ILLUSTRATIVE EXAMPLE OF TRIAL BALANCE

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A trial balance is a schedule listing the total balances of the ledger accounts

It is used to ascertain whether the sum of all debit ledger balances equals the sum of credit ledger balances.

The trial balance is always expected to be balanced because of the double-entry principle, which states that all debit entries must have corresponding credit entries

That is, the total of the trial balance's debit column should equal the total of the trial balance's credit column

However, in preparing the trial balance, it is expected that one knows the accounts that are entered in the debit column of the trial balance and the accounts that are entered on the credit column of the trial balance.

The rule is this:

1. All asset accounts are entered in the debit column of the trial balance

2. All expense accounts are entered in the debit column of the trial balance

3. All liability accounts are entered in the credit column of the trial balance.

4. All revenue accounts are entered in the credit column of the trial balance.

5. All capital accounts are entered in the credit column of the trial balance.

Keeping these rules in mind, let take an example.

illustration

Extract the trial balance from the list of balances in the book of Joshua on 31/12/2010

trade receivable N350,000
trade payable N350,000
sales N5,050,000
opening inventory N12,000
return inward N16,000
return outward N28,000
Bank N1,268,000
purchases N2,120,000
rental income N39,000
rent N140,000
prepayment N10,000
insurance N300,000
Rates N125,000
account payable N20,000
wages N220,000
electricity N66,000
capital N400,000


Solution:

Joshua's trial balance as of 31st December 2019.
Account titleDr Cr
NN
Trade receivable350,000
Trade payable 350,000
Rent1,400,000
Sales 5,050,000
Prepayment10,000
Insurance300,000
Rates125,000
wages220,000
Electricity66,000
Purchases2,120,000
Bank1,268,000
Return inward16,000
inventory12,000
Account payable 20,000
Capital 400,000
Rental income 39,000
Return outward 28,000
total5,887,0005,887,000

ANALYSIS

In the above, trade receivable, prepayment, bank, inventory are all asset accounts, hence, they are entered in the debit column of the trial balance.

Trade payable, account payable are all liability accounts, hence, they are recorded in the credit column of the trial balance.

Sales, rental incomes are all revenue accounts and they are entered in the credit column of the trial balance.

Furthermore, rent, insurance, rates, wages, electricity, purchases, return inward are classified as expense accounts. Therefore, they are entered in the debit column of the trial balance.

Lastly, the capital was entered in the credit column of the trial balance because it represents a capital accounts.

Conclusion

Extracting a trial balance is one of the easy processes in the accounting process because a trial balance is a listing of the debit and credit balances of the ledger to ascertain the arithmetic accuracy of the posting in the ledger.

While the balancing of the trial balance is important, it is equally important to note that the trial balance may still balance if certain errors occur.

These errors are specifically discussed in the next post.

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