The trial balance and the Balance Sheet

Harvesh (Shakeel) Seegolam

Trial Balance : What is it?
• At the end of an accounting period a balance is struck on each ledger account.

• The way to proceed:
– Total all debits and all credits – Debits exceed credits = debit balance – Credits exceed debits = credit balance

Balancing the ledger account : an e.g.
Debtors Account Dr Cr

$ 1.1.x9 Sales 10,000 5.1.x9 Cash

$ 8,000

30.6.x9

Balalnce c/d

2,000

10,000

10,000

30.6.x9

Balance b/d

2,000

Trial Balance : What is it?
• Like this all ledger accounts are balanced and then all the balances are collected in a trial balance. • If the double entry is correct, then: total debits = total credits

Trial Balance :an example
XYZ Ltd Trial Balance as at 30 June x9 Dr Cr $ $

Debtors

2,000

Sales

35,000

Purchases

13,000

Creditors

1,500

Cash

10,000

Capital

10,000

Loan

10,000

Rent

4,000

Balance Sheet : Business Entity Principle

• A business is separate from the owner of the business. The accounting records of a business are always kept separate from the personal records of the owner. • E.g: purchase of a camera to be put to sale to clients (business transaction) • E.g: purchase of a camera for personal use by owner of firm (not a bt)

Balance Sheet : Main elements
• The balance sheet is made of 3 main components, namely: Assets, Liabilities and Equity Establishing the relation between the 3 components: The Accounting Equation: Capital + Liabilities = Assets
XYZ Ltd Balance Sheet as at 30 June x9 Assets Liabilities Equity

The accounting equation
• E.g: On 1st Jan 2006, Tom started a business under the name XYZ Ltd and deposited $10,000 in a business bank account. On 2nd Jan 2006, XYZ Ltd borrowed $2,500 cash from the ABC Bank. • Write up the accounting equation for XYZ Ltd as at 3rd Jan 2006.

The accounting equation
• Assets = Liabilities + (Equity or Capital) • 12,500 = 2,500 + 10,000

The Balance Sheet
• What is it?
– A report showing the assets, liabilities and equity of a business on any one day.

• To understand the balance sheet, we first need to understand the classification of assets and liabilities, as given below:
– – – – Current Assets Non-Current Assets Current Liabilities Non- current Liabilities

Classification of assets and liabilities
• Current Assets:
– Cash and other assets that will be consumed or converted into cash within the next 12 months. – E.g: Cash at bank, Inventory, Debtors

• Non Current Assets:
– Refer to fixed assets – Assets, other than cash that will be used by a business for more than 12 months

Classification of assets and liabilities
• Current Liabilities:
– Liabilities that will be settled within the next 12 months – Include: Creditors, Loans payable within 12 months, Bank Overdraft

• Non Current Liabilities:
– Liabilities that will NOT be settled within the next 12 months – E.g: a loan with a pay back period of 15 years

Classified Balance Sheet
XYZ Ltd Balance Sheet as at 30 June x9 Current Assets Current Liabilities

Non Current Assets

Non Current Liabilities

Equity

Balance Sheet : A worked Example
• • On 2nd Jan x9, Tom opens a business and contributed his car valued at $11,000 to his business, XYZ Ltd. On 5th Jan x9, Tom contributed his personal computer valued at $2,000 and his office desk valued at $500 to XYZ Ltd. On 2nd Feb x9, XYZ Ltd borrows $7,000 from ABC Bank. The loan is repayable in 5 years’ time. On 14th Feb x9, XYZ Ltd bought a motorcycle for $2,800 from AOL Motors and it was agreed that the amount will be paid for within a year’s time. Draw the Balance Sheet as at 15th Feb x9 for XYZ Ltd.

• •

XYZ Ltd Balance Sheet as at 15th Feb x9 Current Assets Cash at bank 7,000 Current Liabilities AOL Motors 2,800

Non Current Assets Motor Vehicle 11,000

Non Current Liabilities Loan from ABC Bank 7,000

Office Equipment Furniture & Fittings Motor Cycle

2,000 500 2,800 Equity Capital 13,500

23,300

23,300

XYZ Ltd Balance Sheet as at 30 June x9

$

$

Fixed Assets

Fixtures and fittings

18,000

Current Assets

Debtors

2,000

Cash at bank

10,000

12,000

Current Liabilities

Creditors

1,500

Loan

10,000

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