Section 3 - Finding and correcting errors using the Unadjusted Trial Balance

Question 1

If the difference between the totals debits and credits is $640, a transposition error might’ve occurred?

True or False

Answer 1

False.

If the difference is evenly divisible by 9, there is a chance that the error might’ve been caused by a transposition or slide. Since $6400 is not evenly divisible by 9, ($640/9=$71.11) the error might’ve been caused by a doubling error, or an entry was entered incorrectly.

Question 2

What are the three trial balances?

Answer 2

1. Unadjusted
2. Adjusted
3. Post-Closing

• The unadjusted trial balance is prepared after all entries for the period have been recorded.
• The adjusted trial balance is prepared after the unadjusted trial balance, and before the financial statements are prepared. The purpose of adjusting entries it to recognize revenues in the accounting period, they were earned adhering to the revenue recognition principle and recognize expenses in the period, they were incurred adhering to the matching principle.
• After the books have been closed, the final TB, the post-closing, is prepared. This trial balance only includes the balance sheet accounts Assets, Liabilities, Owner’s Equity (ALOE) as all other temporary accounts, Revenue and Expenses (RE) have been closed.

Question 3

To find the errors causing a trial balance to be out of balance, one will have to go through the accounting cycle in reverse.

True or False

Answer 3

True.

1. Make sure the account balances were correctly transferred to the trial balance
2. See if the ledger account balances have been calculated correctly
3. Check the journal entries and postings for errors

Question 4

What is the normal balance for an asset account?

Answer 4

Debit (DR)

The normal balance of an account is the side on which an increase is shown; a debit to any asset account increases the balance.

Question 5

When the post-closing trial balance is reviewed for errors, the company should:

Answer 5

1. Make sure no temporary accounts, Revenue and expense accounts are included. All accounts must have a zero balance, therefore should not appear on the post-closing trial balance.
2. See that Retained Earnings has the ending balance and not the beginning balance. The retained earnings account must include the net income or loss and dividends, if declared, must be deducted.
3. Confirm debits and credits equal

Question 6

After discovering the difference between the totals is evenly divisible by 9, what is the next step?

Answer 6

Since the difference is evenly divisible by 9, the bookkeeper is looking for either a slide or transposition error.

• When looking for a slide error, the quotient is used
• When looking for a transposition error, 1 is added to the first digit of the difference to find X. After finding X, one must investigate every ledger account balance where the difference between the first and second digit is X.

Question 7

The ______ accounts are listed on the post-closing trial balance

Answer 7

Permanent

After the books have been closed, the final TB, the post-closing, is prepared. This trial balance only includes the permanent balance sheet accounts Assets, Liabilities, Owner’s Equity (ALOE) as all other temporary accounts, Revenue and Expenses (RE) have been closed.​

Question 8

If an account has a credit balance, when being transferred to the Trial balance it should be listed on the _____ column

Answer 8

Right

A credit means to the right side of the ledger account.

Question 9

What is the normal balance for Allowance for Doubtful Accounts?

Answer 9

Allowance for Doubtful Accounts is a contra-asset account to Accounts Receivable, therefore the normal balance of this account is a credit.

Contra accounts are accounts directly related to a specific asset, liability, owner’s equity, revenue or expense account, however, all contra accounts have a normal balance that is opposite of its related account.

Question 10

If an account has a debit balance, when being transferred to the Trial balance it should be listed on the _____ column

Answer 10

Left

Debit means to the left side of a ledger account.

Question 11

The Balance Sheet accounts consist of

Answer 11

Assets, Liabilities, Owner’s Equity (ALOE)

As a helpful aid to remember which accounts appear on the Balance Sheet, think of “ALOE vera,” a popular medicinal plant with many benefits and often helps to balance out the body.

Question 12

What does a credit mean in accounting?

Answer 12

To the RIGHT side of a ledger account.

Depending on which account type, a credit has either an increasing or decreasing effect.

Question 13

The trial balance can be prepared at any time?

True or False

Answer 13

True

Question 14

The Income Statement accounts consist of:

Answer 14

Revenue and Expense accounts (RE)

An Income Statement also called a ‘Profit and loss’ statement shows how profitable a company is by showing the stream of revenues (amounts earned from business activity) and expenses (monies paid in the course of operations) over a given period, typically a month, quarter, or year.

Question 15

Transactions never recorded on a company’s books are revealed by the Trial Balance.

True or False

Answer 15

False.

Omissions, transactions never recorded are not revealed by the Trial balance. For example, if a $220 credit sale is not recorded, because both the Accounts Receivable (debit) and Revenue (credit) are understated by $220, there will be no difference in the totals.

Question 16

Allowance for Doubtful Accounts is a contra-asset account to

Answer 16

Accounts Receivable

Contra accounts are accounts directly related to a specific asset, liability, owner’s equity, revenue or expense account, however, all contra accounts have a normal balance that is opposite of its related account.

Question 17

When there is an error on the trial balance, certain errors can be found simply by eyeballing the accounts.

One can eyeball the trial balance for the following errors:

Answer 17

• Doubling errors: If the only error in the trial balance is an account balance transferred to the wrong column, it can be found as follows:

1. Find the difference between the debit and credit total columns. If an account was transferred to the wrong column, for example, Cash transferred to the Credit column or a Payable transferred as a debit, the difference is double the amount of the account balance.
2. When looking for a doubling error, divide by 2 to yield the amount of the possible account balance that is out of place.

• Slide error: If an account has an unreasonable balance, the error may be a slide. (Zero added or zero removed)

Question 18

The Post-closing Trial Balance is prepared before the Adjusted Trial Balance

True or False

Answer 18

False.

The post-closing trial balance is the last trial balance prepared after the books have been closed. This trial balance only includes the balance sheet accounts Assets, Liabilities, Owner’s Equity (ALOE) as all other temporary accounts, Revenue and Expenses (RE) have been closed.

Question 19

At the end of the period, the ________ accounts are closed.

Answer 19

Temporary accounts.

At the end of the period, the temporary Income Statement (revenue and expense) and accounts are closed.

Question 20

Accumulated Depreciation is a contra-asset account to

Answer 20

A depreciating asset

Contra accounts are accounts directly related to a specific asset, liability, owner’s equity, revenue or expense account, however, all contra accounts have a normal balance that is opposite of its related account.

Question 21

What does a debit mean in accounting?

Answer 21

To the LEFT side of a ledger account

Depending on which account type, a debit has either an increasing or decreasing effect.

Question 22

What is a normal account balance?

Answer 22

The normal balance of an account is the side on which an increase is shown.

Example: The normal balance for an asset account is a Debit. Therefore, anytime a company debits an asset account, an increase is recorded.

Question 23

A receipt of payment from a customer debited to Accounts Receivable and credited to cash for $1,110 would be revealed by the trial balance

True or False

Answer 23

False

Although the journal entry had a posting error, the amount of debits still equals credits, therefore, the trial balance would not discover this error since the books are still in balance.

Question 24

What is the normal balance for a Revenue account?

Answer 24

Credit

The normal balance of an account is the side on which an increase is shown; a credit to any Revenue account increases the balance.

Question 25

What is a contra-account?

Answer 25

In addition to regular accounts, companies might have ‘contra accounts.’ Contra accounts are accounts directly related to a specific asset, liability, owner’s equity, revenue or expense account, however, all contra accounts have a normal balance that is opposite of its related account.

For example, a contra-asset account would have a normal credit balance since the normal balance for an asset is a debit. A contra-liability account would have a normal debit balance since the normal balance for a liability is a credit.

Question 26

Which errors are not revealed by the trial balance?

Answer 26

• Transactions never recorded on the company’s books (Omission)
• An incorrect amount recorded in the debit and credit of an entry (Transposition or Posting error in two accounts)
• Amount recorded in the wrong account (Classification error)

Question 27

If the unadjusted trial balance shows total debits of $66,000 and total credits of $68,600. If there is only one type of error, which type would you look for?

Answer 27

The difference between the totals is $2,600.

Since $2,600 is not divisible by 9, the error is not due to a transposition or slide error, therefore, it is more than likely that a doubling error has occurred whereby an account with a balance of $1,300 was transferred to the wrong side of the trial balance.

Question 28

What is the normal balance for a liability account?

Answer 28

Credit (CR)

The normal balance of an account is the side on which an increase is shown, a credit to any liability account increases the balance.

Question 29

What is the normal balance for an Expense account?

Answer 29

Debit (DR)

The normal balance is the side on which an increase is shown; a debit to an expense account increases the balance.

Question 30

If the difference between the totals debits and credits is $720, a transposition error might’ve occurred?

True or False

Answer 30

True.

If the difference is evenly divisible by 9, there is a chance that the error might’ve been caused by a transposition or slide. Since $720 is evenly divisible by 9, ($720/9=80) it is possible one of the two errors might’ve occurred.

• If looking for a transposition error, out first step is to find X. We find X by adding 1 to the first digit of the difference, so our X, in this case, would be 8 (1+70). After finding X, we investigate every ledger account where the difference between the first and second digit is X.
• If looking for a slide, we would use the quotient of 80 and investigate any accounts that have an 8, 80, 800, 8,000, 80,000 balance.