Chapter 8: The Trial Balance Flashcards
A TRIAL BALANCE - definition =
A trial balance lists the closing debit or credit balances from all general ledger accounts
A trial balance is usually prepared at the end of the accounting period to ensure the completeness of recorded double-entry transactions. From the trial balance, businesses will prepare..
the financial statements - the Statement of Profit or Loss and the Statement of Financial Position
To credit the debit balances of all general ledger accounts should be..
equal
To extract the trial balance, the following 4 steps are made:
- Close off each ledger account
- each ledger account is closed off, and the balance b/f is identified - Prepare the initial trial balance
- Each ledger account balance b/f is summarised and collected to form the initial trial balance - Check for errors and make corrections
- the initial trial balance is analysed for any errors that need to be corrected via JOURNALS - Prepare the final trial balance
- once the errors are corrected via journal entries, the balances of the affected ledger accounts are updated and summarised into the final trial balance. The final trial balance will be used to prepare the business’s financial statements
Preparing the Initial Trial Balance
A trial balance is a list of all the closing balances from the ledger accoutns in the general ledger. Debit or credit balances will be determined from the category of each ledger account (DEAD CLIC mnemonic)
[see table in screenshots] -
DEBIT
Expense
Assets
Drawings
CREDIT
Liabilities
Income
Capital
BANK and SALES TAX account balances may appear as either debit or credit, depending on their substance
- Bank account - if the balance is in debit, moeny is in the bank account (asset). If the balance is in credit, the bank account is overdrawn (liability)
- Sales tax account - If the sales tax account is in debit (asset), the tax authorities owe the business the money. If the sales tax account is in credit, the business owes money to the tax authorities (liability).
A JOURNAL is
a record of accounting entries posted to the general ledger
A journal is part of the double-entry process and in the era of computerised accounting systems remains one of the few ways in which accountants directly post transactions into the general ledger
Elements of a Journal
Journal adjustments are compiled in the Journal, and below is the record format.
[see screenshot]
Journal Ref. Date GL Account Debit ($) Credit ($)
- Journal Ref – Each journal entry has its unique reference number
- Date – The date a journal entry is recorded
- GL Account – A journal is an accounting entry record made to the general ledger account. The names of the general ledger accounts affected are mentioned.
- Debit/Credit – The amount in each GL account is recorded either in debit or credit
- Description of Journal – Each journal entry will end with a clear explanation
Journals are used to record financial activities such as (3):
- Unusual or One-Off Transactions
For example, RFashion purchases a new display unit for its office. This is a one-off purchase, and it should be recorded in the general ledger by making a journal entry. - Period-End Adjustments
For example, RFashion has identified an irrecoverable receivable (bad debt) at the end of the financial period. The irrecoverable debt will be written off through a journal. - Correct Errors in the trial balance
Errors of commission, principle, omission, and reversal may occur. These errors are covered in detail in Section 3.
Errors in Trial Balance
When a business extracts its initial trial balance, it will investigate if any errors remain. Errors can still exist within a trial balance even when the debit and credit balances are equal.
Once these errors are identified, the business will make the necessary corrections using JOURNAL ENTRIES. The entries will flow into the general ledger accounts, and a new closing balance will be calculated. The corrected trial balance is then redrafted.
Errors can be categorised into those that affect the trial balance and those that do not.
Errors that Affect the Trial Balance
These errors are due to unbalanced double entries where the debit and credit balances do not match. The trial balance will show an unbalanced debit and credit figure.
The difference is transferred to the suspense account to match the debit and credit amount while the business investigates and corrects the errors.
-> Error of Partial Omission
An error of partial omission occurs when only one side of the entry (either debit or credit) is posted in the general ledger.
For example, payment of wages is correctly debited to the wages expense account, but no credit entry is made.
-> Error of Posting
An error of posting occurs when either the debit or credit entry is posted with an incorrect value.
For example, the petty cash tin is being replenished with $40. However, the double entry made is Dr. Petty Cash $44 and Cr. Bank $40
The debit entry is posted with an incorrect amount.
Exam** - with the advent of computerised systems, the likelihood of errors arising from unbalanced double entries is minimised.
Modern accounting systems have embedded controls that prevent these errors from occurring. However, still helpful to learn the nature of these errors
The Suspense Account
The likelihood of errors arising from imbalanced double entries is low in a computerised accounting system.
However, a suspense account may still exist as businesses may deliberately post an entry into the suspense account due to uncertainty about which account to record a transaction correctly.
The bookkeeper may temporarily make the posting into the suspense account and correct the posting later.
Errors that do NOT affect the trial balance: (5)
These errors occur even though the debit and credit balances in the trial balance are equal
- Errors of Commission
- Errors of Principle
- Errors of Omission
- Errors of Reversal Entry
- Errors of Original Entry
Errors of Commission
An error of commission occurs when a transaction has been posted to the wrong account of the same ‘type’. Accounts of the same type are expense, asset, income, or liability.
For example, Rent and Telephone accounts are both expense accounts. If the rent payment is posted to the Telephone account, the trial balance agrees, but the Rent and Telephone account balances would be incorrect.
