Balance Sheet and Income Statement – Solved Examples

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Example 1: Preparation of Balance Sheet – Horizontal and Vertical Style:

The following trial balance is prepared after preparation of income statement for F. Green as at 31 March 2015.

balance sheet example 1

Required:

Prepare balance sheet for F. Green as at 31 March 2015 in both horizontal and vertical style.

Note:

In the absence of information about the date of repayment of a liability, then it may be assumed that loan is a non-current liability and a trade payable is a current liability.

Solution:

Balance Sheet (Horizontal Style)

As at 31 March 2015

balance sheet horizontal style

As mentioned earlier that vertical style of balance sheet is in fact another way of expressing accounting equation, i.e.,

 balance sheet-vertical style formula

This relationship is shown in the following balance sheet:

Balance Sheet (Vertical Style)

As at 31 March 2015

vertical style balance sheet

We can see in the above balance sheet that total of current assets is not directly added to non-current assets rather this is shown in the inner column. It is to provide a subtotal from which we could deduct total of current liabilities, and so identify net current assets (working capital).

If we have more than one current liability, then the individual current liabilities would have to be inserted into a third column and then total amount would be carried and deducted from the subtotal of current assets.

We can see a new item in the vertical style of balance sheet labeled as net current assets because it represents the net worth of current assets after settling outstanding current liabilities. This is also called working capital as this is the amount available to a business for meeting its working (operational) needs of the business.

The net total non-current assets and net current assets ($54400 in the balance sheet given above) is double underlined to indicate the final total of the first side of the balance sheet. This is called capital employed, however, from examination point of view there is no need to name it as such in the balance sheet.

Example 2: Preparation of Income Statement and Balance Sheet:

The following balances are taken from the books of George Anderson at the end of his first year trading on 31 December 2014.

balances from books

The following additional information is available:

Inventory at 31 December 2014 was valued at $4500.

Required:

(a) Prepare income statement for the year ended 31 December 2014.

(b) Prep[are a balance sheet as at 31 December 2014.

Solution:

(a)

Income Statement

For the year ended 31 December 2014

income statement

(b)

Balance Sheet as at 31 December 2014

balance sheet