The following balances were taken from the books of the Smith Company as of December 31, 2005. An inexperienced intern has prepared the following list of accounts that have normal balances to be used in the preparation of the balance sheet. Discuss if these accounts should be listed on the balance sheet. Identify any accounts that should not be listed and discuss the effect of including incorrect accounts on the balance sheet. How will other financial statements be effected?
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Describe the various reports used in accounting such as the trial balance.
Record and post business transactions. The deliverable length is 3-4paragphs, incite citations, at least 3 references and apa format. I need this by tomorrow night 1/24.
As stated in the text, the Balance Sheet includes only permanent (real) accounts (because the balances in those accounts are carried forward into future accounting periods). These accounts DO NOT include revenues, expenses, and dividends since those are considered Temporary (nominal) Accounts.
“Every Account falls under one of two main categories: permanent or temporary. Permanent accounts include assets, liabilities, and equity accounts and they stay in place from year to year, accumulating information the whole time. Temporary accounts include revenues, costs, and expenses, and they carry the information of only a single accounting period (however long that may be).”[i]
Based on the above, the following accounts should not be listed as balance sheet items:
1)Interest Revenue
2)Sales
3)Interest Expense
4)Jim Smith, Drawing
If incorrect accounts are included in the balance sheet, it will not balance because such accounts would have already been included in the calculation of Net Income, and then Retained Earnings. Including those accounts again in the balance sheet would be a double entry.
A Trial Balance “lists accounts and their balances at a given time. A company
usually prepares a trial balance at the end of an accounting period. The accounts
are listed in the order in which they appear in the ledger. Debit balances are
listed in the left column and credit balances in the right column. The totals of
the two columns must be equal. The trial balance proves the mathematical equality of debits and creditsafter posting. Under the double-entry system this equality occurs when the sumof the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting
”[ii]
Another important report is the Statement of Retained earnings which is a “ financial statementthat summarizes the amounts and causes of changes
in retained earnings for a specific period of time.”[iii]
Stakeholders are mostly interested in the Statement of Cash Flows since it provides financial information about the company’s cash receipts and cashpayments of a for a specific period of time.
The Balance Sheet is yet another important financial statement,
“The balance sheet is a listing of the organization’s assets, liabilities,
and owners’ equity at a point in time. In this sense, the balance sheet is like a snapshotof the organization’s financial position, frozen at a specific point in time. The balancesheet is sometimes called the statement of financial position because it summarizesthe entity’s resources (assets), obligations (liabilities), and owners’ claims (owners’ equity).”[iv]
Finally, the income statement reports results for a period of time – in contrast to the balance sheet which reports the company’s position at a specific point in time.
The income statement mainly answers the question of whether the company’s operations have been profitable or not for the period under examination. The income statement lists revenues and expenses of the company to arrive at the bottom line profit “Net Income”
[i] Cagan, Michele: The Everything Accounting Book, P.14
[ii] Kimmel, Weygandt, Kieso, Financial Accounting: Tools for Business Decision Making, 4e, P.127
[iii] Ibid. P.34
[iv]Marshall, McManus, & Viele, Accounting: What the Numbers Mean. P.31