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trial balance

 is a list of ledger balances shown in debit and credit columns.  

 

1.1 The first step 

Before you draw up a list of account balances, you must have a collection of ledger accounts. For the 

sake of convenience, we will use the accounts of Ron Knuckle, which we drew up in the previous 

chapter. 

CASH AT BANK 

 

$ 

 

$ 

 

Capital: Ron Knuckle 

 

7,000

 

Rent 

 

3,500 

 

Bank loan 

 

1,000

 

Shop fittings 

 

2,000 

 

Sales 

10,000

 

Trade accounts payable 

 

5,000 

 

Trade accounts receivable 

 

2,500

 

Bank loan interest 

    

100 

 

 

 

Other expenses 

 

1,900 

 

 

 

Drawings 

 

1,500 

CAPITAL (RON KNUCKLE) 

 

$ 

 

$ 

 

Cash at bank 

 7,000 

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BANK LOAN 

 

$ 

 

$ 

 

Cash at bank 

 1,000 

PURCHASES 

 

$ 

 

$ 

Trade accounts payable 

 5,000   

TRADE ACCOUNTS PAYABLE 

 

 

$ 

 

 

$ 

 

Cash at bank  

 

5,000 

 

Purchases 

 

5,000 

 

 

RENT 

 

$ 

 

$ 

Cash at bank 

3,500 

 

SHOP FITTINGS 

 

$ 

 

$ 

Cash at bank 

2,000 

 

SALES 

 

 

$ 

 

 

$ 

 

 

Cash at bank 

10,000 

 

 

Trade accounts receivable 

  2,500 

 

 

 

TRADE ACCOUNTS RECEIVABLE 

 

 

$ 

 

 

$ 

Sales 

 

2,500  Cash at bank 

 

2,500 

 

 

BANK LOAN INTEREST 

 

$ 

 

$ 

Cash at bank 

100 

 

 

 

OTHER EXPENSES 

 

$ 

 

$ 

Cash at bank 

1,900 

 

 

DRAWINGS 

 

$ 

 

$ 

Cash at bank 

1,500 

 

 

The next step is to 'balance' each account. 

1.2 Balancing ledger accounts 

At the end of an accounting period, a balance is struck on each account in turn. This means that all the 

debits on the account are totalled and so are all the credits. If the total debits exceed the total credits 

there is said to be a debit balance on the account; if the credits exceed the debits then the account 

has a credit balance. 

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In our simple example, there is very little balancing to do. 

(a) 

Both the trade accounts payable and the trade accounts receivable balance off to zero. 

(b) 

The cash at bank account has a debit balance of $6,500. 

(c) 

The total on the sales account is $12,500, which is a credit balance. 

CASH AT BANK 

 

$ 

 

$ 

 

Capital: Ron Knuckle 

   

7,000 Rent 

 

3,500 

 

Bank loan 

   

1,000 Shop fittings 

 

2,000 

 

Sales 

 

10,000 Trade accounts payable 

 

5,000 

 

Trade accounts receivable 

   

2,500 Bank loan interest 

 

100 

 

  Other expenses 

 

1,900 

 

  Drawings 

 

  1,500 

 

   

 

14,000 

 

  Balancing figure – the amount of 

 

 

  cash left over after payments have 

 

 

             been made 

   6,500 

 

 20,500  

 20,500 

TRADE ACCOUNTS PAYABLE 

 

 

$ 

 

 

$ 

 

Cash at bank  

 

5,000 Purchases 

 

5,000 

SALES 

 

 

$ 

 

 

$ 

 

Cash at bank 

 10,000

 

Trade accounts receivable 

   2,500

 

 

 12,500

TRADE ACCOUNTS RECEIVABLE 

 

 

$ 

 

 

$ 

Sales 

 

2,500 Cash at bank 

 

2,500 

Otherwise, the accounts have only one entry each, so there is no totalling to do to arrive at the balance 

on each account. 

1.3 Collecting the balances 

If the basic principle of double entry has been correctly applied throughout the period it will be found 

that the credit balances equal the debit balances in total. This can be illustrated by collecting together 

the balances on Ron Knuckle's accounts. 

 

Dr 

Cr 

 

$ 

$ 

Cash at bank 

   

6,500 

 

Capital 

 

   

7,000 

Bank loan 

 

   

1,000 

Purchases 

   

5,000 

 

Trade accounts payable 

         – 

         – 

Rent 

   

3,500 

 

Shop fittings 

   

2,000 

 

Sales 

 

 

12,500 

Trade accounts receivable 

          – 

         – 

Bank loan interest 

      

100 

 

Other expenses 

   

1,900 

 

Drawings 

 

  1,500 

           

 

 

 

20,500 

 

20,500 

This is called a trial balance. It does not matter in what order the various accounts are listed. It is just a 

method used to test the accuracy of the double entry bookkeeping. 

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1.4 What if the trial balance shows unequal debit and credit balances? 

A trial balance can be used to test the accuracy of the double entry accounting records. It works by 

listing the balances on ledger accounts, some of which are debits and some credits. Total debits should 

equal total credits. 

If the two columns of the list are not equal, there must be an error in recording the transactions in the 

accounts. A list of account balances, however, will not disclose the following types of errors. 

(a) The 

complete omission of a transaction, because neither a debit nor a credit is made 

(b) 

The posting of a debit or credit to the correct side of the ledger, but to a wrong account 

(c) 

Compensating errors (eg an error of $100 is exactly cancelled by another $100 error elsewhere) 

(d) 

Errors of principle (eg cash from receivables being debited to trade accounts receivable and 

credited to cash at bank instead of the other way round) 

The trial balance should reveal errors where the rules of double entry have been broken, such as: 

(a) One-sided 

entries 

(b) 

Where an entry has been posted as a credit to one account and a credit to a second account and 

no debit entry has been made (or two debits and no credits) 

1.5 Example: trial balance  

As at 30.3.20X7, your business has the following balances on its ledger accounts. 

Accounts 

Balance 

 

$ 

Bank loan 

12,000 

Cash at bank 

11,700 

Capital 

13,000 

Local business taxes 

1,880 

Trade accounts payable 

11,200 

Purchases 

12,400 

Sales 

14,600 

Sundry payables 

1,620 

Trade accounts receivable 

12,000 

Bank loan interest 

1,400 

Other expenses 

11,020 

Vehicles 

2,020 

During 31.3.20X7, the business made the following transactions. 

(a) 

Bought materials for $1,000, half for cash and half on credit 

(b) 

Made $1,040 sales, $800 of which was for credit 

(c) 

Paid wages to shop assistants of $260 in cash 

You are required to draw up a trial balance showing the balances as at the end of 31.3.20X7. 

Solution

 

First it is necessary to decide which of the original balances are debits and which are credits. 

Account Dr 

Cr 

 

$ 

$ 

Bank loan (liability) 

 

 

12,000 

Cash at bank (asset; overdraft = liability) 

 

11,700 

 

Capital (liability) 

 

 

13,000 

Local taxes (expense) 

   

1,880 

 

Trade accounts payable (liability) 

 

 

11,200 

Purchases (expense) 

 

12,400 

 

Sales (revenue) 

 

 

14,600 

Sundry payables (liability) 

 

   

1,620 

Trade accounts receivable (asset) 

 

12,000 

 

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Account Dr 

Cr 

 

$ 

$ 

Bank loan interest (expenses) 

   

1,400 

 

Other expenses 

 

11,020 

 

Vehicles (non-current asset) 

 

  2,020 

 

            

 

 

52,420 

 

52,420 

Now we must take account of the effects of the three transactions which took place on 31.3.20X7. 

 

$ 

$ 

(a) 

DEBIT 

Purchases 

  1,000 

 

 

CREDIT 

Cash at bank 

 

     500 

 

 

Trade accounts payable 

 

     500 

(b) 

DEBIT 

Cash at bank 

240 

 

 

 

Trade accounts receivable 

800 

 

 CREDIT 

Sales 

 

1,040 

(c) DEBIT  Other 

expenses 

260 

 

 

CREDIT 

Cash at bank 

 

260 

When these figures are included in the trial balance, it becomes: 

Account  Dr 

Cr 

 

$ 

$ 

Bank loan 

 

 

12,000 

Cash at bank (11,700 + 240 – 500 – 260) 

11,180 

 

Capital 

 

 

13,000 

Local taxes 

1,880 

 

Trade accounts payable (11,200 + 500) 

 

 

11,700 

Purchases (12,400 + 1,000) 

13,400 

 

Sales (14,600 + 1,040) 

 

 

15,640 

Sundry payables 

 

   

1,620 

Trade accounts receivable (12,000 + 800) 

12,800 

 

Bank loan interest 

1,400 

 

Other expenses (11,020 + 260) 

11,280 

 

Vehicles 

   2,020 

  

            

 

 53,960 

  

53,960 

 

2

   The statement of profit or loss 

A profit or loss ledger account is opened up to gather all items relating to income and expenses. When 

rearranged, these items make up the statement of profit or loss. 

The first step in the process of preparing the financial statements is to open up another ledger account, 

called the profit or loss account. In it a business summarises its results for the period by gathering 

together all the ledger account balances relating to the statement of profit or loss. This account is still 

part of the double entry system, so the basic rule of double entry still applies: every debit must have an 

equal and opposite credit entry. 

This profit or loss account contains the same information as the financial statement we are aiming for, ie 

the statement of profit or loss, and in fact there are very few differences between the two. However, the 

statement of profit or loss lays the information out differently and it may be much less detailed. 

So what do we do with this new ledger account? The first step is to look through the ledger accounts 

and identify which ones relate to income and expenses. In the case of Ron Knuckle, these accounts 

consist of purchases, rent, sales, bank loan interest and other expenses. 

The balances on these accounts are transferred to the new profit or loss account. For example, the 

balance on the purchases account is $5,000 DR. To balance this to zero, we write in $5,000 CR. But 

to comply with the rule of double entry, there has to be a debit entry somewhere, so we write $5,000 

DR in the profit or loss (P/L) account. Now the balance on the purchases account has been moved to 

the P/L account. 

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If we do the same thing with all the separate accounts of Ron Knuckle dealing with income and 

expenses, the result is as follows. 

PURCHASES 

$ 

 

$ 

 

Trade account payables 

 

5,000  P/L a/c 

 

5,000 

RENT 

 

$ 

 

$ 

 

Cash at bank 

 

3,500  P/L a/c 

 3,500 

SALES 

 

$ 

 

$ 

P/L a/c 

 

12,500 

 

Cash at bank 

 

10,000 

 

 

 

 

Trade accounts receivable 

  2,500 

 

 

12,500   

 

12,500 

BANK LOAN INTEREST 

 

$ 

 

$ 

 

Cash at bank 

 

100 

P/L a/c 

  

100 

OTHER EXPENSES 

 

$ 

 

$ 

 

Cash at bank 

 

1,900  P/L a/c 

 

1,900 

PROFIT OR LOSS ACCOUNT 

 

$ 

 

$ 

Purchases 5,000 

Sales 

12,500

Rent 3,500 

 

 

Bank loan interest 

100 

 

 

Other expenses 

1,900 

 

 

 

(Note that the P/L account has not yet been balanced off but we will return to that later.) 

If you look at the items we have gathered together in the P/L account, they should strike a chord in your 

memory. They are the same items that we need to draw up the statement of profit or loss. 

QUESTION 

Statement of profit or loss

 

Draw up Ron Knuckle's statement of profit or loss. 

ANSWER 

RON KNUCKLE: STATEMENT OF PROFIT OR LOSS 

 

$      

$      

 

Revenue  

12,500 

Cost of sales (= purchases in this case) 

 

 (5,000) 

Gross profit 

 

  7,500 

Expenses  

 

 Rent 

3,500 

 

 

Bank loan interest 

100 

 

 Other 

expenses 

 

1,900 

 

 

 

 (5,500) 

Profit for the year 

 

  2,000 

 

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