ABFA1173 Principles of Accounting 1

Lecture 4: Trial Balance and Financial Statements Learning objectives:

After you have studied this chapter, you should be able to:
Important Textbook Reading:  Explain the relationship between Sales Ledger and Purchases Ledger
 Chapters6, 7, 8 & 9: Frank Wood & Alan Sangster “Business Accounting 1” with the General Ledger
 Additional reference per approved unit plan  Explain the relationship between General Ledger and the Trial Balance
Recommended Practice Questions:  Prepare Trial Balance from the General Ledger
 Chapter 6: Question no. 6.2  Explain why the debit and credit Trial Balance totals should equal one
 Chapter 7: Question no. 7.2 another
 Chapter 8: Question no. 8.2  Explain how to deal with the opening and closing inventories in the
 Chapter 9: Question no. 9.3 Trial Balance
 Prepare theStatement of Profit or Loss (SPL)and theStatement of
Financial Position (SFP) from the Trial Balance

Extract of the “Accounting Cycle” –TRIAL BALANCE & FINANCIAL STATEMENTS

The 3 Ledgers Trial Balance Financial Statements

Sales Ledger
Statement of Profit or
Purchases Ledger Loss (SPL)

General Ledger Trial Balance Statement of Financial

Position (SFP)
ABFA1173 Principles of Accounting 2

1. The 3 Ledgers

The relationship between the 3 Ledgers are illustrated below: The subsidiary ledgers (Sales and Purchases Ledgers) form only half
of the double-entry bookkeeping.
Direct posting
(each side of The General Ledger contains the complete double-entries, posted
double- from the books of prime entry. Therefore, the General Ledger contains
entry on the complete set of ledger accounts in the accounting equation:
The 7 Books of either side) 2 Subsidiary Ledgers:
Prime Entry Sales Ledger
ASSETS = LIABILITIES + EQUITY.
Purchases Ledger
The subsidiary ledgers are controlled by the following ledger accounts
in the General Ledger:

i) Trade Receivables Control Account

The balance in this account represents the sum of balances of all the
subsidiary accounts inside the Sales Ledger

Example:
Listing of Sales Ledger
Trade Receivables Control Account
accounts
Month-end posting RM RM RM
(both sides of Trade Receivables: #1 10,000 Sales 35,000 Bal c/d 35,000
double-entry inside Trade Receivables: #2 5,000
the General Ledger)
Trade Receivables: #3 20,000 35,000 35,000
35,000 Bal b/d 35,000

General Ledger ii) Trade Payables Control Account

The balance in this account represents the sum of balances of all the
subsidiary accounts in the Purchases Ledger
ABFA1173 Principles of Accounting
2. Trial Balance
As the General Ledger contains the complete set of ledger accounts, the
Trial Balance is prepared from the General Ledger:
i) Accounts that were entered on the debit side of the General Ledger
accounts (i.e. assets, expenses and drawings accounts) are listed in
the Debit column on the Trial Balance
ii) Accounts that were entered on the credit side of the General Ledger
accounts (i.e. liabilities, income and equity accounts) are listed in
the Credit column on the Trial Balance.
Based on the double-entry principle of bookkeeping, for every debit
entry, there is also an equal credit entry. Therefore, the total of debits in
the Trial Balance equals the total of credits in the Trial Balance.
3. Closing inventories
The closing inventories of the accounting period are not found in an
account in the General Ledger, because they can be found only by
physically counting or from the inventory records. Therefore, the
closing inventories are not found in the Trial Balance.
Closing inventories are usually provided as additional information.
4. Opening inventories
However, the opening inventories are recorded in the General Ledger
account at the start of every accounting period, therefore, it is found in
the Trial Balance.
3
5. Financial statements
Financial Statements are the end-productof the accounting process
(accounting cycle).They provide accounting information which are
useful for users to make economic decisions. They are prepared from
the Trial Balance and the additional information regarding closing
inventories.
i) Statement of Profit or Loss (SPL)
The SPL showsthe business performance (whether making a profit
or a loss) over a particular accounting period.
The top part of the SPL determines the Gross Profit or Loss (also
known as Trading Account.)
The bottom part of the SPL shows all other income and expenses, to
determine the Net Profit or Loss of the business.
The SPL shows the Profit Determination Equation:
PROFIT = REVENUE -EXPENSES.
ii) Statement of Financial Position (SFP)
The SFP shows the financial position,of the assets owned and
liabilities and equity owed,by the business as at the end of the
accounting period.
The SFPshows the Accounting Equation:
ASSETS = LIABILITIES +EQUITY.
ABFA1173 Principles of Accounting 4

Statement of Profit or Loss Statement of Financial Position as at (last date of the accounting period)…
for the year ended …(last date of the accounting period)… RM RM RM
RM RM RM Non-current assets
Sales XX Building XX
Less: Returns inwards (XX) Machinery XX
Net Sales XX Office equipment XX
Furniture & fittings XX
Less: Cost of goods sold Motor vehicles XX XX
Opening Inventories XX
Purchases XX Current assets
Less: Returns outwards (XX) Inventories XX
XX Trade receivables XX
Add: Carriage inwards XX Fixed Deposit XX
Wages XX XX Bank XX
XX Cash XX
Less: Closing Inventories (XX) (XX) Petty Cash XX XX
Gross Profit XX XX
Equity
Add: Income Capital as at…(start of accounting period).. XX
Discount received XX Add: Additional capital XX
Rent received XX XX
Bank interest earned XX XX Add: Net Profit XX
XX XX
Less: Expenditure Less: Drawings (XX)
Carriage outwards XX Capital as at…(end of accounting period). XX
Salaries XX
Discount allowed XX Non-current liabilities
Insurance XX Loan XX
Utilities XX Current liabilities
Allowance for doubtful debts XX Trade payables XX
Depreciation XX (XX)
Net Profit XX Bank overdraft XX XX
XX
ABFA1173 Principles of Accounting 5

Illustration 1:
Mohan Trading
The following list is extracted from Mohan Trading’s General Ledger Trial Balance as at 31 Dec, ….
accounts as at 31 December, …: Debit Credit
RM RM RM
Building 35,000 Inventories @ 1 Jan 21,950
Office equipment 20,000 Building 35,000
Motor vehicles 60,000 Office equipment 20,000
Closing inventories 22,500 Motor vehicles 60,000
Trade receivables 26,000 Trade receivables 26,000
Bank 18,000 Bank 18,000
Cash 6,150 Cash 6,150
Petty cash 500 Petty cash 500
Trade payables 18,500 Trade payables 18,500
Other payables 10,000 Other payables 10,000
Bank overdraft 2,250 Bank overdraft 2,250
Drawings 14,000 Drawings 14,000
Loan 50,000 Loan 50,000
Sales 475,000 Sales 475,000
Purchases 400,000 Purchases 400,000
Carriage inwards 5,600 Carriage inwards 5,600
Discount received 3,800 Discount received 3,800
Discount allowed 4,000 Discount allowed 4,000
Telephone 3,500 Telephone 3,500
Office rent 12,000 Office rent 12,000
Salaries 35,000 Salaries 35,000
Capital 102,150
Opening inventories (as at 1 January) were RM21, 950. 661,700 661,700
Required:
Prepare the Trial Balance for Johan Trading as at 31 December, …. and find
out the amount of owner’s equity (capital account).
ABFA1173 Principles of Accounting 6

Illustration 2:

The following balances are extracted from Mr Edward’s ledger.

Debit Credit Additional information:

RM RM 1. Closing inventories are valued at cost RM6,000.
Inventories @ 1 Jan 5,000
Sales 45,000 2. During the year, Mr Edward’s father gave him RM10,000 as additional
Purchases 25,000 capital. The money was banked in to the business bank account with
Commission received 1,000 Public Bank, but this transaction was not recorded.
Insurance 500
Wages and salaries 3,000 3. Mr Edward maintains a petty cash float of RM800, which is reimbursed
Commission 1,100 at the end of every month. The reimbursement on 31 December has not
Rent 2,400 been recorded.
Utilities 1,650
Interest 850 Required:
Interest received 1,500 (a) Prepare the Trading Account for Mr Edward for the year ended 31
Rent received 2,000 December, …..
Land & buildings 48,000 (b) Prepare the Statement of Profit or Loss of Mr Edward for the year
Motor vehicles 10,000 ended 31 December, …..
Fixture & fittings 4,000 (c) Prepare the Statement of Financial Position for Mr Edward as at 31
Furniture 3,500 December, …..
Office equipment 2,000
Trade receivables 13,500 Solution:
Other receivables 4,500
Bank: Public Bank 5,500 Mr Edward
Cash 3,000 Trading Account for the year ended 31 December, ….
Petty cash 100 RM RM RM
Drawings 9,000 Sales 45,000
Capital 49,000 Less: Cost of goods sold
Bank loan 7,500 Opening Inventories 5,000
Mortgage loan 16,500 Purchases 25,000
Trade payables 12,500 30,000
Other payables 1,000 Less: Closing Inventories (6,000) (24,000)
Bank: Maybank 6,600 Gross Profit 21,000
142,600 142,600
ABFA1173 Principles of Accounting 7

Mr Edward Mr Edward
Statement of Profit or Lossfor the year ended 31 December, …. Statement of Financial Position as at 31 December, ….
RM RM RM RM RM RM
Sales 45,000 Non-current assets
Less: Cost of goods sold Land & buildings 48,000
Opening Inventories 5,000 Motor vehicles 10,000
Purchases 25,000 Fixture & fittings 4,000
30,000 Furniture 3,500
Less: Closing Inventories (6,000) (24,000) Office equipment 2,000 67,500
Gross Profit 21,000 Current assets
Inventories 6,000
Add: Income Trade receivables 13,500
Commission received 1,000 Other receivables 4,500
Interest received 1,500 Bank (5,500 + 10,000 - 700) 14,800
Rent received 2,000 4,500 Cash 3,000
25,500 Petty cash (100 + 700) 800 42,600
Less: Expenditure 110,100
Insurance 500 Equity
Wages and salaries 3,000 Capital as at 1 January 49,000
Commission 1,100 Add: Additional capital 10,000
Rent 2,400 59,000
Utilities 1,650 Add: Net Profit 16,000
Interest 850 (9,500) 75,000
Net Profit 16,000 Less: Drawings (9,000)
Capital as at 31 December 66,000
Non-current liabilities
Bank loan 7,500
Mortgage loan 16,500 24,000

Current liabilities
Trade Payable 12,500
Other Payable 1,000
Bank Overdraft 6,600 20,100
110,100
ABFA1173 Principles of Accounting 8

Illustration 3: Required:
a) Record the above transactions into the “T” accounts.
Shana started The Fu-Yoh Souvenir Shop’s operations on 1 March, …. with b) Prepare the Trial Balance as at 31 March, …..
RM1,500 cash and RM10,500 in EON Bank’s current account. The c) Prepare the Statement of Profit or Loss for the month ended 31 March,
following transactions occurred during the month: ….
d) Prepare the Statement of Financial Position as at 31 March, …..
March
2 She bought office equipment for RM1,000 paid by cheque. General Ledger
4 Purchased 50 units of goods at RM200 each from Grace Enterprise, Cash Account
on a credit term of 30 days. Mar RM Mar RM
7 Early settlement by cheque of the above purchase from Grace 1 Capital 1,500 10 Bank 3,200
Enterprise was made at a cash discount of 10%. 9 Sales 3,200 14 Motor Vehicles 1,000
8 Put in additional capital of RM1,000 into the business bank current 31 Electricity 60
account after she won the money in a contest. 31 Bal c/d 440
9 Sold 8 units of goods for RM400 each to customers on cash terms. 4,700 4,700
All the sales proceeds were banked in the next day. Apr
1 Bal b/d 440
11 Obtained a RM50,000 bank loan from EON Bank which was
immediately banked in.
12 Paid advertising expenses RM3,000 to Shao Hong Media by Bank Account
Mar RM Mar RM
cheque.
1 Capital 10,500 2 Office equipment 1,000
14 Bought a delivery van from Amrita Motors costing RM10,000, Paid Trade Payables: Grace
cash RM1,000 and the remaining amount to be settled next month. 8 Capital 1,000 7 9,000
Enterprise
17 Sold 20 units of goods for RM400 each to Intan Sdn Bhd, on credit 10 Cash 3,200 12 Advertising 3,000
terms of 30 days. 11 Loan: EON Bank 50,000 18 Drawings 2,000
18 Issued cheque RM2,000 to pay for the owner’s personal life 29 Commission Received 250 31 Bal c/d 49,950
insurance. 64,950 64,950
29 Banked in a cheque for RM250 as Commission Received. Apr
30 Purchased 30 units of goods at RM200 each from Grace Enterprise, 1 Bal b/d 49,950
on a credit term of 30 days.
31 Paid office electricity bill RM 60 by cash. Capital Account
Mar RM Mar RM
Closing inventory is RM10,000 as at 31 March. 31 Bal c/d 13,000 1 Cash 1,500
1 Bank 10,500
8 Bank 1,000
13,000 13,000
Mar
31 Bal b/d 13,000
ABFA1173 Principles of Accounting 9

Office Equipment Account Loan: EON Bank Account

Mar RM Mar RM Mar RM Mar RM
2 Bank 1,000 31 Bal c/d 1,000 31 Bal c/d 50,000 11 Bank 50,000
Apr Apr
1 Bal b/d 1,000 1 Bal b/d 50,000
Motor Vehicles Account
Purchases Account Mar RM Mar RM
Mar RM Mar RM 14 Cash 1,000 31 Bal c/d 10,000
Trade Payables: Grace Other Payables:
4 10,000 31 SPL 16,000 14 9,000
Enterprise Amrita Motors
Trade Payables: Grace 10,000 10,000
30 6,000
Enterprise Apr
16,000 16,000 1 Bal b/d 10,000
Other Payables: Amrita Motors Account
Trade Payables: Grace Enterprise Account Mar RM Mar RM
Mar RM Mar RM 31 Bal c/d 9,000 14 Motor Vehicles 9,000
7 Bank 9,000 4 Purchases 10,000 Apr
7 Discount Received 1,000 30 Purchases 6,000 1 Bal b/d 9,000
31 Bal c/d 6,000 Trade Receivables: Intan Sdn Bhd Account
16,000 16,000 Mar RM Mar RM
Apr 17 Sales 8,000 31 Bal c/d 8,000
1 Bal b/d 6,000 Apr
1 Bal b/d 8,000
Discount Received Account
Mar RM Mar RM Drawings Account
Trade Payables: Grace Mar RM Mar RM
31 SPL 1,000 7 1,000
Enterprise 18 Bank 2,000 31 Bal c/d 2,000
Mar
Sales Account 31 Bal b/d 2,000
Mar RM Mar RM
31 SPL 11,200 9 Cash 3,200 Commission Received Account
Trade Receivables: Mar RM Mar RM
17 8,000
Intan Sdn Bhd 31 SPL 250 29 Bank 250
11,200 11,200
Electricity Account
Advertising Account Mar RM Mar RM
Mar RM Mar RM 31 Cash 60 31 SPL 60
12 Bank 3,000 31 SPL 3,000
ABFA1173 Principles of Accounting 10

Fu-Yoh Souvenir Shop Fu-Yoh Souvenir Shop

Trial Balance as at 31 March, …. Statement of Financial Position as at 31 March, ….
Debit (RM) Credit (RM) RM RM RM
Cash 440 Non-current assets
Bank 49,950 Office equipment 1,000
Capital 13,000 Motor vehicles 10,000 11,000
Office Equipment 1,000
Purchases 16,000 Current assets
Trade Payables: Grace Enterprise 6,000 Inventories 10,000
Discount Received 1,000 Trade receivables 8,000
Sales 11,200 Bank 49,950
Loan: EON Bank 50,000 Cash 440 68,390
Advertising 3,000 79,390
Motor Vehicles 10,000 Equity
Other Payables: Amrita Motors 9,000 Capital as at 1 March 0
Trade Receivables: Intan Sdn Bhd 8,000 Add: Additional capital 13,000
Drawings 2,000 13,000
Commission Received 250 Add: Net Profit 3,390
Electricity 60 16,390
90,450 90,450 Less: Drawings (2,000)
Fu-Yoh Souvenir Shop Capital as at 31 March 14,390
Statement of Profit or Loss for the month ended 31 March, ….
RM RM RM Non-current liabilities
Sales 11,200 Loan 50,000
Less: Cost of goods sold
Purchases 16,000 Current liabilities
Less: Closing Inventories (10,000) (6,000) Trade payables 6,000
Gross Profit 5,200 Other payables 9,000 15,000
Add: Income 79,390
Discount received 1,000
Commission received 250 1,250
6,450
Less: Expenditure
Advertising 3,000
Electricity 60 (3,060)
Net Profit 3,390