Cambridge O Level7707

The trial balance

Accounting 7707 Chapter Notes

What this chapter covers

The trial balanceCorrections of errorsBank reconciliationControl accounts
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In this chapter

  1. 1What is a Trial Balance?
  2. 2How to Prepare a Trial Balance
  3. 3When the Trial Balance Doesn't Balance
  4. 4The Six 'Hidden' Errors

1. What is a Trial Balance?

A trial balance is a list of all the accounts in the general ledger and their balances at a specific point in time. Its main job is to check the arithmetical accuracy of the double-entry bookkeeping system. After recording all transactions, the total of all debit balances in the ledger should equal the total of all credit balances. A trial balance proves this by listing all debit balances in one column and all credit balances in another. If the two columns total to the same amount, the trial balance 'balances'.

Total Debits = Total Credits

Key term

Trial Balance: A statement that lists all ledger account balances in debit and credit columns to verify the arithmetical equality of debits and credits.

Examiner insight

Examiners reward students who understand that a trial balance is a 'proof of arithmetic' and not a 'proof of correctness'.

Common pitfall

Thinking that a balanced trial balance means no errors have been made. This is incorrect, as several types of errors can exist even when totals agree.

Worked example 15 marks

For each of the following accounts, state whether its normal balance would appear in the Debit (Dr) or Credit (Cr) column of a trial balance:a) Sales,b) Equipment,c) Bank Overdraft,d) Drawings,e) Capital.

  1. 1

    To remember which accounts have which balance, use the DEAD CLIC mnemonic.

  2. 2

    DEAD: Debits are Expenses, Assets, and Drawings.

  3. 3

    CLIC: Credits are Liabilities, Income (Revenue), and Capital.

  4. 4

    a) Sales is Income (Revenue), so it has a Credit balance.

  5. 5

    b) Equipment is an Asset, so it has a Debit balance.

  6. 6

    c) Bank Overdraft is a Liability (money owed to the bank), so it has a Credit balance.

  7. 7

    d) Drawings are a reduction of owner's equity, so they have a Debit balance.

  8. 8

    e) Capital is the owner's investment, so it has a Credit balance.

Recap

  • A trial balance checks if total debits equal total credits.
  • It is prepared on a specific date from ledger account balances.
  • Its main purpose is to check the arithmetical accuracy of the ledger.
  • A balanced trial balance does not guarantee the accounts are error-free.
  • Use the DEAD CLIC rule to remember balance types: Debit = Expenses, Assets, Drawings; Credit = Liabilities, Income, Capital.

Quick check

  1. State the primary purpose of preparing a trial balance.1 mark

2. How to Prepare a Trial Balance

Preparing a trial balance is a straightforward process once the ledger accounts are balanced. Follow these steps: 1. List all the ledger account titles. 2. For each account, take its closing balance (balance c/d). 3. Enter debit balances in the debit column and credit balances in the credit column. Remember DEAD CLIC (Debits: Expenses, Assets, Drawings; Credits: Liabilities, Income, Capital). 4. Add up the debit column. 5. Add up the credit column. 6. Check that the two totals are equal. If they are not, there is an error that must be found.

Key term

Ledger Balance: The final amount in a ledger account, calculated as the difference between the total debits and total credits in that account.

Examiner insight

Clarity and neatness in presentation are important. Always include a proper heading: 'Trial Balance as at [Date]' and ensure columns are clearly labelled 'Debit' and 'Credit'.

Common pitfall

Incorrectly placing a balance in the wrong column. For example, putting Purchases Returns (a credit balance) in the debit column is a common mistake.

Fun fact

The double-entry system, checked by the trial balance, is over 500 years old! It was first fully described by Italian friar Luca Pacioli in 1494 in his book 'Summa de arithmetica, geometria, proportioni et proportionalita'.

Worked example 16 marks

The following balances were extracted from the books of A. Trader on 31 December 2023. Prepare a trial balance. Sales $50,000; Purchases $30,000; Equipment $15,000; Bank $5,000; Capital $10,000; Trade Payables $8,000; Trade Receivables $18,000.

  1. 1

    Step 1: Create the heading for the trial balance: A. Trader, Trial Balance as at 31 December 2023.

  2. 2

    Step 2: List each account and place its balance in the correct column (Debit or Credit) using DEAD CLIC.

  3. 3

    Sales (Income) -> Credit

  4. 4

    Purchases (Expense) -> Debit

  5. 5

    Equipment (Asset) -> Debit

  6. 6

    Bank (Asset) -> Debit

  7. 7

    Capital (Capital) -> Credit

  8. 8

    Trade Payables (Liability) -> Credit

  9. 9

    Trade Receivables (Asset) -> Debit

  10. 10

    Step 3: Construct the trial balance table and total the columns.

  11. 11

    Account | Debit ($) | Credit ($)

  12. 12

    Sales | | 50,000

  13. 13

    Purchases | 30,000 |

  14. 14

    Equipment | 15,000 |

  15. 15

    Bank | 5,000 |

  16. 16

    Capital | | 10,000

  17. 17

    Trade Payables | | 8,000

  18. 18

    Trade Receivables | 18,000 |

  19. 19

    Total | 68,000 | 68,000

  20. 20

    Step 4: Check that the debit total equals the credit total. Here, $68,000 = $68,000, so the trial balance balances.

Recap

  • First, balance all ledger accounts to find the closing balances.
  • List all account names in the trial balance.
  • Place debit balances in the debit column and credit balances in the credit column.
  • Total both columns to ensure they are equal.
  • Always include a heading with the business name and date.

Quick check

  1. In which column of the trial balance would a 'Provision for Depreciation' account appear?1 mark
  2. In which column of the trial balance would 'Carriage Inwards' appear?1 mark

3. When the Trial Balance Doesn't Balance

If the debit and credit column totals are not equal, it's a clear signal that one or more errors have occurred in the bookkeeping process. These are errors that disrupt the equality of debits and credits. Common types include:

  1. Single-sided entry: A debit was recorded without a corresponding credit, or vice-versa.
  2. Unequal posting: A transaction was recorded with a different amount for the debit and credit (e.g., debit $100, credit $10).
  3. Transposition error: Digits in a figure are swapped around (e.g., $54 written as $45). The difference is always divisible by 9.
  4. Arithmetical errors: Simple mistakes in adding up ledger accounts or the trial balance columns themselves.

Difference = |Total Debits - Total Credits|

Key term

Suspense Account: A temporary account used to hold the difference in a trial balance, allowing it to balance while the errors are located and corrected.

Examiner insight

When asked to find an error, a good first step is to calculate the difference between the totals. Then, check if a transaction of that exact amount has been omitted or if half that amount has been posted to the wrong side.

Common pitfall

Assuming the difference itself is the value of the error. Often, the difference is a clue. For example, if the difference is $180, the error could be a $90 item posted to the wrong side.

Worked example 13 marks

A bookkeeper prepared a trial balance. The debit total was $45,200 and the credit total was $45,020. Calculate the difference and suggest one specific error that could have caused this.

  1. 1

    Step 1: Calculate the difference between the two totals.

  2. 2

    Difference = $45,200 (Dr) - $45,020 (Cr) = $180. The debit side is $180 higher than the credit side.

  3. 3

    Step 2: Consider what could cause this specific difference. We need to find an error that would make the debit total $180 too high or the credit total $180 too low.

  4. 4

    Step 3: A common cause is posting a balance to the wrong side. Let's check half the difference: $180 / 2 = $90.

  5. 5

    Step 4: An error of $90 posted to the wrong side would cause a total difference of $180. In this case, a credit balance of $90 (e.g. sales returns) being incorrectly listed in the debit column would increase the debit total by $90 and decrease the credit total by $90, making the debit side $180 higher.

  6. 6

    Possible Answer: A credit balance of $90 was incorrectly entered in the debit column.

Recap

  • An imbalanced trial balance means an error has definitely occurred.
  • Common causes are single entries, incorrect amounts, or calculation mistakes.
  • A difference divisible by 9 suggests a transposition error (e.g., 27 instead of 72).
  • A difference divisible by 2 suggests an amount was posted to the wrong column.
  • A suspense account is used to temporarily balance the books while errors are found.

Quick check

  1. The debit column of a trial balance totals $15,600 and the credit column totals $15,420. What is the difference, and what might an error of half this difference indicate?2 marks

4. The Six 'Hidden' Errors

Frustratingly, a perfectly balanced trial balance can still contain significant errors. This happens when an error is made that still satisfies the 'debit equals credit' rule. There are six main types of these 'hidden' errors, often remembered by the mnemonic 'POOCC C'. The six errors are: Principle, Omission, Original Entry, Commission, Compensating, and Complete Reversal.

Key term

Error of Principle: An error where a transaction is posted to the wrong class of account, violating the principles of accounting, such as treating a capital expenditure as a revenue expenditure.

Examiner insight

Examiners frequently test the error of principle, so be sure you can distinguish between capital and revenue expenditure.

Common pitfall

Confusing an Error of Commission with an Error of Principle. Commission is the right type of account but wrong person/item (e.g., two different trade receivables). Principle is the wrong type of account (e.g., asset vs. expense).

Worked example 16 marks

For each scenario, identify the type of error made.(a) A cash sale of $200 was not recorded anywhere in the books.(b) A payment for motor repairs of $500 was debited to the Motor Vehicles (asset) account.(c) A credit sale to 'T. Jones' was correctly recorded, but was debited to the account of 'P. Jones'.

  1. 1

    (a) This is an Error of Omission. The entire transaction has been completely left out of the accounting records. Both the debit (to cash) and the credit (to sales) are missing, so the trial balance still balances.

  2. 2

    (b) This is an Error of Principle. An expense (motor repairs) has been incorrectly treated as the purchase of an asset (motor vehicles). The accounting principle of distinguishing between capital and revenue expenditure has been broken.

  3. 3

    (c) This is an Error of Commission. The transaction has been posted to the correct type of account (a trade receivable), but the wrong specific person's account. The amount and class of account are correct, but it's in the wrong individual ledger.

Recap

  • Some errors do not cause the trial balance to disagree.
  • An Error of Omission is when a transaction is completely missed out.
  • An Error of Commission is posting to the correct type of account, but the wrong specific account.
  • An Error of Principle is posting to the wrong type of account, breaking an accounting rule.
  • An Error of Original Entry is using the wrong amount from the start.
  • A Complete Reversal of Entries swaps the debit and credit accounts.
  • A Compensating Error is when two separate errors cancel each other out.

Quick check

  1. Buying a new computer for the office was debited to the 'Office Stationery' account. What type of error is this?1 mark
  2. A sales invoice for $210 was entered in the sales day book as $120 and posted as such. What type of error is this?1 mark

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define 'Trial Balance' and state its main purpose.2 marks
  2. A payment for machinery repairs has been debited to the machinery account in error. Name the type of error and explain why it would not be revealed by a trial balance.3 marks
  3. The following balances are from the books of S. Singh at 31 March 2024. Prepare the trial balance. Capital $30,000; Drawings $5,000; Office Furniture $8,000; Bank Overdraft $1,500; Revenue $65,000; Purchases $42,000; Trade Payables $4,000; Trade Receivables $6,000; Rent Expense $9,500.8 marks
  4. Explain why the closing inventory is not usually included in the trial balance.2 marks
  5. A bookkeeper debited a cash sale to the Sales account and credited the Cash account. Name this error and state one other error that does not affect the trial balance totals.2 marks
  6. A trial balance fails to agree. The debit total is $88,400 and the credit total is $87,860. State two different possible errors that could account for this difference.4 marks
  7. Distinguish clearly between an error of commission and an error of principle, using an example for each.4 marks
  8. The trial balance of Z Ltd at 31 December has the following balances: Revenue $150,000; Purchases $90,000; Non-current assets $75,000; Trade receivables $20,000; Trade payables $15,000; Bank loan $10,000; Expenses $18,000; Drawings $12,000. Calculate the closing Capital figure.5 marks
  9. State two uses and two limitations of a trial balance.4 marks
  10. An invoice for the purchase of goods on credit from M. Ali for $350 was completely omitted from the books. A cash payment of $120 for electricity was correctly credited to the bank account but was not debited to any other account. Explain the effect of these two errors on the trial balance totals.3 marks

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