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Basic financial statements from the adjusted trial balance

5 August, 2015 - 15:22

The usefulness of double entry accounting is that the equation assets equals liabilities plus equities should always hold after each double entry , and can be done once after adjusting entries are made , called an adjusted trial balance . From the adjusted trial balance, 3 different parts can be used to produce 3 basic reporting statements, the income statement, the statement of change of equities and the ending balance sheet.

Each statement depends on the previous statement. The income statement is a summary of the temporary income and expenses accounts, and states a profit. The profit is shown in the statement of change of equity, where beginning capital amount is added to the profit from the period, any drawings amount subtracted, and the ending capital amount is determined.

Thirdly, the balance sheet shows the ending amounts of the permanent accounts ( excluding income and expense accounts , which have been closed off), with the ending capital from the statement of change of equity as the capital stated in the equity section. It will show that the sum of the asset accounts less the sum of the liabilities , is equal to the ending capital (equity).