ACCT 612

Week 4: Preparing the trial balance

and the balance sheet

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Introduction to Week 4
In Week 3 you learned how to record transactions in T-accounts using debits and
credits. This week you will learn the crucial process of ‘balancing off’ each T-account
in order to record the correct figure for each account in the trial balance. In Week 4
you will learn how to prepare the trial balance and the balance sheet. You will also
learn that balance sheets can be presented in different forms of the accounting
equation. An important aspect of your study in Week 4 is to learn that the
accounting equation can be expanded to reflect the fact that an increase in profit
means an increase in capital for any business.

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4.1 From T-accounts to the trial balance

You have now learned how to record transactions in T-accounts. Capital, and each
type of asset and liability, has its own T-account. These T-accounts are recorded in
the general ledger (also known as the nominal ledger). Figure 1 below shows the
general ledger and the three categories of T-accounts therein that we have
discussed so far.

Figure 1 The general ledger

View description - Figure 1 The general ledger

In order to prevent errors and to make sure that all transactions are properly
recorded as debits and credits in the correct T-accounts, a checking procedure takes
place at the end of each accounting period. This is known as preparing a trial
balance. A trial balance is thus a list of all the debit and credit balances in the
general ledger accounts. If all the individual double entries have been correctly
carried out, the total of the debit balances should always equal the total of the credit
balances in the trial balance. A further important purpose of the trial balance is that
it forms the basis for the preparation of the balance sheet.
If the total of the debit balances do not equal the total of the credit balance then
there is a mistake somewhere, which needs to be investigated and corrected.

Figure 2

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View description - Figure 2

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4.2 The T-accounts before their balance is worked out

In order to prepare a trial balance at any time, it is necessary to determine the
balance on each account. This process is known as ‘balancing off’ the general ledger
accounts. The trial balance can then be prepared by listing each closing balance from
the general ledger accounts as either a debit or a credit balance.
Below are the T-accounts in Edgar Edwards’ general ledger (see Activity 4 in Week
3). The general ledger accounts should be balanced off prior to compiling the trial
balance.

T-accounts 16

4.2.1 The procedure for balancing off T-accounts

Accounts are straightforward to balance off if they consist of only one type of entry,
i.e. only debit entries or only credit entries. In this case, all the account entries are

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simply added up to get the balance on the account. If, for instance, a bank account
has three debit entries of £50 each, then the balance on the account is a debit
balance of £150. However, when accounts consist of debit and credit entries, there is
a procedure that should be used to balance off these accounts. Take the bank
account:

T-accounts 17

The procedure for balancing it is:

1. Add up the side with the highest total.

T-accounts 18

1. Enter the larger figure as the total for both the debit and credit sides.

T-accounts 19

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1. For the side that does not add up to this total, calculate the figure that
makes it add up by deducting the smaller total (600 + 200 + 50 =
850) from the larger total (10,000). Enter this figure (10,000 – 850 =
9,150) so that the total adds up, and call it the balance carried down.
This is usually abbreviated as ‘Balance c/d’.

T-accounts 20

1. Enter the balance brought down (abbreviated as Balance b/d) on the

opposite side below the total figure. (The balance brought down is
usually dated one day later than the balance carried down as one
period has closed and another one has started.)

T-accounts 21

Edgar Edwards’ bank account in the general ledger has now been balanced off. The
debit side was greater than the credit side, therefore leaving a debit balance of
£9,150. The balance on the bank account reflects that £10,000 has come into this
asset account and £850 has gone out to leave the debit balance of £9,150. This is

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why on the opposite side to the ‘Balance c/d’ figure, a ‘Balance b/d’ figure is needed
to represent a closing debit balance.
The brought down balances at the end of the accounting period will be the opening
balances of the next accounting period.
Using the rules above, all of the other accounts in Edgar Edwards’ general ledger
accounts can now be balanced off.
The furniture account has a single entry on one side. This amount is the total as well
as the balance in the account.

T-accounts 22

The computer and bank loan accounts have single entries on one side, like the
furniture account, so they need to be treated in the same way.

T-accounts 23

In the next activity you will balance off the two accounts that we have not yet dealt
with, the liability account ‘Pearl Ltd’ and the capital account. In order to do this you
will need to follow the four-point procedure that was used to balance off the bank
account. In this activity you will again not enter the answer in a box but will instead
have an opportunity to work out the answer mentally before you click on the ‘Reveal
answer’ button.

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Activity 1 Balancing off a T-account where there is

both a debit and a credit
Complete the entries in the following two accounts for Edgar Edwards Enterprises
in order to correctly balance off the accounts:

T-accounts 24

View answer - Activity 1 Balancing off a T-account where there is both a

debit and a credit

Now all the general ledger accounts have been balanced off, a trial balance can be
prepared by listing all the balances (brought down balances) on Edgar Edwards’
general ledger as follows:

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4.3 The trial balance

If (a) all the double entries for the six transactions for Edgar Edwards were correctly
recorded in the relevant T-accounts and (b) all the relevant T-accounts were
correctly balanced off, then a correct trial balance for Edgar Edwards can be
prepared.
This will be shown in the next activity.

Activity 2 Preparing a correct trial balance

Complete the trial balance below. Your answer should have the correct debit or
credit balance for each of the relevant six accounts as well as the total for all debit
and credit balances.
Edgar Edwards Enterprises
Table 1 Completion of trial balance

Interactive content is not available in this format.

View answer - Activity 2 Preparing a correct trial balance

From the trial balance it can be seen that the total of debit balances equals the total
of credit balances. This demonstrates that for every transaction the basic principle
of double-entry accounting has been followed – ‘for every debit there is a credit’.
In the final section of this week we will go back to our accounting equation to show
that the balances from the trial balance can be used to prepare the balance sheet.

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4.4 The balance sheet

Returning to our example of Edgar Edwards in Activities 1 and 2, the completed trial
balance contains all the elements of the accounting equation.

Account totals in the accounting equation 1

The accounting equation is the basis of the balance sheet, which shows the total of
assets, in this case £10,150 balancing with the total of capital and liabilities £10,150.

Account totals in the balance sheet 1

Although it may be acceptable to prepare a balance sheet with assets on one side
and capital and liabilities on the other (known as the horizontal format) it is more
conventional to show assets at the top and capital and liabilities at the bottom
(known as the vertical format).
Balance sheets are commonly prepared in a vertical format of the accounting
equation. This gives the owners clear information about the assets of the business,
the liabilities of the business (the amount it owes) and the capital or owner’s
interest in the business. The balance sheet is normally produced at the end of each
trading or financial year and is a snapshot of the financial position of the business on
the last day of the financial year.

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4.4.1 Preparing a balance sheet

In your final activity for Week 4 you will prepare a balance sheet in the vertical
format for Edgar Edwards Enterprises at the end of the day on 6 July 20X2.

Activity 3 Preparing a balance sheet in a

conventional format
Complete the balance sheet below. Your answer should have the correct figures for
the individual asset, liability and capital balances as well as the correct figures for
total assets and total capital and liabilities. (Non-current assets refer to assets that
are typically held in a business for longer than a year. Current assets are assets that
are typically held for less than a year. Likewise non-current liabilities refer to
liabilities that are typically held in a business for longer than a year. Current
liabilities are liabilities that are typically held for less than a year.)
Edgar Edwards Enterprises
Balance Sheet as at 6 July 20X2
Table 2 Completion of a balance sheet

Interactive content is not available in this format.

View answer - Activity 3 Preparing a balance sheet in a conventional

format

The capital of a business is the value of the investment in the business by the
owner(s). As you learned in Activity 3 in Week 1, if a business makes a profit, the
value of the investment by the owner (capital) increases. The best way to
understand how this works is to look at the effect of profit on the accounting
equation.

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4.5 The effect of profit on the accounting equation

In both Week 2 and Week 3 we looked at the accounting equation:

Table 3 The accounting equation

Assets = Capital + Liabilities

The three elements (assets, capital and liabilities) are presented in the balance
sheet. The profit earned by the business increases capital, and we have already seen
that Profit = Income/Revenue – Expenses. The accounting equation can, therefore,
be expanded to:

Table 4 The expanded accounting equation

Assets = Liabilities + Capital + (Revenue – Expenses)

The income statement (also known as the profit and loss statement) shows in detail
the elements of the equation: Revenue – Expenses = Profit or Loss. A deep
understanding of the income statement is beyond the scope of this free course. An
understanding of such a statement, as well as much other useful material, is
included in the Open University module, B124 Fundamentals of accounting.

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Summary of Week 4
If (a) all the double entries for every transaction and financial event are correctly
recorded in the relevant T-accounts and (b) all the relevant T-accounts are correctly
balanced off, then a correct trial balance can be prepared. The trial balance shows
the double-entry rule that ‘for every debit there is a credit’.
The balances from the trial balance can be used to prepare the balance sheet.
Balance sheets are commonly prepared in a vertical format of the accounting
equation. The accounting equation can be expanded to Assets = Liabilities + Capital
+ (Revenue – Expenses) to reflect the fact that an increase in profit means an
increase in capital.

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End-of-course conclusion
This free course, FundameTAX RESEARCH PROBLEMS 1 INSTRUCTIONS

For this assignment, you will be submitting a Microsoft Word document with solutions
for the problems detailed below. The purpose of this assignment is for you to apply CCH
tax research principles to relevant scenarios.

The Word document must be labeled as follows: lastname_problems1.doc. Label each

problem and solution with the correct numbers and letters for easy reading.

As this is not a formal writing assignment, current APA format is not required.
Furthermore, there is no need to submit a title page or research page. Just include your
full name at the top of the document.

Problems:

1. Use the CCH IntelliConnect Federal Tax database to answer the following
questions:
a. What are the major database categories provided?
b. Select 2007 in the Federal Tax Achieves. What is the highest amount of
taxable income a single taxpayer can earn before paying a 35 percent
marginal tax rate in 2006? HINT: Use the Master Tax Guide - 2007.)
When would it be useful to know what the IRC was in a prior year?
c. Find the Action on Decisions listed in Letter Rulings & IRS Positions and
perform a keyword search for “Milligan”. Did the IRS acquiesce to the
Milligan decision?
d. Look at “Bills Worth Watching” in the Federal Tax Legislation database.
Which bills does CCH think are worth watching?

2. You are trying to find the current standard deduction amount for an individual.
a. Using a contents search, locate Chapter 1 (Individuals), Computation of
Tax Liability, in the U.S. Master Tax Guide for the most current year.
What is the standard deduction for a single filer for the most current year?
b. Browse the contents of the Standard Federal Tax Reporter and select
Deductions – Secs. 161-249. How many results do you get when you
perform a keyword search for the selected content in the Standard Federal
Tax Reporter for the keywords “standard deduction” (without quotation
marks)?
c. Reperform the search in part b, except now use the keywords “standard
deduction” (using quotation marks) – how many results?
d. How many of the results from the search performed in part c are from the
Internal Revenue Code?
e. Use the history tabs and click on the browse tab (your U.S. Master Tax
Guide document [paragraph 126] should still be in the window). What is

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the primary source link for the most recent standard deduction amounts?

3. Use the CCH IntelliConnect Browse function and select the Federal Tax Editorial
Content heading to answer the following questions:
a. Using Quick Answers Tax Rates, Tables and Credits, determine the
personal exemption amounts for the 3 previous years.
b. In the Interactive Research Aids for Tax Research Consultant, for
Individuals, who is the author of the decision tree for qualified moving
expenses?
c. Using the Master Tax Guide, determine whether the Adoption Credit is a
refundable or nonrefundable credit? In what paragraph number is the
discussion of this credit located?
d. What is the most recent Joint Committee on Taxation Blue Book available
in the Federal Tax Legislation heading?

4. Use the CCH IntelliConnect Practice Tools database to answer the following
questions:
a. Using the Election and Compliance Toolkit, determine what election
might need to be made to elect to expense the cost of property un IRC Sec
179 (Not mine equipment or in a controlled group) and when the election
is due.
b. Using the Depreciation Toolkit, determine the depreciation n in year 5 for
$45,000 of Dairy Cattle, 150 percent DB method for Farm Property with
half-year convention.
c. Using the Federal/ State Taxes, Tax Calendar, prepare a calendar for the
current year for all the taxes for the state within which your college is
located. Print 1 month that shows payment due dates.
d. Explain whether the Practice Tools offered in the Main Menu (where
Browse, Citations, and so forth are located) are the same as in the Practice
Tools, listed in the expanding Browse option?

5. Using a contents search in IntelliConnect’s Standard Federal Tax Reporter:

a. What is the title of I.R.C. Sec 265?
b. How many regulations exist related to Sec 265?
c. What is the paragraph number of the explanations covering “wholly exempt”
income?
d. Using a contents search, locate the Sec 265 related annotations and provide the
name of the case that discussed legal fees and expenses for a wrongful death
claim against a father serving as administrator of his son’s estate.

6. Use the CCH IntelliConnect Citator to answer the following questions regarding
Notice 2010- 10:
a. Where is the Notice located in the Internal Revenue Bulletin?
b. Where is the Notice annotated?
c. What other notice as Notice 2010-10 been cited in?

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7. Use the CCH IntelliConnect Citator to evaluate the 1956 William George Tax
Court case.
a. What is the citation for the case?
b. What is the title of the paragraph where George is annotated?
c. What Code section is related to the George case?
d. A Revenue Ruling cites the George case. What is the citation and title?
How does the Revenue Ruling evaluate the George case?

8. Use CCH IntelliConnect Citator to answer the following questions:

a. Find the discontinued Miscellaneous MS 347; 1950- 1 CB 281 ruling
(Hint: use CB citation to find it). What is its current standing and why?
b. Find court decision 93 T.C. 67. Give the name of the case and all of its
parallel citations.
c. Find the Treasury Decision 9568. Give the date it was filed with the
Federal Register, Code Section to which it applies, and the dates of any
corrections.

9. Use the CCH IntelliConnect Citator to evaluate the 290th Revenue Ruling issued
in 1955.
a. What is its complete Cumulative Bulletin citation? Is this Revenue Ruling
still valid?
b. What tax issue does the Revenue Ruling address?
c. List the citations of any cases that cite Revenue Ruling 1955- 290.
d. In what paragraph of the CCH service was this ruling initially discussed?

10. Use the CCH IntelliConnect Citator to answer the following questions regarding
the 19th Revenue Procedure of 2002:
a. What does this Procedure address? What Code sections are involved?
b. What is its current status?
c. What types of pronouncements have cited this Procedure? That is the most
current citing of the Procedure?

These problems will be due by 11:59 pm ET on Sunday.

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