Ch 5 balancing the account and trial balance

CHAPTER 4

BALANCING THE ACCOUNTS

&

TRIAL BALANCE

ACC 106

KNOWLEDGE OBJECTIVES: Balance off the accounts for assets, liabilities, capital,

revenues & expenses. Distinguish between debit balance, credit balance & zero

balance. To understand why trial balance totals should equal one

another Be able to draw up a trial balance from a given set of

accounts Appreciate that some kinds of error can be made but the

trial balance totals will still equal one another

BALANCING THE ACCOUNTS & TRIAL BALANCE

INTRODUCTION

To check whether all transactions have been recorded correctly based on the double entry rules, the accounts have to be balance off & the trial balance is being prepared.

The purpose/objectives of preparing trial balance are: Determining the arithmetical accuracy of the double entry rules It helps to detect errors within a given time period To facilitate the process of preparing the final accounts -

(financial statements) Trial balance is a list of all ledger accounts with balances at a

particular date. Ledger accounts with zero balances are excluded from the trial

balance. Trial balance is normally prepared at the end of each month.

BALANCING THE ACCOUNTS

Accounts are normally balance off at the end of each month. The purpose of balancing off the accounts is to determine how much is

the balance left in each of the account. Therefore, the debit & credit sides of the account will be compared. If the total debit is more than total credit, the account is said to have a

debit balance. On the other hand, if total credit is more than total debit, so the

account has a credit balance. However, if the total debit is equal to total credit, the account has a

zero balance.

Steps in balancing off accounts are as follows:

i. Total for both sides of an account are added up

ii. The differences between the larger & the smaller totals is known as the balancing figure. The balancing figure is placed on the side of the smaller total as the balance carried down ( balance c/d)

iii. The balance brought down ( balance b/d) is the same figure as the balance c/d but recorded on the opposite side of an account & shown immediately below the total figure on the next day.

iv. If only one item is found in one side of the account, the balancing is done by recording the same amount on the opposite side as the balance c/d.

BALANCING THE ACCOUNTS (cont’d)

DEBIT BALANCEBank

1 Apr. Cash 8,000 10 Apr. Rent 2,00030 Apr. Cash 9,512 11 Apr. Purchases

1,500 30 Apr. Bal c/d 14,012

17,512 17,512 1 May. Bal b/d 14,012

Purchases 3 Apr. Pak Din 5,700 25 Apr. Drawings 1,100 Zila 2,850 8,950 11 Apr. Bank 1,500 10,050 10,050

T.P/L

CREDIT BALANCESales

30 Apr. 15,250 8 Apr. Faizal 4,500 Pak Adi 9,000

12 Apr. Cash 25022 Apr. Cash 1,500

15,250 15,250

Zila21 Apr. Return Outwards 300 3 Apr. Purchases 2,85030 Apr. Bal c/d 2,550 2,850 2,850

1 May. Bal b/d 2,550

T.P/L

PREPARATION OF TRIAL BALANCE

Below are the steps involved in preparing the trial balance State the name of the business & the title accounts having debit

balances are listed in the debit column & accounts having credit balances are listed in the credit column of a trial balance.

The amount in each of the column is then totaled

Method of bookkeeping in use is the double entry method, which means:

i. For each debit entry there is a credit entry

ii. For each credit entry there is a debit entry Items recorded in all the accounts on the debit side should equal

in total all the items recorded on the credit side of the books.

PRO FORMA TRIAL BALANCETimah Trading

Trial Balance as at 30 April 2006

Item Dr Cr

RM RM

Fixed Assets

Bank

Cash

Debtors

Drawings

Expenses

Purchases

Return Inwards

Discount Allowed

Discount Received

Return Outwards

Sales

Capital

Creditors

Loan from Bank

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

TOTAL DEBIT = TOTAL CREDIT

ERRORS IN THE TRIAL BALANCE Even thought the objectives of trial balance is to check the arithmetical

accuracy of the double entry rules used, there might still be some errors in the trial balance.

There are 2 types of error: Errors affecting the trial balance agreement Errors not affecting the trial balance agreement

Errors affecting the trial balance agreement If your trial balance does not balance, this indicates that one or more have been

made in the process of recording the transactions. 5 types of errors affecting the trial balance are as follows:

Single entry Errors of transposition Errors in addition Posting to the incorrect side of an account Errors in the trial balance

ERRORS IN THE TRIAL BALANCE(cont’d)

a) Single entry – this is where only one aspect of a transaction is recorded.

i.e. cash received from debtor RM200 was debited to the cash account. However, no entry was made in the debtor’s account.

b) Errors of transposition - Figures are written in the wrong order that is debiting & crediting the accounts with different amount.

i.e. cash sales RM1,234 was credited to sales account as RM1,432.

Dr. Cash a/c RM1,234

Cr. Sales a/c RM1,432

c) Errors in Addition - Errors occur when adding the debit & the credit sides of an account.

i.e. the total sales account by cash is RM2,200. however, the total cash account is added wrongly RM2,000.

d) Posting to the incorrect side of an account – the debit or credit entry of transaction is posted to the wrong side of an account.

i.e. paid creditor by cheque RM2,000 is debited to the creditors & bank account.

Dr. Creditors a/c RM2,000

Dr. Bank a/c RM2,000

e) Errors in the trial balance – error when transferring the account balances from the ledger into the trial balance.

i.e. the cash account wrongly transferred to the trial balance as RM200 instead of RM2,000.

Errors not affecting the trial balance agreement Even though a trial balance balances ( total debit = total credit), it

doesn’t mean that all transactions have been correctly recorded. The following are errors that may occur:

Error of omission Error of Commission Error of principle Complete reversal of entries Compensating errors Error of original entry

ERRORS IN THE TRIAL BALANCE(cont’d)

Error of omission – entire transaction has not been recorded /transaction is completely omitted from the books of a/c.

i.e. Jan 1 & 2 have cash sales RM200 & RM 400 respectively. However cash sales on Jan 2 was not recorded in either sales/cash a/c.

Error of Commission – where correct amount is posted into wrong a/c of the same category of a/cs.

i.e. credit sales to Amat on Jan 2 was wrongly debited to Ahmad’s a/c (another debtor)

Error of principle – where correct amount is posted into an a/c but of a different category

i.e. Repairs of Machinery (expense) RM200 was debited to Machinery a/c (asset).

Complete reversal of entries – where the amounts & the accounts are correct but each item is shown on the wrong side of the a/c.

i.e. Paid creditor by cash RM100.

Dr. Cash a/c RM100

Cr. Creditor a/c RM100

Compensating errors – an error on the Dr. side compensated by an error on the Cr.side.

i.e. cash sales RM1000 was wrongly credited to sales a/c RM100.& Cash purchase RM1,000 was wrongly debited to purchases a/c RM100.

Error of original entry – errors was made in the books of original entry (journals) then posted to the accounts.

i.e. Goods purchased for RM560 was recorded in the journal as RM650 & was posted to the ledger also as RM650.

ERRORS IN THE TRIAL BALANCE(cont’d)

The end

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