UWI OCACCT 1002 – Introduction to Financial Accounting(Unit Three)

Presented by:

Misty Dawn Floyd

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Weekly Funny

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Learning ObjectivesBy the end of this presentation, students

should be able to:

• 1. Define the term “trial balance”• 2. Balance off ledger accounts• 3. Extract a trial balance from the ledger

accounts• 4. Prepare simple financial statements from

the trial balance• 5. Make an entry to a suspense account and

explain its use

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The Trial Balance

• A trial balance is an auxiliary listing of all of the accounts in their ledger. Accounts which balance on the debit side (Assets & Expenses) are listed on the debit side of the trial balance. Accounts that balance on the credit side are on the credit side of the trial balance (Capital, Liabilities and Revenue).

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Purpose of the Trial Balance

• In order to know if the account has recorded all the transactions correctly– We must know if debits = credits

• Trial Balance– A list of the ledger account balances. (T-

Accounts)– The total of the debit balances should

equal the total of the credit balances. – Balance indicates mathematical accuracy

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Balancing off An Account

Cash

$500$2500

$200 $45

$2700

$2155

1-Sep

2-Sep

3-Sep

4-Sep

Bal c/d

$2700

B/f $2155

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Trial Balance

• The Trial Balance is a financial statement– Therefore, we need to prepare it in a formal

manner– Title

• Similar three lines to B/S & I/S• WHO? PT’s Pizza• WHAT? Trial Balance• WHEN? December 31, 2011

– Accounts are listed in the order they appear in the ledger

• Assets, Liabilities, Owner’s Equity, Revenue & Expenses

• Usually the same order as they would appear on the B/S and I/S

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Trial Balance

Cash

$25000

$300

$3500

$2,100

BALANCE: $26,300

BALANCED!!

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Limitations of the Trial Balance

• Will not find an error if the wrong account was chosen– Example: Debit furniture rather than

equipment

• Will not find if the account mixed up debits and credits for one account– Example: Paid money owing $500

• Debit Cash $500 & Credit A/P $500

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Trial Balance

• At the end of each accounting period, the trial balance is used as a source document for the following financial statements:– Income Statement/Trading & P&L

Account – Revenue e.g. Sales and Expenses are listed on this statement

– Balance Sheet –assets, liabilities, owner’s equity (also called Capital) are illustrated on this statement

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Suspense Accounts

Many errors that are made will affect the trial balance agreement. These errors will normally consist of:

– Entering different amounts in both entries of the transaction. – Making two debit entries (or two credit entries) for a transaction. – Only entering one entry for a transaction.

•If any of these errors are made (one or more) then the trial balance totals will not agree. In this case, the errors should be located. However, this may take time - days, weeks or even months - the more errors that have been made, the longer their location will take. If the trial balance does not agree, then we would not be able draw up the profit and loss account and balance sheet correctly.

• As a part solution to this (finding the errors should always be a priority), a firm can, in effect, make the trial balance agree by entering the amount needed to make the two columns agree again. The difference between the two columns of the trial balance is filled with the creation of a new entry - this is entered in the suspense account.

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Example

• Example

• On 31 December 2007, the trial balance is drawn up for J Mickley. This is a summary of the trial balance:

•J Mickley - Trial Balance as at 31 December 2007

- Dr Cr

- £ £

Total of all entries 47,500 46,900

Suspense account - 600

- 47,500 47,500

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Suspense Account Example

J Mickley - Trial Balance as at 31 December 2007

- Dr Cr

- £ £

Total of all entries 47,500 46,900

Suspense account - 600

- 47,500 47,500

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Suspense Accounts - Explanation•

Normally, we would be now forced to make a debit entry in another accounts somewhere else in the ledgers. However, in this case we make no entry as there need for the credit entry in the suspense account must be the result of excess debit entries made, or shortages on the credit side elsewhere in the accounts - i.e. the mistakes that we are trying to locate.

•This balance will remain in the accounts until the errors have been located and corrected. If we assume that the error that had been made was that the capital account had been undercast by £600 then this would explain why we appeared to have shortage on the credit column. However, it is possible that the error was that a debit entry (e.g. purchases) had been overcast by £600

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Last But not Least…