Topic 5: Trial Balance

 

What is a Trial Balance?

The Trial Balance is a list of debit and credit balances extracted from the accounts in the ledger at a particular date.

 

What is the purpose of a preparing a Trial Balance?

  • The primary purpose of preparing a Trial Balance is to prove the mathematical equality of debits and credits

  • If there is always a matching debit and credit entry for each transaction, the sum of the debits should be equal to the sum of the credits in the recording process.

  • To assist the preparation of the Trading and Profit and Loss Account and the Balance Sheet

 

What are the limitations of a Trial Balance?

  • A Trial Balance that balances does not necessarily prove that all the transactions have been recorded or that the accounting process is error-free.

  • This is because numerous errors may have been made even though the Trial Balance totals are in agreement.

 

How will the total debit balances and the total credit balances of a trial balance be equal?

The total debit balances will be equal to the total credit balances in the Trial Balance if the double entry principles of recording have been strictly adhered to.

 

What are the Errors NOT revealed by the Trial Balance?

  • Errors of omission - A transaction is omitted completely from the books so that there is no debit and no credit entry of the transactions. (e.g. A cash purchase of $800 was not recorded anywhere in the books.)

  • Errors of commission - An entry may be posted to the correct side of the ledger but to the wrong account. (e.g. payment of $100 cash by customer, A John, is wrongly posted to the account of another customer, B John.)

  • Errors of principle - An entry is made in the wrong class of account. This can occur when an expense is treated as an asset or vice versa (e.g. cost of repairs to building amounting to $400 was debited to the Building Account).

  • Complete reversal of entries - An account that should be debited is credited and vice versa. (e.g. a cheque for $200 received from Cai was debited to the account of Cai and credited to the Bank Account.)

  • Compensating errors - Errors on one side of the ledger are compensated by errors of the same amount on the other side (e.g. the Purchases Account and the Sales Account were both overcast by $150).

  • Errors of original entry - The original figure may be incorrectly entered although the correct double entry principle was observed using this incorrect figure. (e.g. credit sales of $87 to Beh were recorded in the Sales Account and in Beh’s account as $78).

 

What are the Errors revealed by the Trial Balance?

  • Errors in calculation - If there is any miscalculation of the Trial Balance totals or the net account balances, the Trial Balance will not balance (e.g. an error in the calculation of the cash balance causing the Trial Balance totals not to balance).

  • Errors of omission of one entry - Omission of either the debit or credit entry of a transaction will cause the totals of the Trial Balance not to agree (e.g. a cheque for $500 received for commission was debited to the Bank Account only).

  • Posting to the wrong side of an account - Entry into the wrong side of an account will cause one side of the ledger to total more than the other (e.g. a cheque of $800 paid to creditor, K. Wang, was credited instead of debited to his account).

  • Amounts posted disagree - If the debit entry of a transaction differs in amount with the credit entry, the Trial Balance will not balance (e.g. cash $134 received from Chen was debited to the Cash Account as $134 and credited to the account of Chen as $143).

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