Revision Notes
Revision Notes: Trial Balance
Condensed revision notes for Form 4 Chapter 6: the function and preparation of the Trial Balance, errors that do not affect its balancing, and the link between closing inventory and the Financial Statements.
Book a Trial Class
One-hour paid trial · Same-day reply · from RM50/hr
1. Function and Meaning of the Trial Balance
- A Trial Balance is a list of all debit and credit balances of the ledger accounts on a particular date (usually the end of the accounting period).
- Main function: to check the arithmetical accuracy of the double entries, i.e. to ensure the total debit column equals the total credit column.
- It is not an account and not part of the double entry; it is merely a list or summary statement.
- It serves as the basis for preparing the Financial Statements, namely the Income Statement and the Statement of Financial Position.
- It helps detect some errors early, but cannot detect all types of errors.
2. Sources of Balances and Preparation Steps
- Balances are transferred from the Cash Book (cash balance and bank balance), the Petty Cash Book, and all ledger accounts.
- Follow the Accounting Cycle: Source Document → Journal → Ledger → Trial Balance.
- Write the full heading: "Trial Balance of (business name) as at (date)".
- Prepare three columns: Particulars, Debit (RM) and Credit (RM); record each balance in the correct column.
- Total both columns; if balanced, total debit must equal total credit.
- It can be prepared manually or using ICT applications such as electronic spreadsheets.
3. Debit Balances versus Credit Balances
- Debit balances: all assets, expenses, drawings, purchases, carriage inwards (on purchases), returns inwards and opening inventory.
- Credit balances: all liabilities, capital, revenue, sales and returns outwards.
- Cash balance and bank balance are usually debit balances; a bank overdraft is a credit balance.
- Discount allowed is a debit balance (expense); discount received is a credit balance (income).
- Remember: opening inventory appears in the Trial Balance, but closing inventory is NOT included in the Trial Balance (periodic system).
4. Errors Not Affecting the Trial Balance
- Error of omission: a transaction is not recorded in any book at all.
- Error of commission: correct amount and side but posted to the wrong account of the same class (e.g. debtor A instead of debtor B).
- Error of principle: recorded in the wrong class of account (e.g. an expense recorded as an asset).
- Error of original entry: the same wrong amount is recorded in both the debit and credit accounts.
- Complete reversal of entries: the debit and credit entries are completely reversed.
- Compensating errors: two or more errors that cancel out each other's effect.
5. Meaning of Inventory and Inventory Systems
- Inventory is trading goods bought for resale that remain unsold at the end of the period.
- Periodic inventory system: the inventory value is determined by a physical count (stock take) only at the end of the accounting period.
- Perpetual inventory system: inventory records are updated every time a purchase or sale occurs, usually using an inventory card.
- Inventory is valued at cost or net realisable value, whichever is lower.
- Determining the closing inventory value is necessary to compute the Cost of Sales and prepare an accurate Income Statement.
6. Closing Inventory and Its Link to Financial Statements
- The inventory card records the quantity and value of goods received, issued and the balance, enabling closing inventory to be computed.
- General journal entry (periodic system): Debit the Closing Inventory account, Credit the Income Statement with the closing inventory value.
- Because it is recorded after the Trial Balance is prepared, closing inventory appears in TWO places in the financial statements.
- In the Income Statement: deducted in the Cost of Sales computation (Opening inventory + Net purchases − Closing inventory).
- In the Statement of Financial Position: shown as a current asset.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Premises | 50,000 | |
| Fittings | 20,000 | |
| Opening inventory | 8,000 | |
| Purchases | 30,000 | |
| Carriage inwards | 1,000 | |
| Debtors | 6,000 | |
| Bank | 12,000 | |
| Cash | 5,000 | |
| Drawings | 3,000 | |
| Capital | 80,000 | |
| Sales | 45,000 | |
| Creditors | 7,000 | |
| Bank loan | 3,000 | |
| Total | 135,000 | 135,000 |
Note that opening inventory is listed in the debit column; closing inventory does not appear here.
Does a balanced Trial Balance mean there are no errors at all?
No. The Trial Balance can still balance despite errors such as omission, commission, principle, original entry, complete reversal and compensating errors, because these do not affect the equality of total debit and total credit.
Why is closing inventory not included in the Trial Balance?
Under the periodic system, the closing inventory value is only known after a physical count at the end of the period, i.e. after the Trial Balance is prepared. It is then recorded via the general journal and appears in the Income Statement and the Statement of Financial Position.
Where are the cash and bank balances taken from for the Trial Balance?
The cash and bank balances are taken from the Cash Book, while the petty cash balance is taken from the Petty Cash Book. Cash/bank balances are usually debit balances, but a bank overdraft is a credit balance.