Unit 4
🔹 1. What is a Trial Balance?
A Trial Balance is a list of all ledger accounts and their balances (debit or credit) at a specific
date, prepared to check the arithmetic accuracy of the books.
👉 Example:
If Shontay’s Print Shop has these balances:
Cash $50,000 (Dr)
Furniture $30,000 (Dr)
Capital $80,000 (Cr)
Trial Balance will show:
Debits = $80,000
Credits = $80,000 ✅ (it balances).
🔹 2. Purpose of a Trial Balance
To check arithmetical accuracy of double-entry records.
To help prepare final accounts (Income Statement & Balance Sheet).
To detect certain errors in recording.
🔹 3. How to Prepare a Trial Balance
Steps:
1. List all ledger accounts with balances.
2. Place debit balances in the debit column and credit balances in the credit column.
3. Total both sides → they should agree.
👉 Mini Example:
Account Debit ($) Credit ($)
Cash 50,000
Purchases 20,000
Sales 30,000
Capital 40,000
Totals: Debit = 70,000; Credit = 70,000 ✅ Balanced
🔹 4. Errors a Trial Balance Will NOT Disclose
Even if the trial balance balances, some errors still hide:
1. Error of Omission → a transaction is completely left out.
o Example: Credit sales of $10,000 not recorded at all.
2. Error of Commission → wrong account of same type used.
o Example: Amount meant for Customer A is posted to Customer B.
3. Error of Principle → entry in wrong class of account.
o Example: Buying a printer ($50,000) recorded as “Stationery Expense.”
4. Compensating Errors → two errors cancel each other out.
o Example: Purchases overstated by $1,000 and Sales also overstated by $1,000.
5. Error of Original Entry → wrong figure used in both debit and credit.
o Example: $500 sale recorded as $50 on both sides.
🔹 5. Correcting Errors Not Revealed by a Trial Balance
Corrections are done through journal entries.
Example: If a machine ($30,000) was debited to “Repairs Expense,” correction would
be:
o Dr Machine $30,000
o Cr Repairs Expense $30,000
🔹 6. Kinds of Errors That May Arise
Disclosed by Trial Balance: posting on one side, unequal amounts.
Not disclosed by Trial Balance: the 5 above (omission, principle, etc.).
🔹 7. How to Record Revenue & Expenses in Double Entry
Revenue (Sales) → increases owner’s equity → Credit.
Expenses → decrease owner’s equity → Debit.
👉 Examples:
Cash sale of $5,000 → Dr Cash $5,000 | Cr Sales $5,000
Paid rent $2,000 → Dr Rent Expense $2,000 | Cr Cash $2,000
🔹 8. Types of Accounts
1. Assets (Dr balance) → Cash, Inventory, Equipment.
2. Liabilities (Cr balance) → Loan, Creditors.
3. Equity/Capital (Cr balance) → Owner’s capital, retained earnings.
4. Revenue/Income (Cr balance) → Sales, Fees earned.
5. Expenses (Dr balance) → Rent, Wages, Utilities.
🔹 9. The Accounting Cycle
1. Identify transactions → business event occurs.
2. Journalize → record in general journal.
3. Post to ledger → update individual accounts.
4. Prepare trial balance → check equality of Dr & Cr.
5. Adjusting entries → accruals, prepayments.
6. Adjusted trial balance → updated balances.
7. Prepare financial statements → Income Statement, Balance Sheet, Cash Flow.
8. Closing entries → close temporary accounts (revenue, expenses).
9. Post-closing trial balance → only permanent accounts remain.
👉 Mini Example Flow:
Shontay sells flyers for $10,000 cash.
Journal: Dr Cash | Cr Sales.
Ledger: update Cash & Sales accounts.
Trial Balance: both sides match.
At year-end: Sales goes to Income Statement → Profit added to Capital.
🔹 10. Steps to Balance a T-Account
1. Add up each side (debit and credit totals).
2. Find the difference between the two sides.
3. Insert the balance on the smaller side to make both sides equal.
This is called the balancing figure (either Balance c/d or Balance b/d).
Put the Balance c/d on the smaller side
4. Carry it down (c/d → carried down) to the opposite side as Balance b/d (brought
down) for the next period.