Lecture 3B - Financial Accounting: Balancing Accounts the Trial Balance PDF

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Financial Accounting: Balancing Accounts the Trial Balance - Lecture 3B - Lecture Notes - Introduction to Financial Accounting for Managers....

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Financial Accounting: Balancing Accounts the Trial Balance Procedure for balancing T accounts • Compute the difference between the amounts in the debit and credit columns of an account and enter it on the side with the lowest amount as a balance carried down (c/d). • Draw parallel lines under the balance (c/d) on both sides and enter the total of each side (these should now be the same). • Enter the amount of the balance below the parallel lines on the opposite side to the balance (c/d) and describe it as the balance brought down (b/d). • This closing of the account is double entry. You are crediting/debiting the old period and then debiting/crediting the new period with the balance on the account.

Step by step 1. 2. 3. 4.

Find the side of the account that has the bigger total Add up the total of all entries on the ‘big’ side and put it below the entries Put the same total on the other side below all entries Add all amounts on the smaller side and work out the difference between this amount and the total at the bottom

Balances on T accounts ▪ To balance off an account, a closing entry is made. ▪ The type of closing entry differs with the type of T account. ▪ For revenue and expense accounts (accounts relating to the statement of profit or loss): ▪ The T account is closed off to zero and a new account is opened next period with no opening balance. The difference between the debit and credit sides is posted to the SOPL account. ▪ For asset, liability and equity accounts (those accounts which relate to the statement of financial position): ▪ The closing balance is carried forward to the next period and becomes the opening balance in the next period.

Debit and credit balances ▪ When the total on the debit side of a T account is greater than on the credit side, the account has a debit balance. ▪ Debit balances are usually recorded for assets (e.g. machines), expenses (e.g. rent) and any drawings/dividends ▪ Where the total on the credit side is greater, this is a credit balance and generally applies to revenues, liabilities and capital/equity. ▪ Sometimes accounts which usually have a debit (credit) balance have the opposite balance. For example, if the business has overdrawn its cash, the balance on the cash account will be a credit ▪ Learn the “normal” balances for each type of account to help you check that your T accounts are accurate

The trial balances ▪ A trial balance is a list of the T accounts balances at the end of an accounting period, divided between those accounts with debit balances and those with credit balances. ▪ The total of the accounts in the trial balance with debit balances should equal the total of those with credit balances. ▪ The trial balance is a method of internal control that provides a check that the double entry has been correctly completed – so it helps spot errors ▪ The trial balance is used in the preparation of final financial statements.

Creating the trial balance ▪ Transfer all balances to the trial balance. ▪ List debit balances on the debit side of the TB and credit balances on the credit side of the TB ▪ Include the profit for the year – this is a credit balance normally but would be a debit balance if the business made a loss for the period ▪ For the TB to balance, the debits must equal the credits. ▪ If the TB doesn’t balance, check whether any accounts have been omitted/miscalculated.

Important Points • A cash account will always have a debit balance, but the bank account can have a credit balance which represents a bank overdraft. • Instead of listing all individual credit customers and credit suppliers accounts in a trial balance, it is common to just enter the total trade receivables and total trade payables. • A trial balance can agree but there may still be errors in the ledger. e.g. an amount entered on the correct side but in the wrong account, or the wrong amount entered on both sides. • At the end of each accounting year every account in the ledger must be balanced. • If the account is a movement in owners’ capital account then it is balanced off to the capital account. • If the account is a revenue account the balance is transferred to the statement of profit or loss account. • If the account is an asset, liability or capital account - the balance carries forward into the new period. • A trial balance is a list of the balances in a ledger at a specific point in time, split into those with debit/credit balances. • The types of errors that cause a trial balance to disagree comprise arithmetic errors, posting error, and extraction errors....