1. The Initial Trial Balance Flashcards
Define the initial trial balance.
The initial trial balance is a list of nominal ledger account balances show in debt and credit columns at a point in time, usually the end of the accounting year.
The initial trial balance is not part of the double entry system, it is extracted from the double entry system.
It is the starting point to preparing the financial statements.
How is a balance extracted for each nominal ledger account?
At the end of a reporting period (usually the year-end), a balance is extracted for each nominal ledger account.
All debits and credits on the account, including opening balances are totalled.
If total debits exceed total credits, there is a debit balance on the account.
If total credits exceed total debits, the account has a credit balance.
When is the initial trial balance said to balance?
What is the accountants role? Why is this important?
The initial trial balance is said to balance when the total of the debit column equals the total of the credit column.
An accountant would be expected to exercise professional scepticism when reviewing the trial balance to check for reasonableness of each nominal ledger account balance.
This reasonableness check can help to identify any errors or omissions that may have occurred in the accounting process.
Even when a trial balance balances, what types of error may have arising in the ledger accounts? (5)
- Transposition Errors - two digits in an amount are accidentally recorded the wrong way round.
- Omission Errors - a transaction is completely omitted, either in the nominal ledger, or the trial balance itself, so neither a debit nor a credit is made.
- Commission Errors - a debit or credit is posted to the correct side of the nominal ledger, but to a wrong account, e.g. wages paid are debited to the rent account instead of the wages account.
- Compensating Errors - one error is exactly cancelled by another error elsewhere.
- Errors of Principle - such as cash paid in respect of machinery maintenance (an expense) being debited to machinery cost (an asset).
How are adjustments to the initial trial balance recorded?
How are these adjustments made?
We often need to make adjustments (e.g. for omissions, errors or period end journals) after the initial trial balance has been extracted.
These adjustments must be recorded in the nominal ledger accounts using adjustment journals.
After the adjustment journals have been posted, rather than extracting another trial balance, we can instead adjust the initial trial balance already extracted to produce a final trial balance.
