ACC 106 CHAPTER 4BALANCING THE ACCOUNTS & TRIAL BALANCE
BALANCING THE ACCOUNTS &TRIAL BALANCEKNOWLEDGE 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
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.
BALANCING THE ACCOUNTS (cont’d) 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.
DEBIT BALANCE Bank 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 17,5121 May. Bal b/d 14,012 Purchases 3 Apr. Pak Din 5,700 25 Apr. Drawings 1,100 Zila 2,850 T.P/L 8,95011 Apr. Bank 1,500 10,050 10,050
PREPARATION OF TRIAL BALANCEBelow 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 totaledMethod of bookkeeping in use is the double entry method, which means:i. For each debit entry there is a credit entryii. 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 BALANCE Timah Trading Trial Balance as at 30 April 2006 Item Dr Cr RM RMFixed Assets XXBank XXCash XXDebtors XXDrawings XXExpenses XXPurchases XXReturn Inwards XXDiscount Allowed XXDiscount Received XXReturn Outwards XXSales XXCapital XXCreditors XXLoan from Bank 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 agreementErrors 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 i.e. cash received from debtor RM200 was aspect of a transaction is recorded. debited to the cash account. However, no entry was made in the debtor’s account.b) Errors of transposition - Figures are i.e. cash sales RM1,234 was credited to sales written in the wrong order that is account as RM1,432. debiting & crediting the accounts with Dr. Cash a/c RM1,234 different amount. Cr. Sales a/c RM1,432c) Errors in Addition - Errors occur i.e. the total sales account by cash is when adding the debit & the credit RM2,200. however, the total cash account is sides of an account. added wrongly RM2,000.d) Posting to the incorrect side of an i.e. paid creditor by cheque RM2,000 isaccount – the debit or credit entry of debited to the creditors & bank account.transaction is posted to the wrong side Dr. Creditors a/c RM2,000of an account. Dr. Bank a/c RM2,000e) Errors in the trial balance – error i.e. the cash account wrongly transferred towhen transferring the account balances the trial balance as RM200 instead offrom the ledger into the trial balance. RM2,000.
ERRORS IN THE TRIAL BALANCE (cont’d)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 i.e. Jan 1 & 2 have cash sales RM200 & RMnot been recorded /transaction is completely 400 respectively. However cash sales on Janomitted from the books of a/c. 2 was not recorded in either sales/cash a/c.Error of Commission – where correct i.e. credit sales to Amat on Jan 2 wasamount is posted into wrong a/c of the same wrongly debited to Ahmad’s a/c (anothercategory of a/cs. debtor)Error of principle – where correct amount is i.e. Repairs of Machinery (expense) RM200posted into an a/c but of a different category was debited to Machinery a/c (asset).Complete reversal of entries – where the i.e. Paid creditor by cash RM100.amounts & the accounts are correct but each Dr. Cash a/c RM100item is shown on the wrong side of the a/c. Cr. Creditor a/c RM100Compensating errors – an error on the Dr. i.e. cash sales RM1000 was wronglyside compensated by an error on the Cr.side. 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 i.e. Goods purchased for RM560 wasthe books of original entry (journals) then recorded in the journal as RM650 & wasposted to the accounts. posted to the ledger also as RM650.
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