3.1 The trial balance
Uses of a Trial Balance
Check Accuracy: Ensures that total debits equal total credits, verifying that entries are mathematically correct.
Prepare Financial Statements: Serves as a basis for preparing the income statement and balance sheet.
Error Detection: Helps identify some types of errors, like posting errors or double entries.
Summarizes Accounts: Provides a summary of all ledger accounts, making it easier to review financial data.
Facilitates Adjustments: Makes it easier to spot where end-of-period adjustments are needed.
Limitations of a Trial Balance
Cannot Detect All Errors: Does not find errors of omission (missing entries), errors of commission (wrong accounts), or errors where the same amount is wrong on both sides.
Incomplete Financial Picture: Only shows account balances, not the full financial health of the business.
Mathematical Focus: Ensures debits equal credits but doesn't check if the transactions themselves are correct.
No Non-financial Information: Lacks important non-financial data, like market conditions or employee performance.
Static Snapshot: Only provides information for a specific date, not over time.
Preparation Errors: Mistakes in preparing the trial balance can lead to incorrect conclusions.
Prepare a trial balance from a given list of balances and amend a trial balance which contains errors
Errors not revealed by the Trial Balance
The Trial Balance will not reveal any errors which have been made in both accounts involved in the double entry or where the same error is made in a debit and a credit account
The Trial Balance will balance but it is concealing errors which have been made
When a Trial Balance balances it does not mean there are no mistakes 🤯
lets explore:
1- A document may have been misplaced and the transaction was never entered at all
This is known as an error of OMISSION i.e. it was missed out completely
To correct an error of OMISSION simply enter the transaction in the ledger as you should have done
Example – An invoice from John for £100 of goods was omitted from the books
Solution –
2- A Trial Balance will still balance even when you made entries in the wrong customer’s account
This is an error of COMMISSION
Example – P John paid us a cheque for £200. This was entered in B John’s account by mistake
Solution –
Credit P John A/c £200 (as you should have done) and Debit B John A/c £200 (to take out the error in B John’s account)
3- When you make an entry in the wrong CLASS of account this is an error of PRINCIPLE
Example – The purchase of spare parts worth £300 for Motor Vehicles was entered in the Motor Vehicles Account instead of Motor Vehicle Expenses Account
Solution –
Credit the Motor Vehicles A/c (to remove it) and Debit the Motor Vehicle Expenses A/c (to enter where it belongs)
4-Two wrongs don’t make a right so when 2 separate errors cancel each other out, the Trial Balance will balance but the errors need to be sorted.
These are referred to as COMPENSATING errors.
Example – Both Purchases and Revenue A/c were overstated/overcast/over added by £500
Solution –
Credit Purchases A/c £500 and Debit Revenue A/c £500 (this will restore both balances to the correct figure)
5-When the wrong figure was taken from the document and entered throughout the accounts, the Trial Balance will still balance
This is an error of ORIGINAL ENTRY
Example – A cheque from ABC Co for £200 was entered throughout as £20
Solution –
Debit Bank A/c £180 and Credit ABC Co A/c £180 (this restores both accounts to the correct value)
6-When the correct accounts are used but the double entry in them is the wrong way round
This is known as a COMPLETE REVERSAL
Example – Wages of £300 paid by cheque was Debited in the bank and Credited in Wages
Solution –
Debit Wages A/c £600 (£300 to undo the wrong credit entry and £300 to enter correctly) and Credit Bank A/c £600 (£300 to removed wrong debit entry and £300 to enter correctly)
