Questions and Answers
What event must take place before preparing the financial statements of an entity?
What is the primary purpose of a trial balance?
In a pre-adjustment trial balance, where are debit balances listed?
What is prepared at the end of an accounting period?
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What is necessary for preparing a pre-adjustment trial balance?
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In what order are accounts listed in a pre-adjustment trial balance?
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What is the main purpose of preparing a trial balance?
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What type of accounts are used to prepare the statement of comprehensive income?
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What does the capital account represent in the trial balance?
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What is the last step before preparing financial statements?
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What is the purpose of the adjustments made to the trial balance?
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What is represented by the drawings account in the trial balance?
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What is the purpose of the balance sheet accounts section in the trial balance?
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When is the pre-adjustment trial balance usually prepared?
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What does the Accumulated depreciation on equipment account reflect?
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What is the purpose of the Provision for bad debts account?
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What type of system is used when the cost of sales is recorded each time a sales transaction occurs?
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What is the purpose of the Sales returns account?
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What is the difference between Debtors control and Provision for bad debts?
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What is the purpose of the Bank account?
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What is the purpose of the Creditors control account?
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What is the purpose of the Loan: Rio Bank (16% p.a.) account?
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What is the purpose of the Petty cash account?
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What is the purpose of the Fixed deposit: Rio Bank (10% p.a.) account?
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What is the purpose of making adjustments to accounts?
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What happens when an account is written off as a bad debt?
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What is the purpose of making a provision for bad debts?
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What is depreciation?
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What is the effect of accrued income on the financial statements?
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What is accrued expense?
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What is the purpose of making adjustments for prepaid expenses?
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What is the effect of depreciation on the financial statements?
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What is the difference between provision for bad debts and bad debts?
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Why are adjustments necessary?
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What is the purpose of adjusting prepaid expenses in the current financial year?
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What is included in the statement of financial position as part of 'Trade and other receivables' under current assets?
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What is the basis of measurement used by Madida Traders in preparing its financial statements?
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Why is an adjustment necessary for consumable inventory?
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How is equipment depreciated in Madida Traders?
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What is the purpose of preparing financial statements from a pre-adjustment trial balance and additional information?
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What is the treatment of consumable stores in Madida Traders' financial statements?
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What is included in the notes to the financial statements under Inventories?
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What is the next step after preparing the formats of the financial statements?
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What is the treatment of an investment at Ben Bank in Madida Traders' financial statements?
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What is the term used to describe income received in the current financial year but relating to the next accounting period?
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What is the impact of the rent increase on Madida Traders' financial statements?
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What is the effect of adjusting income received in advance?
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What should be done with the debit order for R500 for the insurance of the proprietor’s home?
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What is the accounting treatment for the debtor's account with a credit balance of R200?
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What is the purpose of making adjustments in the financial statements?
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What is the accounting treatment for the debtor who was declared insolvent?
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What is the recommended method for preparing financial statements from a pre-adjustment trial balance and additional information?
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Study Notes
Financial Statement Preparation
- Before preparing financial statements, certain events must have taken place, including:
- Occurrence of transactions during the financial year
- Entering transaction data on source documents
- Recording transactions in journals from source documents
- Posting information from journals to ledger accounts
- Preparing a trial balance to ensure correct application of the double-entry principle
Pre-Adjustment Trial Balance
- A pre-adjustment trial balance is a list of accounts and their balances at a given time
- It is usually prepared at the end of an accounting period
- Accounts are listed in the order they appear in the general ledger
- The trial balance includes:
- Debit balances in the left column
- Credit balances in the right column
- The main purpose of the trial balance is to ensure that:
- The total of all debit entries equals the total of all credit entries after posting is completed
Preparing Financial Statements
- The process of preparing financial statements involves several stages, including:
- Transactions occurring during the financial year
- Recording transactions in source documents and journals
- Posting information from journals to ledger accounts
- Preparing a trial balance to check for errors
- Making adjustments to the trial balance to comply with GAAP concepts
- A pre-adjustment trial balance is a list of accounts and their balances at a given time, usually prepared at the end of an accounting period
- The trial balance includes debit balances listed in the left column and credit balances in the right column, with the totals of the two columns being equal
Trial Balance Accounts
- Balance sheet accounts:
- Capital: represents the amount invested by the proprietor plus retained profits
- Drawings: refers to cash or goods taken by the proprietor for personal use
- Land and buildings, Equipment, and Vehicles at cost: reflect the purchase price of these assets
- Fixed deposit: represents an investment account earning interest
- Accumulated depreciation: represents the cumulative total of depreciation recorded on assets
- Trading inventory: represents the cost price of merchandise purchased for resale
- Debtors control: represents the amount owing by customers
- Provision for bad debts: represents the expected amount of bad debts
- Bank and Petty cash: represent cash balances
- Creditors control: represents the amount owing to suppliers
- Loan: represents a loan from a bank or other lender
- Nominal accounts:
- Sales: include cash and credit sales made during the year
- Cost of sales: represents the cost price of merchandise sold
- Sales returns: represents merchandise returned by debtors
- Advertising and other expenses: represent other expenses incurred by the entity
- Discount received, Interest on fixed deposit, and Rent income: represent other income accounts
Year-End Adjustments
- Adjustments are necessary to ensure that financial statements accurately reflect the financial position and performance of the entity
- Types of adjustments include:
- Bad debts: writing off debtors who are unlikely to pay
- Provision for bad debts: making a provision for expected bad debts
- Depreciation: providing for the wear and tear of assets
- Accrued income: recognizing income earned but not yet received
- Accrued expenses: recognizing expenses incurred but not yet paid
- Prepaid expenses: recognizing expenses paid for in advance
- Income received in advance: recognizing income received but not yet earned
- Consumable inventory: recognizing unused consumable items
Preparing Financial Statements from a Pre-Adjustment Trial Balance
- Financial statements can be prepared directly from the pre-adjustment trial balance and additional information
- The recommended method involves:
- Preparing the formats of the financial statements without entering any amounts
- Taking the figures from the pre-adjustment trial balance and writing them down next to the relevant detail in the financial statements
- Studying each adjustment and making the necessary adjustments to the pre-adjusted amounts
- Entering the final figures and completing the financial statements with the necessary calculations
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Description
Learn about the steps that occur before preparing financial statements, including transactions, journal entries, and trial balances.