2: Preparing Financial Statements

Question 1

An entity is preparing their financial statements. After transferring the balances on all the income and expenses ledger accounts to the P&L account, the total credits exceed debits by £4000.

Which two of the following statements are correct

a) The firm has made a profit for the year of £4000

b) The firm has made a loss for the year of £4000

c) To begin to calculate the closing capital account balance, the firm need to credit the capital account and debit the P&L ledger account with £4000

d) The opening balance on the P&L ledger account for the next period is £4000 credit

e) The closing balance of £4000 should be deducted from the capital account to give profit for the year

Answer 1

A & C

Total credits in P&L (Income) exceeds total debits (expenses)

The correct entry to transfer the profit for the year to the capital account is DR P&L CR capital account.
The profit is capital, owed to the owners, thus a liability and should be a credit entry

D is incorrect as the balance is cleared to the capital account - it is not brought down

Question 2

Which of the following statements is true?

a) The balances on income and expense accounts are brought down at the end of the accounting period and carried forward to the next accounting period

b) The balances on asset and liability accounts are summarised in an additional ledger called the SOFP

c) The SOPL is a list of all the balances extracted from the business’ account

d) Loss for the year is a credit entry in the SOPL

Answer 2

d - A loss decreases capital, and so is debited from the capital account in the SOFP. The other side of the entry is credited to the SOPL to clear the debit balance

a is incorrect - the balances are cleared to the SOFP