Ask Me Help Desk - Creating a balance sheet from a specific trial balance

Creating a balance sheet from a specific trial balance

This is what information u have been given:-
Jason Reynolds has recorded the financial transactions for his business for the year ended 31st dec 2008. He has asked us to prepare his profit and loss account and balance sheet using the trial balance info. Closing Stock at 31st Dec 2008 was valued at £7500.
Depreciation is calculated at 25% pa on the written down value of the asset.

Trial Balance Debit Credit
Cash £100.00
Bank £3,000.00
Motor Vehicles £19,925.00
Shop Equipment and Fittings £8,926.75
Rental Charges £10,179.75
Debtors and Creditors £8,095.25 £16,325.00
Sales Returns and Purchase Returns £1,727.00 £2,000.00
Purchases and Sales £40,777.50 £60,850.00
Carriage Outwards £407.00
Carriage Inwards £417.50
Wages £6,000.00
Drawings 13,078.00
opening stock 5,926.00
Rates 2,505.25
light and heat 1,778.75
Insurances 2,200.00
Sundry Expenses 346.25
Loan (Bank) 12,000.00
Loan Interest 600.00
Postage 330.00
Discount Allowed and Received 298.00 432.50
Motor Expenses 3,677.00
Capital 10,687.50
Design Consultancy Fees 27,000
Design Expenses 5,000.00

You do the exercise!
Let us look at your effort.
There are many people here that can do this, but unfortunately we are NOT allowed to do it for you.
HAVE A GO!

I have no clue!! I'm completely lost!! Wouldn't know where to start!! OK I don't want the answer, but at least some guidance on how I start it or go about doing it??

I know that you have several sections i.e. Assets, Fixed Assets, Liabilities, and Long term Liabilities but I don't understand the process in which to do this and why?

WE have to persevere with you and do it together.
We shall take many attempts to get there, but you must do the work.
First you have to read the question half a dozen times to understand what is required.
First move required by you.
Instead of a long list of debits and credits ,
Are you capable of dividing this list into
Two lists:- showing list 1 the debits
And list to the credits.

Trial Balance Debit Credit
Cash £100.00
Bank £3,000.00
Motor Vehicles £19,925.00
Shop Equipment and Fittings £8,926.75
Rental Charges £10,179.75
Debtors and Creditors £8,095.25 £16,325.00
Sales Returns and Purchase Returns £1,727.00 £2,000.00
Purchases and Sales £40,777.50 £60,850.00
Carriage Outwards £407.00
Carriage Inwards £417.50
Wages £6,000.00
Drawings 13,078.00
Opening stock 5,926.00
Rates 2,505.25
Light and heat 1,778.75
Insurances 2,200.00
Sundry Expenses 346.25
Loan (Bank) 12,000.00
Loan Interest 600.00
Postage 330.00
Discount Allowed and Received 298.00 432.50
Motor Expenses 3,677.00
Capital 10,687.50
Design Consultancy Fees 27,000
Design Expenses 5,000.00

List 1 the debits
List to the credits.
Do these two lists totals have an equal balance.
Do it and then come back to me.

RULE NUMBER ONE!

All ASSETS and All EXPENSES are DEBITS.
All( LIABILITIES and EQUITY) and All INCOMES are CREDITS.

Formula A + E = (L + EQ ) + I
______________________________________
Learn this by heart and never forget it!

You must answer these questions :-

1) How old are you ?
2) Is this homework?
3) Are you studying Accountancy ?
4) What level have you reached?

ssmith89,

Please check all the figures again and again.
I have been doing some work on the answer to the problem and I am having some difficulty in getting the trial balance to agree.
Please notify as soon as possible.

One more question .
Do you use EXCEL ?

You must make sure that :
a) You separate the items when you have
Debits and credits in the same line.
b) Do not forget to include the CLOSING STOCK.
c) Do not forget to bring the depreciation
Figures in the trial balance and their corresponding provisions.

Rolcam.

Rolcam, if you'd quote OP's original post, you'll see it's already in Dr/Cr columns and it does balance. The cash is negative.

ssmith89, columns don't come off when you post so you can't use them. We can only see them when quoting the post and they still disappear when we actually post. Either write Dr/Cr on everything or use leaders dots or something.

Was the trial balance given to you exactly that way, with the cash negative like that? In real life, yeah, but for a problem, that's a little weird.

I don't see the point in listing debits first followed by credits, because that ordering doesn't have any meaning. Personally, I would list them in order of assets, liabilities, equity, revenue and expenses. That's the typical order and they'll also need organized by type in order to do your statements. Right now don't worry about sub-categories like current and long-term. Can you just get them into the five classifications?

You need to do two adjusting entries. An example of the reducing balance depreciation is here:
Depreciation – Reducing Balance Method | Bizhelp24.com UK business and finance help and information

Can't help with the closing stock one cause it's done differently in the U.S. Surely they show you that in your textbook?

Why don't you start with all that and see what you can do.

Hey

Thhanks morgraine I have put them in columns but they do not show up! The trail balance does balance!! :D

I have worked out the gross profit which comes to £21644.5. I now need to work out the net profit, when doing this and listing the expenses do I need to add up all of the Debit?? These are all expenses?

ROCLAM , in answer to your quesions:-

I am 20 and I'm currently studying in England doing a foundation degree in landscape design, this work is part of a business module

Thanks

The exercise that you have been given is a fairly advanced one.
It was obvious that you were in England from the Pound signs.
You are aiming to become a landscape artist and not an accountant.
I wish you all the very best.
You must keep persevering with all that is thrown at you.

I don't know if you're still around or working on this. I've been busy. But since I could disappear again, I'll just answer you instead of asking if you still need an answer. If you're done, well, I guess that's what I get for answering a week late. :p

Quote:

Originally Posted by ssmith89

Thhanks morgraine I have put them in columns but they do not show up!

Yes I know. I said that. You have to put Dr & Cr on everything.

Quote:

I have worked out the gross profit which comes to £21644.5.

I'm getting 21636.50. That's $28 -- er, I mean 28 pounds, off. That isn't anything that I see. And I come out balancing everywhere so I don't think it's me. Maybe just a math error? If your math is correct, you might want to show how you got that.

Quote:

I now need to work out the net profit, when doing this and listing the expenses do I need to add up all of the Debit?? These are all expenses?

Things aren't expenses just because they're debits. You need to start thinking of them as expenses and not debits when doing statements. Statements aren't debits and credits. The only way that comes into play is because debit is positive for an expense, then IF you had a credit, it would be listed as a negative (not a credit) on the statement. Just for example, you have a credit bank balance, so that's going to be listed as a negative on the statement -- it'll be included with the other current assets in the same column, but as a negative.

It just so happens the only credit expenses you have are contra accounts and included in the purchases stuff and already taken care of, so the rest will be all debits, yes. Just want to straighten up the thinking process there.

By the way, did you do those adjusting entries? (You must have done at least something with the stock or you'd be more than 28 off!)

Quote:

I am 20 and I'm currently studying in England doing a foundation degree in landscape design, this work is part of a business module

I'm sure that's cause many landscapers will end up managing or owning a business. You don't need to know bookkeeping, but the concepts you will learn, such as the accrued basis and how to read financial statements, what depreciation means, etc. are things you will need to know.

Hey morgaine 300. Thanks a lot for your help... and its never too late!! Though I'm so confused now with the gross profit, I now have three different figures so ill defo have to double check my maths on that one! Ill take on board what you have said and I will have a go at the balance sheet... so watch this space lol thanks again

I'll try to watch out, but I've been pretty busy. (I did keep the whole thing in an Excel file though.) I'll give you some check figures. Net sales is 58825. Net cost of purchases is 38762.50. COGS is 37188.50. Since you were only 28 off, I've got to imagine it's just a little math error.

I got the net profit to be 11,0648.5 but that's using all of the debits and not sorting them out into + and -... its just mind boggling lol! Correct me if I'm wrong, just so I have it right in my head... to get the correct figure for the net profit I have to separate the debits into what are expenses and what are not? Is this correct?

You should not be taking a list of debits and trying to separate them into types of accounts, absolutely not. The accounts should already be separated into types, in order: assets, liabilities, equity, revenue and expense. They have an order to them that has nothing whatsoever to do with debits & credits. For instance, current assets are first -- if one happens to be a credit like your bank account (which I still find odd for a book problem), then it's still listed with the current assets. (Technically, it's now a liability cause you'd owe the bank, but that concept is not usually taught at a beginning level. But I'm trying to make a point here so ignore that technicality. Pretend it's a small company that doesn't care about that.)

The revenues and expenses have an order... i.e. you start with sales, followed by the discounts and returns, followed by purchases, followed by their discounts, returns and freight, etc. They're in that order on the statements, so if they're already in that order, you can just follow right along when statements are done.

If you tried to grab all the debits and start deciding which are expenses, first that's just illogical. Second, you'd miss any contra accounts (or possible negative balances).

That isn't the net profit and I don't know how you're coming up with that. If you know what are revenue and expense accounts, you actually can just add up all the credits, and then subtract out all the debits, and you'll have net income. There's a mathematical reason that works. However, first, you still have to know what are revenues and expenses. Second, the statement isn't organized that way so it's only useful for a "quick check" rather than for actually doing a statement.

You're thinking backwards. You're trying to take debits and credits and organize them from there. It's the other way around. Accounts are classified, and whether they are debits or credits are determined by their classification. So the classification comes first. That is, you have to know it's an expense to know it's a debit, not the other way around.

Do you know where debits & credits come from? They are from Latin words meaning left and right. Quite literally, they mean left and right. And it's referring to the side of the equation: assets = liabilities + equity. That's why assets are debits - they're on the left, which is what debit means. That's why liabilities and equity are credits, cause they're on the right. Revenues and expenses affect equity, so they're determined by that. (And contra accounts, a term I've recently learned is not taught everywhere, are always the opposite cause they're intentionally negative accounts.) Notice the equation is your balance sheet. It's set up that way intentionally. We didn't arbitrarily assign debits and credits.

In the U.S. most problems in your average text will list those accounts in proper order, except for occasionally when they like to list them alphabetically (which annoys the heck out of me). It's only on here, from other countries, that I'm seeing accounts listed in what seem to be very random orders that have no meaning that I can see. If that's typical, and what you're doing is how it's taught, that just seems so convoluted and ridiculous to me -- and making it difficult for people to learn.

Oh, looking back at my list -- I forgot to ask, what is "Rates"? What kind of account is that and what does it represent? That's another thing I've noticed on here -- lack of words that indicate what kind of account something is. Like "insurances" - so is that an expense or a prepaid? It should say. (Just because there was no adjusting entry for it, and because it's listed with some other expenses, I assumed expense.)

As you can see in the trial balance when I posted my initial question... this is how it was given to us with no separation!! Just a list as a trial balance!! And regarding the insurances and rates , I just presumed they were an expense as it does not give any additional info other than rates as a debit and insurances as a debit!!

You say my net profit and gross profit calcualtions are wrong... well now I am truly baffled as I have just worked it out how I have been told!! :(