ACCOUNTING : BOOK-KEEPING TO THE TRIAL BALANCE 

THE TRIAL BALANCE

It has already been seen that in the double-entry system, every debit has its corresponding credit and vice versa. If follows, therefore, that at any given time, the postings from the General Journal, Day Books or Journals and Cash Book being completed, the debit balances standing in all the Ledgers (including the Cash Book) will equal the credit balances.

At the end of the financial period (or at some other date) these balances are extracted, and a schedule prepared in Journal form to test whether, in fact, the total debits equal the total credits. Such a schedule of balances is called a Trial Balance.

With the totals duly agreeing a reasonably reliable check on the total ARITHMETICAL accuracy of the book-keeping entries is afforded; other- wise it is obvious that some error exists either in the actual execution of the double entry or in the extraction of the balances.

The following were his transactions for January:

19..

Jan. 1. Withdrew £35 from bank for petty cash purposes..
Sold Y goods on credit £50.
Paid for business stationery by cheque £20.
3. Sold L goods on credit £30.
5. Sold Q goods for cash £17, paid direct into bank.
6. Sold Y goods on credit £40.
8. Y returned goods to value of £5.
12. Bought typewriter by cheque £60.
13. Received cheque from Y in payment for goods purchased on 1st Jan., less 10% cast
discount, paid direct into bank.
14. Bought goods on credit from D £120.
17. Bought goods from G £150, less 10% trade discount.
18. L pays cash £30, paid direct into bank.
20. Returned goods to G £50 (list price value).
23. A drew out of bank £40 to pay premium on his life policy. He was allowed 24% commission by the assurance company. The net premium was paid in cash on this date.
25. Bought goods by cheque from R £15.
26. Withdrew from stock £15 goods for private purposes.
Sold to L goods on credit £20.
27. Paid B £10 cheque on account of loan, plus £2 for interest.
28. Paid electricity for month by cheque £5.
Received from L cheque for £19 in settlement of his account, paid direct into bank. 30. Cheque dishonoured and debt written off as bad.
31. Acquired second-hand car £50, cheque £350.
Drew £100 from bank to pay monthly wages.

Detection of Errors:

Errors 'not Affecting Balance. Although the Trial Balance totals may agree, it is only the total arithmetical accuracy of the books that may be said to be correct, though even then perfect accuracy is not assured, for compensating errors may arise, e.g. both the Sales and Purchases figures may be undercast to the extent of £100 each. The types of errors that may remain undetected are as follows:

1. Errors of Omission. The omission of both debit and credit aspects of a transaction will not affect the agreement of the Trial Balance.

2. Errors of Commission. The posting of £100 to the credit of J. Robson instead of to the credit of J. Dobson will not affect the agreement of the Trial Balance. The total of the extract of Sundry Debtors will not in itself be incorrect, though two of its composite items will be wrong. The entries required to correct an error of this type would (in this case) be as follows:

3. Compensating Errors. One or more debit errors which happen to equal one or more credit errors will not upset the Trial Balance. Thus, a £90 error in the balance of an Asset account-the balance of £100 having been brought down as £10-and a £10 under-addition in the Purchase Day Book or Journal would be compensated by the omission of the 'corresponding credit in the Sales Ledger for a debit of £100 in the Cash Book.

4. Errors of Principle. The posting of a revenue expense to a Capital Account or vice versa will not affect the Trial Balance agreement. It can thus easily be seen that the books might be quite incorrect as far as the true position of the business is concerned and yet the Trial Balance The student must therefore take the greatest care throughout all his agree. studies to distinguish between capital and revenue receipts and payments. In broad outline it may be stated that capital payments are those incurred in acquiring Assets for the purpose of earning income, usually identifiable as assets of a permanent nature, thus increasing the earning capacity of the business or decreasing costs. Revenue payments are those incurred in the ordinary course of business, being necessary for its efficient running. It may be generally stated that capital receipts are moneys received from the sale of assets or by the raising of loans, and revenue receipts are moneys received in return for goods sold or services rendered. (See Chapter 08.)

A simple example is given here to illustrate such error-X is the owner of £10,000 3 per cent War Loan and' upon receipt of the regular half-yearly dividend of £175 he posts the sum to the credit of the Investment Account, whereas it should go to the credit of Income Ac- count or, as will be seen later, to the Profit and Loss Account.

Errors Affecting Balance. Though the above types of errors may occur and remain undisclosed in the Trial Balance, those given below will always have the effect of causing a discrepancy in the agreement of the Trial Balance unless by chance the errors collectively eliminate each other. They may be divided broadly into two classes:

1. Book-keeping errors.

2. Extraction errors.

BOOK-KEEPING TO THE TRIAL BALANCE

1. Book-keeping Errors. These include the following:

(i) Items posted to the wrong side of an account.

 (ii) The Discount columns of the Cash Book transferred to the wrong sides of the Discount Account.

(iii) Items for which the double entry is not complete. These often occur in the case of small returns, discounts and allowances, which have been entered in the personal accounts and not in the Returns or Discount

Account.

(iv) Omission to post the totals of one or more of the subsidiary books. 

2. Extraction Errors. These include the following:

(i) Omission to extract one or more balances, either debit or credit (particularly the Cash and Bank Balances), or a duplication of an item. (ii) Errors in additions. These are caused more often than not by careless alignment of figures and incorrect carrying forward of additions (e.g. figure 1 badly aligned would result in a difference of 9, 90, 900 according to actual misplacement).

(iii) The confusion of figures, e.g. £1.05 taken as £105.

(iv) The extraction of items on the wrong side (causing an error of double the sum of the items).

Illustration 3

The table shown on p. 0116 is an example of some of the common errors that are made by students when preparing a Trial Balance.

In practice the different items in the Trial Balance would be earmarked by a reference to their Ledger and folio for the sake of quick verification. In examination work such detail is quite unnecessary.

The aim in an examination paper, furthermore, is to avoid the opening of unnecessary accounts, so that where possible all simple accounts should be 'posted' direct to the Trial Balance.