Accounting Practices 501 Chapter 10 Introduction to financial statements Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

At year-end (31 March) 1.Prepare the trial balance from the General Ledger 2.Do the balance day adjustments 3.Prepare the adjusted trial balance 4.Prepare the financial statements from the adjusted trial balance 5.Prepare the closing entries Ch10A - Intro to fin st 2

At start of new period (1 April) 1.Prepare the reversing entries in the new accounting period 2.Transfer the Inventory amount to Opening inventory Ch10A - Intro to fin st 3

Financial Statements Ch10A - Intro to fin st 4 Let’s look at the classification of accounts to be able to transfer the amounts to the correct financial statements

Classification Current Assets – CA Non-current Assets – NCA Current Liabilities – CL Non-current Liabilities – NCL Equity – OE Income (main source) – I Other Income – OI Selling Expenses – SE Admin Expenses – AE Finance Expenses – FE Cost of Sales – COS Ch10A - Intro to fin st 5 Balance Sheet Income statement

Balance Day Adjustments Prepaid Expense - CA Accrued Expense - CL Income in Advance - CL Accrued Income - CA Ch10A - Intro to fin st 6 Can you classify the items on the following slide? The accounts are in alphabetical order

Accounts Receivable15,000 Accounts Payable7,000 Acc Deprec - Vehicles2,000 Accrued expenses14,000 Accrued income5,000 Advertising3,000 Bank$20,000 Capital28,000 Closing inventory15,000 Commission income15,000 Drawings8,000 Furniture10,000 Inventory15,000 Opening inventory4,000 PAYE payable1,000 Prepaid expenses1,000 Purchases37,000 Rent expense12,000 Sales90,000 Vehicles20,000 Wages22,000 Ch10A - Intro to fin st 7 Dr Cr Adjusted Trial balance at year-end $172,000 CA CL CA COS NCA OE- I COS AE SE OE COS CA NCA NCA- CL AE CA OI CA CL $172,000

We can now transfer all the amounts to the Statements Red goes to the Income Statement to calculate the Profit or Loss Blue goes to the Balance Sheet All equity items are also transferred to the Statement of Changes in Equity Ch10A - Intro to fin st 8 And … here’s hoping we balance!!! ASSETS = LIABILITIES + EQUITY