Financial Reporting · Preparation of single entity financial statements

Preparing Financial Statements from a Trial Balance in ACCA FR

Updated 11 October 2026 · Fact-checked

A trial balance lists every ledger balance before year-end adjustments. To prepare financial statements, you apply each adjustment once as a debit and a credit: accruals, prepayments, depreciation, inventory, irrecoverable debts, tax and finance costs. Then you place each balance in the statement of profit or loss or the statement of financial position.

Understand Preparing Financial Statements from a Trial Balance

A trial balance lists all ledger balances at the year end. Debits equal credits. But it is not ready to publish. It is a record of transactions, and the accounts still need adjusting so that they follow the accruals basis. Income and expenses must belong to the right period. Assets and liabilities must be measured correctly.

The adjustments are the heart of the question. An accrual is an expense that belongs to the year but is not yet recorded: debit expense, credit liabilities. A prepayment is a payment recorded as an expense that belongs to a later period: debit prepayments (an asset), credit expense. Depreciation spreads the cost of a non-current asset over its useful life: debit expense, credit accumulated depreciation. Closing inventory is not in the trial balance as a ledger balance, so you add it as a credit to cost of sales and a debit to current assets.

Receivables need two steps. Write off known irrecoverable debts first. Then adjust the allowance for expected credit losses to the required level, and charge only the change to profit or loss. Tax and finance costs work the same way: you charge what belongs to the year, and the unpaid part sits in liabilities.

Every adjustment affects two places. One is in the statement of profit or loss and one is in the statement of financial position. If you remember this, you can check your work. At the end, the statement of financial position must balance. If it does not, you have missed a side of an entry.

Key rules to remember

Cost of sales: Opening inventory + purchases (net of returns, plus carriage in) − closing inventory; Closing inventory is lower of cost and net realisable value (IAS 2).
Accrual: Dr Expense; Cr Accruals (current liabilities); Expense for the year = amount paid + accrual at the end − accrual at the start.
Prepayment: Dr Prepayments (current assets); Cr Expense; Expense for the year = amount paid − prepayment at the end + prepayment at the start.
Straight-line depreciation: (Cost − residual value) ÷ useful life; Charge for the year. Time-apportion in the year of purchase if the question's policy says so.
Reducing balance depreciation: (Cost − accumulated depreciation) × rate; The rate applies to the carrying amount, not cost.
Net realisable value: Estimated selling price − costs to complete − costs to sell; Write inventory down only when NRV is below cost.
Irrecoverable debt and allowance: Write off debt; allowance required = % × (receivables − debts written off); P/L charge = required allowance − opening allowance; If the required allowance is lower than the opening one, the difference is a credit to profit or loss.
Finance cost: Loan × rate × time − interest already paid = accrued interest; Total finance cost goes to profit or loss. Accrued interest is a current liability.
Income tax: Current year estimate ± over/under provision from the prior year; Profit or loss charge. The liability is the unpaid prior-year amount plus the current-year estimate.
Accounting equation check: Assets = Equity + Liabilities; Use it to test that your statement of financial position balances.

How to solve Preparing Financial Statements from a Trial Balance questions

Use the same routine on every question. It keeps your workings tidy and makes sure each adjustment is made exactly once.

1Read the requirements first. Note which statements you need, whether there are notes or extracts, and the date of the year end.
2Read all the notes below the trial balance and number each adjustment. Tick it off as you use it.
3Set up the proforma for each statement with the IAS 1 headings, and leave space for figures.
4Do a working for each adjustment that needs calculation: depreciation, receivables, inventory, accruals, prepayments, interest, tax. Show the debit and credit for each.
5Fill in the statement of profit or loss, line by line. Start with revenue and cost of sales, then expenses, finance costs and tax.
6Fill in the statement of financial position. Take each trial balance balance, after adjustment, to one place only.
7Take retained earnings: opening balance in the trial balance plus the profit for the year, less dividends paid. Then check that total assets equal total equity and liabilities.
8If it does not balance, check for a single missed side of an entry, a number copied wrongly, or an adjustment applied twice.

Quickest way: Adjustment grid under time pressure

When to use it: Use it in Section C when you have about 36 minutes for a 20-mark question and many adjustments in the notes.

Draw a grid with a row per trial balance line and columns for TB, adjustment, final and P/L or SOFP.
Write each adjustment next to the line it changes, with a note number. Do the arithmetic once and put the result in the final column.
Do the working that takes the most marks first: depreciation, receivables, inventory, tax. Do not spend time on lines with no adjustment.
Copy the final column to the statements. Cross each line out as you use it so nothing is missed or used twice.
Finish with the balance check. Spend your last minutes on that, not on polishing.

Common mistakes in Preparing Financial Statements from a Trial Balance

Applying the adjustment to only one side, so the statement of financial position does not balance.
You rush and treat adjustments as changes to profit only.
Fix: Write the debit and credit for every note in your working before you update either statement.
Charging the whole allowance for receivables to profit or loss instead of the movement.
You forget that the trial balance already holds the opening allowance.
Fix: Required allowance minus opening allowance is the charge. Write off irrecoverable debts first and base the % on the reduced receivables.
Adding closing inventory as a trial balance item or ignoring the opening inventory.
The trial balance shows opening inventory, and students mix up the two figures.
Fix: Opening inventory in the TB goes into cost of sales. Closing inventory comes from the notes and is deducted from cost of sales and shown as a current asset.
Applying the depreciation rate to cost when the question says reducing balance.
You do it by habit from straight-line questions.
Fix: Read the policy wording. For reducing balance, use cost minus accumulated depreciation to date, then the rate.
Double counting prepaid or accrued expenses already included in the trial balance.
You do not check whether the figure in the trial balance is the cash paid or the full-year expense.
Fix: Start from the amount in the ledger, then adjust by the change in accrual or prepayment. Check the note wording.
Putting the tax and the prior-year under/over provision in the wrong places.
There are two figures, one for profit or loss and one for the liability, and they differ.
Fix: Profit or loss: current-year estimate plus under-provision, or minus over-provision. Statement of financial position: the amount still unpaid.

Worked examples

Example 1

Extract from a trial balance of Kora Co at 31 December 20X5. Revenue $900,000; opening inventory $60,000; purchases $520,000; administrative expenses $110,000 (including insurance of $12,000 paid on 1 October 20X5 for 12 months); receivables $80,000; allowance for receivables at 1 January 20X5 $2,500; property, plant and equipment at cost $400,000; accumulated depreciation $120,000; 8% loan $100,000 (issued before 20X5), interest paid in the year $4,000. Adjustments: (1) closing inventory $75,000; (2) electricity of $4,000 is unrecorded; (3) a receivable of $3,000 is irrecoverable and must be written off; the allowance should be 5% of the remaining receivables; (4) depreciate PPE at 20% reducing balance; (5) the loan interest for the second half-year is unpaid; (6) the income tax charge is estimated at $55,000. Calculate profit for the year.

Show the solution

Cost of sales = 60,000 + 520,000 − 75,000 = $505,000. Gross profit = 900,000 − 505,000 = $395,000.
Insurance prepayment: 9 of the 12 months fall in 20X6, so 12,000 × 9/12 = $9,000 prepaid.
Depreciation = (400,000 − 120,000) × 20% = 280,000 × 20% = $56,000.
Allowance: receivables after write-off = 80,000 − 3,000 = 77,000. Required allowance = 5% × 77,000 = 3,850. Charge = 3,850 − 2,500 = $1,350. Add the $3,000 irrecoverable debt.
Administrative expenses = 110,000 − 9,000 + 4,000 + 56,000 + 3,000 + 1,350 = $165,350.
Operating profit = 395,000 − 165,350 = $229,650.
Finance cost = 100,000 × 8% = 8,000 (paid 4,000, accrued 4,000). Profit before tax = 229,650 − 8,000 = $221,650.
Profit for the year = 221,650 − 55,000 = $166,650.

Answer: Profit for the year is $166,650.

Example 2

Extract from the trial balance of Ruda Co at 31 December 20X5: rent expense $33,000 (includes $18,000 paid on 1 August 20X5 for six months' rent); income tax payable $12,000 (credit, the prior-year estimate). Notes: (a) inventory at cost is $48,000, which includes items that cost $8,000; these can be sold for $7,000 after selling costs of $1,500; (b) plant cost $150,000 with residual value $10,000 and a five-year life, straight line, for a full year; (c) the prior-year tax was finally agreed at $12,800, not yet paid, and the current-year income tax is estimated at $30,000. Calculate (i) the inventory figure, (ii) the rent expense and prepayment, (iii) the depreciation charge, and (iv) the tax charge and the tax liability.

Show the solution

Inventory: NRV of the damaged items = 7,000 − 1,500 = $5,500, which is below cost of $8,000. Write down by 2,500. Inventory = 48,000 − 2,500 = $45,500.
Rent: $18,000 covers six months, which is $3,000 a month. August to January: January falls after the year end, so prepayment = 1 month = $3,000. Rent expense = 33,000 − 3,000 = $30,000.
Depreciation = (150,000 − 10,000) ÷ 5 = 140,000 ÷ 5 = $28,000.
Tax charge: current-year 30,000 plus under-provision (12,800 − 12,000 = 800) = $30,800.
Tax liability: prior-year amount still unpaid 12,800 plus current-year 30,000 = $42,800. Check: TB 12,000 + charge 30,800 = 42,800.

Answer: (i) Inventory $45,500; (ii) rent expense $30,000 and prepayment $3,000; (iii) depreciation $28,000; (iv) tax charge $30,800 and tax liability $42,800.

Exam tips

Cross out each note when used. Marks go to each adjustment, and one missed note costs more than a small arithmetic slip.
Show your workings clearly and label them. In Section C, a wrong figure that comes from a correct method can still earn marks.
Take care with the wording: cost or NRV, reducing balance or straight line, 'paid' or 'for the year'. Section A and Section B questions often test one of these traps for two marks.
Use the IAS 1 headings and the correct order of lines in your proforma, so marks for presentation are not lost.
Leave time at the end for the balance check. A statement of financial position that does not balance shows you which adjustment is wrong.

Practice questions from Preparation of single entity financial statements

Preparing Financial Statements 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 Financial Statements from a Trial Balance: frequently asked questions

What year-end adjustments appear most often in ACCA FR questions?

Accruals and prepayments, depreciation, closing inventory, irrecoverable debts and the allowance for receivables, income tax and loan interest. Most Section C questions combine several of these in one trial balance. Practise doing each one quickly and in the right place.

Do I need to show journals in the exam?

Not usually. The question asks for the statements. But writing a short debit and credit in your working helps you avoid one-sided entries, and it is quick.

Where do I put the opening balance of retained earnings?

It is in the trial balance. Add the profit for the year and deduct any dividends declared or paid in the year to find the closing retained earnings in the statement of financial position.

How is the allowance for receivables different from an irrecoverable debt?

An irrecoverable debt is a specific receivable you will not collect, so you write it off. The allowance is an estimate of expected credit losses on the remaining receivables. Write off first, then calculate the allowance on what is left.