Module 04 Notes
Module 04 Notes
The trial balance is a simple report that shows the list of account balances classified as per the
debits and credits. The purpose of the trial balance is to show the accuracy of the double entries
made and to facilitate the preparation of financial statements. The debits of the trial balance
should be the same as the credits; if not then there is an error in one or more of the accounts.
The trial balance is prepared with two different techniques: Total Method and Balance Method.
According to the Total Method, the sum of debits and credits of every account is shown in the
trial balance, i.e. both debit and credit totals are recorded in the trial balance. On the other hand,
according to the Balance Method, only the Net balance which is the difference between credit
and debit total is transferred and recorded. The balance method is therefore preferred.
Example
Prepare a trial balance as on 31st Dec 2021 by filling in the debit and credit columns
accordingly for each ledger balance mentioned below.
The way a balance is transferred to either debit or credit side of a trial balance depends on the
nature of that account, below is the table showing the relationship between types of accounts and
their usual balances.
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
1. Non-trial balance errors
2. Trial balance errors
To correct the error of Ksh. 150 posted in the wrong sides of these account
To correct this error, the amount understated or overstated is posted to these accounts to reflect
the correct balance. In this case, we will:
Ksh.
Debit cash book 90
Credit debtors 90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the
debits or credits then another error may take place to overstate the debits or credits by the same
amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is Ksh.3,980
but shown in the trial balance as Ksh.3,890 and another error carried to the trial balance of
fixture amounting to Ksh.4,540 instead of Ksh.4,450:
Ksh.
Purchases 3,980
3,890
(90)
Ksh.
Fixtures 4,450
(4,540)
90
Errors that Affect the Trial Balance and the Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the
credits. The debits may be more than the credits and vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry.
Example cash received from a debtor is debited to the cashbook and no other entry is made in
the account, i.e. no credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits.
Example a payment to a creditor of Ksh. 300 is credited in the cashbook and also credited in
the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit.
Example – cash received from a debtor of Ksh. 450 is debited in the cashbook as Ksh. 450
and credited as Ksh. 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance
due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger
accounts or when taken up to the trial balance. Example Bal c/d in the cash book for cash at
bank of Ksh. 2000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance.
The balance may also be brought down as an overdraft instead of a debit balance in the trial
balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made through an account
called a suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are
posted here. The balance to be shown on the suspense accounts depends on which side the error
is shown on the trial balance.
If the debits credits, then an amount is included on the credit side of the trial balance so that the
debits = credits. This is a credit balance and will be taken to the suspense account on the credit
side.
Example
Give the journal entries needed to record the corrections of the following. Narratives are
required.
a) Extra capital of Ksh. 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use Ksh. 700 had been debited to General Expenses.
c) Private insurance Ksh. 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly Ksh. 857 had been entered in the books as Ksh. 587.
e) Cash banked Ksh. 390 had been credited to the bank column and debited to the cash column
in the cashbook.
f) Cash drawings of Ksh. 400 had been credited to the bank column of the cashbook.
g) Returns inwards Ksh. 168 from M McCarthy had been entered in error in J Charlton’s
account.
h) A sale of a motor van Ksh. 1,000 had been credited to Motor Expenses.
Solution
THE JOURNAL
Debit Credit
Sales 10,000
Capital 10,000
Additional capital passed into sales a/c now
transferred to capital a/c
Drawings 700
General expenses 700
Drawings debited in general expense now
transferred to drawing a/c
Drawings 89
Insurance 89
Private insurance transferred from insurance
a/c to drawings a/c
Purchases 270
C Kelly 270
Purchases and creditors amount to 857
initially entered as Ksh.587
Bank 390
Cash 390
Correct error in posting
Bank 390
Cash 390
To post the cash banked correctly
Bank 400
Cash 400
Cash drawings correctly started from bank to
cash
J Charlton 168
M McCarthy
Returns in from McCarthy entered in error in
J Carlton now transferred to his a/c 168
Motor expenses 1000
Motor disposal a/c 1000
To correct error in recording sales proceeds
In expense account
Suspense Account
Due to poor double entry or other errors not falling in the category described above, the trial
balance may fail to balance. In most cases the error causing this may take long to be identified.
Before then the accountant is allowed to open up an account known as the suspense account. To
this account, he assigns the balance equal to the difference between the credit and debit sides of
the trial balance to ensure that the trial balance balances. For example if the debit side exceeds
the credit side by Sh100000, suspense account will be assigned a credit balance equal to
Sh100000 thus balancing the trial balance. Later on when the cause of the error is identified,
journal entries are passed against the suspense account till its balance is cleared thus eliminating
it from the books.
Basically all errors affecting the balancing of the trial balance necessitate the creation of a
suspense account.
Failure to enter a corresponding entry for every debit or credit entry made Making a wrong
corresponding entry e.g. if cash sales of shs Sh 20000 are made and a debit entry correctly made
in the cash book. However the sales account is credited with Sh Sh2000.
This means that the credit side of the trial balance will be understated by Sh 18000. Suspense
account will thus be created and assigned accredit balance of Sh 18000 to make the trial balance
“appear’ balanced awaiting identification and correct of the error.
Once the error is identified then journal entries need to be passed to remove the suspense account
as follows:
Dr. Suspense account 18000
Cr. Sales account 18000
(To correct the error understating the credit balances of the trial balance)
Learners are however cautioned that the suspense account should not be used to balance the trial
balance unless the examiner specifically asks the students to do so.
CONTROL ACCOUNTS
Control accounts are so called because they control a section of the ledgers. By control we mean
that the total on the control accounts should be the same as the totals on the ledger accounts.
There are two main types of control accounts:
(i) Sales ledger control Account – also called total debtors. The balance on the sales ledger
control account should be the same as the total of the balances in the sale ledger.
(ii) Purchases Ledger Control Account – also called total creditors .The balance carried
down (Bal c/d) on the purchases Ledger Control Account should be the same as the total
of the balances in the purchases ledger.
SALES LEDGER
Debtor A a/c
Debtor B a/c
Debtor C a/c
Debtor D a/c
Creditor A
Creditor B
Creditor C
Creditor D
1. Balance b/d of the total debit 1. Total credit balances of the sales
balances from previous period ledger brought forward
2. Total credit sales for the period 2. Total cash received from credit
(from the sales journal) customers/debtors (from cash
book)
3. Refunds to customers (from 3. Total cheques received from
cashbook) credit customers/debtors (from
cash book)
4. Dishonored cheques (from 4. Total returns-inwards (returns-
cashbook) inwards journal)
5. Bad debts recovered (from 5. Total cash discount allowed to
general journal) customers (from cash book)
6. Bad debtors written-off (from
general journal)
7. Cash received from bad debtors
recovered (cash book)
8. Purchases Ledger contra
Refunds to Customers
Sometimes a firm can refund some cash on the customer’s account. This takes place when there
is a credit balance on the debtor’s a/c and the customer is not a creditor too.
The entry will be:
Example:
Debtor A
£ £
Sales 1000 Cashbook 950
(Refunds) C/B 100 Discounts 50
Returns 100
1100 1100
If the firm has not paid this amount owed to the customer, then it’s carried forward to the next
period then is a credit balance in the customer’s a/c. Therefore, if a firm has several customer,
this information will be shown in the control a/cs as total balance c/f (debit side).
Creditor (A)
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts
should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase
or decrease in provisions for doubtful debts will not affect this account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some
cases it can be included especially where there are incomplete records (Topic to be
covered later).
5) Interest due that is charged on overdue customers’ account may also be shown on the
debit side of the sales ledger control. However when trying to determine the turnover
under incomplete records then it is wise to omit it.