Trial Balance & Financial Statements
The trial balance brings together ending ledger balances. After necessary adjustments, those balances feed the two principal financial statements.
1. Trial balance
A trial balance lists ending ledger balances in debit or credit columns after transactions have been recorded. It checks that total debits equal total credits and supplies information for financial statements.
Debit balances: assets, expenses, drawings and sales returns.
Credit balances: liabilities, income/revenue and capital.
A balanced trial balance does not prove every transaction is correct. Missing or incorrect entries can be adjusted before financial statements are prepared.
2. Statement of financial performance
This reports income, expenses and profit or loss for a financial period. For a trading business: Net sales revenue = Sales revenue − Sales returns; Gross profit = Net sales revenue − Cost of sales; and Profit = Gross profit + Other income − Other expenses.
A service business has no trading component in this framework: Profit = Service fee revenue + Other income − Other expenses.
3. Statement of financial position
This reports assets, liabilities and equity at a specific point in time and reflects Assets = Liabilities + Equity. Total assets combine current and non-current assets; total liabilities combine current and non-current liabilities.
For a sole proprietor with no additional capital: Ending capital = Beginning capital + Profit − Drawings. Going concern and accounting period underlie the preparation of financial statements.
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