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Module 04 Notes

The trial balance is a report that lists account balances to verify the accuracy of double entries and assist in preparing financial statements, ensuring that debits equal credits. It can be prepared using the Total Method or Balance Method, with the latter being preferred. Errors can occur in accounts, categorized as non-trial balance errors or trial balance errors, and may require the use of a suspense account to balance the trial balance until corrections are made.

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0% found this document useful (0 votes)
2 views12 pages

Module 04 Notes

The trial balance is a report that lists account balances to verify the accuracy of double entries and assist in preparing financial statements, ensuring that debits equal credits. It can be prepared using the Total Method or Balance Method, with the latter being preferred. Errors can occur in accounts, categorized as non-trial balance errors or trial balance errors, and may require the use of a suspense account to balance the trial balance until corrections are made.

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frankndende96
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TRIAL BALANCE

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.

How to Prepare a Trial Balance from Ledger Balance


Preparing a trial balance from ledger balances is the next step of posting and balancing ledger
accounts. The trial balance is a statement of debit and credit balances that are extracted from
ledger accounts on a specific date.

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.

Account Balance Account Balance


Capital 70,000 Carriage Inwards 1,500
Opening Stock 20,000 Carriage Outwards 2,000
Salaries 10,000 Plant & Machinery 17,000
Returns Inward 500 Investments 7,000
Returns Outward 6,000 Sales 70,000
Purchases 80,000 Patents 10,000
Sales Ledger Control 7,000 Furniture 8,000
Purchase Ledger Control 40,000 Discount Allowed 1,000
Cash in Hand 15,000 Misc. Receipts 4,000
Cash at Bank 11,000 Closing Stock 9,000
Solution
Trial Balance from the Above Ledger (31st Dec 2013)

Particulars Debit Credit


Capital 70,000
Opening Stock 20,000
Salaries 10,000
Returns Inward 500
Returns Outward 6,000
Purchases 80,000
Sales Ledger Control 7,000
Purchase Ledger Control 4,000
Cash in Hand 15,000
Cash at Bank 11,000
Carriage Inwards 1,500
Carriage Outwards 2,000
Plant & Machinery 17,000
Investments 7,000
Sales 70,000
Patents 10,000
Furniture 8,000
Discount Allowed 1,000
Misc. Receipts 4,000

Total 190,00 190,0


0 00

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.

Type of Account Usual balance


Assets Debit
Liability Credit
Capital Credit
Revenue Credit
Expenses Debit
Drawings Debit

ERRORS ON ACCOUNTS
There are two types of errors in accounts:
1. Non-trial balance errors
2. Trial balance errors

1. Non-trial trial balance errors


The trial balance produced from the accounts appears to be okay/correct, i.e. the debits are the
same as the credits. However, on taking a close check on the balances and transactions posted,
errors may have been made and therefore the balances shown on the trial balance may be
incorrect i.e. under/over stated. There are 6 main types of errors that don’t affect the trial balance
and these are explained as follows:
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not
made e.g. a sales invoice of Ksh.400 is not posted in the sales journal therefore no entry is made
in the debtor’s account and the sales account i.e. both debit of Ksh.400 in debtor’s account and
credit of Ksh. 400 in the sales account. The effect of the error is it understates both the debtors
and the sales. To correct this error, the transaction is posted in the books by:
Debiting debtors Ksh.400
Crediting sales Ksh.400
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same
class. Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount
of Ksh. 200. Instead of a debit to T Thompson’s account it is made to L Thompson’s account
and the corresponding credit in the sales account is correct.
Although the debit entry is made into the wrong account, the two accounts are of the same class
i.e. debtors. To correct this error a transfer is made from L Thompson’s account to T Thompson
by: Ksh.
(i) Debit T Thompson a/c 200
(ii) Credit L Thompson a/c 200
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different
class e.g. Motor vehicle purchased for Ksh. 400 is posted to the motor vehicle expenses a/c.
(Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in
the cashbook is correct).
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense
account. Therefore a capital expenditure has been posted as revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c
by: Ksh.
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400
d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit
is posted as a credit and a credit is posted as a debit. Example: cash drawn from the bank of
Ksh.150 for business use is posted as a debit in the bank account and credit in cash in hand.
To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
(ii) Post the transaction correctly

The entries will therefore be as follows:

(i) Debit Cash in hand by Ksh.150


Credit bank by Ksh.150

To correct the error of Ksh. 150 posted in the wrong sides of these account

(ii) Debit cash by Ksh.150


Credit bank by Ksh.150
To post the entries correctly

e) Error of Original entry


Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is
either under/over stated. In some cases, this is known as a transposition error e.g. cash received
from a debtor of Ksh.980 is credited/posted to the customer’s account as Ksh.890.

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

This type of error is corrected by use of a suspense account.

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.

Example (Sales Ledger Control a/c)

Sales Ledger Control A/c


Sales = 200 + 300 + 400 + 500
Sales 1400 Cashbook 700 Cashbook = 50 + 100 + 250 +
Bal C/D 700 300
1400 1400 Balance c/d = 150 + 150 + 200

SALES LEDGER
Debtor A a/c

Sales 200 C/B 50


Bal c/d 150
200 200

Debtor B a/c

Sales 400 C/B 250


Bal c/d 150
400 400

Debtor C a/c

Sales 300 C/B 100


Bal c/d 200
300 300

Debtor D a/c

Sales 500 C/B 300


Bal c/d 200
500 500

Example: Purchases Ledger Control a/c


Purchases Ledger Control a/c

C/B 1900 Purchases 2600


Bal c/d 700
2600 2600
PURCHASES LEDGER

Creditor A

C/B 400 Purchases 600


Bal c/d 200
600 600

Creditor B

C/B 450 Purchases 700


Bal c/d 250
700 700

Creditor C

C/B 350 Purchases 500


Bal c/d 150
500 500

Creditor D

C/B 700 Purchases 800


Bal c/d 100
800 800

Purpose of Control Accounts


1. Provide for arithmetical check on the postings made in the individual accounts (either in
the sales ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as debtors and
creditors.
3. To detect and prevent errors and frauds in the customers and suppliers account.
4. To facilitate delegation of duties among the debtors and creditors clerks.

FORMAT OF A SALES LEDGER CONTROL


Sales Ledger Control a/c

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

9. Allowances to customers (price


reduction in excess to discounts
allowed)
6. Total credit balances of the sales 10. Total debit balance carried down
Ledger carried forward to the next period – to be derived
after posting all those transactions

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:

Dr. Debtor’s a/c


Cr. Cashbook

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).

Contra against the purchases ledger balances:


Some debtors may also be creditors in the same firm and therefore, if the amount due to them as
creditors is less than what they owe as debtors, then the credit balance is transferred from their
creditors’ a/c to their debtors’ a/c as a contra entry.
Example:
Debtor (A)

Sales 2000 Contra- purchases 1000


Bal c/d 1000
2000 1100

Creditor (A)

Contra - Debtor 1000 Purchases 1000

FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT


Purchases Ledger Control A/C
1. Total debit balances from purchases 1. Total credit balance brought
ledger brought forward from forward (of purchases ledger from
previous period the previous period)
2. Total cash paid to creditors 2. Total credit purchases for the period
(from cash book) (from purchases journal)
3. Total cheques paid to creditors 3. Refunds from suppliers
(from cash book) (from cash book)
4. Total cash discounts received
(from cash book)
5. Allowances by suppliers

6. Sales ledger contra

7. Total returns outwards


(from returns-outwards journal)
8. Total credit balance 4. Total debit balances (of the
(to be derived after posting entries) purchases ledger carried forward)

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.

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