TRIAL BALANCE

OVERVIEW

Objective

To explain the role of the trial balance in financial accounting.

TRIAL ERROR
BALANCE DETECTION

Nature E Types of error

Purpose x Errors identified
t Errors not identified
e
n
d
e
d
Period-end adjustments

FINANCIAL
ACCOUNTS

Copyright Accountancy Tuition Centre Ltd 2001 0601

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1 TRIAL BALANCE

1.1 Nature

The trial balance (TB) has already been introduced in Session 4.

It is simply a list of all the debit and credit balances on the individual ledger
accounts.

It is to be expected that

asset and expense accounts should have debit balances

liabilities and income have credit balances.

There is no prescribed order in which the balances are listed. Businesses

will adopt whatever is most convenient, eg

alphabetical order of account names

order of captions as they appear in the balance sheet and income
statement.

1.2 Purpose

The purpose of the TB is two fold

To assist in the detection of To prepare accounts via the extended

bookkeeping errors trial balance (ETB).

Extracting a trial balance will ascertain whether

every Dr has an equivalent Cr (ie that the double entry is correct in

principle)

Drs and Crs have been correctly cast (ie added up)

account balances have been correctly calculated and recorded.

2 ERROR DETECTION

2.1 Types of error

Illustration

Consider a cash payment of $450 for rent. Identify which of the incorrect double
entries (1) – (7) below, would be shown by the trial balance not balancing.

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 TRIAL BALANCE

The correct D/E

Dr Rent (expense) $450

Cr Cash $450

Incorrect D/E Description of error

1 Dr Rent (expense) $490 Error of original (prime) entry

Cr Cash $490

2 Dr Rent (expense) $540 Transposition †

Cr Cash $450

3 Dr Rent (expense) $450 Single entry

4 No entry Error of omission

5 Dr Rent (expense) $450 Both entries on the same side ‡

Dr Cash $450

6 Dr Wages (expense) $450 Error of commission

Cr Cash $450

7 Dr Freehold (asset) $450 Error of principle

Cr Cash $450

Solution

The TB should reveal the presence of errors 2, 3 & 5

† The difference arising is always divisible by 9

‡ The difference arising is double the transaction amount.

2.1 Errors identified by TB

Single-sided, unequal and same (double)-sided entries

Casting errors (ie adding up) in ledger a/cs (resulting in incorrect balances
being calculated)

Balances b/fwd on the “wrong side” of ledger a/cs

Ledger a/c balances omitted when extracting the TB

Transposition errors (÷ 9).

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2.3 Errors not identified by TB

Errors of original (prime) entry – initial recording at wrong amount

Errors of omission – double entry not recorded

Errors of principle – revenue items recorded as capital (or vice versa)

Error of commission – misanalysis (but not in principle)

Compensating errors.

3 FINANCIAL ACCOUNTS PREPARATION

3.1 Extending the TB

A trial balance can be extracted at any time.

Financial accounts are prepared at a period end via the extended trial balance
(ETB).

The ETB is essentially a “work sheet” (see Session 15).

The ETB takes the TB extracted at the period end and makes adjustments

to correct errors identified by the TB (covered in Session 16)

to account for period-end (or “post-TB”) adjustments.

3.2 Period-end adjustments

Accruals and prepayments (see Session 8)

Depreciation (see Session 9)

Bad and doubtful debts (see Session 10)

Inventory (see Session 11)

FOCUS

You should now be able to

outline the nature and purposes of a TB

state errors which would not be highlighted by a difference in a list of

account balances.

Copyright Accountancy Tuition Centre Ltd 2001 0604