Trial balances Example 1

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Trial balances

At any stage, the sums of debit balances and credit balances should be the same. This is because we were strict to always have equal debit and credit entries.
These totals are the trial balance

Example 1

Answer to Example

Statements of financial position and statement of comprehensive income (income statement)

The accounts can also be used to produce a statement of financial position and an income statement.

• Statement of financial position: the assets and liabilities (things owned and things owed) at a point in time
• Income statements: income and expenses for the period.

Note that capital put in or taken out by the owners is neither income or expense. It is simply the owner changing his or her investment in the business.
The trial balance amounts can be marked up with SOFP or IS to show which document they form part of:

Note that the profit made by the business is added to the liabilities in the SOFP. This is because profit is owed to the owners and becomes part of the capital of the business.

Profits taken out of the business are know as ‘Drawings’ (derived from ‘withdrawals’). If the owner removed $1,000 profits then cash would go down $1,000 and drawings up by $1,000.  The liability side of the SOFP would then look like: