*Business Ownership ( Sole Proprietorship / Partnership / Corporation *Activities ( Service Concern / Merchandising (Trading) / Manufacturing *Types of Business (Source of Income) ( Service & Merchandising / Trading {Sole Proprietorship} *Functions of Accounting Work ( Recording / Classifying / Summarizing *Accounting- “art of recording, classifying & summarizing in a significant matter and in terms of money; transactions and events w/c are in part at least of a financial character and interpreting the results thereof. ( How? (AICPA – American Institute of CPA) *Science- existing body of knowledge that governs accounting practice (Accounting Theory) *Art- creative skill & ability *4 Functions of Accounting 1. Recording- commit to writing (business transactions) *Business Transactions- quantifiable business events w/c can be expressed in terms of money. Exchange of values. ( What? *Books of Accounts (journals / ledgers) ( Where? Chronologically & Systematically (accordance to procedures & established rules of acctg) ( How? 2. Classifying- similar & inter-related transactions of events *Account / Account Title- device used to classify*3 Broad Categories – Assets / Liabilities / Capital 3. Summarizing- preparation of financial statements / financial reports *Financial Statements- Balance Sheet, Income Statement, Capital Statement, & Statement of Cash Flow 4.
Interpreting- quantitative & qualitative interpretation of information in financial statements *Significant Information- Profitability, Growth Potential, Managerial Effectiveness, Stability (ability of a business to pay its long term obligations), Liquidity (how much cash the business has), & Solvency (does the business meet its current debts or obligations [less than 1 year] *Accounting- “service activity whose purpose is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions. ( Why? Fundamental Essence. (PICPA – Philippine Institute of CPA) ( umbrella / national organization *Fundamental Objectives of Accounting: ( Communication -Communicates financial statements & reports. Gives information about / medium of the business to the outside world. *Nature of Accounting -A service activity. Communication of financial info. -Quantitative info. Primarily financial in nature useful for making economic decisions. -Medium through w/c business entity speaks w/ various stakeholders (interested parties) – stockholders, prospective stockholders, management, creditors, etc. Uses of Accounting Information Direct Users- managers, owners, creditors, prospective owners / investors, taxing authorities, employees, & customers. *Internal- managers, stockholders / owners & employees *External- creditors, investors, BIR / IRS, & customers Indirect Users- -trade unions, SEC, financial analysts / advisors, stock exchange, financial press, & trade associations *Different Areas of Accounting / Branches of Accounting -Financial Acctg. / General Acctg, Accounting Education, Auditing (Public Acctg. Practice), Tax Acctg, Gov’t Acctg, Management Acctg. Management Services, & Accounting Systems *Field of Specializations -Systems Installation, Cost Accounting, Gov’t Acctg, Research, Teaching, Property Appraisal, Budgetary Control, Auditing, Taxation, & Management Consultant. *Accounting (conceptual / why) VS. Bookkeeping (how / procedural) -Bookkeeping is procedural & is largely concerned w/ the dev’t & maintenance of acctg records. The “how” of acctg. -Acctg is conceptual and is concerned w/ the “why,” reasons, or justification for the action adopted. *Commission on Audit- Government Accounting Employees use accounting information to see if there’s security of employment & satisfactory compensation. *Accountancy- specialized body of knowledge *Auditing- examination of acctg. statements to make an opinion if it’s fair *Profitability- increase owner’s equity BASIC CONCEPTS: GAAP (Generally Accepted Accounting Principles)- guidelines, conventions, and procedures 1. Entity- business is separate and distinct entity from that of the owners, only transactions of the business should be Recorded, Classified, Summarized & Interpreted. An organization stands apart from other organizations as separate economic unit. . Going Concern- the life of the business is infinite unless stated otherwise, it’s assumed that the business should have a continuous life until liquidation appears imminent. The assumption that the business pursues indefinitely. 3. Cost Principle- assets acquisitions should be measured, recorded and reflected in the balance sheet on the basis of the total cost incurred in their acquisition or exchange cost. “Original Acquisition Cost” & “Historical Cost. ” 4. Objectivity- only transactions fully supported by documents like Receipts, Invoices & Vouchers should be recorded and reflected in financial statements.
Supports the use of cost, because cost is more objective. Freedom from error or bias. 5. Revenue Realization- revenue should be recognized in the financial statements when it is earned, and it’s realized or realizable. Revenue is recognized / realized / earned at the point of sale or when the service is rendered (service) or when the goods are sold / delivered (merchandising). Revenue is recorded when earned not when cash is received. 6. Accrual- accumulate (acquire more & more of, increase in amount), matching the revenue w/ the expense. Calls for ecording revenue at the time revenue is earned not when cash is received. Expenses are recorded when they are incurred and not when cash is paid. Expenses is incurred when you already receive the benefits. Impact of events recognized as they occur. Transactions are recorded even when cash is not received or paid. 7. Matching- match expenses w/ revenue. Predicated on accrual basis accounting, but matching refers to the recognition of expenses. Expenses matched against revenues in the same accounting period. Revenues are matched w/ related expenses for the same time period.
Revenues are recorded when earned, and expenses are recorded when incurred. 8. Time Period- specified time period that is shorter than the life of the enterprise. Used to evaluate performance of business as well as its management. Periodic Assessment is necessary in planning, controlling and decision-making. Chain of 1-year segment (divides the life of the business in intervals so that they can ensure reports). *Calendar- Start January 1 & End December 31 *Fiscal- start anytime, but cover the 12 month period 9. Monetary- Money has constant purchasing power. Money is the basic unit of measure & is stable. Object of Measurement in Accounting ( Business Transactions *Business Transactions ( Money (Unit of Measurement of Business Transactions) 10. Consistency- same accounting principles throughout the years. Comparability (likeness & differences). Financial Transactions and data should be treated consistently (constant to the same principles). 11. Materiality / Doctrine of Convenience- financial reporting is only concerned w/ information that is significant enough to affect evaluation or decision. Any changes in the accounting system that will materially affect the financial statement should be fully disclosed.
It depends on the owner of the business. 12. Conservatism- the principle that dictates that even if the current market value of an asset increases above its cost, the business should not write up the assets’ accounting value. However, if an assets value appears unrealistically high, the same principle directs accountants to write down the asset’s value. When 2 alternative implementations are permitted, the alternative having the least favorable effect on income &/or assets of a business should be used. Provide for all possible losses, but do not _____________________ gain? 3. Disclosure- highlighting significant transactions that happened shortly after balance sheet date to complete the info requirements of interested users. All relevant & material info about the economic activities of an enterprise is reported. All significant info leading to preparation of financial info in order to avoid making it misleading. *2 Business Objectives- earn / gain profit & stay stable *Business Documents- pertains to the original source materials evidencing a transaction *Transaction- changes a firm’s financial position & can be measured objectively Assets- economic resources of an enterprise *Liabilities- claims of creditors in the assets of a business *Revenues- inflow of cash or receivable arising from the rendering of services or sale of merchandise *Expenses- cost of goods & services consumed in the generation of income *Owner’s Equity / Capital- represents the claim / interest of owners in a business entity, excess of assets over liabilities, residual interest of the owner in a business after all claims of creditors have been satisfied Financial Accounting- branch of acctg. that is primarily concerned w/ the recording of business transactions & the consequent preparations of financial reports. *Cost- recording completed transactions at their cash equivalent *Balance Sheet- financial / economic resources, obligations of an enterprise & claims on the resources of a business entity *Income Statement- provides a moving picture of a firm’s operations in terms of revenues earned & expenses incurred during a given period. Presents the results of earnings activity over time. Balance Sheet- financial statement w/c shows the financial position of the business by showing Assets, Liabilities & Capital at a period of time. It’s always equal. *Heading of the B. S. ( Name of the Business Entity / Owner / Proprietor, BALANCE SHEET, & Date *Forms of B. S. Account Form- horizontally (Assets on the Left and Liabilities & Owner’s Equity on the Right) Report Form- vertically (Assets Above and Liabilities & Owner’s Equity Below) ASSETS *Current Assets- cash & other assets to be realized in cash, sold, consumed w/ 1 year or w/ in normal operating cycle of the business w/c ever operating period is longer. Cash, Marketable Securities, [Accounts, Notes, Interest] Receivables, Advances To Employees, Inventory, Prepaid [Office Supplies, Insurance, Advertising & Rent], Petty Cash Fund, Supplies, Unused Supplies, Unexpired Insurance, & Accrued Income +Contra Asset Account- (less:) Allowance for Bad Debts / Doubtful Accounts *Non Current Assets (Property, Plant & Equipment)- must have physical existence, be used for more than 1 year, relatively permanent in nature, used in the conduct / operation of the business, not intended for sale, & must undergo depreciation. Equipment, Machine, Furniture & Fixtures, Land, Building & Tools) +Contra Asset Account- (less:) Accumulated Depreciation LIABILITIES *Current Liabilities- obligations & debts payable w/ in 1 year. ([Accounts, Notes, Interest] Payable, Unearned Income, Accrued Expenses [Taxes, Salaries], Mortgage Payable {current portion}) *Long Term Liabilities- debts / obligations not payable w/ in 1 year & whose payments doesn’t need the use of current assets. (Notes Payables, Mortgage Payable) {due in __ years} OWNER’S EQUITY *Owner’s, Capital- traditional accounting term w/c refers to resources invested by the owner *Owner’s, Drawing-
Withdrawals- The owner of the firm would at times withdraw assets from the business for personal use. These personal withdrawals would be treated differently depending on the intention of the owner in withdrawing such assets 1. Temporary Withdrawal. The owner withdraws business assets (e. g. cash) for personal use in anticipation of profits derived from the operations of the business. This type of withdrawal uses the drawing account when recorded in the books of the company. The pro-forma entry to record this type of withdrawal is: Joseph Labrador, Drawing xxx
Cash or Other Assets xxx To record withdrawal of owner for personal use 2. Permanent Withdrawal. Capital withdrawal that is substantial in amount. The owner in this type of withdrawal of the assets has the intentions of removing the asset permanently from the business operations. This type of drawing uses the capital account. The pro-forma entry to record this type of withdrawal is: Joseph Labrador, Capital xxx Cash or Other Assets xxx To record permanent withdrawal of asset of owner from the business. Ways To Increase O. E. ( Investment & Revenues Earned +Ways To Decrease O. E. ( Withdrawals & Expenses Incurred *Accounting Equation (A = L + C)(A = L [Creditors Equity] + C [Owner’s Equity]) +Assets- resources owned+Liabilities & Capital- sources of assets / suppliers of resources *Residual Claim (A – L = C) *Decrease Liabilities by Investing More Capital*Prepaid Expense ( Asset *Contra Asset Account- account deducted from another account*Unearned Income ( Liability *Accrued Income = (Commission) Receivable ( Asset*Accrued Expenses = Payable ( Liability Accrued Expense (Liability)- expenses incurred but not yet paid for *Accrued Income (Asset)- income earned but not yet collected *Unearned Income (Liability)- cash is collected, but income not yet earned, income is collected in advance *Operating Cycle- average time period required to convert cash back into cash again *Operating Cycle- Cash ( Merchandise ( Accounts Receivable ( Cash *Balance Sheet Accounts / Real Accounts / Permanent Accounts ( Assets, Liabilities, & Capital *Income Statement Accounts / Nominal Accounts / Temporary Accounts ( Revenues & Expenses *Capital Statement Heading of the C. S. – Name of the Company, CAPITAL STATEMENT, & “For the year / month ended” Date *Income Statement- earnings activity that shows results of business operations for a given period of time *Heading of the I. S. – Name of the Enterprise, INCOME STATEMENT, & “For the year ended” Date (period) *Elements of I. S. Revenues (Income)- gross increase in assets / gross decrease in liabilities that result from those types of profit-directed activities / rendering of service of an enterprise that can change owner’s equity. Arises from the sale of goods / services. Service Revenue, Professional Fee, [Rental, Interest, Service, Fees] Income) Expenses- gross decrease in assets / gross increase in liabilities that resulted from those types of profit-directed activities / rendering of service of an enterprise that can change owner’s equity. (Monthly Salaries, Daily Wages, Office Supplies, [Repair & Maintenance, Miscellaneous, Transportation, Travel, Rent, Utilities {Light, Heat, Water, Postage, Telephone, Telegraph}, Taxes, Representation, Insurance, Bad Debts, Interest, Gas, Depreciation, Donation, Licenses, Representation & Entertainment] Expenses, Purchases, Commission &
Doubtful Accounts Net Income Net Loss *Forms of I. S. Single Step I. S. – deduct total revenues from expenses to get Net Income. Statement where all income & expenses are grouped together. Total expenses are deducted from the total income & the difference would be net income / net loss. Multiple Step I. S. – statement wherein revenues & expenses are classified. The gross income from the main business is presented first & the expenses corresponding to it are deducted. The net difference is called the “net income from operations. Any other income & expenses are added & deducted from it. *According to Magnitude (highest to lowest value) except Miscellaneous w/c is always at the bottom *Miscellaneous is always the last regardless of the amount *Revenue Realization- when service is rendered*Accrual- recording revenue at the time it’s earned *Matching- in order to determine net income / net loss. Revenues & Expenses matched in the same period *Gross- total, w/o deductions*Net- remaining after all deductions Classification of Cash Flows Operating Activities Classification of Cash Flows
Cash ReceiptsCash Payments ——————————————————————————————————– Collections from customers for sales ofPayment to suppliers of merchandise goods and services and services, including payments to Interest and dividends received Payments of interest Other receipts from operations; forPayments of income taxes example, proceeds from settlement ofOther expenditures relating to operations; litigation for example, payments in settlement of litigation Investing Activities Cash ReceiptsCash Payments —————————————————————————————————— Cash proceeds from selling investments andPayments to acquire investments and plant plant assets assets Cash proceeds from collecting principalAmounts advanced to borrowers Amounts on loans Financing Activities Cash ReceiptsCash Payments ——————————————————————————————————— Proceeds from both short-term and long-termRepayment of amounts borrowed (excluding borrowing interest payments)
Cash received from owners (for example,Payments to owners, such as cash withdrawals From investment) *Journal- book of original entry*1st Step in Accounting Cycle – Recording Entries *2 Types of Journal Entries Simple Journal Entry- at least 2 accounts affected 2. Compound Journal Entry- at least 3 accounts affected *Accounting Cycle Journalizing (General Journal – 2 column)- chronologically ordered accounts in the Books of Accounts +Journal- book of original entry Posting in the General Ledger (book of final entry) Preparation of the Trial Balance —————————————————————————————————————————————————- Adjusting the Books6. Closing the Books Preparation of Financial Statements7. Post – Closing Trial Balance8. Reversing Entry *Merchandising / Trading- business that buys & sells merchandise *Merchandise- goods bought for resale -For Use ( Asset = DR -For Sale ( Merchandise = DR (Purchases) *Buying – Buyer (Account Titles) +Purchases- record purchases of merchandise at cost ( DR +Purchases Return & Allowances ( CR gt;Purchase Returns- poor quality, defective, sub standard, wrong specification or damaged >Purchase Allowances- +Purchase Discount- when cash discount is taken by the buyer ( CR +Freight In / Transportation In- account to record transportation cost of delivery of goods from seller’s place to buyer’s place ( DR *Selling – Seller (Account Titles) +Sales- sale of merchandise at selling price (revenue account) ( CR +Sales Returns & Allowances ( DR +Sales Discount- when seller gives cash discount to the buyer ( DR +Freight Out / Transportation Out / Delivery Expense- account to record transportation of goods ( DR Credit Terms + 2 / 10 n / 30 ( buyer gets 2% cash discount (incentive given by seller to buyer to induce the buyer to pay promptly) if he pays w/ in 10 days of the invoice date and full payment on the account is due in 30 days (read as “2, 10, net 30”) + 2 / 10 1 / 20 n / 30 ( buyer gets 2% cash discount if he pays w/ in 10 days, 1% if he pays w/ in 20 days of the invoice date, and full payment on the account is due in 30 days + 2 / 10 e. o. m. (end of the month)- buyer gets 2% cash discount if paid w/ in 10 days from e. . m. + 2 / e. o. m. – buyer gets 2% discount if he pays before or on the end of the month + 10 e. o. m. – payment is due 10 days after the end of the month in w/c purchases occurred *Debit Memo- *Credit Memo- *Cash Discounts-discount w/c provides incentive for the customer to make an early cash payment, also known as purchase discounts to buyers and sales discounts to sellers *Trade Discounts *Discount Period- period during w/c the discount is available *Perpetual Inventory System -large company w/ professional management management and employees wanting information about items in inventory and the quantities of specific products that are selling -items in the inventory w/ a high per-unit cost -low volume of sales transactions or a computerized accounting system (point-of-sale terminals) -merchandise stored in multiple locations or in warehouses separate from the sales site *Periodic Inventory System -small company, run by the owner -accounting records of inventories and specific product sales not needed in daily operations; such information developed primarily for use in annual income tax returns -inventory w/ many different kinds of low-cost items high volume of sales transactions and a manual accounting system -lack of full-time accounting personnel -all merchandise stored at the sales site (store) 2 INVENTORY SYSTEMS (Approaches Used in Accounting for Merchandising Transactions): *Perpetual (Book)- inventory account is used [high value & low volume] -used by most large businesses (and many smaller ones) use computers to assist in maintenance -merchandising transactions are recorded as they occur system draws its name from the fact that the accounting records are kept perpetually up-to-date -uses an inventory subsidiary ledger (this ledger provides company personnel w/ up-to-date information about each type of product that the company buys and sells, including the per-unit cost and the number of units purchased, sold, and currently on hand) -used when management needs up-to-date information throughout the year about inventory levels and gross profit. Used by all manufacturing companies. These businesses need current information to coordinate their inventories of raw materials w/ their production schedules. primary goals are to develop annual data and to minimize recordkeeping requirements -accounting for products w/ a high per-unit cost, also when sales volume is usually low enough *Periodic (Physical Count)- no inventory account, no records are maintained [high volume & low value] -used primarily in small businesses w/ manual accounting system -no effort is made to keep up-to-date records of either the inventory or the cost of goods sold, instead, these amounts are determined only periodically – usually at the end of the year -its foundation is the taking of a complete physical inventory at year-end.
This physical count determines the amount of inventory appearing in the balance sheet. The cost of goods sold for the entire year then is determined by a short computation -used when the need for current information about inventories and sales does not justify the cost of maintaining a perpetual system -most businesses – large and small – use periodic systems for inventories that are immaterial in dollar amount, or when management has little interest in the quantities on hand. -businesses that sell many low-cost items and have manual accounting systems sometimes have no choice but to use the periodic method BUYERS Transactions |PERIODIC |PERPETUAL | |*Purchases of Merchandise on Account |Purchases |Merchandise Inventory | | |Accounts Payable |Accounts Payable | |*Purchases Returns & Allowances |Accounts Payable |Accounts Payable | | |Purchases Returns & Allowances |Merchandise Inventory | |*Payment of Freight |Freight In |Merchandise Inventory | | |Cash |Cash | |*Payment of Account w/ in Discount |Accounts Payable |Accounts Payable | |Period |Cash |Cash | | |Purchase Discount |Merchandise Inventory | SELLER Transactions |PERIODIC |PERPETUAL | |*Sales of Merchandise on Account |Accounts Receivables |Accounts Receivables | | |Sales |Sales | | | |Cost of Sales | | | |Merchandise Inventory | |*Sales Returns & Allowances |Sales Returns & Allowances Sales Returns & Allowances | | |Accounts Receivables |Accounts Receivables | | | |Merchandise Inventory | | | |Cost of Sales | |*Payment of Freight |Freight Out |Freight Out | | |Cash |Cash | |*Collection of Account w/ in Discount |Cash |Cash | |Period |Sales Discount |Sales Discount | | |Accounts Receivables |Accounts Receivables | Accounting for Freight on Merchandise ( Bill of Lading *Freight In- account used by the buyer when buyer shoulders the freight = Buyer = Receiver *Freight Out- account used by the seller when seller shoulders the freight = Seller = Shipper *Bill of Lading 1. FOB Shipping Point ( Seller’s Place (Point of Shipment / Point of Origin) 2.
FOB Destination Point ( Buyer’s Place (Destination Point) +FOB (Free On Board Up To) *Shipping Point ( Buyers Shoulders Transportation Cost ( Freight In *Destination Point ( Seller Shoulders Transportation Cost ( Freight Out *Freight Collect ( Buyer Pays*Freight Prepaid ( Seller Pays *“Passage of Title to the Goods” ( Ownership of Goods *Terms of Shipment / Freight Terms 1. FOB SP (Buyer), Collect (Buyer) Buyer:Seller: PurchasesAccounts Receivables Accounts Payable Sales Freight In Cash 2. FOB SP (Buyer), Prepaid (Seller) Buyer:Seller: PurchasesAccounts Receivable Accounts Payable Sales Freight InAccounts Receivables Accounts Payable Cash 3.
FOB DP (Seller), Prepaid (Seller) Buyer:Seller: PurchasesAccounts Receivables Accounts Payable Sales Freight Out Cash 4. FOB DP (Seller), Collect (Buyer) Buyer:Seller: PurchasesAccounts Receivables Accounts Payable Sales Accounts PayableFreight Out Cash Accounts Receivables *Terms of Shipment / Freight Terms 1. FOB SP, Freight Collect3. FOB DP, Freight Prepaid 2. FOB SP, Freight Prepaid4. FOB DP, Freight Collect PAYEE – NOTES RECEIVABLEMAKER – NOTES PAYABLE 1 Receipt of NoteI. Issuance of Note a. Sale of Merchandisea. Purchase of Merchandise Notes ReceivablePurchase
Sales Notes Payable b. Lending of Moneyb. Borrowing Money Notes ReceivableCash Cash Notes Payable c. Settlement of an Accountc. Settlement of an Account Notes ReceivableAccounts Payable Accounts Receivable Notes Payable II. Collection of NoteII. Payment of Note a. Interest Bearinga. Interest Bearing CashNotes Payable Notes ReceivableInterest Expense Interest Income Cash b. Non-Interest Bearingb. Non-Interest Bearing CashNotes Payable Notes Receivable Cash III. Dishonor of NoteIII. Dishonor of Note a. Interest Bearinga. Interest Bearing Accounts ReceivableNotes Payable Notes ReceivableInterest Expense Interest Income Accounts Payable b.
Non-Interest Bearingb. Non-Interest Bearing Accounts ReceivableNotes Payable Notes Receivable Accounts Payable IV. Renewal of NoteIV. Renewal of Note a. Interest Bearinga. Interest Bearing Notes Receivable (new)Notes Payable (old) Notes Receivable (old)Interest Expense Interest Income Notes Payable (new) b. Non-Interest Bearingb. Non-Interest Bearing Notes Receivable (new)Notes Payable (old) Notes Receivable (old) Notes Payable (new) V. Discounting of NoteV. Discounting of Note Cash*No Entry Interest Expense Notes Receivable Discounted Interest Income a. Honoreda. Honored Note Receivable DiscountedNotes Payable Note ReceivableInterest Expense Cash b.
Dishonoredb. Dishonored Accounts ReceivableNotes Payable CashInterest Expense Accounts Payable Notes Receivable Discounted Notes Receivable *Promissory Note- written promise to pay made by one person to another. It’s issued to settle an account and issued for merchandise, which is bought or sold The components of a promissory note are as follows: ? Maker. The person or business that signs the note and promises to pay the amount required by the agreement. The maker is the debtor. In the illustration – Mary de Jesus. ? Payee. The person or business to whom the maker promises future payment. The payee is the creditor. In the illustration – Joseph Labrador. Principal amount or principal. The amount loaned out by the payee and borrowed by the maker of the note. In the illustration – P10,000. 00. ? Interest. The revenue to the payee for loaning out principal and the expense to the maker for borrowing the principal. ? Interest period or term of the note. The period of time during which interest is to be computed. It extends from the date of the note to maturity date. ? Interest rate. The percentage rate that is multiplied to the principal amount and the term of the note in computing for the interest. ? Maturity date or due date. The date on which final payment of the note is due. ? Maturity value.
The sum of principal and interest due at the maturity date of note. ? Place of issue. The locality where the maker executed the note. In the illustration – Quezon City. *Dishonor of Note- gets reverted back to an open account; note not collected on maturity date *Dishonor of Note- maker fails to pay *Renewal of Note- issue of a new note *Discounting of Note- date of discounting *Discounting w/ Recourse- has the effect of guaranteeing payment (bank runs after payee) *Note Receivable Discounted- Contingent Liability (potential liability w/c either develops into a full pledge liability or will be entirely eliminated depending on the outcome of a future event) Honored- customer paid on maturity date *Dishonored- customer did not pay at maturity date Discounting of Own Notes Payable *July 24- discounted w/ FA its own 60-day 16% note for P9,000 +July 24+September 22 (Paid the note that matures today) Cash Notes Payable Interest Expense Cash Notes Payable Preliminary Steps in Making A Trial Balance a. Placed on the wrong side of the Trial Balance b. Omitted from the Trial Balance *Foot- add*Footings- memorandum totals *Closed Account- Zero Balance*Open Account TRIAL BALANCE -does not prove accuracy of recording transactions & debits and credits are equal *Use- prove the equality of the Debit & Credit in the General Ledger *Limitations- the Trial Balance will remain equal even if: . The transaction is recorded w/ a wrong account 2. The transaction is recorded w/ a wrong amount 3. The transaction is nor recorded *Errors & Their Location (Short Cut Method in Locating Errors) >Step 1: Get the difference / amount of the error +If the difference is a figure of 1, 10, 100, the error may be due to wrong addition >Step 2: Re-add / Re-foot the Trial Balance +If the difference is a figure exactly divisible by 2, error may be due to wrong placement in TB. >Step 2: Look for an account equal to the quotient & check if it’s placed on the correct side +If the difference is a figure divisible by 2, error may be due to omission
