5. The Trial Balance Flashcards
What are the five steps up to the creation of the trial balance?
- Transactions occur
- Books of prime entry written up
- Nominal ledger written up
- NL accounts closed off at end of period
- Balances on NL accounts transferred to Trial Balance
When is the trial balance prepared?
Before the final financial statements are produced.
What is the trial balance?
A summary of the balances on all the ledger accounts making up the general ledger - used to detect errors as total debits should equal total credits
When does an error of omission cause the trial balance not to balance?
When one side of an entry is posted and the other side is not (balances when not posted at all)
What is an error of principle?
An item is posted to the correct side of the wrong type of account
What is an error of comission?
An item is posted to the wrong account but of the correct type
What is an error of transpoition?
Figures written the wrong way round in one side of the entry - TB does not balance
What is a casting error?
Adding up of NL account done incorrectly so TB does not balance
What are the 5 main accounting adjustments that have to be made once the trial balance has been drawn up?
- Depreciation
- Accruals and pre-payments
- Bad debt
- Recording closing inventory
- Correcting errors
What is the calculation for cost of sales?
COS = Opening Inventory + Purchases - Closing Inventory
Do we carry forward balances on statement of profit and loss accounts?
No - the balances are cleared to the P&L at the end of each period
What happens to the value on the statement of profit or loss (the closing profit/loss) at the end of the period?
It is cleared and added to the owner’s capital.
What are the 6 forms of the accounting equation?
Debits = Credits
Assets = Liabilities + Capital + Profit - Drawings
Assets - Liabilities (Net Assets) = Capital + Profit - Drawings
Net Assets = Closing Capital
Change in Net Assets = Change in Capital + Profit - Drawings
Profit = Increase in Net Assets - Increase in Capital + Drawings
