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:

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

What are the uses of a trial balance?

A trial balance has two main uses: it checks the arithmetic of the ledgers and it supplies figures for the final accounts.

1. Checking accuracy: it is used to check the arithmetical accuracy of the entries in the ledgers.
2. Providing data: it provides the figures used for the preparation of the final accounts.

How do you prepare a trial balance?

A trial balance is prepared by listing every ledger balance in a debit column or a credit column and comparing the two totals.

1. Balance all the ledger accounts, including the Cash Book and the Petty Cash Book.
2. List the balance of each account in the Trial Balance.
3. Place debit balances in the debit column and credit balances in the credit column.
4. Add up each column.
5. Compare the totals. If they are equal, the trial balance agrees.

Which balances go into which column?

Example of a trial balance

This simple illustration shows the layout. The figures are for practice only.

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 debit and credit totals of the Trial Balance agree, the double-entry bookkeeping is arithmetically correct.

What does it mean if the trial balance balances?

A trial balance that balances has equal debit and credit totals, but this is not proof that the ledger is free from errors.

• Still possible: some errors leave both totals equal, so the trial balance will still balance.
• Still needed: the accounts must be checked for these hidden errors.

What does it mean if the trial balance fails to balance?

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

• Action: the accountant must trace and correct the error before preparing the final accounts.

What is the difference between an error and fraud?

An error is a mistake made while recording and/or posting financial transactions.

Fraud is a deliberate effort to change or modify financial information (or records) for someone’s gain, to the detriment of others.

• Types of error: errors are of two kinds, those that affect the agreement of the trial balance and those that do not.

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

Seven errors do not affect the agreement of the trial balance: omission, commission, principle, original entry, complete reversal, compensating errors and duplication of entries.

1. Error of omission: a transaction is completely left out of the records, so neither the debit nor the credit entry is posted. 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: a transaction is posted to the wrong account of the same class as the correct one. It mostly affects personal accounts of customers and suppliers. Example: goods sold on credit to Adebola for ₦5,000 were debited to Ademola’s account.
3. Error of principle: a transaction is posted to an account of a different class from the correct one. Example: cash paid for furniture, ₦10,000, was debited to the Purchases Account.
4. Error of original entry: a wrong amount is used in both entries of the double entry, or in the book of prime entry. 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: the debit and credit entries are each posted to the wrong side. Example: a payment of ₦9,000 received from Gloria was debited to Gloria’s account and credited to the Cash Account.
6. Compensating errors: error(s) on one side of the ledger are cancelled out (offset) by error(s) on the other side. Example: the Sales Account was overstated by ₦4,000 and the Rent Account was also overstated by ₦4,000.
7. Error of duplication of entries: the full double entry for a transaction is made more than once. Example: a credit sale to Adesua for ₦7,000 was debited twice in Adesua’s account and credited twice in the Sales Account.

How do omission and commission differ?

An error of omission leaves the transaction out completely. An error of commission records it, but in the wrong account of the same class.

What errors affect the agreement of the trial balance?

Nine errors make the debit and credit totals of the trial balance unequal.

1. Single entry (lone entry): only one side of a transaction is posted.
2. Casting errors: figures are added wrongly, by overcasting (too high) or undercasting (too low).
3. Transposition errors: digits are written in the wrong order, for example ₦540 written as ₦450.
4. Omission of a ledger balance: an account balance is left out of the Trial Balance.
5. Balance in the wrong column: a correct balance is entered in the wrong column of the Trial Balance.
6. Wrong balance in the Trial Balance: the figure copied from a ledger account differs from the real balance.
7. One-sided duplication of entry: one side of an entry is posted twice while the other side is posted once.
8. Wrong totals from subsidiary books: a wrong total is transferred from a subsidiary book into the ledger.
9. Wrong opening balance: a wrong balance is brought down 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.