Session 4 From trial balance to financial statements
　　Main Contents:
　　1.Accounting cycle
　　2.Balancing off ledger accounts
　　3.The trial balance
　　4.Closing off ledger accounts
　　5.Prepare financial statements
　　4.1 Accounting cycle
　　4.2 Balancing off a ledger account
　　Once the transactions for a period have been recorded, it will be necessary to find the balance on the ledger accounts:
　　1.Total both sides of the T account and find the larger total.
　　2.Put the larger total in the total box on the debit side and credit side.
　　3.Insert a balancing figure to the side of the T account which does not currently add up to the amount in, the total box.Call this balancing figure ‘balance c/f’ (carried forward) or “balance c/d” (carried down).
　　4.Carry the balance diagonally and call it “balance b/f” (brought forward) or “balance b/d” (brought down).
　　4.3 The trial balance
　　● Once all ledger accounts have been balance off a trial balance is prepared.
　　● A trial balance is a list of the “balance b/f” on the ledger accounts
　　according to whether they are on the debit or credit side.
　　● The trial balance will balance if for every debit entry made, an equal credit entry was made and the balances were correctly extracted and cast.
　　The purpose of a trial balance is:
　　● To check that for every debit entry made, an equal credit entry has been made
　　● As a first step in preparing the financial statements.
　　A number of adjustments will be made after the trial balance is extracted.These adjustments do not therefore appear in the trial balance.
　　4.4 Closing off the ledger accounts
　　At the year end, the ledger accounts must be closed off in preparation for the recording of transactions in the next accounting period.
　　● SFP ledger accounts:
　　Assets /liabilities at the end of a period = Assets/ liabilities at start of the next period
　　Balancing the account will result in ---
　　a balance c/f (being the asset/liability at the end of the accounting period)
　　a balance b/f (being the asset/liability at the start of the next accounting period)
　　● I.S.ledger accounts:
　　- At the end of the period any amounts that relate to that period are transferred out of the income and expenditure accounts into another ledger account – I.S.
　　- This is done by closing the account
　　- Do not show a balance c/f or balance b/f, but instead put the balancing figure on the smallest side and label it “income statement”.
　　Example: Closing of revenue and expense account
　　Capital amount is equal to---
　　- what was owed to the owner at the start of the previous period
　　- plus any capital that the owner introduced in the period
　　- plus any profits earned in the period
　　- less any drawings taken out in the period
　　The balance is the correct opening balance at the start of the next.
　　The balance on the I.S.and the balance on the drawings account are transferred to the
　　capital account at the end of the period.
　　Opening balance in the ledger accounts
　　If a business has been in operation in the previous year, then at the beginning of any accounting period it will have assets and liabilities balances.
　　- Any opening amounts are shown in the balance sheet ledger accounts as opening balances.
　　- The opening balance on an asset account is a debit entry.
　　- Theopening balance on a liability account is a credit entry.
　　- Income statement ledger accounts donot have any opening balance.
　　Example:
　　Johnny had receivables of $4,500 at the start of 2005.During the year to 31 December 2005, he makes credit sales of $45,000 and receives cash of $46,500 from credit customers.
　　What is the balance on the receivables account at 31 December 2005?
　　Solution：