Certificate in Business Accounting Fundamentals of Financial ...

Chapter 4
MALTA INSTITUTE OF MANAGEMENT
CIMA – Certificate in Business Accounting
Fundamentals of Financial Accounting
Summarizing the Ledger Accounts
The trial balance
Trial balance: A list of account balances in a double-entry accounting system. The sum
of the debit balances will equal the sum of the credit balances although certain errors may
occur.
A trial balance is a useful step before a trading account, income statement and balance
sheet are prepared. After these financial statements have been prepared the ledger
accounts can be balanced off.
A trial balance is a way of checking the accuracy of the ledger entries.
The double-entry rule shows us that the total of all the accounts with debit balances
should equal the total to all the accounts with credit balances. However, certain errors
may occur such as the omission of a transaction or erroneous entries will not be disclosed
by a trial balance.
If the totals of the debit and credit balances entered in the trial balance are not equal, then
an error(s) have been made either in the:
• Posting of the transactions to the ledger accounts;
• Balancing of the accounts;
• Transferring of the balances from the ledger accounts to the trial balance;
Example page 70
Does the trial balance prove the accuracy of the ledger accounts?

MALTA INSTITUTE OF MANAGEMENT
CIMA – Certificate in Business Accounting
Fundamentals of Financial Accounting
Although the trial balance totals may agree, this does not mean that there are no errors
within the ledger accounts. There are a number of errors that might have been made that
do not prevent the trial balance from agreeing.
These are:
• Errors of omission: a transaction has been completely omitted from the ledger
accounts
• Errors of commission: one side of a transaction has been entered in the wrong
account.
• Errors of principle: the correct and incorrect accounts are of different types. This
type of error would affect the calculation of profit, and the position shown by the
balance sheet.
• Errors of original entry: the wrong amount has been used for both the debit and
the credit entries.
• Reversal of entries: the debit has been made to the account that should have been
credited and vice versa.
• Duplication of entries: the transaction has been posted twice.
• Compensating errors: two or more transactions have been entered incorrectly, but
cancelling each other out.
Example page 71,72
Preparing a statement of profit
After completing the trial balance, the profit can be calculated, this is referred to as an
income statement. The part of the income statement that calculates the gross profit is
known as the ‘trading account’, this is a sub section of the income statement. This
comprises sales, less cost of goods sold which equals gross profit.
The trading account

MALTA INSTITUTE OF MANAGEMENT
CIMA – Certificate in Business Accounting
Fundamentals of Financial Accounting
The trading account is part of the double-entry bookkeeping of an organisation with the
intention of making profit. The trading account is part of the income statement and is
produced regularly by an organisation.
The trading account compares revenue derived from selling the goods with the costs of
obtaining the goods sold.
Example page 72
Transferring the balances to the trading account
Every entry in the trading account must have an opposite entry elsewhere in the ledger
accounts (double entry-rule).
Example: the credit in the trading account for sales will also be debited in the sales
account.
Example page 73
When the accounts are balanced, that is, the totals of both sides are equal, they should be
ruled off to prevent including them in the figures for the following year. The account is
now said to be closed, although it can still be used to record the sales for the next period.
In the inventories account there will be a balance at the start of the period, which will be
a debit balance.
As the trading account is being prepared, a balance is transferred into it, by crediting the
inventories account and debiting the trading account.
When the inventory account is balanced it can be closed off with the sales account.
As the preparation of the trading account continues, it will be necessary to determine the
value of the inventories at 31 December. This is often done by referring to a separate
inventory control system, which is maintained outside the bookkeeping system. The
figure is passed to the bookkeeper, who debits the inventories account with the new
value, and credits the trading account.