How to prepare a trial balance

The main purpose of preparing a rough balance sheet is to assist in making year-end balance sheet . Thus, the trial balance is drawn up towards the end of the accounting cycle. This article explains

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.

Similar,

An increase in liabilities / income / capital is recorded as a credit, while a decrease is recorded as a debit posting.

How to create a test balance - 2

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.

How to prepare a 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.

failure

example

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

Casting defects

The total of an account is more or less recorded

The total of the purchase book is overshadowed by $ 450

Transmission error

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

failure

example

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.

Compensation error

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

Reference:

"What is depreciation? | AccountingCoach. " AccountingCoach.com . Np, nd web. January 25, 2017.
“Types of accounting errors archives.” Finance and accounting simplified . Np, nd web. January 25, 2017.

Image courtesy:

"Y2cary3n6mng-daet13-example-of-a-trial-balance" by Peter Baskerville (CC BY-SA 2.0) via Flickr

About the author: Dilini

Dilini is a management and financial accountant with an MBA. Knowledge sharing is very important to her and her areas of interest include research methods, marketing, management accounting and financial accounting.