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The Trial Balance
When entering transactions in the double entry accounts we see that for every entry made on the debit side of the account there will always be a credit entry made in another account for the same amount of money. When we balance off the individual accounts in the ledgers, we should therefore find that the total of all the debit balances should be exactly equal to the total of credit balances. If the totals are not the same then a mistake must have been made in the bookkeeping.
To see if the two totals are equal we draw up a trial balance at the end of an accounting period. When the totals of the trial balance are equal we say that the trial balance totals agree.
The uses of the trial balance as follows:
- It provides a check on the accuracy of the ledger account balances - ensuring that entries have been made correctly.
- It makes preparation of the final accounts easier - we can simply use the balances from the trial balance, rather than having to refer to all the individual accounts.
- Certain errors will be highlighted or avoided as outlined below.
The trial balance will ensure that the following errors are avoided or highlighted:
- Only entering one half of the transaction (e.g. a debit but no credit entry)
- Entering different figures for the two halves of the transaction
- Entering two debits or two credits for a transaction
If any of the above errors have been made then the trial balance totals will not agree and investigative work can begin to see where the mistakes are. Technically, it could be possible for these errors to be made and the trial balance would appear as if the mistakes had not taken place. For example, if we missed out an entry of £50 on the debit side of an account and then later we missed out on another transaction a credit entry of £50, the trial balance totals would still agree. However as far as examination questions go, you will know when you are dealing with errors - it will be indicated in the question itself.
Even if the trial balance totals do agree this does not mean that the books are completely correct. These errors outlined here could have been made:
- Entering correct figures in the wrong account (but on the correct side)
- Reversing entries so that both entries are made on the incorrect side of the each account
- Entering the incorrect total on both sides of the account.
We would need to know how to identify these errors, how to correct them and also how to recalculate the firm's profits if they have been affected.
A lot of students believe that the profit and loss account, and the balance sheet could not be constructed without a trial balance. This is not true. We would, if we wished, use the balances from each account.
However this approach would take a lot longer and we would not have the check on the accuracy that the trial balance provides.
As a rule the entries for the trial balance are as follows (a good way of remembering where the entries go is to use the word PEARLS):
| Type of Account
| Entry
|
| Purchases, Expenses, Assets
| Debit
|
| Receipts, Liabilities, Sales
| Credit
|
Debit entries: Audit fees, carriage inwards, carriage outwards, cash, (trade) debtors, directors' fees, equipment, interest paid, investments, machinery, motor vehicle, petty cash, premises, purchases, rates, rent, returns inwards, salaries, sales ledger control account, (opening) stock*, sundry expenses, wages
Credit entries: Bank loan/overdraft, capital, (trade) creditors, discount received, mortgage, profit and loss account, purchase ledger control account, rent receivable, returns outwards, sales, share capital, share premium, VAT
Both: Bank balance (would be debit if owned and credit if owed)
*note closing stock is not included in most trial balances, but is included in the debit column if the double entry has already been completed
The following is a trial balance for S Halls, which was extracted from the books on 31 December 2002:
| S Halls - Trial Balance as at 31 December 2002
|
| -
| Dr (£)
| Cr (£)
|
| Capital
| -
| 1000
|
| Cash
| 210
| -
|
| Bank
| 270
| -
|
| Mortgage
| -
| 50
|
| Purchases
| 242
| -
|
| Office supplies
| 24
| -
|
| Sales
| -
| 216
|
| Creditors
| -
| 87
|
| Debtors
| 95
| -
|
| Returns in
| 15
| -
|
| Returns out
| -
| 12
|
| Carriage in
| 10
| -
|
| Carriage out
| 10
| -
|
| Discount allowed
| 8
| -
|
| Discount received
| -
| 9
|
| Wages
| 140
| -
|
| Office fixtures
| 350
| -
|
| -
| 1374
| 1374
|
The title of any financial statement is very important. It should always contain the following three pieces of information:
- Who it is for. In this case it is for S Halls.
- What it is. In this case it is a trial balance.
- When it is for. In this case it is as at 31 December 2002.
Remember! Who? What? When?
In this trial balance we have the balances from three personal accounts. S Knight is a creditor of the firm (it is in the credit column - indicating that it is a liability). A Hynam and K Curnock are both debtors (in the debit column - indicating that they are an asset). Normally, debtors and creditors are listed in a trial balance as just 'debtors' or 'creditors', rather than as their individual names.
Also, if a firm has unsold stocks of goods left at the end of a period, these will be listed underneath the trial balance. This is because the account for closing stock is not part of the double entry system. However, any stock that was in the firm at the start of a period will be listed in the debit balances of the trial balance.
Also See
Comments
These notes are aimed at people studying for AQA A Level Accounting Unit 1, but will also be suitable for other courses and exam boards.
Originally submitted by duke_stix on TSR Forums.
