Wages

£

Ins

£

HMRC

– VAT

£

Gen

£

Dwgs

£

Cash 14,815 150 410 5,000 755 8,500

Bank 38,505 5,060 26,700 1,710 2,300 1,000 1,735

53,320 5,210 26,700 2,120 2,300 5,000 1,000 1,735 755 8,500

Cash book (receipts)

Date Details Total

£

VAT

£

Net

£

Cash sales 54,230 7,030 47,200

Deposits to bank 39,315

Bank control account

Dr Cr

£ £

Balance b/d at

1 Jan 13

820 Payments 38,505

Cash deposits 39,315 Bal c/d at

31 Dec 13

1,630

40,135 40,135

Bal b/d 1,630


Dr Cr

£ £

Balance b/d at

1 Jan 13

150 Bank 39,315

Sales 54,230 Payments 14,815

Bal c/d at

31 Dec 13

250

54,380 54,380

Bal b/d 250


10-Feb-14 173

Closing balances at 31 December 2013

£

Accruals (wages) 200

Trade debtors 150


Stock 1,500

Other information

Annual depreciation on the car and equipment was £1,875.

Closing trade debtors of £150 include VAT of £25.

Closing trade creditors of £1,200 include VAT of £200.

Opening trade debtors of £100 include VAT of £17.

Opening trade creditors of £700 include VAT of £117.

The opening balances have been extracted from the

previous year's balance sheet and are shown on the ETB

provided.


174 10-Feb-14

12

Cr

£

11

Bal

ance

shee

t

Dr

£

10

Cr

£

9

Tra

din

g a

nd P

& L

Dr

£

8

Cr

£

7

Deb

tors

and c

reditors

Dr

£

6

Cr

£

5

Adju

stm

ents

Dr

£

4

Cr

£

3

Cas

h a

nd b

ank

Dr

£

2

Cr £

8,7

00

700

370

100

2,5

00

12,3

70

1

Bal

ance

shee

t at

31/1

2/2

012

Dr

£

9,0

00

1,0

00

820

100

1,3

00

150

12,3

70

E

xte

nd

ed

Tri

al B

ala

nce

as

at

31

Dece

mb

er

20

13

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s (w

ages

)

Moto

r ca

r

Equip

men

t

Ban

k

Tra

de

deb

tors

Sto

ck 1

Jan

13

Cas

h o

n h

and

Acc

dep

'n

N

et p

rofit

Tota

ls


10-Feb-14 175


1. What is the purpose of an extended trial balance for a

business with limited accounting records?

It is the main way you can transform limited accounting

records into the double entry system and balanced financial

accounts.



176 10-Feb-14

2. The completed ETB for the year ended 31 December 2013 is

below.

12

Cr

£

8,7

00

1,2

00

380

200

4,3

75

7,1

75

22,0

30

11

Bal

ance

shee

t

Dr

£

9,0

00

1,0

00

1,6

30

150

1,5

00

250

8,5

00

22,0

30

10

Cr

£

47,2

42

1,5

00

48,7

42

9

Tra

din

g a

nd P

& L

Dr

£

2,1

20

2,3

00

5,1

00

1,0

00

755

27,1

17

1,8

75

1,3

00

7,1

75

48,7

42

8

Cr

£

1,2

00

2

5

117

100

583

125

2,1

50

7

Deb

tors

and

cred

itors

Dr

£

700

17

200

150

1,0

00

83

2,1

50

6

Cr

£

200

1,3

00

1,8

75

100

1,5

00

4,9

75

5

Adju

stm

ents

Dr

£

100

1,5

00

200

1,8

75

1,3

00

4,9

75

4

Cr

£

7,0

30

38,5

05

14,8

15

39,3

15

47,2

00

146,8

65

3

Cas

h a

nd b

ank

Dr

£

150

5,0

60

1,7

35

39,3

15

54,2

30

410

1,7

10

2,3

00

5,0

00

1,0

00

755

8,5

00

26,7

00

146,8

65

2

Cr

£

8,7

00

700

370

100

2,5

00

12,3

70

1

Bal

ance

shee

t at

31/1

2/2

012

Dr

£

9,0

00

1,0

00

820

100

1,3

00

150

12,3

70

E

xte

nd

ed

Tri

al B

ala

nce

as

at

31

Dece

mb

er

20

13

Cap

ital

Tra

de

cred

itors

VAT

Acc

rual

s (w

ages

)

Moto

r ca

r

Equip

men

t

Ban

k

Tra

de

deb

tors

Sto

ck 1

Jan

13

Cas

h o

n h

and

Acc

dep

'n

M

oto

r ex

pen

ses

Ren

t

Wag

es

In

sura

nce

Gen

eral

exp

ense

s

Dra

win

gs

Pu

rchase

s

Sal

es

D

epre

ciat

ion

Op s

tock

(TP

& L

) Clo

s st

ock

(TP &

L)

N

et p

rofit

Tota

ls


10-Feb-14 177

The debit entry to cash of £54,230 is made up of the

following credit entries.

£

Sales 47,200

VAT 7,030

The credit entry to cash of £14,815 is made up of the

following debit entries.

£

VAT 150

Motor expenses 410

Wages 5,000


Drawings 8,500

The credit entry to bank of £38,505 is made up of the

following debit entries.

£

VAT (5,060 + 1,735) 6,795

Purchases 26,700


Rent 2,300

Insurance 1,000



178 10-Feb-14

Before moving on




table below.


You will To achieve your aim you need

to be able to

understand how to prepare

an ETB in order to produce

financial accounts for a

business with limited

accounting records.

prepare an ETB from limited

accounting records in order

to produce financial

accounts.







Notes

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Bookkeeping Extended Trial Balance

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