This article uses a small business scenario to suggest ways to help you successfully extend a Trial Balance (ETB) and is the culmination of the knowledge and understanding previously covered in both basic and advanced bookkeeping blogs.
E&J Consultancy are a small VAT registered company and they are working on their year-end accounts. They maintain a manual double entry bookkeeping system with general, sales and purchase ledgers. The year-end adjustments have been made and the error that originally gave rise to a suspense account has been cleared. They have asked us to complete their accounts and calculate their net profit or loss for the year.
This is their ETB to date:
All that we need to do now is extend the ETB, taking the adjustments into account, calculate the profit or loss for the year and ensure all the columns balance – simple right?
Actually, it is, providing we have understood all the basic bookkeeping and year-end adjustments that got E&J Consultancy to this point. Do you recognise this ‘box lid’ diagram?
Note: Drawings are technically within the capital category as they reduce to amount owed by the business to its owner(s) but are posted into a separate account and work as the opposite and pair to capital.
We can use this simple visual aid to help us work line by line through the ETB, breaking our job down into manageable bite sized steps.
Divide the ETB into the accounts that go on each financial statement.
Ask the question, is this account an expense or income?
If so, highlight it as it goes on the Statement of Profit or Loss (SPL)
If not, leave it as it must go on the Statement of Financial Position (SFP)
NB – be careful about:
Inventory, as both the opening and closing inventory are on the SPL
anything ‘received’, as it is likely to be income
disposal proceeds, as they can be either income or an expense
Extend the highlighted SPL accounts across to the SPL columns, adjusting them as required.
Remember, the ‘box lid’ diagram shows the expected balance of each category of account and how to increase it. As we understand how to increase account balances we can simply do the opposite when a decrease is required.
In this extract we have calculated a £140 loss on the disposal of a non-current asset when we extended the disposal row; £800 debit reduced by £660 credit to leave £140 debit. The drawings account wasn’t highlighted as it isn’t an expense or income. The interest received was extended unadjusted and has a credit balance as expected because it is an income account. Finally, the irrecoverable debts account had an original balance of £78 as it is an expense account, which we increased by the £100 debit adjustment, to give a final balance in the debit column of the SPL of £178.
Calculate the profit or loss.
Even though the SPL is presented as a report, it is part of the double entry system. That is why we close down all the SPL accounts at year-end and transfer the amounts to the SPL using double entry. Therefore, if we treat it as a ‘T’ account we can calculate the balancing figure i.e. the profit or the loss and double entry that with the SFP.
The balancing figure is double entered into the SFP column in the same way year-end accounts are closed off ie. a debit in the SPL will be a credit in the SFP. As the value of the credits on the SPL is larger than the debits we’ve got more income than expense which means E&J Consultancy made a profit. This double entry will enable the SFP columns to balance as long as the correct accounts have been accurately adjusted.
Extend the SFP rows, adjusting as necessary.
In this extract the receivables’ debit balance has been reduced by the £120 credit adjustment to leave an expected debit balance as it is an asset account. The sales account was dealt with on the SPL. The suspense account balance has been cleared by the adjustment. Suspense accounts should not feature on either financial statement. The VAT account originally had a credit balance which means it is owed to HMRC. The £20 debit adjustment therefore reduces the balance to £3,720 but it still remains a liability and in the credit column.
Finally, add up the SFP columns which should match.
Have a go at completing E&J Consultancy’s ETB yourself. You already have some of the workings to get you started and know that you should calculate a profit of £19,219. There are no hidden surprises and your SFP columns will balance once you add them up as long as your accounts are correctly adjusted and in the right columns.
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Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.