Concept of Trial Balance

Transcription

1 Concept of Trial Balance Objectives 1. Define Trial Balance 2. The purpose of preparing a Trial Balance 3. Draw up a Trial Balance 4. Explain the limitations of a Trial Balance 5. State the type of errors that are revealed by the Trial Balance and those that are not 24/2/2012 Mr Kong, WWSS POA 1

2 Define Trial Balance A trial balance is a two column schedule showing account titles with the debit balances and the credit balances of all the accounts in the ledger at a given date. 24/2/2012 Mr Kong, WWSS POA 2

3 Purpose of a Trial Balance 1. To check the arithmetical accuracy of the posting of the ledgers. (eg. Total debit=total Credit) 2. To facilitate the preparation of the final accounts (profit and Loss, Balance sheet) 24/2/2012 Mr Kong, WWSS POA 3

4 Drawing up a Trial Balance To balance a trial balance, the total on both the debit and credit side must have the same figure Closing stock is never included in the trial balance Debit side : Expense, Assets, Drawings Credit side: Revenue, Liabilities, Capital 24/2/2012 Mr Kong, WWSS POA 4

5 Steps: 1. For each ledger account, add up the debit side and add up the credit side. 2. Determine the balance of each account by comparing the total. Eg. Debit total > Credit total = Debit balance Credit total > Debit total= Credit balance 3. List the debit balances in one column and credit balances in another column. 4. Add all debit balances. 5. Add all credit balances. These 2 totals should equal. 24/2/2012 Mr Kong, WWSS POA 5

6 Worked Example Linda s books contained the following balances on 31 March $ Trade Debtors 12,500 Trade Creditors 7,800 Premises 154,850 Motor Vehicle 56,000 Stock, 1 April ,500 Stock, 31 March ,500 Bank overdraft 6,700 Loan from Lion Bank 90,000 Loan interest payable 3,600 Rent Revenue 48,000 Sales 78,000 Purchases 23,000 Discount allowed 450 Discount received 1,200 Capital, 1 April 2006? Prepare a Trial Balance as at 31 March 2007 from the above balances 24/2/2012 Mr Kong, WWSS POA 6

7 Linda Pte Ltd Trial Balance as at 31 March 2007 DR ($) CR ($) Trade Debtors 12,500 Trade Creditors 7,800 Premises 154,850 Motor Vehicle 56,000 Stock, 1 April ,500 Bank overdraft 6,700 Loan from Lion Bank 90,000 Loan interest payable 3,600 Rent Revenue 48,000 Sales 78,000 Purchases 23,000 Discount allowed 450 Discount received 1,200 Capital, 1 April , , ,300 24/2/2012 Mr Kong, WWSS POA 7

8 Notes to the trial balance 1. Trial Balance must have a business name 2. must have a heading Trial Balance as at (date) the date has to be stated because the balances are true only at that point in time. 3. Need not include account with zero balance 24/2/2012 Mr Kong, WWSS POA 8

9 If Trial Balance did not balance, what errors could have caused this? Errors revealed by the Trial Balance Errors in calculation Miscalculation of Trial Balance totals or account balances Amounts posted disagree Errors of omission of one entry Omission of either debit or credit entry Posting to the wrong side of an account The debit and credit entry differ in amount These errors cause Trial Balance not to balance One entry is posted to the wrong side of an account 24/2/2012 Mr Kong, WWSS POA 9

10 Errors that are revealed by the Trial Balance: (a) Arithmetic errors - in the trial balance, totals of the debits and credits are wrongly added - in the individual accounts, the balances are wrongly calculated (b) Posting errors - a transaction may be recorded twice on the debit side or credit side of the two accounts involved - e.g. $1000 cash paid to Goodman Both the Cash A/c and Goodman A/c were credited (credit side exceeds by $2000) (c) Incomplete Double-Entry - a transaction may be entered only once either on the debit or credit side of the account - e.g. Credit purchases of $500 from ABC Ltd Purchases A/c debited No corresponding credit entry for ABC Ltd (debit side exceeds by $500) (a) Correct Entries with Different Amounts - a transaction may be entered correctly according to the double-entry system but with a differing amount - e.g. Cash Sales of $345 Cash A/c debited with $345; Sales A/c credited with $354 (credit side exceeds by $9) 24/2/2012 Mr Kong, WWSS POA 10

11 If Trial Balance is balanced, does it mean accounting process is error free? Errors not revealed by Trial Balance Errors of omission Errors of commission Complete reversal of entries Compensating errors These errors did not affect the equality of the Trial Balance totals Omission of a transaction Limitations of a Trial Balance Entry posted to wrong account Recording of entries reversed One error is compensated by another Not necessarily, because errors may not be revealed by the Trial Balance. Errors of principle Entry posted to wrong class of account Errors of original entry Original figure incorrectly entered 24/2/2012 Mr Kong, WWSS POA 11

12 4.4 Errors Not Revealed by the Trial Balance (a) Error of Omission - a transaction is not entered in the books at all. (b) Error of Principle - a transaction is entered in the wrong category of account. (c) Error of Commission - an entry is posted to the wrong account that belongs to the same category (d) Compensating Errors / Offsetting Errors - errors on the debit side of one account may be offset by errors of the same amount on the credit side of another account. (e) Error of Original Entry - the original amount was wrongly entered in the books of original entry. - E.g. Sales of $1000 was recorded as $100 in the Sales Journal. (f) Error of Reversal of Entries - transactions are entered in the accounts using the double-entry system but the entries are in complete reversal 24/2/2012 Mr Kong, WWSS POA 12

13 Questions? 24/2/2012 Mr Kong, WWSS POA 13