Trial Balance – JSS3 Business Studies Lesson Note (Second Term)

A trial balance is a list of all the debit and credit balances taken from the ledger, used to check that the two totals agree.

Behavioural objectives

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

1. explain what a trial balance is;
2. state the uses of a trial balance;
3. explain why an agreed trial balance does not prove that the accounts are free of error;
4. draw the format of a trial balance;
5. prepare a trial balance from a list of ledger balances.

What is a trial balance?

A trial balance is a list of debit and credit balances extracted from the ledger at a given date.

• Purpose: it shows the arithmetical accuracy of ledger entries.
• Double entry: every debit has an equal credit, so the debit total must equal the credit total.
• Agreement: if both columns have the same total, the trial balance is said to agree.
• Disagreement: if the totals differ, there is at least one error in the ledger.
• Limit: agreement does not prove that the accounts are free of error, because some errors do not change the totals.

What are the uses of a trial balance?

A trial balance has three main uses, listed below.

• Checks accuracy: it shows the arithmetical accuracy of postings made in the ledger.
• Gives a summary: it shows the balances of all accounts in the general ledger at a glance.
• Helps final accounts: it is used to prepare the trading account, profit and loss account and balance sheet.

Which balances go on the debit side and which on the credit side?

Assets, expenses and drawings are debit balances, while liabilities, capital and incomes are credit balances.

What is the format of a trial balance?

A trial balance has a heading, four columns and a total line, as shown below.

Lucy Enterprises
Trial balance as at 31st December, 2002

• Heading: the name of the business, the words “Trial balance” and the date.
• Particulars: the name of each ledger account.
• Folio: the page number of the account in the ledger.
• DR (₦): the column for debit balances.
• CR (₦): the column for credit balances.

How is a trial balance prepared?

A trial balance is prepared by listing each ledger balance on its correct side and adding both columns.

1. Write the heading with the name of the business and the date.
2. Find the balance of every account in the ledger.
3. List each account name under Particulars.
4. Write debit balances in the DR column.
5. Write credit balances in the CR column.
6. Add the DR column and the CR column.
7. Compare the two totals. They must be equal.

Illustration 1

Prepare a trial balance from the following accounts: creditors ₦2,784, bank overdraft ₦1,980 and purchases ₦4,764.

Solution

Trial balance as at ……………

• Creditors and bank overdraft: both are liabilities, so they are credits.
• Purchases: an expense, so it is a debit.
• Check: ₦2,784 + ₦1,980 = ₦4,764, which equals the debit total.

Illustration 2

Prepare a trial balance from the following ledger account balances: capital ₦1,000, creditors ₦100, purchases ₦4,764, sales ₦5,194, stocks ₦480, debtors ₦100 and cash ₦950.

Solution

Trial balance as at ……………

• Credit total: ₦1,000 + ₦100 + ₦5,194 = ₦6,294.
• Debit total: ₦4,764 + ₦480 + ₦100 + ₦950 = ₦6,294.

Why does an agreed trial balance not prove that the accounts are free of error?

An agreed trial balance only proves that total debits equal total credits, so some errors stay hidden.

Errors that do not affect agreement

• Error of omission: a transaction is left out of the books completely.
• Error of commission: an entry is posted to the wrong account of the same type, such as the wrong debtor.
• Error of principle: an entry is posted to the wrong class of account, such as a motor vehicle bought but recorded as an expense.
• Compensating errors: two or more errors of equal amount on opposite sides cancel each other out.
• Error of original entry: a wrong amount is used for both the debit and the credit.
• Complete reversal of entries: the debit and credit accounts are swapped.

Errors that make the trial balance disagree

• One-sided entry: a debit is posted with no matching credit, or the reverse.
• Different amounts: the debit and credit sides of one transaction are posted with different amounts.
• Addition error: an account balance or a column total is added wrongly.

Evaluation

1. State the rules for posting entries into the trial balance.
2. State two uses of a trial balance.
3. Name two errors that do not stop a trial balance from agreeing.
4. Which side of the trial balance holds capital, and which holds drawings?
5. Prepare a trial balance from these balances: capital ₦5,000, sales ₦3,000, cash ₦2,000, purchases ₦2,500, rent ₦500 and debtors ₦3,000.

General revision questions

1. What is a cash book?
2. Mention the types of cash books.
3. State the principle of double entry.
4. Draw the format of a ledger.
5. Which type of cash book is similar to the format of a ledger?

Assignment

Reading assignment

Business Studies for Junior Secondary Schools, Book 3 by O.A. Lawal et al, pages 60 to 71.

Weekend assignment

1. All expenses are ______ in the trial balance. A. debited B. credited C. added D. deducted
2. All liabilities and incomes should be ______. A. debited B. earmarked C. credited D. added
3. Which of the following is credited to the trial balance? A. Loan B. Purchases C. Wages D. Rent
4. Drawings is ______ in the trial balance. A. credited B. debited C. added D. deducted
5. All liabilities are ______ in the trial balance. A. debited B. credited C. added D. deducted

Theory

1. What is a trial balance?
2. Sketch a format of the trial balance with at least seven entries on the credit side and fifteen entries on the debit side.