Preparing accounts from a trial balance

Year-end adjustments

The trial balance provides a foundation for preparing a statement of comprehensive income and a statement of financial position at the end of an accounting period.

•  A trial balance is extracted from the general ledger, and various year-end adjustments are then made to the accounts.

•  These adjustments include adjustments for:

· Depreciation expense (to reflect the use of non-current assets);

· Accruals and prepayments;

· Bad and doubtful debts; and

· Inventory.

•  Further adjustments are made as necessary to deal with items missed or incorrectly dealt with during a period.

When the year-end adjustments have been made, a statement of comprehensive income and then a statement of financial position can be prepared, using the adjusted balances.

This session will now use the trial balance of Abbas to illustrate the preparation of a set of accounts from a trial balance.

A useful first step is to identify the different types of balance (this will become automatic for you very quickly).

 

The only closing adjustment in the case of Abbas is in respect of the closing inventory.

Opening and closing inventory and the cost of sales

The cost of sales in the statement of comprehensive income is not the cost of goods purchased or the cost of goods produced. It must be the cost of the goods sold. The accruals or matching concept must be applied.

When there are differences between the quantity of materials purchased or made, and the quantity of materials used or sold, there is an increase or decrease in inventory during the period.

To calculate the cost of sales for a statement of comprehensive income, it is necessary to make an adjustment for changes in the amount of inventory.

 

Inventory, at any point in time, represents goods made or purchased with the intention of selling them in the ordinary course of business, which remain unsold at that point in time.

Closing inventory is recognised as an asset and as a deduction against the cost of sales expense. (The double entry is Dr Inventory (asset) in the statement of financial position and Cr Cost of sales (reduction of an expense) in the statement of comprehensive income.