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ANALYZING BUSINESS TRANSACTIONS

The Account
Accounts are the basic storage units for accounting data used to record the increases and decreases of a
specific asset, liability, or owner’s equity item during a specific period.

An account title should describe what is recorded in the account. However, account titles can be confusing. For
example, Wages Expense and Salaries Expense are both titles for labor expenses. Moreover, many account
titles change over time as preferences and practices change (Needles, Powers, & Crosson, 2014).

Accountants record business transactions first in a journal, which is the chronological record of transactions.
Then post (copy) the data to the book of accounts called the ledger. A list of all the ledger accounts and their
balances is called a trial balance (Horngren, Harrison Jr., & Oliver, 2012).

Record
Post (copy) to the Prepare the trial
transactions in
ledger balance
the journal

Accounts are grouped in three (3) broad categories, according to the accounting equation: A = L + OE

Assets are economic resources that will benefit the business in the future, or simply, something the business
owns that has value. Most firms use the following asset accounts:
• Cash. This account is a record of the cash effects of transactions. Cash includes money such as bank
balance, paper currency, coins, and checks. Cash is the most pressing need of start-up businesses.
• Accounts Receivable. Most businesses sell goods or services in exchange for a promise of future cash
receipts. Such sales are made on credit (“on account”), and Accounts Receivable is the account that holds
these amounts. Accounts Receivable is the right to receive cash in the near future.
• Notes Receivable. A business may sell goods or services and receive a promissory note. A promissory
note is a written pledge that the customer will pay a fixed amount of money and interest on a certain date.
Notes receivable is the right to receive cash and interest in the future.
• Prepaid Expenses. A business often pays certain expenses such as rent and insurance, in advance. A
prepaid expense is considered an asset because the prepayment provides a future benefit. With a prepaid
expense, the company pays for the expense before it is used. Prepaid rent, prepaid insurance, and office
supplies are separate prepaid expense accounts.
• Land. This account shows the cost of land a business holds for use in operations. Land held for sale is
different; its cost is an investment.
• Building. The cost of buildings, an office, or a warehouse, appears in the Buildings account.
• Equipment, Furniture, and Fixtures. A business has a separate asset account for each type of equipment:
computer equipment, office equipment, and store equipment. The Furniture account shows the cost of this
asset. Similarly, the Fixtures account shows the cost of light fixtures and shelving.

Liabilities are debts—that is, something you owe. A business generally has fewer liability accounts than asset
accounts.
• Accounts Payable. This is the opposite of Accounts Receivable. The promise to pay a debt arising from a
credit purchase is an Accounts Payable. Such a purchase is said to be made on account. An Accounts
Payable is an obligation to pay cash in the near future.
• Notes Payable. Opposite with Notes Receivable that is a right to receive, Notes Payable is an obligation to
pay. It represents debts the business owes because it signed promissory notes to borrow money or to
purchase something. Notes Payable is an obligation to pay cash and interest in the future.
• Accrued Liabilities. This is a liability for which the business knows the amount owed, but the bill has not
been paid. Taxes Payable, Interest Payable, and Salary Payable are examples of accrued liability accounts.

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Owner’s Equity is the owner’s claim to the assets of the business. A company has separate accounts for the
various elements of owner’s equity.
• Capital. This account represents the net investment of the owner in the business. It holds the accumulation
of owner investment, withdrawals, and net income (loss) of the business over the life of the business. In
other words, capital is the net worth invested in the business by the owner.
• Drawing. The owner may withdraw cash or other assets at any time from the company. This represents a
return of his or her capital investment, as well as a distribution of earnings from the company. Owner
drawings mean less earnings retained by the company for future growth.

Revenues are an increase in equity created by delivering goods or services to customers. Revenues refer to
the earnings for work done or goods delivered by the company, regardless of when the cash is received. The
ledger contains as many revenue accounts as needed.

Expenses are used up assets or created liabilities in the course of operating a business. These have the
opposite effect of revenues. Expenses decrease equity. These are present or future payments of cash that are
incurred to help the company earn revenues. A business needs a separate account for each type of expense
such as Salary Expense, Rent Expense, Advertising Expense, and Utilities Expense. Businesses strive to
minimize their expenses in order to maximize net income.

To help identify accounts in the ledger and make them easy to find, the accountant often numbers them. A list
of these numbers with the corresponding account titles is called a chart of accounts. This chart is a table of
contents for the ledger. Typically, it lists accounts in the order in which they appear in the ledger, which is usually
the order in which they appear in the financial statements. The numbering scheme allows for some flexibility.
Account numbers usually have two (2) or more digits. Assets are often numbered beginning with 1, liabilities
with 2, owner’s equity with 3, revenues with 4, and expenses with 5. The second and third digits in an account
number indicate where the account fits within the category. When numbers are used, all accounts are numbered
by this system. However, each company chooses its own account numbering system.

Sample chart of accounts:

Asset Accounts Liability Accounts
101 Cash 201 Accounts Payable
102 Petty Cash 202 Insurance Payable
103 Cash Equivalents 203 Interest Payable
104 Short-term Investments 204 Legal Fees Payable
106 Accounts Receivable 207 Office Salaries Payable
107 Allowance for Doubtful Accounts 208 Rent Payable
109 Interest Receivable 209 Salaries Payable
110 Rent Receivable 210 Wages Payable
111 Notes Receivable 211 Accrued Payroll Payable
119 Merchandise Inventory 214 Estimated Warranty Liability
124 Office Supplies 215 Income Taxes Payable
128 Prepaid Insurance 216 Common Dividend Payable
129 Prepaid Interest 217 Preferred Dividend Payable
131 Prepaid Rent 218 Income Taxes Payable
141 Long-term Investments 219 Insurance Payable
151 Furniture 221 Union dues Payable
152 Accumulated Depreciation – Furniture 222 Unearned Consulting Fees
153 Office Equipment 223 Unearned Legal Fees
154 Accumulated Depreciation – Office Equipment 224 Unearned Rent
161 Machinery 225 Short-term Notes Payable
162 Accumulated Depreciation – Machinery 226 Notes Payable
163 Building 230 Long-term Notes Payable
164 Accumulated Depreciation – Building 251 Long-term Notes Payable
169 Land 253 Long-term Lease Liability
170 Patents 255 Bonds Payable
175 Franchise 258 Deferred Income Tax Payable

Equity Accounts Revenue Accounts

301 Owner’s Capital 401 Fees Earned from product
302 Owner’s Withdrawals 402 Service Revenue

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307 Common Stock, Par Value 403 Commissions Earned

308 Common Stock, No Par Value 404 Rent Revenue
309 Common Stock, Stated Value 405 Dividends Revenue
310 Common Stock, Dividend Distributable 406 Interest Revenue
311 Paid-in Capital in Excess of Par Value, Common Stock 407 Sinking Fund Earnings
313 Paid-in Capital from Retirement of Common Stock 408 Sales
314 Paid-in Capital, Treasury stock 409 Sales Returns and Allowances
315 Preferred Stock 410 Sales Discount
316 Paid-in capital in Excess of Par Value, Preferred Stock
318 Retained Earnings Expense Accounts
319 Cash Dividends 502 Depreciation Expense
320 Stock Dividends 520 Office Salaries Expense
321 Treasury Stock, Common 525 Payroll Taxes Expense
322 Unrealized Gain – Equity 561 Bad debts Expense
323 Unrealized Loss – Equity 576 Miscellaneous Expense

Double-Entry Accounting
Accounting uses the double-entry system, which means that we record the dual effects of each transaction.

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆

As a result, every transaction affects at least two (2) accounts. It would be incomplete to record only the giving
side, or only the receiving side, of a transaction.

T-Account
The T-account is a good place to begin the study of the double-entry system. This is a shortened form of
general ledger account and so called because it resembles the form of the capital letter T. The vertical line
divides the account into three (3) parts (Needles, Powers, & Crosson, 2014):

Title of Account • a title, which identifies the asset, liability, or owner’s equity account
Debit Credit • the left side, which is called the debit side
(left side) (right side) • the right side, which is called the credit side

Debits go on the left; credits go on the right. The terms debit and credit are Title of Account
deeply entrenched in business. They are abbreviated as follows: DR = Debit CR = Credit

The terms debit (abbreviated Dr., from the Latin word “debere”) and credit (abbreviated Cr., from the Latin word
“credere”) are simply the accountant’s words for “left” and “right” (not for “increase” or “decrease”).

Illustration: Suppose a company had several transactions during the month that involved the receipt or payment
of cash. These transactions can be summarized in the Cash account by recording receipts on the left (debit)
side of a T account and payments on the right (credit) side.

Cash When comparing the totals of the two (2) sides, an account shows a debit
Dr. Cr. balance if the total of the debit amounts exceeds the credits. An account
100,000 70,000 shows a credit balance if the credit amounts exceed the debits. Having
3,000 400 increases on one side and decreases on the other reduces recording errors
1,200 and helps in determining the totals of each side of the account as well as the
103,000 71,600 account balance. The balance is determined by netting the two (2) sides
(subtracting one amount from the other).
Bal. 31,400

Expanding the Rules of Debit and Credit

The account category (asset, liability, equity) governs how we record increases and decreases. For any given
account, increases are recorded on one side, and decreases are recorded on the opposite side. The following
T-accounts provide a summary (Horngren, Harrison Jr., & Oliver, 2012):

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ASSETS LIABILITIES AND OWNER’S EQUITY

Increase = Debit Decrease = Credit Decrease = Debit Increase = Credit

These are the rules of debit and credit. Whether an account is increased or decreased by a debit or a credit
depends on the type of account. Debits are not “good” or “bad,” neither are credits. Debits are not always
increases or always decreases – neither are credits.

The relationship between the accounting equation and the rules of debit and credit:

DEBITS = CREDITS
Accounting
Assets = Liabilities + Owner’s Equity
Equation
Rules of ↑ ↓ ↓ ↑ ↓ ↑
Debit and DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Credit
+ - - + - +
Being said, revenues are increases in equity that result from providing goods or services for customers.
Expenses are decreases in equity that result from using up assets or increasing liabilities in the course of
operations. Revenues are earned. Expenses are incurred. Therefore, the accounting equation will be expanded
and include revenues and expenses.

DEBITS = CREDITS
Accounting Owner’s
Assets = Liabilities + + Revenues - Expenses
Equation Equity
Rules of ↑ ↓ ↓ ↑ ↓ ↑ ↓ ↑ ↑ ↓
Debit and DR CR DR CR DR CR DR CR DR CR
Credit
+ - - + - + - + + -
An account’s normal balance appears on the side – either debit or credit – where an increase (+) is recorded in
the account’s balance. For example, assets normally have a debit balance, so assets are debit-balance
accounts. Liabilities and equity accounts normally have the opposite balance, so they are credit-balance
accounts. Expenses and Drawing are equity accounts that have debit balances – unlike the other equity
accounts. They have debit balances because they decrease equity. Revenues increase equity, so a revenue’s
normal balance is a credit (Horngren, Harrison Jr., & Oliver, 2012).

Normal Account Balances of Major Account Categories

Increases Recorded by Normal Balance
Account Category
Debit Credit Debit Credit
Assets X X
Liabilities X X
Owner’s Equity:
Owner’s Capital X X
Withdrawals X X
Revenues X X
Expenses X X

Source Documents
Each time a company makes a financial transaction, some sort of paper trail is generated called a source
document. This is where the accounting data came from. The source document is essential to the bookkeeping
and accounting process as it is the evidence that a financial transaction occurred. If a company is audited,
source documents back up the accounting journals and general ledger as an indisputable audit trail (The Source
Document in an Accounting Transaction, 2018). Some examples of these are:

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• Bank deposit ticket – the document that shows the amount of cash received by the business.
• Purchase invoice – the source document that tells the business how much and when to pay the vendor.
• Bank check – the source document that gives information about the payment of its purchases and must be
recorded immediately.
• Sales invoice – this is the source document that tells the business how much revenue will be recorded.
The source document should be recorded in the appropriate accounting journal as soon as possible after the
transaction. After recording, all source documents should be filed away in some sort of system where they can
be retrieved if and when they are needed. In certain instances, it may even be important to provide the chain of
custody to be able to determine that the source document in question remained in your control (The Source
Document in an Accounting Transaction, 2018).

Journalizing Transactions
The recording process begins with the transaction. Business documents such as a sales receipt, a check, or a
bill, provide evidence of the transaction. The company analyzes this evidence to determine the transaction’s
effects on specific accounts. The company then enters the transaction in the journal, known as journalizing.

The following are significant in the recording process:

Transaction The date and a description of the transaction are provided.
Analysis The transaction is analyzed to determine which accounts are affected and its type (asset,
liability, or owner’s equity)
Application of T-accounts show how the transaction affects the accounting equation. Note that this is not
Double-Entry part of the accounting records but is undertaken before recording a transaction in order to
understand the effects of the transaction.
Journal Entry A journal entry is a notation that records a single transaction in the chronological accounting
record known as a journal (sometimes called the book of original entry because it is where
transactions first enter the accounting records).

Each entry must be in proper journal form. The transactions are recorded with the date, debit account, and
debit amount on the first line, and the credit account (indented) and credit amount on the next line right after the
debited journal entry. The amounts are shown in their respective debit and credit columns. Lastly, each journal
entry must have a brief explanation in support of applying the rules of double-entry accounting.

Illustration:
Journal Page 1
Date Particulars PR Debit Credit
Apr 01 Debit Account Name Amount
Credit Account Name Amount
Brief explanation

Peso signs are omitted because it is understood that the amounts are in peso (Php). Ultimately, the journal
entry presents the full story for each transaction.

Types of journal entries:

• Simple Entries – involves only two (2) accounts, one (1) debit and one (1) credit.
Date Particulars PR Debit Credit
Apr 01 Accounts Payable 10,000
Cash 10,000
To record payment of accounts on due

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• Compound Entries – involves three (3) or more accounts. This requires that all debits be listed before the
credits.
Date Particulars PR Debit Credit
Apr 01 Cash 10,000
Accounts Receivable 10,000
Service Income 20,000
To record rendered services to customers

Illustration: Provided are sample business transactions and their corresponding journal entries.
Transaction 1: On February 01, the owner invested P750,000 cash to start the business, Mac Co.
Analysis:  Increases the asset account, Cash P750,000
 Increases the owner’s equity account, Mac, Capital P750,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Mac, Capital
Dr. Cr Dr. Cr.
2-1 750,000 2-1 750,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 01 Cash P 750,000
Mac, Capital P 750,000
To record initial investment of the owner
Transaction 2: On February 02, Mac Co. purchases store equipment for P350,000 cash.
Analysis:  Increases the asset account, Equipment P350,000
 Decreases another asset account, Cash P350,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Equipment Cash
Dr. Cr. Dr. Cr.
2-2 350,000 2-2 350,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 02 Equipment P 350,000
Cash P 350,000
To record purchase of equipment
Transaction 3: On February 03, Mac Co. purchases store supplies worth P80,000 from Ian Co. The
company agrees to allow Mac Co. to pay the bill next month.
Analysis:  Increases the asset account, Supplies P80,000
 Increases the liability account, Accounts Payable P80,000

Rules of Debit and Credit Application

Assets = Liabilities + Owner’s Equity
Supplies Accounts Payable
Dr. Cr. Dr. Cr.
2-3 80,000 2-3 80,000

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Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 03 Supplies P 80,000
Accounts Payable P 80,000
To record purchased supplies on account
Transaction 4: On February 04, Mac Co. receives P60,000 cash from customers for the services it has
performed.
Analysis:  Increases the asset account, Cash P60,000
 Increases the equity account, Service Revenue P60,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Service Revenue
Dr. Cr. Dr. Cr.
2-4 60,000 2-4 60,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 04 Cash P 60,000
Service Revenue P 60,000
To record payment for rendered services
Transaction 5: On February 05, Mac Co. receives a bill for P12,500 from a TV 22 Clan for advertising on
its TV shows but postpones payment until a later date.
Analysis:  Increases the liability account, Accounts Payable P12,500
 Decreases the equity account, Advertising Expense P12,500
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Accounts Payable Advertising Expense
Dr. Cr. Dr. Cr.
2-5 12,500 2-5 12,500

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 05 Advertising Expense P 12,500
Accounts Payable P 12,500
To record receipt of bill and pay until later date
Transaction 6: On February 06, Mac Co. performs services for customers amounting P175,000. The
company receives cash of P75,000 from customers, and it bills the balance on account,
P100,000.
Analysis:  Increases the asset account, Cash P75,000
 Increases another asset account, Accounts Receivable P100,000
 Increases the owner’s equity account, Service Revenue P175,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Accounts Receivable Service Revenue
Dr. Cr. Dr. Cr. Dr. Cr.
2-6 75,000 2-6 100,000 2-5 175,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 06 Cash P 75,000
Accounts Receivable 100,000
Service Revenue P 175,000
To record services rendered to customer

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Transaction 7: On February 10, Mac Co. pays the following expenses in cash: office rent, P30,000;
salaries and wages of employees, P45,000; and utilities, P10,000.
Analysis:  Decreases the asset account, Cash P85,000
 Decreases the owner’s equity accounts: Rent Expense P30,000; Salaries Expense
P45,000; Utilities Expense P10,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Rent Expense Salaries Expense Utilities Expense
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
2-10 85,000 2-10 30,000 2-10 45,000 2-10 10,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 10 Rent Expense P 30,000
Salaries Expense 45,000
Utilities Expense 10,000
Cash P 85,000
To record payment of various expenses
Transaction 8: On February 15, Mac Co. pays its P12,500 bill from TV 22 Clan.
Analysis:  Decreases the asset account, Cash P12,500
 Decreases the liability account, Accounts Payable P12,500
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Accounts Payable
Dr. Cr. Dr. Cr.
2-15 12,500 2-15 12,500

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 15 Accounts Payable P 12,500
Cash P 12,500
To record payment on billed account.
Transaction 9: On February 20, Mac Co. receives P30,000 in cash from billed customers.
Analysis:  Increases the asset account, Cash P30,000
 Decreases the asset account, Accounts Receivable P30,000
Rules of Debit and Credit Application
Assets = Liabilities + Owner’s Equity
Cash Accounts Receivable
Dr. Cr. Dr. Cr.
2-20 30,000 2-20 30,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 20 Cash P 30,000
Accounts Receivable P 30,000
To record collection of payment from account customers
Transaction 10: On February 27, Mac, the owner of the business, withdraws P65,000 cash for his
personal use.
Analysis:  Decreases the asset account, Cash P65,000
 Decreases the owner’s equity accounts, Mac, Drawing P65,000
Rules of Debit and Credit Application

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Assets = Liabilities + Owner’s Equity

Cash Mac, Drawing
Dr. Cr. Dr. Cr.
2-27 65,000 2-27 65,000

Journal Entry
DATE PARTICULARS DEBIT CREDIT
February 27 Mac, Drawing P 65,000
Cash P 65,000
To record owner’s withdrawal for personal use

Summary of Journal Entries

General Journal Page 1

Date Particulars PR Debit Credit
Feb. 01 Cash P 750,000
Mac, Capital P 750,000
To record initial investment of the owner

02 Equipment 350,000
Cash 350,000
To record purchase of equipment

03 Supplies 80,000
Accounts Payable 80,000
To record purchased supplies on account

04 Cash 60,000
Service Revenue 60,000
To record payment for rendered services

05 Advertising Expense 12,500

Accounts Payable 12,500
To record receipt of bill and pay until later date

06 Cash 75,000
Accounts Receivable 100,000
Service Revenue 175,000
To record services rendered to customer

10 Rent Expense 30,000

Salaries Expense 45,000
Utilities Expense 10,000
Cash 85,000
To record payment of various expenses

15 Accounts Payable 12,500

Cash 12,500
To record payment on billed account

20 Cash 30,000
Accounts Receivable 30,000
To record collection of payment from account
customers

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27 Mac, Drawing 65,000

Cash 65,000
To record owner’s withdrawal for personal use

Posting to the Ledger

Journalizing a transaction records the data only in the journal – but not in the ledger. The data must also be
copied to the ledger. The process of copying from the journal to the ledger is called posting. Debits in the
journal are posted as debits in the ledger and credits as credits – no exceptions.

Illustration:
General Journal Page 1
Date Particulars PR Debit Credit
2018
Apr 01 Cash 101 15,000
Owner’s Capital 301 15,000
Owner’s initial investment

General Ledger
Cash No. 101
Date Particulars PR Debit Credit Balance
2018
Apr 01 GJ1 15,000 15,000

General Ledger
Owner’s Capital No. 301
Date Particulars PR Debit Credit Balance
2018
Apr 01 GJ1 15,000 15,000

Posting should be performed in chronological order. That is, the company should post all the debits and credits
of one (1) journal entry before proceeding to the next journal entry. Postings should be made on a timely basis
to ensure that the ledger is up-to-date. The post reference column of a ledger account indicates the journal page
from which the transaction was posted. The particulars space of the ledger account is used infrequently because
an explanation already appears in the journal (Weygandt, Kimmel, & Kieso, 2015).

Alternatively, T-accounts can be used in replacement of the formal ledger. Each account must have a T-account.

Illustration:
General Journal Page 1
Date Particulars PR Debit Credit
2018
Apr 01 Cash 15,000
Owner’s Capital 15,000

03 Accounts Payable 10,000

Cash 10,000

10 Rent Expense 5,000

Cash 5,000

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T-Accounts (Ledger)

Cash Accounts Payable

4-1 15,000 4-3 10,000 4-3 10,000
4-10 5,000

Owner, Capital Rent Expense

4-1 15,000 4-10 5,000

Summary of T-Accounts (Ledger) for Mac Co.

Cash Accounts Payable Service Revenue

1-Feb 750,000 2-Feb 350,000 15-Feb 12,500 3-Feb 80,000 4-Feb 60,000
4-Feb 60,000 10-Feb 85,000 5-Feb 12,500 6-Feb 175,000
6-Feb 75,000 15-Feb 12,500 12,500 92,500 235,000
20-Feb 30,000 27-Feb 65,000 80,000
915,000 512,500 Advertising Expense
402,500 Mac, Capital 5-Feb 12,500
1-Feb 750,000
Accounts Receivable
6-Feb 100,000 20-Feb 30,000 Rent Expense
70,000 Mac, Drawing 10-Feb 30,000
27-Feb 65,000
Supplies
3-Feb 80,000 Salaries Expense
10-Feb 45,000

Equipment
2-Feb 350,000 Utilities Expense
10-Feb 10,000

Preparing the Trial Balance

A trial balance is a list of accounts with their balances at a given time. Customarily, companies prepare a trial
balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger.
Debit balances appear in the left column and credit balances in the right column (Weygandt, Kimmel, & Kieso,
2015).

The trial balance shows the mathematical parity of debits and credits after posting. Under the double-entry
system, this equality occurs when the sum of the debit account balances equals the sum of the credit account
balances. A trial balance may also uncover errors in journalizing and posting.

The steps for preparing a trial balance are:

1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two (2) columns.

The following illustration shows the trial balance prepared from Mac Co.’s ledger. Note that the order of
presentation in the trial balance is: Assets, Liabilities, Owner’s Equity, Revenues, and Expenses. The total debits
must equal the total credits.

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MAC CO.
Trial Balance
February 28, 2018
Balance
Particulars PR Debit Credit
Cash P 402,500
Accounts Receivable 70,000
Supplies 80,000
Equipment 350,000
Accounts Payable P 80,000
Mac, Capital 750,000
Mac, Drawing 65,000
Service Revenue 235,000
Advertising Expense 12,500
Rent Expense 30,000
Salaries Expense 45,000
Utilities Expense 10,000

P 1,065,000 P 1,065,000

A trial balance is a necessary spot check to expose certain types of errors. For example, if only the debit portion
of a journal entry has been posted, the trial balance would have brought up an error.

Limitations of a Trial Balance

A trial balance does not guarantee freedom from recording errors. Numerous errors may exist even though the
totals of the trial balance columns agree. For example, the trial balance may balance even when:
a. A transaction is not journalized.
b. A correct journal entry is not posted.
c. A journal entry is posted twice.
d. Incorrect accounts are used in journalizing or posting.
e. Offsetting errors are made in recording the amount of a transaction.

Even if wrong account or amount is posted, total debits will still equal the total credits. The trial balance does
not prove that the company has recorded all transactions or that the ledger is correct (Weygandt, Kimmel, &
Kieso, 2015).

Finding Trial Balance Errors

If the debit and credit balances in a trial balance are not equal, look for one (1) or more of the following errors:
• A debit was entered in an account as a credit, or vice versa.
• The balance of an account was computed incorrectly.
• An error was made in carrying the account balance to the trial balance.
• The trial balance was summed incorrectly.

Other than simply adding the columns incorrectly, the two (2) most common mistakes in preparing a trial balance
are:
• Recording an account as a credit when it usually carries a debit balance, or vice versa. This mistake causes
the trial balance to be out of balance by an amount divisible by 2.
• Transposing two (2) digits when transferring an amount to the trial balance (for example, entering P23,459
as P23,549). This error causes the trial balance to be out of balance by an amount divisible by 9.

So, if a trial balance is out of balance and the addition of the columns is correct, determine the amount by which
the trial balance is out of balance and divide it first by 2 and then by 9. If the amount is divisible by 2, look in the

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trial balance for an amount that is equal to the quotient. If you find such an amount, chances are it’s in the wrong
column. If the amount is divisible by 9, trace each amount back to the T-account balance, checking carefully for
a transposition error. If none of these techniques is successful in identifying the error, recompute the balance
of each T account. Then, if you still have not found the error, retrace each posting to the journal or the
T-account (Needles, Powers, & Crosson, 2014)

References:
(2018, March 20). Retrieved from Germanna Community College: https://78bbm3rv7ks4b6i8j3cuklc1-
wpengine.netdna-ssl.com/wp-content/uploads/2017/06/chart-of-accounts.pdf
Horngren, C. T., Harrison Jr., W. T., & Oliver , M. (2012). Accounting (9th Edition). Upper Saddle River, New
Jersey: Prentice Hall.
Needles, B. E., Powers, M., & Crosson, S. V. (2014). Principles of accounting. United States of America:
Cengage Learning.
The source document in an accounting transaction. (2018, March 20). Retrieved from The Balance:
https://www.thebalance.com/the-source-document-in-an-accounting-transaction-393005
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Accounting principles (Twelfth Edition). United States of
America: John Wiley & Sons, Inc.

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