Chapter Six: Trial Balance Overview

Trial Balance

• The trial balance is a list of general ledger balances.
• Every general ledger account must be included in the trial balance to maintain the double-entry system.
• The trial balance has two columns: debit and credit.

Purpose of Trial Balance

• In a manual accounting system, the trial balance checks the accuracy of entries in ledger accounts.
• It verifies that total debits equal total credits.
• If the trial balance balances (debit column total equals credit column total), the postings are likely correct.
• If the trial balance doesn't balance, there is an error in the double entry.
• In a computerized system, for every debit entry, there is a credit entry, the trial balance should always balance.
• Manual adjustments or journals can cause imbalances, requiring authorization from a higher authority to post a journal.

Structure of a Trial Balance

• Totals from individual ledger accounts go into the trial balance.
• Every ledger account in the general ledger is represented in the trial balance.
• Debit side typically includes assets, expenses, and drawings (DEAD).
• Credit side includes capital, sales (income), and liabilities (CL).
• When a transaction is posted, debits should always equal credits.
• If the two columns of the trial balance are not equal, there must be an error.

Errors Not Disclosed by the Trial Balance

• The trial balance may still balance even with certain types of errors:
  • Omission: Completely forgetting a transaction will not affect the trial balance.
  • Incorrect Account: Posting a debit or credit to the wrong account but on the correct side (e.g., debiting telephone instead of electricity) will not unbalance the trial balance.
  • Compensating Errors: An error of $100$ on the debit side is canceled by another error of $100$ on the credit side.
  • Error of Principle: Incorrectly applying double-entry principles (e.g., crediting the bank when an asset increases) while still maintaining equal debits and credits.

Errors Revealed by the Trial Balance

• Errors that cause the trial balance to be unequal include:
  • One-Sided Entry: Debit electricity expense $100$, credit nothing.
    • A computer system will not allow a one-sided entry.
  • Incorrect Double Entry: Posting an entry as a credit to one account and a credit to a second account, with no debit entry.
    • Or two debits and no credits.

Basic Principle

• If the basic principle of double entry has been correctly applied throughout the period, total debit balances will equal total credit balances.
• If it does not balance, it indicates an error.

Exam Focus Point

• Many companies use cloud accounting packages, where the bank account is integrated into the accounting system.

• Bank payments may need manual intervention if the system doesn't know where to post the other side of the entry.

  • May result in an entry to a suspense account that has to be identified, and corrected.

• In the exam, assume the bank account is not integrated; it's manually dealt with.