Final Accounts and Trial Balance

 7.2 Final Accounts and Trial Balance

You know final accounts are prepared with the help of a Trial Balance which shows all the ledger balances as at the end of an accounting period. Generally, when you are asked to prepare final accounts you are given a properly prepared Trial Bblance and you have no difficulty in identifying the items of incomes, expenses, assets, and liabilities. But , sometimes you may not be given a proper Trial Balance. You may simply be asked to prepare the final accounts from the list of closing balances extracted from the books of some firm. In such a situation, it will be helpful if you first prepare the Trial Balance and then the final accounts. Hence it is hprtant that you should know how to prepare! the Trial Balance from a given list of balances. Normally when-a Trial  Balance is to be prepared, you have full details of ledger accounts with you. you can easily ascertain whether a particular amunt has a debit

balance or a mdit bdance; and prepare the Trial Balance without any difficulty . The problem arises when you are given a list of balances but it is not whether the account has a debit balance or a credit balance. Under such a situation you will have to determine the nature of each balance before you can prepare the Trid balance. In this exercise your knowledge of rules of debit and adt will help you. For example you bow that in case of noIlnind ts all expenses and losses are debited and all incomes and gains are credited, Similarly, you know the reuls for real and personal account to which the account of assets  like cash , machinery debtors, etc will show debit balances while accounts like capital, creditors etc. will show credit balances. For convenienw however, a few guidelines should help you. They are.

In Illustration 1 the Trial Balance has tallied i.e, the total of debit balances column is equal to the total of cre'dit balances column. This would mean that each balance has been entered in the appropriate amount column of the Trial Balance. This is not always true. It is quite possible that even when the Trial Balance has tallied, some balances may not have been entered in the correct columns. Look at Illustration 2. You will find that the Trial Balance has tallied (the totals of both Dr. balances and Cr. balances is the same i.e., Rs. 91,650 but there are a number of items which have been shown in the wrong columns. For example, bank overdraft which should have been shown in the Cr. balances column has been included in the Dr. balances column and Furniture which should have appeared in Dr. balances column has been shown in the Cr. balances column. So, the Trial Balance has been rewritten and all items shown correctly. Such situation arises on account of the compensating effect of the errors which is very rare.

Illustration 2 

An inexperienced accountant provides you with the following Trial Balance. In case  you find it to be incorrect prepare it again so as to remove its defects.

Trial Balance ar an June 30, 1987

Solution: 

                   

Revised Trial Balance m on Juae 30, 19817