Measuring Business Transactions

1
Chapter 2

• Measuring Business Transactions

2
Trial Balance

• Listing of accounts and their balances to prove
  that debits credits
• if NOT, stop and fix it
• Cannot detect
• entry posted to wrong account
• miscalculated entry
• failure to book an entry
• duplicate entry

3
Trial Balance - Books Way

• Weaknesses
• No initial indication of income or loss
• Misread totals with large numbers
• If Out of Balance, separate calculation required
  to determine amount
• Cumbersome when expanding into the accountants
  work sheet (Chapter 4)

4
Trial Balance - Toms Way

• Two Sections
• Balance Sheet accounts (permanent accounts)
• Income Statement accounts (temporary accounts)
• Net income or loss passes to balance sheet
• One Column
• Debits entered as positive numbers
• Credits entered as negative numbers (in brackets)
• If in balance, total of balance sheet section is
  ZERO

5
Abnormal Balances

• Balance other than what the account should
  normally have
• If normal balance is Debit, then the account
  would have an abnormal balance if were a Credit
• If normal balance is Credit, then the account
  would have an abnormal balance if it were a Debit

6
Then Whats Normal

• If increases are recorded by debits, then normal
  balance for an account would be Debit
• Assets
• Withdrawals
• Expenses

7
Then Whats Normal

• If increases are recorded by credits, then
  normal balance for an account would be Credit
• Liabilities
• Investments (Capital)
• Revenue

8
Trial Balance Out of Balance

• Cant Be - Find the Error FIX IT!

9
Common Errors That Cause Trial Balance to be Out
of Balance

• Debit account balance entered as a credit or vice
  versa
• look for an account balance that is 1/2 of what
  the balance sheet section is off
• only works if there is only one error
• otherwise agree each account balance back to
  source

10
Common Errors That Cause Trial Balance to be Out
of Balance

• Transposition Error right numerals, wrong order
• 63,457.28 becomes 63,547.28
• If sole error, amount balance sheet section is
  off will be divisible evenly by 9 check your
  numbers carefully back to their source
• If combined with another error, division by 9
  wont work

11
Common Errors That Cause Trial Balance to be Out
of Balance

• Transferring incorrectly from one section or
  sheet to another
• Income Statement to Balance Sheet
• Formula driven spreadsheets best defense
• Balance forward on multiple page trial balance

12
Journal Entry Etiquette

• Explanations are required
• Separate column for Debits Credits
• In description column, the credited account names
  are indented
• An entry can have more than one debit or credit
  so long as in total the entry balances
• Skip a line between entries