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9. The Trial Balance

After all transactions have been posted from the journal to the ledger, it is a good practice to prepare a trial balance. A trial balance is simply a listing of the ledger accounts along with their respective debit or credit balances. The trial balance is not a formal financial statement, but rather a self-check to determine that debits equal credits. Following is the trial balance prepared from the general ledger of Xao Corporation.

XAO CORPORATION Trial Balance January 31, 20X3

Debits

Credits

Cash

$26,300

Accounts receivable

3,200

Land

15,000

Accounts payable

$ 500

Notes payable

10,000

Capital stock

25,000

Service revenues

12,000

Advertising expense

2,000

Utilities expense

1,000

$47,500

$47,500

9.1. Debits Equal Credits

Since each transaction was journalized in a way that insured that debits equaled credits, one would expect that this equality would be maintained throughout the ledger and trial balance. If the trial balance fails to balance, an error has occurred and must be located. It is much better to be careful as you go, rather than having to go back and locate an error after the fact. You should also be aware that a "balanced" trial balance is no guarantee of correctness. For example, failing to record a transaction, recording the same transaction twice, or posting an amount to the wrong account would produce a balanced (but incorrect) trial balance.

9.2. Financial Statements From the Trial Balance

In the next chapter you will learn about additional adjustments that may be needed to prepare a truly correct and up-to-date set of financial statements. But, for now, you can probably see that a tentative set of financial statements could be prepared based on the trial balance. The basic process is to transfer amounts from the general ledger to the trial balance, then into the financial statements:

The basic process is to transfer amounts from the general ledger to the trial balance, then into the financial statements:

In reviewing the following financial statements for Xao, notice that blue italics were used to draw attention to the items taken directly from the trial balance above. The other line items and amounts simply relate to totals and derived amounts within the statements. These statements would appear as follows:

XAO CORPORATION Income Statement For the Year Ending January 31, 20X3

Revenues

Services to customers

$12,000

Expenses

Advertising Utilities

$2,000 1,000

3,000

Net income

$9 000

XAO CORPORATION Statement of Retained Earnings For the Year Ending January 31, 20X3

Retained earnings - January 1, 20X3

$ -

Plus: Net income

9,000

$9,000

Less: Dividends

-

Retained earnings - January 31, 20X3

$9 000

XAO CORPORATION Balance Sheet January 31, 20X3

Assets

Cash

Accounts receivable Land Total assets

$26,300 3,200 15,000 $44 500

Liabilities

Accounts payable Notes payable

Total liabilities

$ 500 10,000

$10,500

Stockholders' equity

1

Capital stock Retained earnings Total stockholders' equity Total liabilities and equity

$25,000 9,000

34,000 $44 500

10. Computerized Processing Systems

You probably noticed that much of the material in this chapter involves rather mundane processing. Once the initial journal entry is prepared, the data are merely being manipulated to produce the ledger, trial balance, and financial statements. No wonder, then, that some of the first business applications that were computerized many years ago related to transaction processing. In short, the only "analytics" relate to the initial transaction recordation. All of the subsequent steps are merely mechanical, and are aptly suited to computerization.

Many companies produce accounting software. These packages range from the simple to the complex. Some basic products for a small business may be purchased for under $100. In large organizations, millions may be spent hiring consultants to install large enterprise-wide packages. Recently, some software companies have even offered accounting systems maintained on their own network, with the customers utilizing the internet to enter data and produce their reports.

10.1. What do they Look Like

As you might expect, the look, feel, and function of software-based packages varies significantly. Each company's product must be studied to understand its unique attributes. But, in general, accounting software packages:

o Attempt to simplify and automate data entry (e.g., a point-of-sale terminal may actually become a data entry device so that sales are automatically "booked" into the accounting system as they occur).

o Frequently divide the accounting process into modules related to functional areas such as sales/collection, purchasing/payment, and others.

o Attempt to be "user-friendly" by providing data entry blanks that are easily understood in relation to the underlying transactions.

o Attempt to minimize key-strokes by using "pick lists," automatic call-up functions, and auto complete type technology.

o Are built on data-base logic, allowing transaction data to be sorted and processed based on any query structure (e.g., produce an income statement for July, provide a listing of sales to Customer Smith, etc.)

o Provide up-to-date data that may be accessed by key business decision makers.

o Are capable of producing numerous specialized reports in addition to the key financial statements.

Following is a very typical data entry screen. It should look quite familiar. After the data are input, The subsequent processing (posting, etc.) is totally automated.

Following is a very typical data entry screen. It should look quite familiar. After the data are input, The subsequent processing (posting, etc.) is totally automated.

Despite each product's own look and feel, the persons primarily responsible for the maintenance and operation of the accounting function must still understand accounting basics such as those introduced in this chapter: accounts, debits and credits, journal entries, etc. Without that intrinsic knowledge, the data input decisions will quickly go astray, and the output of the computerized accounting system will become hopelessly trashed. So, while it is safe to assume that you will probably be working in a computerized accounting environment, it equally true to say that you should first come to understand the basic processing described in this and subsequent chapters. These principles will clearly guide you toward successful implementation and use of most any computerized accounting product, and the reports they produce.

 
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