Lesson 4 Financial Performance and Financial Position 2
Summary
In Lesson 3, we looked at the end-of-period adjustments where an adjusted trial balance is prepared after all the adjusting entries for an accounting period have been posted to the accounts. This trial balance is used as a basis to prepare financial statements. This step of accounting cycle is important to ensure that financial statements reflect the true financial position and performance of a business by allocating to the appropriate period the income earned and expenses incurred. In Lesson 4, we adjusted the trial balance based on the adjustment information. We learnt to prepare:
a) Income statement
b) Retained earnings statement
c) Statement of financial position / Balance sheet
Adjusted trial balance
It is a listing of all the account titles and balances contained in the general ledger after the adjusting entries for an accounting period have been posted to the accounts.
This trial balance is used as a basis to prepare financial statements.
This topic is covered in Lesson 3.
Income Statement
The income statement reveals how much profit (or loss) has been generated over a period.
Statement of Financial position
It is one of the main financial statements and it reports an entity's assets, liabilities, and the difference in their totals.
Interpretation of financial statements
It provides a grounding in the contents of the financial statements by examining their structures and contents.
This topic will be covered in Lesson 5.
This Lesson's To-Do List
· Do the Pre-Lesson Activity 4.
· Go through the Lesson Materials.
· Participate in Discussion 4 (5%).
· Do the Post-Lesson Quiz 4 Part A & Part B - Check to see how well you have understood this lesson.
· Continue doing the Group Assignment.
Introduction to the Lesson
In Lesson 3, we looked at the end-of-period adjustments where an adjusted trial balance is prepared after all the adjusting entries for an accounting period have been posted to the accounts. This trial balance is used as a basis to prepare financial statements. This step of accounting cycle is important to ensure that financial statements reflect the true financial position and performance of a business by allocating to the appropriate period the income earned and expenses incurred.
In Lesson 4, we will be covering the topics of Financial Performance and Financial position in more detail. The focus of this lesson is on the process of preparing a simple Income Statement and Statement of Financial Position of a sole trader. A sole trader is a person who owns their own business and does not have a partner.
The purpose of the income statement is to show managers and investors whether the company has made a profit or lost money during the period being reported. Whereas a balance sheet, also referred to as a statement of financial position, reports on a company's assets, liabilities, and ownership equity (capital) at a given point in time.
Learning Outcomes
This lesson is about the analysis of the performance of an enterprise based on its financial statements.
At the end of this lesson you should be able to:
· Prepare a simple Income Statement for a sole trader.
· Prepare a simple Statement of Financial Position for a sole trader.
Lesson Materials
Adjustment Information
We have learnt to adjust the trial balance in preparation to extracted information to create financial statements such as the income statement and retained earnings statements.
For this lesson, you will prepare financial statements from an unadjusted trial balance using a worksheet.
You are given adjustment information as follows:
(a) Prepaid rent expired, RM1,000.
(b) Supplies on hand, RM400 (balance before adjustment equals RM700).
(c) Depreciation on furniture, RM275.
(d) Accrued salary expense, RM950.
(e) Accrued service revenue, RM250.
(f) Amount of unearned service revenue that has been earned, RM150.
(g) Accrued income tax expense, RM540.
For the worksheet, click here.
For the answer sheet, once you have completed the adjustments and prepared the adjusted trial balance, click here.
Suggestion: Please complete this exercise before you move on to the next page.
Preparing the Financial Statements
From the adjusted trial balance, you can now prepare:
a) Income statement
b) Retained earnings statement
c) Statement of financial position / Balance sheet
Financial Statements – Worksheet
The worksheet you have downloaded earlier contains this part of the task.
Once you have the adjusted trial balance, you will be able to prepare:
Preparation of Financial Statement
Watch Video
Accounting Example Financial Statements Sole Trader
User: n/a - Added: 10/12/13
YouTube URL:
Watch this video.
It is an example of the preparation of a simple income Statement and Statement of Financial Position of a sole trader from a trial balance (without adjustments).
Final accounts of a sole trader
This is another example of the preparation of a simple income Statement and Statement of Financial Position of a sole trader from a trial balance (without adjustments).
Watch this video.
Watch Video
Financial Accounts of Sole Trader
YouTube URL:
