ZIMSEC O-Level Principles of Accounting (4051)

Trial Balance and Correction of Errors: notes

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Preparing a Trial Balance

Trial balance: a list of all ledger account balances, with debit balances in one column and credit balances in the other.
Totals: add both columns. If they are equal, the arithmetic check has passed.
Example: Cash has a debit balance of $500 and Capital has a credit balance of $500. Both columns show $500 for this pair.

Proves: every debit has an equal credit, so the double entry was recorded in equal amounts.
Does not prove: that the right accounts were used, that amounts were correct, or that no transactions were missed.
Example: A $200 sale recorded as $20 on both sides still balances, but the sales figure is $180 too low.

Omission: a transaction is not recorded at all. Example: a $300 purchase is left out of the books.
Commission: the right class of account is used but the wrong account is debited or credited. Example: a $400 sale to Smith is posted to Jones, another debtor.
Principle: a transaction is recorded in the wrong class of account. Example: an $800 computer (an asset) is recorded as an expense.
Original entry: the wrong amount is recorded from the start. Example: a $450 invoice is recorded as $540.
Compensating: two errors cancel each other out in the totals. Example: sales are overstated by $100 and purchases are overstated by $100.
Reversal: the debit and credit sides are swapped. Example: a $250 payment to a creditor is debited to Bank and credited to the creditor.

Journal entry: a correcting entry that fixes the ledger without deleting the original record.
Method: work out what was recorded wrongly, reverse it, then post the correct entry.
Example: A $300 rent payment was debited to Wages. Correction: debit Rent $300 and credit Wages $300.

Suspense account: a temporary account used to make the trial balance agree when the cause of the difference is not yet known.
Use: if the credit column is $200 more than the debit column, open a suspense account with a $200 debit.
Example: Debits total $5,000 and credits total $5,200. Open a Suspense Account with a $200 debit.
Clearing: once the error is found, correct it by journal entry and bring the suspense account to zero.