Do you still recall the definition of financial reporting? In the first module of the course, financial reporting was defined as the process of recording, classifying, summarizing, reporting, and analysing financial information.

The previous three (3) modules focused on how to record and classify business transactions in the books of prime entry and how to post them to the general ledger. After transactions have been recorded and classified in the general ledger accounts, they’re summarized in a trial balance.

This chapter looks at how to extract a trial balance from the general ledger accounts and how to identify and correct errors that may or may not be revealed by the trial balance.

Learning objectives

By the end of this chapter, you should be able to:

Describe the purpose of a trial balance.
Extract general ledger balances into a trial balance.
Prepare extracts of an opening trial balance.
Explain the limitations of a trial balance.

Definitions

Trial balance: It compiles all general ledger account balances at a specific date to verify accounting and arithmetical accuracy of the double-entry bookkeeping. It confirms that all debit and credit accounts are equal, serving as a critical checkpoint before financial statement preparation.

The trial balance is able to reveal some errors that might have been made when the transactions were being posted into the ledger accounts.

When and how is the trial balance prepared?

You prepare a trial balance after all general ledger accounts have been balanced off.

Once each general ledger account is balanced, the closing balance (i.e., the balance b/d) is determined. These closing balances are then transferred to the trial balance:

All debit balances are recorded on the debit side of the trial balance.
All credit balances are recorded on the credit side.

Note: All things being equal, the closing balance of each general ledger account should reflect the normal balance of its corresponding element of the financial statement. For instance, accounts receivable should have a debit balance because it represents an asset, and assets normally carry debit balances. However, in practice, some accounts may occasionally deviate from this rule depending on the transactions recorded in them.

Illustration: Extracting trial balance

A sole trader started a business with GHC 50,000 cash. During January 2024, the following transactions occurred:

Bought goods for cash, GHC 15,000.
Purchased goods on credit from Kofi & Sons, GHC 10,000.
Sold goods for cash GHC 12,000.
Sold goods on credit to Ama Ltd., GHC 8,000.
Paid rent by cash GHC 2,000.
Paid Kofi & Sons GHC 6,000 by cash.
Received GHC 5,000 from Ama Ltd.

Required:

Prepare the General Ledger accounts to record the above transactions.
Extract the trial balance of the sole trader as at 31st January 2024. Suggested Solution:

At this point, you should be able to prepare manual journal entries from each transaction using double-entry bookkeeping principles, and then post those entries to the related general ledger accounts.

See below the journal entries as well as the general ledger accounts.

Journal entries	DR ($)	CR ($)
Owner introduced capital:
Cash/Bank	50,000
Capital		50,000
Bought goods for cash
Purchases	15,000
Cash/Bank		15,000
Purchased goods on credit from Kofi & Sons
Purchases	10,000
Payables		10,000
Sold goods for cash
Cash/Bank	12,000
Sales		12,000
Sold goods on credit to Ama Ltd.
Receivables	8,000
Sales		8,000
Paid rent by cash
Rent Expense	2,000
Cash/Bank		2,000
Paid Kofi & Sons by cash
Payables	6,000
Cash/Bank		6,000
Received payment from Ama Ltd.
Cash/Bank	5,000
Receivables		5,000

Below are the balanced general ledger accounts following the extraction from the journal entries above.

T-account showing cash and bank with a closing balance of 44,000. — Cash and bank ledger account

T-account showing capital of 50,000 transferred from cash and bank. — Capital ledger account

T-account showing purchases totaling 25,000. — Purchases ledger account

T-account showing sales totaling 20,000. — Sales ledger account

T-account showing receivables totaling 8,000. — Receivables ledger account

T-account showing payables totaling 10,000. — Payables ledger account

T-account showing rent expense of 2,000. — Rent expense ledger account

Once the general ledger accounts have been prepared and balanced off, the trial balance can be extracted.

The closing balance on each general ledger account determines where the item appears on the trial balance:

Accounts with debit closing balances appear on the debit side.
Accounts with credit closing balances appear on the credit side.

See the trial balance below.

Trial balance as at 31st January 2024
	Dr	Cr
	$	$
Cash and Bank	44,000
Purchases	25,000
Receivables	3,000
Rent	2,000
Capital		50,000
Sales		20,000
Payables		4,000
	74,000	74,000

Notes:

Since the total debit on the trial balance equals the total credit, it can be partially concluded that the journal entries made were free of error.
Where there is a difference between the sums of the debits and credits on the trial balance, it is an indication of the existence of some errors in the journal entries, which will require an investigation and correction.

Limitations of a trial balance

Despite its ability to confirm the mathematical balance between debits and credits, the trial balance can’t validate the underlying accuracy, completeness, or proper classification of accounting entries. It also can’t detect offsetting mistakes of equal amounts.

It cannot identify errors where transactions go completely unrecorded, compensating errors that offset each other, errors where items are posted to incorrect account types, and original entry mistakes.

The trial balance verifies that total debits equal total credits, serving as a checkpoint for double-entry accuracy before preparing financial statements.
Trial balance is extracted after balancing all general ledger accounts: Debit balances go on the debit side, credit balances on the credit side.
Equal debits and credits indicate mathematical accuracy but don’t guarantee the transactions are error-free or complete.
Normal balances follow financial statement elements: Assets and expenses have debit balances; liabilities, equity, and income have credit balances.
Trial balance has limitations: It cannot detect unrecorded transactions, compensating errors, misclassifications, or errors of original entry.

Next | 6.2 Correction of errors

The trial balance