Trading,pl and balance sheet
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Examples of Trading and Profit and Loss
Account and Balance Sheet:
Learning Objectives:
1. Prepare trading and profit and loss account and balance sheet.
Example 1:
From the following balances extracted from the books of X & Co., prepare a trading and
profit and loss account and balance sheet on 31st December, 1991.
$ $
Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200
Purchases 39,000 Office fixtures 1,000
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750
Sundry debtors 30,000 Tent and taxes 1,100
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000
Interest on capital 700 Bills payable 3,000
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900
The stock on 21st December, 1991 was valued at $25,000.
Solution:
X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991
To Opening stock 11,000 | By Sales 60,000
To Purchases 39,000 |
Less
returns i/w
1,300
Less returns o/w 500 |
58,700
38,500 |
By Closing
stock
25,000
To Carriage inwards 800 |
To Wages 2,800 |
To Gross profit c/d 30,600 |
|
83,700 | 83,700
|
To Stationary 450 | By Gross 30,600
Account and Balance Sheet:
Learning Objectives:
1. Prepare trading and profit and loss account and balance sheet.
Example 1:
From the following balances extracted from the books of X & Co., prepare a trading and
profit and loss account and balance sheet on 31st December, 1991.
$ $
Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200
Purchases 39,000 Office fixtures 1,000
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750
Sundry debtors 30,000 Tent and taxes 1,100
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000
Interest on capital 700 Bills payable 3,000
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900
The stock on 21st December, 1991 was valued at $25,000.
Solution:
X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991
To Opening stock 11,000 | By Sales 60,000
To Purchases 39,000 |
Less
returns i/w
1,300
Less returns o/w 500 |
58,700
38,500 |
By Closing
stock
25,000
To Carriage inwards 800 |
To Wages 2,800 |
To Gross profit c/d 30,600 |
|
83,700 | 83,700
|
To Stationary 450 | By Gross 30,600
profit b/d
To Rent and rates 1,100 |
To Carriage
outwards
1,450 |
To Insurance 700 |
To Trade expenses 200 |
To Commission 800 |
To Interest on
capital
700 |
To Net profit
transferred to
capital a/c
25,200
|
|
|
30,600 | 30,600
|
X & Co.
Balance Sheet
As at 31st December, 1991
Liabilities $
|
Assets $
Creditors 19,650
|
Cash in hand 500
Bills payable 3,000
|
Cash at bank 4,750
Capital 17,900
|
Sundry debtors 30,000
Add Net profit 25,200
|
Bill receivable 4,500
43,100
|
Stock 25,000
|
Office equipment 1,000
|
65,750
|
65,750
|
Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December 31,
19 ....
Cash 13,000
Sundry debtors 10,000
Bill receivable 8,500
Opening stock 45,000
Building 50,000
Furniture and fittings 10,000
Investment (Temporary) 5,000
Plant and Machinery 15,500
Bills payable 9,000
Sundry creditors 20,000
Habib's capital 78,200
To Rent and rates 1,100 |
To Carriage
outwards
1,450 |
To Insurance 700 |
To Trade expenses 200 |
To Commission 800 |
To Interest on
capital
700 |
To Net profit
transferred to
capital a/c
25,200
|
|
|
30,600 | 30,600
|
X & Co.
Balance Sheet
As at 31st December, 1991
Liabilities $
|
Assets $
Creditors 19,650
|
Cash in hand 500
Bills payable 3,000
|
Cash at bank 4,750
Capital 17,900
|
Sundry debtors 30,000
Add Net profit 25,200
|
Bill receivable 4,500
43,100
|
Stock 25,000
|
Office equipment 1,000
|
65,750
|
65,750
|
Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December 31,
19 ....
Cash 13,000
Sundry debtors 10,000
Bill receivable 8,500
Opening stock 45,000
Building 50,000
Furniture and fittings 10,000
Investment (Temporary) 5,000
Plant and Machinery 15,500
Bills payable 9,000
Sundry creditors 20,000
Habib's capital 78,200
Habib's drawings 1,000
Sales 100,000
Sales discount 400
Purchases 30,000
Freight in 1,000
Purchase discount 500
Sales salary expenses 5,000
Advertising expenses 4,000
Miscellaneous sales expenses 500
Office salary expenses 8,000
Misc. general expenses 1,000
Interest income 1,000
Interest expenses 800
2,08,700 2,08,700
Closing stock on December 31, 19 ... was $10,000
Required: Prepare income statement/trading and profit and loss account and balance sheet
from the above trial balance in report form.
Solution:
Habib-ur-Rehman
Income Statement/Profit and Loss Account
For the year ended December 31, 19.....
Gross sales 100,000
Less: Sales discount 400
Net Sales 99,600
Cost of Goods Sold:
Opening stock 45,000
Purchases 30,000
Add: Freight in 1,000
31,000
Less purchase discount 500
Net purchases 30,500
Cost of goods available fort sale 75,500
Less closing stock 10,000
Cost of goods sold 65,500
Sales 100,000
Sales discount 400
Purchases 30,000
Freight in 1,000
Purchase discount 500
Sales salary expenses 5,000
Advertising expenses 4,000
Miscellaneous sales expenses 500
Office salary expenses 8,000
Misc. general expenses 1,000
Interest income 1,000
Interest expenses 800
2,08,700 2,08,700
Closing stock on December 31, 19 ... was $10,000
Required: Prepare income statement/trading and profit and loss account and balance sheet
from the above trial balance in report form.
Solution:
Habib-ur-Rehman
Income Statement/Profit and Loss Account
For the year ended December 31, 19.....
Gross sales 100,000
Less: Sales discount 400
Net Sales 99,600
Cost of Goods Sold:
Opening stock 45,000
Purchases 30,000
Add: Freight in 1,000
31,000
Less purchase discount 500
Net purchases 30,500
Cost of goods available fort sale 75,500
Less closing stock 10,000
Cost of goods sold 65,500
Gross profit 34,100
Operating Expenses:
Selling Expenses:
Sales salary expenses 5,000
Advertising expenses 4,000
Misc. selling expenses 500
9,500
General Expense:
Office salaries expenses 8,000
Misc. general expenses 1,000
9,000
Total operating expenses 18,500
Net profit from operations 15,600
Other Expenses and Incomes:
Interest income 1,000
Interest expenses 800
Net increase 200
Net income 15,800
Habib-ur-Rehman
Balance Sheet
As at December 31, 19.....
ASSETS
Current Assets:
Cash 13,000
Sundry debtors 10,000
Bills receivable 8,500
Stock on Dec. 31, 19 .. 10,000
Investment 5,000
Total Current Assets 46,500
Fixed Assets:
Buildings 50,000
Plant and Machinery 15,500
Furniture and fittings 10,000
Total Fixed Assets 75,500
Operating Expenses:
Selling Expenses:
Sales salary expenses 5,000
Advertising expenses 4,000
Misc. selling expenses 500
9,500
General Expense:
Office salaries expenses 8,000
Misc. general expenses 1,000
9,000
Total operating expenses 18,500
Net profit from operations 15,600
Other Expenses and Incomes:
Interest income 1,000
Interest expenses 800
Net increase 200
Net income 15,800
Habib-ur-Rehman
Balance Sheet
As at December 31, 19.....
ASSETS
Current Assets:
Cash 13,000
Sundry debtors 10,000
Bills receivable 8,500
Stock on Dec. 31, 19 .. 10,000
Investment 5,000
Total Current Assets 46,500
Fixed Assets:
Buildings 50,000
Plant and Machinery 15,500
Furniture and fittings 10,000
Total Fixed Assets 75,500
Total Assets 122,000
LIABILITIES:
Current Liabilities:
Sundry creditors 20,000
Bills payable 9,000
Total Current Liabilities 29,000
Fixed Liabilities:
Habib's capital 78,200
Net income for the year 15,800
94,000
Less: Drawings 1,000
93,000
Total Liabilities and Capital 122,000
………………………………………………………………………………………………………………………………………………………………
LIABILITIES:
Current Liabilities:
Sundry creditors 20,000
Bills payable 9,000
Total Current Liabilities 29,000
Fixed Liabilities:
Habib's capital 78,200
Net income for the year 15,800
94,000
Less: Drawings 1,000
93,000
Total Liabilities and Capital 122,000
………………………………………………………………………………………………………………………………………………………………
Preparing Profit and Loss Account From Trial
Balance
Preparation of Profit and Loss Account
Profit and loss account or income statement is prepared from the trial balance.
To keep things as simple as possible initially a very simple version of profit and loss account
is shown and the more complex issues and more elegant formatting of the report are not
covered in this article.
We start with the following trial balance
Trial Balance of Narayana Rao & Co, on 31.12.2007
Account Debit
Rs.
Credit
Rs.
Purchases 100,000
Wages 6,000
Rent 2,400
Travelling expenses 4,800
Interest 1,200
Returns inward 4,000
Bank 10,000
Cash 34,000
Machinery 14,000
Furniture 1,000
Loan 45,800
Miscellaneous expenses 200
Balance
Preparation of Profit and Loss Account
Profit and loss account or income statement is prepared from the trial balance.
To keep things as simple as possible initially a very simple version of profit and loss account
is shown and the more complex issues and more elegant formatting of the report are not
covered in this article.
We start with the following trial balance
Trial Balance of Narayana Rao & Co, on 31.12.2007
Account Debit
Rs.
Credit
Rs.
Purchases 100,000
Wages 6,000
Rent 2,400
Travelling expenses 4,800
Interest 1,200
Returns inward 4,000
Bank 10,000
Cash 34,000
Machinery 14,000
Furniture 1,000
Loan 45,800
Miscellaneous expenses 200
Returns outward 3,000
Salaries 12,000
Insurance 800
Discount 900
Sales 99,900
Sundry creditors 50,000
Capital 110,000
Drawings 15,000
Advertisements 2,400
Buildings 10,000
Sundry debtors 80,000
Stock (1-1-2007) 10,000
308,700 308,700
Profit and Loss Account
Dr.
Cr.
Particulars Rs. particulars Rs.
To Purchases 100,000 By Sales 99,900
Stock (1-1-2007) 10,000 Returns outward 3,000
Wages 6,000 Stock (31-12-2007) 50,000
Rent 2,400
Salaries 12,000
Insurance 800
Discount 900
Sales 99,900
Sundry creditors 50,000
Capital 110,000
Drawings 15,000
Advertisements 2,400
Buildings 10,000
Sundry debtors 80,000
Stock (1-1-2007) 10,000
308,700 308,700
Profit and Loss Account
Dr.
Cr.
Particulars Rs. particulars Rs.
To Purchases 100,000 By Sales 99,900
Stock (1-1-2007) 10,000 Returns outward 3,000
Wages 6,000 Stock (31-12-2007) 50,000
Rent 2,400
Travelling expenses 4,800
Interest 1,200
Returns inward 4,000
Salaries 12,000
Insurance 800
Discount 900
Miscellaneous
expenses
200
Advertisements 2,400
Net Profit 8,200
152,900
152,900
Procedure of Preparing Profit and Loss Account From Trial Balance
From trial balance all amounts nominal accounts (accounts related to revenues and
expenses) are shown in the debit and credit sides of the profit and loss account. This
account is similar to the other accounts in the ledger. All credit amounts in the trial balance
are shown in the credit side of the P&L account and all debit amounts are shown on the
debit side. When totals of these two sides are compared, if credit side is more than the debit
side, the firm has made a profit. In the example the credit side is more than the debit side by
Rs. 8,200. This amount is shown at the end in the debit side as net profit. Then similar to
the ledger accounts, the total of both sides are shown at the both sides in the same line at
the same level.
If you notice an additional entry which was not there in the trial balance was included in the
credit side of P&L account. This item is stock on 31-12-2007. The closing stocks in the store,
shop floor and finished goods store are ascertained and are valued by accountants. This
figure is to be included in the profit and loss account to determine the profit made in a
period.
After the profit and loss account is prepared, balance sheet of the firm, that shows its assets
and liabilities as on the day can be prepared. All real accounts with debit balances are assets.
All personal accounts with credit balances are liabilities. All personal accounts with debits
balances are assets. All customers' account balances are summed up and the total amount is
Interest 1,200
Returns inward 4,000
Salaries 12,000
Insurance 800
Discount 900
Miscellaneous
expenses
200
Advertisements 2,400
Net Profit 8,200
152,900
152,900
Procedure of Preparing Profit and Loss Account From Trial Balance
From trial balance all amounts nominal accounts (accounts related to revenues and
expenses) are shown in the debit and credit sides of the profit and loss account. This
account is similar to the other accounts in the ledger. All credit amounts in the trial balance
are shown in the credit side of the P&L account and all debit amounts are shown on the
debit side. When totals of these two sides are compared, if credit side is more than the debit
side, the firm has made a profit. In the example the credit side is more than the debit side by
Rs. 8,200. This amount is shown at the end in the debit side as net profit. Then similar to
the ledger accounts, the total of both sides are shown at the both sides in the same line at
the same level.
If you notice an additional entry which was not there in the trial balance was included in the
credit side of P&L account. This item is stock on 31-12-2007. The closing stocks in the store,
shop floor and finished goods store are ascertained and are valued by accountants. This
figure is to be included in the profit and loss account to determine the profit made in a
period.
After the profit and loss account is prepared, balance sheet of the firm, that shows its assets
and liabilities as on the day can be prepared. All real accounts with debit balances are assets.
All personal accounts with credit balances are liabilities. All personal accounts with debits
balances are assets. All customers' account balances are summed up and the total amount is
shown as sundry debtors in the balance sheet. All suppliers' account balances are summed
and the total amount is shown as sundry creditors in the balance sheet.
Liabilities Rs. Assets Rs.
Sundry
creditors
50,000 Buildings 10,000
Loan 45,800 Machinery 14,000
Capital 110,000 Furniture 1,000
Net Profit 8,200 Sundry
debtors
80,000
Balance
Sheet as on 31.12.2007
Drawings 15,000
Stock (31-
12-2007)
50,000
Bank 10,000
Cash 34,000
214,000 214,000
As mentioned at the beginning many complex adjustments that are done to prepare profit
and loss account and balance sheet as well as certain formatting conventions are ignored to
provide a simple treatment in this article. The objective of the article is to show the basic
logic of determining profit and then preparing a balance sheet.
……………………………………………………………………………………………………………………………………………………………… ….
and the total amount is shown as sundry creditors in the balance sheet.
Liabilities Rs. Assets Rs.
Sundry
creditors
50,000 Buildings 10,000
Loan 45,800 Machinery 14,000
Capital 110,000 Furniture 1,000
Net Profit 8,200 Sundry
debtors
80,000
Balance
Sheet as on 31.12.2007
Drawings 15,000
Stock (31-
12-2007)
50,000
Bank 10,000
Cash 34,000
214,000 214,000
As mentioned at the beginning many complex adjustments that are done to prepare profit
and loss account and balance sheet as well as certain formatting conventions are ignored to
provide a simple treatment in this article. The objective of the article is to show the basic
logic of determining profit and then preparing a balance sheet.
……………………………………………………………………………………………………………………………………………………………… ….
How to Prepare a Trading Account?
FOLLOW
How to prepare a Trading Account? Let us now consider the individual items recorded in the Trading
Account. (i) Opening Stock : This means the closing stock of the previous year. In the first year of
business there will be no opening stock. In a trading concern the opening stock consists of finished goods
only. But in a manufacturing concern, it comprises raw materials, work in progress, and finished goods.
Opening stock is the first item on the debit side of the Trading account.
How to prepare a Trading Account?
Let us now consider the individual items recorded in the Trading Account.
(i) Opening Stock : This means the closing stock of the previous year. In the first year of business there
will be no opening stock. In a trading concern the opening stock consists of finished goods only. But in a
manufacturing concern, it comprises raw materials, work in progress, and finished goods. Opening stock
is the first item on the debit side of the Trading account.
(ii) Purchases and Purchase Return: Purchases include cash and credit purchase of goods. Purchases
are recorded on the debit side of the Trading Account after deducting the Returns outward or Purchase
return. Care should be taken to ensure that purchases do not include the amount of goods taken or
purchased by the proprietor for his own use, the cost of goods received on consignment, goods in transit,
goods purchased on hire purchase basis, goods distributed as free samples. ,
(iii) Direct Expenses: These include manufacturing wages, carriage inward, power and fuel, factory
lighting and heating, factory rent and rates, factory insurance, freight, octroi, customs duty on imported
materials, royalty on production, etc. These expenses are recorded on the debit side of the Trading
Account.
FOLLOW
How to prepare a Trading Account? Let us now consider the individual items recorded in the Trading
Account. (i) Opening Stock : This means the closing stock of the previous year. In the first year of
business there will be no opening stock. In a trading concern the opening stock consists of finished goods
only. But in a manufacturing concern, it comprises raw materials, work in progress, and finished goods.
Opening stock is the first item on the debit side of the Trading account.
How to prepare a Trading Account?
Let us now consider the individual items recorded in the Trading Account.
(i) Opening Stock : This means the closing stock of the previous year. In the first year of business there
will be no opening stock. In a trading concern the opening stock consists of finished goods only. But in a
manufacturing concern, it comprises raw materials, work in progress, and finished goods. Opening stock
is the first item on the debit side of the Trading account.
(ii) Purchases and Purchase Return: Purchases include cash and credit purchase of goods. Purchases
are recorded on the debit side of the Trading Account after deducting the Returns outward or Purchase
return. Care should be taken to ensure that purchases do not include the amount of goods taken or
purchased by the proprietor for his own use, the cost of goods received on consignment, goods in transit,
goods purchased on hire purchase basis, goods distributed as free samples. ,
(iii) Direct Expenses: These include manufacturing wages, carriage inward, power and fuel, factory
lighting and heating, factory rent and rates, factory insurance, freight, octroi, customs duty on imported
materials, royalty on production, etc. These expenses are recorded on the debit side of the Trading
Account.
(iv) Sales and Sales Return: Sales include both cash and credit sales. Sales return or Return outward is
deducted from total sales and net sales are credited to the Trading Account. Care should be taken to
ensure that sales do not include sale of any fixed assets, goods sent on consignment and goods sold on
approval.
(v) Closing Stock: It means the goods which remain unsold at the end of the accounting year. Closing
stock is valued on the principle of cost or market price whichever is lower. It is exposed on the credit side
of the Trading Account. Closing stock is also shown, as an asset in the Balance Sheet.
While preparing the Trading Account, adjustment entries are made for expenses outstanding and
expenses paid in advance, if any. For example, a part of the direct wages or factory rent may be
outstanding. Similarly, factory insurance might have been paid in advance for some months of the next
year. Expenses outstanding are added to while expenses paid in advance are deducted from the
expenses shown on the debit side of the Trading Account.
Note : Carriage outwards, packing charges for goods sold, export duty, cash discount on sales pill appear
in Profit and Loss Account, because these are all selling expenses
…………………………………………………………………………………………………………………………
deducted from total sales and net sales are credited to the Trading Account. Care should be taken to
ensure that sales do not include sale of any fixed assets, goods sent on consignment and goods sold on
approval.
(v) Closing Stock: It means the goods which remain unsold at the end of the accounting year. Closing
stock is valued on the principle of cost or market price whichever is lower. It is exposed on the credit side
of the Trading Account. Closing stock is also shown, as an asset in the Balance Sheet.
While preparing the Trading Account, adjustment entries are made for expenses outstanding and
expenses paid in advance, if any. For example, a part of the direct wages or factory rent may be
outstanding. Similarly, factory insurance might have been paid in advance for some months of the next
year. Expenses outstanding are added to while expenses paid in advance are deducted from the
expenses shown on the debit side of the Trading Account.
Note : Carriage outwards, packing charges for goods sold, export duty, cash discount on sales pill appear
in Profit and Loss Account, because these are all selling expenses
…………………………………………………………………………………………………………………………
Prepare Trading and Profit and Loss Account and Balance Sheet
>> OCTOBER 14, 2010
In corporate accounting, you have to learn final accounts of company in which you have to
prepare trading and profit and loss account and balance sheet. These statements are advance
than final accounts of individual. You have to spend your brain to understand its adjustments. I
am taking one of following question and tell you how to solve it. This question came in my
M.Com.'s higher Accounts.
Problem
The alfa manufacturing company ltd. was registered with a nominal capital of Rs. 60,00,000 in
equity shares of Rs. 10 each. The following is the list of balances extracted from its books on
31st March , 2009.
Calls in arrears Rs 75,000
Premises Rs. 30,00,000
Plant and machinery Rs. 33,00,000
Interim Dividend paid on Ist Nov. , 2009 Rs. 3,92,500
Stock, 1st April, 1988 Rs. 7,50,000
Fixtures Rs. 72,000
Sundry Debtors Rs. 8,70,000
Goodwill Rs. 2,50,000
>> OCTOBER 14, 2010
In corporate accounting, you have to learn final accounts of company in which you have to
prepare trading and profit and loss account and balance sheet. These statements are advance
than final accounts of individual. You have to spend your brain to understand its adjustments. I
am taking one of following question and tell you how to solve it. This question came in my
M.Com.'s higher Accounts.
Problem
The alfa manufacturing company ltd. was registered with a nominal capital of Rs. 60,00,000 in
equity shares of Rs. 10 each. The following is the list of balances extracted from its books on
31st March , 2009.
Calls in arrears Rs 75,000
Premises Rs. 30,00,000
Plant and machinery Rs. 33,00,000
Interim Dividend paid on Ist Nov. , 2009 Rs. 3,92,500
Stock, 1st April, 1988 Rs. 7,50,000
Fixtures Rs. 72,000
Sundry Debtors Rs. 8,70,000
Goodwill Rs. 2,50,000
Cash in hand Rs. 7,500
Cash at Bank Rs. 3,99,000
Purchases Rs. 18,50,000
Preliminary Expenses Rs. 50,000
Wages Rs. 8,48,650
General Expenses Rs. 68,350
Freight and Carriage Rs. 1,31,150
Salaries Rs. 1,45,000
Directors' Fees Rs. 57,250
Bad Debts Rs. 21,100
Debenture Interest Paid Rs. 1,80,000
Share Capital Rs. 40,00,000
12% Debentures Rs. 30,00,000
Profit and loss account ( credit balance) Rs. 2,62 ,500
Bill Payable Rs. 3,70,000
Sundry Creditors Rs. 4,00,000
Sales Rs. 41,50,000
Cash at Bank Rs. 3,99,000
Purchases Rs. 18,50,000
Preliminary Expenses Rs. 50,000
Wages Rs. 8,48,650
General Expenses Rs. 68,350
Freight and Carriage Rs. 1,31,150
Salaries Rs. 1,45,000
Directors' Fees Rs. 57,250
Bad Debts Rs. 21,100
Debenture Interest Paid Rs. 1,80,000
Share Capital Rs. 40,00,000
12% Debentures Rs. 30,00,000
Profit and loss account ( credit balance) Rs. 2,62 ,500
Bill Payable Rs. 3,70,000
Sundry Creditors Rs. 4,00,000
Sales Rs. 41,50,000
General Reserve Rs. 2,50,000
Bad Debts provision 1st April 2009 Rs. 35,000
Prepare trading and profit and loss account and balance sheet in proper form after making the
following adjustments
i) Depreciation plant and machinery by 15%
ii) Write off Rs. 5,000 from preliminary expenses
iii) Provide for half year's debenture interest due.
iv) Leave bad and doubtful debts provision at 5% on sundry debtors.
v) Provide fo r income tax @ 50%
vi) Stock on 31st march, 2010 was Rs. 9,50,000
Solution
Ist Step : Write Small sign in list of balances relating to
adjustment
In first step of solving this problem, you have to read the question and write small sign in list of
balances relating to adjustment. With this, you can treat correctly.
2st Step : Make Working Notes for Adjustments
Working Notes : -
1. ) Depreciation on plant and machinery by 15%
Bad Debts provision 1st April 2009 Rs. 35,000
Prepare trading and profit and loss account and balance sheet in proper form after making the
following adjustments
i) Depreciation plant and machinery by 15%
ii) Write off Rs. 5,000 from preliminary expenses
iii) Provide for half year's debenture interest due.
iv) Leave bad and doubtful debts provision at 5% on sundry debtors.
v) Provide fo r income tax @ 50%
vi) Stock on 31st march, 2010 was Rs. 9,50,000
Solution
Ist Step : Write Small sign in list of balances relating to
adjustment
In first step of solving this problem, you have to read the question and write small sign in list of
balances relating to adjustment. With this, you can treat correctly.
2st Step : Make Working Notes for Adjustments
Working Notes : -
1. ) Depreciation on plant and machinery by 15%
33,00,000 X 15% = 4,95,000
2. Rs. 5,000 written off preliminary expenses w ill show in the debit side of profit and loss
account. And rest Rs. 45,000 will show in the asset side in balance sheet.
3.) Show half year debenture interest due as outstanding interest in the debit side of
profit and loss account.
4) Provision for Doubtful Debts Account
Credit Side :
Bad debts provision 1st April, 1988 Rs. 35,000
Transfer to Profit and loss account (Balancing figure) Rs 29,600
--------------------------------------------------------------------
Total = Rs. 64,6 00
--------------------------------------------------------------------
Debit Side
Bad Debts Rs. 21,100
New bad debts provision 5%
8,70,000 X 5% = Rs. 43,500
-------------------------------------------------------------------
Total Rs. 64,600
-------------------------------------------------------------------
2. Rs. 5,000 written off preliminary expenses w ill show in the debit side of profit and loss
account. And rest Rs. 45,000 will show in the asset side in balance sheet.
3.) Show half year debenture interest due as outstanding interest in the debit side of
profit and loss account.
4) Provision for Doubtful Debts Account
Credit Side :
Bad debts provision 1st April, 1988 Rs. 35,000
Transfer to Profit and loss account (Balancing figure) Rs 29,600
--------------------------------------------------------------------
Total = Rs. 64,6 00
--------------------------------------------------------------------
Debit Side
Bad Debts Rs. 21,100
New bad debts provision 5%
8,70,000 X 5% = Rs. 43,500
-------------------------------------------------------------------
Total Rs. 64,600
-------------------------------------------------------------------
Now, balancing figure of Rs. 29600 will go to debit side of profit and loss account and new
provision of Rs. 43500 will deduct from sundry debtors in balance sheet.
5) Provide for Income Tax @ 50%
Calculate net profit before charging income tax in profit and loss account and then calculate its
50% and it will be shown as provision for income tax in the debit side of profit and loss account
and also it will be shown in the liability side in b alance sheet.
6) Closing stock of Rs. 9,50,000 will go to the credit side of trading account. We will also show it
in asset side in balance sheet.
7) Interim dividend paid will go to the debit side of profit and loss appropriation account. 15%
dividend distribution tax and surcharge of 3% is paid by companies before distribution. It means
it will also be debited in profit and loss appropriation account. In balance sheet, dividend
distribution tax and surcharge will be shown in the liability side in bala nce sheet.
8.) Call in arrears will deduct from equity share capital in liability side of balance sheet.
After this, you have to make trading, profit and loss account, profit and loss appropriation
account and balance sheet.
……………………………………………………………………… ………………………………………………………………………………………
provision of Rs. 43500 will deduct from sundry debtors in balance sheet.
5) Provide for Income Tax @ 50%
Calculate net profit before charging income tax in profit and loss account and then calculate its
50% and it will be shown as provision for income tax in the debit side of profit and loss account
and also it will be shown in the liability side in b alance sheet.
6) Closing stock of Rs. 9,50,000 will go to the credit side of trading account. We will also show it
in asset side in balance sheet.
7) Interim dividend paid will go to the debit side of profit and loss appropriation account. 15%
dividend distribution tax and surcharge of 3% is paid by companies before distribution. It means
it will also be debited in profit and loss appropriation account. In balance sheet, dividend
distribution tax and surcharge will be shown in the liability side in bala nce sheet.
8.) Call in arrears will deduct from equity share capital in liability side of balance sheet.
After this, you have to make trading, profit and loss account, profit and loss appropriation
account and balance sheet.
……………………………………………………………………… ………………………………………………………………………………………
How to prepare balance sheet
Prepare balance sheet from trial balance in five easy steps. Format and elements of
classified balance sheet.
1. Reasons companies prepare balance sheet
A balance sheet is a picture of a company's financial position as of a point in time. A balance
sheet can be prepared as of any date, but it's usually prepared as of month, quarter or year-end.
A balance sheet is a very valuable statement that provides information about financial health of a
company. Things like cash, accounts receivable, accounts payable, net worth, etc. can be
determined by looking at a balance sheet.
There are multiple good reasons to prepare a balance sheet. First, you (as a business owner or a
business manager) will want to know where your company stands in terms of financial health at
a point in time. Second, anybody interested in your company will want to see your balance sheet.
Such interested parties may include the following:
Banks: Financial institutions want to know if your company will be able to repay a loan when you
apply for one.
Investors: At some point one source of capital (your savings in the business) may not be
sufficient to maintain a rapid growth. You may want to find investors who would like to invest in
your company. Before inventors give you their money, though, they might want to see a balance
sheet (and other financial statements) to ensure their investments won't go south in the future.
Authorities: Some authorities might like to see a balance sheet of your business. A good
example is the Internal Revenue Service (IRS).
Vendors: Sometimes vendors ask for a balance sheet (and other financial statements) to
understand if you will be able to settle your obligations. Note: Where possible, you should also
ask for the vendors' financial statements to understand if your vendors will stay in business long
enough to provide you with the products you buy from them.
Customers: Similar to vendors, customers may sometimes ask for a balance sheet (and other
financial statements) to understand if you will be able to stay in business to provide them with
products or services you sell. For instance, from customers' standpoint, changing vendors may
be time and resource-consuming; thus, customers want to analyze your balance sheet to make
sure you will not go bankrupt in the near future. Note: Where possible, you should also ask for
customers' financial statements to see if they will be able to pay for goods or services you
provide.
As you can see, there are a lot of parties that will be interested in a balance sheet of your
company, so it's a good idea to prepare one regularly.
Prepare balance sheet from trial balance in five easy steps. Format and elements of
classified balance sheet.
1. Reasons companies prepare balance sheet
A balance sheet is a picture of a company's financial position as of a point in time. A balance
sheet can be prepared as of any date, but it's usually prepared as of month, quarter or year-end.
A balance sheet is a very valuable statement that provides information about financial health of a
company. Things like cash, accounts receivable, accounts payable, net worth, etc. can be
determined by looking at a balance sheet.
There are multiple good reasons to prepare a balance sheet. First, you (as a business owner or a
business manager) will want to know where your company stands in terms of financial health at
a point in time. Second, anybody interested in your company will want to see your balance sheet.
Such interested parties may include the following:
Banks: Financial institutions want to know if your company will be able to repay a loan when you
apply for one.
Investors: At some point one source of capital (your savings in the business) may not be
sufficient to maintain a rapid growth. You may want to find investors who would like to invest in
your company. Before inventors give you their money, though, they might want to see a balance
sheet (and other financial statements) to ensure their investments won't go south in the future.
Authorities: Some authorities might like to see a balance sheet of your business. A good
example is the Internal Revenue Service (IRS).
Vendors: Sometimes vendors ask for a balance sheet (and other financial statements) to
understand if you will be able to settle your obligations. Note: Where possible, you should also
ask for the vendors' financial statements to understand if your vendors will stay in business long
enough to provide you with the products you buy from them.
Customers: Similar to vendors, customers may sometimes ask for a balance sheet (and other
financial statements) to understand if you will be able to stay in business to provide them with
products or services you sell. For instance, from customers' standpoint, changing vendors may
be time and resource-consuming; thus, customers want to analyze your balance sheet to make
sure you will not go bankrupt in the near future. Note: Where possible, you should also ask for
customers' financial statements to see if they will be able to pay for goods or services you
provide.
As you can see, there are a lot of parties that will be interested in a balance sheet of your
company, so it's a good idea to prepare one regularly.
How to prepare balance sheet
2. Classifications on balance sheet
All balance sheets are normally classified: that is, different financial elements on a balance sheet
are grouped into categories and presented under a common caption. This is a general practice
that helps to compare balance sheets of different companies. You can see an example below. For
instance, if there are two companies within different industries, they may have different items
(components) going into the Current Assets category. However, due to this classification rule, it
may sometimes not be as relevant to compare components of current assets. Instead, you may
just compare the total current assets of the two companies, and that may be all you need in your
analysis.
Illustration 1: Example of classifications on the balance sheet (horizontal)
Assets Liabilities
Current Assets Current liabilities
Investments Non-current liabilities
Fixed Assets
Intangible Assets Equity
Other Non-current Assets Common Stock
Retained Earnings
The example above shows a balance sheet in a horizontal format: Assets are on the left side, and
Liabilities and Equity are on the right side. It is also possible to present a balance sheet in a
single column format (vertically) as follows:
Illustration 2: Example of classifications on the balance sheet (vertical)
Assets
Current Assets
Investments
Fixed Assets
2. Classifications on balance sheet
All balance sheets are normally classified: that is, different financial elements on a balance sheet
are grouped into categories and presented under a common caption. This is a general practice
that helps to compare balance sheets of different companies. You can see an example below. For
instance, if there are two companies within different industries, they may have different items
(components) going into the Current Assets category. However, due to this classification rule, it
may sometimes not be as relevant to compare components of current assets. Instead, you may
just compare the total current assets of the two companies, and that may be all you need in your
analysis.
Illustration 1: Example of classifications on the balance sheet (horizontal)
Assets Liabilities
Current Assets Current liabilities
Investments Non-current liabilities
Fixed Assets
Intangible Assets Equity
Other Non-current Assets Common Stock
Retained Earnings
The example above shows a balance sheet in a horizontal format: Assets are on the left side, and
Liabilities and Equity are on the right side. It is also possible to present a balance sheet in a
single column format (vertically) as follows:
Illustration 2: Example of classifications on the balance sheet (vertical)
Assets
Current Assets
Investments
Fixed Assets
Intangible Assets
Other Non-current Assets
Liabilities
Current liabilities
Non-current liabilities
Equity
Common Stock
Retained Earnings
It is a matter of preference, but normally balance sheets are presented vertically as shown in
Illustration 2.
Important term to remember, as we discuss balance sheet classifications further, is a balance
sheet date. A balance sheet date is the date as of which the balance sheet is prepared. For
example, most businesses prepare their balance sheets at least once a year as of December 31.
However, the balance sheet date is not the date when a balance sheet is actually prepared and
becomes available.
As you may have noticed in Illustration 1, assets are on the left side, and liabilities and equity are
on the right side. There is a reason why they are presented liked that. Total assets equal the sum
of total liabilities and total equity. This is a fundamental accounting equation that results in this
equality:
Assets = Liabilities + Equity
This equation must hold true in any balance sheet, and if it doesn't, then it is due to an error
somewhere in the balance sheet. You can use this rule in situations where your assets don't equal
your liabilities and equity.
The reason the equation must hold true is because assets are economic resources of a business
used to accomplish its main goal, i.e. increase owners' wealth. Liabilities and equity are the
sources of such assets. In other words, liabilities and equity show where assets were obtained
Other Non-current Assets
Liabilities
Current liabilities
Non-current liabilities
Equity
Common Stock
Retained Earnings
It is a matter of preference, but normally balance sheets are presented vertically as shown in
Illustration 2.
Important term to remember, as we discuss balance sheet classifications further, is a balance
sheet date. A balance sheet date is the date as of which the balance sheet is prepared. For
example, most businesses prepare their balance sheets at least once a year as of December 31.
However, the balance sheet date is not the date when a balance sheet is actually prepared and
becomes available.
As you may have noticed in Illustration 1, assets are on the left side, and liabilities and equity are
on the right side. There is a reason why they are presented liked that. Total assets equal the sum
of total liabilities and total equity. This is a fundamental accounting equation that results in this
equality:
Assets = Liabilities + Equity
This equation must hold true in any balance sheet, and if it doesn't, then it is due to an error
somewhere in the balance sheet. You can use this rule in situations where your assets don't equal
your liabilities and equity.
The reason the equation must hold true is because assets are economic resources of a business
used to accomplish its main goal, i.e. increase owners' wealth. Liabilities and equity are the
sources of such assets. In other words, liabilities and equity show where assets were obtained
from. Liabilities are claims of third parties for resources provided to the business (e.g. creditors).
Equity is claims of business owners for resources they invested in the business. Equity, therefore,
is an indicator of how many assets the owners can claim in the business after all liabilities are
settled. The difference between assets and liabilities (i.e. equity) is sometimes called net worth.
Any trial balance account (trial balances are a starting point in preparing a balance sheet – see
further) has a balance. An account may have a debit or credit balance. The normal account
balance also indicates whether the account is increased or decreased when it's debited or
credited. There are rules stating which account has a debit or credit balance. The illustration
below shows accepted conventions about such balances:
Illustration 3: Normal balances, increases and decreases for balance sheet accounts
Balance Sheet Category
Increase (Normal
Balance)
Decrease
Assets Debit Credit
Contra Asset Accounts Credit Debit
Liabilities Credit Debit
Contra Liability Accounts Debit Credit
Equity Credit Debit
For example, an asset account called Cash increases when it's debited and decreases when it's
credited. The Cash account normally has a debit balance.
Note that there are "contra" accounts. Such accounts are opposite to their related accounts and
thus have a different normal balance. Contra accounts are presented as a reduction to their related
accounts on the balance sheet. An example of such accounts is Accumulated Depreciation. This
account has a credit balance and is related to the Fixed Assets account. On the balance sheet,
Accumulated Depreciation (credit balance) is shown under Fixed Assets (debit balance) and
reduces the balance of Fixed Assets creating Net Fixed Assets.
Going back to the accounting equation, note that assets normally have debit balances, and
liabilities and equity have credit balances:
Debit Balance Credit Balance Credit Balance
Assets = Liabilities + Equity
Equity is claims of business owners for resources they invested in the business. Equity, therefore,
is an indicator of how many assets the owners can claim in the business after all liabilities are
settled. The difference between assets and liabilities (i.e. equity) is sometimes called net worth.
Any trial balance account (trial balances are a starting point in preparing a balance sheet – see
further) has a balance. An account may have a debit or credit balance. The normal account
balance also indicates whether the account is increased or decreased when it's debited or
credited. There are rules stating which account has a debit or credit balance. The illustration
below shows accepted conventions about such balances:
Illustration 3: Normal balances, increases and decreases for balance sheet accounts
Balance Sheet Category
Increase (Normal
Balance)
Decrease
Assets Debit Credit
Contra Asset Accounts Credit Debit
Liabilities Credit Debit
Contra Liability Accounts Debit Credit
Equity Credit Debit
For example, an asset account called Cash increases when it's debited and decreases when it's
credited. The Cash account normally has a debit balance.
Note that there are "contra" accounts. Such accounts are opposite to their related accounts and
thus have a different normal balance. Contra accounts are presented as a reduction to their related
accounts on the balance sheet. An example of such accounts is Accumulated Depreciation. This
account has a credit balance and is related to the Fixed Assets account. On the balance sheet,
Accumulated Depreciation (credit balance) is shown under Fixed Assets (debit balance) and
reduces the balance of Fixed Assets creating Net Fixed Assets.
Going back to the accounting equation, note that assets normally have debit balances, and
liabilities and equity have credit balances:
Debit Balance Credit Balance Credit Balance
Assets = Liabilities + Equity
Let's review each balance sheet classification in more detail.
How to prepare balance sheet
2.1. Current assets on classified balance sheet
Current assets are cash and other assets that are expected to be converted to cash or sold or used up
usually within one year or the company's operating cycle, whichever is longer, through the normal
operations of the business.
An operating cycle, for a manufacturing company, represents time it takes to invest cash by buying raw
materials, produce a product, and receive cash back after selling the product. An operating cycle may be
more or less than a year depending on the industry.
Current assets are usually listed in the order of liquidity starting with cash and cash equivalents.
Examples of current assets are cash and cash equivalents, marketable securities, accounts
receivable, inventories, and prepaid expenses.
Cash and cash equivalents represent coins, currency, checks, money orders, money on deposit and
short-term, highly liquid investments that are usually reported with cash on the balance sheet. Normally,
highly liquid means that the investments can be converted to cash within 90 day and with a minimal loss
in their value due to changes in interest rates.
Marketable securities are short-term (temporary) investments in securities and other interest-generating
financial assets. Such investments are usually made to earn interest on excess cash which is currently
not used in the business.
Accounts receivable are amounts due from customers on credit sales (i.e. sales when customers agree
to pay you later).
Accounts receivable sometimes may have a related contra asset account called Allowance for
Doubtful Accounts. Such an account represents the amounts that you believe may not be
collectable (e.g. a customer is bankrupt). The net amount (Accounts Receivable – Allowance for
Doubtful Accounts) is shown on the balance sheet.
Inventories are raw materials, work-in-process (i.e. started but unfinished products), finished goods (i.e.
products ready for sale), and sometimes supplies (e.g. spare parts for your machinery and equipment).
Similar to accounts receivable, the Inventories Account may also have a related contra asset
account called Excess and Obsolete Reserve (E&O Reserve). This account represents the cost of
inventory that you do not anticipate to sell or use in your production any more due to technical
How to prepare balance sheet
2.1. Current assets on classified balance sheet
Current assets are cash and other assets that are expected to be converted to cash or sold or used up
usually within one year or the company's operating cycle, whichever is longer, through the normal
operations of the business.
An operating cycle, for a manufacturing company, represents time it takes to invest cash by buying raw
materials, produce a product, and receive cash back after selling the product. An operating cycle may be
more or less than a year depending on the industry.
Current assets are usually listed in the order of liquidity starting with cash and cash equivalents.
Examples of current assets are cash and cash equivalents, marketable securities, accounts
receivable, inventories, and prepaid expenses.
Cash and cash equivalents represent coins, currency, checks, money orders, money on deposit and
short-term, highly liquid investments that are usually reported with cash on the balance sheet. Normally,
highly liquid means that the investments can be converted to cash within 90 day and with a minimal loss
in their value due to changes in interest rates.
Marketable securities are short-term (temporary) investments in securities and other interest-generating
financial assets. Such investments are usually made to earn interest on excess cash which is currently
not used in the business.
Accounts receivable are amounts due from customers on credit sales (i.e. sales when customers agree
to pay you later).
Accounts receivable sometimes may have a related contra asset account called Allowance for
Doubtful Accounts. Such an account represents the amounts that you believe may not be
collectable (e.g. a customer is bankrupt). The net amount (Accounts Receivable – Allowance for
Doubtful Accounts) is shown on the balance sheet.
Inventories are raw materials, work-in-process (i.e. started but unfinished products), finished goods (i.e.
products ready for sale), and sometimes supplies (e.g. spare parts for your machinery and equipment).
Similar to accounts receivable, the Inventories Account may also have a related contra asset
account called Excess and Obsolete Reserve (E&O Reserve). This account represents the cost of
inventory that you do not anticipate to sell or use in your production any more due to technical
obsolescence, etc. The net amount (Inventories – E&O Reserve) is presented on the balance
sheet. Note that not all businesses will have an E&O reserve.
Prepaid assets are prepayments you've made that will benefit future periods.
For example, if you pay an insurance premium for your business, the coverage you obtain is for a
year. Thus, the benefits you will be getting from this asset are extended over a year. Normally,
prepaid assets shown in the current assets are the ones expected to be used (expected to expire)
within a year after the balance sheet date. If a prepaid asset is expected to provide benefits for
longer, then the portion of the prepaid asset related to benefits after one year is shown in the non-
current assets (i.e. Other Non-current Assets) on the balance sheet.
2.2. Non-current assets on classified balance sheet
All assets not included into current assets are non-current (long-term) assets. They are presented
on the balance sheet after the current assets and may include the following classifications: fixed
assets, intangible assets, investments, and other non-current assets. Let's review each
classification in greater detail.
Fixed assets may include land, buildings, machinery and equipment, vehicles, and leasehold
improvements.
Fixed assets are expected to be utilized by the company (i.e. provide benefits) over a period
longer than one year. Note that fixed assets are tangible assets (i.e. have physical substance).
Fixed assets, as they provide benefits, use up some of their cost.
The process of allocating this decrease in fixed assets' cost to multiple years is called depreciation.
A contra asset account called Accumulated Depreciation keeps information about how much of
the fixed assets' cost has been depreciated. The net amount (Fixed Assets – Accumulated
Depreciation) is shown on the balance sheet.
Intangible assets may include patents, goodwill, technology, customer lists, value of non-compete
agreements, among others.
Intangible assets are similar to fixed assets except that the major value of intangible assets comes
with the rights they bring to the owner and not their physical substance. Similar to fixed assets,
some intangible assets lose their value with time as they provide benefits (process is called
amortization), and this process is reflected in the Accumulated Amortization account. Note,
however, that some intangible assets (e.g. trademarks or goodwill) have indefinite lives, and
thus, they are not amortized.
sheet. Note that not all businesses will have an E&O reserve.
Prepaid assets are prepayments you've made that will benefit future periods.
For example, if you pay an insurance premium for your business, the coverage you obtain is for a
year. Thus, the benefits you will be getting from this asset are extended over a year. Normally,
prepaid assets shown in the current assets are the ones expected to be used (expected to expire)
within a year after the balance sheet date. If a prepaid asset is expected to provide benefits for
longer, then the portion of the prepaid asset related to benefits after one year is shown in the non-
current assets (i.e. Other Non-current Assets) on the balance sheet.
2.2. Non-current assets on classified balance sheet
All assets not included into current assets are non-current (long-term) assets. They are presented
on the balance sheet after the current assets and may include the following classifications: fixed
assets, intangible assets, investments, and other non-current assets. Let's review each
classification in greater detail.
Fixed assets may include land, buildings, machinery and equipment, vehicles, and leasehold
improvements.
Fixed assets are expected to be utilized by the company (i.e. provide benefits) over a period
longer than one year. Note that fixed assets are tangible assets (i.e. have physical substance).
Fixed assets, as they provide benefits, use up some of their cost.
The process of allocating this decrease in fixed assets' cost to multiple years is called depreciation.
A contra asset account called Accumulated Depreciation keeps information about how much of
the fixed assets' cost has been depreciated. The net amount (Fixed Assets – Accumulated
Depreciation) is shown on the balance sheet.
Intangible assets may include patents, goodwill, technology, customer lists, value of non-compete
agreements, among others.
Intangible assets are similar to fixed assets except that the major value of intangible assets comes
with the rights they bring to the owner and not their physical substance. Similar to fixed assets,
some intangible assets lose their value with time as they provide benefits (process is called
amortization), and this process is reflected in the Accumulated Amortization account. Note,
however, that some intangible assets (e.g. trademarks or goodwill) have indefinite lives, and
thus, they are not amortized.
Investments are long-term investments in securities of other companies. Such securities may be debt
securities (e.g. bonds, notes receivable) or equity securities (e.g. stock).
Other non-current assets may include other long-term assets not included into the investments, fixed, or
intangible assets categories. Such other assets may be portions of prepaid expenses that will start
expiring in more than a year after the balance sheet date, the cash surrender value of life insurance on
officers, and others.
How to prepare balance sheet
2.3. Current liabilities on classified balance sheet
Current liabilities are obligations due to be paid or settled within one year or the company's operating
cycle, whichever is longer.
Usually current liabilities are settled by using current assets. Therefore, sometimes it is useful to
compare current assets and current liabilities to understand if your business will be able to pay
your current obligations using your current assets (the difference between the two is called
working capital). Current liabilities may include accounts payable, accrued expenses, short-term
loans, current portion of long-term debt, and income taxes payable. Let's review current
liabilities in greater detail.
Accounts payable are liabilities (obligations) created by buying goods or services on account. In other
words, it is your company's promise (and obligation) to pay for purchased goods or service later.
For example, if you purchased merchandise inventory today, and the credit terms state that you
need to pay for the inventory next month, then you need to record this obligation as an account
payable in your books.
Accrued expenses represent costs incurred but unpaid as of the period end.
Accrued expenses are required under the accrual basis of accounting, which is used for financial
reporting purposes. An example of accrued expenses may be a cell phone bill with the billing
period running from the 16
th
of the current month to the 15
th
of the following month. You will
not receive the bill until the middle of the next month; however, you have used the cell phone for
15 days in the current month and, therefore, should recognize cell phone expense for 15 days of
the current month by posting an accrued expense.
Short-term loans are notes payable expected to be settled within one year after the balance sheet date.
securities (e.g. bonds, notes receivable) or equity securities (e.g. stock).
Other non-current assets may include other long-term assets not included into the investments, fixed, or
intangible assets categories. Such other assets may be portions of prepaid expenses that will start
expiring in more than a year after the balance sheet date, the cash surrender value of life insurance on
officers, and others.
How to prepare balance sheet
2.3. Current liabilities on classified balance sheet
Current liabilities are obligations due to be paid or settled within one year or the company's operating
cycle, whichever is longer.
Usually current liabilities are settled by using current assets. Therefore, sometimes it is useful to
compare current assets and current liabilities to understand if your business will be able to pay
your current obligations using your current assets (the difference between the two is called
working capital). Current liabilities may include accounts payable, accrued expenses, short-term
loans, current portion of long-term debt, and income taxes payable. Let's review current
liabilities in greater detail.
Accounts payable are liabilities (obligations) created by buying goods or services on account. In other
words, it is your company's promise (and obligation) to pay for purchased goods or service later.
For example, if you purchased merchandise inventory today, and the credit terms state that you
need to pay for the inventory next month, then you need to record this obligation as an account
payable in your books.
Accrued expenses represent costs incurred but unpaid as of the period end.
Accrued expenses are required under the accrual basis of accounting, which is used for financial
reporting purposes. An example of accrued expenses may be a cell phone bill with the billing
period running from the 16
th
of the current month to the 15
th
of the following month. You will
not receive the bill until the middle of the next month; however, you have used the cell phone for
15 days in the current month and, therefore, should recognize cell phone expense for 15 days of
the current month by posting an accrued expense.
Short-term loans are notes payable expected to be settled within one year after the balance sheet date.
For example, if your company purchased equipment and issued a note payable to be settled in six
months after the balance sheet date, then the amount of the note will be recorded under short-
term loans.
Current portion of long-term debt represents the amount of long-term debt that will be paid within one
year after the balance sheet date.
For example, some long-term debts (i.e. bank loans) are required to be paid in installments
quarterly or semiannually, and then, a balloon payment is made at the maturity date for the
remaining balance. The installment payments to be paid within one year after the balance sheet
date represent short-term obligations and thus are recorded in the current liabilities under the
caption "Current Portion of Long-term Debt" (may be shortened to Current Portion of LT Debt).
Income taxes payable are the amounts of income taxes that your company is obligated to pay to local,
state, or federal authorities. These obligations are presented in the current liabilities section because it is
usually expected that these balances will be paid within a year after the balance sheet date.
2.4. Non-current liabilities on classified balance sheet
Non-current (long-term) liabilities are other liabilities that are not included into the current
liabilities section. Therefore, non-current liabilities are obligations that are not expected to be
due (paid) within one year after the balance sheet date. Examples of non-current liabilities are
long-term lines of credit and term loans.
A line of credit is an agreement, under which a bank provides your business with loans of money (i.e. up
to an approved limit) during a predefined period.
You can take out the amount you need (e.g. via check, ATM, etc.), repay it, and then borrow
again. At a point in time you can only have an outstanding balance up to a certain limit. This
kind of loans is sometimes called revolving loans. If an outstanding amount is to be repaid within
more than a year after the balance sheet date, then the amount is shown under the non-current
liabilities on the balance sheet date.
Term loans are loans that are to be paid on a certain date (i.e. maturity date). Again, if the payment date
is not within one year after the balance sheet date, then the loan is presented under the non-current
liabilities.
As mentioned above, when we talked about current liabilities, any portion of long-term debts
(whether it's a line of credit or term loan), which is to be paid within one year after the balance
sheet date, must be presented under the current liabilities
months after the balance sheet date, then the amount of the note will be recorded under short-
term loans.
Current portion of long-term debt represents the amount of long-term debt that will be paid within one
year after the balance sheet date.
For example, some long-term debts (i.e. bank loans) are required to be paid in installments
quarterly or semiannually, and then, a balloon payment is made at the maturity date for the
remaining balance. The installment payments to be paid within one year after the balance sheet
date represent short-term obligations and thus are recorded in the current liabilities under the
caption "Current Portion of Long-term Debt" (may be shortened to Current Portion of LT Debt).
Income taxes payable are the amounts of income taxes that your company is obligated to pay to local,
state, or federal authorities. These obligations are presented in the current liabilities section because it is
usually expected that these balances will be paid within a year after the balance sheet date.
2.4. Non-current liabilities on classified balance sheet
Non-current (long-term) liabilities are other liabilities that are not included into the current
liabilities section. Therefore, non-current liabilities are obligations that are not expected to be
due (paid) within one year after the balance sheet date. Examples of non-current liabilities are
long-term lines of credit and term loans.
A line of credit is an agreement, under which a bank provides your business with loans of money (i.e. up
to an approved limit) during a predefined period.
You can take out the amount you need (e.g. via check, ATM, etc.), repay it, and then borrow
again. At a point in time you can only have an outstanding balance up to a certain limit. This
kind of loans is sometimes called revolving loans. If an outstanding amount is to be repaid within
more than a year after the balance sheet date, then the amount is shown under the non-current
liabilities on the balance sheet date.
Term loans are loans that are to be paid on a certain date (i.e. maturity date). Again, if the payment date
is not within one year after the balance sheet date, then the loan is presented under the non-current
liabilities.
As mentioned above, when we talked about current liabilities, any portion of long-term debts
(whether it's a line of credit or term loan), which is to be paid within one year after the balance
sheet date, must be presented under the current liabilities
How to prepare balance sheet
2.5. Equity on classified balance sheet
Equity is the owners' claim on assets. Equity, as noted above, is also the difference between
assets and liabilities. Equity may include multiple financial elements. The most common equity
elements are capital (common stock), current year earnings, and retained earnings. Let's review
them in more detail.
Capital (common stock for corporations) represents the amounts contributed by owners to the business.
Depending on the legal form of a business, capital can be named differently.
Current year earnings are the net income or loss of the business for the current year. This amount is the
difference between all revenues and all expenses on the income statement. Current year earnings are
presented on the balance sheet only until they are transferred to retained earnings.
Retained earnings are net income (loss) retained (accumulated) by your company.
For a company with relatively simple operations, retaining earnings are cumulative net incomes
(losses) less dividends paid out since the company's origination. Note that when dividends are
paid out, they reduce retaining earnings. Also note that retained earnings may be a negative
amount in situations when the company is not profitable (i.e. more losses than net incomes).
3. Balance sheet format
A balance sheet is a financial statement that has a certain commonly used format.
First of all, a balance sheet has a header. The header needs to include your company name, the
title of the financial statement (i.e. balance sheet), and period(s) presented in the financial
statement. Note that some balance sheets are presented for one year, while others are presented
for two years in a comparable format (e.g. comparable balance sheets of public companies). An
example of the header for a single-year balance sheet is presented below:
Your Company Name
Balance Sheet
December 31, 2010
Next, the balance sheet with related captions is presented. Major captions (Assets, Liabilities,
Equity) are presented first. Then, the next level captions are shown. The next level captions are
the categories (classifications) we reviewed earlier (current assets, investments, etc.). Under each
caption, components of the caption are presented. An example of the current assets caption is
presented below:
2.5. Equity on classified balance sheet
Equity is the owners' claim on assets. Equity, as noted above, is also the difference between
assets and liabilities. Equity may include multiple financial elements. The most common equity
elements are capital (common stock), current year earnings, and retained earnings. Let's review
them in more detail.
Capital (common stock for corporations) represents the amounts contributed by owners to the business.
Depending on the legal form of a business, capital can be named differently.
Current year earnings are the net income or loss of the business for the current year. This amount is the
difference between all revenues and all expenses on the income statement. Current year earnings are
presented on the balance sheet only until they are transferred to retained earnings.
Retained earnings are net income (loss) retained (accumulated) by your company.
For a company with relatively simple operations, retaining earnings are cumulative net incomes
(losses) less dividends paid out since the company's origination. Note that when dividends are
paid out, they reduce retaining earnings. Also note that retained earnings may be a negative
amount in situations when the company is not profitable (i.e. more losses than net incomes).
3. Balance sheet format
A balance sheet is a financial statement that has a certain commonly used format.
First of all, a balance sheet has a header. The header needs to include your company name, the
title of the financial statement (i.e. balance sheet), and period(s) presented in the financial
statement. Note that some balance sheets are presented for one year, while others are presented
for two years in a comparable format (e.g. comparable balance sheets of public companies). An
example of the header for a single-year balance sheet is presented below:
Your Company Name
Balance Sheet
December 31, 2010
Next, the balance sheet with related captions is presented. Major captions (Assets, Liabilities,
Equity) are presented first. Then, the next level captions are shown. The next level captions are
the categories (classifications) we reviewed earlier (current assets, investments, etc.). Under each
caption, components of the caption are presented. An example of the current assets caption is
presented below:
ASSETS
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Note how the components of current assets are intended to the right so it's easier to read the
balance sheet.
Finally, let's recall that assets can be shown on the left side while liabilities and equity are shown
on the right side (horizontal presentation). Alternatively, assets can be shown first with liabilities
and equity presented underneath the assets. If a balance sheet for a single period is shown, it
seems to be more readable to show assets on the left and liabilities and equity on the right side.
However, if comparable balance sheets (i.e. a balance sheet for two or more periods) are
prepared, then it makes more sense to show liabilities and equity under assets.
How to prepare balance sheet
4. Example of preparing balance sheet
There are several steps in preparing a balance sheet. These steps are not prescribed procedures,
so there may be variations based on your company’s needs and situation. Let’s review each step
in detail.
4.1. Step 1: Prepare balance sheet template
A balance sheet template is a blank format with header, date, categories, and components of
categories. The template can be prepared on paper, or better off, it can be prepared in a
spreadsheet software (e.g. MS Excel).
For our illustration, we prepared a balance sheet template in MS Excel and presented it below.
The template is in the vertical format due to width limitations on our website:
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Note how the components of current assets are intended to the right so it's easier to read the
balance sheet.
Finally, let's recall that assets can be shown on the left side while liabilities and equity are shown
on the right side (horizontal presentation). Alternatively, assets can be shown first with liabilities
and equity presented underneath the assets. If a balance sheet for a single period is shown, it
seems to be more readable to show assets on the left and liabilities and equity on the right side.
However, if comparable balance sheets (i.e. a balance sheet for two or more periods) are
prepared, then it makes more sense to show liabilities and equity under assets.
How to prepare balance sheet
4. Example of preparing balance sheet
There are several steps in preparing a balance sheet. These steps are not prescribed procedures,
so there may be variations based on your company’s needs and situation. Let’s review each step
in detail.
4.1. Step 1: Prepare balance sheet template
A balance sheet template is a blank format with header, date, categories, and components of
categories. The template can be prepared on paper, or better off, it can be prepared in a
spreadsheet software (e.g. MS Excel).
For our illustration, we prepared a balance sheet template in MS Excel and presented it below.
The template is in the vertical format due to width limitations on our website:
Illustration 4: Balance sheet template
Your Company Name
Trial Balance
December 31, 20X0
ASSETS
Current Assets:
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
Fixed Assets
Intangible Assets
Investments
Other Non-current Assets
TOTAL ASSETS
LIABILITIES
Current Liabilities:
Accounts Payable
Your Company Name
Trial Balance
December 31, 20X0
ASSETS
Current Assets:
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
Fixed Assets
Intangible Assets
Investments
Other Non-current Assets
TOTAL ASSETS
LIABILITIES
Current Liabilities:
Accounts Payable
Your Company Name
Trial Balance
December 31, 20X0
Accrued Expenses
Short-term Loans
Current Portion of LT Debt
Income Taxes Payable
Total Current Liabilities
Non-current Liabilities:
Line of Credit
Term Loan
Total Non-current Liabilities
TOTAL LIABILITIES
EQUITY
Capital
Current Year Earnings
Retained Earnings
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY
Trial Balance
December 31, 20X0
Accrued Expenses
Short-term Loans
Current Portion of LT Debt
Income Taxes Payable
Total Current Liabilities
Non-current Liabilities:
Line of Credit
Term Loan
Total Non-current Liabilities
TOTAL LIABILITIES
EQUITY
Capital
Current Year Earnings
Retained Earnings
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY
The spaces highlighted in light green are the ones where we will enter amounts taken from the
trial balance.
How to prepare balance sheet
4.2. Step 2: Obtain trial balance for your company
A trial balance is the collection of all accounts that exist in the company's chart of accounts with
balances as of a particular date. Each account has either a debit or credit balance. The total of all
debits equals the total of all credits (i.e. double-entry accounting system).
Most businesses, nowadays, use accounting software that is capable of generating a trial balance.
Therefore, for your purposes, you can extract such a trial balance from your software. If you
don't use such software, then you can prepare a trial balance from your records using, for
example, MS Excel.
For our illustration, we obtained the trial balance from our accounting software as shown below:
Illustration 5: A trial balance extracted from accounting software
Your Company Name
Trial Balance
December 31, 20X0
Account Account Name Debit Credit
1000 Petty Cash $ 500
1010 Chase Checking 42,000
1020 PayPal Checking 23,500
1030 Savings 300,000
1040 Money Market 25,000
1200 Marketable Securities 0
1300 Accounts Receivable 389,000
1350 Allowance for Doubtful Accounts
25,500
1400 Raw Materials 87,000
trial balance.
How to prepare balance sheet
4.2. Step 2: Obtain trial balance for your company
A trial balance is the collection of all accounts that exist in the company's chart of accounts with
balances as of a particular date. Each account has either a debit or credit balance. The total of all
debits equals the total of all credits (i.e. double-entry accounting system).
Most businesses, nowadays, use accounting software that is capable of generating a trial balance.
Therefore, for your purposes, you can extract such a trial balance from your software. If you
don't use such software, then you can prepare a trial balance from your records using, for
example, MS Excel.
For our illustration, we obtained the trial balance from our accounting software as shown below:
Illustration 5: A trial balance extracted from accounting software
Your Company Name
Trial Balance
December 31, 20X0
Account Account Name Debit Credit
1000 Petty Cash $ 500
1010 Chase Checking 42,000
1020 PayPal Checking 23,500
1030 Savings 300,000
1040 Money Market 25,000
1200 Marketable Securities 0
1300 Accounts Receivable 389,000
1350 Allowance for Doubtful Accounts
25,500
1400 Raw Materials 87,000
Your Company Name
Trial Balance
December 31, 20X0
1410 Work-in-process 12,000
1420 Finished Goods 132,000
1430 Spare Parts 58,000
1500 Prepaid Insurance 5,400
1510 Prepaid Rent 3,000
1600 Land 570,000
1610 Buildings 430,000
1620 Leasehold Improvements 100,000
1630 Office Equipment 44,000
1650 A/D-Buildings
240,000
1660 A/D-Leasehold Improvements
51,000
1670 A/D-Office Equipment
25,000
1700 Patens 170,000
1710 Trademark 60,000
1750 Accum Amort-Parents
90,000
1800 Investments in Debt Securities 0
1810 Investments in Equity Securities 75,000
1900 Cash Surrender Value Life Insr 54,000
2000 Accounts Payable
285,000
2100 Accrued Payroll
205,000
Trial Balance
December 31, 20X0
1410 Work-in-process 12,000
1420 Finished Goods 132,000
1430 Spare Parts 58,000
1500 Prepaid Insurance 5,400
1510 Prepaid Rent 3,000
1600 Land 570,000
1610 Buildings 430,000
1620 Leasehold Improvements 100,000
1630 Office Equipment 44,000
1650 A/D-Buildings
240,000
1660 A/D-Leasehold Improvements
51,000
1670 A/D-Office Equipment
25,000
1700 Patens 170,000
1710 Trademark 60,000
1750 Accum Amort-Parents
90,000
1800 Investments in Debt Securities 0
1810 Investments in Equity Securities 75,000
1900 Cash Surrender Value Life Insr 54,000
2000 Accounts Payable
285,000
2100 Accrued Payroll
205,000
Your Company Name
Trial Balance
December 31, 20X0
2110 Accrued Property Taxes
42,000
2120 Accrued Vacation
323,000
2200 Short-term Bank Loan
245,000
2300 Current Portion of Line of Credit
100,000
2400 State Income Tax Payable
30,000
2410 Federal Income Tax Payable
60,000
2500 Line of Credit (Revolver)
53,000
2510 Term Loan
250,000
3000 Capital
50,000
3010 Current Year Earnings
159,000
3020 Retained Earnings
346,900
Total $ 2,580,400 $ 2,580,400
Note that the total in the Debit column equals the total in the Credit column.
How to prepare balance sheet
4.3. Step 3: Group trial balance accounts by classification
There are more trial balance accounts in Illustration 5 than there are balance sheet classifications
(groups) in Illustration 4. That is because some classifications (groups) may include multiple
trial balance accounts. For example, Cash and Cash Equivalents on the balance sheet template
will include the following trial balance accounts since they have the same nature: Petty Cash,
Chase Checking, PayPal Checking, Savings, and Money Market. Therefore, the next step is to
group all accounts on the trial balance by their respective balance sheet classifications.
Trial Balance
December 31, 20X0
2110 Accrued Property Taxes
42,000
2120 Accrued Vacation
323,000
2200 Short-term Bank Loan
245,000
2300 Current Portion of Line of Credit
100,000
2400 State Income Tax Payable
30,000
2410 Federal Income Tax Payable
60,000
2500 Line of Credit (Revolver)
53,000
2510 Term Loan
250,000
3000 Capital
50,000
3010 Current Year Earnings
159,000
3020 Retained Earnings
346,900
Total $ 2,580,400 $ 2,580,400
Note that the total in the Debit column equals the total in the Credit column.
How to prepare balance sheet
4.3. Step 3: Group trial balance accounts by classification
There are more trial balance accounts in Illustration 5 than there are balance sheet classifications
(groups) in Illustration 4. That is because some classifications (groups) may include multiple
trial balance accounts. For example, Cash and Cash Equivalents on the balance sheet template
will include the following trial balance accounts since they have the same nature: Petty Cash,
Chase Checking, PayPal Checking, Savings, and Money Market. Therefore, the next step is to
group all accounts on the trial balance by their respective balance sheet classifications.
Here we have added another column to the trial balance where we entered the balance sheet
classification for the accounts. Refer to Illustration 6 below.
4.4. Step 4: Subtotal account balances by classification
The following step is to subtotal the balances in the accounts for each classification. Note that
when subtotals are prepared, all asset balances are calculated as Debit – Credit, while all liability
and equity balances are calculated as Credit – Debit. For example, the subtotal for the balance
sheet classification "Accounts Receivable" is equal to the debit amount in the account 1300,
Accounts Receivable, less the credit balance in the account 1350, Allowance for Doubtful
Accounts (that is, $389,000 - $25,500 = $363,500). Even though the calculations seem to be
complicated, if you use spreadsheet software, it is pretty easy:
Illustration 6: Trial balance with subtotals for balance sheet classifications (groups)
Your Company Name
Trial Balance
December 31, 20X0
Acct # Account Name Debit Credit
Balance Sheet
Classification
Subtotal
1000 Petty Cash $ 500
Cash & Cash
Equivalents
391,000
1010 Chase Checking 42,000
1020 PayPal Checking 23,500
1030 Savings 300,000
1040 Money Market 25,000
1200 Marketable Securities 0 Marketable
Securities
0
1300 Accounts Receivable 389,000
Accounts
Receivable
363,500
1350 Allowance for Doubtful Accts 25,500
1400 Raw Materials 87,000
Inventories 289,000 1410 Work-in-process 12,000
1420 Finished Goods 132,000
classification for the accounts. Refer to Illustration 6 below.
4.4. Step 4: Subtotal account balances by classification
The following step is to subtotal the balances in the accounts for each classification. Note that
when subtotals are prepared, all asset balances are calculated as Debit – Credit, while all liability
and equity balances are calculated as Credit – Debit. For example, the subtotal for the balance
sheet classification "Accounts Receivable" is equal to the debit amount in the account 1300,
Accounts Receivable, less the credit balance in the account 1350, Allowance for Doubtful
Accounts (that is, $389,000 - $25,500 = $363,500). Even though the calculations seem to be
complicated, if you use spreadsheet software, it is pretty easy:
Illustration 6: Trial balance with subtotals for balance sheet classifications (groups)
Your Company Name
Trial Balance
December 31, 20X0
Acct # Account Name Debit Credit
Balance Sheet
Classification
Subtotal
1000 Petty Cash $ 500
Cash & Cash
Equivalents
391,000
1010 Chase Checking 42,000
1020 PayPal Checking 23,500
1030 Savings 300,000
1040 Money Market 25,000
1200 Marketable Securities 0 Marketable
Securities
0
1300 Accounts Receivable 389,000
Accounts
Receivable
363,500
1350 Allowance for Doubtful Accts 25,500
1400 Raw Materials 87,000
Inventories 289,000 1410 Work-in-process 12,000
1420 Finished Goods 132,000
Your Company Name
Trial Balance
December 31, 20X0
1430 Spare Parts 58,000
1500 Prepaid Insurance 5,400
Prepaid
Expenses
8,400
1510 Prepaid Rent 3,000
1600 Land 570,000
Fixed
Asset
828,000
1610 Buildings 430,000
1620 Leasehold Improvements 100,000
1630 Office Equipment 44,000
1650 A/D-Buildings 240,000
1660 A/D-Leasehold Improvements 51,000
1670 A/D-Office Equipment 25,000
1700 Patens 170,000
Intangible
Asset
140,000 1710 Trademark 60,000
1750 Accum Amort-Parents 90,000
1800 Investments in Debt Secs 0
Investments 75,000
1810 Investments in Equity Secs 75,000
1900 Cash Surrender Value Life Insr 54,000 Other Non-current
Assets
54,000
2000 Accounts Payable 285,000 Accounts
Payable
285,000
2100 Accrued Payroll 205,000
Accrued
Expenses
570,000
2110 Accrued Property Taxes 42,000
Trial Balance
December 31, 20X0
1430 Spare Parts 58,000
1500 Prepaid Insurance 5,400
Prepaid
Expenses
8,400
1510 Prepaid Rent 3,000
1600 Land 570,000
Fixed
Asset
828,000
1610 Buildings 430,000
1620 Leasehold Improvements 100,000
1630 Office Equipment 44,000
1650 A/D-Buildings 240,000
1660 A/D-Leasehold Improvements 51,000
1670 A/D-Office Equipment 25,000
1700 Patens 170,000
Intangible
Asset
140,000 1710 Trademark 60,000
1750 Accum Amort-Parents 90,000
1800 Investments in Debt Secs 0
Investments 75,000
1810 Investments in Equity Secs 75,000
1900 Cash Surrender Value Life Insr 54,000 Other Non-current
Assets
54,000
2000 Accounts Payable 285,000 Accounts
Payable
285,000
2100 Accrued Payroll 205,000
Accrued
Expenses
570,000
2110 Accrued Property Taxes 42,000
Your Company Name
Trial Balance
December 31, 20X0
2120 Accrued Vacation 323,000
2200 Short-term Bank Loan 245,000 Short-term Loans 245,000
2300 Current Portion of Line of Credit 100,000 Current Portion
of Long-term Debt
100,000
2400 State Income Tax Payable 30,000
Income Taxes
Payable
90,000
2410 Federal Income Tax Payable 60,000
2500 Line of Credit (Revolver) 53,000 Line of Credit 53,000
2510 Term Loan 250,000 Term Loan 250,000
3000 Capital 50,000 Capital 50,000
3010 Current Year Earnings 159,000 Current Year
Earnings
159,000
3020 Retained Earnings 346,900 Retained
Earnings
346,900
Total $ 2,580,400 $ 2,580,400
The final step is to transfer the classification subtotals from the trial balance (Illustration 6) to the balance
sheet template (Illustration 4). For example, we transfer the $391,000 subtotal from the trial balance for
Cash & Cash Equivalents to the identical line on the balance sheet template. The result will be a
completed balance sheet:
Trial Balance
December 31, 20X0
2120 Accrued Vacation 323,000
2200 Short-term Bank Loan 245,000 Short-term Loans 245,000
2300 Current Portion of Line of Credit 100,000 Current Portion
of Long-term Debt
100,000
2400 State Income Tax Payable 30,000
Income Taxes
Payable
90,000
2410 Federal Income Tax Payable 60,000
2500 Line of Credit (Revolver) 53,000 Line of Credit 53,000
2510 Term Loan 250,000 Term Loan 250,000
3000 Capital 50,000 Capital 50,000
3010 Current Year Earnings 159,000 Current Year
Earnings
159,000
3020 Retained Earnings 346,900 Retained
Earnings
346,900
Total $ 2,580,400 $ 2,580,400
The final step is to transfer the classification subtotals from the trial balance (Illustration 6) to the balance
sheet template (Illustration 4). For example, we transfer the $391,000 subtotal from the trial balance for
Cash & Cash Equivalents to the identical line on the balance sheet template. The result will be a
completed balance sheet:
sIllustration 7: Completed balance sheet template
Your Company Name
Trial Balance
December 31, 20X0
ASSETS
Current Assets:
Cash & Cash Equivalents $ 391,000
Marketable Securities 0
Accounts Receivable 363,500
Inventories 289,000
Prepaid Expenses 8,400
Total Current Assets 1,051,900
Fixed Assets 828,000
Intangible Assets 140,000
Investments 75,000
Other Non-current Assets 54,000
TOTAL ASSETS $ 2,148,900
LIABILITIES
Current Liabilities:
Accounts Payable 285,000
Accrued Expenses 570,000
Short-term Loans 245,000
Current Portion of LT Debt 100,000
Income Taxes Payable 90,000
Total Current Liabilities 1,290,000
Non-current Liabilities:
Line of Credit 53,000
Term Loan 250,000
Total Non-current Liabilities 303,000
TOTAL LIABILITIES 1,593,000
Your Company Name
Trial Balance
December 31, 20X0
ASSETS
Current Assets:
Cash & Cash Equivalents $ 391,000
Marketable Securities 0
Accounts Receivable 363,500
Inventories 289,000
Prepaid Expenses 8,400
Total Current Assets 1,051,900
Fixed Assets 828,000
Intangible Assets 140,000
Investments 75,000
Other Non-current Assets 54,000
TOTAL ASSETS $ 2,148,900
LIABILITIES
Current Liabilities:
Accounts Payable 285,000
Accrued Expenses 570,000
Short-term Loans 245,000
Current Portion of LT Debt 100,000
Income Taxes Payable 90,000
Total Current Liabilities 1,290,000
Non-current Liabilities:
Line of Credit 53,000
Term Loan 250,000
Total Non-current Liabilities 303,000
TOTAL LIABILITIES 1,593,000
Your Company Name
Trial Balance
December 31, 20X0
EQUITY
Capital 50,000
Current Year Earnings 159,000
Retained Earnings 346,900
TOTAL EQUITY 555,900
TOTAL LIABILITIES & EQUITY $ 2,148,900
A few notes about the completed balance sheet:
The subtotals and totals on the balance sheet (i.e. the $1,051,900 for current assets) were
directly determined when all subtotals from the trial balance were transferred to the balance
sheet template.
The total assets of $2,148,900 equal the total liabilities and equity of $2,148,900. However, these
totals don't match the trial balance totals for debits and credits of $2,580,400 (Illustration 6).
The reason these totals don't match is because in the trial balance the totals are calculated for
the debit and credit balances separately. In the balance sheet, though, some credit balances
are subtracted from debit balances and vice versa (i.e. due to contra asset and contra liability
accounts). Therefore, the totals on the trial balance and the balance sheet may not match.
Normally, if a particular balance sheet classification has a zero balance (i.e. Marketable
Securities in Illustration 7), the classification line is not shown. We left Marketable Securities in
there so it is consistent with the balance sheet template (Illustration 4) we prepared earlier.
The line for Marketable Securities can be taken out without any "harm" to the balance sheet.
Trial Balance
December 31, 20X0
EQUITY
Capital 50,000
Current Year Earnings 159,000
Retained Earnings 346,900
TOTAL EQUITY 555,900
TOTAL LIABILITIES & EQUITY $ 2,148,900
A few notes about the completed balance sheet:
The subtotals and totals on the balance sheet (i.e. the $1,051,900 for current assets) were
directly determined when all subtotals from the trial balance were transferred to the balance
sheet template.
The total assets of $2,148,900 equal the total liabilities and equity of $2,148,900. However, these
totals don't match the trial balance totals for debits and credits of $2,580,400 (Illustration 6).
The reason these totals don't match is because in the trial balance the totals are calculated for
the debit and credit balances separately. In the balance sheet, though, some credit balances
are subtracted from debit balances and vice versa (i.e. due to contra asset and contra liability
accounts). Therefore, the totals on the trial balance and the balance sheet may not match.
Normally, if a particular balance sheet classification has a zero balance (i.e. Marketable
Securities in Illustration 7), the classification line is not shown. We left Marketable Securities in
there so it is consistent with the balance sheet template (Illustration 4) we prepared earlier.
The line for Marketable Securities can be taken out without any "harm" to the balance sheet.
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