Trial Balance and Final Accounts

The summary of the ledger at the end of an accounting period, as set forth in the trial balance, is a convenient starting point in the preparation of the profit and loss and balance sheet. Assuming no errors in journalizing or posting, many of the amounts listed are acceptable for presentation on the profit and loss account and balance sheet. For example, the balance of the cash account probably represents the amount of that asset owned by the enterprise on the last day of the accounting period. Similarly, the balance in creditors account is likely to represent the total amount of that type of liability owned by the enterprise on the last day of the accounting period.

Certain accounts listed on the trial balance are not yet ready for inclusion in the profit and loss account and balance sheet. The amounts listed on the trial balance for supplies and prepaid assets are ordinarily overstated. The reason for the overstatement is that the day to day usage or expiration of such assets has, for reasons of practicability, not yet been recorded. For example, the balance in the supplies account represents the cost of the supplies on hand at the beginning of the period plus the cost of those purchased during the period. Some of the supplies would inevitably have been consumed during the period; hence the balance listed on the trial balance is overstated. In the same manner, the balance in Prepaid Insurance represents the beginning balance plus the cost of policies acquired during the period, and no entries were made for the premiums as they expired, the benefit of which was received during the period. The effect of not recording the reduction in prepaid assets is two fold: (1) asset accounts are overstated and (2) expense accounts are understated.’

Other data needed for the profit and loss account and balance sheet may be entirely omitted from the ledger and the trial balance because of income or expense applicable to the period that has not been recorded. For example, salary for the last month of the accounting period, if paid in the following month, would not ordinarily be recorded in the accounts because salaries are customarily recorded only when they are paid. Such salaries are an expense of the period, however, because the services were rendered and benefit was received during the period; they also represent a liability on the last day of the period because they are owed to the employees.Kingston 4 GB Class 4 SDHC Flash Memory Card SD4/4GB