Preparing the trial balance - Totals, balancing, and checks

Learning Outcomes

After studying this article, you will be able to compile a trial balance by extracting and listing account balances, identify and resolve errors using trial balance checks, distinguish errors found and not found by a trial balance, and understand the role of suspense accounts in balancing the ledger. These are essential bookkeeping skills for the ACCA FA1 exam.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand the process and importance of preparing the trial balance as part of checking the accuracy of accounting records. Key focus areas include:

• The method for extracting balances from the general ledger to compile a trial balance
• How to ensure the totals of debits and credits match and what this demonstrates
• Recognising errors that would or would not be revealed by a trial balance
• Understanding the function and use of a suspense account
• Applying balancing and correction methods as part of period-end checks

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What does a trial balance demonstrate if the total debits equal total credits?
2. Which of the following errors will a trial balance reveal? a) Failing to post the credit entry for a cash sale
   b) Entering an expense in the wrong expense account
   c) Recording both sides of a transaction for the wrong amount
   d) Omitting a purchase invoice entirely
3. What is the primary use of a suspense account during the trial balance process?
4. When balancing a ledger account, how do you carry the closing balance forward?

Introduction

A trial balance is a fundamental step in checking the accuracy of your accounting records and forms the basis for financial statement preparation. It involves listing every general ledger account’s balance as either a debit or a credit, ensuring the total debits equal total credits under the double-entry system. Any mismatch between these totals signals errors in the accounting process that must be investigated and resolved. This article explains how to extract ledger balances, total and balance accounts, spot potential errors, and use a suspense account where needed.

Key Term: trial balance
A summary list showing the debit and credit balances of all general ledger accounts at a specific date to verify that total debits equal total credits.

PREPARING THE TRIAL BALANCE

To produce a trial balance, you must:

1. Calculate the balance of every general ledger account by totaling both sides of each account.
2. List each balance as either a debit or a credit in the trial balance.
3. Check that the sum of all debit balances equals the sum of all credit balances.

Balancing Ledger Accounts

Each account may have several entries on both the debit and credit sides following a month or year’s transactions. The steps for balancing are:

1. Add up the debit and credit sides separately.
2. Find which side is larger.
3. Record the total on both sides.
4. Enter the difference (“balance carried down”) on the side with the lower total, to make both sides equal.
5. Bring down (“balance brought down”) this closing balance as the opening balance for the next period.

Key Term: balancing off
The process of totaling both sides of a ledger account, inserting the difference to make both sides equal, and bringing this figure forward to the next accounting period.

Worked Example 1.1

A Wages account shows the following entries for the month:

• Debit side: $2,500 (wages paid on 1st), $2,400 (wages paid on 20th)
• Credit side: none

What is the balance to be carried forward?

Answer:
Add the debits: $2,500 + $2,400 = $4,900.
The credit side totals $0.
The closing balance is $4,900 debit, labelled as "balance c/d" on the credit side. The opening balance for the next period is brought down as $4,900 on the debit side.

Extracting the Trial Balance

When all ledger accounts are balanced, each closing balance is listed on the trial balance. Asset and expense accounts usually show debit balances; liabilities, equity, and income accounts show credit balances.

A basic trial balance will look like this:

Key Term: suspense account
A temporary ledger account used when the trial balance does not balance, allowing the records to be completed and errors to be investigated.

IDENTIFYING ERRORS USING THE TRIAL BALANCE

If the total debits and credits do not match, this signals an error in the accounting records. Common types of errors include:

• Mathematical errors in totaling account balances
• Omission of a debit or credit entry
• Only entering one side of a transaction

However, not all errors will cause the trial balance to be out of balance. Errors not revealed include:

• Entering the correct amount on both sides but into the wrong accounts (error of commission)
• Omitting a transaction altogether (error of omission)
• Entering equal and opposite errors (compensating errors)

Key Term: error of omission
A transaction not recorded at all in the accounting system.

Key Term: error of commission
Recording a correct amount in the wrong account of the correct type (e.g., recording an expense in the wrong expense account).

Key Term: compensating error
Offsetting mistakes where two or more errors cancel each other out, so the trial balance still agrees.

What If Debits and Credits Don’t Agree?

If the trial balance does not balance, the difference is placed in a suspense account to allow financial statements to be prepared while errors are investigated. Once errors are found and corrected, the suspense account should be cleared to zero.

Worked Example 1.2

Suppose, after preparing your trial balance, total debits are $52,900 and total credits are $52,400, making a $500 difference. What should you do?

Answer:
Open a suspense account with a $500 credit balance (to make total debits equal total credits). Then, investigate the cause of the difference and make adjusting entries to remove the suspense balance.

Exam Warning

Be careful: a balanced trial balance only confirms the arithmetical accuracy of the bookkeeping—not that every entry is correct or complete. Always check for errors that the trial balance cannot reveal.

CORRECTING AND CHECKING THE TRIAL BALANCE

To resolve discrepancies, check:

• That all ledger account balances have been listed and transferred correctly
• The totals of each account are correct (recalculate if necessary)
• Whether any account is missing from the trial balance
• That debits and credits have not been mixed up

Once any errors are corrected, redo the trial balance to confirm debit and credit totals are equal and the suspense account is cleared.

Worked Example 1.3

During your check, you discover that a payment of $1,200 for equipment was entered on the debit side of the Equipment account but not credited to the Bank account. How would you fix this?

Answer:
Post a $1,200 credit entry to the Bank account to complete the double entry. This correction will clear the error originally causing the trial balance imbalance.

Summary

Preparing, balancing, and checking the trial balance provides a key arithmetic check on the reliability of accounting records. Mismatches must be investigated, with suspense accounts serving as a holding account until corrections are made. However, some errors require further investigation beyond a balanced trial balance.

Key Point Checklist

This article has covered the following key knowledge points:

• List and explain the steps for preparing and balancing ledger accounts
• Extract the trial balance from the general ledger
• Identify errors that will and will not be revealed by the trial balance
• Understand when and why a suspense account is used
• Describe how to correct errors and clear the suspense account

Key Terms and Concepts

• trial balance
• balancing off
• suspense account
• error of omission
• error of commission
• compensating error