Extended trial balance and statements - Statement of financi...

Learning Outcomes

After studying this article, you will be able to prepare a basic statement of financial position for a sole trader, classify assets, liabilities, and capital, understand the effect of year-end adjustments, and explain the significance of opening and closing balances in financial statements.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand how to produce the statement of financial position from an extended trial balance, apply correct ledger account balances, and account for year-end adjustments. You should focus your revision on:

• The purpose and layout of the statement of financial position for a sole trader
• The classification and presentation of assets, liabilities, and capital
• The process for transferring closing balances to financial statements
• Accounting for year-end adjustments (e.g., accruals, prepayments, inventory, depreciation)
• The treatment and impact of opening vs. closing balances

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which one of the following is presented in the statement of financial position as a non-current asset?
   1. Inventory
   2. Plant and machinery
   3. Bank overdraft
   4. Trade payables

2. True or false? Closing inventory is shown as a deduction from purchases in the statement of financial position.

3. In the statement of financial position, which section shows the owner's claim after deducting all liabilities from total assets?

4. What is the main effect on the statement of financial position if accrued expenses are not recorded at year-end?

Introduction

The statement of financial position (often called the balance sheet) provides a summary of a business’s assets, liabilities, and capital at a specific moment in time. For the ACCA exam, you must know not only the structure and layout but also how year-end adjustments and closing balances are reflected in this statement. This article explains the format, the core principles of classifying assets and liabilities, and the role of the extended trial balance in preparing a statement of financial position for a sole trader.

Key Term: statement of financial position
A financial statement showing assets, liabilities, and capital of an entity at a specific date, usually at the end of the accounting period.

Key Term: asset
A resource controlled by an entity as a result of past events, from which future economic benefits are expected.

Key Term: liability
A present obligation to transfer economic resources due to past events, expected to result in outflow of resources.

Key Term: capital
The owner's residual interest in the assets of the entity after deducting all liabilities.

Key Term: year-end adjustment
An accounting entry made at the end of the accounting period to ensure financial statements reflect accruals, prepayments, depreciation, inventory, and other relevant corrections.

Purpose and Format of the Statement of Financial Position

The statement of financial position is a snapshot of the business’s financial standing at the end of the accounting period. It demonstrates the equality:

Assets = Capital + Liabilities

Assets are shown on one side (or at the top), with liabilities and capital on the other side (or below).

A typical format for a sole trader is as follows:

Statement of financial position at [date]

Key Term: non-current asset
An asset the entity expects to use for more than one accounting period, such as property, plant, and equipment.

Key Term: current asset
An asset that is expected to be converted into cash or used up within one year from the statement date.

Key Term: current liability
An obligation due within one year of the statement date, such as trade payables, bank overdrafts, or accruals.

Key Term: non-current liability
An obligation not expected to be settled within the next year, such as long-term loans.

Classification and Presentation

Correct classification is critical. Each balance in the trial balance must be identified as an asset, a liability, or capital.

• Non-current assets: Shown at cost minus accumulated depreciation.
• Current assets: Shown at likely recoverable amount (e.g., trade receivables net of allowances, inventory at lower of cost and net realisable value).
• Current liabilities: Owed within twelve months.
• Non-current liabilities: Owed after twelve months.
• Capital: Calculated by updating opening capital for profit (or loss) and drawings.

Worked Example 1.1

A sole trader’s trial balance includes: Fixtures $7,000, Inventory $3,000, Trade payables $2,500, Bank $1,000, Opening capital $8,000, and profit for the year $2,000. The owner withdrew $1,200 as drawings.

Prepare the capital section of the statement of financial position.

Answer:

Opening capital: $8,000
Add: Profit for the year: $2,000
Less: Drawings: ($1,200)
Closing capital: $8,800

Role of the Extended Trial Balance

After all year-end adjustments (accruals, prepayments, depreciation, inventory), the extended trial balance provides final balances for presentation. Adjusted balances for assets increase or decrease based on these adjustments and are then transferred to the statement of financial position.

Year-End Adjustments and Their Effects

• Accruals: Increase expense in the statement of profit or loss and create a current liability.
• Prepayments: Decrease expense and create a current asset.
• Inventory: Closing inventory is a current asset; also reduces cost of sales in the profit or loss.
• Depreciation: Reduces carrying value of non-current assets and increases expense.
• Allowance for receivables: Deducts from receivables, shows only expected recoverable amount.

Worked Example 1.2

At year-end, a business has $1,500 of rent unpaid (accrued) and $300 of insurance paid in advance (prepaid). How are these shown in the statement of financial position?

Answer:

• Rent accrual is shown as a current liability of $1,500.
• Insurance prepayment is shown as a current asset of $300.

Exam Warning

Year-end adjustments are frequently examined. Marks are often lost by omitting adjustments or misclassifying accruals and prepayments. Ensure you include both in the correct sections.

Transferring Balances From the Extended Trial Balance

The process is as follows:

• Identify each closing ledger balance after adjusting for year-end entries.
• Classify each as asset, liability, or capital/drawings.
• Insert each figure in the appropriate location in the statement of financial position format.

Be aware that some balances (e.g., depreciation, accruals, opening capital) must be altered to reflect the final year’s movements.

Worked Example 1.3

The adjusted trial balance shows: Motor Vehicles at cost $12,000, Accumulated depreciation $5,000, Trade receivables $6,500, Allowance for receivables $200.

How are these figures presented?

Answer:

Motor Vehicles (non-current asset): $12,000 - $5,000 = $7,000
Trade receivables (current asset): $6,500 - $200 = $6,300

Key Point Checklist

This article has covered the following key knowledge points:

• Define and explain the purpose of a statement of financial position
• Classify closing trial balance amounts accurately as assets, liabilities, or capital
• Present non-current and current assets and liabilities correctly
• Apply year-end adjustments (accruals, prepayments, inventory, depreciation) to financial statements
• Transfer balances from the extended trial balance to the statement of financial position

Key Terms and Concepts

• statement of financial position
• asset
• liability
• capital
• year-end adjustment
• non-current asset
• current asset
• current liability
• non-current liability