subject: From the Trial Balance to the Balance Sheet [print this page] There are many concepts accounting can teach us to use in everyday life. The trial balance is a very important part. This contains the income statement, statement of owner's equity, and balance sheet. All three of these pieces are key to understanding the full accounting cycle. Throughout this article I will make examples using a small business you might own, we will say a candy store. The trial starts off the process.
First the trial balance holds all the information, just in a compact form and not all broken down into its separate sheets yet. A trial balance is like a guide line to see what you actually have and do not have in your account and at your disposal to use. This lists your assets, liabilities, and equity. Revenues and expenses are also included but listed under owner's equity. Those are the basic groups everything is placed into like these examples; cash, supplies, equipment, guest revenue, rent expense, accounts receivable, and accounts payable. It is essential to understand what cards are in your deck so you can make wise business decisions. The income statement takes this understanding even farther and gives you more detail to your business.
Next the income statement goes more in depth with the accounting process. It holds your revenues and expenses. Say you make money from selling candy at your candy store. That will be recorded here. But you also have to take into account that there were water expenses and electric expenses that take away from that revenue. This income statement is just the rough start to showing you what is actually at hand in your business. The statement of owner's equity is the next piece to the puzzle.
After the revenue and expense is taken care of the owner's equity is then calculated. This statement takes the original capital of you the owner and adds the investments to which you made during the year. Say you put money into your business for a new sign. That would be an investment to make your business better. Also the money that was taken out by you is documented. An owner of a business can remove money for personal use whenever they wish because it is their business and their money that's being made. It just has to be recorded to make it legal. The balance sheet comes after the statement of owner's equity to close out the system.
Finally to finish the accounting cycle is the balance sheet which ties all aspects together. This sheet will have your assets, liabilities, and owner's equity posted directed on it. Under assets it will hold your actual cash like hard money that's in the cash register or vault. Also, the supplies the company owns like the candy itself, spoons for the candy, and napkins. And the equipment which would be tables, chairs, and containers for the candy to be stored in. Under liabilities will be accounts payable and unearned revenue. Accounts payable will be the things you purchased through your business but not yet paid for. Say you buy a new candy machine for your shop, but placed it on your credit. It is not yet paid for but will cost you money in the short run. Also unearned revenue is taken down which is where someone pays you in advance to cater a party. You have the money but have not done the work yet. Finally the owners equity is added in again which you have already calculated this total. Take the total capital that your business holds and add it with your liabilities and it should match you total assets to equal out your balance sheet and balance your books. If these are not matched then there was an error in your books or you miss calculated somewhere. It can sometimes be an easy fix though and just be a number error.
These were the different sections presented to help you understand the accounting process. The trail balance where all your information is presented is raw form. Then follows into the income statement which presents your revenues and expenses, a good look at how things are working so far with your business. Next was the statement of owner's equity that displays your capital at the beginning of the recording, the following investments through the year, the withdrawals you might make for personal usage, and the final closing balance of your capital in the business. Lastly the balance sheet that holds your assets; cash, supplies, equipment, liabilities; accounts payable, unearned revenue, and equity. Combining owner's capital with liabilities will produce a figure that should match your combined assets to balance your book.
