CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 5 Lecture 5 Lecturer: Kleanthis Zisimos

Chapter Review In Today’s Lecture we Examine the trial balance Examine the trial balance

Trial Balance A trial balance is a list of accounts and their balances at a point of time. A trial balance is a list of accounts and their balances at a point of time. Preparing a trial balance involves three steps Preparing a trial balance involves three steps 1. List each account title and its amount in the trial balance 2. Compute the total of debit balances and the total of credit balances 3. Verify total debit balances equal total credit balances

Trial Balance One or more errors exist when a trial balance does not balance (when its columns are not equal). When errors exist, they often occur in one of the following steps in the accounting process: One or more errors exist when a trial balance does not balance (when its columns are not equal). When errors exist, they often occur in one of the following steps in the accounting process: (1) preparing journal entries (2) posting entries to the ledger (3) computing account balances (4) entering account balances on the trial balance, or (5) totaling the trial balance columns.

Trial Balance When a trial balance does balance, the accounts are likely free of the kinds of errors that create unequal debits and credits, yet errors can still exist. One example is when a debit or credit of a correct amount is made to a wrong account. This can occur when either journalizing or posting. This error would produce incorrect balances in two accounts, but the trial balance would balance. Another error is to record equal debits and credits of in incorrect amount. This error produces incorrect balances in two accounts, but again the debits and credits are equal. When a trial balance does balance, the accounts are likely free of the kinds of errors that create unequal debits and credits, yet errors can still exist. One example is when a debit or credit of a correct amount is made to a wrong account. This can occur when either journalizing or posting. This error would produce incorrect balances in two accounts, but the trial balance would balance. Another error is to record equal debits and credits of in incorrect amount. This error produces incorrect balances in two accounts, but again the debits and credits are equal.

Trial Balance Searching for Errors Searching for Errors If the trial balance does not balance, the error must be found and corrected before preparing financial statements. Searching for the error is more efficient if we check the journalizing, posting, and trial balance preparation process in reverse order. While methods vary, we suggest the following sequence of steps. If the trial balance does not balance, the error must be found and corrected before preparing financial statements. Searching for the error is more efficient if we check the journalizing, posting, and trial balance preparation process in reverse order. While methods vary, we suggest the following sequence of steps. Step 1 is to verify that the trial balance columns are correctly added. Step 1 is to verify that the trial balance columns are correctly added. step 2 is to verify that the account balances are accurately entered from the ledger. step 2 is to verify that the account balances are accurately entered from the ledger.

Trial Balance Searching for Errors (continued) Searching for Errors (continued) Step 3 is to see whether a debit (or credit) balance is mistakenly listed in the trial balance as a credit (or debit). A clue to this kind of error is when the difference between total debits and total credits in the trial balance equals twice the amount of the incorrect account balance. Step 3 is to see whether a debit (or credit) balance is mistakenly listed in the trial balance as a credit (or debit). A clue to this kind of error is when the difference between total debits and total credits in the trial balance equals twice the amount of the incorrect account balance. Step 4 is to recompute each account balance in the ledger. Step 4 is to recompute each account balance in the ledger. Step 5 is to verify that each journal entry is properly posted to ledger accounts. Step 5 is to verify that each journal entry is properly posted to ledger accounts. Step 6 is to verify that the original journal entry has equal debits and credits. Step 6 is to verify that the original journal entry has equal debits and credits.

Trial Balance Correcting Errors Correcting Errors If errors are discovered in either the journal or the ledger, they must be corrected. Our approach to correcting errors depends on the type of error and when it is discovered. If errors are discovered in either the journal or the ledger, they must be corrected. Our approach to correcting errors depends on the type of error and when it is discovered. In one case, if an error in a journal entry is discovered before the error is posted, it can be corrected in a manual system by drawing a line through the incorrect information. The correct information is written above it to create a record of change for the auditor. Many computerized systems allow the operator to replace the incorrect information directly. If a correct amount in the journal is posted incorrectly to the ledger, we can correct it the same way In one case, if an error in a journal entry is discovered before the error is posted, it can be corrected in a manual system by drawing a line through the incorrect information. The correct information is written above it to create a record of change for the auditor. Many computerized systems allow the operator to replace the incorrect information directly. If a correct amount in the journal is posted incorrectly to the ledger, we can correct it the same way

Trial Balance Correcting Errors (continued) Correcting Errors (continued) Another case occurs when an error in a journal entry is not discovered until after it has been posted. We usually do not strike through both error entries in the journal and ledger. Instead, the usual practice is to correct the error in the original journal entry by cre­ating another journal entry. This correcting entry removes the amount from the wrong ac­count and records it to the correct account. Another case occurs when an error in a journal entry is not discovered until after it has been posted. We usually do not strike through both error entries in the journal and ledger. Instead, the usual practice is to correct the error in the original journal entry by cre­ating another journal entry. This correcting entry removes the amount from the wrong ac­count and records it to the correct account.

Trial Balance Correcting Errors (continued) As an example, suppose we recorded a purchase of office supplies 1400 euro in the journal with an incorrect debit to Office Equipment:As an example, suppose we recorded a purchase of office supplies 1400 euro in the journal with an incorrect debit to Office Equipment: Incorrect Journal Entry Dr Cr Office Equipment 1400 Cash 1400 Cash 1400

Trial Balance Correcting Errors (continued) Correcting Errors (continued) We then post this incorrect entry to the ledger. The Office Supplies ledger account balance is understated by 1,400, and the Office Equipment ledger account balance is overstated by 1,400. When we discover the error three days later, we make the following correcting entry: We then post this incorrect entry to the ledger. The Office Supplies ledger account balance is understated by 1,400, and the Office Equipment ledger account balance is overstated by 1,400. When we discover the error three days later, we make the following correcting entry: correct Journal Entry Dr Cr Office Supplies 1400 Office Equipment 1400 Office Equipment 1400

Trial Balance Ex. The owner of Simpson ltd deposited 5000 in bank in January He then made the following transactions during 2010 Ex. The owner of Simpson ltd deposited 5000 in bank in January He then made the following transactions during January Bought supplies from Peterson ₤1000 by credit 2. February. Paid ₤Peterson 500 from check 3. March. Bought a used car for ₤2000 by check 4. May. Received check from his debtor Tim August. Paid Rent ₤500 by check 6. December. Withdrew for his personal use ₤400 in check REQUIRED REQUIRED Make the necessary journal entries to record the above transactions and prepare the trial balance Make the necessary journal entries to record the above transactions and prepare the trial balance