The best way to learn what a reviewer looks for in a trial balance is to review one. This page gives an unadjusted trial balance for a small company with seven problems built in. Try to find them before reading the answers. They are the same patterns that show up in real files: an out-of-balance total, a clearing account that was never cleared, a missing year-end entry, and an opening balance that does not agree to last year's audit.
For how the trial balance is used across the engagement, see the trial balance guide. This page is the exercise.
The trial balance
All numbers are illustrative. The company is a small distributor with a December 31 year end. It borrowed $150,000 at 6 percent a year before the year began. Last year's audited ending retained earnings were $124,650.
| Account | Debit | Credit |
|---|---|---|
| Cash | 84,200 | |
| Accounts receivable | 156,300 | |
| Inventory | 98,000 | |
| Prepaid expenses | 12,400 | |
| Loan to officer | 18,000 | |
| Equipment | 240,000 | |
| Suspense | 4,850 | |
| Cost of sales | 610,000 | |
| Salaries expense | 215,000 | |
| Rent expense | 48,000 | |
| Utilities expense | 9,600 | |
| Depreciation expense | 0 | |
| Interest expense | 4,500 | |
| Accumulated depreciation | 96,000 | |
| Accounts payable | 74,500 | |
| Notes payable (6%) | 150,000 | |
| Common stock | 50,000 | |
| Retained earnings, opening | 112,650 | |
| Sales | 1,015,000 | |
| Total | 1,500,850 | 1,498,150 |
Total debits are 1,500,850 and total credits are 1,498,150. The columns are out of balance by 2,700.
How to work it
- Foot the columns and compare the totals.
- Read each account for balances that look wrong in size or direction.
- Compare opening balances to the prior-year audited figures.
- Compute expectations for accounts you can estimate: interest, depreciation, payroll accruals.
- List what is missing, not only what is there.
- Estimate the effect on income and the balance sheet.
The seven problems
1. The columns do not balance: a transposition
Debits exceed credits by 2,700. A difference divisible by 9 points to a transposition, where two adjacent digits are swapped. 2,700 / 9 = 300, which says the two swapped digits differ by 3 and the lower of the two sits in the hundreds place. Accounts receivable of 156,300 should be 153,600 (the 3 and 6 are swapped): 156,300 - 153,600 = 2,700. Agree the balance to the receivables subledger or aging report to confirm.
2. Suspense account with a balance of 4,850
A suspense account holds items that were not coded. At year end it should be zero. Ask for the detail, clear each item to its proper account and see whether the items belong to other accounts. Until it is cleared, income and balance sheet lines are misstated by an unknown amount.
3. A loan to an officer of 18,000
A loan to an officer is a related-party transaction. Check the agreement, interest, repayment terms and collectibility, classification (current or noncurrent depending on expected settlement) and disclosure. If it was a distribution recorded as a loan, equity is affected. See related-party transactions.
4. No depreciation expense
Equipment is 240,000, accumulated depreciation is 96,000, and depreciation expense is zero. If the accumulated depreciation balance equals last year's ending balance, no depreciation was recorded this year. Illustratively, a 10-year life with no salvage value gives 240,000 / 10 = 24,000.
Proposed entry: debit depreciation expense 24,000, credit accumulated depreciation 24,000.
5. Interest expense is too low
A note of 150,000 at 6 percent should produce 150,000 x 6% = 9,000 for a full year. The trial balance shows 4,500, so about 4,500 is missing. There is also no accrued interest account. Check payments against the loan statement and accrue the unpaid portion.
Proposed entry: debit interest expense 4,500, credit accrued interest payable 4,500.
6. Opening retained earnings do not agree to the prior audit
The trial balance opens at 112,650, but last year's audited ending retained earnings were 124,650. The difference is 12,000. A closed period should not change. Possible causes include an unrecorded prior-year audit adjustment, a posting to a closed period or a distribution booked directly to equity. Find the entry. See first-year audits and opening balances.
7. No accrued liabilities at all
There is no accrued payroll, accrued interest, accrued sales tax or other accrual. A company with 215,000 of salaries and a bank loan will have some at year end. The omission points to a completeness problem. See accrued expenses and the search for unrecorded liabilities.
Effect on income
Before the adjustments, income is sales less expenses: 1,015,000 - (610,000 + 215,000 + 48,000 + 9,600 + 0 + 4,500) = 1,015,000 - 887,100 = 127,900. The two quantified adjustments reduce it by 24,000 + 4,500 = 28,500, to 99,400. That is a drop of 28,500 / 127,900 = 22.3 percent, from two entries a reviewer can see in minutes. The suspense account, the officer loan, the opening difference and unrecorded accruals could move the numbers further.
What the exercise shows
- A balanced trial balance would still have problems 2 through 7. Only the first error shows up in the totals.
- Most of the findings come from comparing the trial balance to something else: the prior year, a subledger, a loan statement, an expectation.
- Missing entries are harder to see than wrong entries. Ask what should be there.
Work through the trial balance template, then see how the corrections flow to the adjusted trial balance and how entries are tracked in adjusting journal entries.
Common mistakes in real reviews
- Stopping when the totals agree.
- Plugging a difference to a suspense or other account.
- Accepting opening balances without comparing them to the prior audit.
- Checking only the accounts that exist.
- Booking audit adjustments without asking the client to approve and record them.
FAQ
How do I find a transposition error in a trial balance?
If the difference between debits and credits is divisible by 9, a transposition is likely. Divide the difference by 9. The leading digit of the quotient is the gap between the two swapped digits, and the number of zeros after it shows where the lower digit sits. A quotient of 300 means digits that differ by 3, with the lower one in the hundreds place.
What does a suspense account in a trial balance mean?
It holds transactions that have not been assigned an account. It should be cleared before the statements are issued.
Does a balanced trial balance mean the books are right?
No. It shows that debits equal credits. Omissions, misclassification and wrong amounts can all exist in a balanced trial balance.
What is an unadjusted trial balance?
It is the trial balance before period-end adjusting entries such as depreciation and accruals.
Why compare opening balances to the prior year?
To confirm nothing changed in a closed period. A difference means an entry was posted to the wrong period or the prior statements were wrong.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- AICPA, AU-C section 510 (opening balances in initial audit engagements), AU-C section 240 and AU-C section 450
- FASB ASC 360-10 (depreciation of property and equipment)
Part of CORAA University · Evidence and audit procedures: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error