Trial balances
Contents: 6 sections
What a trial balance is
A trial balance is a list of every ledger balance at a date, with debit balances in one column and credit balances in the other. If the double entry has been done correctly the two columns are equal, because every transaction put the same amount on each side.
Which column each item belongs in follows the normal balance of the account:
| Debit column | Credit column |
|---|---|
| Assets | Liabilities |
| Expenses | Income |
| Drawings | Capital |
| Purchases | Sales |
| Sales returns | Purchases returns |
| Discount allowed | Discount received |
| Carriage inwards and outwards | Provision for depreciation |
| Trade receivables | Trade payables |
| Allowance for irrecoverable debts |
The last two entries on the credit side catch people out. Provision for depreciation and the allowance for irrecoverable debts are credit balances even though they relate to assets. They sit against the asset rather than with it, and are deducted from it in the statement of financial position.
What it is for
- It checks the arithmetic of the double entry.
- It collects the balances in one place, ready to prepare the financial statements.
- It locates some errors, because an imbalance proves something is wrong.
That is all it does. It is a checking device, not a financial statement, and it is never published.
What it does not prove
A trial balance that balances does not prove the books are correct. Six kinds of error leave it in agreement, and they are examined constantly:
| Error | What happened |
|---|---|
| Omission | The transaction was left out completely, both sides |
| Commission | Right amount, right type of account, wrong account of that type: a sale to J Smith posted to J Smyth |
| Principle | Right amount, wrong type of account: a new machine debited to repairs |
| Original entry | The wrong amount was used, but the same wrong amount on both sides |
| Reversal of entries | The debit and credit were the right accounts the wrong way round |
| Compensating | Two separate errors of equal size on opposite sides that cancel out |
A useful way to tell commission from principle: commission stays in the right class of account, principle crosses into the wrong class. Both post $600 somewhere wrong; only one of them turns an asset into an expense.
When it does not balance
The difference is put into a suspense account so that a set of draft financial statements can still be produced. The suspense account is a temporary holding figure, not a real asset or liability, and it must be cleared before the final statements are published.
The errors that cause an imbalance are the one-sided ones: a single entry posted, an entry posted twice to the same side, a balance added up wrongly, a balance written into the wrong column, or a figure transposed on one side only.
Transposition errors have a signature worth knowing: the difference is always divisible by 9. Writing $540 as $450 gives a difference of $90, and 90 divided by 9 is 10. If the difference divides by 9, look for two digits swapped.
Common mistakes
- Saying a balanced trial balance proves the accounts are correct.
- Putting provision for depreciation, or the allowance for irrecoverable debts, in the debit column.
- Putting drawings on the credit side because capital is a credit.
- Calling the trial balance a financial statement or including it in published accounts.
- Confusing errors of commission with errors of principle.
- Leaving a suspense account balance in the final statement of financial position.
- Putting carriage outwards on the credit side. Both carriage inwards and carriage outwards are expenses, so both are debits; they simply appear in different parts of the income statement.
Check you have it
Question 1
Which statement about the purpose of a trial balance is correct?
Answer: A.
What the syllabus asks for on this topicSyllabus points
Syllabus points
- Prepare a trial balance from a list of ledger balances.
- Explain the purposes and the limitations of a trial balance.
- Identify the errors that a trial balance does not reveal.
- Explain the use of a suspense account when the trial balance does not agree.
Related CIE 9706 Accounting topics
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