Chapter 5 Trial Balance

Question 1

Define a trial balance

Answer 1

A trial balance is a list of all the ledger accounts and their ending balances at a point in time. It is usually prepared at the end of the financial period after all the business transactions have been recorded and posted to the ledger accounts.

Question 2

Explain the purpose of trial balance

Answer 2

-facilitate the preparation of the financial statements as this is a list of all account balances at a particular date.
-Ensure arithmetic accuracy in recording

Question 3

Explain the limitation of a trial balance

Answer 3

A balanced trial balance is not an absolute proof of accuracy of transactions recorded in ledger accounts because there may be errors which may not affect the balancing of the trial balance and this would not be revealed by a trial balance.

Question 4

Explain the purpose of the statement of financial performance

Answer 4

A statement of financial performance shows the income earned and expenses incurred for a period of time. It shows the profit for the period, i.e., the excess of income over expenses for a period of time.

Question 5

Explain the purpose of the trading portion of the statement of financial performance

Answer 5

-The trading portion shows the gross profit or loss from the buying and selling of goods.

Question 6

Explain the purpose of the profit and loss portion of the statement of financial position

Answer 6

-The profit and loss portion reports the overall profit earned from operating the business. Profit or loss for the period is the final profit after including other income and deducting other expenses.

Question 7

Explain the difference between gross profit and profit

Answer 7

-Gross profit is the amount by which net sales revenue exceeds the cost of sales. It is the profit earned by selling the goods, before deducting any other expenses.

On the other hand, profit is the amount by which total income is greater than total expenses. It is the overall profit earned after all expenses have been deducted.

Question 8

Explain why it is important to prepare the statement of financial performance at regular period of time

Answer 8

Statement of financial performance is prepared at regular periods of time to provide timely financial information on the profitability of the business which is important for stakeholders when they make decisions.

Question 9

Explain why it is important for a business to be profitable

Answer 9

-continue operating and to sustain in the long term
-distribute profits to the owners for their contributions to the business
-reward employees and retain them to continue to work for the business
-attract other investors
-measure the demand for the products or services offered by the business, in terms of its ability to sell and this possibility of future expansion.

Question 10

Explain the purpose of statement of financial position

Answer 10

-The statement of financial position lists the assets, liabilities and equity of a business as at a point in time

Question 11

Define the term equity

Answer 11

-Equity refers to the claim by the owner(s) on the net assets of the business.