Fundamentals of Trial Balance

This article on the fundamentals of trial balance is in response to the question asked by a Facebook fan of AccountantNextDoor on our page. ‘Tell me more about trial balance’ was the question.

 
What is a Trial Balance?
A trial balance is a bookkeeping tool used by accountants to test the equality of Debt (Dr) and Credit (Cr). A trial balance is the schedule or list that shows the Dr and Cr balances extracted from the ledgers to prove its arithmetical accuracy.

 
A Trial BalanceFinancial statements are prepared from the trial balance. A trial balance is a statement with its conventional format.
The Dr items are on the left hand side while the Cr items are on the right hand side. Traditionally, a trial balance has four columns. The first from the left is used to code the accounts or number the items, the column following is used for item description, the third used for Dr items, while the fourth is used for Cr items.

 
Just a little might buster. A Dr item is an account that received more than it gave out while a Cr item is an account that gave out more than it received. This is consistent with the idea of debiting the receiver and crediting the giver.

 
The most liquid asset appears first at the top while the most illiquid asset appears last. Within the liabilities, those with the shortest maturities appear first. The left hand side must equal the right hand side. A suspense account is used to temporarily make the trial balance to equal while the investigation continues.

 
How to Fix Trial Balance Errors Leading to it not Balancing
There are times when a trial balance will not equal. When a trial balance did not balance, try recasting the two Dr and Cr columns. If this does not fix the error, divide the difference in the totals by 2 and by 9.

 
If the difference is divisible by 2, this may indicate that you may have transferred a debit balance account to the trial balance as a credit or vice versa. The fix this type of error is to look for an amount(s) that is half of the difference. For example, suppose the difference between both sides is £1000.00, look for an account with a balance of £500.00 and ensure that they are all posted to the correct side of the TB.

 
If however the difference is divisible by 9, this may indicate that you may have made a transposition error while transferring a balance to the trial balance or that you have made a slide error.

 
A transposition error occurs when the digital are put in reversed order in an amount (e.g writing £525 as £252 or £302 as £203). A slide error is when you place decimal point incorrectly (e.g £3,000.33 £3,00.0000).
The fix for a situation when the difference is divisible by 9 is to ensure that the numbers are not transposed and that decimal points are placed correctly.

 
If after doing these and the problem still persist, it may then be due to one of the following:-
1. Error of omission i.e completely omitting an account from the trial balance
2. Error of commission i.e entering an item in wrong person’s account
3. Error of principles i.e when an item is entered in a wrong class of account
4. Compensating error i.e where one error cancels out another error.
5. Error of original entry i.e when a wrong amount is entered on the debit and credit sides of the account.
6. Error of complete reversal i.e posting Dr as a Cr and vice versa.

 
The way to fix any of the above mentioned errors that could not be fixed following the two tips given earlier is to work backwards through the steps taken to prepare the trial balance. This may include:
• Re-totalling both columns
• Tracing each items to the general ledger account balances
• Verifying the balance of each general ledger account
• Verifying postings to general ledger
• Verifying journal entries
• Review the transactions
• Review source documents

 
A trial balance can be prepared at any time – at the end of each business day, every week, every month, each quarter or yearly.
Note that the equality of the two sides in the trial balance does not necessarily mean that the accounting process has been error-free. This simply means that there are no arithmetical errors. This re-emphasises the purpose of a trial balance which is to test the arithmetic accuracy of the ledgers.

 
Rules of Trial Balance
a. All assets must be put on the debit side (left hand side).
b. All liabilities must be on the credit side
c. All income or gains must be recorded on the credit side
d. All expenses must be recorded on the debit side

Example of a trial balance
Accountant Next Door Limited
Trial Balance
31-Dec-16
Account CodeAccount Title or DescriptionDrCr
1021£9,000.00
1032£6,000.00
1033£7,400.00
1034£1,400.00
1039£50,000.00
1040Share capital£60,000.00
1043Service income£10,000.00
1044Accounts payable£3,800.00
£73,800.00£73,800.00

 

Conclusion
Accountants before transferring relevant balances at year end to the statement of profit and loss and putting closing balances carried forward to the statement of financial positions usually test the arithmetic accuracy of the double entry bookkeeping records by preparing a list of account balances.
Few tricks that can be used to figure out errors are discussed in this article on the fundamentals of trial balance.
Please note that the advancement in technology and the use of business technology by accountants has made it easy to generate a trial balance with click of few buttons.

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