Chapter 4
The Accounting Cycle: Journals and Ledgers
95
1.
Do all accounts on the trial balance show a normal balance?
2.
Were the balances on the trial balance copied correctly from the ledger accounts?
3.
Was the calculation of the ledger account balances done correctly?
4.
Were the amounts in the ledger accounts copied correctly from the journal?
5.
Were the journal entries created correctly?
The fact that a trial balance balances does not necessarily mean that all transactions were correctly
recorded. For example, the following errors can be made but still leave the trial balance in balance.
•
The wrong account was used. For example, debiting an asset instead of debiting an expense.
•
An entire journal entry may have been omitted.
•
An entire journal entry may have been recorded or posted twice.
•
Incorrect amounts may have been used for the journal entry.
•
Debits and credits were placed on the wrong side of the entry. For example, instead of debit-
ing cash and crediting revenue, the entry may have debited revenue and credited cash.
Locating errors can be a frustrating experience, so it is important to ensure that entries are made
correctly the first time.
A common error that leaves the trial balance unbalanced is transposition. A transposition error
occurs when two numbers are switched, for example 530 may be written as 350. If the difference
between the total debits and total credits is evenly divisible by 9, then it is likely a transposition error has
been made.
Ethics and Controls
Regardless of whether the company uses accounting software or records transactions manually,
there is ample opportunity to manipulate the books. Computerized accounting information is only
as reliable and accurate as the information that goes into the system.Most of the time, the account-
ing system used by a company is not fully automated.This means that the user must input informa-
tion into the system or interact directly with the software at one point or another, which provides
opportunity for inaccurate reporting.
For instance, certain accounting software allow automat-
ed recurring entries. In other words, they can be set up to
repeat the same entry at various time intervals. Consider
GG Property Management, which manages and rents
out offices in high-rise buildings. Since the company
receives rent from its tenants on a monthly basis, it set
up its accounting software to record rent revenue auto-
matically at the beginning of each month. Suppose that a
