Trial Balance and preparation of Financials

using the TB

Topics:
A Preparation of the trial balance
B Adjustments to Trial Balance
C The relationship between financial transactions and the financial statements
and the use of the trial balance to prepare simple financial statements for a sole
trader.

Learning Objectives
• Explain the causal link between the analysis of transactions, entries in the books
of account, and the preparation of financial statements.

Problem solving skills

• Be able to prepare a simple set of financial statements from the post-adjustment
trial balance.

Glossary of terms

Trial balance A list of all the balances in the ledger at a specific time
(usually the end of an accounting period).

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Page 1 of 10 Trial Balance and preparation of Financials using the TB
A PREPARATION OF A TRIAL BALANCE

At the end of a period (month, quarter or year), all the ledger accounts will be
balanced as described above, and a trial balance can then be prepared. This is simply
a list of all the ledger accounts together with the balance of each account. The
balance is shown in either the debit or credit column, and assuming the balances are
correct, the total of the debit column should equal the total of the credit column.

If we were to do a trial balance of the ledger balances of Luke Skywalker, it would

look like this:

Trial balance at 31 March 20x0

Dr Cr
Bank 48 000
Capital 30 000
Equipment 9 000
Accounts Payable 5 000
Service Fees Revenue 60 000
Accounts Receivable 3 000
Operating Expenses 35 000
95 000 95 000

Preparation of a trial balance is important for a number of reasons:

▪ In a manual set of books it will indicate whether any errors have been made in
postings (eg. debit entry posted to the credit side of a ledger account), or in
calculating the balance of any ledger account. This will show up because the
total debits will not equal the total credits. It will not show other errors such as
a posting to the wrong account, or omission of postings from the journal.
▪ It gives a snapshot of all the balances in the ledger and enables the accountant
to investigate any ‘funnies’ such as debtors’ accounts showing a credit balance,
without having to plough through the entire ledger. The above trial balance is
for a very simple set of books; many businesses have general ledgers running
into hundreds of accounts.

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Page 2 of 10 Trial Balance and preparation of Financials using the TB
B ADJUSTMENTS TO TRIAL BALANCE

After the preparation of the initial trial balance (such as the one above), the
accountant will prepare any necessary adjusting entries. Examples of these would be:
▪ Depreciation of fixed assets
▪ Accounting for the closing inventory
▪ Bringing to account any expenses incurred in the current period that have not
being paid for and not yet entered in the books or taking out any expense paid
for that belongs to the next financial year.
▪ Bringing to account any income that was earned in the current period but has
not yet been entered in the books or taking out any income received that
belongs to the next financial year.

For Luke Skywalker, the following adjustments have been identified:

▪ Depreciation of equipment: R75.00
▪ Telephone expenses for March not yet paid: R150.00
▪ Of the fees paid by clients of R54 000, R1 000 was a deposit for work to be
done in April.

The journal entries for the above adjustments would be as follows:

Date Details Dr Cr
Mar 31 Depreciation expense 75
Accumulated depreciation on Equipment 75
(Depreciation of equipment for March)
Mar 31 Operating expenses (telephone) 150
Other payables (Creditor) 150
(Accounting for telephone expense for March)
Mar 31 Service fees revenue 1 000
Service Fees Liability 1 000
(Fees paid in advance by client)

These journal entries would entail opening three new ledger accounts:
▪ Depreciation expense
▪ Accumulated depreciation
▪ Service fees liability.

These journal entries would then be posted to the respective ledger accounts, and a
new trial balance drawn up. Some accountants prefer to show the adjusting entries
in columns to the right of the initial trial balance and this would be shown as follows:

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Page 3 of 10 Trial Balance and preparation of Financials using the TB
Trial balance at 31 March 20x0
Initial TB Adjustments Final TB
Dr Cr Dr Cr Dr Cr
Bank 48 000 48 000
Capital 30 000 30 000
Equipment 9 000 75 8 925
Accounts Payable 5 000 150 5 150
Service Fees Revenue 60 000 1 000 59 000
Accounts Receivable 3 000 3 000
Operating Expenses 35 000 150 35 150
Depreciation expense 75 75
Service fees liability 1 000 1 000
95 000 95 000 1 225 1 225 95 150 95 150

It should be noted that the adjustments take into account the ‘Accrual Convention’
whereby expenses incurred in the period (depreciation and telephone) are brought
to account, and fees paid in advance by a client are treated as a liability and not as
income earned.

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Page 4 of 10 Trial Balance and preparation of Financials using the TB
 Activity
The following are all unrelated situations:

1. Unrecorded depreciation expense on equipment amounts to R7 000.

2. The cleaning supplies asset account has a balance of R5 200. A count of
cleaning supplies at the end of the period shows that cleaning supplies
worth R2 800 are on hand.
3. On the date for preparing financial statements, it was estimated that an
electricity charge of R700 had been incurred for which no account had been
received.
4. On the first day of the current month, rent for three months was paid and
recorded as a R6 000 debit to rent expense and a R6 000 credit to cash.
Monthly financial statements are now being prepared.
5. Four months ago, an attorney received an amount of R7 200 from a client
for work to be done over a two year period and debited cash R7 200 and
credited revenue R7 200. No adjusting entries have yet been prepared. The
work is done evenly on a monthly basis, over the two years.
6. At the end of the accounting period, wages expense of R6 400 had been
incurred but not paid.

Show the adjusting journal entries for the above situations in the journal format
below:
Description Dr. Cr.
1 Depreciation 7000
Accumulated depreciation - equipment 7000

2 Operating expenses (cleaning supplies) 2400

Cleaning supplies (assets) 2400

3 Operating expenses (Electricity) 700

Other payables 700

4 Prepaid expenses (rent) 4000

Rent expense 4000

5 Revenue 6000
Income in advance 6000

6 Operating expenses (salary&wages) 6400

Other payables 6400

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Page 5 of 10 Trial Balance and preparation of Financials using the TB
C THE RELATIONSHIP BETWEEN FINANCIAL TRANSACTIONS AND THE
FINANCIAL STATEMENTS AND THE USE OF THE TRIAL BALANCE TO
PREPARE SIMPLE FINANCIAL STATEMENTS FOR A SOLE TRADER

From the final trial balance, the financial statements can now be prepared.

Preparation of financial statements

1. Statement of comprehensive income

Luke Skywalker Statement of comprehensive income (profit and loss) for the
month ended 31 March 20x0.

R R
Service Fees Revenue 59 000
Expenses
Operating expenses 35 150
Depreciation 75 (35 225)
Net operating profit 23 775

2. Statement of Financial Position

Luke Skywalker. Statement of Financial Position at 31 March 20x0.

R R
Assets
Non-current Assets
Equipment 9 000
Accumulated depreciation (75) 8 925
Current Assets
Receivables (Accounts 3 000
receivable)
Cash and cash equivalents 48 000 51 000
(Cash at bank)
59 925
Owner’s Equity & Liabilities
Owner’s Equity
L. Skywalker – Capital 30 000
Retained profit 23 775 53 775
Current Liabilities
Payables 6 150
Accounts payable 5 150
Service fees liability 1 000
59 925

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Page 6 of 10 Trial Balance and preparation of Financials using the TB
 Lecture Tutorial 4 (a)

The following is the pre-adjustment trial balance of Nice Garden, a business that
provides gardening services and sells various gardening equipment.

Trial Balance as at 31 March 20XX

DR CR
Bank and Cash 21 700
Capital 250 000
Plant and Equipment 350 000
Accounts receivable 45 600
Accounts Payable 36 700
Inventory 51 200
Revenue from services
rendered 140 000

Revenue from sale of goods 117 800

Operating Expenses 76 000
544 500 544 500

The following additional information for the month of March 20XX is relevant:

1. Depreciation for the month on Plant and Equipment is still to be provided for
R500
2. A stock take on 31 March 20XX revealed that Inventory on hand amounted to
R49,000.
3. An advertising contract for R6,000 was entered into on 01 March 20XX. The
work is to be performed evenly over a period of 6 months. Nice Garden
deducted the full payment made in March, from bank. And debited operating
expenses for R1,000.
4. Revenue from services rendered includes an amount of R3,500 which was
received in March 20XX. The related work is however only to be performed in
April 20XX.
5. On 31 March 20XX, it was found that certain gardening equipment with a
selling price of R1,400 had been delivered to a customer and remained unpaid
as at 31 March 20XX. Only the inventory and cost of sales aspect has been
taken into account in the records.

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Page 7 of 10 Trial Balance and preparation of Financials using the TB
 6. As at 31 March 20XX, the rental for March 20XX has not yet been paid R5,000.
The rental amount has been debited to operating expenses.

7. On the 31 March 20XX, it was discovered that a cash contribution of R15,000

by the owner to the business was journalised as follows:
a. DR Plant and Equipment R15,000
b. CR Accounts Payable R15,000

You are required:

Show how each adjustment would affect the pre-adjustment trial balance by
completing the following table:

Initial TB Adjustments Final TB

DR CR DR CR DR CR

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Page 8 of 10 Trial Balance and preparation of Financials using the TB