Chapter 4 - Financial Statements - The Extended Trial Balance

Question 1

Financial statements

Answer 1

Profit or loss

Statement of financial position

Question 2

Financial statements and the trial balance

Answer 2

The trial balance provides the starting point in the preparation of financial statements. There are two trial balance formats:

The two column trial balance

The trail balance extended into a number of columns

Question 3

Extended trial balance

Answer 3

Transfer to the statement of profit and loss columns the rows for:

Opening inventory at the start of the year, purchases made by the business, sales made by the business, expenses

Transfer to the statement of financial position columns the remaining rows from the trial balance. These figures represent:

Assets, liabilities, capital and drawings

Question 4

Revenue and capital expenditure in financial statements

Answer 4

Revenue expenditure is shown in the statement of profit or loss, while capital capital expenditure is shown in the statement of financial position

Question 5

Closing inventory adjustment in the extended trial balance

Answer 5

In the adjustments columns the amount of closing inventory is credited to the statement of profit or loss and debited to the statement of financial position.

Question 6

Working out profit for the year with the extended trial balance

Answer 6

Total the amounts on each side of the profit to loss and balance the account. If the amount is entered on the debit side it is a profit however on the credit side it is a loss. The profit for the year is then credited to the statement of financial position.

Question 7

Double entry bookkeeping and the financial statements

Answer 7

Profit for the year:

Debit statement profit or loss account, credit capital account

Loss for the year:

Debit capital account, credit statement of profit or loss

Drawings:

Debit capital account, credit drawings account

Purchases:

Debit profit or loss account, credit purchases

Inventory:

Opening inventory - Debit profit or loss account, credit inventory

Closing inventory - Debit inventory, credit profit or loss account

Expenses:

Debit profit or loss account, credit wages

For the statement of financial position it is not part of the double entry system