Back to: Financial Accounting
Welcome to Week 3!
By now, you’ve probably realised that accounting is very structured—and that’s a good thing. This week, we’ll explore the Trial Balance and Adjusting Entries. These steps ensure accuracy and completeness before we prepare financial statements.
Trial Balance and Adjusting Entries
The Trial Balance
A trial balance is a list of all accounts and their balances at a certain date. Its main purpose is to check that:
Total Debits = Total Credits
If they don’t match, there’s an error in your journal or ledger postings.
Example of Trial Balance Format:
Account Name
Debit (N)
Credit (N)
Cash
5,000
Sales
10,000
Rent Expense
1,000
Capital
6,000
Totals
6,000
16,000
In this case, there’s clearly an error—the trial balance doesn’t tally. You’d then need to investigate.
Common Errors in the Trial Balance
Not all errors are revealed by a trial balance. Some may not affect the balance, but still be wrong:
Error of omission: A transaction is completely left out.
Error of commission: Correct amount, wrong account.
Error of principle: Breaking accounting rules (e.g., recording capital expense as revenue).
Compensating errors: Two equal and opposite errors that cancel each other out.
Adjusting Entries
At the end of the accounting period, we often need to make adjustments so that all revenues and expenses are recorded in the right period.
Types of Adjusting Entries:
Accruals – Expenses incurred or income earned but not yet recorded.
E.g. wages owed but unpaid at the end of the month.
Prepayments – Payments made in advance for future benefits.
E.g. paying rent upfront for the next quarter.
Depreciation – As covered last week, spreading the cost of a fixed asset over its useful life.
Provision for doubtful debts – Estimating potential losses from customers who may not pay.
Why Adjust?
Because we follow the matching principle: expenses must be matched to the income they helped generate, in the same accounting period.
From Adjusted Trial Balance to Financial Statements
After adjustments, we create an adjusted trial balance. From this, we’re ready to prepare the financial statements accurately, ensuring all income and expenses are reflected in the correct period.