Accounting Business Reporting for Decision Making

CHAPTER 4 Business transactions 137

4.8 The trial balance

LEARNING OBJECTIVE 4.8 Explain the purpose of a trial balance.

The trial balance is a list of ledger account balances that is prepared at the end of the period. It is pre-

pared to assist in the preparation of the financial statements and to check the accuracy of the ledger or

journal entries. However, the trial balance will not detect all recording errors. Any errors that are made

to both accounts affected by the transaction will not be detected by the trial balance. For example, if rent

paid of $1000 is incorrectly recorded as $10 000 both in the rent and cash accounts, both sides of the

trial balance will still be equal. Care must be taken to double-check that the correct accounts are being

recorded for each transaction.

The trial balance has two columns: a debit column and a credit column. Illustrative example 4.8 shows

the trial balance after recording all transactions to 7 September.

ILLUSTRATIVE EXAMPLE 4.8

Trial balance for Advantage Tennis Coaching

Advantage Tennis Coaching

Trial Balance as at 7 September 2016

Name of account Dr Cr

Cash

Accounts receivable

Office equipment

Capital – N Cash

Coaching fees

Rent expense

$28 500

3 000

500

1 000

$20 000

13 000

Total $33 000 $33 000

The totals of the debit side and the credit side are shown at the bottom of the trial balance. Both sides

are equal at $33 000. If the trial balance did not balance, we would then need to retrace the transactions

to identify if we have followed the double-entry rules and not made any errors that were discussed

earlier in the chapter (such as transposition errors or single-entry errors).

VALUE TO BUSINESS

•   The accounting worksheet summarises the duality associated with each of the business

transactions. The column totals can be used to prepare the statement of profit or loss and the

balance sheet.

•   If the two sides of the worksheet do not balance, we should check carefully for errors in recording.

Common errors in recording are transposition errors, single-entry errors and incorrect entries.

•   The accounting equation can be used to solve for missing amounts.

•   A journal is a book that records each business transaction shown on the source documents in

chronological order.

•   A ledger can be used in place of a journal, or it can be used to record the summarised information

from a journal. There will be a separate ledger account for each item affected by the transaction,

and each account will have a debit side and a credit side.

•   The trial balance is a list of ledger account balances that is prepared at the end of the period. It is

prepared to assist in the preparation of the financial statements and to check the accuracy of the

ledger or journal entries.