G. Trial Balance.
A trial balance is a list of accounts and their balances at a given time.
1. It proves the mathematical equality of debits and credits after posting.
2. It may also uncover errors in journalizing and posting.
3. It is useful in the preparation of financial statements.
ETHICS INSIGHT
Bank regulators fined Bank One Corporation (now Chase) $1.8 million because they
felt
the reliability of the bank’s accounting system caused it to violate regulatory
requirements. The financial records of Waste Management, Inc. were in such
disarray that 10,000 employees were receiving pay slips that were in error.
In order for these companies to prepare and issue financial statements, their
accounting equations must have been in balance at year-end. How could these
errors or misstatements have occurred?
Answer: A company’s accounting equation (its books) can be in balance yet its
financial statements have errors or misstatements because of the
following: entire transactions were not recorded, transactions were recorded
at wrong amounts; transactions were recorded in the wrong accounts;
transactions were recorded in the wrong accounting period. Audits of
financial statements uncover some, but not all, errors or misstatements.
9
IFRS
A Look At IFRS
International companies use the same set of procedures and records to keep track of transaction
data. Thus, the material in Chapter 2 dealing with the account, general rules
of debit and credit, and steps in the recording process—the journal, ledger, and chart of
accounts—is the same under both GAAP and IFRS.
KEY POINTS
Transaction analysis is the same under IFRS and GAAP but, as you will see in later
chapters, different standards sometimes impact how transactions are recorded.
Rules for accounting for specific events sometimes differ across countries. For example,
European companies rely less on historical cost and more on fair value than U.S.
companies. Despite the differences, the double-entry accounting system is the basis of
accounting systems worldwide.
Both the IASB and FASB go beyond the basic definitions provided in this textbook for the
key elements of financial statements, that is, assets, liabilities, equity, revenues, and
expenses. The more substantive definitions, using the IASB definitional structure, are
provided in the Chapter 1 A Look at IFRS discussion.
A trial balance under IFRS follows the same format as shown in the textbook.
As shown in the textbook, dollar signs are typically used only in the trial balance and the
financial statements. The same practice is followed under IFRS, using the currency of the
country that the reporting company is headquartered.
In February 2010, the SEC expressed a desire to continue working toward a single set of
high-quality standards. In deciding whether the United States should adopt IFRS, some of
the issues the SEC said should be considered are:
Whether IFRS is sufficiently developed and consistent in application.
Whether the IASB is sufficiently independent.
Whether IFRS is established for the benefit of investors.
The issues involved in educating investors about IFRS.
The impact of a switch to IFRS on U.S. laws and regulations.
The impact on companies including changes to their accounting systems, contractual
arrangements, corporate governance, and litigation.
The issues involved in educating accountants, so they can prepare financial statements
under IFRS.
LOOKING TO THE FUTURE
The basic recording process shown in this textbook is followed by companies across the globe. It
is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues,
and expenses may change over time as the IASB and FASB evaluate their overall conceptual
framework for establishing accounting standards.
11
20 MINUTE QUIZ
Circle the correct answer.
True/False
True False
True False
3. An account will have a credit balance if the total debit amounts exceed the total credit
amounts.
True False
True False
5. The basic steps in the recording process are (1) to analyze each transaction, (2) to enter the
accounts.
True False
6. Transferring journal entries to the ledger accounts is called posting and should be performed
in chronological order.
True False
7. Assets = liabilities + common stock + retained earnings – dividends + revenues – expenses is a
True False
True False
9. When the columns of the trial balance equal each other, it proves no errors occurred in
recording and posting.
True False
equal debit and credit entries.
True False
Multiple Choice
1. Transactions are initially recorded in the
a. general ledger.
b. general journal.
c. trial balance.
d. balance sheet.
2. The right side of an account is referred to as the
a. footing.
b. chart side.
c. debit side.
d. credit side.
3. A purchase of office equipment for cash requires a credit to
a. Equipment.
b. Cash.
c. Accounts Payable.
d. Common Stock.
4. The equality of the accounting equation can be proven by preparing a
a. trial balance.
b. journal.
c. general ledger.
d. T-account.
5. Which of the following accounts would be increased with a debit?
a. Rent Payable
b. Common Stock
c. Service Revenue
d. Dividends
13
ANSWERS TO QUIZ
True/False
Multiple Choice