Financial Accounting · Statement of financial position

Preparing the Statement of Financial Position from a Trial Balance

Updated 11 October 2026 · Fact-checked

To prepare a statement of financial position from a trial balance, you post each year-end adjustment twice, then sort every balance. Asset balances and liability balances go to the statement of financial position. Income and expense balances go to profit or loss. Profit then joins retained earnings in equity, so assets minus liabilities equal equity.

Understand Preparing the Statement from a Trial Balance

A trial balance lists every ledger balance at the year end. Debit balances equal credit balances. It is only a starting point. It does not yet include all the year-end adjustments, so it cannot be published as it stands.

Adjustments are things the ledger has not yet recorded. Typical ones are closing inventory, depreciation, accruals, prepayments, irrecoverable debts and the allowance for receivables. Each adjustment has two sides. One side usually hits profit or loss. The other side hits the statement of financial position. That is why you must post both.

Once adjusted, every balance has one home. Assets, liabilities, share capital and reserves go to the statement of financial position. Revenue and expenses go to the statement of profit or loss. The profit for the year is added to retained earnings. This is what makes the statement of financial position balance.

In the FA exam you often do not draw the full statement. Objective questions ask for one figure, such as carrying amount, total current liabilities or net assets. The same method gives you that figure quickly.

Key formulas to remember

Accounting equation: Assets − Liabilities = Equity; The statement of financial position must satisfy this. Use it as a final check.
Closing retained earnings: Opening retained earnings + Profit for the year − Dividends = Closing retained earnings; Profit comes from the adjusted income and expense balances. Dividends are only those declared in the year.
Carrying amount: Cost (or valuation) − Accumulated depreciation = Carrying amount; Show non-current assets at carrying amount. Add the year's depreciation to the opening accumulated depreciation.
Reducing balance depreciation: Depreciation = Rate × (Cost − Accumulated depreciation b/f); Apply the rate to the carrying amount at the start of the year.
Accrual and prepayment: Accrual: expense rises, liability created. Prepayment: expense falls, current asset created.; Accrued expenses are current liabilities. Prepaid expenses are current assets.
Closing inventory entry: Dr Inventory (current asset); Cr Cost of sales; The trial balance usually shows opening inventory. Closing inventory is given as an adjustment.
Allowance for receivables: Write off irrecoverable debts first. Then: Allowance = % × (Receivables − Debts written off); Only the change in the allowance goes to profit or loss. Show receivables net of the full allowance.

How to solve Preparing the Statement from a Trial Balance questions

Use the same sequence for every question. It keeps the double entry straight and stops you missing an adjustment.

1Read the whole question first. List every adjustment and note whether the question wants a full statement or one figure.
2For each adjustment, write both sides of the entry in the margin: which account is debited, which is credited, and the amount.
3Work out each figure: depreciation on the right base, accruals and prepayments by time proportion, and the allowance on the receivables left after write-offs.
4Go down the trial balance and tag each line: SOFP or profit or loss. Replace each balance with its adjusted figure where you posted an adjustment.
5Build the SOFP in order: non-current assets at carrying amount, current assets, equity, non-current liabilities, current liabilities.
6Find profit for the year from the income and expense lines. Add it to opening retained earnings and deduct dividends to get closing retained earnings.
7Check that total assets equal equity plus liabilities. If not, look for a missed adjustment or a one-sided entry.

Quickest way: Adjust, tag, total

When to use it: Use this for number-entry and multiple-choice questions that ask for one statement of financial position figure.

Ignore lines that cannot affect the figure asked for.
Take the balance for the item asked for, for example prepayments or payables, from the trial balance.
Apply only the adjustments that touch that item, in the correct direction.
Add or subtract to reach the total. Do not compute profit unless equity or retained earnings is asked for.
Read the question again to check the sign, the unit and whether it wants net or gross.

Common mistakes in Preparing the Statement from a Trial Balance

Posting only one side of an adjustment, so the statement does not balance.
You add an accrual to the expense but forget to create the liability.
Fix: Write both the debit and the credit for every adjustment before you touch the statement.
Charging reducing balance depreciation on cost instead of carrying amount.
You see the cost figure first and use it.
Fix: Deduct accumulated depreciation b/f first, then apply the rate.
Treating a prepayment as an expense or an accrual as an asset.
You mix up which way the adjustment moves the expense.
Fix: Prepaid is paid in advance, so it is a current asset. Accrued is owed, so it is a current liability.
Applying the allowance percentage to receivables before writing off irrecoverable debts.
You use the trial balance receivables figure straight away.
Fix: Write off the bad debt first, then apply the percentage to the remaining balance.
Putting the full new allowance in profit or loss when an allowance already exists.
You forget the opening allowance is in the trial balance.
Fix: Charge only the increase, or credit only the decrease. Show receivables net of the full allowance in the SOFP.
Leaving closing inventory out of current assets.
The trial balance has an inventory figure, so you assume it is the closing one.
Fix: The trial balance figure is normally opening inventory. Use the closing figure given in the adjustments.

Worked examples

Example 1

At 31 December 20X5, a company's trial balance shows receivables of $48,000 and an allowance for receivables of $2,000 (credit). A receivable of $3,000 is to be written off as irrecoverable. The allowance is to be 5% of the remaining receivables. What amount of receivables is shown in the statement of financial position, and what is the total charge to profit or loss for these two items?

Show the solution

Write off the irrecoverable debt: $48,000 − $3,000 = $45,000.
Required allowance: 5% × $45,000 = $2,250.
Opening allowance is $2,000, so the increase is $2,250 − $2,000 = $250.
Receivables in the SOFP: $45,000 − $2,250 = $42,750.
Charge to profit or loss: irrecoverable debt $3,000 + allowance increase $250 = $3,250.

Answer: Receivables are shown at $42,750 and the total charge to profit or loss is $3,250.

Example 2

At 31 March 20X6 a company's trial balance includes: plant at cost $80,000; accumulated depreciation on plant $20,000; receivables $30,000; bank $9,000 (debit); payables $14,000; rent paid $12,000; electricity $4,500. Adjustments: (i) depreciate plant at 20% reducing balance; (ii) rent paid includes $3,000 relating to the next year; (iii) electricity of $1,500 is owed at the year end; (iv) closing inventory is $15,000. Calculate the carrying amount of plant, current assets, current liabilities and net assets.

Show the solution

Depreciation: 20% × ($80,000 − $20,000) = 20% × $60,000 = $12,000.
Carrying amount of plant: $60,000 − $12,000 = $48,000.
Current assets: inventory $15,000 + receivables $30,000 + prepayment $3,000 + bank $9,000 = $57,000.
Current liabilities: payables $14,000 + electricity accrual $1,500 = $15,500.
Net assets: $48,000 + $57,000 − $15,500 = $89,500.

Answer: Plant $48,000; current assets $57,000; current liabilities $15,500; net assets $89,500.

Exam tips

Objective questions usually ask for one figure. Do not build the whole statement unless it helps you reach that figure.
Find the adjustments list first. The wrong answer options are often what you get when you skip one adjustment.
In multiple response questions, check each statement against the adjusted figures. Select exactly the number the question states.
For number entry, work to the unit the question asks for and type the figure without extra symbols.
If the statement does not balance, check your adjustments before you recheck the arithmetic.

Practice questions from Statement of financial position

Preparing the Statement from a Trial Balance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparing the Statement from a Trial Balance: frequently asked questions

What is the first step in preparing financial statements from a trial balance?

Read the adjustments and write the double entry for each one. This shows you which balances change and by how much. Only then should you sort the balances into the statement of financial position and profit or loss.

Where does profit for the year go in the statement of financial position?

It is added to opening retained earnings within equity. Deduct any dividends declared in the year. The result is closing retained earnings.

Is closing inventory in the trial balance?

Usually not. The trial balance normally shows opening inventory. Closing inventory is given as an adjustment, and you show it as a current asset.

Do I need to draw the full statement in the FA exam?

Not always. Section A questions mostly ask for single figures. Section B multi-task questions can ask for several figures or statement extracts, so practise the full method.