Duration: 60

mins
Slides: 11

LMT SCHOOL OF MANAGEMENT, THAPAR

UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis

Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 5: Process of Preparation of Financial

Statements: Trial Balance

Rules of Debit and Credit

In terms of the accounting equation
Assets
Debit
to
Increa
se

Credit
to
Decreas
e

Liabilities
Debit
to
Decrea
se

Credit
to
Increas
e

Owners
Equity
Debit
to
Decrea
se

Credit
to
Increas
e

For Expenses and Income

Expenses
Debit
to Increase
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Credit
to Decrease

Income
Debit
to Decrease

Process of Preparation of Financial

Statements: Trial Balance

Credit
to Increase
2

Errors in trial balance

When debit balance = credit balance
Error of principle: posting a journal entry to a wrong
account will not affect the trial balance, e.g. for office rent
if office equipment is debited instead of rent expense
Error of omission and repetition: trial balance will not
reveal a complete omission or repetition of a transaction
Compensatory errors: recording of same erroneous
amount for both debit and credit will not show up in the
trial balance

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Process of Preparation of Financial

Statements: Trial Balance

Errors in trial balance

When debit balance is not equal to credit balance
Recording different amount for debit and credit in
the journal
Posting a debit as credit or vice versa
Computing an account balance incorrectly
Copying the amount of an account balance to the
trial balance incorrectly
Copying the debit balance in an account as credit
balance or vice versa, to the trial balance
Omitting an account balance from the trial balance
Totaling the trial balance incorrectly
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Process of Preparation of Financial

Statements: Trial Balance

Locating errors
Unfortunately there is no sure-shot method of locating
differences, you can try the following short cuts
If the amount of trial balance difference is divisible by
9 it indicates transposition of digits, e.g. 4921 written
as 4291
If the amount of trial balance difference is divisible by
2, look for an amount equal to the quotient in the trial
balance. It indicates taking a debit as credit or vice
versa
Best is to Do it right the first time
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Process of Preparation of Financial

Statements: Trial Balance

Correcting Errors
An accountant must correct an error when he locates it
If error is discovered before making journal entries, it
can be corrected then and there
But if error is discovered after making journal entry, a
correcting entry needs to be made

For example: if rent expense account is debited instead of

electricity expense account
Type of entry

Account Heads

Debit

Incorrect Entry

Dr.Rent Expense
Cr.Cash

4300

Dr.Electricity
Expense
Cr.Cash

4300

Correcting
Statements:Dr.Electricity
Trial Balance

4300

Correct Entry

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Process of Preparation of Financial

Credit
4300
4300
6

Correcting errors when trial balance

does not balance
The difference in trial balance is
initially placed in a suspense account
Then accounting records are
scrutinized
Correcting entries are made by
debiting or crediting the Suspense
account
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Process of Preparation of Financial

Statements: Trial Balance

Problems
Effect of Errors
(a)A debit of Rs. 800 to Salaries Expense was overlooked
and not posted
(b)Payment of Rs. 1400 for rent was recorded as a debit to
Rent Expense of Rs. 1400 and a credit to Cash of Rs. 140
(c)Payment of annual insurance premium of Rs. 180 for the
companys equipment was recorded as a debit to
Equipment of Rs. 180 and a credit to Cash of Rs. 180
(d)A purchase of supplies of Rs. 2900 on credit was not
recorded in the journal at all
(e)Payment of telephone bill of Rs. 430 was recorded in the
amount of Rs. 430 as a debit to Cash and as a credit to
Telephone Expense
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Process of Preparation of Financial

Statements: Trial Balance

Solution
Effect of Errors
(a)The trial balance will not balance. Salaries Expense
is understated by Rs. 800
(b)The trial balance will not balance. Cash is overstated
by Rs. 1260
(c)The trial balance will balance. Insurance Expense is
understated and Equipment is overstated
(d)The trial balance will balance. Both Supplies and
Creditors (or Account Payable) are understated by
Rs. 2900
(e)The trial balance will balance. Cash is overstated
and Telephone Expense is understated by Rs. 860
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Process of Preparation of Financial

Statements: Trial Balance

Error Analysis and Correcting Entries

a) A cash receipt of Rs. 1900 for services yet to be
provided was debited to cash and credited to Revenue
from Services
b) A purchase of supplies of Rs. 4400 on credit was
recorded as a debit to Supplies of Rs. 4400 and a
credit to Cash of Rs. 4400
c) An interest payment of Rs. 1000 was debited to Bank
Loan Payable and credited to Cash
d) Cash payment of Rs. 3600 to suppliers was recorded
as a debit to Creditors of Rs. 6300 and credit to Cash
of Rs. 3600
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Process of Preparation of Financial

Statements: Trial Balance

10

Solution
a) Effect: The trial balance will balance. Revenue from Services is
overstated and Unearned Revenue is understated by Rs. 1900
Correcting
Entry

Dr.Revenue from
Services
Cr. Unearned
Revenue

1900

Dr..Cash
CrCreditors

4400

1900

b) Effect: The trial balance will balance. Creditors is overstated and

Cash is understated by Rs. 4400
Correcting
Entry

4400

c) Effect: The trial balance will balance. Bank loan Payable is

overstated and Interest Expense is understated by Rs. 1000
Correcting
Entry

Dr..Interest Expense
CrBank Loan
Payable

1000
1000

d) Effect: The trial balance will not balance. Creditors is understated

by Rs. 2700
Correcting
Suspense Account
2700
Entry
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Creditors
Process of Preparation of Financial
Statements: Trial Balance

2700
11