1. What is an accounting cycle?
2. How to create a trial balance - Errors that are reflected in the trial balance - Errors that are not reflected in the trial balance
What is an accounting cycle?
Gathering financial information in accounts is a long, multi-step process. When technology wasn't as advanced as it is today, all of these steps were done manually. Today, most companies use advanced accounting software to prepare financial accounting documents. therefore, this process is less time consuming and convenient. The steps for preparing the annual financial statements are as follows.
The main goal of doing a trial balance is to determine the mathematical accuracy of the ledger balances. According to the basic accounting principle, all debit postings (DR) should be the same as credit postings (CR). There is a corresponding credit posting for each debit posting.
Assets + expenses = liabilities + income + capital
According to the above equation,
An increase in an asset or expense is recorded as a debit, while a decrease is recorded as a credit.
An increase in liabilities / income / capital is recorded as a credit, while a decrease is recorded as a debit posting.
How to prepare a trial balance
A trial balance has a simple structure where all final debit balances are recorded in one column and all final credit balances are recorded in another column. These closing balances are determined from individual G / L accounts such as sales, purchases, stocks, accounts receivable, accounts payable, and so on. A trial balance provides all final balances in a single document at a glance; This makes it easy to compare the balances. If all transactions of a billing period are recorded correctly, the sum of the debit balances of the trial balance should be equal to the sum of the credit balances. If this is achieved, it can be concluded that the transitions will be recorded mathematically precisely. It also helps in uncovering a number of possible errors should they occur and helps identify which journal entries should be posted in order to correct the errors found. Thus, there are errors that can be identified by making a trial balance, while others are not reflected by the trial balance.
Errors that are reflected in the test balance
The following errors are one-sided errors and are reflected in the trial balance. In such situations, the trial balance will not be settled.
Partial omission error
Only debit or credit postings are posted to accounts
|Cash A / C entry is not recorded when paying for inventory of USD 1500 in cash|
The total of an account is more or less recorded
The total of the purchase book is overshadowed by $ 450
The final balance is carried forward incorrectly
|The closing balance of $ 550 on the sales book is carried forward as $ 500|
Errors that are not reflected in the test balance
Fundamental errors in accounting
The postings are posted to the wrong account type
|A sale of $ 2200 will be credited to the payroll account instead of the sales account|
Failure to omit in accounting
The entries are completely omitted from the accounts
|A payment of $ 3,500 to creditors will not be posted to accounts|
Error of the commission
An entry is posted to the correct account type, but to the wrong account
|Cash payments of $ 1,150 to AB Ltd. are paid in cash to ABC Ltd. posted.|
Incorrect entries in two or more accounts cancel each other out
The fixed assets account is wrongly totaled and underestimated for $ 500, and the rental account is also incorrectly totaled and underestimated for $ 500.
Original input error
The wrong amount is posted to the correct accounts
|Cash received on accounts receivable of $ 300 is recorded as $ 3,000|
Complete cancellation of bookings
The correct amount is posted to the correct accounts, but the debits and credits have been canceled
|A cash sale of USD 750 is recorded when the sales account is debited and credited to the cash account|