ACCA Applied Knowledge · Financial Accounting

Trial balance: formula sheet

Full chapter guide

Key formulas

Trial balance check: Total debit balances = Total credit balances; If equal, the double entry is arithmetically balanced. It does not prove there are no errors.
Normal debit balances: Assets + Expenses + Drawings = Debit; Includes non-current assets, inventory, receivables, bank (if positive), purchases, wages, rent and drawings.
Normal credit balances: Liabilities + Capital/Equity + Income = Credit; Includes payables, loans, share capital, reserves, sales, other income and allowance for receivables.
Ledger account balance: Balance = Total of larger side − Total of smaller side; The balance sits on the side with the larger total. A debit larger than credit gives a debit balance.
Accounting equation link: Assets = Capital + Liabilities; Explains why debits and credits agree when all entries are complete double entries.
Accounting equation: Assets = Liabilities + Equity; Assets are normally debit balances. Liabilities and equity are normally credit balances.
Balance of an account: Balance = Total of larger side − Total of smaller side; The balance is written on the smaller side as 'balance carried down' (c/d).
Normal debit balances: Assets, Expenses, Drawings, Purchases, Receivables, Inventory (opening inventory in the trial balance); An increase is a debit. Remember: DEAD (Drawings, Expenses, Assets = Debit).
Normal credit balances: Liabilities, Equity (capital, reserves), Income, Payables, Loans; An increase is a credit. Remember: liabilities, equity and income are credits.
Trial balance check: Total debit balances = Total credit balances; Equality does not prove the ledger is free from error.
What the trial balance proves: Total debit balances = Total credit balances; This proves only that postings balance. It does not prove the right accounts or amounts were used.
Error of omission: Transaction missed entirely: no debit, no credit; Correct by posting the full entry that was missed.
Error of commission: Right category, wrong account: Dr correct account, Cr wrong account (or the reverse); Correction moves the amount between two accounts of the same type.
Error of principle: Wrong category of account, e.g. capital item posted to expenses; Correction moves the amount between asset and expense (or similar). Profit changes.
Error of original entry: The same wrong amount used for both the debit and the credit, e.g. $450 posted as $540 on both sides; Correct only the difference between the right and wrong amounts.
Compensating errors: Excess debit of X in one account offset by excess credit of X in another account; Identify and correct each error in its own account. Post the two corrections together in one balanced journal.
Reversal of entries: Correcting entry: debit the account that was wrongly credited and credit the account that was wrongly debited, for 2 × the original amount; Undo the wrong entry and post the right one, so the net effect is twice the amount.
Suspense balance: Suspense = difference between total debits and total credits in the trial balance; Debits less than credits: debit suspense. Debits more than credits: credit suspense.
Clearing rule: Total of corrections through suspense = opening suspense balance; After all journals, suspense must be nil.
Correction approach: Correcting journal = reverse what was done wrongly + record what should have been done; Combine into one journal, netting entries where the same account appears.
Profit adjustment: Corrected profit = original profit + increases in income or decreases in expense − decreases in income or increases in expense; Only errors affecting income or expense accounts change profit.
Errors not revealed by trial balance: Omission, commission, principle, original entry, compensating, reversal; These do not create a trial balance difference, so suspense is not used.
Trial balance check: Total debit balances = Total credit balances; Balancing shows arithmetic consistency of the double entry only. It does not prove the accounts are accurate.
Errors that do not affect the trial balance: Omission, commission, principle, original entry, reversal, compensating; Debits still equal credits, so the trial balance balances and the error stays hidden.
Suspense account balance: Suspense = difference between total debits and total credits; A debit total lower than the credit total needs a debit in suspense. A credit total lower needs a credit in suspense.
Accounting equation: Assets = Capital + Liabilities; Statement of financial position items come from the trial balance after adjustments.
Profit: Profit = Income − Expenses; Use adjusted income and expense balances from the trial balance.
Gross profit: Gross profit = Revenue − Cost of sales; Cost of sales = Opening inventory + Purchases − Closing inventory (with carriage inwards and returns adjusted).

Quick revision

A trial balance lists all ledger balances at a date; total debits should equal total credits.
Debit balances: assets, expenses, drawings, receivables. Credit balances: liabilities, capital, income, payables.
A balanced trial balance does not prove the records are correct.
Error of omission: a transaction left out completely, with both sides missing, so it still balances. Omitting only one side is a one-sided entry, and the trial balance then disagrees.
Error of commission: right type of account, wrong account; still balances.
Error of principle: wrong type of account, such as capital item treated as expense; still balances.
Compensating errors: two errors of equal and opposite amount; still balances.
Error of original entry: wrong amount used on both sides; still balances.
Reversal of entries: debit and credit sides swapped; still balances.
A suspense account holds a difference temporarily until the cause is found; it is not a permanent balance.
A one-sided entry, a wrong total, or a transposition error on only one side of an entry makes the trial balance disagree.
Correcting journals: check they balance, then see if profit changes.

Common mistakes

Putting a bank overdraft in the debit column. Fix: A positive bank balance is debit. An overdraft is a liability, so it is credit.
Treating drawings as a credit or as an expense in a separate column. Fix: Drawings are a debit balance. They reduce capital, but the account itself carries a debit.
Putting the balance carried down on the larger side. Fix: Write c/d on the smaller side so that both sides total the same. Bring the balance down (b/d) on the opposite side, which is the side that was larger.
Treating the b/d side as the opposite of the account's balance. Fix: The b/d is the balance. If b/d is on the debit side, the balance is a debit.
Confusing error of commission with error of principle. Fix: Ask whether the wrong account is of the same type. Same type is commission. Different type, such as asset versus expense, is principle.
Thinking a one-sided entry leaves the trial balance balanced. Fix: A one-sided entry or a different amount on each side creates a difference. Only errors that keep debits equal to credits are hidden.
Using suspense for an error that does not affect the trial balance. Fix: Use suspense only when the original entry was one-sided or unequal. Errors such as omission or wrong account need no suspense.
Putting the suspense balance on the wrong side. Fix: If debits are less than credits, add the difference to debits, so suspense is a debit.
Saying a balanced trial balance proves the accounts are correct. Fix: Say it proves only that total debits equal total credits. Errors of omission, commission, principle and others can remain.
Treating a reversal of entries as an error that unbalances the trial balance. Fix: A reversal swaps both sides by the same amount, so totals still agree. Only one-sided or unequal entries cause an imbalance.

Exam tips

In objective tests, work out the side of each balance first. Most wrong answers come from putting one item in the wrong column.
Watch for items that look like they belong on one side but do not: overdraft, returns outwards, allowance for receivables and drawings.
For a missing figure, find the difference between the two totals. Do not try to find it by reasoning about the business.
If the question asks which error would stop the trial balance agreeing, check whether the error affects debits and credits unequally.
Know the purpose in words. Expect questions asking what a trial balance does and does not prove.
Learn the normal side of every account type. Most objective test questions ask about this directly.
Watch for contra asset accounts. Accumulated depreciation and allowance for receivables are credit balances deducted from assets. Also remember that drawings and sales returns are debit balances, because they reduce equity and income.
In number entry questions, work out the balance on your notepad and check the side before typing.