what is Trial Balance ?

 

 #THE TRIAL BALANCE

A trial balance is a list of accounts and their balances at a given time.
Customarily, a trial balance is prepared at the end of an accounting period.

Trial Balance is:
👍A list of accounts and their balances at a point in time.
👍Used to prove the equality of debit and credit amount in the ledger
👍Does not provide complete proof of the accuracy of ledger
👍The primary purpose of a trial balance is to prove the mathematical accuracy of debits and credits after 

posting.

♥A trial balance also uncovers errors in naturalizing and posting. In addition, it is useful in the preparation of financial statements.

♥The procedures for preparing a trial balance consist of;
1. Listing the account titles and their balances.
2. Totaling the debit and credit columns.
3. Proving the equality of the two columns

A trail balance does not prove the all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance columns agree.

Errors not detected by a trail balance among other things include the following:-

1. If the journalizing of a transaction is omitted altogether, the error will not be indicated by the trial balance.

2. If an amount is posted to the correct side or a wrong account, trial balance column totals will still be equal.

3. If an entry is posted twice, the trial balance columns will be equal, failing to detect error.

4. If posting of both debit and credit of an entry is omitted, the trial balance totals will remain equal.

👉To Be Continued. . .

#Common Errors that Cause a Trial Balance not to Balance

1. Errors in the addition of the trial balance columns.

👉If there are arithmetic errors in computing trial balance debit and/or credit totals, the trial will obviously be out of balance.
That is, debit total will not be equal to credit total.

2. Listing an account balance in the wrong column of a trial balance.

👉If a correctly determined account balance is put in the wrong column of the trial balance, it will result in twice overstatement of the side in which the balance is wrongly put.

3. Mistakes in arithmetic when figuring account balances.

👉Assuming that all entries posted to ledger accounts do not have problems, an arithmetic error in determining an account balance will later cause inequality of the trial balance totals.

4. Copying an amount incorrectly when journalizing, posting or preparing the in balance.

👉An amount may be copied wrongly either from source document to a journal or from a journal to accounts in the ledger, or from ledger to the trial balance. And, any these errors will make the trial balance totals not to balance.

5. Posting only one part of a journal entry.

👉In double entry accounting, debit entries are always accompanied by equal amount of credit entries. So, if only one part of these two components is posted and the other component is not, you should not expect the trail balance totals to be equal.


#Steps in Locating Errors when the Trial Balance does not equal

🌟After the trial balance has indicated that there is an accounting error, the next procedure would be to locate the error. The steps in locating errors include:

1. Re-add the trial balance columns to prove the accuracy of the addition of these columns.

2. Find the difference between the totals of the trial balance columns. And then look in the ledger to see if the difference is because of an omission from the trial balance.

3. Divide the amount of the difference between the two totals of the Trial Balance by 2 to check if the difference is evenly divisible by 2 without remainder. If the difference is evenly divisible by 2 do this👇:        

✈Look through the accounts to see it this amount has been recorded on the wrong side of an account. or

✈Check if this amount has been written in the wrong column of the Trial Balance.

4. Divide the amount of the difference of the two totals of the Trial Balance by 9, 1f this difference is evenly divisible by
9, look for an amount in the trial balance in which the digits have been transposed in copying the balance from the ledger. Also, the digits might have been transposed in posting from the journal.

💧Transposition error - a reversal of digits e.g. 69.236 as 96.236

💧Slide error -  moving decimal points incorrectly. E.g.: 46.98 as 469.5 or 4.698

5. Compare the balances on the trial balance with the balances in the ledger accounts if there are balances omitted from the trial balance, if balances are taken to wrong trial balance columns, or both.

6. Verify the pencil footings and the account balances in the ledger if the error is due to wrong account balance determination.

7. Verify the posting of each item in the journal by comparing what was recorded in the journal against items posted to accounts in the ledger.


#Accrual Versus Cash-Basis Accounting

#Accrual-Basis

Under this method, revenues and expenses are recognized as earned or incurred, utilizing the various principles introduced throughout this lesson

#Cash Basis Accounting

An alternative method in use by some small businesses is the "cash basis." The cash basis is much simpler, but its financial statement results can be very misleading in the short run. Under this easy approach, revenue is recorded when cash is received (no matter when it is earned"), and expenses are recognized when paid (no matter when incurred"). The cash basis is not compliant with GAAP.

#Modified cash Basis Approaches

The cash and accrual techniques may be merged together to form a modified cash basis system. The modified cash basis results in revenue and expense
recognition as cash is received and disbursed, with the exception of large cash outflows for long lived assets (which are recorded as assets and depreciated over time). However, to repeat, proper
Income measurement and strict compliance with GAAP dictates use of the accrual basis; virtually all large companies use the accrual basis.

The revenue recognition and matching principles are used under the accrual basis of accounting. Generally, accepted accounting principles require accrual basis accounting rather than cash basis accounting.

#Matching principle

Members of the Channel ! Do you remember as we have discussed about matching concept in the previous post ? Great 👍 so matching principle dictates that efforts (expenses) be matched with accomplishments (revenues) in the accounting period. The need for proper matching of revenues and expenses arises because of the existence of accounting periods and of payments and receipts that apply for different accounting periods.

#Meaning of Adjusting Entries

Adjusting entries are entries made at the end of the period to bring the balances of accounts that do not show their true balance to the true balance to be reported on the financial reports. In the accounting process, there are economic
events that do not immediately trigger the  recording of the transactions. These are addressed via adjusting entries, which serve to match expenses with revenues in the accounting period in which they Occur.

Adjusting entries are required every time financial statements are prepared.

#The Need of Adjusting Entries

💧To report all revenues earned during the accounting period.

💧To report all expenses incurred to produce the revenues earned in the same accounting period.

💧To accurately report the assets on the balance sheet date. Some assets may have been used up during the accounting period.

💧To accurately report the liabilities on the balance sheet date. (Expenses may have been incurred, but not yet paid.)