This series focuses on balancing a trial balance, and correcting errors with journals, for AAT students working on the AAT Foundation Certificate in Accounting.
Study tips: Trial balance and correcting errors series
In part one of this article we looked at the context of account categories linking it to the picture on the box lid of a jigsaw.
We built up an image of the five account types with their expected account balances. We then made the connection between the expected balance and the posting required to increase that category of account, noting that once we’d learnt how to increase then we automatically knew how to decrease, as it’s just the opposite.
We also saw that the account categories work as pairs and opposites, so we only needed to learn half of them to know them all.
Finally, we completed the wider context by relating the categories to financial statements.
A business’s transaction must legally be accounted for and this is done through accounting systems which organise each transaction into an account in the general ledger.
Because each account can be categorised into one of the five, and then all the income and expenditure goes on the Statement of Profit and Loss (SPL), everything else must go on the Statement of Financial Position (SFP).
Here is a visual reminder.
Remember, we said that drawings and capital are technically within the equity category. Drawings reduce capital which is the amount owed by the business to its owner(s). They are posted into separate accounts so work as an opposite and pair.
If that doesn’t ring bells with you, then it’d be a good idea to look over the first article before continuing, as we’re going to use this context to look at an imbalanced trial balance (TB), then see what thought process we need to use to find out why, and what is required to correct it.
Imbalanced trial balance scenario
The TB is for a small VAT registered company called E&J Consultancy and the debit column totalled £568,453 whilst the credit column totalled £568,459.
As the TB needs to balance, we have to open a suspense account. However, it doesn’t fit into any of our six categories, as a suspense account just acts as a temporary ‘holding’ account.
It must end up with a nil balance once we’ve made our corrections, so therefore has no balance to go on either of the financial statements.
This means it doesn’t have an expected balance, so we just need to post the value of the difference between the TB columns to the side which is the same as the smaller column total. In this case that’s £6 on the debit side, like this:
The source of the trial balance imbalance
After some investigation, the imbalance in the TB has been traced to an error in the cash-book where the VAT column has been incorrectly totalled.
Note: the analysis columns are just shown on the credit side of the cash-book and explain what the expenditure was for.
Our thought process here is based on three questions:
- What’s happened?
- What should have happened?
- What correction(s) are needed?
Understanding the trial imbalance
Using our understanding of account categories, we can work out what’s happened, even though we already know some of it will be wrong.
Now let’s look at what should have happened.
By comparing the two we can see what corrections we need…
If we need to show our corrections as journals we can easily now take the information from our ‘T’ account workings.
Ensure the journal balances and the total debits match the total credits.
Correcting errors is a challenging area to work in as we can be dealing with anything, mistakes are mistakes after all. Therefore, understanding the account categories and using a strategic thought process to tackle them, gives us the context and manageable steps to pretend we’re doing a jigsaw instead.
Note: Drawings are technically within the capital category as they reduce to amount owed by the business to its owner(s) but are posted into a separate account and work as the opposite and pair to capital.
Read more study tips from AAT:
- Study tips: The best way to work through an assessment
- Study hacks to help you slay your final assessment
- The trick with synoptics is
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.