Double Entry System
All accounting is underpinned by a record keeping system known as the double entry system. The double entry system is also known as the duality concept and it is a system of book keeping that results in two accounting entries being created or recorded for every business transaction or event.
An example of the two entries that are created from a credit sale to a customer will be in an increase in debtors or accounts receivable and also an increase in sales.In book keeping terms debtors or account receivables will be debited and sales will be credited.
When manual accounts are used then “T” accounts will be used and the debit side is the left side of the ledger and the credit is the right hand side of the ledger. “T” accounts are not visible when a computerised accounting package is being used even though the process that happens behind the scene replicates the way “T” accounts operates in a manual system.
When all the business transactions have been entered they will be classified and grouped or classified under various expense types, income or revenue types, asset types, liability types and capital contributions by owners. The current year profit and prior years or accumulated profit will also be disclosed in the trial balance.
In a computerised system the trial balance is computer generated and the checking of the totals is automatically done. Computerised systems have internal controls embedded in them that allows checking of castings to be done automatically. The internal controls also makes it impossible to post a transaction that does not balance or that is single sided such as erroneously not posting the other leg, for example only posting a credit sale to the sales account and not the debtors account.
When a manual accounting system is used a trial balance can be used to check whether the accounting records have been posted accurately, to check casting errors and to identify errors such as one sided transactions.
Format of the Trial Balance
The trial balances will have at least four columns on each page which will be listed vertically. The first column may show the account code which is usually a number or alpha numeric, the second column may show the description of the account, the third column will show all the debit balances and the forth column will show all the credit balances.
The column that shows the debit balances will show totals for fixed assets, current assets, credit notes for sales returns, withdrawals from the business by the owners, all the business expenses and accumulated losses if the business has been making losses year after year. The column which shows the credit balances will show totals for long term liabilities, current liabilities, capital contributions by owners, sales revenues, accumulated or retained profits or reserves and accumulated depreciation.
At the bottom of columns three and four there will be totals for the debit balances and totals for credit balances. If all the double entry has been done correctly then the column with debit balances will be equal to the column with credit balances.
It is important to note that the fact that the two columns are equal does not indicate that the trial balance is correct. Far from it, the balancing of the trial balance only demonstrates that the castings are correct and that not one sided transactions have been posted. In accounting there are errors called type 2 errors that do not affect the balancing of the trial balance and these will be the subject of a future separate article by this writer.