Book-keeping · Lesson 6

Trial balance, errors, journal corrections and the suspense account

WAECNECO

What the syllabus asks

WAEC: (1) trial balance: meaning, functions and rules; preparation; (2) errors: meaning, types and classification; correction of errors and preparation of suspense account. Extends fa4.

NECO: (1) trial balance: meaning, functions and rules; preparation; (2) errors: meaning, types and classification; correction of errors and preparation of suspense account. Extends fa4.

What you will learn

Define the trial balance and state its functions and rules.
Prepare a trial balance from ledger balances.
State the limitations of a trial balance.
Classify and explain errors that do and do not affect agreement.
Correct errors by journal entries.
Open and clear a suspense account.
Prepare a statement of corrected net profit.
Apply a checklist to locate errors.

Key points

Trial balance: balances as at a date; debits should equal credits.
It checks arithmetic, not correctness.
Closing stock is usually outside the trial balance.
Six errors leave it balanced: omission, commission, principle, original entry, reversal, compensating.
One-sided, wrong-amount, same-side, casting and extraction errors unbalance it.
Correct errors by journal, never by erasing.
Reversals and wrong-side postings need double the amount.
Suspense takes the difference on the smaller side and closes at nil.
Errors in incomes or expenses change profit.
Divide by 2 and by 9 to locate errors.

Start here: Meaning and functions of a trial balance

A trial balance is a list of all the balances in the ledger (including the cash book) at a particular date, arranged in two columns: debit balances on the left and credit balances on the right. Because every transaction has been recorded with an equal debit and credit (bk3), the two columns should give the same total. The trial balance is a test (a “trial”) of that arithmetic.

Note the heading: a trial balance is drawn up “as at” a date, because it shows the balances on that one day. It is not an account and has no “Dr” and “Cr” sides in the T-account sense; it is a statement or schedule.

Functions (purposes)

Arithmetic check: it tests whether debits equal credits, showing that the double entry has been completed for every transaction.
Detecting errors: if totals disagree, some error exists; its size gives a clue where to look.
Summary of the ledger: in one page the owner sees all balances: cash, bank, debtors, creditors, sales, expenses.
Basis for final accounts: the trading, profit and loss account and the balance sheet are prepared from the trial balance (bk7).
Saves time: the accountant need not turn every page of the ledger to find balances.

Rules for preparing a trial balance

Balance every account first, including cash and bank.
Put debit balances in the debit column: assets, expenses, losses, drawings, purchases, returns inwards, discount allowed.
Put credit balances in the credit column: capital, liabilities, incomes, gains, sales, returns outwards, discount received, provisions.
Include the opening stock (it is a debit balance in the stock account); closing stock is not usually in the trial balance, because it is found by a count after the books are closed and is entered in the final accounts as an adjustment.
Total both columns and compare.

Worked example 6.1

State the column for: (a) bank overdraft; (b) carriage outwards; (c) returns outwards; (d) drawings; (e) provision for depreciation.

Solution. (a) Credit (liability). (b) Debit (expense). (c) Credit (reduces purchases). (d) Debit. (e) Credit (a provision is a credit balance).

Trial balance and the accounting equation

Why must the totals agree? Rearrange the accounting equation: Assets = Capital + Liabilities. During the year capital changes by income, expenses and drawings, so before the year-end transfers: Assets + Expenses + Drawings = Capital + Liabilities + Income. The left-hand items are the debit balances and the right-hand items are the credit balances. Every correctly recorded transaction keeps the two sides equal, so the totals of the trial balance must agree.

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Practice questions

1. A trial balance is

a list of ledger balances to check arithmetical accuracy
a final account
a statement of affairs
a cash budget

Show answer

A: a list of ledger balances to check arithmetical accuracy
Arithmetic check.

2. Which error does NOT affect the agreement of the trial balance?

one-sided posting
casting error in one account
balance omitted from the trial balance
error of principle

Show answer

D: error of principle
Both sides equally wrong.

3. Repairs debited to the motor van account is an error of

omission
original entry
principle
commission

Show answer

C: principle
Revenue vs capital.

4. A sale to Obi posted to Obiora’s account is an error of

reversal
commission
principle
omission

Show answer

B: commission
Wrong account of same class.

5. The suspense account is used to

hold a trial balance difference temporarily
record cash sales
record drawings
store stock

Show answer

A: hold a trial balance difference temporarily
Temporary account.

Key words

Trial balance: List of ledger balances in debit and credit columns.
Error of omission: Transaction not recorded at all.
Error of commission: Wrong account of the same class.
Error of principle: Wrong class of account.
Error of original entry: Wrong amount in the book of original entry.
Complete reversal: Debit and credit sides swapped.
Compensating error: Errors that cancel each other.
Casting: Adding up.
Transposition: Digits written in the wrong order.
Suspense account: Temporary account for a trial balance difference.
Extraction: Copying balances to the trial balance.
Audit trail: Record showing how entries were made and corrected.

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