Question

14. Does the preliminary trial balance of the general ledger as it exists before end-of-period entries are made typically indicate a higher operating profit than the final trial balance? Discuss your answer.

Answer 1

Preliminary trial balance of the general ledger as it exists before the end-of-period adjustments need not necessarily indicate a higher operating profit.

Preliminary trial balance has recorded all the incomes and expenses thereby indicating operating profit. There are several adjustments entries normally referred to as end -of-period adjustment entries which are required to be passes before the accounts could be closed and final trial balance can be generated. Such adjustment entries can either increase or decrease the preliminary operating profit.

Typically, the end-of-period adjustment entries are required to be passed for all the items of income and expenditures to recognize the accrual concept i.e. to book the income and expenses to the period to which it pertains to. Hence, accrued incomes, accrued expenses, prepaid expenses, depreciation etc are recorded. Also, year end provisions, excess provision reversals are to be recorded to reflect the real operating profit for the reporting period.