Class notes
introduction to the trial balance
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This looks into the accounts and what carried forward and brought forward mean. it also introduces what errors could be made in a trial balance.
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Preparing basic financial statement notes if the credit and debit side of an account are not the same after a period, then a balance is
carried down on the side with a smaller amount to bring it up and the following period, the
same balance is brought down on the other side in order to match.
The trial balance is a list of all the balances made in the nominal ledger. When added up, the
credit and debit side should be equal, and it doesn’t matter what order the accounts are
listed.
Nominal accounts either need to be balanced off and the balance carried down or totalled
and the total transferred to the final accounts. Income and expenses relate to that
accounting period therefore the account is closed off and start off new the next period.
However, assets and liabilities are ongoing so balance and carry on.
In order to transfer profits and income, we debit each income account and credit the profit
and loss account. It is the opposite for expenses, we credit each expense account and debit
the profit and loss account.
If the profit and loss account has an excess of the credit side, the period was a profit. But if
the debit side was greater, it was a loss.
In statement of financial position, and debit balances brought down are classed as assets
and any credit balances brought down are classed as liabilities. Under the capital account
should be the initial capital with either the profit added, or expenses took away minus the
drawings.
There are 5 main types of error that can be made in the trial balance:
Error of omission- a transaction is completely omitted so both the debit and credit entries
are wrong by the amount omitted.
Error of commission- amount included is in the right type of account (asset, liability, etc) and
therefore the right credit or debit side but it is in the wrong ledger account.
Error of principle- amount is entered into the wrong type of account
Compensating error- when multiple errors cancel each other out.
Transposition error- two digits are recorded the wrong way around.
Errors are corrected by creating a journal entry.
If we know where to post one side of a transaction but not the other, we can create a
suspense account which temporarily holds the unknown side of the transaction. When it
comes to creating the financial statements, the suspense account should be resolved.
A bank statement is a record of transactions on the business’ bank account that is held by
the bank. As cash in the bank is seen to be something the bank owes the company, it is
recorded as a credit on the bank statement. And something owed to the bank is seen as a
gain of assets, it is a debit on the statement. To check the cash at bank account is correct,
you can reconcile by comparing the bank statement to the nominal account. Any differences
can be changed, and this is called bank reconciliation.
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