2.  When setting up a ledger, where does the beginning balance of ledger accounts come from? ◦ They come from a balance sheet. If your ledger starts from January 1 2013, then the beginning balances of ledger accounts come from December 31 2012 balance sheet.  As business transactions occur, these transactions will be recorded in ledger accounts. These changes are all in the form of accounting entries. (each transactions have same debit amount and credit amount)

3.  As a result, the ledger should be balanced after each full accounting entry.  Just as a balance sheet must balance (total assets = total liabilities + total equity), a ledger must also balance all the time.

4.  But in reality, accounting staffs sometimes (or few times) make mistakes.  Therefore, accountants have to periodically check the accuracy of the ledger and make sure the ledger is in balance. This is done by setting up a TRIAL BALANCE.

5.  Trial Balance is done usually at the end of the month (after you are finished recording the business transactions into the T- Account Ledgers.)  A Trial balance is a listing of the account balances in a ledger. It is used to see if the total value of the debit accounts is equal to the total value of the credit accounts  To do this, you simply add up all of the debit balances, add up all of the credit balances, and see if the two totals are the same.

6.  If the balances (total debit amount vs total credit amount) agree, then the ledger is said to be in balance.  If the balances do not agree, then the ledger is said to be out of balance. This process is called “taking off trial balance”  In manual accounting system, they had to check trial balances at the end of each week or month.

7.  If you use a computerized accounting system, the ledger is never out of balance because accounting software programs prevent users from entering unbalanced accounting entries.  (For example, simply accounting software does not allow you to “enter” (or “post”) the transaction unless the debit amounts are equal to credit amounts.)

9.  If the Debits and Credits balance, the ledger is said to be in balance. If they don’t agree, the ledger is said to be out of balance. This whole process is called taking off a trial balance  If the ledger is out of balance, the work is not accurate and there is at least one mistake.  A trial balance is taken off the ledger monthly and kept until the books are audited at year end.

10.  We will do P113 (Fig 4.10) on the board.  Step 1: Write the title, “who, what (trial balance) and when”  Step 2: List all the accounts in first column and their balances on second column or third column.  Step 3: Place the debit balances in the second column and credit balances in the third column.  Step 4: Add up the two total amount for debit column and for credit balances.  Step 5: Check if the two totals are the same. If they are, draw a line above the total amount and draw double line below the total amounts.

11.  Another type of worksheet…has 3 main columns  Title: Who, what and when  All accounts are listed in the first column (same order as balance sheet!!! This time, we just have one column for all three types of accounts.)  Second column lists debit amounts  Third column lists credit amounts  Single (indicate totalling) and double underlines (totals)

12.  NOTE: Sometimes trial balances do not work out on the first attempt. This is where the accountant’s real skill shines in finding and correcting errors.  Errors happen due to: ◦ faulty addition: example: someone added 1000 instead of 10000 ◦ Transposing numbers: example: someone added 196 instead of 169 ◦ Entering items on the wrong side: example: instead of debitting AR for $500, someone creditted AR for $500

13.  Even if the ledger is in balance, but still it might have errors!!! These are the most difficult errors to find. ◦ Example: customer paid $500 they owed last month, so someone made incorrect entry of debiting AR by $500 and crediting $500 cash by $500. This kind of mistake will not be found by Trial Balance worksheet.

14.  What to do if the Trial Balance is not balanced: Here are the 4 steps: 1.Re-add the Trial Balance columns 2.Check the account balances from the ledger against those of the Trial Balance (none missing, none on wrong side, correct amounts, etc) 3.Recalculate the account balances 4.Check that there is balanced accounting entries for each transaction in each account

15.  Review Q’s – pg 115 #4, 5, 6, 7  Exercise Q’s – pg 115 #1 to #4  If you finish these questions and prepare yourself really well for the quiz, then you should work on the following questions: