Final Accounts from Trial Balance with Adjustments

Understand Final Accounts from Trial Balance

Key rules to remember

Cost of goods sold

Opening stock + Net purchases + Direct expenses − Closing stock

Net purchases = Purchases − Purchase returns − Goods withdrawn by proprietor.

Gross profit

Net sales + Closing stock − (Opening stock + Net purchases + Direct expenses)

If the debit side is bigger, the difference is gross loss.

Net profit

Gross profit + Other incomes − Indirect expenses

Indirect expenses include adjusted salaries, rent, depreciation, bad debts and provision.

Adjusted expense

Expense per trial balance + Outstanding − Prepaid

Outstanding is added to the expense. Prepaid is deducted from it.

Adjusted income

Income per trial balance + Accrued − Received in advance

Accrued income is an asset. Income received in advance is a liability.

Closing capital

Opening capital + Net profit − Drawings (cash and goods) − Net loss

Use this figure on the liabilities side of the Balance Sheet.

Depreciation (straight line on cost)

Cost × Rate % × Period ÷ 12

Charge to Profit and Loss Account and deduct from the asset in the Balance Sheet.

Provision for doubtful debts

(Debtors − Further bad debts) × Rate %

Create it on debtors left after writing off further bad debts.

Accounting equation check

Assets = Capital + Liabilities

Both Balance Sheet totals must agree.

Goods withdrawn entry

Drawings A/c Dr; To Purchases A/c (at cost)

Not an expense of the business.

How to solve Final Accounts from Trial Balance questions

1. 1Read the adjustments first. Tick each one and note its two effects: income statement and Balance Sheet.
2. 2Check whether the trial balance already includes any adjustment. If a figure appears in both places, do not use it twice.
3. 3Prepare the Trading Account. Put opening stock, net purchases, wages, carriage inwards and other direct expenses on the debit. Put net sales and closing stock on the credit. Find gross profit.
4. 4Prepare the Profit and Loss Account. Bring down gross profit. Add incomes. Charge all indirect expenses after adjusting outstanding, prepaid, depreciation, bad debts and provision. Find net profit.
5. 5Compute closing capital: opening capital + net profit − all drawings, including goods withdrawn.
6. 6Prepare the Balance Sheet. Show liabilities (closing capital, creditors, outstanding expenses) and assets (closing stock, debtors less provision, cash, bank, prepaid, fixed assets less depreciation).
7. 7Total both sides and compare. If they differ, go back to the adjustments that have a double effect.
8. 8If asked, write the closing entries: transfer nominal accounts to Trading, Profit and Loss and Capital Accounts.

Quickest way: Adjustment grid method

Common mistakes in Final Accounts from Trial Balance

• Treating drawings as an expense in the Profit and Loss Account.

  Drawings appear on the debit side of the trial balance, like expenses.

  Fix: Drawings are not a business cost. Deduct them from capital in the Balance Sheet.

• Ignoring goods withdrawn, or deducting them only from Purchases and not adding to Drawings.

  The adjustment has two parts and students complete only one.

  Fix: Reduce Purchases in the Trading Account at cost and add the same amount to Drawings. Balance Sheet capital then falls by the total drawings.

• Showing an adjustment only once.

  Students forget that every adjustment has a double effect.

  Fix: Use the adjustment grid. An outstanding expense is added to the expense and shown as a liability.

• Showing closing stock only in the Trading Account.

  It is given as an adjustment, so it feels like a trading item only.

  Fix: Credit it in the Trading Account and show it as a current asset in the Balance Sheet.

• Calculating provision for doubtful debts on the original debtors figure.

  Students apply the percentage before writing off further bad debts.

  Fix: First deduct further bad debts, then apply the rate to the remaining debtors.

• Putting carriage inwards or wages in the Profit and Loss Account.

  Students are unsure which expenses are direct.

  Fix: Expenses to bring goods to a saleable condition (wages, carriage inwards, freight) go to the Trading Account. Selling and office costs go to the Profit and Loss Account.

Worked examples