Elements of Financial Statements and Uses of a Trial Balance

  

Date Posted: 4/5/2012 6:50:02 AM

Posted By: sashoo  Membership Level: Silver  Total Points: 382

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1. ELEMENTS OF FINANCIAL STATEMENTS
Economic resources known as assets are owned by the business entity and are expected to benefit the current and the future operations of the business. Assets may have a physical form e.g. buildings, motor vehicles, stock, furniture etc. Some assets are not in physical form but in the form of valuable legal claims or rights e.g. the amounts owed by the business credit customers (debtors). Liabilities are debts or obligations of entities that have arisen from the past transactions - for instance the business borrowing cash from the bank. Sometimes the business may purchase goods on credit from the suppliers or creditors.

Capital or owners equity:
This is the owner’s claim against the assets of the business. It consists of the value of economic resources invested in the business by the owner.

Income (revenue):
This is the inflow of assets to a business that results from the sale of goods or services by the business. Income is measured in terms of the selling price. This is the price of the goods or services sold to the customer, for example, the business sold goods at shs.10,000 cash. This cash inflow represents an income to the business.

Expenses: They consist of the assets used by the business in order to sell goods and provide services to customers. Expenses do not include the cost of goods sold to the customer. Examples of expenses include salary expenses, advertising expenses, telephone expenses etc.

The profit or loss generated by the business is determined by comparing the income earned and expenses incurred within a specified period.

2. USES OF A TRIAL BALANCE
a) To check the arithmetic accuracy of the work done when posting and balancing the ledger accounts. If the debit column total of the trial balance agrees with the credit column total, this is a confirmation that the

arithmetic computations were correct i.e. correct additions and subtractions were done in the ledger accounts.

b) It is used to check whether the double entry system has been observed when posting transactions to the ledger accounts i.e. for every debit entry, make a corresponding credit entry.

c) It provides a simple summary of the work done in the ledger accounts by listing down the balances of the individual ledger accounts.

d) The trial balance provides the information needed to prepare the trading and profit and loss account and the balance sheet of business at the end of the trading period.

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