understand that a trial balance is a statement of ledger balances on a particular date

3.1 The Trial Balance

Objective

Understand that a trial balance is a statement of the closing balances of all ledger accounts on a particular date, and be able to prepare, check and correct it.

1. Definition, Purpose, Uses & Limitations

• Definition: A trial balance is a worksheet that lists the closing balance of every ledger account (debit or credit) on a specific date, usually the end of an accounting period.
• Purpose: To confirm that the total of debit balances equals the total of credit balances after all postings have been made.
• Uses
  • Checks the arithmetical accuracy of the ledger.
  • Provides the starting point for preparing the final accounts (Income Statement and Balance Sheet).
  • Helps locate certain types of errors (e.g., double posting, posting to the wrong side).
• Limitations
  • It does not prove that every transaction has been recorded.
  • It cannot detect errors of omission, commission, principle, or compensating errors.
  • A balanced trial balance may still contain mistakes that offset each other.

2. Preparing a Trial Balance – Step‑by‑Step

1. Ensure that all transactions for the period have been recorded in the journal.
2. Post every journal entry to the appropriate ledger accounts.
3. Calculate the closing balance of each ledger account (debit or credit).
4. List each account name on the trial‑balance worksheet, placing the balance in the correct column.
5. Add the debit column and the credit column separately.
6. Compare the two totals.
   • If they are equal, the trial balance “balances”.
   • If they differ, investigate the discrepancy and correct the error before proceeding.

3. From a Raw List of Balances to a Trial Balance

3.1 Raw list of balances (as at 31 May 2025)

3.2 Trial‑balance worksheet

3.3 Interpretation

The debit total ($43 000) equals the credit total ($43 000); therefore the trial balance balances and the accountant can move on to adjustments and the preparation of final accounts.

4. Errors that Do NOT Affect the Trial Balance

5. Correction of Errors Detected from an Unbalanced Trial Balance

5.1 Use of a Suspense Account

• If the trial balance does not balance, the difference is temporarily posted to a Suspense Account:
  • Debit the suspense account when credits exceed debits.
  • Credit the suspense account when debits exceed credits.
• The suspense balance is investigated and cleared once the underlying error is identified.

5.2 Typical Journal‑Entry Corrections

5.3 Effect on Profit and the Statement of Financial Position

• Errors that affect expense or revenue accounts change the profit figure and therefore the capital (or retained earnings) shown in the Balance Sheet.
• Errors that involve only asset and liability accounts alter the presentation of the financial position but do not affect profit.
• When a suspense account is cleared, the correcting entries automatically adjust the relevant accounts, ensuring that both the Income Statement and Balance Sheet are correct.

3.2 Bank Reconciliation

Purpose

• To ensure that the cash‑book balance agrees with the bank statement balance.
• To identify and correct errors made by the business or the bank.

Key Steps

1. Start with the cash‑book balance (as at the reconciliation date).
2. Adjust for items recorded in the cash book but not yet reflected in the bank statement:
   • Outstanding cheques
   • Unpresented deposits
3. Adjust for items recorded by the bank but not yet recorded in the cash book:
   • Bank charges
   • Interest received
   • Direct credits/debits
4. Identify any bank errors (e.g., wrong amount posted) and correct them in the cash book.
5. After all adjustments, the adjusted cash‑book balance should equal the adjusted bank‑statement balance.

Worked Example

Since the two adjusted balances still differ, the remaining $150 discrepancy must be investigated (e.g., a bank error). Once resolved, both balances will agree.

3.3 Control Accounts

Purpose

• To provide a summary of the total balances of a group of related subsidiary ledger accounts.
• To ensure that the total of the subsidiary ledger agrees with the control account in the general ledger.

Common Types

• Purchases Ledger Control Account (summarises all creditors).
• Sales Ledger Control Account (summarises all debtors).

Sources of Information

• Purchase Journal (for the Purchases Ledger Control Account).
• Sales Journal (for the Sales Ledger Control Account).
• Subsidiary ledgers (individual creditor or debtor accounts).

Example – Purchases Ledger Control Account

The closing balance of $6 700 in the Purchases Ledger Control Account must equal the total of the individual creditor balances in the purchases subsidiary ledger.

3.4 Glossary of Key Terms (Cambridge terminology)

Key Points to Remember

• The trial balance is prepared after all ledger postings for the period are complete.
• Only the closing balances of each account are shown; individual transaction details are omitted.
• If the totals do not agree, locate and correct the error (use a suspense account if necessary) before preparing the final accounts.
• A balanced trial balance does not guarantee that the accounts are free from all errors; it only confirms that total debits equal total credits.
• Bank reconciliation and control accounts are additional verification tools required by the Cambridge IGCSE syllabus.