5. Preparing Basic Financial Statements Flashcards
How are financial statements made?
Balances need to be extracted from ledger accounts and entered into the trial balance
What does double entry bookkeeping dictate?
Dictates that the trial balances will have the same amount on the debit side as there is on the credit side
Where are all account balances collected
In a trial balance
Does a trial balance guarantee accuracy
No
Which errors do trial balances not pick up
Compensating errors
Errors of commission
Errors of omission
Errors of principle
What creates a debit balance
Debits exceed credits
What creates a credit balance
Credits exceed debits
What are examples of source documents
Invoices
Credit notes
Bank transactions
Payroll
What do source documents feed into creating
The nominal ledger
What does the nominal ledger help to create
Initial trial balance
What must take place after an initial trial balance has been created
Adjustments, then the final trial balance is made
What is the final trial balance used to create
Financial statements (e.g., soce, socf, sofp, p&l)
Why are adjustments made to trial balances
Information may become known at or shortly after the year end or to correct errors
What are examples of adjustments
Accruals & prepayments
Depreciation, bad debts
Adjustments to inventory figures
What is the financial statement production process
Extract initial trial balance from the accounting system
Make adjustments
Check debits = credits
Prepare financial statements
