• Posting adjusting entries to the ledgers and re-balancing the accounts

 

After preparing the journal entries, we have to post them to the ledgers.

Let’s start by reviewing NeatNiks’s trial balance for the month of October:

NeatNiks
Trial Balance (unadjusted)
For the month ended October 31, 20XX

Reference No.	Accounts	Debits	Credits
110	Checking	3,500.00
120	Accounts Receivable	5,650.00
125	Supplies	2,600.00
130	Prepaid Rent	12,000.00
210	Account Payable		1,600.00
220	Contractor Payable		–
310	Nick Frank, Capital Contributions		20,000.00
330	Nick Frank, Withdrawals	4,000.00
410	Service Revenue		8,750.00
510	Insurance Revenue	1,500.00
520	Rent Expense	–
530	Supplies Expense	–
540	Contractor Expense	1,100.00
	Totals	Single line 30,350.00 Double line	Single line 30,350.00 Double line

Next, we analyze each account, going down the list in order and starting with the checking account, which we verify with the bank. We’ll go into this step in more detail in the next module on accounting for cash, so for now let’s just assume this account is verified and we can check it off.

Next is Accounts Receivable. We didn’t keep a subsidiary ledger for this account and because this is just a hypothetical project, we didn’t have the details for the subsidiary ledger, but let’s just say this is what the subsidiary ledger looks like:

NeatNiks
Accounts Receivable Subsidiary Ledger
For the month ended October 31, 20XX

Date		Item	Post. Ref.	Debit	Credit
		Max Von Snyder
		invoice dtd 10/20/20XX		5,000.00
		payment 10/30		(1,000.00)
		balance owing			4,000.00
		Donnie Almond
		invoice dtd 10/20/20XX		1,000.00
		payment 10/30		(400.00)
		balance owing			600.00
		Gracie Monocle
		invoice dtd 10/20/20XX		1,250.00
		payment 10/30		(200.00)
		balance owing			1,050.00
		Total due from customers			5,650.00Double Line

The subsidiary ledger agrees with the general ledger control account as reported on the trial balance. What we don’t know is if this list is accurate. An auditor might send a letter to each of these accounts (or to a random sample of accounts) without mentioning the amount in our records, asking the customer to report what they owe (per their accounts payable records). What that report would not reveal, however, would be an account that is missing from the list. There are other tests and procedures for that audit, including tests of internal systems and statistical analysis, but those are covered in more advanced auditing courses. For now, since we’re not doing a full audit for a publicly traded company, it’s enough that we have matched the general ledger amount (control account) to the subsidiary ledger.

Check that one off.

Now we come to supplies. The trial balance shows a debit balance of $2,600, but we have a physical count as of October 31 that shows an ending balance of $1,000 (from the original list of information way back in Module 1).

That balance means that during the month of October, Nick used up (expended) $1,600 of supplies. We’ll need an adjusting journal entry.

Question: Is this a deferral or an accrual? (answer after the AJE)

If you need to, scratch this example out on a piece of paper using T accounts.

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
Oct 31	Supplies Expense		1,600.00
Oct 31	Supplies			1,600.00
Oct 31	To record supplies used during the month

This is a deferred expense because we spent the money before we expended the resource.

A debit to an expense account increases that account because expenses represent decreases to equity, and equity is on the right side of the accounting equation (A = L + E). A debit decreases equity because an increase is represented by an entry on the right side of the ledger/T account (a.k.a. credit).

After we post this expense to the ledger, our balance in the supplies account should be $1,000. We’ll check that amount soon.

Next on the list, as we walk our way down the trial balance, is Prepaid Rent. To analyze this account, we take a look at the ledger:

Date		Item	Post. Ref.	Debit	Credit	Balance
						Debit	Credit
20–
Oct	1	Balance	a			0.00
Oct	4		GJ1	12,000.00		12,000.00

We trace the $12,000 entry back to the journal, and then from the journal to the supporting document in the file showing Nick rented a truck for $12,000 cash for October through March (6 months). It equates to $2,000 per month. One month is now used up, so we need to record the amount of the deferred expense that is now current. We’ll decrease the asset “Prepaid Rent” with a credit entry and increase “Rent Expense” with a debit entry.

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
Oct 31	Rent Expense		2,000.00
Oct 31	Prepaid Rent			2,000.00
Oct 31	To record rent expense for the month

Next on the trial balance is Accounts Payable. We’d have an Accounts Payable subsidiary ledger to compare the trial balance to, and we’d do some research to determine if there were any payables that hadn’t been recorded. For purposes of this simulation, let’s just say that Accounts Payable checks out.

Next is Contractor Payable (if Nick had employees this would be called Wages Payable), and since the month of October is actually over at this point and it’s probably the first week of November as we are making these adjusting journal entries, we have the following information from Nick:

Nick owes his independent contractor workers $1,200 for work done in October—he’ll pay it in November.

We looked at this exact journal entry in the prior section, so we’ll just use that entry as a template and record the following:

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
Oct 31	Contractor Expense		1,200.00
Oct 31	Contractor Payable			1,200.00
Oct 31	To record October work paid in November

After this account, we would verify the Capital account and the Withdrawal account, and scan the Revenue and Expense accounts, do some statistical analysis and some testing (if this were a full audit), and we’d look for other things that need to be disclosed, such as any outstanding lawsuits, pension plan, etc. But this is just a small company, so we’ll stop here for now. We’ve done our due diligence and it doesn’t look like we missed anything significant.

We have just three adjusting journal entries now, and we’ve added them to the bottom of page 2 of our journal:

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
Oct. 30	Checking	110	1,600.00
Oct. 30	Accounts Receivable	120		1,600.00
Oct. 30	To record receipt of payments from customers on account
Oct. 31	Owner Withdrawal	320	4,000.00
Oct. 31	Checking	110		4,000.00
Oct. 31	To record payment to owner
AJE1 31	Supplies Expense		1,600.00
AJE1 31	Supplies			1,600.00
AJE1 31	To record supplies used during the month
AJE2 31	Rent Expense		2,000.00
AJE2 31	Prepaid Rent			2,000.00
AJE2 31	To record rent expense for the month
AJE3 31	Contractor Expense		1,200.00
AJE3 31	Contractor Payable			1,200.00
AJE3 31	To record October work paid in November

Then we post them to the appropriate ledgers, updating the references as we go. Let’s just look at the last one to accrue wages for October. Assume you have already posted the other two.

Here is the journal entry you wrote:

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
AJE3 31	Contractor Expense		1,200.00
AJE3 31	Contractor Payable			1,200.00
AJE3 31	To record October work paid in November

First, post the debit to Contractor Expense, making sure you update the balance in the ledger and the posting reference:

Date		Item	Post. Ref.	Debit	Credit	Balance
						Debit	Credit
20–
Oct	1	Balance	a			0.00
Oct	25		GJ1	1,100.00		1,100.00
Oct	31	AJE3	GJ2	1,200.00		2,300.00

Then post the credit to Wages Payable:

Date		Item	Post. Ref.	Debit	Credit	Balance
						Debit	Credit
20–
Oct	1	Balance	a				0.00
Oct	31	AJE3	GJ2		1,200.00		1,200.00

As you update each ledger, you also update the journal by posting the ledger account number into the journal reference column:

JournalPage 2

Date	Description	Post. Ref.	Debit	Credit
20–
Oct. 30	Checking	110	1,600.00
Oct. 30	Accounts Receivable	120		1,600.00
Oct. 30	To record receipt of payments from customers on account
Oct. 31	Owner Withdrawal	320	4,000.00
Oct. 31	Checking	110		4,000.00
Oct. 31	To record payment to owner
AJE1 31	Supplies Expense	530	1,600.00
AJE1 31	Supplies	125		1,600.00
AJE1 31	To record supplies used during the month
AJE2 31	Rent Expense	520	2,000.00
AJE2 31	Prepaid Rent	130		2,000.00
AJE2 31	To record rent expense for the month
AJE3 31	Contractor Expense	540	1,200.00
AJE3 31	Contractor Payable	220		1,200.00
AJE3 31	To record October work paid in November

We numbered the AJEs, but that is optional.

Next, we’ll run an adjusted trial balance, but first let’s check our understanding of this process so far.