Accounting: The Language of Business (Part 13)

“Balanced budget requirements seem more likely to produce accounting ingenuity than genuinely balanced budgets.” —Thomas Sowell

Analyzing Transactions (Part E)

by

Charles Lamson

Trial Balance

How can you be sure that you have not made an error in posting the debits and credits to the ledger? One way is to determine the equality of the debits and credits in the ledger. This equality should be proved at the end of each accounting, if not more often. Such a proof, called a trial balance, may be in the form of a computer printout or in the form shown in Exhibit 5. 

EXHIBIT 5

The first step in preparing the trial balance is to determine the balance of each account in the ledger. When the standard account form is used, the balance of each account appears in the balance column on the same line as the last posting to the account.

The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. If the two totals of a trial balance are not equal an error has occurred. In the next section of this post, we will discuss procedures for discovering and correcting errors.

Discovery and Correction of Errors

Errors will sometimes occur in journalizing and posting transactions. In some cases, however, an error might not be significant enough to affect the decisions of management or others. In such cases, the materiality concept implies that the error may be treated in the easiest possible way. For example, an error of a few dollars in recording an asset as an expense for a business with millions of dollars in assets would be considered immaterial, and a correction would not be necessary. In the remaining paragraphs, we assume that errors discovered are material and should be corrected.

Discovery of Errors

As mentioned previously preparing the trial balance is one of the primary ways to discover errors in the ledger. However, it indicates only that the debits and credits are equal. If the two totals of the trial balance are not equal, it is probably due to one or more of the errors described an Exhibit 6.

EXHIBIT 6

Among the types of errors that will not cause the trial balance totals to be unequal are the following:

1. Failure to record a transaction or to post a transaction.

2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.

3.  Recording the same transaction more than once.

4.  Posting a part of a transaction correctly as a debit or credit but to the wrong account.

It is obvious that care should be used in recording transactions in the journal and in posting to the accounts. The need for accuracy in determining account balances and reporting them on the trial balance is also evident.

Errors in the accounts may be discovered in various ways: (1) through audit procedures, (2) by looking at the trial balance or (3) by chance. If the two trial balance totals are not equal, the amount of the difference between the totals should be determined before searching for the error.

The amount of the difference between the two totals of a trial balance sometimes gives a clue as to the nature of the error or where it occurred. For example, a difference of 10, 100, or 1,000 between two totals is often the result of an error in addition. A difference between totals can also be due to omitting a debit or a credit posting. If the difference can be evenly divided by 2, the error may be due to the posting of a debit as a credit, or vice versa. For example, if the debit total is $20,640 and the credit total is $20,236, the difference of $404 may indicate that a credit posting of $404 was omitted or that a credit of $202 was incorrectly posted as a debit.

Two other common types of errors are known as transpositions and slides. A transposition occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524. In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. If an error of either type has occurred and there are no other errors the difference between the two trial balance totals can be evenly divided by 9.

If an error is not revealed by the trial balance. The steps in the accounting process must be retraced, beginning with the last step and working back to the entries in the journal. Usually, errors causing the trial balance totals to be unequal will be discovered before all of the steps are retraced.

Correction of Errors

The procedures used to correct an error in journalizing or posting vary according to the nature of the error and when the error is discovered. These procedures are summarized an Exhibit 7.

EXHIBIT 7

Correcting the first two types of errors shown in Exhibit 7 involves simply drawing a line through the error and inserting the correct title or amount. Usually, the person making corrections initials the correction in case questions arise later.

Correcting the third type of error in Exhibit 7 is more complex. To illustrate, assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500. This posting of the incorrect entry is shown in the following T accounts.

Incorrect:

Before making a correct correcting entry, it is best to determine the debit(s) and credit(s) that should have been recorded. These are shown in the following T accounts.

Correct:

Comparing the two sets of T accounts shows that the incorrect debit to Supplies may be corrected by debiting Office Equipment for $12,500 and crediting Supplies for $12,500. The following correcting entry is then journalized and posted: 

Entry to Correct Error:

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 68-71*

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