Question

QUESTION 3

A

The agreement of the trial balance totals is an indication that all transactions have been properly recorded in the books of accounts. Do you agree with this statement?

Required:

Outline 4 reasons to justify your response.

Answer 1

The agreement of the trial balance totals is an indication that all transactions have been properly recorded in the books of accounts.

No, I do not agree with the above statement.

The reasons for disagreement are explained below

-The agreement of Trial Balance totals merely indicates that for a debit there was an equal credit and vice versa. It does not imply that all transactions have been properly recorded. Example, while recording a purchase, entry should be Purchase debit, Cash credit. But it was recorded as Cash Debit, Purchase credit. This would result in equal debits and credits even though this transaction wasn't correctly recorded.

-Compensating errors may be present. Example of this would be Accounts Receivable debited by 500 instead of 1000. On the other hand, Prepaid expenses debited by 2000 instead of 1500. This is a compensating error, Trial would still tally but transactions are not correctly posted.

-Omissions - What if a transaction was omitted all together? In such a scenario too trial balance would agree because both credit and debit of the same transaction has been missed. But all transactions have not been recorded.

-Misposting errors - If instead of debiting Cash, Inventory was debited. Trial balance would still agree but transaction has not been correctly recorded.