22108 Chap.5 From Trial Balance to the Four Financial Statements
From Trial Balance to the Four Financial Statements
Week 5 is where the worksheet finally becomes a set of reports, and it is the highest-value technical chapter in 22108. It introduces opening balances and the permanent-versus-temporary distinction, then the trial balance as the list of every account and its closing balance, and then builds the profit and loss statement, the statement of changes in equity and the balance sheet in that fixed order, plus an understanding of the statement of cash flows and Australian reporting requirements. The two articulation formulas printed for this topic - balance-sheet retained earnings and balance-sheet share capital - are the single highest-value micro-topic in the subject, because they are the step where students most often lose the thread. Expect this pipeline in the weekly Canvas quiz, in the in-tutorial Excel problem, and in the final exam.
What this chapter covers
- 01Opening balances and why only permanent accounts have them
- 02Permanent (real) accounts - assets, liabilities, equity - carry balances forward; temporary (nominal) accounts - revenues, expenses, dividends - hold the period only and start at zero
- 03The trial balance: a list of all accounts and their closing balances, bridging worksheet to statements (a signed single column in this subject, not a debit-equals-credit proof)
- 04The non-negotiable order of operations: worksheet to trial balance to profit and loss to statement of changes in equity to balance sheet
- 05The profit and loss statement: revenue less cost of sales gives gross profit, less named operating expenses gives net profit before tax, less income tax expense gives net profit after tax
- 06The statement of changes in equity: opening share capital and retained earnings, plus profit (or less loss), plus new shares issued, less dividends, equals closing equity - and when losses accumulate, retained earnings becomes accumulated losses
- 07The two articulation formulas: balance-sheet retained earnings = opening retained earnings + profits (or - losses) - dividends; balance-sheet share capital = opening share capital + new shares issued
- 08The balance sheet as a snapshot, the proof that net assets must equal total equity, and the three-category structure of the statement of cash flows (operating, investing, financing)
From a trial balance to all three statements, with the proof
- +1Separate permanent from temporary. Permanent (they go to the balance sheet): cash, accounts receivable, inventory, prepaid insurance, equipment, accounts payable, unearned revenue, bank loan, share capital, opening retained earnings. Temporary (they go to the profit and loss statement, except dividends which goes to the statement of changes in equity): revenue, cost of sales, wages, rent, interest, dividends.
- +1Profit and loss statement - gross profit first. Revenue 62,000 less cost of sales 34,000 = GROSS PROFIT $28,000.
- +1Profit and loss statement - net profit. Less the named operating expenses: wages 14,000 + rent 6,000 + interest 1,000 = 21,000. NET PROFIT = 28,000 - 21,000 = $7,000. Note that dividends are NOT in this statement.
- +1Statement of changes in equity. Opening share capital 32,000 + opening retained earnings 11,000 + profit 7,000 + new shares issued 0 - dividends 2,000 = CLOSING EQUITY $48,000. Split it with the two articulation formulas: retained earnings = 11,000 + 7,000 - 2,000 = $16,000; share capital = 32,000 + 0 = $32,000.
- +1Balance sheet. Current assets: cash 21,000 + accounts receivable 9,000 + inventory 12,000 + prepaid insurance 2,000 = 44,000. Non-current: equipment 36,000. TOTAL ASSETS $80,000. Current liabilities: accounts payable 8,000 + unearned revenue 4,000 = 12,000. Non-current: bank loan 20,000. TOTAL LIABILITIES $32,000.
- +1The proof. NET ASSETS = 80,000 - 32,000 = $48,000. EQUITY = share capital 32,000 + retained earnings 16,000 = $48,000. They agree, so the statements tie. If they had not, the error would be upstream - in the worksheet, in the profit figure, or in the statement of changes in equity - not in the balance sheet itself.
Key terms
- Opening balance
- The balance a permanent account carries into the period from the end of the last one. Closing balance = opening balance + movements during the period. Temporary accounts have no opening balance - they start each period at zero.
- Trial balance
- A list of every account and its closing balance, produced from the totalled worksheet and handed to the statements. In this subject's no-debits-and-credits convention it is a single column of signed balances (assets, liabilities and share capital positive; expenses and dividends negative) rather than a debit-equals-credit proof.
- Statement of changes in equity (SoCiE)
- A reconciliation from the opening balance of equity through every equity transaction of the period - profit or loss, share issues, dividends - to the closing balance of equity. It is the statement that supplies the balance sheet's equity figures.
- Accumulated losses
- What retained earnings is called when cumulative losses exceed cumulative profits, producing a negative balance in the equity block. The subject flags it explicitly and it is a favourite exam wrinkle, because students expect the line to be positive.
- Net assets
- Total assets less total liabilities. It must equal total equity - that identity is the proof at the bottom of the balance sheet. If the two differ, stop and find the error upstream rather than adjusting the balance sheet.
- Statement of cash flows
- A summary of cash inflows and outflows for the period in three categories: operating (the principal revenue-producing activities), investing (acquiring and disposing of long-term assets), financing (equity and borrowings). Net change in cash = operating + investing + financing, and closing cash = opening cash + net change.
From Trial Balance to the Four Financial Statements FAQ
Why can't I just build the balance sheet first?
Because you cannot source the equity figures. Balance-sheet retained earnings is opening retained earnings plus profit (or less losses) less dividends - and the profit figure only exists once the profit and loss statement is done, while the dividends only get applied in the statement of changes in equity. So the order worksheet, trial balance, profit and loss, statement of changes in equity, balance sheet is not a stylistic preference, it is a dependency chain. Students who start at the balance sheet stall at the equity block and then try to plug the difference, which turns one lost mark into several.
What is the difference between the trial balance figure for retained earnings and the balance sheet figure?
The trial balance carries the OPENING retained earnings, because retained earnings is a permanent account and the trial balance is a list of balances before the temporary accounts have been rolled in. The balance sheet carries the CLOSING figure, which is the opening balance plus the period's profit less dividends. They are only the same number in the rare case where profit exactly equals dividends. Copying the trial balance figure across is the single most common reason a student's balance sheet fails to prove.
Do I have to prepare a statement of cash flows in this subject?
The Week 5 material asks you to understand the statement of cash flows - what it shows and its three categories of operating, investing and financing - rather than to prepare one from scratch, and the four-statement pipeline you are drilled on runs worksheet to trial balance to profit and loss to statement of changes in equity to balance sheet. Know the three categories, know which transactions land in which, and know that net change in cash equals the sum of the three and that closing cash equals opening cash plus that change. Confirm the depth expected for your offering on the Canvas topic page and the Subject Outline.
Can AI help me build the four statements?
Yes, and it is a good fit for this chapter because the pipeline is procedural. Sia is an AI tutor built to mirror how 22108 is taught and assessed at University of Technology Sydney: give it a trial balance and ask it to walk the order of operations one statement at a time, or ask it to check where your balance sheet stopped proving - it will usually find the break in the articulation step. It can also generate a loss-making variant so you meet accumulated losses before the exam does. It explains step by step and does not do graded assessment for you; the UTS academic-integrity policy applies, and generative AI is not permitted in the in-tutorial problem or the final exam.
Exam move
Practise the pipeline end to end in Excel, against the clock, more than once - this is a procedure, and procedures reward repetition rather than reading. Set the sheet up so the profit figure flows by formula into the statement of changes in equity, and the closing equity figures flow by formula into the balance sheet, then finish with a live cell that computes net assets minus total equity and should read zero. That single check cell is worth more than any amount of re-reading, and it is exactly the kind of formula use the in-tutorial rubric rewards. Drill two entry points, because both are examinable: starting from a set of opening balances plus a month of transactions, and starting from a ready-made trial balance. Write the two articulation formulas on your one-page trigger sheet and rehearse them until you can state them without hesitation. Deliberately work one loss-making case so accumulated losses is familiar, and one case with an unearned-revenue balance, an accrued wage and a prepayment still open at period end - those three are what make the pipeline non-trivial. Confirm the depth expected on the Canvas topic page and your Subject Outline.
Working through From Trial Balance to the Four Financial Statements in 22108? Sia is AskSia’s AI Accounting tutor — ask any 22108 From Trial Balance to the Four Financial Statements question and get a clear, step-by-step explanation grounded in how 22108 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
