Exam code:0452 & 0985
Uses & limitations of a trial balance
What is a trial balance?
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A trial balance is a statement which lists all accounts and their balances on a particular date
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Each balance is placed either in the debit column or in the credit column
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The totals of the debit and credit columns are calculated
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The totals should be equal
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A trial balance is not part of the double entry system
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The balance for the inventory account will always be the opening balance
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This is because the current inventory is contained within the purchases account
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This is dealt with once the balances are transferred to the income statement
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What are the uses of a trial balance?
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A trial balance is used to check for arithmetic errors in the ledger accounts
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If the balance of a ledger account has been miscalculated, it is likely that the totals in the trial balance will not be equal
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Preparing a trial balance helps with the preparation of financial statements
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All the balances are in one place
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What are the limitations of a trial balance?
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Not all errors are identified by a trial balance
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The totals may be equal despite there being errors
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You will need to use other measures to locate errors
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Such as bank reconciliation statements and control accounts
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Preparing a trial balance
How do I prepare a trial balance?
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You will likely be given a list of accounts and balances
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STEP 1
Identify whether each account should have a debit or a credit balance-
The table below gives a summary of the different accounts
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STEP 2
Check that the total of the debits is equal to the total of the credits -
STEP 3
Write each account in the trial balance and put the balance in the correct column -
STEP 4
Total each column
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Accounts with debit balances |
Accounts with credit balances |
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Purchases |
Purchases returns (returns outwards) |
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Sales returns (returns inwards) |
Sales (revenue) |
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Other expenses |
Other income |
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Trade receivables |
Trade payables |
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Bank |
Bank overdraft |
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Other assets (Including inventory, vehicles, machinery, etc) |
Other liabilities (Including bank loan, mortgage, etc) |
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Drawings |
Capital |
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Provision for depreciation |
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Provision for doubtful debt |
Examiner Tips and Tricks
Check the totals agree before you write any accounts in the trial balance. This will help you spot any mistakes before you write anything in the trial balance.
How do I amend a trial balance?
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You could be given a trial balance which contains errors
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The balances could also be in the wrong columns
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STEP 1
Correct the errors to find the correct balances for each account -
STEP 2
Double-check whether each account has been correctly identified as a debit or a credit -
STEP 3
Complete a corrected trial balance-
The totals will be equal
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Worked Example
Dimitri is a sole trader. He has prepared a trial balance on 31 March 2024. However, it contains errors.
Dimitri
Trial Balance at 31 March 2024
|
Debit $ |
Credit $ |
|
|
Sales |
35 471 |
|
|
Purchases |
17 714 |
|
|
Purchases returns |
1 407 |
|
|
Discount received |
1 895 |
|
|
Rent paid |
5 321 |
|
|
General expenses |
2 087 |
|
|
Office equipment at cost |
20 000 |
|
|
Provision for depreciation of office equipment |
4 580 |
|
|
Trade receivables |
9 710 |
|
|
Trade payables |
3 980 |
|
|
Inventory |
7 060 |
|
|
Bank overdraft |
450 |
|
|
Capital at 1 April 2023 |
20 869 |
|
|
Drawings |
8 760 |
|
|
67 933 |
71 371 |
Dimitri has included the value of the inventory on 31 March 2024, the value of the inventory on 31 March 2023 was $2 000 lower than this value. Prepare a corrected trial balance at 31 March 2024.
Answer
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STEP 1 – Correct any amounts
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The value of inventory should be for 31 March 2023
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$7060 – $2000 = $5060
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STEP 2 – Identify whether the balances should be debits or credits
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The following should have debit balances:
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Purchases
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Rent paid
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General expenses
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Office equipment at cost
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Trade receivables
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Inventory
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Drawings
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All other items should have credit balances
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STEP 3 – Prepare the corrected trial balance
Dimitri
Corrected Trial Balance at 31 March 2024
|
Debit $ |
Credit $ |
|
|
Sales |
35 471 |
|
|
Purchases |
17 714 |
|
|
Purchases returns |
1 407 |
|
|
Discount received |
1 895 |
|
|
Rent paid |
5 321 |
|
|
General expenses |
2 087 |
|
|
Office equipment at cost |
20 000 |
|
|
Provision for depreciation of office equipment |
4 580 |
|
|
Trade receivables |
9 710 |
|
|
Trade payables |
3 980 |
|
|
Inventory |
5 060 |
|
|
Bank overdraft |
450 |
|
|
Capital at 1 April 2023 |
20 869 |
|
|
Drawings |
8 760 |
|
|
68 652 |
68 652 |
Responses