Lecture 2
Trial Balance &
Introduction to Financial Reporting
Lecture #2 – Study contents:
• ➢ The nominal ledger and financial reporting
• ➢ Nominal ledger and account classifications
• ➢ Account ‘types’ and the financial reports
• ➢ The matching principle of accounts
• ➢ Income statement
• ➢ Statement of financial position
• ➢ Inventory, purchases and cost of goods sold
Introduction:
The nominal ledger contains all of the business financial accounts.
Nominal ledger accounts are classified as income, expenditure, asset or liability items.
The trial balance is a list of account balances extracted from the nominal ledger and
used as the basis for the business financial reports.
The income statement is a summary of incomes and expenditure used to establish
business profits.
The SOFP is a statement of assets and liabilities ‘as at’ a specific point in time (the end of
the trading period).
The matching principle of accounts informs the treatment of account ‘types’ and
determines the treatment of inventories.
The Nominal Ledger and Financial Reporting:
The nominal ledger and the double-entry bookkeeping system are the raw data to be
used for the financial reports.
Nominal ledger:
• All accounts included in the business for the accounting period
• Application of the double-entry bookkeeping system and accurate transaction
recording.
Trial balance:
• Extract of all account balances from the nominal ledger
, • Application of the double-entry bookkeeping system should ensure that total
debits will be equal to the total debits in the nominal ledger
Financial reports:
• Based on the trial balance account ‘classes’
• Adjusted for period end items
Nominal Ledger – Account Classifications:
Account type: Explanation:
• Resources owned by the business
• Fixed (long-term) / Current (short-term)
Assets
• Future economic benefit – Debit balance
• Source of finance provided by owners and
others
Liabilities and
• Long-term / Current (short-term)
capital
• Future economic outflow – Credit balance
• Revenue earnings
• Sales
Incomes
• Increase to profits – Credit balance
• Revenue expenditures
• Costs and expenses
Expenditures
• Reduction in profits – Debit balance
The Financial Reports:
Financial reporting is the objective outcome of bookkeeping and accounting systems.
The output is often standardised into a number of specific reports. Two of them being:
The income statement:
• Summary of incomes and expenditures
• For the period ended
• To establish gross and net profits
• Profits indicate business success
• Profits used to calculate tax liabilities
The statement of financial position:
• Analysis of assets, liabilities and capital
• Balance sheet ‘as at’
, • End point of the last trading period
• Starting point for the next trading period
• Proving the balance sheet equation
Account types and Financial Reporting:
Income Statement (Income and expenditure accounts):
Dr Cr
£ £
Incomes 1,000
Profits are transferred to the owner’s capital
Expenditures 500
account
Profit c/d 500
Statement of Financial Position (Asset and liability accounts):
Dr Cr
£ £
Fixed assets 2,000
Current assets 200
Current liabilities 100
Long – term liabilities 600
Capital account 1,000
Profit B/d 500
2,200 2,200
ICX 2.1 – Trial balance to financial reports #1
Trial Balance &
Introduction to Financial Reporting
Lecture #2 – Study contents:
• ➢ The nominal ledger and financial reporting
• ➢ Nominal ledger and account classifications
• ➢ Account ‘types’ and the financial reports
• ➢ The matching principle of accounts
• ➢ Income statement
• ➢ Statement of financial position
• ➢ Inventory, purchases and cost of goods sold
Introduction:
The nominal ledger contains all of the business financial accounts.
Nominal ledger accounts are classified as income, expenditure, asset or liability items.
The trial balance is a list of account balances extracted from the nominal ledger and
used as the basis for the business financial reports.
The income statement is a summary of incomes and expenditure used to establish
business profits.
The SOFP is a statement of assets and liabilities ‘as at’ a specific point in time (the end of
the trading period).
The matching principle of accounts informs the treatment of account ‘types’ and
determines the treatment of inventories.
The Nominal Ledger and Financial Reporting:
The nominal ledger and the double-entry bookkeeping system are the raw data to be
used for the financial reports.
Nominal ledger:
• All accounts included in the business for the accounting period
• Application of the double-entry bookkeeping system and accurate transaction
recording.
Trial balance:
• Extract of all account balances from the nominal ledger
, • Application of the double-entry bookkeeping system should ensure that total
debits will be equal to the total debits in the nominal ledger
Financial reports:
• Based on the trial balance account ‘classes’
• Adjusted for period end items
Nominal Ledger – Account Classifications:
Account type: Explanation:
• Resources owned by the business
• Fixed (long-term) / Current (short-term)
Assets
• Future economic benefit – Debit balance
• Source of finance provided by owners and
others
Liabilities and
• Long-term / Current (short-term)
capital
• Future economic outflow – Credit balance
• Revenue earnings
• Sales
Incomes
• Increase to profits – Credit balance
• Revenue expenditures
• Costs and expenses
Expenditures
• Reduction in profits – Debit balance
The Financial Reports:
Financial reporting is the objective outcome of bookkeeping and accounting systems.
The output is often standardised into a number of specific reports. Two of them being:
The income statement:
• Summary of incomes and expenditures
• For the period ended
• To establish gross and net profits
• Profits indicate business success
• Profits used to calculate tax liabilities
The statement of financial position:
• Analysis of assets, liabilities and capital
• Balance sheet ‘as at’
, • End point of the last trading period
• Starting point for the next trading period
• Proving the balance sheet equation
Account types and Financial Reporting:
Income Statement (Income and expenditure accounts):
Dr Cr
£ £
Incomes 1,000
Profits are transferred to the owner’s capital
Expenditures 500
account
Profit c/d 500
Statement of Financial Position (Asset and liability accounts):
Dr Cr
£ £
Fixed assets 2,000
Current assets 200
Current liabilities 100
Long – term liabilities 600
Capital account 1,000
Profit B/d 500
2,200 2,200
ICX 2.1 – Trial balance to financial reports #1
