Discuss the two forms of trial balances. Give the cons and pros of the two.
Trial balance is referred as the total of the accounts on the debit and credit side. It is a summary of balances of all accounts recorded in the ledger.
Trial balance does not prove that transactions have been correctly analyzed and recorded in the proper account. This proves only one aspect of the ledger; that is the equity of debits and credits. This report summarizes the debit and credit entries of each account in the General Ledger.
The trial balance has two forms. One is the trial balance of balances and the trial balance of totals. In the trial balance of balances, the listing of the debit and credit balances of each account in the ledger that are remaining open after footing has been done. While in the trial balance of totals, both the debit and credit entries of the General Ledger will appear in the listing including closed accounts (debit is equal to credit). The trial balance of totals is helpful in the reconstruction of accounts.
The two forms of trial balance have advantages and disadvantages. The trial balance has the following advantages and objectives.
1. It ensures that the transactions recorded in the books of accounts have identical debit and credit amount.
2. The balance of each ledger account has been computed correctly.
3. The balance of each and every ledger account has been transferred accurately and on the correct side of the sheet on which trial balance has been prepared.
4. The debit and the credit columns of trial balance have been added up correctly.
5. Preparation of final accounts is not possible without preparing trial balance first.
6. Agreed trial balance is a prima facie evidence of the arithmetical accuracy of the accounting books maintained.
7. Errors which are revealed by preparing trial balance (listed below) are rectified even before the preparation of final accounts.
Also, it has disadvantages especially when errors and omission take place. Errors and omission are very common to occur because of the volume of works to be done which may result a trial balance to be still in balance or out of balance.
If the trial balance is not in balance, then an error has been made somewhere in the accounting process. The following is listing of common errors that would result in an unbalanced trial balance; this listing can be used to assist in isolating the cause of the imbalance.
1. Summation error for the debits and credits of the trial balance
2. Error transferring the ledger account balances to the trial balance columns
* Error in numeric value
* Error in transferring a debit or credit to the proper column
* Omission of an account
* Error in numeric value
* Error in transferring a debit or credit to the proper column
* Omission of an account
3. Error in the calculation of a ledger account balance
4. Error in posting a journal entry to the ledger
* Error in numeric value
* Error in posting a debit or credit to the proper column
5. Errors in journal entry
* Error in a numeric value
* Omission of part of a compound journal entry
* Error in numeric value
* Error in posting a debit or credit to the proper column
5. Errors in journal entry
* Error in a numeric value
* Omission of part of a compound journal entry
What is posting? In what books of accounts this is being done?
Posting to the ledger is considered as the second step of the accounting process. It is the process of transferring entries from the journal to the ledger. In accounting terms the word "post" means to record a transaction or adjustment to the correct accounts, assigning a debit to one account and an offsetting credit to another. To post is to summarize all journal entries and transfer them to the general ledger accounts. The action of recording a debit or credit in the general ledger is referred to as posting. The posting of a journal entry to the general ledger accounts is a purely mechanical process using information already in the journal entry and requiring no additional analysis. The posting is done in the General Ledger.
What is “cross-referencing” or “cross indexing”? Explain its importance.
Cross-referencing or cross-indexing is the process wherein the ledger account number in the posting reference column (or folio) of the journal and the journal page number in the posting reference column (or folio) of the ledger account are positioned. With the use of cross-referencing or cross-indexing, the ledger account number and journal page number are used as cross-reference to easily locate and review the accounts.
What is footing? How is it accomplished in the General Ledger?
Footing is the final balance when adding the debits and credits on an accounting balance sheet. It is the summary of the debits (left side of any account) and credits (right side of any account) to obtain a new balance. Footings are commonly used in bookkeeping to determine final balances to be put on the financial statements. In footing the account, a well sharpened pencil should be used in writing the total of the amount and the account balance. If an account is debit balance (debit total is bigger than the credit total), the amount of difference is placed on the particular column of the debit side. If the account, on the other hand is credit balance (credit total is bigger than the debit total), the amount of difference is placed in the particular column of the credit side. If there is only one entry in any side of an account in the ledger, no footing is done and the entry is left as is. Footing is nearly the total of the column and if error is committed, it may be erased and corrected easily because pencil is being used. Footing is not considered an entry posted in the general ledger.
What is a Trial Balance?
Trial Balance is a statement of ledger account balances within the ledger. It is a list and total of all the debit and credit accounts for an entity for a given period – usually a month. It is also a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns.
What is the source of a Trial Balance?
The sources of trial balance are the debit and credit entries of the accounts in the general ledger. In the trial balance of balances, the final balance of debit and credit amount (footing) of the accounts are considered and presented in the trial balance. While in the trial balance of totals, both the debit and credit entries of the general ledger will appear in the listing including closed accounts.
What is the purpose of a Trial Balance?
A trial balance is prepared to check the mathematical and arithmetic accuracy of accounting. Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system.
When is a Trial Balance prepared?
It is prepared at the end of a chosen period which may either be monthly, quarterly, half-yearly, or annually or as and when required. A company prepares a trial balance periodically, usually at the end of every reporting period.
When a Trial Balance is said to be “forced balance”?
A trial balance is considered as “forced balance” when a trial balance is forced to appear to be “in balance” even though it is actually “out of balance”. It is done by changing the amount or changing an account with the amount of the unlocated difference. This action is never permissible in the accounting practice and can be discovered through an audit or examination of books of accounts.
Enumerate some of the errors committed that will make a trial balance to be “out of balance”.
A trial balance is considered to be “out of balance” due to some errors and omissions. If the trial balance is not in balance, then an error has been made somewhere in the accounting process. Some of the errors and omissions are listed below:
1. The footing of the debit and credit columns of the trial balance is wrong; (error)
2. An account with “open balance” in the General Ledger was not listed in the trial balance; (omission)
3. The footing of the account balance in the General Ledger is wrong; (error)
4. Posting the amount of an item to the wrong side of the account or ledger; (error)
5. Omission in posting of either debit or credit entry in the journal; (omission)
6. And the balance of an account is listed in the trial balance with a wrong amount, such as “transportation” of the amount or “sliding” of the amount or listing a different amount from the correct one.
What are the possible errors that when committed, the trial balance will still be “in balance”?
A trial balance can be called as “in balance” but actually unbalanced due to some possible errors and omissions that are committed. Some of them are listed below:
1. A transaction may not have been recorded in the journal; (omission)
2. A journal entry may not have been posted in the ledger in its entirely; (omission)
3. Posting a correct amount to a wrong account; (error)
4. And wrong charging of account title in the journal entry and was carried to posting in the ledger. (error)
Differentiate a “sliding error” from that of a “transportation error”.
A sliding error is committed when there is an error in placing the decimal point of a figure. Like for example, P 200.00 is inaccurately written as P 20.00 and P 55.00 as P 5.50. While the transportation error is committed when the order or arrangement of a figure is reversed, reorder or swapped. Like for example, P 1234 is inaccurately written as P 1243.
Are omissions considered errors? Explain.
Yes, omissions are considered as errors because when we commit errors, it will result to an unbalanced trial balance and it is an error if an account in the ledger was not listed in the trial balance. An omission refers to an act where accounts or transaction are excluded in the process and therefore an error occur.
Differentiate “single ruling” from “double ruling”.
Single ruling is done at the last account or account title of the trial balance wherein a single line is drawn after all the accounts and serves as its separation from the total of debit and credit. While in double ruling, a double line is drawn at the total that signifies that the debit and credit are equal.
How are the accounts in the Trial Balance arranged?
The format of the trial balance is a two-column schedule. Key to preparing a trial balance is making sure that all the account balances are listed under the correct column. The appropriate columns are as follows:
Assets = Debit balance
Liabilities = Credit balance
Expenses = Debit Balance
Equity = Credit balance
Revenue = Credit balance
Liabilities = Credit balance
Expenses = Debit Balance
Equity = Credit balance
Revenue = Credit balance
CASES FOR CLASSROOM DISCUSSION
CASE A
A newly hired bookkeeper of a certain company was in trouble. His trial balance was out of balance and he was looking for a ten-centavo amount of difference. When his supervisor learned that he was not able to locate the difference for a day, he was being told arrogantly that the company is losing because of this. While he was paid P200.00 a day, he was only looking for that ten-centavo difference in his trial balance.
What he did later was to add that unlocated difference to one of the accounts, so then, the trial balance appeared to be “in balance”.
Questions:
a.) What was he trying to do with the trial balance?
The newly hired bookkeeper tries to locate the ten-centavo amount of difference and make his trial balance “balanced” but the result is it appeared to be “in balance” and adds the unlocated difference to one of the accounts.
b.) Do you think this error will be discovered? How? When? And who?
Yes, this error will definitely be discovered. Even though it’s just a ten-centavo, it is noticeable once the receipts, journal entries, t-accounts, general journal, general ledger and all other books of accounts are reviewed and verified by the company’s accountant and auditor.
CASE B
A student in basic accounting was requested by his uncle to prepare a trial balance for his business because his bookkeeper got sick. The trial balance prepared by the student is presented below:
Debit | Credit | |
Accounts Payable | P 30, 000 | |
Accounts Receivable | P 10, 000 | |
Building | 100, 000 | |
Capital | 85, 000 | |
Cash | 20, 000 | |
Drawing | 5, 000 | |
Salaries Expense | 3, 000 | |
Service Income | 25, 000 | |
Supplies Used | 2, 000 | |
P 140, 000 | P 140, 000 |
The student told his uncle that once a trial balance is “balanced”, there is no error. In other words he can guarantee that his work is correct.
Questions:
a.) Was the arrangement of the account correct?
No, the arrangement of the accounts is in incorrect order. The order of accounts is generally from asset, liabilities, owner’s equity, income to expenses. And each account titles are alphabetically arranged.
b.) Do you agree that when a trial balance is ”in balance”, the work is presumably correct?
Maybe because a trial balance may still be “in balance” even though some errors and omissions are committed. And commonly, when we have the trial balance “in balance”, we identify it as correct if no errors are committed in the process of journalizing, posting and etc.
CASE C
Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately would prevent the trial balance from balancing.
a) The bookkeeper debited cash for P 700, 000 and credited salaries expense of P700 for payment of salaries.
b) Cash collected on account was debited on cash account for P 500 and service income was credited for P 50.
b) Cash collected on account was debited on cash account for P 500 and service income was credited for P 50.
Question:
What would you tell them?
I will inform the two students that an error in an accounting process will absolutely affect and prevent the trial balance from balancing. Even a centavo may be a great difference if the process is not accurate. And also, in both transactions, they commit a sliding error wherein the decimal point was misplaced and the values were incorrectly written because the zeros were omitted.
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