Trial balance

The trial balance has two purposes:

1. Arithmetical check — if every transaction has been recorded with Dr = Cr, then total Dr balances should equal total Cr balances. If not, there is at least one error.

2. Source data for the financial statements — every figure in the income statement and SOFP comes ultimately from the trial balance (plus year-end adjustments).

The trial balance is NOT a financial statement. It is an internal working document. It uses the heading 'as at [date]' because it's a snapshot — not 'for the year ended', which is reserved for the income statement.

Special cases:

• Opening inventory is in the TB (Dr — asset b/d). Closing inventory is NOT in the TB (it's a year-end adjustment).
• Bank depends on the balance: Dr if in funds, Cr if overdrawn.
• Loans classified by maturity: current liability if due ≤ 12 months, otherwise non-current.

1. One-sided errors — Dr entered but Cr forgotten (or vice versa). Example: customer pays £200 by cheque; Dr Bank £200 entered but no Cr Customer.

2. Transposition in a single account — wrong digits in only ONE side. Example: sale of £75 entered correctly on customer's account as £75, but as £57 in sales account.

3. Casting errors — wrong addition in totalling a column or ledger account.

4. Posting wrong amount to one of the two accounts — Dr £100 / Cr £10.

These all break the Dr = Cr identity and are detected when the TB is drawn up.

Mnemonic: O-C-P-O-C-R

1. Error of OMISSION. Transaction completely missed from the books. Both sides equally missing — TB still balances. Example: a £500 invoice is never recorded in the books.

2. Error of COMMISSION. Correct amount, correct side, wrong account of the SAME class. Example: paid £200 to J Smith; debited J Smyth (a different customer of the same name).

3. Error of PRINCIPLE. Correct amount and side, but wrong CLASS of account. Example: purchase of equipment £6,000 debited to Repairs.

4. Error of ORIGINAL ENTRY. Wrong figure entered on BOTH sides. Example: sale of £85 entered as £58 in both the customer's account and Sales.

5. COMPENSATING errors. Two errors of equal opposite effect that cancel out. Example: Wages overstated by £100 AND Sales overstated by £100.

6. Complete REVERSAL of entries. Dr and Cr swapped — correct accounts, wrong sides. Example: Dr Bank £400, Cr Customer £400 (should be Dr Customer, Cr Bank — receiving from customer reverses).

All six leave Dr = Cr — so the TB stays in balance despite the error.

When the TB doesn't balance and the underlying error(s) haven't yet been identified, accountants create a suspense account equal to the difference.

Side rule: the suspense goes on the SMALLER side — so the totals match.

• If Dr > Cr, suspense is on the Cr side.
• If Cr > Dr, suspense is on the Dr side.

Once the errors are identified, journal entries CLEAR the suspense by reallocating to the correct accounts. The suspense account should always end up with a zero balance after all errors are corrected.

Example: Dr £150,300 vs Cr £148,750 → Suspense £1,550 Cr. Later investigation finds (a) a £1,200 sale was missed and (b) a £350 cheque was Dr Bank without the Cr Customer side. Correcting journals would clear the £1,550.

After preparing the TB, the bookkeeper applies year-end adjustments (depreciation, accruals, prepayments, irrecoverable debts, inventory valuation) and then constructs:

1. Income Statement — uses INCOME and EXPENSE balances from the TB, plus adjustments.

   • Gross Profit = Sales − Cost of Sales (Opening Inventory + Purchases + Carriage Inwards − Returns Outwards − Closing Inventory).
   • Profit for the year = Gross Profit + Other Income − Expenses.

2. Statement of Financial Position — uses ASSET, LIABILITY and CAPITAL balances from the TB, plus adjustments.

   • Non-current Assets (at cost less accumulated depreciation).
   • Current Assets (Inventory at year-end, Receivables less Provision, Bank, Cash, Prepayments).
   • Current Liabilities (Trade Payables, Bank Overdraft, Accruals).
   • Non-current Liabilities (long-term loans).
   • Capital (Opening + Profit − Drawings + New Capital).

Crucial: Closing inventory does NOT appear in the TB. It is a year-end adjustment that appears in BOTH the income statement (deducted from Cost of Sales) and the SOFP (current asset).