Acca f3 Financial Accounting (int) Study Text

99

From trial balance to 

financial statements 

Introduction

In the previous chapter you learned the principles of double entry and how to 

post to the ledger accounts. The next step in our progress towards the financial 

statements is the 

trial balance.

Before transferring the relevant balances at the year end to the income 

statement and putting closing balances carried forward into the statement of 

financial position, it is usual to test the accuracy of double entry bookkeeping 

records by preparing 

a list of account balances. This is done by taking all the 

balances on every account; because of the self-balancing nature of the system 

of double entry, 

the total of the debit balances will be exactly equal to the 

total of the credit balances. 

In very straightforward circumstances, where no complications arise and where 

the records are complete, it is possible to prepare accounts directly from a trial 

balance. This is covered in Section 4. 

Topic list 

Syllabus reference 

1 The trial balance 

C2(d), E1(a)–(d) 

2 The income statement 

A3(a)

3 The statement of financial position 

A3(a)

4 Balancing accounts and preparing financial statements 

C2(d), A3(a) 

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6: From trial balance to financial statements   Part C  The use of double entry and accounting systems 

Study guide 

Intellectual level

A3 

The main elements of financial reports 

(a) 

Understand and identify the purpose of each of the main financial 

statements.

1

C2

Ledger accounts, books of prime entry and journals

(d) 

Illustrate how to balance and close a ledger account 

1

E1

Trial balance

(a)

Identify the purpose of a trial balance.

1

(b) 

Extract ledger balances into a trial balance. 

1

(c) 

Prepare extracts of an opening trial balance. 

1

(d) 

Identify and understand the limitations of a trial balance. 

1

Exam guide 

Exam questions at all levels in financial accounting can involve preparation of final accounts from a trial 

balance. Last but not least, you may end up having to do it in 'real life'. 

1 The trial balance 

At suitable intervals, the entries in each ledger account are totalled and a 

balance is struck. Balances are 

usually collected in a 

trial balance which is then used as a basis for preparing an income statement and a 

statement of financial position. 

You have a list of transactions, and have been asked to post them to the relevant ledger accounts. You do 

it as quickly as possible and find that you have a little time left over at the end of the day. How do you 

check that you have posted all the debit and credit entries properly? 

There is no foolproof method, but a technique which shows up the more obvious mistakes is to prepare a 

trial balance.

A

trial balance is a list of ledger balances shown in debit and credit columns.

1.1 The first step 

Before you draw up a list of account balances, you must have a collection of ledger accounts. For the sake 

of convenience, we will use the accounts of Ron Knuckle, which we drew up in the previous chapter. 

CASH AT BANK 

$

$

Capital: Ron Knuckle

7,000

Rent

3,500

Bank loan

1,000

Shop fittings

2,000

Sales

10,000

Trade accounts payable

5,000

Trade accounts receivable

2,500

Bank loan interest

100

Other expenses

1,900

Drawings

1,500

 

 

Key term 

FAST FORWARD

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Part C  The use of double entry and accounting systems

  6:  From trial balance to financial statements

101

CAPITAL (RON KNUCKLE) 

$

$

  Cash at bank 

7,000

BANK LOAN 

$

$

  Cash at bank 

1,000

PURCHASES

$

$

Trade accounts payable 

5,000

TRADE ACCOUNTS PAYABLE 

$

$

Cash at bank

5,000

Purchases

5,000

 

 

RENT

$

$

Cash at bank 

3,500

SHOP FITTINGS 

$

$

Cash at bank 

2,000

SALES

$

$

Cash at bank

10,000

Trade accounts receivable 

  2,500

 

 

TRADE ACCOUNTS RECEIVABLE 

$

$

Sales

2,500 Cash at bank

2,500

BANK LOAN INTEREST 

$

$

Cash at bank 

100

OTHER EXPENSES 

$

$

Cash at bank 

1,900

DRAWINGS 

$

$

Cash at bank 

1,500

The next step is to 'balance' each account. 

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6: From trial balance to financial statements   Part C  The use of double entry and accounting systems 

1.2 Balancing ledger accounts 

At the end of an accounting period, a balance is struck on each account in turn. This means that all the 

debits on the account are totalled and so are all the credits. 

If the total debits exceed the total credits 

there is said to be a debit balance on the account; if the credits exceed the debits then the account has 

a credit balance. 

In our simple example, there is very little balancing to do. 

(a) 

Both the trade accounts payable and the trade accounts receivable balance off to zero. 

(b) 

The cash at bank account has a debit balance of $6,500. 

(c) 

The total on the sales account is $12,500, which is a credit balance. 

CASH AT BANK 

$

$

Capital: Ron Knuckle

7,000

Rent

3,500

Bank loan

1,000

Shop fittings

2,000

Sales

10,000

Trade accounts payable

5,000

Trade accounts receivable

2,500

Bank loan interest

100

Other expenses

1,900

Drawings

1,500

14,000

Balancing figure – the amount of

cash left over after payments have

been made 

   6,500

20,500

20,500

TRADE ACCOUNTS PAYABLE 

$

$

Cash at bank

5,000

Purchases

5,000

SALES

$

$

Cash at bank

10,000

Trade accounts receivable 

  2,500

 

 12,500

TRADE ACCOUNTS RECEIVABLE 

$

$

Sales

2,500 Cash at bank

2,500

Otherwise, the accounts have only one entry each, so there is no totalling to do to arrive at the balance on 

each account. 

1.3 Collecting the balances 

If the basic principle of double entry has been correctly applied throughout the period it will be found that 

the credit balances equal the debit balances in total. This can be illustrated by collecting together the 

balances on Ron Knuckle's accounts. 

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