In this session we will have a look at the trial balance the income statement and the balance sheet. First of all, we need to have a look to see what we already did. We accounted for all the transactions in the different journals. above the line, we copied all the titles to the general ledger. From the general ledger, we will summarize all the accounts in the trial balance and from the trial balance we will combine an income statement and a balance sheet. Now, what is a trial balance?

The Trial Balance is a summary of all the transactions that are accounted for in the general ledger. So in the general ledger, we accounted for all the transactions. Each and every account will have a total sales will have a total And that data will be copied to the trial balance, and we will make a summary of all those balances in the trial balance. At the trial balance I have two sections. The first section is the income statement section. And the second section is the balance sheet items.

The income statement section we will account for income and expenses and the balance sheet section we will account for assets liabilities and equity. The sum of all the debits should equal the sum of all the credits. The Trial Balance balances if the debits equal the credits due to the double entry system. If you add up the debits and he do not equal the credits, the numeric mistake, you will have to go back into the general ledger and into the journals default mistake and to correct it. And then we will do a year end on the last day of the financial year. So after we Close the door.

So business we will have to do a urine all the income and expense titles will be transferred to the retained income account and the retained income account as a balance sheet item. And the balance sheet accounts will have the opening balance and the travels for the new financial year is an example of a general ledger. And we are going to prepare a provenance so we have sales, sales an income statement and we have all the transactions relating to sales for the year. These interests are January February, March, April, May, June, July, August, September, October, November and December. And our total for sales was a 53 400 created and we have cost of sales also an income statement item or the increase relating to cost of sales. And we have a total 1100.

David, and we have our bank is all the receipts violence and we have a debit balance of 41 600. And we will prepare the trial balance as at the end of December 2008 Senior income and expenses, the science and we will copy that title to the trial balance, credit 53 405 three 400 cost of sales 11 800 debit even 800 debit and the balance sheet items bank. Thanks a balance sheet item bank total 41 600 and up the debits 53 400 and we add up the credits 53 400 You can see that the debits or equal to the credits is a trial balance on the 31st of December 2000 is all the income statement items and the balance sheet items and income statement items these two credits sells and this can receive cost of sales expense. And then we have all the other expenses. So the credits, please all the debits will leave us with a profit of one on six iTunes 60.

That's all the income accounts please the expenses and that will be a debit. That's a profit of 162 60. So that's a balancing figure. So we added up all the credits 29 840. We put that at the end and it balances the tune on 840. If we put in the Prophet in the we need to put a credit in his mouth remember for every debit decent credit so he put the credit in there.

That's also possible that you can leave that out and you can leave that out and this will still balance. It's always nice if you calculate the profit day you put a profit line in here and you can fully profit indeed. And we have all the balance sheet items now that profit thing is part of the retained income at the end of the year in the balance sheet, electric bill prepare income statement. Income Statement First of all, we have sales sales created 1824040 created next one cost of sales. David six 400 David 600 and sales less cost of sales is gross. Profit 11 840 to create at least a debit will leave us with a credit 118 Fawzia this can receive so we have a subtitle yet other income this can receive 11 600 created and we worked out our income, its gross profit plus other income to create was it created 23 440 created and we account for all the expenses.

Copy all the expenses to the income statement expenses. The bank charges 257 for cleaning 57 1140 for consumables and we will total the expenses and the expenses total of 3757 point 40 David so we created this a David is a profit of 106 it 60 so sales less cost of sales will give us the gross profit plus our income and give us total income less the expenses will give us a profit and loss and we prepare a balance sheet. Now, we don't have fixed assets in this example, but if we had fixed assets, they will be allowing fixed assets definitely. And we account for current assets current assets, just status stock cashing in. If we add a positive bank balance that will also borrow current assets. So data's control 606 400, debit, stock 962 hundred 962 hundred debit and petty cash 209 360 cash on hand.

David, we title our David's and the current assets 10469 360. So, we will take fixed assets plus current assets and we will get a title 10469 360 and is the title assets. So, the balance sheet is divided into two sections the assets and in the second section we will account for equity liabilities, equity, share capital and retained income, Shea capital 10,000 10,000. retained income years is zero. This business started off on the first of January 2006. So there was no previous financial years. If it is conducted business in the previous year, there will be a return income here and the profit for this year plus TV income from the previous year from the return income, so she capitalistic credit returned income as a created and if the retained income was a debit every year, that will not be returned income that will be accumulated loss that will be a debit thing, and that will be a negative.

So there will be a critically say, David, but in this example, it's a created net only. So it might have profit creativity and the total equity is 296 60. Then we have a section long term lunch, there was a loan from a bank 45,000. That's a credit also creativity and the current liabilities, current liabilities on liabilities that will be settled within 12 months. First of all, thank overdraft and credit balance gutturals 29498 and critters 513 we subtitle that we will get current liabilities 30011. That's also created.

And we will add a total equity plus long term liabilities plus current liabilities, title 10469 360. And that will be created. And you can see that the credits are equal to the debits 10469 360. And then the question why did we do all this work? Why don't we account for all the transactions in the accounting records and compiled an income statement and the balance sheet? the income statement in the balance sheet are the tools that we use to manage our business.

If we don't have this information, we cannot make decisions. First of all, We need to make sure that we make a profit and see this is not net profit. If this is a loss, we have a serious problem on it. If this is the last thing this company will not survive, if it may last one year it might survive and if it makes a loss for the next year, then this company will go bankrupt. So very important that we first of all make sure that this company makes a profit, then you can generate an income statement for every month. So every month you can see if you make a profit or loss for tax purposes, we compile a an income statement for the year so that we can declare our taxable income.

Then we have gross profit sales less cost of sales is gross profit 11 840 and we need to calculate the gross profit percentage, the gross profit percentages cross profit divided by sales times 100. And that will give us 64%. And the gross profit is a percentage that we determine when we start off the business. And that is the amount that we need to make on the items that we sell to be able to pay the expenses. So if the gross profit for this instance dropped to 10%, interest profitable led 1824 and if we don't have an income when I do faultless 3757, in this company will make a loss of roughly 2000 just plus minus. So if the gross profit drops to 10%, this company will make a gross profit 184 listing expenses equals a loss Why?

The trash profit dropped 80%. It might be that people are stealing our stock. So they we bought a stock and I steal it. And we need to account for the stock that was stolen in the cost of sales. So as sales is lower, our cost of sales are higher. And now we only make 10%.

It might also be that the items that we bought increased in price, and we haven't increased our sales. So gross profit percentage drop. Now the gross profit percentage will be determined when the start of the business so that let's take an example. We have expenses of 100,000 for the year. And we decided that our gross profit percentage will be 20%. And then we can calculate our break even point so 100,000 divided by 20% equals 500,000.

So, our silence will be 500,000 times 20%. That's the gross profit 500,000 less hundred thousand in expenses, profit and loss zero. So we need to sell 500,000 grand to be able to buy the expenses of 100,000 if the sales are higher than 500,000, we will make a profit. If the sales drop below 500,008, we will make a loss. So it's very important that you know in your business how much you need to sell to be able to keep the doors open. Then the balance sheet.

In this example, there is no fixed assets but if it was fixed, Since then we will account for it or they will be along fixed assets. And we will be for this amount against the fixed asset register. And we can take the fixed asset register and walk through our property and make sure that all the fixed assets are still the end. If it's not the then we can climb it from the insurance. So it might be that the fixed assets, the amount of vehicles and all that was stolen, so we will claim it back from the insurance. They may have current assets, data status, we need to keep the status quo as possible.

If the data is done by us, we will not have enough money in the bank to pay our creditors and to pay for expenses or to buy stuff. So it's very important that we manage our status, things stuck on in 96 to 100. We will go back to the warehouse and we will count all the stock We are supposed to add stock to the value of 96,200. And in the warehouse, let's say we can only account for stock to the value of 36 200. Then it means that we have accounted incorrectly for stock for that someone stole the stock. And we will have to write off 60,000 grant to cost of sales.

If we need to add 60,000 into cost of sales every year, we will make a huge loss. So it's very important that we reconcile that with the stock in the warehouse, so that we make sure that we calculate the correct profit or loss. Cash on end is just a petty cash then the total assets less Long term liabilities least current liabilities will leave us with equity assets less liabilities, liabilities equals equity. It's very important that this figure is a positive figure positively, meaning a credit if that figure is a debit and negative in this company's insolvent so the assets of wonderful place 45 plus 30 will give a credit of 29, six and two. But if we have assets of 100,000 Rand and we have liabilities of 300,000. Then the liabilities will exceed the assets with 200,000.

And this company is technically insolvent. So if you have a debit every day, this company is technically insolvent. And what it actually means is if we sell all the assets, we will not be able to pay the liabilities. So if we get all the money from the datas plus we sell all the stock and we take the cash in the petty cash, we will be able to buy the plan and the current liabilities and we will have a surplus of 29,000. So, it's very important that we have a look at all these figures. We need to make sure that the titles on the total assets are more than the liabilities.

We need to make sure that the creditors or as low as possible, if we create this or too high, then the creditors will not supply us with stop. So we need to make sure that we pay our creditors that the bank overdraft is not too long. Did this as possible, and that we have the stock in the warehouse. And that stock figure should also be as low as possible. That has an influence on our cash that we, if we take all the money out of the bank and we buy stock, then and we don't sell the stock, then we will not have enough money to buy our creditors. They mean to ever look at urine, and our shadow on the camera is on an avenue space.

So we have the general ledger we have sales for the year for four year x, we have cost of sales for you x and we have all the bank transactions for x and on the 31st of December 2008. After business hours, we need to transfer the titles from the income and expense accounts to the retained income and we will do it with a journal so The 31st of December off because the rules for business love sales and we have cells here or 53 400 created and the only way to clear it is to put in a debit for three 400 cost of sales 11 800 cost of sales is a debit so we need to create it in 800 and we will take it to the retained income account and the retained income account is that balance sheet item 416 hundred and we will add up the David's for 400 and if the credits for three 400 and we will copy and paste this to the general ledger.

So here we are from the general journal for three 400 you can see that the David's Are you Equity credits. Our new balance here zero net cost of sales. So David we need to create a copy of the general journal even 800 credits are equal to David's New Balance zero and we will open a new account three times income 416 hundred 416 hundred credit and we still have the bank balance four and 600 debit. So a trial balance on the first of January 2001 on the first day of the new financial year before we opened the doors for business the trial balance will look like this sales 00 that was transferred to the new financial year cost of sales zero transferred to the new financial year. bank bank the balance on the last day the 31st of December four and 600 and that will be the opening balance on the first of January 2001 for 600 and we will add retained income for one 600 Davidson equity credits.

Let's have a look at this example is a trial balance on 31st December before you're in so this will be income expenses and the balance sheet. So after business on the 31st we will do a journal now sales is created we will sell David Yep, costs ourselves as a debit. We will create it in the journal This can be traded and we will save it and we will create it all the expenses. So in the general ledger, we add sales by 24 zero and you can see the on the 31st of december of the business. We will transfer the title to the returned income we put in the debit. And on the first of the first 2001 total carried forward for zero bank.

We had all the receipts and all the payments, the balance on the 31st of December 2016 1498. That's the balancing figure that we put into debit and we will carry it forward to the credit side and that will form the opening balance on the first of January 2001 and the trial balance so we had 18 T for zero cred we put in David, we had a credit we put in a debit knee that was zero. So only first on the first 2000 why all the income statement items will be zero. And then the balance sheet items, Shea capital 10,000 10,003 times income, you can see that profit day will be carried over to the retained income account one on six on line 44, line 45. Stock 962 hundred stock on 1600 added the debits and the credits. So there's no income and export expenses before we conduct business on the first of January 2000.

Why all the balance sheet items will be carried forward and that is how easy it is to prepay I drop Allen's and Coppola income stream When in a balance sheet. In session eight, we will have a look at the comprehensive exercise and I will show you how to do the comprehensive exercise and in session nine I'll discuss the solution with you see in the next session