The trial balance

The trial balance

Learning objectives

After you have studied this chapter, you should be able to: l prepare a trial balance from a set of accounts l explain why the debit and credit trial balance totals should equal one another l explain why some of the possible errors that can be made when double entries

are being entered in the accounts do not prevent the trial balance from ‘balancing’ l describe uses for a trial balance other than to check for double entry errors

Introduction

In this chapter, you’ll learn how to prepare a trial balance from the accounts in the accounting books. You’ll discover that the alternate version of the accounting equation can be a useful guide to understanding why a trial balance must balance if all the double entries in the accounts are correct. You’ll also learn that the trial balance is no guarantee that the double entries have all been recorded correctly. Finally, you’ll have the opportunity to do twenty multiple choice questions covering the material in Chapters 1–6.

6.1 Total debit entries == Total credit entries

l for each debit entry there is a credit entry

You’ve learnt that under double entry bookkeeping

l for each credit entry there is a debit entry. Let’s see if you can remember the basics of double entry.

Activity

6.1 What is the double entry for each of the following transactions: (a) Purchase of a new van for £9,000 which was paid in full by cheque

Dr

£ (b) Goods which cost £40 taken out by the owner for her own use

Cr

Dr

Cr

Part 1 l Introduction to double entry bookkeeping All the items recorded in all the accounts on the debit side should equal in total all the items

recorded on the credit side of the accounts.

Activity

6.2 Do you remember the alternate form of the accounting equation you were shown in Chapter 1? What does it tell you has happened when it does not

balance?

We need to check that for each debit entry there is also an equal credit entry. In order to check that there is a matching credit entry for every debit entry, we prepare something called a trial balance .

A type of trial balance could be drawn up by listing all the accounts and then entering the total of all the debit entries in each account in one column and the total of all the credit entries in each account into another column. Finally, you would add up the two columns of figures and ensure they are equal. Using the worked example in Section 3.8, this trial balance would be:

Trial Balance as at 31 May 20X9

Returns outwards

Returns inwards

D Small

A Lyon & Son

D Hughes

M Spencer

6.2 Total debit balances == Total credit balances

The method described in Section 6.1 is not the accepted method of drawing up a trial balance , but it is the easiest to understand at first. The form of trial balance used by accountants is a list of

account balances arranged according to whether they are debit balances or credit balances.

Let’s balance off the accounts you saw in Section 3.8. The new entries are highlighted so that you can see the entries required to arrive at the closing balances that are used in the trial balance.

You may find it worthwhile trying to balance these accounts yourself before reading any further.

May 31 Balance c/d 994 ==

1 D Small

2 A Lyon & Son

31 A Lyon & Son

994 June

1 Balance b/d

Chapter 6 l The trial balance

Sales

20X9

£ May 31 Balance c/d

5 D Hughes

6 M Spencer 45

490 June 11 Balance b/d

Returns Outwards

20X9

£ May 31 Balance c/d

20X9

15 May 10 D Small

June

1 Balance b/d 15

Returns Inwards

20X9

£ May 19 M Spencer

20X9

16 May 31 Balance c/d 16 June

1 Balance b/d

D Small

20X9

£ May 10 Returns outwards

A Lyon & Son

20X9

£ May 31 Balance c/d

1 Balance b/d 624

D Hughes

60 May 30 Cash

M Spencer

6 Sales 45 May 19 Returns inwards 16

31 Balance c/d 29 45 45

June 1 Balance b/d

Cash

20X9

£ May 11 Sales

May 12 Purchases

22 D Small

30 D Hughes

31 Balance c/d 90 445

June 1 Balance b/d

Part 1 l Introduction to double entry bookkeeping

If you tried to do this before looking at the answer, be sure you understand any mistakes you made before going on.

If the trial balance was drawn up using the closing account balances, it would appear as follows:

Trial Balance as at 31 May 20X9

Returns outwards

Returns inwards

A Lyon & Son

M Spencer

The trial balance always has the date of the last day of the accounting period to which it relates. It is a snapshot of the balances on the ledger accounts at that date.

Just like the trial balance you saw in Section 6.1, the two sides of this one also ‘balance’. However, the totals are lower. This is because the £220 in D Small’s account, £60 in D Hughes’ account, £16 in M Spencer’s account and £355 in the cash account have been cancelled out from each side of these accounts by taking only the balances instead of the totals. As equal amounts have been cancelled from each side, £651 in all, the new totals should still equal one another, as in fact they do at £1,129. (You can verify this if you subtract the new total of £1,129 from the previous one of £1,780. The difference is £651 which is the amount cancelled out from both sides.)

This form of trial balance is the easiest to extract when there are more than a few transactions during the period and it is the one accountants use.

Note that a trial balance can be drawn up at any time. However, it is normal practice to prepare one at the end of an accounting period before preparing a ‘profit and loss account’ and balance sheet. The profit and loss account shows what profit has been earned in a period. (You will be looking at profit and loss accounts in the next chapter.) The balance sheet shows what the assets and liabilities of a business are at the end of the period.

Go back to Chapter 1 to refresh your understanding of the balance sheet.

Activity

6.3 What advantages are there in preparing a trial balance when you are about to prepare a profit and loss account and balance sheet?

As you’ve just learnt from Activity 6.3 trial balances are not just done to find errors.

6.3 Trial balances and errors

Many students new to accounting assume that when the trial balance ‘balances’, the entries in the accounts must be correct. This assumption is incorrect. While it means that certain types of error have not been made (such as forgetting to enter the credit side of a transaction), there are

Chapter 6 l The trial balance several types of error that will not affect the balancing of a trial balance – omitting a transaction

altogether, for example. Examples of the errors which would be revealed, provided there are no compensating errors which cancel them out, are addition errors, using one figure for the debit entry and another figure for the credit entry, and entering only one side of a transaction.

We shall consider addition errors in greater detail in Chapter 32.

Activity

6.4 If a trial balance fails to agree, what steps would you take in order to find the cause of the difference?

6.4 Multiple choice self-test questions

A growing practice of examining boards is to set multiple choice questions in accounting. In fact, this has become so popular with examiners that all the largest professional accounting bodies now use them, particularly in their first level examinations.

Multiple choice questions give an examiner the opportunity to cover large parts of the syl- labus briefly, but in detail. Students who omit to study areas of the syllabus will be caught out by an examiner’s use of multiple choice questions. It is no longer possible to say that it is highly probable a certain topic will not be tested – the examiner can easily cover it with a multiple choice question.

We have deliberately included sets of twenty multiple choice questions at given places in this textbook, rather than a few at the end of each chapter. Such questions are relatively easy to answer a few minutes after reading the chapter. Asking the questions later is a far better test of your powers of recall and understanding. It also gives you practice at answering questions cover- ing a range of topics in one block, as in an examination.

Each multiple choice question has a ‘stem’ (a part which poses the problem), a ‘key’ (which is the one correct answer), and a number of ‘distractors’, i.e. incorrect answers. The key plus the distractors are known as the ‘options’.

If you do not know the answer, you should guess. You may be right by chance, or you may remember something subconsciously. In any event, unless the examiner warns otherwise, you will be expected to guess if you don’t know the answer.

Read through the Learning Outcomes for this chapter and then attempt Multiple Choice Set 1. Answers to all the multiple choice questions are given in Appendix 2 at the end of this book.

Learning outcomes

You should now have learnt:

1 How to prepare a trial balance.

2 That trial balances are one form of checking the accuracy of entries in the accounts.

3 That errors can be made in the entries to the accounts that will not be shown up by the trial balance.

4 That the trial balance is used as the basis for preparing profit and loss accounts and balance sheets.

Part 1 l Introduction to double entry bookkeeping

Answers to activities

6.1 (a) Dr Van account

Cr Bank account

(b) Dr Drawings account

Cr Purchases account

6.2 The alternate form of the accounting equation is Assets = Capital + Liabilities. All the accounts with debit balances are assets and all the accounts with credit balances are either capital or liabilities. This means that so long as you enter a debit for every credit, the alternate accounting equation must always balance. If the alternate accounting equation does not balance, you’ve made an error somewhere, either in your double entries, or in your arithmetic within the individual accounts. Virtually all occurrences where the accounting equation does not balance that arise in practice are the result of double entry errors.

6.3 Firstly, you can verify whether the total of the debit balances equals the total of the credit balances. They need to be equal, or your profit and loss account and balance sheet will be incorrect and your balance sheet will not balance. (That is, the accounting equation will not balance.) Secondly, you need to know what the balance is on every account so that you can enter the appropriate figures into the profit and loss account and balance sheet. If you don’t prepare a trial balance, you will find it much more difficult to prepare these two accounting statements.

6.4 You need to check each entry to verify whether or not it is correct but firstly, it is best to start by checking that the totals in the total balance have been correctly summed. Then, check that no account has been omitted from the trial balance. Then, check each account in turn.

Multiple choice questions: Set 1

Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). You should read each question and then decide which choice is best, either (A) or (B) or (C) or (D). Write down your answers on a separate piece of paper. You will then be able to redo the set of questions later without having to try to ignore your answers.

MC1 Which of the following statements is incorrect? (A) Assets – Capital = Liabilities

(B) Liabilities + Capital = Assets (C) Liabilities + Assets = Capital

(D) Assets – Liabilities = Capital

MC2 Which of the following is not an asset? (A) Buildings

(B) Cash balance (C) Debtors (D) Loan from K Harris

MC3 Which of the following is a liability? (A) Machinery

(B) Creditors for goods (C) Motor Vehicles (D) Cash at Bank

Chapter 6 l The trial balance

MC4 Which of the following is incorrect?

Assets Liabilities

MC5 Which of the following statements is correct?

Effect upon Assets

Liabilities

(A) We paid a creditor by cheque

−Bank

−Creditors

(B) A debtor paid us £90 in cash

+Cash

+Debtors

(C) J Hall lends us £500 by cheque

+Bank

−Loan from Hall

(D) Bought goods on credit

+Stock

+Capital

MC6 Which of the following are correct?

Accounts To record

Entry in the account

(i) Assets an increase

Debit

a decrease

Credit

(ii) Capital an increase

Debit

a decrease

Credit

(iii) Liabilities an increase

Credit

a decrease

Debit

(A) (i ) and (ii ) (B) (ii ) and (iii ) (C) (i ) and (iii ) (D) (i ), (ii ) and (iii )

MC7 Which of the following are correct?

Account to be credited (i)

Account to be debited

Bought office furniture for cash

Office furniture

Cash

(ii ) A debtor, P Sangster, pays us by cheque

P Sangster (iii ) Introduced capital by cheque

(iv) Paid a creditor, B Lee, by cash

B Lee

Cash

(A) (i ), (ii ) and (iii ) only (B) (ii ), (iii ) and (iv) only (C) (i ), (ii ) and (iv) only (D) (i ) and (iv) only

MC8 Which of the following are incorrect?

Account to be credited (i)

Account to be debited

Sold van for cash

Cash

Van

(ii) Returned some of Office Equipment to

Suppliers Ltd Suppliers Ltd (iii) Repaid part of loan from C Charles

Office Equipment

Loan from C Charles

Bank

by cheque (iv) Bought machinery on credit from

Machinery Betterways Ltd

Betterways Ltd

Part 1 l Introduction to double entry bookkeeping

‘ (A) (ii) and (iv) only

(B) (iii) and (iv) only (C) (ii ) and (iii ) only (D) (i ) and (iii ) only

MC9 Which of the following best describes the meaning of ‘Purchases’? (A) Items bought

(B) Goods bought on credit (C) Goods bought for resale (D) Goods paid for

MC10 Which of the following should not be called ‘Sales’? (A) Office fixtures sold

(B) Goods sold on credit (C) Goods sold for cash (D) Sale of item previously included in ‘Purchases’

MC11 Of the following, which are correct?

Account to be credited (i)

Account to be debited

Sales (ii ) S Johnson returns goods to us

Goods sold on credit to R Williams

R Williams

S Johnson (iii ) Goods bought for cash

Returns inwards

Purchases (iv) We returned goods to A Henry

Cash

Returns inwards (A) (i ) and (iii ) only

A Henry

(B) (i ) and (ii ) only (C) (ii ) and (iv) only (D) (iii ) and (iv) only

MC12 Which of the following are incorrect?

Account to be credited (i )

Account to be debited

Sales (ii ) Goods bought on credit from T Carter

Goods sold for cash

Cash

T Carter (iii ) Goods returned by us to C Barry

Purchases

Returns outwards (iv) Van bought for cash

C Barry

Cash (A) (i ) and (iii ) only

Purchases

(B) (iii ) only (C) (ii ) and (iv) only (D) (iv) only

MC13 Given the following, what is the amount of Capital? Assets: Premises £20,000; Stock £8,500; Cash £100. Liabilities: Creditors £3,000; Loan from A Adams £4,000

(A) £21,100 (B) £21,600 (C) £32,400 (D) £21,400

MC14 Which of the following is correct? (A) Profit does not alter capital

(B) Profit reduces capital (C) Capital can only come from profit (D) Profit increases capital

Chapter 6 l The trial balance

MC15 Which of the following are correct?

Account to be credited (i )

Account to be debited

Commission received (ii ) Paid rates by cash

Received commission by cheque

Bank

Cash (iii ) Paid motor expenses by cheque

Rates

Bank (iv) Received refund of insurance by cheque

Motor expenses

Bank (A) (i ) and (ii ) only

Insurance

(B) (i ), (ii ) and (iii ) only (C) (ii ), (iii) and (iv) only (D) (i ), (ii ) and (iv) only

MC16 Of the following, which are incorrect?

Account to be credited (i )

Account to be debited

Sales (ii ) Bought stationery by cheque

Sold van for cash

Cash

Bank (iii ) Took cash out of business for private use

Stationery

Drawings (iv) Paid general expenses by cheque

Cash

Bank (A) (ii ) and (iv) only

General expenses

(B) (i ) and (ii ) only (C) (i ) and (iii ) only (D) (ii ) and (iii ) only

MC17 What is the balance on the following account on 31 May 20X5?

C De Freitas

May 17 Cash

(A) A credit balance of £395 (B)

A debit balance of £380 (C)

A debit balance of £395 (D) There is a nil balance on the account

MC18 What would have been the balance on the account of C De Freitas in MC17 on 19 May 20X5?

(A) A debit balance of £265 (B)

A credit balance of £95 (C)

A credit balance of £445

(D) A credit balance of £265 MC19 Which of the following best describes a trial balance?

(A) Shows the financial position of a business (B) It is a special account (C) Shows all the entries in the books (D) It is a list of balances on the books

MC20 Is it true that the trial balance totals should agree? (A) No, there are sometimes good reasons why they differ

(B) Yes, except where the trial balance is extracted at the year end (C) Yes, always (D) No, because it is not a balance sheet

Part 1 l Introduction to double entry bookkeeping

Review questions

6.1 You are to enter up the necessary accounts for the month of May from the following infor- mation relating to a small printing firm. Then balance off the accounts and extract a trial balance as at 31 May 20X6.

20X6 May

1 Started in business with capital in cash of £800 and £2,200 in the bank.

== 2 Bought goods on credit from the following persons: J Ward £610; P Green £214; M Taylor £174; S Gemmill £345; P Tone £542.

== 4 Sold goods on credit to: J Sharpe £340; G Boycott £720; F Titmus £1,152. ==

6 Paid rent by cash £180. ==

9 J Sharpe paid us his account by cheque £340. ==

10 F Titmus paid us £1,000 by cheque. ==

12 We paid the following by cheque: M Taylor £174; J Ward £610. ==

15 Paid carriage by cash £38. ==

18 Bought goods on credit from P Green £291; S Gemmill £940. ==

21 Sold goods on credit to G Boycott £810. ==

31 Paid rent by cheque £230.

6.2 Enter the following transactions of an antiques shop in the accounts and extract a trial bal- ance as at 31 March 20X6.

20X6 March

1 Started in business with £8,000 in the bank. ==

2 Bought goods on credit from the following persons: L Frank £550; G Byers £290; P Lee £610.

== 5 Cash sales £510. ==

6 Paid wages in cash £110. ==

7 Sold goods on credit to: J Snow £295; K Park £360; B Tyler £640. ==

9 Bought goods for cash £120. ==

10 Bought goods on credit from: G Byers £410; P Lee £1,240. ==

12 Paid wages in cash £110. ==

13 Sold goods on credit to: K Park £610; B Tyler £205. ==

15 Bought shop fixtures on credit from Stop Ltd £740. ==

17 Paid G Byers by cheque £700. ==

18 We returned goods to P Lee £83. ==

21 Paid Stop Ltd a cheque for £740. ==

24 B Tyler paid us his account by cheque £845. ==

31 Bought a van paying by cheque £6,250.

27 We returned goods to L Frank £18. ==

30 G Prince lent us £1,000 by cash. ==

6.3A Record the following details relating to a carpet retailer for the month of November 20X7 and extract a trial balance as at 30 November 20X7:

20X7 Nov

1 Started in business with £15,000 in the bank. ==

3 Bought goods on credit from: J Small £290; F Brown £1,200; T Rae £610; R Charles £530.

== 5 Cash sales £610. ==

6 Paid rent by cheque £175. ==

7 Paid business rates by cheque £130. ==

11 Sold goods on credit to: T Potts £85; J Field £48; T Gray £1,640. ==

17 Paid wages by cash £290. ==

18 We returned goods to: J Small £18; R Charles £27.

Chapter 6 l The trial balance

== 19 Bought goods on credit from: R Charles £110; T Rae £320; F Jack £165. ==

20 Goods were returned to us by: J Field £6; T Potts £14. ==

21 Bought van on credit from Turnkey Motors £4,950. ==

23 We paid the following by cheque: J Small £272; F Brown £1,200; T Rae £500. ==

25 Bought another van, paying by cheque immediately £6,200. ==

26 Received a loan of £750 cash from B. Bennet. ==

28 Received cheques from: T Potts £71; J Field £42. ==

30 Proprietor brings a further £900 into the business, by a payment into the business bank account.

6.4A Record the following transactions for the month of January of a small finishing retailer, balance off all the accounts, and then extract a trial balance as at 31 January 20X8:

20X8 Jan

1 Started in business with £10,500 cash. ==

2 Put £9,000 of the cash into a bank account. ==

3 Bought goods for cash £550. ==

4 Bought goods on credit from: T Dry £800; F Hood £930; M Smith £160; G Low £510.

== 5 Bought stationery on credit from Buttons Ltd £89. ==

6 Sold goods on credit to: R Tong £170; L Fish £240; M Singh £326; A Tom £204. ==

8 Paid rent by cheque £220. ==

10 Bought fixtures on credit from Chiefs Ltd £610. ==

11 Paid salaries in cash £790. ==

14 Returned goods to: F Hood £30; M Smith £42. ==

15 Bought van by cheque £6,500. ==

16 Received loan from B Barclay by cheque £2,000. ==

18 Goods returned to us by: R Tong £5; M Singh £20. ==

21 Cash sales £145. ==

24 Sold goods on credit to: L Fish £130; A Tom £410; R Pleat £158. ==

26 We paid the following by cheque: F Hood £900; M Smith £118. ==

29 Received cheques from: R Pleat £158; L Fish £370. ==

30 Received a further loan from B Barclay by cash £500. ==

30 Received £614 cash from A Tom.

6.5 Note, this question should not be attempted until cash discounts and trade discounts have been covered (see Chapters 13 and 14).

On 1 October 20X9, the owner of the USS Enterprise, Mr Kirk, decided that he will boldly go and keep his records on a double entry system. His assets and liabilities at that date were:

Fixtures and equipment

Stock including weapons

Balance at Universe Bank

Cash 375 Creditors – Spock

Kirk’s transactions during October were as follows: 1 Sold faculty phasers, original cost £500, to Klingon Corp, for cash £5,000

2 Bought Photon Torpedoes (weapons), on credit from Central Council £2,500 3 Sold Stocks to Aardvarks, original cost £250, on credit, £1,500 4 Bought Cloaking Device (Fixture and Fittings) from Klingon Corp £3,500 5 Paid the balance owed to Spock at 1 October less a 5% cash discount 6 Paid Central Council full amount due by cheque 7 Received full amount due from Aardvarks by cheque

Part 1 l Introduction to double entry bookkeeping

8 Paid Klingon Corp by cheque after deducting 20% trade discount 9 Paid, by bankers order, £10,000 for repairs to Enterprise following disagreement over amount

owing to Klingon Corp and faculty phasers. Required:

Open Enterprise’s ledger accounts at 1 October, record all transactions for the month, balance the ledger accounts, and prepare a trial balance as at 31 October.

You can find a range of additional self-test questions, as well as material to help you with your studies, on the website that accompanies this book at www.pearsoned.co.uk/wood

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