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Chapter 3

Trial Balance
To
Final Accounts
• Describe how to prepare a trial balance
• Discuss the rectification of errors in trial balance
• Describe different types of final accounts
Trial Balance

Format of a Trial Balance


Trial Balance

Trial Balance refers to Objectives of preparing a trial balance


• A list of closing balances of ledger from a ledger account:
accounts 1. For achieving arithmetical accuracy
• On a particular date and constitutes 2. For using as a worksheet
the first step 3. For serving as a source report
• Towards the preparation of
financial statements of an
organisation.
• Prepared at the end of the
accounting period .
Discuss which balance these accounts have ?

Furniture Accounts receivable


Cash Loan taken
Bank Advances given
Salary paid Taxes paid
Commission paid Interest paid
Commission received
Interest received
Purchases
Closing Stock
Sales
Dividend received
Creditors
Illustration 2. . Preparing a Trial Balance, page no.75
Rectifying Errors

• If trial balance does not agree, we need to locate the errors committed
which may occur at the time of recording, classifying, or summarising a
financial transaction.
• Even when the trial balance is correct, some errors may remain in the
accounting records.
• Two types of errors are committed:
a) errors that affect the trial balance and
b) the errors that do not affect the trial balance
Rectifying Errors

Types of Accounting Errors

Errors of Principle

Errors of Omission

Error of Commission

Errors of
Compensation
Errors of Principle

Example
Occurs- In case, there is lack of • The revenue Expenditure may be
understanding, classification . taken as capital or vice versa.
• Recording of personal expenses
of director as business expenses.
Errors of Omission

• This type of error occurs when Example


any transaction is not completely • Goods sold to Ram for Rs 10,000

or partially recorded in the books were not recorded in the sales

of accounts. book at all.

• Such errors can be rectified by


correcting the normal journal
entry that was supposed to be
made for the transaction, which
is omitted.
Errors of Commission

Also called as posting error Example

• Error of recording with wrong • Recording at Rs5000 instead of


amount Rs 500
• Casting errors (totaling mistakes) • Totaling Mistake 50600 as Rs
• Error of posting (posted wrongly 56000
in ledger)
• Errors of carrying forward
(mistake in carrying forward the
total)
Errors of Compensation

Example
Compensating errors happens while When purchase entry of $10000 is
preparing trial balance, it happens recorded on credit side and sales
when an error on debit side is entry of $10000 is recorded on debit
compensated by an error on credit side.
side and therefore it does not have
any effect on the agreement of trial
balance
Financial Statements

The main aim of final accounts is to


inform the owner about the
progress of his/her business and the
financial position at the right time
and in the right manner.
Profit and Loss Account & its components

• Revenue
• COGS
• Gross profit
• Operating expenses
• Administrative expense
• Operating income-EBIT
• Profit before tax
• Net profit

Illustration no. 6, page number 92


Balance Sheet

Balance
Sheet

Equity and
Assets
liabilities

Non current Current


Equity Non current current
liabilities liabilities
Balance Sheet

• Illustration 6 , page no. 92


Cash Flow Statement

• Operating Activities

• Investing Activities

• Financing Activities
Chapter 3- Trial Balance to Final Accounts

Relationship between - Important Terms


• Income statement • Opening stock
• Closing stock
• Balance Sheet
• Purchase
• Sales
• Direct expenses
• Indirect expenses
• Income
Let’s Sum Up

• Accounting process is one of the most fundamental concepts of


accounting.

• A journal can also be defined as a chronological record of the business


transactions.

• A ledger refers to a book or register in which financial transactions are


permanently recorded after being summarised and classified.

• After we have posted and recorded the transactions, it is necessary to


balance each account prepared in a ledger.
Assess your self

Cash Account is a ……………….. Account


• Asset
• Liability
• Equity
• Expenses

Salary paid is a ……………….. Account


• Asset
• Liability
• Equity
• Expenses
Assess your self

Building Account is a ……………….. Account


• Asset
• Liability
• Equity
• Expenses

Loan taken is a ……………….. Account


• Asset
• Liability
• Equity
• Expenses
Assess your self

Reserves and Surplus is related to ………………..


• Asset
• Liability
• Equity
• Expenses

Closing stock is an ……………….. Account


• Asset
• Liability
• Equity
• Expenses
Assess your self

Bank Overdraft is related to ………………..


• Asset
• Current Liability
• Non current Liability
• Expenses

Salary outstanding is a ………………..


• Asset
• Current Liability
• Non current Liability
• Expenses
Assess your self

Failure to record a sales transaction is ………………..


• Error of Omission
• Error of Commission
• Error of Principle
• Errors of Compensation

Recording maintenance expenses as an asset purchased is………………..


• Error of Omission
• Error of Commission
• Error of Principle
• Errors of Compensation
Assess your self

When one type of error is set off by the another type of error, its called as
………………..
• Error of Omission
• Error of Commission
• Error of Principle
• Errors of Compensation

Error of recording with wrong amount is called as ………………..


• Error of Omission
• Error of Commission
• Error of Principle
• Errors of Compensation
Assess your self

Furniture purchased is a ………………..


• Operating activity
• Financing activity
• Non Cash Activity
• Investing Activity

Loan given to another company is a ………………..


• Operating activity
• Financing activity
• Non Cash Activity
• Investing Activity
Assess your self

Amount paid to acquire shares in another company is an ………………..


• Operating activity
• Financing activity
• Non Cash Activity
• Investing Activity

Debentures issued is a ………………..


• Operating activity
• Financing activity
• Non Cash Activity
• Investing Activity
Assess your self

COGS is a component of ………………..


• Balance Sheet
• Profit and Loss Account
• Cash Flow Statement
• Journal

Reserves and Surplus is a component of ………………..


• Equity
• Profit and Loss Account
• Cash Flow Statement
• Outsiders liabilities
Review Questions

• Discuss the components of –


– Financial statement
– Balance sheet
– Profit and loss account
– Cash flow statement

• Rectification of errors and its types

• Trial balance and objectives behind its preparation