Key Concepts
A trial balance is a list of all ledger accounts and their closing balances at a specific date, arranged into two columns — debit and credit.
Purposes of a trial balance:
- To check the arithmetic accuracy of double-entry recording — if total debits equal total credits, the posting is arithmetically correct.
- To facilitate the preparation of financial statements — it provides a convenient summary of all account balances in one place.
Which column does each account go in?
Use the mnemonic DEAD CLIC — Debit: Expenses, Assets, Drawings | Credit: Liabilities, Income, Capital
| Debit (Dr) | Credit (Cr) |
|---|---|
| Expenses (Wages and salaries, Rent expense, Cost of sales, Discount allowed) | Liabilities (Trade payables, Bank overdraft, Bank loan) |
| Assets (Inventory, Trade receivables, Cash at bank, Cash in hand, Fixtures and fittings, Office equipment, etc.) | Income (Sales revenue, Commission income, Discount received, Rental income) |
| Drawings | Capital |
Note on Sales returns:Sales returns is a deduction from revenue (contra-income), not an expense. It has a debit balance in the trial balance — so it goes in the Dr column. In the Statement of Financial Performance, it appears directly below Sales revenue, not in the expenses section.
How to prepare a trial balance:
- Take the closing balance of every ledger account.
- Identify whether each balance is a debit or credit balance.
- Enter each balance in the correct column.
- Total both columns — they must be equal.
Limitation of a trial balance:
A trial balance that balances does not guarantee that all entries are correct. It only confirms arithmetic accuracy. Errors a balanced trial balance cannot detect include:
- Omission — a transaction was completely left out of the books (both sides missing, so totals still agree)
- Wrong amount — an incorrect figure was recorded on both the debit and credit sides (e.g. $250 written as $520 on both sides — still balances)
- Wrong account — an amount was posted to the wrong account of the same type (e.g. rent expense posted to wages expense — both are debit accounts, so the column totals are unaffected)
The full list of errors and how to correct them is covered in Chapter 15.
Adjusted (corrected) trial balance:
When errors are discovered or transactions have been omitted, you prepare an adjusted trial balance:
- Identify each affected account.
- Determine how the correction changes the balance (increase or decrease, and in which column).
- Apply the adjustment to the original balance.
- Re-total both columns.
Finding missing capital:
If the capital balance is unknown, calculate it after all other accounts are correctly placed:
This works because total debits must equal total credits — capital is whatever makes the credit side balance.
DEAD CLIC — Debit: Expenses, Assets, Drawings | Credit: Liabilities, Income, Capital
| Account | $ |
|---|---|
| Wages and salaries | 5,880 |
| Rent expense | 2,760 |
| Sales revenue | 35,500 |
| Bank charges | 110 |
| Sales returns | 700 |
| Cost of sales | 20,250 |
| Fixtures and fittings | 24,500 |
| Trade receivables | 2,530 |
| Trade payables | 2,570 |
| Cash in hand | 50 |
| Bank overdraft | 7,580 |
| Petty cash | 300 |
| Commission income | 900 |
| Discount received | 500 |
| Discount allowed | 1,000 |
| Inventory | 10,500 |
| Drawings | 3,300 |
| Capital | ? |
Additional information:
- Goods costing $2,000 were purchased on credit, but no entries had been made.
- Anand withdrew $300 from the business bank account for personal use. No entries had been made.
- Rent expense of $2,500 had been posted in error to the wages and salaries account.
Required: Prepare an adjusted trial balance as at 31 August 20X5 and calculate the missing capital balance.
Apply DEAD CLIC: Expenses (including discount allowed), Assets, Drawings → Debit. Liabilities, Income (including discount received), Capital → Credit.
Note: Sales returns has a debit balance (contra-income) → Dr. Bank overdraft is a liability (the business owes the bank money after spending more than it has in the bank) → Cr. Commission income is income → Cr.
Omission 1 — $2,000 of goods purchased on credit (no entries made):
- Inventory increases by $2,000 → Dr side increases
- The business now owes the supplier → Trade payables increases by $2,000 → Cr side increases
Omission 2 — $300 withdrawn from the bank for personal use (no entries made):
- The business is operating at a bank overdraft, so taking out $300 more increases what it owes the bank → Bank overdraft increases by $300 → Cr side increases
- Drawings increases by $300 → Dr side increases
Error 3 — Rent expense of $2,500 posted to the wages and salaries account:
- Remove $2,500 from Wages and salaries → Dr balance decreases
- Add $2,500 to Rent expense → Dr balance increases
- Both are debit accounts, so the total Dr is unchanged — the amount simply moves to the correct account.
Trial Balance as at 31 August 20X5
| Dr $ | Cr $ | |
|---|---|---|
| Wages and salaries (5,880 − 2,500) | 3,380 | |
| Rent expense (2,760 + 2,500) | 5,260 | |
| Sales revenue | 35,500 | |
| Bank charges | 110 | |
| Sales returns | 700 | |
| Cost of sales | 20,250 | |
| Fixtures and fittings | 24,500 | |
| Trade receivables | 2,530 | |
| Trade payables (2,570 + 2,000) | 4,570 | |
| Cash in hand | 50 | |
| Bank overdraft (7,580 + 300) | 7,880 | |
| Petty cash | 300 | |
| Commission income | 900 | |
| Discount received | 500 | |
| Discount allowed | 1,000 | |
| Inventory (10,500 + 2,000) | 12,500 | |
| Drawings (3,300 + 300) | 3,600 | |
| Capital | ? | |
| Total | 74,180 |
Capital = Total Dr − All other Cr
= 74,180 − (35,500 + 7,880 + 4,570 + 900 + 500)
= 74,180 − 49,350
= $24,830
Completed adjusted trial balance: Dr $74,180 | Cr $74,180 ✓
Bank overdraft placed in the debit column. A bank overdraft is a liability (the business owes the bank money after spending more than it has in the bank) — it always goes in the credit column, even though it relates to the bank account.
Discount received placed in the debit column. Discount received is income — it is a credit entry. Do not confuse it with discount allowed, which is an expense (Dr).
Concluding that a balanced trial balance means all entries are correct. A balanced TB only confirms arithmetic accuracy. Transactions may still be omitted or posted to the wrong account entirely.