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:

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:

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.

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:

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.

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:

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:

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:

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

Then post the credit to Wages Payable:

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

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.