Trial Balance

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Rapid summary for last-minute revision before your exam.

A trial balance is a list of all the balances on the ledger accounts of a business at a given date, extracted with the intention of verifying that the total debits equal total credits. It is not a financial statement — it is an internal check document. The trial balance is usually prepared at the end of each month or at the period end.

Format of a Trial Balance:

Account Name	Dr. (₦)	Cr. (₦)
Share Capital		500,000
Land and Buildings	300,000
Machinery	150,000
Inventory	80,000
Trade Receivables	60,000
Cash at Bank	45,000
Trade Payables		35,000
Sales		400,000
Purchases	200,000
Wages	50,000
Rent	30,000
Provision for Doubtful Debts		5,000
Totals	915,000	915,000

Errors That Cause a Trial Balance to Disagree:

Errors that affect only one side of the trial balance (making it disagree):

• Casting errors: Incorrect totalling of an account
• Posting errors: Recording only the debit or only the credit of a transaction
• Balancing errors: Incorrectly balancing an account
• Slide/dimension errors: Misplacing a decimal point (e.g., ₦25,000 posted as ₦2,500)

Errors That Do NOT Cause a Trial Balance to Disagree:

Errors that affect both sides equally (the trial balance still agrees):

• Errors of omission (transaction not recorded at all)
• Errors of commission (wrong account, but correct side)
• Errors of principle (capital vs. revenue misclassification)
• Compensating errors (two errors that cancel out)
• Original entry errors (wrong amount recorded on both sides)

⚡ Exam Tip: ICAN questions frequently ask candidates to identify the type of error and propose a correction. When answering, always: (1) state the type of error, (2) give the journal entry to correct it, (3) provide a brief explanation.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Trial Balance — ICAN (Nigeria) Study Guide

Preparation of a Trial Balance — Step by Step

1. Ensure all ledger accounts are balanced (debit balances placed on the debit column, credit balances on the credit column)
2. List all account names with their debit or credit balances
3. Total the debit column and the credit column
4. If the totals are equal, the trial balance is said to “agree” — indicating that the double-entry has been mathematically maintained
5. If the totals differ, calculate the difference and investigate

Extracting Balances from Different Account Types:

Account Type	Normal Balance	Which Column
Assets	Debit	Dr.
Liabilities	Credit	Cr.
Capital	Credit	Cr.
Revenue	Credit	Cr.
Expenses	Debit	Dr.
Drawings	Debit	Dr.
Provision for depreciation	Credit (contra asset)	Cr.

The Adjusted Trial Balance

After adjusting entries (accruals, prepayments, depreciation, bad debts) are posted, a second trial balance — the adjusted trial balance — is extracted. This becomes the basis for preparing financial statements.

Suspense Account

When the trial balance does not agree, the difference is placed in a Suspense Account to make it agree temporarily. The suspense account is then investigated and cleared when errors are found and corrected. Note that correcting entries are made regardless of whether the suspense account is in debit or credit — the correction goes to the account that was wrong, not to suspense.

Rectification of Errors — Examples:

Error 1: Sales day book was undercast by ₦5,000. This means sales (credit) is too low and either cash/debtors (debit) is too low by ₦5,000. The trial balance would show credits short by ₦5,000.

• Dr. Suspense a/c ₦5,000 (to make debits = credits temporarily)
• Cr. Sales a/c ₦5,000

When found: No separate correction needed beyond the suspense clearing — the suspense entry self-corrects once the original posting error is found and corrected.

Error 2: A motor vehicle of ₦200,000 was correctly debited to Motor Vehicle a/c but credited to Purchases a/c (error of principle).

• Dr. Purchases a/c ₦200,000 (to reverse the wrong credit)
• Cr. Motor Vehicle a/c ₦200,000 (to restore the correct credit)

⚡ Common Mistakes: Candidates forget that provision for doubtful debts is a credit balance (a contra-asset allowance) and place it in the debit column. Also, drawings account is a debit balance, not a credit — students sometimes confuse it with capital.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Trial Balance — Comprehensive ICAN (Nigeria) Notes

Limitations of the Trial Balance

A trial balance that agrees is not proof that the accounts are correct. Many errors leave the trial balance in agreement. A complete audit would be required to verify correctness of the books. The trial balance only proves that the double-entry rule has been applied to all recorded transactions — it does not prove that the correct amounts were recorded in the first place.

The trial balance also does not verify:

• That transactions were recorded in the correct period (cut-off errors)
• That asset values are appropriate (impairment, overvaluation)
• That all liabilities have been recognised (provisions, contingencies)
• Completeness of the records (omissions)

The Adjusted Trial Balance and Its Role in Financial Statement Preparation

The adjusted trial balance contains all the balances after adjusting entries. It serves as the direct source for preparing financial statements:

Income Statement (Trading & P&L):
  Gross Profit = Sales − Cost of Goods Sold
  Operating Profit = Gross Profit − Operating Expenses
  Net Profit = Operating Profit ± Non-operating items

Balance Sheet:
  Assets = Liabilities + Equity
  Working Capital = Current Assets − Current Liabilities

Suspense Account — Detailed Treatment

The suspense account is opened when the trial balance fails to agree. The difference is placed in suspense. When errors are identified:

• Each correction is posted to the relevant account, and the suspense account is correspondingly cleared
• If multiple errors are found totalling the original suspense amount, suspense is fully cleared
• If errors are found before financial statements are prepared, no suspense balance should remain in the balance sheet
• If errors are found after statements are issued (and cannot be adjusted retrospectively), the correction is disclosed by note

Correction of Errors — Comprehensive Classification:

Error Type	Effect on Trial Balance	Correction Required
Complete omission	Trial balance agrees	None (but books incomplete)
Wrong amount, both sides	Trial balance agrees	Journal entry reversing wrong amount, then correct entry
Correct amount, wrong account	Trial balance agrees	Journal entry to move amount to correct account
Debit posted only	Disagrees by amount	Post missing credit; clear suspense
Credit posted only	Disagrees by amount	Post missing debit; clear suspense
Both sides overstated	Trial balance agrees	Reduce both sides by excess
Capital expensed	Trial balance agrees	Remove from expense, add to asset

Bank Reconciliation Statement

Although the trial balance agrees, the cash book may not reflect the bank statement. A bank reconciliation statement explains the difference between the cash book balance and the bank statement balance. Common reasons for differences:

• Unpresented cheques (issued but not yet presented for payment)
• Uncredited deposits (paid in but not yet cleared)
• Bank charges not yet recorded in cash book
• Direct credits (e.g., standing orders, dividends) not recorded in cash book
• Dishonoured cheques
• Errors in either the cash book or bank statement

⚡ ICAN Exam Pattern: Trial balance questions typically form part of a larger question on the preparation of financial statements from a trial balance. Common sub-questions include: extracting the trial balance, identifying types of errors, passing correcting journal entries, and preparing a suspense account. A common 20-mark question involves a 15-transaction narrative, preparation of a trial balance (10 marks), and correction of three errors (10 marks).

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