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Trial Balance
« on: June 27, 2016, 05:26:01 PM »
The Trial Balance

When entering transactions in the double entry accounts we see that for every entry made on the debit side of the account there will always be a credit entry made in another account for the same amount of money. When we balance off the individual accounts in the ledgers, we should therefore find that the total of all the debit balances should be exactly equal to the total of credit balances. If the totals are not the same then a mistake must have been made in the bookkeeping.

To see if the two totals are equal we draw up a trial balance at the end of an accounting period. When the totals of the trial balance are equal we say that the trial balance totals agree.

The uses of the trial balance as follows:

    It provides a check on the accuracy of the ledger account balances - ensuring that entries have been made correctly.
    It makes preparation of the final accounts easier - we can simply use the balances from the trial balance, rather than having to refer to all the individual accounts.
    Certain errors will be highlighted or avoided as outlined below.

The trial balance will ensure that the following errors are avoided or highlighted:

    Only entering one half of the transaction (e.g. a debit but no credit entry)
    Entering different figures for the two halves of the transaction
    Entering two debits or two credits for a transaction

If any of the above errors have been made then the trial balance totals will not agree and investigative work can begin to see where the mistakes are. Technically, it could be possible for these errors to be made and the trial balance would appear as if the mistakes had not taken place. For example, if we missed out an entry of £50 on the debit side of an account and then later we missed out on another transaction a credit entry of £50, the trial balance totals would still agree. However as far as examination questions go, you will know when you are dealing with errors - it will be indicated in the question itself.

Even if the trial balance totals do agree this does not mean that the books are completely correct. These errors outlined here could have been made:

    Entering correct figures in the wrong account (but on the correct side)
    Reversing entries so that both entries are made on the incorrect side of the each account
    Entering the incorrect total on both sides of the account.

We would need to know how to identify these errors, how to correct them and also how to recalculate the firm's profits if they have been affected.

A lot of students believe that the profit and loss account, and the balance sheet could not be constructed without a trial balance. This is not true. We would, if we wished, use the balances from each account.

However this approach would take a lot longer and we would not have the check on the accuracy that the trial balance provides.

Debit entries: Audit fees, carriage inwards, carriage outwards, cash, (trade) debtors, directors' fees, equipment, interest paid, investments, machinery, motor vehicle, petty cash, premises, purchases, rates, rent, returns inwards, salaries, sales ledger control account, (opening) stock*, sundry expenses, wages

Credit entries: Bank loan/overdraft, capital, (trade) creditors, discount received, mortgage, profit and loss account, purchase ledger control account, rent receivable, returns outwards, sales, share capital, share premium, VAT

Both: Bank balance (would be debit if owned and credit if owed)

*note closing stock is not included in most trial balances, but is included in the debit column if the double entry has already been completed

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