Bookkeeping basics - PART 5
It's time for the course finale
Are you excited for the course finale? I wonder how it is going to end? Will there be an unexpected twist? Could there be a cliff-hanging ending?
Prepare yourself for the finale of all finales... Bookkeeping Basics Part 5: Trials balances and financial statements!
Prepare yourself for the finale of all finales... Bookkeeping Basics Part 5: Trials balances and financial statements!
lesson 1 - The Trial Balance
To keep the world organised, we order the months of the year into a calendar. 12 months forming a full calendar year.
Many countries also have a tax calendar, which often starts and ends differently to the world calendar.
Businesses and companies also have a calendar that marks the start and end of the entities financial year. This calendar is called the financial calendar.
Financial calendars are 12 months and begin with the start of a businesses financial year and end with the businesses financial year end. This 12 month cycle is called the 'financial year' or 'fiscal year'.
Not all businesses have the same financial year, as financial years are generally based on when the company was started/formed/incorporated.
This means that business owners and accountants have 3 calendar years to remember! The standard calendar year, the tax year calendar, and their businesses financial year calendar...
Calendar Year... 1 January - 31 December
Example Tax Calendar Year... 1 April - 31 March
Example Business Calendar Year... 1 July - 30 June
To make things easier, some business owners choose to have/change their businesses financial year to run in-line with the tax year or standard calendar year.
Many countries also have a tax calendar, which often starts and ends differently to the world calendar.
Businesses and companies also have a calendar that marks the start and end of the entities financial year. This calendar is called the financial calendar.
Financial calendars are 12 months and begin with the start of a businesses financial year and end with the businesses financial year end. This 12 month cycle is called the 'financial year' or 'fiscal year'.
Not all businesses have the same financial year, as financial years are generally based on when the company was started/formed/incorporated.
This means that business owners and accountants have 3 calendar years to remember! The standard calendar year, the tax year calendar, and their businesses financial year calendar...
Calendar Year... 1 January - 31 December
Example Tax Calendar Year... 1 April - 31 March
Example Business Calendar Year... 1 July - 30 June
To make things easier, some business owners choose to have/change their businesses financial year to run in-line with the tax year or standard calendar year.
So, why is this important and what does it have to do with bookkeeping?
Well, entities are required by law to provide certain financial reports dated as of their financial year. These reports are usually a profit and loss statement and a balance sheet (there will be more about these reports later on this page). These reports are often referred to as 'financial statements' or 'year end accounts'.
In order to prepare these needed financial reports, a business or company must first compile a trial balance...
A trial balance is a list of all the balances on all the nominal accounts. In other words, it shows the totals of all the asset, liability, equity, sale, and expense accounts. It often lists these balances as either a credit or debit balance, as per the trial balance example below...
Well, entities are required by law to provide certain financial reports dated as of their financial year. These reports are usually a profit and loss statement and a balance sheet (there will be more about these reports later on this page). These reports are often referred to as 'financial statements' or 'year end accounts'.
In order to prepare these needed financial reports, a business or company must first compile a trial balance...
A trial balance is a list of all the balances on all the nominal accounts. In other words, it shows the totals of all the asset, liability, equity, sale, and expense accounts. It often lists these balances as either a credit or debit balance, as per the trial balance example below...
There are a few things to note about the above trial balance...
1. Did you notice that the nominal accounts are organised into their account types? All the assets are listed together, all the expenses are listed together, etc, etc.
2. Can you see that the nominal account totals are showing either a debit or credit balance? This is the closing balance of the nominal account, which is either going to be debit or credit.
3. The debit and credit totals balance. They should always balance. This is due to the double entry nature of the accounts - every debit entry has an equal credit entry and vice versa.
The trial balance is created, so that the totals can be used to create financial reports.
Financial reports are required by law and are needed for financial forecasting and planning, as well as a number of other reasons.
Let's have a look financial statements in more detail, starting with the profit and loss statement...
1. Did you notice that the nominal accounts are organised into their account types? All the assets are listed together, all the expenses are listed together, etc, etc.
2. Can you see that the nominal account totals are showing either a debit or credit balance? This is the closing balance of the nominal account, which is either going to be debit or credit.
3. The debit and credit totals balance. They should always balance. This is due to the double entry nature of the accounts - every debit entry has an equal credit entry and vice versa.
The trial balance is created, so that the totals can be used to create financial reports.
Financial reports are required by law and are needed for financial forecasting and planning, as well as a number of other reasons.
Let's have a look financial statements in more detail, starting with the profit and loss statement...
lesson 2 - The profit and loss statement
The profit and loss statement is a financial report that shows the overall profit or loss that a business, company, or other entity has made. Profit and loss statements are always compiled for the financial year of an entity, but they can be compiled at any time for any date range. For example, some businesses create monthly or weekly profit and loss statements, as well as the required profit and loss statement at year end.
To create a profit and loss statement, an accountant or bookkeeper uses the account totals from the trial balance for sales and expenses. In layman's terms, the sales minus the expenses total the overall profit or (loss) of the business.
Some profit and loss statements can be more detailed than others (this is covered in my free management accounts course) but the principle is always the same... Sales minus expenses equals profit or (loss).
The profit and loss infographic below should help...
To create a profit and loss statement, an accountant or bookkeeper uses the account totals from the trial balance for sales and expenses. In layman's terms, the sales minus the expenses total the overall profit or (loss) of the business.
Some profit and loss statements can be more detailed than others (this is covered in my free management accounts course) but the principle is always the same... Sales minus expenses equals profit or (loss).
The profit and loss infographic below should help...
lesson 3 - the balance sheet
The balance sheet is a financial report that shows what the financial position of a business, company, or other entity. In other words, the balance sheet shows what a business owes and what it owns.
The profit and loss statement uses the account totals of all sales and expense accounts. The balance sheet uses the account totals of all asset, liability, and equity accounts. All of these figures will be listed on the trial balance.
The profit and loss statement and the balance sheet - i.e. the financial statements - form a set of annual or year end accounts.
On the balance sheet, the total of all assets should equal the total of all liabilities and equity, hence the term 'balance sheet' - the totals balance each other.
Below is an infographic of a balance sheet, which should help your learning process...
The profit and loss statement uses the account totals of all sales and expense accounts. The balance sheet uses the account totals of all asset, liability, and equity accounts. All of these figures will be listed on the trial balance.
The profit and loss statement and the balance sheet - i.e. the financial statements - form a set of annual or year end accounts.
On the balance sheet, the total of all assets should equal the total of all liabilities and equity, hence the term 'balance sheet' - the totals balance each other.
Below is an infographic of a balance sheet, which should help your learning process...
So long, farewell, auf wiedersehen, goodbye...
So, what has this free bookkeeping taught you?
Hopefully, you now at least understand some accounting terminology, the basics of double entry, and what a profit and loss statement is.
Obviously the course is free, so perhaps take it again or consider my other basic accounting courses.
If you would like a more detailed course, then The Bookkeeping Master does offer an exclusive course here.
Don't forget to watch the video below!
Hopefully, you now at least understand some accounting terminology, the basics of double entry, and what a profit and loss statement is.
Obviously the course is free, so perhaps take it again or consider my other basic accounting courses.
If you would like a more detailed course, then The Bookkeeping Master does offer an exclusive course here.
Don't forget to watch the video below!
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