About two weeks ago, precisely on May 15, 2022 we discussed part two of our transaction analysis and recording. We succeeded in preparing the Journal voucher and posted the entries to each account. Now we want to move some steps forward towards completing the accounting recording for these transactions.
Our next stop is preparation of trial balance. As the name implies, it is a list of all accounts and their current balances. It is called ‘trial balance’ as it seeks to find out if total debit equals total credit. The trial balance itself is not an account but a list of accounts. It shows the balance of each account at the time the trial balance is prepared. It can be prepared anytime but most times, it is done at the end of a period.
Back to our example, we will now make a list of all the accounts balances as follows:
Adeola and Co
Trial Balance
April 30, 2022
| Account | Debit | Credit |
| Cash | N72,650.00 | |
| Supplies | N80,000.00 | |
| Account payable | N40,000.00 | |
| Capital | N50,000.00 | |
| Sales | N65,000.00 | |
| Office rent expense | N2,000.00 | |
| Electricity expense | N350.00 | |
| N155,000.00 | N155,000.00 |
Did you observe the following in the trial balance above?
- The trial balance summaries all the balances for the financial statements, We can say, the trial balance is a gateway to the preparation of final accounts.
- Trial balance list all accounts starting with assets (from the most liquid), then liabilities and stock holders’ equity or capital.
TRANSACTION RECORDING – THE RESULT
So far, we have journalize transaction, posted to individual account and prepared trial balance. Does any of these tell you the result of the transactions? I mean can you tell if Adeola and Co are profitable? Can you tell the status of the company’s financial position? Likely no, it thus mean that all we have done are preliminaries. We need to be able to tell the impact of all these transactions on the company.
To get started on this quest of finding the result or impact of these transactions, we will now prepare the financial statements. First on the list is Profit or loss statement. As the name implies, this financial statement helps to know if the company made profit or loss for the period. It is also called Income statement; it shows result of operations by this simple formula: Revenue (Sales) less expenses equal to net income or net loss.
Back to our example, let us now prepare the Profit or loss financial statement.
Adeola and Co
Profit or loss financial statement
For the month ended April 30, 2022
| Revenue: | ||
| Sales | N65,000.00 | |
| Expenses: | ||
| Office rent | N2,000.00 | |
| Electricity | N350.00 | |
| Less total expenses | N2,350.00 | |
| Net Income | N62,650.00 |
We have seen the result of operation; Adeola and co made net income of N62,650.00 in April 2022.
Now let us prepare balance sheet. It shows financial position of a business at a particular time, it ensures the accounting equation is maintained as at a given date. That is, Asset is equal to Liabilities and Owners equity.
Adeola and Co
Balance sheet as at 30 April 2022
| Assets: | |
| Cash | N72,650.00 |
| Supplies | N80,000.00 |
| Total assets | N152,650.00 |
| Liabilities and equity: | |
| Account payable | N40,000.00 |
| Capital | N50,000.00 |
| Net Income | N62,650.00 |
| Total liabilities and equity | N152,650.00 |
