← Company financial statement preparation

The reporting cycle, start to finish

Every question on this paper is one step in the same pipeline. Knowing which step you are in tells you which accounts are even possible answers.

The five steps, in order

  • 1. Trial balance — unadjusted account balances at year end, taken straight from the ledger.
  • 2. Adjustments — accruals, prepayments, depreciation, revaluations and fair value changes are journaled so the accrual basis is applied.
  • 3. Statement of Comprehensive Income — income and expenses for the PERIOD are reported, arriving at profit for the year and total comprehensive income.
  • 4. Closing entries — income and expense balances are transferred out (to zero), and profit flows into retained earnings; dividends declared also close to retained earnings.
  • 5. Statement of Financial Position and notes — the snapshot AT balance date: assets, liabilities and equity, with notes reconciling opening to closing for each major balance.
✓

Use this to sanity-check an answer before you write it

If a question asks you to complete the Statement of Financial Position, an income or expense account should never appear in your answer — that belongs to step 3, already closed out by step 4. If a "trial balance" figure for retained earnings looks too small to include this year's profit, it is almost certainly the OPENING balance from step 1, not the closing figure step 5 is asking for.

Practise just this