Trial balance → financial statements
Area F is a large part of FA. You take a trial balance (and extra information), adjust it, then build a statement of profit or loss and a statement of financial position. This page is a practical method you can use on every question — not a full textbook.
What you must be able to do
- Read a trial balance and know which balances are assets, liabilities, equity, income, or expenses
- Process typical adjustments (inventory, depreciation, accruals, prepayments, irrecoverable debts, allowance, etc.)
- Build a clear SoPL and SFP from the adjusted figures
- Keep workings tidy so marks are easy to award
1. What the trial balance is
A trial balance lists ledger balances at a date, with totals of debits and credits equal (if the double entry was complete and error-free in total). It is a starting list, not the final statements. FA almost always adds “notes” under the TB that force adjustments.
Tutor tip
Never publish the TB as the answer. Always adjust first, then present SoPL and SFP in the required format.
2. A reliable exam method (same order every time)
- Skim the TB — mark income/expense vs SFP items in your mind.
- Read all additional information before you write numbers (inventory, dep, accruals, errors).
- Do workings for each adjustment (one small working each).
- Draft SoPL — revenue, cost of sales, gross profit, expenses, profit for the year.
- Draft SFP — non-current assets, current assets, equity, non-current liabilities, current liabilities.
- Balance check — assets = equity + liabilities (after including profit for the year in equity).
3. Cost of sales working (trading businesses)
| Opening inventory | X |
| Purchases (adjust returns, carriage in if required) | X |
| Less: closing inventory | (X) |
| Cost of sales | X |
Closing inventory also appears as a current asset on the SFP (after any NRV write-down).
4. Typical adjustments under the TB
| Extra information | What you usually do |
|---|---|
| Closing inventory | Reduce cost of sales; show asset on SFP |
| Depreciation | Expense in SoPL; reduce carrying amount of PPE |
| Accrual / prepayment | Adjust expense or income; SFP liability or asset |
| Irrecoverable debt | Expense; reduce receivables |
| Allowance for receivables | Movement to SoPL; net receivables on SFP |
| Prepaid income / deferred income | Adjust income; liability if unearned |
| Suspense / error note | Correct before final totals (Area E skills) |
Link back to your topic pages for the detailed method on each adjustment.
5. Mini illustration (numbers)
Extract from a TB (simplified) at 31 Dec:
| Sales | 200,000 |
| Purchases | 110,000 |
| Opening inventory | 20,000 |
| Operating expenses (cash-based in TB) | 40,000 |
| PPE cost | 80,000 |
| Accumulated depreciation (1 Jan) | 30,000 |
| Receivables | 25,000 |
| Payables | 15,000 |
| Cash | 12,000 |
| Capital | balancing figure in a full TB |
Additional information: Closing inventory Rs. 22,000. Depreciation for the year Rs. 8,000. Accrued expenses Rs. 3,000 (not in TB).
Cost of sales = 20,000 + 110,000 − 22,000 = 108,000
Gross profit = 200,000 − 108,000 = 92,000
Expenses = 40,000 + 8,000 depreciation + 3,000 accrual = 51,000
Profit for the year = 92,000 − 51,000 = 41,000
PPE carrying amount = 80,000 − (30,000 + 8,000) = 42,000
Current assets include inventory 22,000, receivables 25,000, cash 12,000. Current liabilities include payables 15,000 and accruals 3,000.
6. Presentation reminders
- SoPL: show gross profit if the question is a trading entity and format requires it.
- SFP: non-current vs current; equity includes capital + profit − drawings (as given).
- Assets must equal equity + liabilities after all adjustments.
- Do not net unrelated balances just to force a total.
Exam traps
- Using closing inventory only on the SFP and forgetting cost of sales
- Depreciation expense forgotten, or accumulated depreciation not updated
- Ignoring accruals/prepayments in the notes
- Leaving drawings as an expense instead of reducing equity
- Putting profit for the year nowhere on the SFP