Introduction to Accounting 120
Chapter 4
Trial Balance
Wednesday, April 21st
In Today’s Class
• Reminder: All outstand
assignments are now overdue.
• Check Engrade.ca for you Midterm MC marks and to see any
assignments you’re missing.
• Moving on: The Trial Balance
The Trial Balance
• A ledger must always balance. When
establishing a ledger, the originating data
(opening account balances) is obtained
from a balance sheet. This ensures the
ledger begins in a balanced position. The
total of the accounts with debit balances
equals the total of the accounts with
credit balances.
The Trial Balance
•
•
After a series of transactions have
been recorded, it is necessary to
verify that the ledger is still in
balance. This is accomplished by
preparing a trial balance. A trial balance is a
listing of all of the accounts and their balances.
It assures that the total debit balances equals
the total credit balances.
If the total of the debits does not equal the total
of the credits, the ledger is said to be "out of
balance."
Preparing a Trial Balance
•
Computerized accounting applications
eliminate the responsibility of manually
preparing a trial balance. The
programs produce the document
automatically. Prior to computerized
accounting, trial balances were often
"taken" with a printing calculator or
adding machine. The bookkeeper
simply added all debit balances
in a ledger and subtracted all credit balances. If
the end result were zero, the ledger was thought to
be in balance.
Preparing a Trial Balance
•
•
•
•
For businesses utilizing computers but not yet
using an accounting software application (and
for the purpose of this course), a spreadsheet
application can be used to prepare trial
balances. Examine the following trial balance
noting:
The heading is similar to a balance sheet
heading (who? what? when?).
Asset accounts are listed first, in order of
liquidity.
Liability accounts are listed next, in order of
retiring debt.
Preparing a Trial Balance
•
•
•
•
•
•
•
There are no classification headings (asset, liability,
owner's equity) within the account listing.
There is no indenting of receivables or payables.
Debit balances are entered in the first monetary
column.
Credit balances are entered in the second monetary
column.
The total debits equal the total credits.
The balanced figures are double underlined.
The trial balance is not a formal document; therefore,
abbreviations are used (exception - headings are not
abbreviated).
Preparing a Trial Balance
Trial Balance Errors
• It is not uncommon for a trial balance to be out of
balance. This indicates to accounting personnel that
at least one accounting error has been made. It is
an accountant's job to locate and correct errors.
• There are numerous reasons why a ledger may be
out of balance:
• Faulty addition
• An unbalanced transaction
• Recording two debits or two credits rather than
equalizing debits and credits
Trial Balance Errors
• Errors of this type are eliminated with computerized
accounting.
• There are also times when the ledger is in balance,
but due to an accounting error, it is not correctly
balanced. These mistakes are more difficult to fix
because they are not necessarily found by means of
a trial balance. For example:
• Suppose a debtor pays $100 on their account, but
$10 is recorded in both the Bank and the debtor's
account. The entry is balanced, thus the ledger
would balance.
Trial Balance Errors
• Another error is termed transposition. A
transposition error occurs when numbers are
switched in place value. Suppose $120 worth of
supplies is purchased for cash but is recorded as a
debit of $210 to supplies and as a credit of $210 to
cash. The transaction entries do balance and again
the trial balance would balance, yet the ledger
balances are overstated/understated by $90.
• Mistakes such as these are generally found during
an audit or some other type of post-trial balance
verification procedure.
Trial Balance Error Detection
• The following suggested steps might help
you locate an error when a trial balance
does not balance.
• Step 1 Check the accuracy of the trial
balance addition.
• Step 2 Double check the figures from the
ledger to ensure they were carried to the trial balance
properly.
• Step 3 Check the accuracy of the T-Account balances.
• Step 4 Verify that each accounting entry affecting the TAccounts was balanced. Do the debits equal the credits
for each transaction?
Trial Balance Error Detection
• Verifying that each accounting entry affecting
the ledger is balanced (step 4) is the most
complicated step of error detection.
• This requires tracing through T-Accounts,
ensuring that debits equal credits, for each
transaction. T-Accounts are not organized in a
manner that allows this to happen
systematically. Thus in the event where error
detection reaches this stage, "patience is a
virtue."
Trial Balance Error Detection
• Examine the following T-Account ledger. You will find it does not balance.
Can you easily locate a possible transaction error? Imagine the size of an
actual company ledger and the difficulty locating the "needle in the
haystack"!
Trial Balance Error Detection
• To avoid an unbalanced ledger and challenging problems,
such as that shown below, ledger verification should happen
regularly and often. The more transactions to check, the
longer and more frustrating the process becomes.
Error Detection Scenario - 1
• Consider the following:
• A new desk is purchased for $600 cash. Bank is
credited for the correct amount, but equipment
rather than furniture, is debited $600.
• Is the trial balance in balance?
• Is the trial balance correct?
• What is the effect on the equipment account?
• What is the effect on the furniture account?
Error Detection Scenario - 1
• Is the trial balance in balance?
– Yes, the trial balance is in balance.
• Is the trial balance correct?
– No, two accounts have incorrect balances.
• What is the effect on the equipment
account?
– The effect on the equipment is that it is overstated by $600.
• What is the effect on the furniture
account?
– The effect on the furniture account is that it is understated by
Error Detection Scenario - 1
•
Review the position of the accounts and the trial balance with both the
incorrect and correct procedure:
• A new desk is purchased for $600 cash. Bank is credited for the correct
amount, but equipment rather than furniture, is debited $600.
Error Detection Scenario - 2
• Consider the following:
• Cash of $200 was received from a customer,
for services performed. Bank was debited for
$200 and Capital was credited for $20.
• Try to answer the following questions
– Is the trial balance in balance?
– Is the trial balance correct?
– What is the effect on the Bank account?
– What is the effect on the Capital account?
Error Detection Scenario - 2
• Try to answer the following questions
– Is the trial balance in balance?
• No, the trial balance it not balanced. It is out $180.
– Is the trial balance correct?
• No, the trial balance is not correct. It does not balance.
– What is the effect on the Bank account?
• There is no effect on the Bank account.
– What is the effect on the Capital account?
• Capital is understated $180.
Error Detection Scenario - 2
• Consider the following: Cash of $200 was received
from a customer, for services performed. Bank was
debited for $200 and Capital was credited for $20.
Error Detection Scenario - 3
• Consider the following:
• A $500 service is performed for a customer who
pays immediately with cash. Cash is debited
$500 and Capital is debited $500. Try to answer
the following questions
– Is the trial balance in balance?
– Is the trial balance correct?
– What is the effect on the Bank account?
– What is the effect on the Capital account?
Error Detection Scenario - 3
• A $500 service is performed for a customer who pays
immediately with cash. Cash is debited $500 and Capital
is debited $500. Try to answer the following questions
– Is the trial balance in balance?
• No, the Trial Balance is out $1000.
– Is the trial balance correct?
• No, the Trial Balance does not balance.
– What is the effect on the Bank account?
• There is no effect on the Bank account.
– What is the effect on the Capital account?
• It is understated $1000.
Error Detection Scenario - 3
• A $500 service is performed for a customer who pays
immediately with cash. Cash is debited $500 and Capital
is debited $500.
Error Detection Scenario - 3
• Notice the entry involved the sum of $500, but the account
and trial balance are "out" by $1000. This is the effect of an
entry to the wrong side of a ledger account.
Error Detection Scenario Practice
• Consider the following:
• Supplies are purchased for $100 cash. When entering the
transaction, Supplies are debited $100 and Bank is debited
$10.
Error Detection Scenario Practice
• Consider the following:
• Supplies are purchased for $100 cash. When entering the
transaction, Supplies are debited $100 and Bank is debited
$10.
Let's Review
• Now that the unit is completed, you should be able to
discuss:
– An account and a ledger
– Proper and exceptional account balances
– Double entry accounting
– The rules of debit and credit theory as it relates to
transactions
– The term "on account"
– Pencil footings
– The purpose and importance of a trial balance
– The types of errors in accounting that affect the trial
balance
Assignment: U4A4
• Go to the O:\Binet\Intro to Accounting
folder.
• Open U4A4.doc and U4A4.xls and
complete!
• Due Friday at the beginning of class.