chapter 6 Flashcards
trial balance
a list of the balances on each account extracted from the ledgers at a particular date. purpose is to check the arithmetical accuracy of the double entry in the ledger
steps of preparing trial balance
balance all the ledger accounts including the cash book
list all the accounts putting the debit balances in one column and credit balances in another column
add up debit column and add up the credit column. the total of the debit balances should be equal the total of the credit balances. if the totals are equal, the trial balance agrees
principle of double entry
it determines that the debit balances and credit balances should agree. if the totals do not agree there must be an error somewhere in the bookkeeping
sole trader
a business that is owned by one person
benefits of a trial balance
to check that the total of the debit balances equals the total of the credit balances
it will help uncover many types of error in the ledger accounts and can make it easier to find and correct errors
to provide a summary of all ledger accounts and their balances in one document
it is used for preparing the financial statements
limitations of trial balance
errors can be made
errors of ommision
A financial transaction omitted completely from the books results in there being neither a debit nor a credit entry for the transaction. This could happen if a transaction is not entered in a book of prime entry.
errors of commission
A financial transaction is posted with the correct amount to the correct side of the wrong account, but the account is in the same class.
errors of principle
A financial transaction is posted with the correct amount to the correct side of the wrong account, but the account is in the same class.
errors of original entry
A wrong amount is entered in a book of prime entry for a financial transaction.
complete reversal of entries
An account that should have been debited has been credited, and the account that should have been credited has been debited.
compensating errors
Two or more errors that cancel each other out.
underadded
a figure that is found by adding up two or more figures but which is lower than the correct figure.
overadded
a figure that is found by adding up two or more figures but which is lower than the correct figure.
checks to find trial balance errors
Check the additions of the trial balance.
Check that all accounts have been entered in the trial balance and are correctly entered in the debit or credit column.
If the difference between the debit and credit totals is divisible by nine, two figures may have been transposed in a balance (e.g. $269 may have been copied as $296).
If still haven’t found the cause of the imbalance, go back to the start and check you the balances on each of the accounts and that you have transferred them correctly to the trial balance.
