Redraft the Correct Trial Balance
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Skill: Create
Stimulus
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Capital | 45,000 | |
| Purchases | 52,000 | |
| Sales | 78,000 | |
| Returns inwards | 1,500 | |
| Returns outwards | 800 | |
| Carriage inwards | 900 | |
| Opening inventory | 7,000 | |
| Closing inventory | 7,600 | |
| Rent | 6,000 | |
| Salaries | 14,400 | |
| Trade receivables | 9,800 | |
| Trade payables | 6,200 | |
| Cash | 2,400 | |
| Bank | 11,000 | |
| Fixtures and fittings | 20,000 | |
| Drawings | 5,000 | |
| Total | 131,100 | 136,500 |
Trial Balance prepared by Encik Faizal as at 31 December 2025 (contains errors).
Question
(a) Identify three errors in Encik Faizal's Trial Balance and explain why each is wrong.
(b) Draft the correct Trial Balance (state the items, columns and the new balanced totals).
(c) Explain the correct treatment of closing inventory and its relationship with the financial statements.
(d) Propose one procedural improvement Puan Noraini could put in place to prevent such errors recurring. Justify it.
Thinking steps
- Check each balance: assets, expenses and drawings are debit balances; capital, liabilities and revenue are credit balances.
- Recall that closing inventory is not a ledger balance, so it should not appear in the Trial Balance at all.
- Spot the three misplacements: closing inventory included (debit), returns inwards in credit, and drawings in credit.
- Remove closing inventory; move returns inwards RM1,500 and drawings RM5,000 to the debit column.
- Re-total: debit RM130,000 and credit RM130,000, now balanced.
- Determine the treatment of closing inventory in the Trading Account and the Statement of Financial Position.
- Propose a practical control procedure and link it to the cause of the errors.
Model answer
(a) Three errors:
1) Closing inventory RM7,600 was entered as a debit. This is wrong because closing inventory is not a ledger balance; it is obtained by valuing stock at the balancing date rather than from the ledger, so it cannot appear in the Trial Balance.
2) Returns inwards RM1,500 was placed in the credit column. This is wrong because returns inwards reduce sales (a contra to revenue) yet carry a debit balance; they belong in the debit column.
3) Drawings RM5,000 was placed in the credit column. This is wrong because drawings reduce owner's equity but are recorded as a debit balance; they belong in the debit column.
(b) Correct Trial Balance:
Remove closing inventory RM7,600 from the Trial Balance; move returns inwards RM1,500 and drawings RM5,000 to the debit column.
Debit: Purchases 52,000; Returns inwards 1,500; Carriage inwards 900; Opening inventory 7,000; Rent 6,000; Salaries 14,400; Trade receivables 9,800; Cash 2,400; Bank 11,000; Fixtures 20,000; Drawings 5,000 = RM130,000.
Credit: Capital 45,000; Sales 78,000; Returns outwards 800; Trade payables 6,200 = RM130,000.
Both columns now agree at RM130,000.
(c) Closing inventory is treated as an adjustment after the Trial Balance. In the Trading Account it is deducted from the cost of purchases to arrive at cost of sales, thereby raising gross profit; in the Statement of Financial Position it is reported as a current asset. Thus closing inventory affects the financial statements but never enters the Trial Balance.
(d) Improvement: Puan Noraini could introduce a two-stage cross-check: the clerk lists each balance directly from the ledger, then a second officer verifies the debit/credit classification against an account-type checklist before the Trial Balance is finalised. Justification: segregation of duties plus a checklist catches classification errors (returns inwards, drawings) and the inclusion of non-ledger items (closing inventory) early, reducing the risk of the columns disagreeing.