1. Trial Balance A trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger The name comes from the purpose of a trial balance which is to prove that that the value of all the debit value balances equal the total of all the credit value balances. accounts listed on the trial balance

2. Trial Balance Preparing a trial balance involves 3 steps: – List each account title and its amount (from the ledger) in the trial balance – Compute the total of debit balances and the total of credit balances – Verify total debit balances equal total credit balances

3. FAST FORWARD Trial Balance December 31, 2008 DebitCredit Cash3950 Accounts Receivable0 Supplies9720 Prepaid Insurance2400 Equipment26000 Accounts Payable 6200 Unearned Consulting Revenue 3000 C. Taylor,Capital 30000 C.Taylor,Withdrawals600 Consulting Revenue 5800 Rental Revenue 300 Salaries Expense1400 Rent Expense1000 Utilities Expense230 Total45300

4. ..Cont Assets = Debit balance Liabilities = Credit balance Equity = Credit balance Expenses = Debit Balance Revenue = Credit balance

5. Example

6. Trial Balance Account TitleDebitCredit Cash6825 Accounts Receivable275 Parts Inventory2225 Accounts Payable 2000 Capital 7500 Revenue 1100 Expenses1275 Total10600

7. Using a Trial Balance When Errors exist, they often occur in one of the following steps in the accounting process – Preparing journal entries – Posting entries to the ledger – Computing account balances – Entering account balances on the trial balance – Totaling the trial balance columns

8. Trial Balance Limitations An error of original entry is when both sides of a transaction include the wrong amount. For example, if a purchase invoice for $21 is entered as $12, this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for $9 less, so the total of both columns will be $9 less, and will thus balance. An error of omission is when a transaction is completely omitted from the accounting records. As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance.

9. An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa. For example, if a cash sale for $100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals. An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type. For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals. Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out.

10. Searching for Errors Verify that the trial balance columns are correctly added Verify that the account balances are accurately entered from the ledger See whether a debit (or credit) balance is mistakenly listed in the trial balance as a credit (or debit) Recomputed each account balance in the ledger Verify that each journal entry is properly posted to ledger accounts Verify that the original journal entry has equal debits and credits

11. Correcting Errors Incorrect Entry Oct 14 Office equipment1600 Cash1600 Correcting Entry Oct 17 Office Supplies1600 Office Equipment1600

12. Accounting Cycle The accounting procedures in the accounting cycle may be summarized as follows: 1.Journalize transactions 2.Post to ledger accounts 3.Prepare a trial balance 4.Make end of period adjustments 5.Prepare an adjusted trial balance 6.Prepare financial statements 7.Journalize and post closing entries 8.Prepare an after closing trial balance