How are the accounts in the trial balance arranged in merchandising business?

Every business transaction has a dual effect. Thus, each transaction is recorded in two separate accounts as per the Double Entry System of accounting. The double entry accounting principle means that for every debit, there is an equal credit. Thus, as per this principle, the sum of all debits is equal to the sum of all credits. As a result, it is assumed that the transactions posted in ledger accounts in terms of debit and credit amounts are correct.

So, the accountant or the business owner first records transactions in the Journal following the basics of accounting. Then, entries from the Journal are recorded into the ledger accounts. Further, the closing debit or credit balances in various ledger accounts go into the Trial Balance of the business for a particular year.

Therefore, Trial Balance is prepared basically to check if debit or credit amounts recorded in the ledger accounts are accurate. So, let’s understand

Trial balance is an accounting procedure used to ensure the mathematical equality between debit and credit accounts as recorded in the general ledger. A trial balance can take different forms, depending on when the trial balance occurs within an accounting cycle. Each trial balance contains different ledger accounts based on the account-related accounting entries-regular, adjusting or closing entries. Some merchandising accounts may have been adjusted and closed, and thus, may not appear on the post-closing trial balance.

Trial Balance

1. A trial balance lists all the accounts currently recorded in the general ledger with their respective debit or credit balances that are subsequently added up to prove the equality between total debit and credit balance. The original trial balance contains accounts recorded whenever related business transactions take place. Certain business transactions such as prepayments and accruals must be adjusted at the end of an accounting period to reflect the revenue earned and expense incurred for the period. Thus the adjusted trial balance expands to include any adjusted accounts. Also at the end of a period, a business removes and closes all revenue and expense ledger accounts, and reports the balances in the income statement. Therefore, the post-closing trial balance is only a list of the remaining accounts.

Merchandising Accounts

1. Merchandising accounts often include the accounts of inventory, other supplies, cost of goods sold and supplies expense, and are subject to adjustments and closing. While a business records inventory and other supplies at the time of their purchases, it makes further adjustments at end of an accounting period to account for any inventory sold and supplies expense incurred during the period. As a result, the accounts of inventory sold, or cost of goods sold, and supplies expense appear only on the adjusted trial balance. On the other hand, inventory and supplies accounts show up on both the original and adjusted trial balance. Some of the merchandising accounts may not appear on the post-closing trial balance after a business closes its books.

Closing Entries

1. A business uses closing entries to close out revenue and expense accounts, including the merchandising accounts of cost of goods sold and supplies expense. Revenue and expense are periodic business results, and must be reset to zero in the general ledger to be ready for recording in the next accounting period. Thus, the accounts of revenue and expense often are referred to as nominal accounts, compared to the real accounts of asset, liability and equity measuring accumulated value at any given time. Both revenue and expense are closed into the account of retained earnings, resulting in changes of the account listing in the post-closing trial balance.

Post-Closing Trial Balance

1. The post-closing trial balance is taken to ensure the balance between remaining debit and credit accounts. The post-closing trial balance does not include the closed merchandising accounts of cost of goods sold and supplies consumed, and consists only of real accounts of asset, liability and equity. Merchandising accounts of inventory and other supplies are asset accounts and will appear in the post-closing trial balance, provided that there is still a balance in those accounts. Accounts in the post-closing trial balance are the basis for compiling the balance sheet.

   An unadjusted trial balance is a listing of all the business accounts that are going to appear on the financial statements before year-end adjusting journal entries are made. That is why this trial balance is called unadjusted.

   This is the third step in the accounting cycle. After the all the journal entries are posted to the ledger accounts, the unadjusted trial balance can be prepared.

   ---

   Format

   An unadjusted trial balance is displayed in three columns: a column for account names, debits, and credits. Accounts with debit balances are listed in the left column and accounts with credit balances are listed on the right.

   Accounts are usually listed in order of their account number. Most charts of accounts are numbered in balance sheet order, so the unadjusted trial balance also displays the account numbers in balance sheet order starting with the assets, liabilities, and equity accounts and ending with income and expense accounts.

   Both the debit and credit columns are calculated at the bottom of a trial balance. As with the accounting equation, these debit and credit totals must always be equal. If they aren’t equal, the trial balance was prepared incorrectly or the journal entries weren’t transferred to the ledger accounts accurately.

   As with all financial reports, trial balances are always prepared with a heading. Typically, the heading consists of three lines containing the company name, name of the trial balance, and date of the reporting period.

   

   ---

   Preparation

   Posting accounts to the unadjusted trial balance is quite simple. Basically, each one of the account balances is transferred from the ledger accounts to the trial balance. All accounts with debit balances are listed on the left column and all accounts with credit balances are listed on the right column. That’s all there is to it.

   ---

   Example

   After Paul’s Guitar Shop, Inc. records its journal entries and posts them to ledger accounts, it prepares this unadjusted trial balance.

   

   As you can see, all the accounts are listed with their account numbers with corresponding balances. In accordance with double entry accounting, both of the debit and credit columns are equal to each other.

   Managers and accountants can use this trial balance to easily assess accounts that must be adjusted or changed before the financial statements are prepared.

   After the accounts are analyzed, the trial balance can be posted to the accounting worksheet and adjusting journal entries can be prepared.

   How are the accounts in the trial balance are arranged?

   On the trial balance the accounts should appear in this order: assets, liabilities, equity, dividends, revenues, and expenses. Within the assets category, the most liquid (closest to becoming cash) asset appears first and the least liquid appears last.

   Which accounts are used in a merchandising business?

   However, the Merchandising worksheet will include the following account titles and amount: accounts receivable, merchandise inventory, accounts payable, sales tax and purchases.

   What is the format for trial balance?

   Trial Balance has a tabular format that shows details of all ledger balances in one place. It includes transactions done during the year and the opening and closing balances of ledgers, as every entity needs to evaluate its financial position over a particular period.