= Example Exercise 2-6 Liabilities + Stockholders’ Equity Assets In this example exercise, we will consider errors that may occur when posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance. We have learned that with double-entry accounting, debits must always equal credits. The total of the debit column must equal the total of the credit column. By preparing a trial balance you can verify this equality.

4 Example Exercise 2-6 Preparing the Trial Balance – 4 basic steps: List the name of the company, the title of the trial balance and the date it was prepared. List the accounts from the ledger and enter their debit or credit balance in the applicable column. Total each column (debit column and credit column). Verify that debits equals credits. There are 4 basic steps to remember when preparing a trial balance. [READ SLIDE BEGINNING AT #1; click each step to make it appear].

4 Example Exercise 2-6 Here is what a completed TRIAL BALANCE looks like. It has been prepared using the four steps outlined. Notice the balance of the DEBIT column equals the balance of the CREDIT column. When the trial balance is balanced (that is that the debits equal the credits), then you can be reasonably assured that no mathematical errors occurred during the preparation of the trial balance.

4 2 Example Exercise 2-6 Example Exercise 2-6 (continued) Salary Expense $5,600 $6,500 Cash Fees $2,850 $2,580 A/R A/P $3,500 $3,500 Cash In this example exercise, we will look at three different transactions; how they were posted; and then analyze their effect on debits and/or credits and the amount of that effect.

Example Exercise 2-6 In scenario “a”, [CLICK] a dividend payment of $5,600 was journalized as a debit to Salary Expense and a credit to Cash for $6,500. This is considered a transposition error.

Example Exercise 2-6 Debit Credit (a) Salary Expense $6,500 Cash $6,500 $6,500 $6,500 (a) In scenario “a”, we were told that a journal entry was prepared that debited Salary Expense and credited Cash, both in the amount of $6,500. The fact that the debit and credit are the same amount tells us that the debits equal the credits. And, as a consequence, the trial balance would not be out of balance. However, the accounts Salary Expense and Cash are both overstated by $900; the difference between the incorrect amount of $6,500 and the correct amount of $5,600.

4 2 Example Exercise 2-6 Example Exercise 2-6 (continued) In scenario (b), fees earned in the amount of $2,850 was debited to Accounts Receivable at $2,580 and credited to Fees Earned for the correct amount, $2,850. This is also an example of a transposition error; however, unlike scenario (a), on one account is incorrect—Accounts Receivable.

Example Exercise 2-6 Debit Credit (b) Accounts Receivable $2,580 Fees Earned $2,850 $2,580 $2,850 (b) In this scenario, we are told that the journal entry debited Accounts Receivable in the amount of $2,580 with a credit, in the amount $2,850, to Fees Earned. Identifying the imbalance tells us that the trial balance could not be in balance. As you can see, the credit total would be higher by $270. Credit $2,850 – Debit $2,580 = Credits are $270 higher

2 4 Example Exercise 2-6 In our last scenario, a creditor payment of $3,500 was debited to Accounts Payable and debited to Cash.

Example Exercise 2-6 Debit Credit Accounts Payable $3,500 Cash 3,500 Should be zero Should be smaller by $3,500 In this last scenario, a look at two journal entries, the one that was made and the one to correct the error, reveals the imbalance. The trial balance is out of balance [CLICK] in the amount of $7,000 on the debit side.

Example Exercise 2-6  For Practice: PE 2-6A, PE 2-6B For additional practice, go to PE 2-6A and 2-6B.  For Practice: PE 2-6A, PE 2-6B