Preparing a Trial Balance
Purpose and limits of the trial balance
A trial balance lists every ledger account balance in debit and credit columns; the totals agree because of duality. It therefore proves arithmetical accuracy only - it cannot prove entries were correct, complete or reasonable.
Errors the trial balance will not detect: error of omission (the whole entry is left out), error of commission (right class of account, wrong account), error of principle (wrong class, e.g. vehicle repairs debited to motor vehicles), compensating errors (two equal and opposite errors), original entry (the same wrong figure used in both accounts from the book of prime entry) and reversal of entries.
Errors it will detect (one-sided entries): an omitted debit or credit, a figure posted twice on one side, different amounts in the two accounts, addition and extraction errors. The imbalance is held in a suspense account until corrected.
Corrections are made by journal, with the suspense account used only for one-sided errors. Where a correction changes profit, adjust the draft profit figure and explain the direction.
Worked example: rent of $450 was entered in the rent account as $540, with the bank entry correct at $450. Correction: Dr Suspense $90, Cr Rent $90 - profit increases by $90. By contrast, a $100 credit sale omitted from both accounts creates no suspense: Dr Receivables $100, Cr Sales $100, increasing profit by $100.
Rule of thumb: if the same wrong figure sits in two accounts, there is no suspense; if only one side is wrong, the difference goes to suspense.