SECTION 3: VERIFICATION OF ACCOUNTING RECORDS

CHAPTER 6: THE TRIAL BALANCE

TEACHER ENG
 TRIAL BALANCE
• A trial balance is a statement that lists account names and their balances,
recorded in debit and credit columns, on a certain day.
• Uses and limitations of a trial balance
• The trial balance can be used as follows:
» Verify accounting records
» Help locate errors
» Facilitate the preparation of financial statements
 PREPARING A TRIAL BALANCE
• WORKED EXAMPLE 1
The following are balances for Will as at 31 July 2018. Prepare a trial balance.
$
Revenue 49000
Purchases 33000
Trade receivables 8750
Trade payables 2980
Bank 3213
Cash 131
Wages 6866
Equipment 21000
Owner's equity 20000
Rent received 980‫ם‬
PREPARING A TRIAL BALANCE
Will
Trial Balance as at 31 July 2018
Debit Credit
$ $
 CLOSING INVENTORY
• Closing inventory is the value of inventory that has remained unsold at the
end of the financial year.
• Finished goods are goods ready for sale after having gone through the
manufacturing process.
• Work in progress are items that are not yet completed and only partly made.
• Opening inventory is inventory that a business has at the start of the year. It
represents an asset and hence will be a debit balance. It is last year’s closing
inventory.
AMENDING A TRIAL BALANCE WHICH CONTAINS ERRORS
DEBIT BALANCES CREDIT BALANCE
ASSETS, EXPENSES, DRAWINGS, LIABILITIES, CAPITAL, INCOME, SALES
PURCHASES AND SALES RETURNS AND PURCHASES RETURNS

The trial balance reveals the following errors:

» Arithmetical errors – these are errors of addition and subtraction. For example,
an error in addition within an account or within the trial balance.
» Using one figure for a debit entry of a transaction and another figure for the
credit entry.
» Entering only one aspect of a transaction. For example, making a debit entry
but forgetting to make a corresponding credit entry.
» Entering a transaction twice on the same side of an account. For example,
entering two debits instead of one debit and one credit.
 AMENDING A TRIAL BALANCE WHICH CONTAINS ERRORS
You can do the following to locate errors:
» Check whether the closing balances of accounts are correct.
» Check whether the closing balances are transferred correctly to the trial balance
numerically.
» Check whether the closing balances are transferred correctly to the right column of the
trial balance.
» Check whether the totals of the debit and credit columns of the trial balance are correct.
» Find the difference in the trial balance totals and check whether it resembles any of the
closing balances or transactions. This balance may not have been transferred to the trial
balance or the transaction may have been omitted.
» Find the difference in the trial balance totals and divide by two. See if this figure
resembles any of the transactions or closing balances. If the figure matches either a
transaction or a closing balance, then it may have been written on the wrong side of the trial
balance.
» Finally, check whether all the double entries have been made for each transaction.
AMENDING A TRIAL BALANCE WHICH CONTAINS ERRORS
• WORKED EXAMPLE 2
The cash book shows an overdrawn balance. The following trial balance has
been prepared but errors are present. Prepare a corrected trial balance for
Mariam as at 31 December 2018.
 Mariam
Trial Balance as at 31 December 2018
Debit Credit
$ $
Revenue 104 000
Purchases 66 750
Bank 3 108
Premises 100 000
Wages and salaries 21 300
Trade receivables 12 313
Trade payables 8 970
Owner's equity 88 000
Drawings 15 600
Inventory at 1 January 2018 8 452
Rent 4 910
Sales returns 241
Purchases returns 488
Bank loan 25 000
Inventory at 31 December 2018 9 855
 ERRORS THAT DO NOT AFFECT THE TRIAL BALANCE
Trial balances cannot detect book-keeping errors that fall into the following
categories:
Name of error Description of error Example
Error of commission This occurs when a Cash received from Malini
transaction is entered using credited to Mallika’s account.
the correct amount and on
the correct side, but in the
wrong account of the same
class.
Error of complete reversal This occurs when the correct Cash drawings debited to the
amount is entered in the cash account and credited to
correct accounts, but the the drawings account.
entry has been made on the
wrong side of each account.
 ERRORS THAT DO NOT AFFECT THE TRIAL BALANCE
Name of error Description of error Example
Error of omission This occurs when a Payment of wages not
transaction has been entered in the books.
completely omitted from the
accounting records. Neither a
debit entry nor a credit entry
has been made.
Error of original entry This occurs when an incorrect Goods, $100, bought on
figure is used when a credit but recorded as $1
transaction is first entered in 000.
the accounting records. The
double entry will therefore
use the incorrect figure.
 ERRORS THAT DO NOT AFFECT THE TRIAL BALANCE

Name of error Description of error Example

Error of principle This occurs when a Motor expenses debited to
transaction is entered using the motor vehicles account.
the correct amount and on
the correct side, but in the
wrong class of account.
Compensating errors These occur when two or Purchases account
more errors cancel each underadded by $100 and
other out. sales returns account over-
added by $100.
 EXAM STYLE QUESTIONS
1 The balance of which account may appear on the debit side of a trial
balance?
A Carriage inwards B Purchases returns
C Rent receivable D Sales

2 The totals of a trial balance did not agree.

Which error may have caused this?
A Expenses paid in cash omitted from the accounting records
B Goods sold on credit to Jones debited in Jenson’s account
C Repairs to machinery debited to machinery account
D Total of the purchases returns account overcast
 EXAM STYLE QUESTIONS
3 Rent received from a tenant in cash, $450, was entered in the accounts as
$460.
How will this affect the trial balance?
 EXAM STYLE QUESTIONS
4 Jai is a trader. The following balances appeared in his books on 31 March 20–8.
$
Sales 86 000
Purchases 51 500
Bank overdraft 1 100
Cash 50
Trade payables 4 900
Trade receivables 6 900
Furniture and equipment 26 400
Wages 21 300
Sundry expenses 3 100
Rent payable 3 200
Purchases returns 350
Inventory 9 200
Drawings 10 100
Capital 39 400
Prepare Jai’s trial balance at 31 March 20–8.
 EXAM STYLE QUESTIONS
5 Sayeeda provided the following list of balances on 30 April 20–4, but was not able to provide her bank account balance.
$
Capital 392 000
Drawings 18 000
Premises 210 000
Fixtures and fittings 66 100
Inventory 11 950
Trade receivables 13 160
Trade payables 12 280
Loan from FH 20 000
Cash 100
Sales 157 280
Purchases 143 400
Rates 6 000
General expenses 11 540
Wages 96 750
Bank ?
Prepare Sayeeda’s trial balance at 30 April 20–4, inserting the missing bank balance.
 EXAM STYLE QUESTIONS
6 A trial balance drawn up at the end of Jim’s financial year balanced. The
following errors were then discovered:
1 Goods returned to K Weston had been debited to K Wilton.
2 Repairs to office equipment had been debited in the office equipment
account.
3 An invoice, $1 000, for goods sold on credit to Jacob & Co had been recorded
in the accounts as $100.
4 Goods purchased on credit from Brixton Ltd had been debited in Brixton’s
account and credited in the purchases account.
a State the type of error made in each of the errors 1–4.
b Name two further errors not revealed by a trial balance.