Chapter 4: The Trial Balance Flashcards
4.1 Balancing the Ledger Accounts
The purpose of balancing a ledger account is to summarise the data recorded in the account in order for the information to be in a presentable form.
The meaning of balances brought forward –
• a debit balance on an expense account will disclose the amount expended to date.
• A credit balance on an income account will disclose the amount earned to date
• A debit balance on as asset account will disclose the amount expended to date to acquire the asset and to bring it in its current condition. It may show the current value of the asset if it has been revalued, the effect of the revaluation exercise is reflected in the accounting records
• A credit balance on a liability account will disclose the amount due to the creditor
A debit balance (excess debits over credits) thus represents:
• An asset – this is recorded in the balance sheet
• An expense – this is recorded in the profit and loss account
A credit balance (excess of credits over debits) thus represents:
• A liability – this is recorded in the balance sheet
• An item of income – this is recorded in the profit and loss account
4.2 Trial Balance
The principal of the double entry concept is that for every credit there is a corresponding debit entry and for every debit entry there was a corresponding credit entry. This means the total of all debit entries equals the total credit entries and the total of the balance’s b/f on the debit and credit side are equal. A balanced trial balance gives indication that it is correct, an unbalanced trial balance may contain errors. If it is unbalanced:
• Look at the individual T accounts to see if the balance on one of them has been omitted which makes up the difference
• Take the difference and divide by 2 and look to see if there is a transaction for this amount. This will have arisen if you put two debits or two credits instead of a credit and a debit.
• If this is unsuccessful divide the difference by 9, if it is divisible it means we may have made a transposition error, this is when we swap two numbers by mistake. For example, debiting £4,500 and crediting £5,400
