Question

The trail balance will be used in preparation of the income statement, statement of owner's equity, balance sheet, and statement of cash flow.

Specifically how?

Answer 1

A trial balance is a base for preparation of Income Statement, Balance sheet and Statement of Retained Earning. It provides Closing balances of all the accounts needed for preparing Final Financial Statements.

Use of Trial Balance for preparing:-

Income Statement: Income statement contains details about Revenues such as Sales, Rental revenue, Interest received etc and Expenses of a business such as Salary, Cost of goods sold, selling cost ,rent expense etc. The difference between income and expense is recorded as Income or loss and transferred to retained earnings statement.

Statement of Retained Earnings : Retained Earnings statement consist of opening balance of retained earnings, net profits, dividends paid and closing balance of retained earnings. Trial balance provides the amount of Opening balances of Retained Earnings, Dividends paid during the year. Income earned during the year is taken from income statement and income statement is prepared by using trial balance.

Balance Sheet: A trial Balance provides balances of assets and liabilities which makeup the balance sheet of the company. It also provides details of Common stock, Additional paid in capital and preferred stock. A person cannot prepare a balance sheet if he does not have a trial balance in hand. A trial balance also helps detect errors in accounts preparations. Balance sheet is prepared by taking balances of retained earnings from Statement of Retained Earnings which is linked with trial balance.