Unit 4

Preparation of
Trial Balance and
Financial
Statements
Prepared by
Dr. Mohammed Shahwar Alam
Al- Kharj University, Al-Kharj
 Preparation of Unadjusted Trial Balance

• Meaning: Trial Balance is a summary of ledger balances. It is prepared

at the end of an accounting period. Debit balance of a ledger is
recorded in debit side and credit balance of a ledger is recorded in a
credit side of it. The total of both the columns must agree.
• Importance of Trial Balance:
• It proves the mathematical equality of debits and credits after posting
under double entry system.
• This equality occurs when the sum of the debit account balances equals
the sum of the credit account balances.
• Procedure of preparing Unadjusted Trial Balance:
• Listing the account titles and their balances.
• Totaling the debit and credit balances.
• Proving the equality of both columns
Preparation of Adjusted
Trial Balance

• Adjusted Trial Balance

– prepared after all adjusting entries have
been journalized and posted
– purpose is to prove equality of the total debit
and credit balances in the ledger after
adjustments have been made
– prepared financial statements directly from
the adjusted trial balance.
Problems of Unadjusted Trial Balance

• Q.1 Prepare unadjusted trial balance with the help of the following ledger balances on December31,
2007.
• Cash – 5,000 SR, Accounts Receivable- 8,000 SR, Accounts Payable- 7,000 SR, Salary Payable-
3,000 SR, Service Revenue- 12,000 SR, Advertising Expenses- 11,000 SR, Plant- 20,000 SR, Prepaid
Insurance- 4,000 SR, Salim’s Capital- 27,500 SR, Repair Expenses- 1,500 SR.
• Answer:
• Unadjusted Trial Balance as at December 31, 2007
• Account Debit Credit
• Cash SR 5,000
• Account Receivable 8,000
• Accounts Payable SR 7,000
• Salary Payable 3,000
• Service Revenue 12,000
• Advertising Expenses 11,000
• Plant 20,000
• Prepaid Insurance 4,000
• Salim’s Capital 27,500
• Repair Expenses 1,500
• _____________________
• Total 49,500 49,500
• _____________________

•
Problems of Unadjusted Trial Balance

• Q.2 Following are the ledger balances of United Company as at December 31, 2008. Common Stock-
60,000 SR, Rent Receivable 5,000 SR, Machinery- 45,000 SR, Accumulated Depreciation on
Machinery-8,000 SR, Notes Payable 12,000 SR, Notes Receivable- 15,000 SR, Retained Earnings-
7,500 SR, Dividend- 2,000 SR, Salary Expenses- 3,500 SR, Depreciation Expenses- 4,000 SR,
Interest Expenses- 3,000 SR, Prepaid Rent- 2,500 SR, Interest Revenue- 6,500 SR, Cash- 24,000 SR.
• Prepare Trial Balance with the help of the above information.
• Solution:
• Unadjusted Trial Balance as at December 31, 2008
• Account Debit Credit
• Common Stock SR 60,000
• Rent Receivable 5,000
• Machinery SR 45,000
• Accumulated Depreciation on Machinery 8,000
• Notes Payable 12,000
• Notes Receivable 15,000
• Retained Earnings 7,500
• Dividend 2,000
• Salary Expenses 3,500
• Depreciation Expenses 4,000
• Interest Expenses 3,000
• Prepaid Rent 2,500
• Interest Revenue 6,500
• Cash 24,000 ____________
• Total 99,000 99,000
•
 Problem on Adjusted Trial Balance

• Q.3 Prepare adjusted trial balance with the help of the following unadjusted trial balance & adjustments as on
December 31, 2008.
• Account Debit Credit
• Supplies 700 SR ----
• Prepaid Insurance 2,400 ----
• Salaries Payable ---- 800 SR
• Unearned Revenue ---- 750
• Supplies Expenses 950 ----
• Insurance Expenses 400 ----
• Salary Expenses 1,800 ----
• Service Revenue ---- 2,000
• Notes Payable ---- 4,700
• Notes Receivable 2,000 ----
• Total= 8,250 8, 250
• Adjustments:
• 1. Insurance expired during the year 500 SR.
• 2. Interest Accrued on Notes Receivable 200 SR.
• 3. Estimated bad debts during the year 500 SR.
• 4. Income Tax payable 600 SR.
 Solution of Question 3
• Adjusted Trial Balance as at December 31, 2008
• Account Debit Credit
• Supplies SR 700
• Prepaid Insurance 1,900
• Salary Payable SR 800
• Unearned Revenue 750
• Supplies Expenses 950
• Insurance Expenses 900
• Salary Expenses 1,800
• Service Revenue 2,000
• Notes Payable 4,700
• Notes Receivable 2,000
• Bad Debts 500
• Allowance for Doubtful Debts 500
• Interest Receivable (Accrued) 200
• Interest Revenue 200
• Income Tax Expenses 600
• Income Tax Payable 600
• ___________________
• Total 9,550 9,550
• ____________________
 Post Closing Trial Balance

• A company can make a third trial balance

after posting the closing entries. The trial
balance after closing is called the post
closing trial balance. It consists only of
assets, liabilities, and owner’s equity
accounts.
Preparation of Financial Statements

Financial statements are prepared directly from

the adjusted trial balance.
• Income statement
– use the revenue and expense accounts

• Owner’s Equity Statement

– use the owner’s capital and drawing accounts and the net
income or net loss from the Income Statement.
Balance sheet
– use asset and liability accounts and ending owner’s capital
balance reported in Owner’s Equity Statement
Problems of Financial Statements
Q.4 Prepare Income Statement from
the following adjusted trial balance
WANDA ADVERTISING AGENCY
Adjusted Trial Balance
October 31, 2008
Debit Credit
Cash SR 15,200
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000
Accumulated Depreciation - Office Equipment 40
Notes Payable 5,000
Accounts Payable 2,500
Interest Payable 50
Unearned Revenue 800
Salaries Payable 1,200
Wanda Capital 10,000
Wanda Drawing 500
Service Revenue 10,600
Salaries Expense 5,200
Advertising Supplies Expense 1,500
Rent Expense 900
Insurance Expense 50
Interest Expense 50
Depreciation Expense 40
SR30,190 SR 30,190
 Prepare Income Statement

• Income statement of Wanda Advertising Agency as at October 31, 2008

• Revenue
• Fees Earned SR 10,600
• Expenses
• Salary Expense SR 5,200
• Advertising Supplies Expenses 1,500
• Rent Expenses 900
• Insurance Expense 50
• Interest Expense 50
• Depreciation Expense 40
• Total Expense 7,740
• ________
• Net Income SR 2,860
• _________
• Income statement is prepared with the help of Revenue and Expense accounts.
 Preparation of Retained Earning or
Owner’s Equity Statement
• Q.5 Prepare retained earning statement with the help of adjusted trial balance given before.
• Solution:
• Retained Earning Statement as at October 31, 2008
•
• Opening balance of retained earning statement 0
• Add Net Income SR 2, 860
• ______
• 2,860
• Less Dividend 0
• ______
• Retained Earning as at October 31,2008 2,860
• Add Capital Investment 10,000
• Less Drawings 500
• ______
• Owner’s Equity 12,360
• ______
PREPARATION OF THE BALANCE SHEET
FROM THE ADJUSTED TRIAL BALANCE
Q. 6 Prepare Balance Sheet from the adjusted trial balance given before

Balance Sheet of Wanda Advertising Company

October 31, 2008

Assets Liabilities and Owner’s Equity

Cash SR15,200 Liabilities

Accounts receivable 200 Notes payable SR 5,000
Advertising supplies 1,000 Accounts payable 2,500
Prepaid insurance 550 Interest payable 50
SRS
Office equipment SR 5,000 Unearned fees 800
Less: Accumulated Salaries payable 1,200
depreciation 40 4,960 Total liabilities 9,550
Owner’s equity
Wanda Capital 12,360
Total liabilities and owner’s
Total assets SR21,910 equity SR21,910
 Quiz - 4
• Fill in the blanks:
•
• Q. 1. A trial balance is a summary of -------------------balances.
Q. 2. A company make a third trial balance after posting the --------------------------entries.

True and False:

Q.3. The balance sheet reports the assets, liabilities, and stockholders’ equity of a business
enterprise. ( True/False)
Q.4. The trial balance does not prove the mathematical equality of debits and credits. (True/False)

Multiple Choice Question:

Q.5. Revenues include –
a. Sales b. Fees
c. Interest d. All

•
 Home Assignment- 4
• Do the following question and show me in the next period.
• The adjusted trial balance of Cooper Co. as of December 31, 2007, contains the following.
• Account Title Dr. Cr.
• Cash 19,472 SR ----
• Accounts Receivable 6,922 ----
• Prepaid rent 2,280 ----
• Equipment 18,050 ----
• Accumulated Depreciation ---- 4,895 SR
• Notes Payable ---- 5,700
• Accounts Payable ---- 5,472
• Common Stock ---- 20,000
• Retained Earnings ---- 11,310
• Dividends 3.000 ----
• Service Revenues ---- 11,590
• Salaries Expense 6,840 ----
Rent Expense 2, 260 ----
• Depreciation Expense 145 ----
• Interest Expense 83 ----
• Interest Payable ---- 83
• Total= 59,050 SR 59,050 SR
• Instructions:
• A. Prepare an Income Statement.
• B. Prepare a Statement of Retained Earning.
• C. Prepare a classified Balance Sheet.
 Problems on Financial Statements

• Q.7 Q. 3. Presented below is financial information of Alatorre company.

• Alatorre Company
• Sales 90,000 SR
Sales return (a)
• Net Sales 81,000
• Cost of Goods Sold 56,000
• Gross Profit (b)
• Operating Expenses 15,000
• Net Income (c)
• Compute the missing amounts.
• Answer- Sales – Net Sales = Sales return
• 90,000 – 81,000 = 9,000
• Net sales – Cost of goods sold = Gross Profit
• 81,000 – 56,000 = 25,000
• Gross Profit – Operating Income = 25,000 – 15,000 = 10, 000 SR
 Problem on Financial Statements
• Presented below is the adjusted trial balance of Santo Design Agency as of December 31, 2007
• Account Titles Debit Credit
• Cash 11,000 SR ----
• Accounts Receivable 21,500 ----
• Advertising Supplies 5,000 ----
• Prepaid Insurance 2,500 ----
• Printing Equipment 58,000 ----
• Accumulated Depreciation ---- 35,000 SR
• Accounts Payable ---- 5,000
• Interest Payable ---- 150
• Notes Payable ---- 5,000
• Unearned Advertisement ---- 5,600
• Salaries Payable ---- 1,300
• Common Stock ---- 10,000
• Retained Earning ---- 3,500
• Advertising Revenue ---- 61,500
• Dividends 2,000 -----
• Salaries Expenses 11,300 ----
• Insurance Expense 850 ----
• Interest Expense 500 ----
• Depreciation Expense 7,000 ----
• Art Supplies Expense 3,400 ----
• Rent Expense 4,000 ----
• Total= 127,050 SR 127,050 SR
• Prepare an Income Statement, a Statement of Retained Earnings and an unclassified Balance Sheet as at December 31,
2007.
• Q. 8 Prepare Income Statement of Santo Design Agency for the year ended December 31, 2007.
• Q. 9 Prepare Retained Earning Statement .
• Q. 10 Prepare Balance Sheet from the above adjusted trial balance for the year ended December 31, 2007.

•
 Preparation of Income Statement

• Answer- 8
• Income Statement of Santo Design Agency
• for the year ended December 31, 2007
• Revenues
• Advertising Revenue SR 61,500
• ______________
Total Revenues 61,500
Expenses
Salaries Expenses SR 11,300
Insurance Expenses 850
Interest Expenses 500
Depreciation Expenses 7,000
Advertising Supplies Expenses 3,400
Rent Expenses 4,000
Total Expenses 27,050
____________________________
Net Income SR 34,450
_______________
 Retained Earning Statement

• Answer- 9
• Retained Earning Statement of Santo Design Agency
• for the year ended December 31, 2007
•
• Retained Earning Jan. 1, 2007 SR 3,500
• Add Net Income 34,450
• _______
• 37,950
• Less Dividends 2,000
• _______
• Retained Earning Dec. 31, 2007 SR 35,950
• _______
 Preparation of Balance Sheet

• Answer – 10
• Balance Sheet of Santo Design Agency
• for the year ended December 31, 2007
• Assets
• Cash SR 11,000
• Account Receivable 21,500
• Advertising Supplies 5,000
• Prepaid Insurance 2,500
• Printing Equipment 58,000
• Less Accumulated Depreciation 35,000 23,000
• Total Assets 63,000
• ________
• Liabilities & Shareholders Equity
• Liabilities
• Accounts Payable 5,000
• Interest Payable 150
• Notes Payable 5,000
• Unearned Advertising Revenues 5,600
• Salaries Payable 1,300
• Total Liabilities 17,050
• Shareholders Equity
• Common Stock 10,000
• Retained Earnings 35,950
• __________
• Total Liabilities & Shareholders Equity 63,000
• _________
 Mini Project
• Prepare the Income Statement and Balance Sheet
from the adjusted trial balance of Almarai
Company .

• Guidelines: Collect the annual report of Almarai

Company and then prepare Income Statement and
Balance Sheet.