Chapter 4
The Accounting Cycle: Journals and Ledgers
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To summarize, the first three steps of the accounting cycle (analyze transactions, journalize trans-
actions, and post to the general ledger) are done repeatedly during the period.There may be hun-
dreds of journal entries each period, depending on the size of the business. Once the period ends,
then the accountant will move on to the rest of the accounting cycle, starting with step 4.
Prepare the Trial Balance
Remember that in every journal entry, the total value of the debits must equal the total value of
the credits (at
all
times). To ensure that this rule has been adhered to, we need to create a trial bal-
ance. A
trial balance
lists all accounts in the general ledger and their balances at a specific date. If
the total debits equals total credits, then the trial balance balances. The trial balance is created at
the end of the accounting cycle and is used as an internal report for the preparation of financial
statements. Some accountants choose to total the debit and credit columns in journals as well, as
an added control.
The trial balance has a title which indicates the company name, the name of the report (Trial
Balance) and the date the trial balance was prepared. It then lists each account in the order they
appear in the general ledger and their final balances in the debit or credit column.The trial balance
in Figure 4.14 is based on the accounts and balances from Figure 4.13. Only accounts that have a
balance are listed in the trial balance.
MP Consulting
Trial Balance
January 31, 2016
Account
DR
CR
Cash
$3,800
Accounts Receivable
3,000
Prepaid Insurance
1,200
Equipment
8,300
Accounts Payable
$1,250
Unearned Revenue
2,000
Bank Loan
2,500
Parish, Capital
10,300
Parish, Drawings
2,000
Service Revenue
3,300
Rent Expense
800
Telephone Expense
250
Total
$19,350 $19,350
________________
figure 4.14
If the trial balance does not balance, the financial statements cannot be prepared because there is an
error somewhere in the accounts. Double check the following items to identify the error.
