PRINCIPLES OF ACCOUNTS

LECTURE TITLE: THE TRIAL BALANCE

In this unit, you will be exposed to the Trial Balance which is an important source of
accounting information as it is used to summarize the balances from the various ledgers
and ensures that double entry is maintained when transactions are posted. Remember to
review the video resources at the end of this lesson after you’ve read the lecture notes.
On completion of this unit on the Trial Balance, you should be able to:
 Describe the purpose of a Trial Balance.
 Extract a Trial Balance.
 Describe errors that a Trial Balance will not disclose.
 Correct errors not revealed by a Trial Balance.
 Distinguish between the different kinds of errors that may arise.

Recommended Reading:
Chapters 6 - F. Wood & A. Sangster (2012). Business Accounting 1, 12th edition.

I. What is the Trial Balance?

Trial Balance lists all the accounts and their respective balances taken from the Ledgers.

Note: The Trial Balance is done after all the transactions have been posted, and the
accounts balanced off. It therefore shows all the accounts in use at the end of the
accounting period, with their respective debit or credit balance, i.e. the Bal. b/d.

The Trial Balance is an internal document used only by the company insiders. The
general public never sees the Trial Balance; only the company’s financial statements.

II. Purposes of the Trial Balance

There are two main purposes for the preparation of the Trial Balance:
1. It serves as an interim check of the accounts in order to ensure that double entry
was maintained when posting the transactions. Thus the debit column of the trial
balance must be equal to the credit column.

Generally, the debit column shows the balances on accounts for assets and expenses,
while the credit column shows balances on accounts for revenue and liabilities.

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2. Since all the accounts are scattered in the various ledgers, the Trial Balance brings
them to a concise listing or forms a work sheet. This makes it easier for the
preparation of the final accounts, i.e. The Trading & Profit & Loss Account (Income
Statement), and the Balance Sheet.

III. Format of the Trial Balance

The Trial Balance must have a heading that shows
 The Name of the Firm
 The Title of the Statement
 The Date in Consideration

The outline of the Trial Balance is as follows:

The Original Gringos
Trial Balance As At August 31, 1992
Dr. Cr.
$ $
Loan 30,000
Capital 61,860
Sales 145,200
Drawings 4,500
Carriage Inwards 2,050
Carriage Outwards 4,750
Return Inwards 3,200
Return Outwards 4,035
Insurance 4,600
Stock at Sept. 1, 1991 23,470
Rates 3,120
Building 45,000
Motor Vehicle 30,500
Fixtures & Fittings 8,250
Purchases 102,340
Rent 5,000
Commission Received 12,300
Office Expense 6,320
Interest Received 3,750
Bank 12,250
Cash 6,407
Debtors 6,230
Creditors 10,842

267,987 267,987
====== =======

Footnote: a) Stock at August 31, 1992 is $25,650

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 The opening stock is shown in the Trial Balance as a debit item because it would
have been treated as a Current Asset in the previous Balance Sheet.

However, the Closing Stock is listed as a footnote because it was not obtained as a
double entry calculation. It will be used, though, when preparing the final
accounts as we shall see later.

IV. Detection of Errors

The process of recording transactions, extracting a Trial Balance and the set of
final accounts is not error free. Errors are likely to occur at different stages in the
accounting process. These may be of two broad categories;
 Errors not affecting Trial Balance Agreement (i.e. total debit = total credit)
 Errors affecting Trial Balance Agreement (i.e. total debit > total credit or
total debit < total credit)

Items 1-6 of the table below represent errors that do not affect Trial Balance
agreement while items 7-8 represent errors that will affect the Trial Balance
agreement.

Error type Suspense account involved?

1 Error of Omission – a transaction is not recorded at all No
2 Error of commission – an item is entered to the correct side of the wrong No
account (there is a debit and a credit here, so the records balance)
Example: P. Luen paid us by cheque $100, correctly entered in the cash book,
but it is entered wrongly into the account of P. Lee.
3 Error of principle – an item is posted to the correct side of the wrong type No
(nature) of account
Example: when cash paid for plant repairs (expense) is debited to plant account
(asset).
(errors of principle are really a special case of errors of commission, and once
again there is a debit and a credit)
4 Error of original entry – an incorrect figure is entered in the records and then No
posted to the correct account
Example: Cash HK$1,000 for plant repairs is entered as HK$100; plant repairs
account is debited with HK$100
5 Complete Reversal of entries – the amount is correct, the accounts used are No
correct, but the account that should have been debited is credited and vice versa
Example: We paid cheque of $200 on 20 May 2005 to D.Chan.
Debit: Bank
Credit: D. Chan
6 Compensating errors – two equal and opposite errors leave the trial balance No
balancing. This case is rare.)
Example: Purchases and Sales were overstated by $100.
7 Addition errors – figures are incorrectly added in a ledger account Ye

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e.g. overcast or undercast s
8 Posting error – Ye
a) debit but no credit; credit but no debit s
b) enter a different amount on the debit side from the amount on the credit side.

Example: cash HK$10,000 entered in the cash book for the purchase of a car is:
a) posted to Motor cars account as HK$1,000 only, no posted to cash book

9 Trial balance errors – a balance is omitted, posting an amount incorrectly, or Ye

posting a balance to wrong side of the trial balance s

V. Suspense Accounts and Errors Correction

A suspense account is a temporary resting place for an entry that will end up somewhere
else once its final destination is determined. There are two reasons a suspense account
could be opened:
1. A bookkeeper is unsure where to post an item and enters it to a suspense account
pending instructions;
2. When there is a difference in a Trial Balance, a Suspense Account is opened with
the amount of the difference so that the trial balance agrees (pending the
discovery and correction of the errors causing the difference). This is the only
time an entry is made in the records without a corresponding entry elsewhere (See
exhibit A).

When the trial balance does not agree, the amount of the difference is entered in a
Suspense Account.

Exhibit A
Trial Balance as on 31 December 2005
　 　 　 　 　 　 Dr. 　 Cr.
$ $
Total after all the accounts have been listed 100,000 99,960
Suspense Account 40
100,000 100,000

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 Lecture Questions

Question 1
Enter the following transactions in the accounts of H. Smith Balance off the accounts and
extract a Trial Balance as at January 31, 2015.

2014
January
1 Started Business with capital in cash of $450 and $800 in the bank.
2 Bought goods on credit from the following persons: R.Lopez $550;
D.Jordan $300 and K. Korver $280
4 Sold goods on credit to: M. Thomas $650; P. Mathew $400; R.Mullings
$810
6 Paid rent by cash $190.
9 P. Mathew paid us his account by cash $210
10 R. Mullings paid us $400 by cheque.
12 We paid the following by cheque: : R.Lopez $130; K. Korver $50.
31 Paid Telephone bill by cheque $160

Question2
On preparing a Trial Balance as at April 30, 2010 there was a difference; the debit side
totaled $100,000 while the credit totaled $100,120. An investigation was carried out and
the following errors were found:

(a) A credit sale of goods amounting to $31,500 to Franklin Johnson was debited to
the account of Mary Johnston.
(b) A payment of $9300 made to JPS for electricity had been debited to the electricity
expenses account as $9030.
(c) The sales journal had been overstated by $9000.
(d) The purchases journal had been overstated by $3750.
(e) Motor van sold for $75,000 had been credited to the Sales Account.
(f) Return Outwards Journal was overstated by $2,100.

Required:
(a) Prepare journal entries required to correct the above errors.
(b) Create a Suspense Account.

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 Self-Assessment/Practice Question
Question 3
Enter the following transactions in the accounts of P.Reynolds. Balance off the accounts
and extract a Trial Balance as at January 31, 2015.

2015
January
1 Started Business with capital in cash of $675 and $1200 in the bank.
2 Bought goods on credit from the following persons: M. Davis
$825; D. Riley $450 and T. Bailey $420
4 Sold goods on credit to: R. Miller $975; S. Jew $600; R. Mullings $1215
6 Paid rent by cash $190.
9 S. Jew paid us his account by cash $315.
10 R. Mullings paid us $600 by cheque.
12 We paid the following by cheque: M. Davis $195, T. Bailey $75.
31 Paid Telephone bill by cheque $ 240

Question 4
On preparing a Trial Balance as at April 30, 2010 there was a difference; the debit side
totaled $91 000 while the credit totaled $91 080. An investigation was carried out and
the following errors were found:

(a) A credit sale of goods amounting to $21,000 to Franklin Johnson was debited to
the account of Mary Johnston.
(b) A payment of $6200 made to JPS for electricity had been debited to the electricity
expenses account as $6020.
(c) The sales journal had been overstated by $6000.
(d) The purchases journal had been overstated by $2500.
(e) Return Outwards Journal was overstated by $1,400.
(f) Motor van sold for $50,000 had been credited to the Sales Account.

Required:
(a) Prepare journal entries required to correct the above errors.
(b) Create a Suspense Account.

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 Glossary
Terms Meaning
Balance Sheet/Statement of financial A statement showing the assets, liabilities
position and capital of a business.
Book keeper A person who records data relating to
accounting transactions in the accounting
books.

Carriage inwards Cost of transport of goods into a business.

Carriage outwards Cost of transport of goods out to the

customer of a business

Closing stock The amount of inventory that a business

still has on hand at the end of a reporting
period.
Commissions paid A company may pay a commission to a
salesperson who generates revenue for the
company by selling its products or services
or obtaining clients for it.
Commissions received A company may receive commissions when
it promotes or sells products or services on
behalf of another company, such as serving
as a broker for the manufacturer of a good.
Current Asset An item on an entity's balance sheet that is
either cash, a cash equivalent, or which
can be converted into cash within one year.
Cash, including foreign currency,
Investments, except for investments that
cannot be easily liquidated, prepaid
expenses, Accounts receivable  and
Inventory
Drawings Funds or goods taken out of a business by
the owners for their private use

Error correction  The correction of an error in previously

issued financial statements. This can be an
error in the recognition, measurement,
presentation, or disclosure in financial
statements that are caused by mathematical
mistakes, mistakes in applying GAAP, or
the oversight of facts existing when the
financial statements were prepared. It is
not an accounting change.

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Final accounts The financial statements of
an organization made up at the end of
an accounting period, usually the fiscal
year.
Interest revenue Earnings that an entity receives from any
investments it makes, or on debt it owns.
Opening Stock An item at the beginning of a new
inventory-keeping period
Overcast/overstated To say that (something) is larger or
greater than it really is

Return inwards Goods returned by customers

Return outwards
Suspense account
Trading & Profit & Loss Account The financial statement in which the
(Income Statement)
Undercast/Understated
Worksheet
Goods returned to suppliers
An account in which you can enter the
amount equal to the difference in the trial
balance while you try to find the cause of
the error(s) that resulted in the failure of
the trial balance to balance.
calculation of gross profit and then net
profit are presented.
To represent as less than is the case
A specially prepared sheet, pamphlet,
or booklet containing data of
assistance in planning and
accomplishing some piece of work

References:
https://www.merriam-webster.com/dictionary/understate
http://www.businessdictionary.com/definition/opening-stock.html
http://www.accountingtools.com/questions-and-answers/what-is-interest-revenue.html
smallbusiness.chron.com/commission-balance-sheet-36570.html

Other Resources:
https://www.youtube.com/watch?
v=bYVzaim4zhQ&list=PLuARbs1Yww_scHW5PQoGYKvHKFeNWazSh&index=13
https://www.youtube.com/watch?
v=SCUqf7B8KoI&index=15&list=PLuARbs1Yww_scHW5PQoGYKvHKFeNWazSh
https://www.youtube.com/watch?v=0R0SNfYgmjc