Lesson Notes By Weeks and Term - Senior Secondary School 1

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 1

DATE:

TERM: 2nd TERM

TOPIC: THE TRIAL BALANCE 

CONTENT

• Definition of the Trial Balance 

• Uses of the Trial Balance 

• Preparation of the Trial Balance 

• The Trial Balance and Errors in the Books 

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. 

Uses of the Trial Balance 

1. It is used to check the arithmetical accuracy of the entries in the ledgers. 
2. It provides data (figures) used for the preparation of the final accounts 

How to Prepare a Trial Balance 

First balance all the ledger accounts including the Cash Book and the Petty Cash Book. Then list the balances with the debit balances and the credit balances in separate columns of the Trial Balance. The total of the debit balances should equal the total of the credit balances. If the totals are equal, the trial balance agrees. 

The following key points should be noted. 

1. The trial balance is not an account; therefore 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/verify the arithmetical accuracy of postings done in the ledger 
5. The heading of the Trial Balance should read “Trial Balance as at 31st December 2016” 
6. The balances on the accounts in the sales ledger are totaled 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 totaled and the total is entered in the trial balance as Sundry creditor (or Trade Creditors)
8. The balances of accounts shown in the trial balance are not arranged in any specific order. 

EVALUATION

1. State two uses of the Trial Balance 
2. Mention a class of account that would always show: (a) debit balance   (b) credit balance 
3. Simplified and Amplified Financial Accounting Exercise 6, 7 and 8x 

The Trial Balance and Errors 

When the totals of the debit column and the credit column of the Trial Balance agree, it indicates that the double entry bookkeeping is arithmetically correct. 

1. If the trial balance balances: 

When a trial balance balances, it simply means that the total of the debit balances is equal to the total of the credit balances. However, the balancing of the trial balance is not proof that the entries in the ledger accounts are completely free from errors. The Trial Balance will still balance if any of the following errors are made. 

Errors that will not affect the Agreement of the Trial Balance 

• Error of Omission 

This occurs when a transaction has been completely omitted from the accounting records. i.e. the debit entry and the credit entry were not posted e.g. Goods sold for cash N7, 000 was not debited to the cash account and not credited to the sales account.

• Error of Commission 

This occurs when a transaction is posted into a wrong account which belong to the same class as the account to which the posting should have been made. This type of error mostly affect personal accounts i.e. accounts of customers and suppliers e.g. Goods sold on credit to AdebolaN5, 000 debited to Ademola’s account 

• Error of Principle

This occurs when a transaction is posted to a wrong account of a different class with the correct account to which the posting should have been e.g. payment of cash for furniture purchased N10, 000 debited to purchases account. 

• Error of Original entry 

This occurs when the wrong amount is posted in double entry to record a transaction or when a wrong amount is made in a book of prime entry for a transaction.e.g. goods sold for cash N50, 000 was recorded in both the Cash Account and Sales Account as N5, 000. 

• Complete Reversal of Entry

This occur when a transaction is recorded on the wrong side of the ledger for both the debit and credit entries. i.e. an account which should have been debited has been credited, and the account which should have been credited is debited e.g. Payment of N9, 000 received form Gloria is debited to Gloria’s account and credited to Cash Account

• Compensating Errors

This occurs when error(s) on one side of the ledger is completely cancelled out (or offset) by error(s) on the other side of the ledger e.g. Sales Account was overstated by N4, 000 while Rent Account was also overstated by N4, 000

• Error of Duplication of Entries 

This occurs when the double entry records for a transaction is made more than once in the books of account e.g. Sale of goods on credit to AdesuaN7,000 was debited twice in Adesua’sAccount and also credited twice in Sales Account. 

1. If the Trial Balance fails to balance 

When the totals of the debit balances and the credit balances did not agree, it is obvious that an error has been made somewhere. 

NB: Error in accounting terminology is used to signify mistakes made while recording and/or posting financial transactions. Error is not the same as fraud. Fraud is a deliberate effort and/or attempt to change or modify financial information (or records) for someone personal gains to the detriment of others. 

Errors are genuine mistakes that are not deliberate or pre-planned but which occur in the course of recording financial transactions. Errors in accounting are of two types. Those that affects the agreement of the trial balance and those that do not affect the agreement of the trial balance. 

Errors that will affect the Agreement of the Trial Balance 

1. Single entry or Lone entry 
2. Casting errors i.e. overcosting or undercosting of figures 
3. Transposition Errors 
4. Omission of a ledger balance in the Trial Balance 
5. Recording a correct balance of an account in the wrong column of the Trial Balance. 
6. Recording the wrong balance of a ledger account in the Trial Balance. 
7. One-sided duplication of entry.
8. Transfer of wrong totals from the subsidiary books into the ledger.
9. Bringing down a wrong opening balance in a ledger account.

EVALUATION 

1. What is a Trial Balance 
2. Give the format of a Trial Balance with ten items 
3. The agreement of the Trial Balance debit and credit totals does not indicate its entire correctness. Do you agree? Explain your answer

READING ASSIGNMENT 

1. Simplified and Amplified Financial Accounting Page 89 – 105 
2. Business Accounting 1 Page 240 – 246 

GENERAL EVALUATION QUESTION 

1. Business Accounting 1. Exercise 5.10 and 5.12A
2. Simplified and Amplified Financial Accounting Exercise 9, 10X and 11X

WEEKEND ASSIGNMENT 

1. When a transaction is completely left out from the books, it is an error of    A. commission B. omission    C. principle     D. compensation 
2. Which of the following errors will affect the totals of a trial balance   A. compensating error    B. complete reversal of entry    C. error in addition    D. error of original entry 
3. A trial balance is prepared to  A. detect fraud   B. ascertain losses in a trading period    C. determine opening capital   D. test arithmetical accuracy of ledger entries 
4. Where a wrong figure occurs in only one account with the second figure correctly stated, this is an error of  A. transportation   B. compensation    C. omission    D. commission 
5. The payment of N6,000 for electricity was debited to entertainment account. This is an error of   A. principle    B. omission    C. original entry    D. commission 

THEORY

1. Explain six errors that would not affect the agreement of a trial balance 
2. State ten reasons why a trial balance may not balance.