Chapter 5 : Trial balance and financial statements Flashcards
Define a trial balance
A trial balance is a list of all the ledger accounts and their ending balances at a point in time
Explain the purpose of a trial balance
- 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
Explain the limitation of a trial balance
A balanced trial balance is not an absolute proof of accuracy of transactions recorded in ledger accounts because there may be errors which would not affect the balancing of the trial balance and thus would not be revealed by a trial balance
Explain the purpose of the statement of financial performance
A statement of financial performance shows the income earned and expenses incurred for a period of time. It informs stakeholders of the profitability of a business.
explain the purpose of the trading portion of the statement of financial performance
The trading portion shows the gross profit or loss from buying and selling goods.
explain the purpose of profit and loss portion of the statement of financial performance.
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
Explain the difference between gross profit and profit
Gross profit is the amount by which net sales revenue exceeds the cost of sales.
It is the profit earned from selling goods. 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.
Explain why it is important to prepare the statement of financial performance at regular periods of time.
Statement of financial performace 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
Explain why it is important for a business to be profitable
Bussinesses need to be profitable so that it is able to :
- 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 over investors
- Measure the demand for the products or services offered by the business, in terms of its ability to sell and thus possiblity of future expansion
Explain the purpose of the statement of financial position
The statement of financial position lists the assets, liabilities, and equity of a business as at a point in time. It provides information on how resources are obtained and used in a business and the claim by the owner on the net assets of the business at a point in time.
