Preparing a Trial Balance Flashcards
4.5: Prepare a trial balance.
What is the 4th step in the accounting cycle?
To prepare a trial balance
What is a trial balance?
A list of general ledger accounts and their balances at a specific time, usually at the end of the accounting period. There are three kinds of trial balances: unadjusted trial balances (before adjusting entries are made), adjusted trial balances (after adjusting entries are made), and post-closing trial balances (after closing entries are made).
When is a trial balance prepared?
It is typically prepared at the end of an accounting period (e.g., monthly, quarterly, or annually).
What is the main purpose of a trial balance?
- The main purpose is to verify that debit balances equal credit balances after all journal entries have been posted.
- It ensures that the accounting equation (Assets = Liabilities + Shareholders’ Equity) remains balanced.
What is the procedure for preparing a trial balance?
- List account titles and their balances in the same order as the general ledger or chart of accounts.
- Enter debit balances in the debit column (left) and credit balances in the credit column (right).
- Total both columns and ensure they are equal. If they aren’t, there’s an error to investigate.
How does the trial balance help in financial reporting?
A trial balance is also a useful tool in the preparation of financial statements. It ensures all accounts are correctly listed and balances are in order for reporting.
What is the trial balance often called?
An unadjusted trial balance to distinguish it from the adjusted trial balance
Why is the Retained Earnings account not shown with its ending balance in the trial balance?
The Retained Earnings account in the trial balance shows the beginning balance for the period.
This is because the trial balance is prepared before updating the Retained Earnings for revenues, expenses, and dividends declared during the period.
What happens to the Retained Earnings balance at the end of the period?
At the end of the period, Retained Earnings is updated by adding revenues and subtracting expenses and dividends declared from the beginning balance.
Why does Retained Earnings in the trial balance show the beginning balance instead of the ending balance?
The trial balance is prepared before the updates for revenues, expenses, and dividends declared are reflected
.
The beginning balance of Retained Earnings is listed because those adjustments will occur in the next phase of the accounting cycle.
When will the Retained Earnings balance be updated?
The Retained Earnings balance is updated after revenues, expenses, and dividends declared are accounted for, which happens in the next step of the accounting cycle.
What is the main limitation of a trial balance?
A trial balance can only verify that debits and credits are equal. It does not ensure that all transactions have been correctly recorded or that there are no other errors in the accounting process.
What can cause a trial balance to not balance?
Errors in journalizing or posting can cause the debits and credits to be unequal, leading to an unbalanced trial balance.
How can you identify errors if the trial balance doesn’t balance?
Retrace the steps of the accounting cycle, or use the following tips:
- Re-add the trial balance columns if the error is a simple amount (e.g., $1, $100, $1,000).
- Check if the error is divisible by two—look for an amount equal to half the error in the wrong column.
- If the error is divisible by nine, check for transposition errors (e.g., $12 recorded as $21).
- If neither of the above, scan the ledger and journal to see if an account balance or posting has been omitted.
Why is a trial balance typically balanced in a computerized system?
In a computerized system, the system usually prevents unbalanced journal entries, automatically posts journal entries, and prepares the trial balance. It also flags violations of the normal balance and generates error reports.
Does a balanced trial balance prove the ledger is free from errors?
No, a balanced trial balance does not guarantee all transactions have been recorded or that the general ledger is correct. Errors can still exist even if the totals agree.
What errors could still occur even if the trial balance is balanced?
The trial balance could still balance if:
- A transaction is not journalized.
- A correct journal entry is not posted.
- A journal entry is posted twice.
- Incorrect accounts are used.
- Errors canceling each other out (wrong amounts or accounts) are made.
Why might errors in account balances go unnoticed in a trial balance?
As long as the debits and credits are equal, errors (like using the wrong account or posting an incorrect amount) will not affect the trial balance, even if the accounts are incorrect.
How do auditors view misstatements in financial statements?
Auditors differentiate between errors (unintentional mistakes) and fraud (intentional misstatements), with fraud being considered unethical and illegal.
What is the sequence of steps in the accounting cycle?
The steps must be done in sequence, with:
1. Analyze transactions
2. Journalize transactions
3. Post transactions to the general ledger
4. Prepare a trial balance
How frequently do Steps 1 and 2 occur?
Steps 1 and 2 (analyzing and journalizing transactions) may occur daily during the accounting period.
How often is Step 3 (posting to the general ledger) done?
Step 3 is usually done monthly, although it can also occur daily in a computerized system.
When is Step 4 (preparing the trial balance) done?
Step 4 is typically done on a periodic basis, such as monthly, quarterly, or annually.
