Preparing A Trial Balance

Preparing A Trial Balance

It is likely that you will only have some of the main ledger accounts in full; some may need to be updated with recent transactions.  The problem here is to determine whether the balance is a debit or credit balance.

The P.E.A.R.L.S Rule

P.E.A.R.L.S is a simple way to determine whether an account should be debited or credited.

How To Prepare A Trial Balance

We have provided a working example of how to prepare a trial balance.  Use this example as a guide.

Trial Balance Accounting Errors

Having now prepared our trial balance, this section considers a trial balance that does not balance.  This be so, you must then identify and rectify discrepancies and create a suspense account where necessary.  In order to identify the errors you will need to be aware of the different types of error that exist, both those that are shown up by the trial balance and those that are not.  This section looks at the following:

• Types of errors that lead to an imbalance in the trial balance
• Types of that do not cause an imbalance in the trial balance
• The procedure to follow to try to determine the error or errors made when the trial balance does not balance
• Creation and clearing of a suspense account

Types of Error

In a manual accounting system there are several types of error that can be made when making entries to the ledger accounts.  Some of these errors will be identified when a trial balance is extracted but a number of types of error can take place and the trial balance will still balance.

Errors Leading To An Imbalance On The Trial Balance

There are a number of types of error that will mean that the debit balances on the trial balance will not equal the credit balances.

• Single entry - if only one side of the double entry has been made in the ledger accounts, e.g. the debit and not the credit, then the trial balance will not balance.
  
  

• Transposition Error – a transposition error is where the digits in a number are transposed (correct digits but in the wrong order) or you leave a zero off the end of a number.  Both are extremely easy to do.

  When the difference, the amount you are out of balance or off from the expected total, is evenly divisible by 9, youhave a transposition error.

  First, how do you tell if it's evenly divisible by 9?  You could go to a calculator and divide by 9 and see if there's a decimal portion in the answer, but that's a lot of work.  There's a shortcut method:

  1. Take the digits of the number you want to check and add them together.
  2. If the result has more than 1 digit, add those digits together until you get a single digit.
  3. If that single digit is 9, then the number is evenly divisible by 9.
  4. If it's anything other than 9, the number is not evenly divisible by 9.

  Example 1: Is 81 divisible by 9?

  1. Add (8 + 1) to get 9.  The answer is 9.  It is divisible by 9.

  Example 2: Is 17,514 divisible by 9?

  1. Add (1 + 7 + 5 + 1 + 4); the answer is 18.  That's still more than one digit.
  2. Add these two digits together.  Add (1 + 8) to get 9.  Yes, 17,514 is evenly divisible by 9.

  Example 3: Is 17,520 divisible by 9?

  1. Add (1 + 7 + 5 + 2 + 0); the answer is 15.  That's still more than one digit.
  2. Add these two digits together.  Add (1 + 5) to get 6.  No, 17,520 is not evenly divisible by 9.

  Example 4: If you should have written (or entered into your calculator or accounting system 672 but you accidentally wrote 762, you have made a transposition error.  The first two digits are reversed.

  1. The difference (762 - 672) is 90.
  2. Check to see if 90 is divisible by 9.  That one is obvious; it is.

  Example 5: If you should have written 880 but you accidentally wrote 88 (leaving off the final zero), you have made a transposition error.

  1. The difference (880 - 88) is 792.
  2. Check to see if 792 is divisible by 9.
  3. Add (7 + 9 + 2) you get 18.
  4. Add those two digits (1 + 8) together to get 9.  It is divisible by 9, as all transposition differences are.
  
  
• Balancing Error – if a ledger account has not been correctly balanced and the incorrect balance has been included in the trial balance, it will not balance.
  
  
• Balance Omission – if a balance on a ledger account is omitted from the trial balance then again this means that the debits will not equal the credits.
  
  
  

Errors Which Do Not Cause An Imbalance On The Trial Balance

Unfortunately there are also some types of error that will not cause a difference on the trial balance and therefore cannot be shown up through the trial balance process.

• Error of Original Entry - here both entries into the main ledger, debit and credit, have been made using the incorrect amount.  This maybe due to the fact that the transaction was recorded in the books of prime entry at the incorrect amount, or that the incorrect figure was picked up from the original source document (e.g. transposition error) and this incorrect figure was used for both the debit and credit entry.  However as long as both the debit and credit entry are equal this error will not cause an imbalance in the trial balance.
  
  
• Error of Omission - an entry is completely omitted from the ledger accounts.  If the transaction is not recorded as either a debit or a credit then it will not affect the trial balance.
  
  
• Error of Reversal – this is where the correct figure has been used and a debit and credit entry made but the debit and the credit are on the incorrect side of the respective accounts (see T-Account & P.E.A.R.L.S).  The trial balance will still balance but the two accounts will have incorrect balances.
  
  
• Error of Commission – this double entry is arithmetically correct but an incorrect account of the same type has been used.  For example, if the telephone bill is paid the bank account will be credited and an expense account, the telephone account, should be debited.  If instead the electricity account is debited this is an error of commission.  It does not affect the trial balance but it does mean that both the telephone account and electricity account show the incorrect balance.
  
  
• Error of Principle – an error of principle is similar to an error of commission in that the double entry is arithmetically correct but with an error of principle the wrong type of account has been used.  For example if computer disks are purchased, the bank account should be credited and the computer expenses or office expenses debited.  If instead the cost of the disks is debited to the computer fixed asset account, this is an error of principle but again will not affect the balancing of the trial balance.
  
  
• Compensating Errors - these are probably rare in practice but it is where two errors are made which exactly cancel each other out.  For example, if a debtors control account is entered at £100 too high an amount (a debit balance) and the purchase returns (a credit balance) is also entered at £100 too high an amount, the two errors will cancel each other out.  The two errors are unrelated but the fact that they both occurred will mean that there is no imbalance in the trial balance.

Imbalance On The Trial Balance

If the trial balance does not balance then the reason or reasons for this have to be discovered.  As we have seen in the previous section there are many types of error that could cause the total of the debit not to equal the total of the credits.  Rather than going back to each ledger account and checking each entry to find the cause of the imbalance it makes sense, in practice, to take a logical approach to finding the causes of any imbalance.

The problem might be arithmetical or to do with a double entry but it makes sense to check the more obvious and simple errors before getting involved with detailed checking of the ledger accounts.

How To Find Trial Balance Errors

1. Check the totalling of the debit column and the credit column.  It is very easy to make an error when totalling a large column of figures therefore this is an obvious place to start.
2. Calculate the difference between the debit and credit totals as this may come in useful later in the checking exercise if the difference cannot be found easily.
3. Check that each balance in the trial balance has been correctly copied into the trial balance and that each has been included on the correct side, debit or credit.
4. Check that all balances in the main ledger have been included in the trial balance.  In particular ensure that the bank balance and petty cash balances have been included, as these are generally kept physically separate from the main ledger.
5. Check that the calculation of the balance on each ledger account is correct.
6. Look in the ledger accounts for any entry that is for the same amount as the difference on the trial balance and, if it is found, check that the double entry for this transaction has been correctly carried out.
7. Look in the ledger accounts for any entry that is for half the amount of the difference on the trial balance and, if it is found, check that the double entry for this transaction has been correctly carried out.

If all else fails resort to:

8. Checking all the bookkeeping entries since the date of the last trial balance.  This will entail following through each transaction from the primary records to the ledger accounts.

Tips

If the difference on the trial balance is divisible exactly by nine then the error is likely to be a transposition error.

If the difference on the trial balance is a round number e.g. £10, £100, £1000 etc then it is likely that the error that has been made is arithmetical rather than a double entry error.  Therefore take great care when checking account balance calculations.

Correcting The Error

When the reason for the imbalance of the trial balance is discovered it must be rectified.  Each error or omission must be corrected and this is done using a journal entry.

Creation Of A Suspense Account

When the trial balance is initially drafted it is possible that the debit total does not equal the credit total.  When this happens the reasons for this must be investigated.  However until the reasons for the imbalance on the trial balance have been discovered a suspense account is opened in order to make the trial balance totals equal.

As previously stated, not all errors affect the balancing of the trial balance.  Therefore when drafting journals to correct errors there will not always be an entry to the suspense account.  The only time that there will be a suspense account entry will be if the double entry has broken down in some way, so that there is only one correcting entry to the ledger accounts rather than a double entry.  In these situations the other side of the entry will be to the suspense account.