Preparing a Revenue and Expense Report from a Pre-Adjustment Trial Balance

When preparing financial statements, the sequence of tasks is often misunderstood. While an income statement and balance sheet are derived from an adjusted trial balance, it is essential to understand the steps involved in preparing a trial balance. This article will guide you through the process of creating a pre-adjustment trial balance from an income statement, categorizing accounts, and preparing both an income statement and a balance sheet.

Understanding a Trial Balance

A pre-adjustment trial balance is a comprehensive list of all account balances extracted from the General Ledger. It is a crucial step in the financial reporting process. The purpose of a trial balance is to ensure the equality of debits and credits, ensuring that no calculation errors were made.

The pre-adjustment trial balance is divided into several categories:

Balance Sheet Accounts: This includes assets, liabilities, and capital. Nominal Accounts: These are accounts related to revenues, expenses, income, and losses.

Let's consider a practical example. Suppose you have recorded employees' salaries in the Cash at Bank Payable (CPJ) or Cash at Bank Payable (CBP) over the year. As you prepare the pre-adjustment trial balance, any amounts accrued or paid in advance are then allocated against the appropriate nominal accounts (such as Salaries).

Preparing the Pre-Adjustment Trial Balance

To prepare the pre-adjustment trial balance, follow these steps:

Review the General Ledger: Examine each General Ledger account code to determine its category. Categorize Each Account: Tag each account as either a sales or revenue item, cost of sales item, general expense item, asset item, liability item, or shareholders’ equity item. Summarize the Totals: Use an electronic spreadsheet like Microsoft Excel to categorize and sum the totals from the pre-adjustment trial balance into these six categories. Prepare the Income Statement: Use the categorized totals to prepare the income statement, following the structure:
Total sales and revenue
less total cost of sales
gross profit GP 4a - 4b
less overhead and general expenses OH
net profit NP 4c - 4d Prepare the Balance Sheet: The formula is:
Total Asset Total Liabilities Shareholders’ Equity

Conclusion

By following this structured approach, you can effectively prepare both the income statement and the balance sheet from a pre-adjustment trial balance. This method ensures the accuracy and integrity of your financial reports.

While detailed explanations and examples are available in introductory accounting textbooks, understanding the process through a systematic breakdown can greatly enhance your financial reporting skills.