Balancing-off accounts, TB, SPL, SFP PDF

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UNI OF LIVERPOOL ACFI 101...

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Faye Henaghan

Balancing-off Accounts, the Trial Balance, and the SPL & SFP

Increase Decrease 

EXPENSES + ASSETS Debit Credit

=

LIABILITIES + INCOME + CAPITAL Credit Debit

E.g. if a business pays for electricity on 9/10/X8  this is an increase in expenses, so will be a debit transaction of electricity. The asset of cash @ bank falls, so this is a credit transaction. Electricity Bank 20X8 £ 20X8 £ 9/10 Bank 84 9/10 Elec 84

DEADCLIC

Debit entries are for increases in: Expenses Assets Drawing (or dividends)

Credit entries are for increases in: Liabilities Income Capital

Preparing the Basic Financial Statements of a Business 1. Record all transactions for the period in ‘T accounts’. 2. Establish the ‘balance’ on each T account at the end of the period. 3. List out all the balances (on a ‘trial balance’ or ‘TB’). 4. Show each balance from the TB in the appropriate place in either the Statement of Profit or Loss (income-expenses) or the Statement of Financial Position (assets -liabilities = capital). Establishing the Balance on Each Account  How much money in the bank does this business have on 31 Jan? Cash @ bank 20X2 £ 20X2 £ 10/1 Sales 300 15/1 Electricity 84 20/1 Sales 200 

To formally record the balance on the account, we must ‘balance off.



Cash @ bank £ 20X2 £ 20X2 84 10/1 Sales 300 15/1 Electricity 20/1 Sales 200 31/1 Balance c/d 400 500 500 1/2 Balance b/d 400 The balance on this account is a ‘debit balance’  debit entries > credit entries

Faye Henaghan

Steps for Balancing-off Asset & Liability Accounts 1. Leaving a row blank, rule a total box on each side of the account. These total boxes must be level with each other. 2. Add up the debit side of the account 3. Add up the credit side of the account 4. Enter the greater value of 2. and 3. above in each total box 5. Enter the difference needed to make the lower side correctly add up to the total in the box: this is the closing balance to be carried down ('c/d'). 6. This balance must be brought down ('b/d') on the opposite side, below the total box, to represent the opening balance on the first day of the next period. Examples

Steps for Balancing-off Income & Expense Accounts 1. Leaving a row blank, rule a total box on each side of the account. These total boxes must be level with each other. 2. Add up the debit side of the account. 3. Add up the credit side of the account. 4. Enter the greater value of 2. and 3. above in each total box. 5. Enter the difference needed to make the lower side correctly add up to the total in the box: this is the closing balance to be taken to ‘Profit and loss’ (or ‘To P&L’) 6. No balance is brought down on the first day of the next period Examples 



The balance on the account is a ‘credit balance’  credit entries > debit entries.

Faye Henaghan 



The balance on the account is a ‘debit balance’  debit entries > credit entries.

Listing out the Balances on a ‘Trial Balance’ 1. Once all accounts have been balanced-off, a ‘Trial Balance’ (TB) can be produced 2. A TB is simply a list of all the nominal ledger account balances: a. on a specific date; b. shown in Debit (Dr) and Credit (Cr) columns 3. The accounts can be listed in any order on the TB! Example Example of a Trial Balance as at 31 December 20X2 Dr

Cr

£

£

Cash

20

Purchases

500

Sales Motor vehicles

900 1,300

Bank overdraf D Jones: receivable

400 80

B Smith: payable Electricity

200 100

Capital Totals

500 2,000

2,000

The Trial Balance (TB) 1. A trial balance can be drawn up at any point in time. 2. TB will highlight whether certain book-keeping errors have been made, such as: a. Entering only one side of a transaction b. Using one figure for a debit entry and another for the credit

Faye Henaghan c. Errors in addition when balancing-off 3. Figures on the TB can also be used to construct the two key Financial Statements (the Statement of Profit or Loss and Statement of Financial Position). Debit & Credit Balances on the Trial Balance  Using the double entry rule:  The balances on expense, asset and drawings accounts will normally be debit balances.  The balances on liability, income and capital accounts will normally be credit balances.  The exception is the cash @ bank account as it can go either way. The SPL (‘Income Statement’)  The SPL shows: Income earned – Expenses incurred = profit/loss  Arguably the most important financial statement? - the one the public will likely have the most interest.  The SPL shows, for a particular period: a) Income earned in that period, regardless of whether the money was received in the period; minus b) Expenses incurred in earning that income, regardless of whether the money was paid in the period.  This is known as the ACCRUAL BASIS of accounting. Example SPL for the year ended 31 May 20X2 £ Sales Less cost of goods sold Gross profit Less Expenses Wages Rent Electricity Net profit

3 2 4

£ 25 (11) 14

(9) 5

Calculating Cost of Goods sold/Cost of Sales  On 1 June Neil starts a business that buys and sells a type of light bulb: o He buys 5 bulbs @ £1 each. o He sells 3 bulbs @ £1.50 each. June trading:

£

£

Faye Henaghan Sales Less Cost of goods sold Purchases Less Closing inventory

4.50 5.00 (2.00) (3.00) 1.50

GROSS PROFIT 

Then during July: o He buys 7 bulbs @ £1 each. o He sells 8 bulbs @ £1.50 each.

July trading: Sales Less Cost of goods sold Opening inventory Purchases Less Closing inventory

£

£ 12.00

2.00 7.00 (1.00) (8.00) 4.00

GROSS PROFIT Fuller Example of an Income Statement for the year ended 31 May X2 £ Sales Less Cost of goods sold Opening inventory Purchases Less closing inventory GROSS PROFIT Less Expenses Wages Rent Electricity NET PROFIT

6 12 (7)

3 2 4

£ 25

(11) 14

(9) 5

SPL (‘Income Statement’): Further Points 1. All the figures in the preceding example SPL, except for closing inventory, are taken from the trial balance (TB). 2. The figure for closing inventory is confirmed at the end of the period when it is checked/counted/valued.  It is included in the financial statements via a ‘post-TB adjustment’.

Faye Henaghan  

We will see other ‘post-TB adjustments’ in the coming weeks. Note the textbooks (FW1 & ICAEW) transfer all income & expenses to ‘trading’ and ‘profit and loss account’ T accounts first, but it is ok for us to skip this step!

Returns Inwards & Outwards in the SPL 1. Returns inwards are goods that come back in from customers, so this figure is deducted from Sales in the SPL  a ‘cancelled sale’. 2. Returns outwards are goods that are sent back out to suppliers, so this figure is deducted from Purchases in the SPL  a ‘cancelled purchase’. Example Extract from Statement of Profit or Loss: Sales Less Returns inwards

£

Less Cost of goods sold: Opening inventory Purchases Less Returns Outwards Less Closing inventory GROSS PROFIT



9 30 (7) (10)

£ 50 (8) 42

(22) 20

The above section of the SPL is also known as the ‘Trading Account’.

Format of the top section of the SFP SFP as at 31/12/X2 Non-current assets Equipment Current assets Inventory

£

£

£ 70

30

Faye Henaghan Trade receivables Cash @ bank and in hand Total assets Current liabilities Bank overdraf Trade payables Total liabilities NET ASSETS

20 10

50 40

60 130

90 (90) 40

Format of the SFP: The Bottom Section (for a sole trader) SFP as at 31/12/X2 CAPITAL Opening capital at 1/1/X2 Add Capital introduced during the year Add Net profit for the year Less Drawings Closing capital at 31/12/X2 

£ 18 12 23 (13) 40

SFP can also be presented as ASSETS = CAPITAL + LIABILITIES

Preparing the SFP (‘Balance Sheet’) from the TB  All of the figures on the preceding example Statement of Financial Position are taken from the trial balance (TB) except for two: o Closing inventory is a ‘post-TB adjustment’. o The ‘net profit for the year’ comes from the Statement of Profit or Loss (or ‘Income Statement’)....