10.3 From trial balance to financial statements
　　Example:
　　The trial balance of Tyndall at 31 May 20x6 is as follows:
　　Trial balance of Tyndall at 31 May 20x6
　　$　　　　　　　 $
　　Capital account　　　　　　　　　　　　　　　　　　 15,258
　　Drawings by proprietor　　　　　 5,970
　　Purchases　　　　　　　　　　　　73,010
　　Return inwards　　　　　　　　　 1,076
　　Return outwards　　　　　　　　　　　　　　　　　　　 3,720
　　Discounts　　　　　　　　　　　　 1,870　　　　　　　　 965
　　Credit sales　　　　　　　　　　　　　　　　　　　　　96,520
　　Cash sales　　　　　　　　　　　　　　　　　　　　　　30,296
　　Customs duty　　　　　　　　　　　11,760
　　Carriage inwards　　　　　　　　　 2,930
　　Carriage outwards　　　　　　　　　1,762
　　Salesman’s commission　　　　　　　 711
　　Salesman’s salary　　　　　　　　 3,970
　　Office salaries　　　　　　　　　　7,207
　　Bank charges　　　　　　　　　　　　 980
　　Loan interest　　　　　　　　　　　　450
　　Light and heat　　　　　　　　　　 2,653
　　Sundry expenses　　　　　　　　　　2,100
　　Rent　　　　　　　　　　　　　　　 3,315
　　Insurance　　　　　　　　　　　　　4,000
　　Printing and postage　　　　　 　　2,103
　　Advertising　　　　　　　　　　　　1,044
　　Irrecoverable debts　　　　　　　　1,791
　　Allowance for receivables　　　　　　　　　　　　　　　　437
　　Inventory　　　　　　　　　　　　　7,650
　　Receivables　　　　　　　　　　　 10,760
　　Payables　　　　　　　　　　　　　　　　　　　　　　　 7,411
　　Cash at bank　　　　　　　　　　　 2,634
　　Cash in hand　　　　　　　　　　　　　75
　　New delivery van (less trade-in) 2,200
　　Motor expense　　　　　　　　　 　　 986
　　Furniture and equipment:
　　Cost　　　　　　　　　　　　　　　 8,000
　　Depreciation at 1 June 20x5　　　　　　　　　　　　　　2,400
　　Old delivery van:
　　Cost　　　　　　　　　　　　　　　 2,000
　　Depreciation at 1 June 20x5　　　　　　　　　　　　　　1,000
　　Loan account at 9%
　　(repayable in five years)　　　　______　　                5,000
　　163,007 　　　　163,007
　　The following information is relevant:
　　1.Closing inventory has been valued for accounts purpose ta $8,490.
　　2.The motor van was sold on 31 August 20x5 and traded in against the cost of a new van.
　　The trade-in price was $1,400 and the cost of the new van was $3,600.No entries have yet been made for this transaction apart from debiting the $2,200 cash paid to the New
　　Delivery van account.
　　3.Straight- line depreciation is to be provided on a monthly basis at the following annual
　　rates:
　　Motor vans 　　　　　　　25%
　　Furniture and equipment　10%
　　4.Past experience indicates that an allowance for receivables should be made equivalent to 5% if the closing receivables.
　　5.An accrual of $372 is required in respect of light and heat.
　　6.A quarter’s rent to 30 June 20x6 amounting to $900 was paid on 2 April 20x6.Insurance
　　For the year to 31 March 20x7 amounting to $1,680 was paid on 16 April.
　　Prepare an income statement and a balance sheet for the year ended 31 May 20x6.
　　Solution:
　　Step 1 Inventory
　　The closing inventory figure of $8,490 must be included in the financial statement.
　　The accounting journal is:
　　Dr. Inventory (B/S)　　　　　　　　　 $8,490
　　Cr. Inventory ( Cost of sales in I/S) $8,490
　　Step 2 Non-current assets and depreciation
　　As well as calculating the depreciation for the year, we must also deal with the part-exchange
　　of the van during the year.
　　Depreciation of van from 1 June 20x5 to 31 August 20x5:
　　Cost $2,000 x 25% x 3/12 = $125
　　Disposal of van:
　　The van has been part-exchanged against the cost of a new van.
　　The trade-in value of $1,400 is equivalent to the disposal proceeds of the van. The new van
　　has a total cost of $3,600 consisting of $1,400 trade-in allowance and $2,200 cash.
　　The double entry to record the disposal is:
　　Dr. Delivery van accumulated depreciation account ($1,000+125) $1,125
　　Dr. New delivery van cost account　　　　　　　　　　　　　　　　 1,400
　　Cr. Delivery van cost account　　　　　　　　　　　　　　　　　　$2,000
　　Cr. Profit on sale of asset　　　　　　　　　　　　　　　　　　　　$525
　　This can be shown in the disposal account as follows:
　　Don’t forget to add on the depreciation for the first three months of the year when you are
　　calculating the profit on disposal.
　　Note that this question specifically requires monthly depreciation. Some questions may state
　　that there is no depreciation in the year of acquisition or year of disposal of an asset. Make
　　sure you read the question carefully.
　　Depreciation of van from 1 September 20x5 to 31 May 20x6:
　　Cost $3,600 x 25% x 9/12= $675
　　The total depreciation for the year for delivery vans is $800.
　　Depreciation on furniture and equipment:
　　Cost $8,000 x 10% = $800.
　　Step 3 Irrecoverable debts
　　The TB shows us that:
　　●$1,791 has been written off in the year for irrecoverable debts and
　　●The balance on the allowance for receivables is $437.
　　The closing allowance should be 5% of closing receivables.
　　$ 10,760 x 5% = $538
　　The charge to the income statement is the movement between the opening and closing allowance.
　　$538 - $437 = $101 increase in the allowance which is debited to the income statement.
　　The double entry to record this transaction is:
　　Dr. Irrecoverable debts expense $101
　　Cr. Allowance for receivables　 $101
　　The charge in the income statement for irrecoverable debts will amount to $1,892 including the debt already written off ($1,791 + $101).
　　Step 4 Light and heat
　　$372 needs to be accrued for light and heat expenses. The double entry is:
　　Dr. Light and heat expense $372
　　Cr. Current liability　　　$372
　　This journal entry ensures that the business has recorded all of its expenses in the period.
　　Step 5 Rent
　　The rent has been paid in advance and part of the payment relates to the next accounting period. This must be taken out of expenses for the current period and shown in the balance sheet as a prepayment.
　　Rent prepaid ( 1/3 x $900) = $300
　　Step 6 Insurance
　　Insurance has also been paid in advance and must be adjusted.
　　Insurance prepaid 10/12 x $1,680 = $1,400
　　Step 7 Prepare the income statement and balance sheet