Forensics for one that does not balance; the cycle; source documents

What balances anyway

Pinecrest's trial balance agrees at 49,800. The bookkeeper says the books are therefore correct. They are not — or rather, the trial balance cannot say. It proves that every posted debit had an equal posted credit, and nothing else. Four kinds of error leave it perfectly balanced:

1. An omitted transaction. The 28 November billing never journalised: both the receivable and the revenue are missing, by the same 1,900, and the columns still agree.
2. The right amount on the correct side of the wrong account. The treatment table debited to Supplies instead of Equipment: a debit is still a debit.
3. A duplicate posting. The 500 deposit posted twice: both columns are 500 too high.
4. Two offsetting errors. A 100 overstatement in one debit and a 100 overstatement in some other credit.

Every one of these is an error of analysis or transcription that the arithmetic check cannot see. That is why the trial balance is a checkpoint, not a proof, and why the paper asks you to name what it misses.

Worked example — a trial balance that does not agree

When the columns differ, the size of the difference is a clue.

Out by 1,400, credits the larger. Divide by 2: 700. An amount of 700 was posted to the wrong side — a debit that went in as a credit moves 700 out of one column and into the other, a difference of twice the amount. Pinecrest's 700 supplies purchase: the debit to Supplies was posted as a credit. Look for a 700 on the wrong side, and there it is.

Out by 1,800. Divide by 9: 200, a whole number. A whole-number result means a transposition (two digits swapped) or a slide (a decimal point moved) is possible. Pinecrest's wages of 3,100 posted as 1,300: the difference is 1,800, which is 9 × 200. Search the ledger for a figure whose digits could be swapped to give the difference.

Neither test is a proof — an odd difference, or one not divisible by 9, only rules the pattern out — but on a case each is a one-line explanation that earns its mark.

The accounting cycle

Everything so far, and everything in the next two modules, is one repeating sequence. Nine steps, and the order matters:

1. Analyse the transaction (the four questions, from a source document).
2. Journalise it.
3. Post to the ledger.
4. Unadjusted trial balance.
5. Adjust — the year-end entries of Module 5.
6. Adjusted trial balance.
7. Statements — income statement, statement of retained earnings, balance sheet.
8. Close the temporary accounts — Module 6.
9. Post-closing trial balance.

The cycle does not end at the statements. Closing empties the revenue, expense and dividends accounts into retained earnings so that the next period starts at zero, and the post-closing trial balance proves the permanent accounts still balance.

Source documents

Step 1 starts from a document, and a case gives you the document to tell you which transaction family it is: a sales invoice issued means revenue on account; a supplier's invoice received means an expense or asset and a payable; a cash receipt or bank deposit slip means cash in; a cheque or bank record means cash out; a contract signed and unperformed means, as L4.3 showed, nothing yet. The documents are also the audit trail — the path from a number on a statement back to the paper that justifies it.

One awareness item: a business with many customers keeps a subledger — one page per customer — behind the single Accounts Receivable account in the general ledger. The general-ledger account is then called a control account, and it must equal the total of its subledger.