How do we turn a trial balance and a list of adjustments into the two financial statements?
Prepare the financial statements of a sole trader from a trial balance with year-end adjustments
A simple answer to the N(A)-Level Principles of Accounts outcome on building the statements. Which trial balance items go to the income statement and which to the balance sheet, and how adjustments are applied to each.
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What this dot point is asking
SEAB wants you to build both financial statements from a trial balance plus a set of year-end adjustments. This is the big Paper 2 question that brings the whole course together. The central insight is a simple sorting rule: income and expenses go to the income statement; assets, liabilities, capital and drawings go to the statement of financial position, and each adjustment usually changes both statements.
The answer
The sorting rule
Each trial balance line belongs to exactly one statement:
| Goes to the income statement | Goes to the statement of financial position |
|---|---|
| Sales, purchases, returns | Non-current and current assets |
| Carriage, wages, rent, electricity | Liabilities (payables, loans, accruals) |
| Discount allowed and received | Capital and drawings |
| Irrecoverable debts, depreciation charge | Inventory (closing), prepayments |
A useful check: each trial balance item appears once in the statements (an income or expense once, an asset or liability once), but adjustments add a second effect.
Applying adjustments
Most adjustments hit both statements:
- Accrual: add to the expense (income statement) and show a current liability (balance sheet).
- Prepayment: subtract from the expense and show a current asset.
- Depreciation: charge the expense and increase accumulated depreciation (reducing net book value).
- Irrecoverable debt: charge the expense and reduce receivables.
- Closing inventory: subtract in cost of sales and show as a current asset.
A clear order of work
- Sort each trial balance line into the right statement.
- Apply each adjustment to both places it affects.
- Prepare the income statement to find profit for the year.
- Carry the profit into the capital section of the statement of financial position.
Examples in context
Example 1. One note, two effects. A trial balance lists insurance of \2,400\ is prepaid. The income statement shows insurance of \2,000\ current asset. The single note touches both statements, which is the pattern behind almost every adjustment in the big question.
Example 2. Closing inventory linking the two. Closing inventory of \8,000$ reduces cost of sales, raising gross profit, and also appears as a current asset. The same figure therefore helps determine profit in the income statement and increases assets in the balance sheet, which is why a single inventory error throws out both statements at once.
Try this
Q1. State which statement the purchases figure belongs to. [1 mark]
- Cue. The income statement, as part of cost of sales.
Q2. A note says equipment should be depreciated by \3,000$. State the two effects. [2 marks]
- Cue. Charge \3,000\ in the balance sheet.
Q3. Explain why the profit for the year must be carried into the capital section. [2 marks]
- Cue. Profit increases the owner's stake, so adding it to capital is what makes net assets equal closing capital and the statement balance.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original6 marksState whether each trial balance item goes to the income statement or the statement of financial position: (a) sales; (b) equipment; (c) wages; (d) trade payables; (e) drawings; (f) purchases.Show worked answer →
(a) Sales: income statement (income).
(b) Equipment: statement of financial position (non-current asset).
(c) Wages: income statement (expense).
(d) Trade payables: statement of financial position (current liability).
(e) Drawings: statement of financial position (deducted in the capital section).
(f) Purchases: income statement (part of cost of sales).
What markers reward: income and expenses to the income statement, assets, liabilities, capital and drawings to the statement of financial position, with drawings correctly in the capital section.
Original6 marksA trial balance shows rent \5\,000\ is owing at the year end. (a) State the figure used in the income statement. (b) State the figure and heading used in the statement of financial position.Show worked answer →
(a) Add the accrual to the rent in the income statement: 5\,000 + 500 = \5,500$.
(b) The \500$ owing appears as a current liability (accrued expense) in the statement of financial position.
The adjustment affects both statements: the expense rises in the income statement, and a liability appears in the balance sheet.
What markers reward: the \5,500\ current liability, and showing the adjustment touches both statements.
Related dot points
- Prepare the income statement of a sole trader, showing gross profit and profit for the year
A simple answer to the N(A)-Level Principles of Accounts outcome on the income statement. The cost of sales, gross profit, expenses and profit for the year, and how to lay the statement out for a sole trader.
- Prepare the statement of financial position of a sole trader and show the capital section
A simple answer to the N(A)-Level Principles of Accounts outcome on the statement of financial position. How to set out non-current and current assets, liabilities, and the capital section with profit and drawings.
- Account for accruals and prepayments of expenses and income, and show them in the financial statements
A simple answer to the N(A)-Level Principles of Accounts outcome on accruals and prepayments. How to adjust an expense for amounts owing or prepaid, where each appears in the statement of financial position, and a worked calculation.
- Prepare a trial balance from a list of ledger balances and explain its purpose
A simple answer to the N(A)-Level Principles of Accounts outcome on the trial balance. What a trial balance is, which balances go on the debit and credit sides, how to total it, and what it can and cannot prove.