Trial Balance – SS1 Financial Accounting Lesson Note (Second Term)

A trial balance is a list of all the balances extracted from the ledgers at a particular date, to test (verify, check or confirm) the arithmetical accuracy of postings done in the ledger.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a trial balance;
• state the uses of a trial balance;
• prepare a trial balance from ledger balances;
• explain the errors that do not affect the agreement of a trial balance, with examples;
• list the errors that affect the agreement of a trial balance.

What are the uses of a trial balance?

1. It is used to check the arithmetical accuracy of the entries in the ledgers.
2. It provides data (figures) used for the preparation of the final accounts.

How do you prepare a trial balance?

First, balance all the ledger accounts, including the Cash Book and the Petty Cash Book. Then list the balances, with the debit balances and the credit balances in separate columns of the Trial Balance. The total of the debit balances should equal the total of the credit balances. If the totals are equal, the trial balance agrees.

Key points to note

1. The trial balance is not an account, so it has no debit and credit side.
2. It is not part of the double-entry system.
3. It is a list of all the balances in the ledger at a particular date.
4. It is extracted to check or verify the arithmetical accuracy of postings done in the ledger.
5. The heading of the Trial Balance should read “Trial Balance as of 31st December 2016”.
6. The balances on the accounts in the Sales Ledger are totalled and the total is entered in the trial balance as Sundry Debtors (or Trade Debtors).
7. The balances on the accounts in the Purchase Ledger are totalled and the total is entered in the trial balance as Sundry Creditors (or Trade Creditors).
8. The balances of accounts shown in the trial balance are not arranged in any specific order.

How does a trial balance relate to errors?

When the totals of the debit column and the credit column of the Trial Balance agree, it indicates that the double-entry bookkeeping is arithmetically correct.

If the trial balance balances

When a trial balance balances, it means that the total of the debit balances is equal to the total of the credit balances. However, this is not proof that the entries in the ledger accounts are completely free from errors. The Trial Balance will still balance if any of the following errors are made.

What errors do not affect the agreement of the trial balance?

1. Error of omission: This occurs when a transaction has been completely omitted from the accounting records, i.e. neither the debit entry nor the credit entry was posted. For example, goods sold for cash ₦7,000 were not debited to the Cash Account and not credited to the Sales Account.
2. Error of commission: This occurs when a transaction is posted into the wrong account which belongs to the same class as the account to which the posting should have been made. This type of error mostly affects personal accounts, i.e. accounts of customers and suppliers. For example, goods sold on credit to Adebola for ₦5,000 were debited to Ademola’s account.
3. Error of principle: This occurs when a transaction is posted to the wrong account, of a different class from the correct account to which the posting should have been made. For example, cash paid for furniture purchased, ₦10,000, was debited to the Purchases Account.
4. Error of original entry: This occurs when the wrong amount is posted in a double entry to record a transaction, or when the wrong amount is entered in a book of prime entry for a transaction. For example, goods sold for cash ₦50,000 were recorded in both the Cash Account and the Sales Account as ₦5,000.
5. Complete reversal of entry: This occurs when a transaction is recorded on the wrong side of the ledger for both the debit and credit entries, i.e. an account which should have been debited has been credited, and the account which should have been credited has been debited. For example, a payment of ₦9,000 received from Gloria was debited to Gloria’s account and credited to the Cash Account.
6. Compensating errors: This occurs when error(s) on one side of the ledger are completely cancelled out (or offset) by error(s) on the other side of the ledger. For example, the Sales Account was overstated by ₦4,000 while the Rent Account was also overstated by ₦4,000.
7. Error of duplication of entries: This occurs when the double entry records for a transaction are made more than once in the books of account. For example, a sale of goods on credit to Adesua for ₦7,000 was debited twice in Adesua’s account and also credited twice in the Sales Account.

If the trial balance fails to balance

When the totals of the debit balances and the credit balances do not agree, an error has been made somewhere.

NB: In accounting terminology, an error is a mistake made while recording and/or posting financial transactions. An error is not the same as fraud. Fraud is a deliberate effort or attempt to change or modify financial information (or records) for someone’s gain, to the detriment of others.

Errors are genuine mistakes that are not deliberate or pre-planned but which occur in the course of recording financial transactions. Errors in accounting are of two types: those that affect the agreement of the trial balance and those that do not.

What errors affect the agreement of the trial balance?

1. Single entry or lone entry
2. Casting errors, i.e. overcasting or undercasting of figures
3. Transposition errors
4. Omission of a ledger balance in the Trial Balance
5. Recording a correct balance of an account in the wrong column of the Trial Balance
6. Recording the wrong balance of a ledger account in the Trial Balance
7. One-sided duplication of entry
8. Transfer of wrong totals from the subsidiary books into the ledger
9. Bringing down a wrong opening balance in a ledger account

Evaluation

1. Define a trial balance.
2. State two uses of a trial balance.
3. Explain the difference between an error of omission and an error of commission.
4. List four errors that do not affect the agreement of the trial balance.
5. State the difference between an error and fraud.

Assignment

1. The agreement of the Trial Balance debit and credit totals does not indicate its entire correctness. Do you agree? Explain your answer.