LECTURE 4 Trial Balance & Financial Statements

We first record transactions in the books of prime entry. The purpose is to record similar transactions into
one book and reduce the detail in the ledgers, as only the total amounts are posted to ledgers
Ledgers contain summarised accounting information that have been transferred / posted from the books of
prime entry, using double entry system.
The rules of the double entry system are illustrated below:

Debit <Assets> Credit

RM RM

Increase in assets Decrease in assets

Debit <Liabilities> Credit

RM RM

Decrease in liabilities Increase in liabilities

Debit <Equity> Credit

RM RM

Decrease in equity Increase in equity

Debit <Revenue> Credit

RM RM

Decrease in revenue Increase in revenue

Debit <Expenses> Credit

RM RM

Increase in expenses Decrease in expenses

Ledgers Explanations

General Ledger This is the main ledger that contains all the accounts (the complete double
entries) that summarise all the business transactions that occurred. Therefore, the
Trial Balance and Financial Statements are prepared using the General Ledger.

Subsidiary ledgers:
Sales Ledger Contains the individual trade receivables’ accounts. It forms only half of the
double entry bookkeeping. An account inside the General Ledger controls this
entire ledger.

Purchases Ledger Contains all the individual trade payables accounts. It forms only half of the
double entry bookkeeping. An account inside the General Ledger controls this
entire ledger.

Trial Balance

A trial balance is a list of all the balances extracted from the ledgers at a particular date. It is prepared to
check the arithmetical accuracy of the accounts (to check that the total of the debit balances equals the
total of the credit balances). The principle of double entry ensures that the two total should agree. If the
totals do not agree, there must be an error somewhere in the bookkeeping.

Illustration 1:
Suzana’s ledger accounts are as follows:

Cash Account
01.08.16 Capital 50 000 20.08.16 Nippon 6 000
29.08.16 Capital 15 000 31.08.16 Balance c/d 59 000
65 000 65 000
01.09.16 Balance b/d 59 000

Capital Account
31.08.16 Balance c/d 65 000 01.08.16 Cash 50 000
______ 29.08.16 Cash 15 000
65 000 65 000

01.09.16 Balance b/d 65 000

 Machinery Account
08.08.16 Nippon 30 000 31.08.16 Balance c/d 41 000
25.08.16 Nippon 11 000 ______
41 000 41 000

01.09.16 Balance b/d 41 000

Nippon Account
20.08.16 Cash 6 000 08.08.16 Machinery 30 000
31.08.16 Balance c/d 35 000 25.08.16 Machinery 11 000
41 000 41 000

01.09.16 Balance b/d 35 000

Prepare the trial balance as at 31 August 2016.

Illustration 2:
Write up the various accounts needed in the books of Henry Books Distributors to record the
following transactions. Prepare the trial balance as at 30 April 2016.

April Transactions Dr. Cr.

1 Started business with RM600 000 in the bank
3 Bought motor van paying by cheque RM40 000
Bought office fixtures of RM2 000 on credit from Sam
6
Suppliers
Bought goods costing RM160 000 for resale on credit
7
from Big Book Store
Withdrew RM300 from business bank account for
9
office use
11 Paid Sam Suppliers a cheque RM400
Cash sales RM35 000. A cheque was received and
15
banked on the same day
Credit purchases costing RM80 000 from Big Book
19
Store
23 Paid Big Book Store by cheque RM100 000
28 Cash RM2 800 was received from sales
Financial Statements
Financial statements 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

The main reason why people set up businesses is to make profits. Statement of profit or loss is
drawn up to calculate profits by grouping revenue and expenses together. The statement of profit
or loss shows the business performance (whether making a profit or a loss) over a particular
accounting period.

PROFIT = REVENUE -EXPENSES

ii) Statement of financial position

The statement of financial position 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 statement of financial position shows the accounting equation.

ASSETS = LIABILITIES +EQUITY

Format of an income statement

Statement of profit or loss for the year ended 31 December 2019

RM RM RM
Sales x
Less: Sales returns (x)
Net sales x
Less: Cost of sales
Opening inventory x
Purchases x
Less: Purchases returns (x)
Net purchases xx
Add: Carriage inwards X
Wages X
Insurance on purchases X
Import duties X
X
X
Less: Closing inventory (x)
Cost of sales (x)
Gross profit x
Add: Other income
Rent received x
Commission received x
Interest received x
Discounts received x
x
x
Less: Expenses
Rent expense / paid x
Carriage outwards x
Interest paid x
Repairs & maintenance / motor expenses x
Commission paid x
Bad debts x
Discount allowed x
Doubtful Debts x
Advertising x
Depreciation x
Utilities x
Salaries / Salaries & wages x
Insurance x
(x)
Profit / (Loss) for the year xx
 Format of Statement of Financial Position

Statement of financial position as at 31 December 2019

RM RM RM
Non-current Assets
Plants & machinery x
Land & buildings x
Motor vehicles x
Office equipment x
Furniture x
Fixtures & fittings x
x
Current Assets
Inventories x
Trade receivables x
Bank x
Cash x
x
xx

Financed by:
Opening capital x
Add: Additional capital x
x
Add: Profit for the year / (Loss) x
x
Less: Drawings (x)
x

Non-current Liabilities
Bank loan x

Current Liabilities x
Trade payables x
Bank overdraft x
x
xx
Illustration 1
The following trial balance was extracted from the books of DD for the year ended 31st December 2019:

Debit Credit
RM RM
Capital 50 000
Plants & machinery 18 000
Wages 10 000
Repairs 1 600
Salaries 28 000
Cash in hand 2 500
Land & buildings 74 500
Purchases 123 500
Sales 249 000
Bank overdraft 4 000
Discounts received 8 500
Commissions received 1 500
Trade receivables 45 000
Trade payables 26 300
Commission paid 1 000
Inventory on 1st January 2019 37 000
Advertising 600
Office expenses 1 000
Fixtures & fittings 4 000
Stationery 400
Interest 2 000
Rent 1 700
Bank loan ______ 11 500
350 800 350 800

The closing inventory on 31st December 2019 was valued at RM28000.

(a) Prepare the statement of profit or loss for the year ended 31st December 2019.
(b) Prepare the statement of financial position as at 31st December 2019.
Illustration 2

The following balances are extracted from GG’s ledgers.

Debit Credit
RM RM
Opening inventory 17,000
Sales 55,000
Purchases 25,000
Commission received 1,500
Insurance 600
Wages and salaries 24,000
Commission 1,100
Rent 12,000
Utilities 1,650
Interest 850
Interest received 1,000
Rent received 24,000
Land & buildings 48,000
Motor vehicles 20,000
Fixture & fittings 4,000
Furniture 3,500
Office equipment 2,000
Trade receivables 18,000
Cash 3,000
Drawings 9,000
Capital 69,600
Bank loan 24,000
Trade payables 13,500
Bank overdraft 1,100
189,700 189,700

Additional information:
Closing inventory is valued at cost RM6,000.

Required:
(a) Prepare the statement of profit or loss for the year ended 31 December 2019.
(b) Prepare the statement of financial position as at 31 December 2019.
Illustration 3
The following trial balance was extracted from the books of Chinaman for the year ended 31 May 2019:-

Debit Credit
RM RM
Salaries and wages 4 200
Insurance 1 200
Administrative expenses 2 670
Selling expenses 3 180
Carriage on purchases 2 700
Sales returns 400
Purchases returns 700
Cash in hand 1 255
Carriage outwards 725
Bank overdraft 7 900
Bank loan 12 000
Capital 31 280
Drawings 7 550
Land and buildings 29 500
Trade receivables 21 000
Trade payables 9 600
Plants & machinery 25 000
Purchases 93 250
Sales 160 400
Equipment 20 000
Inventory of goods (1st June 2018) 8 250
Interest on bank loan 1 000 _______
221 880 221 880

The closing inventory on 31st May 2019 was valued at RM 14700.

• Prepare the statement of profit or loss for the year ended 31st May 2019
• Prepare the Statement of Financial Position as at 31st May 2019