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: Balancing a trial balance and correcting errors with journals series
It struck me the other day, whilst helping my four-year-old put together a jigsaw, just how important context is.
He attempted to dive into the pile of pieces hoping to make the right connections and whilst this approach worked briefly, he soon became frustrated and gave up, informing me that it was boring.
How often have you been told that accounting is boring? I like to switch the word boring for difficult, as this is often what we actually mean. However, when we place things in context and break them down into manageable tasks, they become more accessible, less difficult and not boring.
I persuaded Charlie to have a look at the picture on the box and that way he knew what he was trying to achieve. We looked at the pieces he had managed to fit together and matched them on the overall image. Then, by comparing individual pieces to the surrounding areas of the final picture on the box lid, he gradually built up his jigsaw – a floor sized dinosaur, in case you were wondering.
So, how does a dinosaur jigsaw relate to study tips for balancing a trial balance and correcting errors with journals?
This is the first of a two-part series and it’s about placing the bookkeeping that we learn at Level 2 in the wider context of the accounting that you’ll continue to study at Level 3 and beyond.
You could just run down the accounts guessing which should be in the debit column and which in the credit column. You may get lucky and not have to move too many figures around to get your column totals to balance.
Accounting students are good at maths, right?
So it shouldn’t be too difficult. Alternatively, you could learn what the picture on the box lid looks like.
Five categories of accounts
The first things to take note of are the five categories of accounts that make up any accounting system; expenses, income, assets, liabilities and equity. Equity is made up of the accounts that record amounts to do with the owner(s) and, for the purposes of this illustration, is shown as drawings and capital:
All accounting transactions can be classified as one of these five categories. The debits and credits show the expected account balance for each category, plus they indicate the posting that would be needed to increase the balance of that type of account.
I use the word expected as a couple of accounts such as the bank/cash-book and VAT control account can have either a debit or credit balance. So even though we’d always like our bank account to be an asset, if it’s overdrawn it will have a credit balance and therefore will be categorised as a liability.
How it works
A utility bill is categorised as an expense, therefore we’d expect to see a debit balance on the electricity account. When we pay our bill we’ll need to debit the electricity to increase the account balance.
Obviously, this debit requires an equal, opposite and balancing credit. That will be posted to the bank account which, as long as we’re not overdrawn, is an asset.
Assets have debit balances so would be debited to increase them.
Therefore, to decrease them, we just need to do the opposite i.e. post on the credit side.
Using opposites in this way works well for these categories as they also work in pairs (colour co-ordinated below). Therefore, you only need to learn half of them to know them all.
Be careful of returns. Sales returns will have a debit balance because they are the opposite of sales not because they are an expense. Purchase returns work in the same way. They’re still categorised as an expense, but they reduce the value of the purchases so will have a credit balance.
Drawings and capital don’t have examples as they can only be drawings and capital accounts. They work as a pair as they are both equity accounts that specifically relate to the owner(s) of the business.
The final piece of our jigsaw completes our context as it shows us that two of the account categories will eventually make up the Statement of Profit and Loss (SPL) and the other four the Statement of Financial Position (SFP).
The SPL simply deducts expenses from income to calculate whether a business has made a profit or a loss. It’s a historical statement that covers a financial period, usually the accounting year.
The SoFP is an expanded version of the accounting equation, as it shows what the business owns in the way of assets less what it owes in liabilities. The difference between the two is the capital and can be shown as: A – L = C.
The SFP has a balancing section at the bottom which explains the closing capital figure, which is opening capital (closing capital from the previous year) plus this year’s profit or loss (from the SPL) less drawings.
The SFP just shows us the value of the business on the day it was produced.
Whilst you don’t need to use this final bit of information at Level 2, it gives you the context of where you’re heading.
In part two we’ll use this ‘box lid’ image to help us work out what has caused a trial balance to be imbalanced and what journal entries are needed to correct it.
Read more on studying AAT:
- How AAT study support materials helped me pass my exams
- The trick with synoptics is…
- 10 Essential articles for your AAT revision
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.