RESEARCHING TRIAL BALANCE ERRORS

1. Check your math. Add your columns again to be sure the error isn’t just one of addition. That’s the simplest kind of error to fi nd. Correct the addition mistake and re-total your columns.

2. Compare your balances. Double-check the balances on the trial balance by comparing them to the account balances in the gen- eral ledger. Be sure you didn’t make an error when transferring the account balances to the trial balance. Correcting this type of problem isn’t very diffi cult or time-consuming. Simply correct the incorrect balances, and add up the trial balance columns again.

3. Check your general ledger balances. Double-check the math in all your ledger accounts, making sure that all totals are correct. Running this kind of a check is somewhat time-consuming, but it’s still better than rechecking all your transactions. If you do fi nd math errors in your general ledger, correct them, reenter the totals correctly, change the numbers on the trial balance to match your corrected totals, and retest your trial balance.

4. Check your journal entries. Unfortunately, if Steps 1, 2, and 3 fail to fi x your problem, all that’s left is to go back and check your original transaction entries in the journal.

5.4.3 Preparing a Trial Balance Using Software

If you use a computerized accounting system, your trial balance is auto- matically generated for you. Because the system allows you to enter only transactions that are in balance, the likelihood that your trial balance won’t be successful is pretty slim. But that doesn’t mean your accounts are guar- anteed to be error free. The trial balance has its limitations, as discussed later in this chapter.

In QuickBooks, the trial balance is an option on the Report Navigator’s Accountant & Taxes page. Although it doesn’t match the trial balance done manually in Figure 5-8, a QuickBooks trial balance gives you an idea of what a computerized trial balance looks like.

101

Section 5.4:Preparing the Trial Balance Figure 5-8

A sample trial balance produced by QuickBooks. 08 Interest Expenses 2008 2008 06/12/08 05/01/2008 05/31/2008 As of May 31, 2008 May 31, 08

Save Time and Money

Julia’s catering business had grown from a kitchen operation to a small but high-end alternative for Boston companies looking to bring in health- food catering for staff and meetings. When it came time for Julia to close the books at the end of the year, she was still managing just fi ne with her manual accounting methods. To get a better idea of how her busi- ness was really doing, however, Julia wanted to prepare more than one trial balance a year, or even a quarter. Certainly, a computerized method would simplify matters, but she simply did not want to make that type of investment yet. A quick Google search for “Excel trial balance template” led Julia to a number of free Excel templates, and using one has cut her preparation time by at least 50 percent.

IN THE REAL WORLD

Save Time and Money

Julia’s catering business had grown from a kitchen operation to a small but high-end alternative for Boston companies looking to bring in health- food catering for staff and meetings. When it came time for Julia to close the books at the end of the year, she was still managing just fi ne with her manual accounting methods. To get a better idea of how her busi- ness was really doing, however, Julia wanted to prepare more than one trial balance a year, or even a quarter. Certainly, a computerized method would simplify matters, but she simply did not want to make that type of investment yet. A quick Google search for “Excel trial balance template” led Julia to a number of free Excel templates, and using one has cut her preparation time by at least 50 percent.

5.4.4 Limitations of the Trial Balance

Remember the saying, “Garbage in, garbage out?” If you make a mistake when you enter transaction data into the system, even if the transactions are in balance, the information that comes out will be wrong.

Whether you do the books manually or you use accounting software, you could have the following errors in your accounts and still be in balance: • You forgot to record a transaction.

• You forgot to post a transaction.

• You recorded or posted a transaction twice.

• You recorded or posted the wrong amount for both sides of the transaction. • You recorded or posted using the wrong account(s).

If, by chance, the errors listed here slip through the cracks, there’s a good chance that you will notice the discrepancy when the fi nancial statements are prepared. Even with these potentially lurking errors, the trial balance is a use- ful tool and the essential fi rst step in developing your fi nancial statements.

Your manual trial balance columns don’t match. You already checked the math in each column and it is correct. What would you do next?

SELF-CHECK

1. What is the trial balance? What is its purpose?

2. List the four steps needed to prepare a manual trial balance. 3. How do you prepare a computerized trial balance?

4. True or False? If your trial balance debits and credits are equal, all

your ledger accounts are correct. Explain your answer. Apply Your Knowledge

SUMMARY