UNIT 7:THE TRIAL BALANCE
Key Unit competence: Present and interpret the trial balance.
Introductory activity
The following are essential tasks of accountant as advertised by a
company that want to hire an accountant:
• Research financial information for audit purposes and financial
reporting.
• Analyze financial records and reports and make adjustments as
needed.
• Assist bookkeepers, coordinators, principals, and administrators
on day-to-day financial matters, reports and questions.
• Assist auditors in analysis work.
• Prepare and enter journal entries which include correcting entries,
allocating expenditures, grant related entries, etc.
• Assist in year-end closing and audits.
• Assist on monthly interim financial statements, Superintendent's
Annual School Report, and Comprehensive Financial Report.
• Perform the financial administration and reporting of assigned
federal and state grants which includes establishing grant in
financial system, preparing budget and any adjustments, monitoring
spending and assisting in accurate and timely reimbursements.
You will need to prepare the trial balance as a prerequisite to prepare the
financial reports.
1. What do you understand by trial balance?2. Explain the main columns of a trial balance
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Trial balance also known as List of accounts balances is a simple report that
shows the list of account balances classified as per the debits and credits after
accounts have been balanced. It is an accounting or bookkeeping report that
lists balances from a company’s general ledger accounts.
The purpose of the trial balance is to show the accuracy of the double entry
made and to facilitate the preparation of final accounts, that is the income
statement (or trading, profit & loss account) and a balance sheet. The total of
debits of the list of accounts balances should be the same as the total of credits;
if not then there is an error in one or more of the accounts.7.1 Analysis of debit and credit balances
Learning Activity 7.1
You are an accountant of a company that still uses manual accounting
system, at the end of a financial period; you have to prepare financial
reports. As usual, before preparing income and balance sheet, you will
prepare the trial balance to check on the accuracy of your arithmetic.
1. Explain the debit and credit columns of a trial balance.
2. Which accounts do you have in mind that must always have debit
balances?
3. Which accounts should appear credit column of the trial balance?
Learning Activity 7.1
A. Debit column: Debit column of the trial balance is the column in which the
amounts of the ledger accounts’ debit balances are recorded.When we balance
off accounts, the assets and expenses have debit balances, so they are shown on
the debit side of the trial balance.
B. The credit column: The credit column of the trial balance is column in which
we record all ledger accounts with credit balances.As we balance off accounts,
Capital, liabilities and incomes normally have credit balances so shown on the
credit side.
The capital account shows the net worth of a business at a specific point in time.
It is also known as owner’s equity for a sole proprietorship or shareholders’
equity for a corporation. It always has a credit balance and so, on the credit
column of the trial balance. Other accounts that always have credit balanceinclude sales, sundry creditors, gains and reserves.
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Application activity 7.1
1. Explain the debit column of the trial balance
2. List down the four accounts appearing on the debit column.3. List down the accounts with credit balances.
7.2 Errors in accounting
Learning Activity 7.2
MUTESI is an accountant of ABC Ltd and still use manual accounting. At
the end of financial period, she prepares a trial balance and finds that two
totals do not agree, which implies that some errors have been committed
while recording the transactions in the books of accounts.
1. Helps her identify the errors not affecting the trial balance2. Helps her identify the errors affecting the trial balance.
7.2.1 Errors not disclosed by a trial balance
In recording of accounting transactions, some errors made may not be
detected by the trial balance. This means that for every debit entry, there is
the corresponding credit entry. But this does not justify that an accountant has
not committed mistakes. In this regard, an accountant must be aware of those
errors that are not disclosed by a trial balance.
The following errors are not detected by the trial balance:
1. Clerical Errors:
• Errors of Omission: If a transaction is not recorded at all, the amount of
the transaction will not be recorded in the relevant ledger account, and/or
if the transaction is not transferred from journal to ledger, both columns of
the trial balance will be valued by an equal sum lower amount of money.
For example, goods sold to Green but not recorded in the sales book. Because
an equal amount of debit and credit has been omitted from the record, the trial
balance will agree.
• Errors of Commission: If a transaction is recorded in the primary books
of accounts by a lower or higher amount of money, that lower or higher
amount will also be recorded in the ledger in question, and thus the trialbalance will agree.
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As an example, consider the $3000 in goods sold to Green. If it is recorded as
$30000, both Sales A/C and Green A/C will be valued at $27000 more. In this
case, too, the trial balance will agree.
• Errors of Miss-posting: Such errors occur as a result of employees’
carelessness. Assume Green has given you $3000 in cash. The cash book
is properly debited with $3000, but when posted to the ledger, the Yellow
account is credited instead of the Green account.
The trial balance will agree because the total of credits has been the same,
despite the fact that the amount has been credited to the incorrect account.
• Compensating Errors: Compensating errors occur when one mistake is
compensated for by another.
Even if there are two errors, in this case, the total of both sides of the trial
balance will agree. Because both sides will be reduced by the same amount,
$1800.
2. Errors of Principle
Errors committed due to a lack of proper accounting knowledge and/or
violations of recognized accounting principles are referred to as errors of
principles. An example of such an error is when capital expenditure is recorded
as revenue expenditure and vice versa. Another example is when a purchase
of assets is recorded in the purchases book. It is an error of principle, because
the purchases book is meant for recording credit purchases of goods meant for
resale and not fixed assets. A trial balance will not disclose errors of principle.
7.2.2 Errors disclosed by a trial balance
When errors do not affect the trial balance, this means that the debit side is not
equal to the credit side and means that the trial balance does not balance. There
are various types of such errors that are revealed in the trial balance.
Note that these errors cannot happen in accounting software like Sage line 100,
since the user receive the notification in recording transaction warning that
the journal is not balanced and cannot close Sage line window. The user should
therefore balance the journal to be allowed to close it.
Some of these are discussed below:
1. Wrong Totaling of Subsidiary Books:
If the total of any subsidiary book is wrongly cast, it would cause a disagreementin the Trial Balance. For instance, Sales book has been under cast by Frw 100.
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From the Sales book, all the personal accounts have been debited correctly but
mistake occurred only in Sales Account, to the extent of Frw 100 (Less). Thus,
the Trial Balance disagrees to the extent of Frw 100; credit side falls short of
the amount.
2. Posting of the Wrong Amount:
If a wrong amount is posted in one of the two accounts, the Trial Balance
disagrees. For instance sales made to Rugero for Frw 570, wrongly debited to
Tuza’s Account with Frw 750, instead of Frw 570. Tuza’s account has been over
debited by Frw 180. Thus, the debit side of the Trial Balance will exceed by Frw
180. i.e., 750 – 570 = 180.
3. Posting an Amount on the Wrong side of the Account:
For instance, a credit sales made to a customer for Frw 500 has been credited to
the customer account, instead of debit. As a result of this error, the credit side
of the Trial Balance will exceed by Frw 1,000 (double the amount of the error)
because there are two credits one in Sales Account and another in Personal
Account and no debit for the transaction.
4. Posting Twice to a Ledger:
For instance, salary of Frw 500 paid has been debited to Salary Account twice
by mistake. This will cause disagreement of Trial Balance in debit side by excess
of Frw 500.
Apart from the above, the following are some of the common errors, by which
Trial balance totals disagree:
5. Omission of an account from the Trial Balance (Cash, Bank etc.):
this error happens if an account is completely omitted while preparing
a trial balance.
6. Wrong additions or balancing of ledger accounts: these are errors
committed by the accountant while adding up the transactions made in
an account during the time of balancing off accounts.
7. Balance of account written to the wrong side of the Trial Balance:
this happens if the accountant mistakenly writes the total of one side
to the opposite side. For instance, the total debits written under totalcredits and vice versa.
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8. Errors made in preparing the list of Debtors and Creditors: this
error may occur when a debtor is wrongly considered as creditor, and
vice versa.
9. Errors made in carrying forward the total from one page to another
page. The balance from one page may be modified when it is brought
forward.
10. There may be some items to which double entry is incomplete: this
error originates from the violation of double entry principle and occurs
if for a transaction, one account has been debited/credited without the
corresponding account being credited/debited respectively.
11. Wrong totals of the Trial Balance: these are errors of addition an
accountant may commit when s/he is adding up the trial balance figures.
Application activity 7.2
Cyusa A/C is supposed to be debited with $2000 but has only been debited
with $200. On another occasion, Teta A/C was mistakenly credited with
$200 rather than $2000.
1. What kind of error is it?
2. Will the error affect the trial balance?3. Give an example of an error that will cause the trial balance not to agree.
7.3. Assets and expenses accounts of trial balance
Learning Activity 7.3
Using the knowledge from senior four, identify the accounts that mustappear on the debit side of the trial balance
7.3.1 Assets
When we prepare a trial balance assets appear in the debit column. This is
because generally assets have a debit balance in time of balancing off accounts.Exception may be to bank account which may have a credit balance in case of
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bank overdraft. Basically, an overdraft means that the bank allows customers
to withdraw more money than s/he has on his/her account. This makes a bank
account balance negative.
The typical asset accounts with debit balances are Cash, Marketable securities,
Accounts receivable, Inventory, Prepaid expenses, Buildings and Equipment.
7.3.2 Expense accounts
Expenses accounts normally carry debit balances on the left side of the
T-a7.5. Debits increase the balance in an expense account. They are entered
on the debit side of the trial balance. Examples of these accounts are Salaries,
Rent, Supplies, Interest, Insurance, Licenses, Advertising, and so many others.
Application activity 7.3
1. Complete the table below by ticking in the appropriate column:
2. Differentiate between assets and liabilities
7.4. Liabilities accounts of trial balance
Learning Activity 7.4
ISHIMWE wants to start a business. Her savings is not enough to cover the
startup and operating capital. Advise her on how she can get funds to start
and run her business.
A liability is something a person or company owes, usually a sum of money.Liabilities are settled over time through the transfer of economic benefits
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including money, goods, or services. In accounting, liability accounts have
credit balance, and hence, they appear in the credit column of the trial balance.
Businesses sort their liabilities into two categories: current and longterm.
Current liabilities are debts payable within one year, while long-term
liabilities are debts payable over a longer period. Below are the types of
liabilities:
7.4.1 Current (Near-Term) Liabilities
Ideally, analysts want to see that a company can pay current liabilities, which
are due within a year, with cash. Some examples of short-term liabilities
include payroll expenses and accounts payable, which include money owed to
vendors, monthly utilities, and similar expenses. Other examples include:
1. Wages Payable: The total amount of accrued income employees have
earned but not yet received.
2. Interest Payable: Companies, just like individuals, often use credit to
purchase goods and services to finance over short time periods. This
represents the interest on those short-term credit purchases to be paid.
3. Dividends Payable: For companies that have issued stock to investors
and pay a dividend. This represents the amount owed to shareholders
after the dividend was declared.
4. Unearned Revenues: This is a company’s liability to deliver goods and/
or services at a future date after being paid in advance.
7.4.2 Non-Current (Long-Term) Liabilities
Long-term liabilities, also called long-term debts, are debts a company owes
third-party creditors that are payable beyond 12 months. Considering the
name, it’s quite obvious that any liability that is not near-term falls under non
current liabilities, expected to be paid in 12 months or more.
Examples of long-term liabilities include long-term loans, bonds payable, post-re
tirement healthcare liabilities, pension liabilities, deferred compensation, deferred
revenues, etc.Both short-term and long-term liabilities always have credit balance;therefore, they appear on the credit column of the trial balance.
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Application activity 7.4
1. With examples, distinguish between current and non-current liabilities.
2. Explain how liabilities are treated in the trial balance.7.5. Income/Revenues account of trial balance
Learning Activity 7.5
A newly recruited account needs advice on how to prepare a trial balance
especially how to treat revenues of the business. As a fresh school leaver
accountant, advise her on whether revenues are debits or credits in the
trial balance and explain why.
7.5.1 Incomes/revenues
Revenues and gains are recorded in accounts such as Sales, Service
Revenues, Interest Revenues (or Interest Income), and Gain on Sale of
Assets. These accounts normally have credit balances that are increased with a
credit entry. In a T-account, their balances will be on the right side. In the trial
balance they are credits.
The exceptions to this rule are the accounts sales returns, Sales Allowances, and
Sales Discounts these accounts have debit balances because they are reductions
to sales. The following are some of the revenue accounts.
– Sales account: This revenue account that reports the sales of
merchandise.
– Service revenues: these are revenues from a work accomplished by a
company.
– Interest income: these are interests earned by a company during a
given time period.
– Gain on sale of assets: this is income earned from the sale of an asset
(other than stock/inventory) for more amount than the amount shown
in the company’s records. It is the difference between the proceeds
from the sale and carrying amount shown on the company’s book.
Note the following:
• The trial balance is of crucial importance in the business since it ensures
mathematical accuracy, ensures accurate recording, assists in quicklydetermining the current financial situation, aids in the correction of
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accounting errors and ensures proper use of the double-entry system.
• The assets and expenses have debit balances so shown on the debit side
( it includes accounts like assets, drawings accounts, expense accounts,
cash balance, bank balance, losses, purchases, and sundry debtors, among
others), While Capital, liabilities and incomes normally have credit
balances so shown on the credit side (it includes capital accounts, income
accounts, sales, sundry creditors, gains and reserves).
• In a trial balance statement, where the debit and credit side of it is equal,
it is considered balanced. Additionally, it ensures that there are no errors
in the ledger. However, this does not qualify that it is free of mistakes.
For instance, improper entries and missing entries from ledgers are still
considered accounting errors that are not detected by a trial balance; this
means that an accountant may commit some errors which cannot affect
the trial balance.
7.5.2 The process of generating a trial balance in sage line
100
Now that the previous steps should have been followed, that is, creating a
company profile, creating charts of accounts, creating s/p charts creating the
journal codes and record the transactions in the appropriate journals. The user
can generate the trial balance of the business.
Taking an example of ABCD Company operating from 1/1/2023 to 31/12/12023
with the following transactions taking place on January 1st 2023:
Started business with cash 5,000,0000FRW and bank 10,000,000FRW
Drawings in kind.....................................................................400,000FRW
Land bought on credit for Kimenyi.................................2,000,000 FRW
Purchase by bank....................................................................5,000,000 FRW
Purchase by cash.....................................................................4,000,000 FRW
Credit purchases from Kimenyi.........................................1,000,000 FRW
Credit purchases from Agnes..............................................500,000 FRW
Credit sales to Kalisa ..............................................................7,000,000 FRW
Credit sales to Jane...................................................................13,000,0000 FRW
Goods returned to Jane...........................................................50,000,000 FRW
Agnes returned goods to ABCD company.......................25,000 FRW
Machinery bought by cash.....................................................400,000 FRW
Rent received by cash................................................................150,000FRW
Discount received by cheque............................................80,000,000 FRW
Paid salaries......................................................................700,000 FRW
Paid rent by check.............................................................200,000 FRW
Cash deposited...................................................................4,000,000 FRWThe chart of accounts is as follows:
Figure 7. 2:SP chart
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The journal codes created are as follows:
Figure 7. 3: Journal codes
Entries in every journal are shown below:
a. Purchase journal:
Figure 7. 4: Journalizing credit purchases transactions
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Figure 7. 5: Journalizing credit sales transactions
c. Cash journal:
Figure 7. 6: Journalizing cash transactions (Payments and receipts by cash or
cheque)
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d. General journal:
Figure 7. 7: Entries in general journal
e. Returns inwards journal:
Figure 7. 8: Entries in returns inwards
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f. Returns outwards journal:
Figure 7. 10: Selection of trial balance
-Click on trial balance: The window that appears and the user click on trial
balance to print it or view its print preview and click ok (here we selectcomplete):
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In Sage 100, the trial balance is composed of four main columns:
1. Account number which shows the numbers as per charts of accounts
2. Account names as per charts of accounts
3. Transactions: this part shows the total amount of transactions made in
each side of an account and the grand total of debits and credits.
4. Balances: this column shows the balance brought down for everyaccount. It corresponds to the manual trial balance
Application activity 7.5
1. What are revenue accounts?
2. How are revenues treated in the trial balance?
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End unit assessment
The following are information extracted from BIRASHOBOKA ltd Company
in 2022. You are required to record these transactions into their respective
journals and extract a trial balance.
1st January: Started a business with :
- Cash 500,000 FRW
- Building 800,000 FRW
- Cash at bank 1,500,000 FRW
2nd January bought land valued at 600,000 FRW by cheque.
10th January bought goods from Gloria for 350,000 FRW on credit.
15th January Gloria returned goods amounted 10,000FRW
25th January sold goods valued at 250,000 FRW to Emma on credit.
10th March paid for rent 50,000FRW, communication 200,000FRW and
transport 40,000FRW all paid by cash.
Additional information:
Activity: Construction
Account length: 4 digits
File name: Your proper namesSave you work on desktop.