110
6: From trial balance to financial statements Part C The use of double entry and accounting systems
After balancing the accounts, the income and expense account should be opened. Into it should be
transferred all the balances relating to income and expense (ie purchases, other expenses, and sales). At
this point, the ledger accounts will be as follows.
CASH AT BANK
$
$
Capital
2,000
Trade accounts payable
3,600
Trade accounts receivable
3,200
Non-current assets
1,500
Balance c/d
800
Other expenses
900
6,000
6,000
Balance b/d
800*
* A credit balance b/d means that this cash item is a liability, not an asset. This indicates a bank overdraft
of $800, with cash income of $5,200 falling short of payments of $6,000 by this amount.
CAPITAL
$
$
Balance c/d
2,600
Cash at bank
2,000
I & E a/c
600
2,600
2,600
TRADE
ACCOUNTS
PAYABLE
$
$
Cash at bank
3,600
Purchases
4,300
Balance c/d
700
4,300
4,300
Balance b/d
700
PURCHASES
ACCOUNT
$
$
Trade accounts payable
4,300
I & E a/c
4,300
NON-CURRENT
ASSETS
$
$
Cash at bank
1,500
Balance c/d
1,500
Balance b/d
1,500
SALES
$
$
I & E a/c
5,800
5,800
TRADE ACCOUNTS RECEIVABLE
$
$
Sales
5,800
Cash at bank
3,200
Balance c/d
2,600
5,800
5,800
Balance b/d
2,600
OTHER
EXPENSES
$
$
Cash at bank
900
I & E a/c
900
Part C The use of double entry and accounting systems
6: From trial balance to financial statements
111
INCOME AND EXPENSE ACCOUNT
$
$
Purchases account
4,300
Sales
5,800
Gross profit c/d
1,500
5,800
5,800
Other expenses
900
Gross profit b/d
1,500
Net profit (transferred to capital
account)
600
1,500
1,500
So the income statement will be:
INCOME STATEMENT
FOR THE ACCOUNTING PERIOD
$
Sales
5,800
Cost of sales (purchases)
4,300
Gross profit
1,500
Expenses
900
Net profit
600
Listing and then rearranging the balances on the ledger accounts gives the statement of financial position
as:
STATEMENT OF FINANCIAL POSITION AS AT THE END OF THE PERIOD
Assets
$
$
Non-current assets
1,500
Current assets
Trade accounts receivable
2,600
Total assets
4,100
Capital and liabilities
Capital
At start of period
2,000
Net profit for period
600
At end of period
2,600
Current liabilities
Bank overdraft
800
Trade accounts payable
700
1,500
Total capital and liabilities
4,100
The above example is highly detailed. This detail is given to help you to work through the example
properly. You may wish to do things this way yourself until you get more practised in accounting
techniques and are confident enough to take short cuts.
The techniques are worth practising as you may well get a MCQ requiring you to calculate a figure for the
income statement or statement of financial position from a trial balance.
Exam focus
point
112
6: From trial balance to financial statements Part C The use of double entry and accounting systems
Question
Opening trial balance
Alpha has the following opening balances on its ledger accounts.
$
Fixtures
5,000
Trade accounts receivable
2,000
Bank account
1,000
Loan
3,000
(a)
What is the total assets figure?
A $6,000
B $5,000
C $8,000
D $3,000
(b)
What is the opening figure for capital?
A $6,000
B $5,000
C $8,000
D $3,000
Answer
(a)
C
Assets = 5,000 + 2,000 + 1,000
=
8,000
(b)
B
Capital = assets – liabilities
= (5,000 + 2,000 + 1,000) – 3,000
=
5,000
Chapter Roundup
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.
A trial balance can be used to
test the accuracy of the double entry accounting records. It works by
listing the balances on ledger accounts, some of which will be debits and some credits. The total debits
should equal total credits.
An
income and expense ledger account is opened up to gather all items relating to income and expenses.
When
rearranged, the items make up the income statement.
The balances on all
remaining ledger accounts (including the income and expense account) can be listed
and
rearranged to form the statement of financial position.
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