Once all monthly transactions for the billing period (one month in our example) have been analysed, recorded and posted daily, we can start creating a trial (unadjusted) balance sheet. Creating an unadjusted trial balance is the fourth step in the billing cycle. TObalance sheetis a list of all general ledger accounts with non-zero balances. A trial balance is an important step in the accounting process as it helps identify miscalculations in the first three steps of the cycle.
Note that for this step we take into account our mismatched test balance. EITHERunadjusted trial balanceThis section contains the accounts before they were customized. As you see in step 6 of the billing cycle, we create another trial balance that adjusts (seeThe voting process).
When preparing a balance sheet, we need to take into account some formatting rules, similar to the requirements for financial statements:
- The header should contain the company name, the title of the trial balance sheet (unadjusted) and the date.
- The accounts are listed in the order of the balance sheet equation, with assets listed first, then liabilities, and finally equity.
- The values at the top of each debit and credit column must have a dollar sign.
- When adding values, the last value in each column should be underlined.
- Totals at the end of the balance sheet must contain dollar signs and double underscores.
Transferring trial balance information from T-accounts requires considering the ending balance of each account. If the ledger (T) account ending balance is a debit balance, record the total in the left column of the trial balance. If the ledger (T) account ending balance is a credit balance, enter the total in the right column.
After all general ledger accounts and their balances have been recorded, the debit and credit columns in the trial balance are added together to see if the numbers in each column match. The grand total in the debit column should match the dollar amount specified in the final credit column. For example, if you determine that the ending debit balance is $24,000, the trial balance ending credit balance must also be $24,000. If the two balances are not equal, there is an error in at least one of the columns.
Now let's take a look at the Druck-Plus-T-Accounts and the Unadjusted Trial Balance to see how information is carried over from the T-Accounts into the unadjusted trial balance.
For example, Cash has a ending balance of $24,800 on the direct debit. This balance is transferred to the cash account in the debit column of the unadjusted balance sheet. Receivables ($1,200), Supplies ($500), Equipment ($3,500), Dividends ($100), Labor ($3,600), and Utilities ($300) also have final debit balances on their T-accounts, so this information is carried over to the debit side of the unadjusted trial balance. Accounts Payable ($500), Unearned Income ($4,000), Common Stock ($20,000), and Service Income ($9,500) all have ending balances in their T accounts.
After all balances have been rolled over to the unadjusted trial balance, we add up all the debit and credit columns. The debit and credit columns total $34,000, meaning they are equal and balanced. But just because the column totals are equal and balanced, we still have no guarantee that there is no error.
What if the columns are not equal?
concepts in practice
Enron and Arthur Andersen
One of the most well-known financial systems affects companiesEnron CorporationmiArturo Andersen.Enronscammed thousands by intentionally inflating revenue that wasn't there.Arturo AndersenHas the auditing company been commissioned to verify the accuracy of theEnronFinancial Statements and Disclosures. This meant they would review the statements to ensure, among other things, that they were consistent with GAAP principles, assumptions and concepts.
That has been claimedArturo Andersenhe was careless in dealing withEnronand contributed to the collapse of the company.Arturo Andersenwas prosecuted for obstruction of justice for destroying important documents related to a criminal proceedingEnron. They were found guilty, but that conviction was overturned. However, the damage was already done and the company's reputation prevented it from operating as before.10
Sometimes errors can occur in the accounting process and the trial balance sheet can make these errors apparent if it is not in balance.
One way to find the error is to take the difference between the two sums and divide the difference by two. For example, suppose the following is the test balance for Printing Plus.
You realize that the balances are not equal. Find the difference between the two totals: $34,100 – $33,900 = $200 difference. Now divide the difference by two: $200/2 = $100. Since the credit side has a higher total, look closely at the numbers on the credit side to see if there are any. of which is $100. The dividend account has an amount of $100 in the credit column. Dividends usually have a debit balance, but here it's a credit balance. Check the dividend T account to see if it was mistakenly copied to the trial balance. If the answer is the same as the T account, go back to the journal entry to check for errors. You may find upon your investigation that you copied the T account number incorrectly. Correct your mistake and the total charge will increase by $100 and the total loan amount will decrease by $100, making them both $34,000.
Another way to find an error is to take the difference between the two totals and divide by nine. If the result of the difference is an integer, you may have transposed a number. For example, suppose the following is the test balance for Printing Plus.
Find the difference between the two totals: $35,800 - $34,000 = $1,800 difference. This difference divided by nine is $200 ($1,800/9 = $200). If we look at the debit column that has the highest total, we see that the team account had transposed values. The bill should be $3,500, not $5,300. We transpose the three and the five.
What do you do when you've tried both methods and neither worked? Unfortunately you have to go back step by step until you find the error.
If a trial balance is balanced, does that mean that all the numbers are correct? Not necessarily. We can have flaws and still be mathematically balanced. It's important to follow each step very carefully and review your work regularly to avoid mistakes early in the process.
Once the unadjusted balance sheet is prepared and appears error-free, a company can review its financial statements to get a picture of the company's position before making adjustments to specific accounts. After the adjustments, a more complete picture of the company's situation is developed and an adjusted balance sheet is prepared. These next steps in the billing cycle will be coveredThe voting process.
Carry out a test balance
Complete the Balance Sheet for Magnificent Landscaping Service using the following information from the T account ending balance as of April 30, 2018.
think about it
Correction of errors in the trial balance
You have a small consulting company. Every month he draws up a balance sheet showing the situation of his company. After you create your account balance for that month, you find that it doesn't add up. The debit column shows $2,000 more than the credit column. You decide to investigate this error.
What methods could you use to find the error? If you can't find and fix this error, what are the implications? How can you minimize these types of errors in the future?