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Types of Trial Balance and Preparation of Trial
Balance:
Trial Balance is a summary of all accounts with their
respective closing balances at the year's end. Here, the total of debits will
match the total of credits. There are three types of trial balances:
1.Unadjusted
-: The unadjusted trial balance is prepared in real-time means before adjusting
journal entries based on daily transactions.
2.Adjusted
-: It is prepared based on final balances of all accounts means after adjusting
entries and the ledger is balanced.
3.Post
Closing -: This type of trial balance reflects accounts after the closing
entries have been applied.
Accounting is based on a double-entry
system means every transaction has one credit side and one debit side. For
example. Cash deposit in bank a/c, here the journal entry would be written as
Bank A/c ---------------------- Dr.
To Cash (Cr.)
In trial Balance, all the assets are
recorded on the debit side and all the liabilities & incomes are recorded
on the credit side. It shows that the double entry system has been complied.
We can prepare the trial balance in
two ways:
1.Total method: - The total of the debit
and credit sides of each ledger account is shown in the debit and credit
columns of the trial balance.
2.Balanced method: - In this method,
each ledger account’s final debit and credit balance is shown in the trial
balance.
In the preparation of the trial
balance, we take the entries from the general ledger which were recorded
initially in the journal.
There are the following steps to be
taken in preparation for the trial balance:
First close all ledger accounts
including cash and bank books.
Match each ledger account with total
debits and total credits.
Prepare a table of three columns with
account name, debit and credit details and put the relevant information in
these columns.
Now, evaluate the debit and credit
columns in the table and if any discrepancy is found, identify the error and
rectify it.
If the amount of the debit and credit
columns match, the trial balance is considered correct.
Definition of letter of Credit: “A letter of credit is a
letter of guarantee from a bank for the payment to be received by seller on
time as agreed from buyer.”
In other words, we may call it a letter of trust or guarantee
for payment to the seller from the buyer.
It is used extensively in the financing of cross-border
trades. It helps to inculcate trust between the buyer and seller who may not be
known to each other. Therefore, to establish the reliability between buyer and
seller, they introduce their bank as an underwriter that assumes the
counterparty risk of the buyer who will pay to seller for goods.
Types of LCs: The following are the LCs issued by banks.
a)Irrevocable LC
-: This type of LC can not be amended or cancelled without the agreement of all
the concerned parties. This is an unconditional undertaking by the issuing bank
to make the payment.
b)Revocable LC
-: It can be amended or cancelled at any moment by the issuing bank even
without the consent of any other party until the documents are not taken.
c)Transferrable LC -: It can be transferred completely or partly in favour of any party by
advising the bank at the request of the issuing bank.
d)Back-to-Back LC
-: In this case, the beneficiary uses the same LC to get another LC in favour
of the seller.
e)Negotiation LC
-: Negotiating LC can be freely negotiable to any bank chosen by the LC issuing
bank.
f)Red Clause LC
-: This LC has a Red Clause through which an intermediary bank is allowed to
make an advance payment to the beneficiary before shipment.
g)Green Clause LC
-: In this LC, pre shipment and post shipment advances are allowed to the
exporter.
h)Revolving LC
-: Under this LC, a fixed amount can be renewed as soon as the earlier bills
have been paid.
i)Confirmed LC
-: If advising bank provides the confirmation to the beneficiary then it is
called confirmed LC and only irrevocable LC can be confirmed.
Prominently, four parties are
involved in the payment of the Letter of Credit:
1)Buyer/Importer: - Who makes the
payment as per letter of credit’s terms and conditions.
2)Seller/Exporter: - It gets the
payment from the buyer’s bank as per the LC’s terms and conditions.
3)Buyer’s Bank: - It may be called an
opening bank or issuing bank and it is liable to pay.
4)Seller’s Bank: - Who receives the
payment from the buyer’s bank.
The letter of credit is governed by the rules of UCPDC
(Uniforms Customs and Practice for documentary credits) and the International
Chamber of Commerce, Paris. Letter of credit can be issued by banks, financial
institutions, mutual funds and insurance companies.
The operations of LC could be easily understood with the help
of the following steps:
1.Contract between buyer and seller for
supply of goods.
2.Buyer approaches his bank to issue LC
to the seller.
3.The seller consigns the goods to a
carrier and takes a Bill of Lading from the carrier.
4.The seller gives a Bill of Lading
along with documents to his bank for payment as proof of dispatch of goods.
5.The seller’s bank gives a Bill of
lading along with documents to the buyer’s bank for payment.
6.The buyer’s bank provides the
documents to the buyer.
7.The buyer provides the documents
along with the Bill of Lading to the carrier and takes the delivery of the
goods.
MCQs
Q1. What type of error is called where one journal entry is
debited to the wrong account head?
Ans. An error of principle
Q2. Provision for Bad Debts shown on which side of the trial
balance?
Ans. Credit side
Q3. Which of the following errors will affect the trial
balance?
i)Wrong
balancing of an account
ii)Wrong
totalling of an account
iii)Amount
written in the wrong account but on the correct side
iv)Omission
of amount in an account.
Ans. (a) i (b) ii
& iii (c) i, ii & iv (d) i, ii, iii & iv
Q4. Which of the following accounts will generally show a
credit balance?
i)Loan
a/c
ii)Income
a/c
iii)Bank
a/c
iv)Capital
a/c
Ans. (a) i, ii & iv (b) iii (c) ii, iii
& iv (d) i & iv
Q5. Case Study:
What would be the rectification entry if credit sales to Mr.
Ram Rs. 5,000 was recorded as Rs. 50,000 in the sales book.
Ans. i) Ram a/c Dr. 45000 to sales a/c 45000
ii) Ram
a/c Dr. 55,000 to sales a/c 55,000
iii) Sales
a/c Dr. to 45,000 to Ram a/c Cr. 45,000
iv) Sales a/c Dr. to 55,000 to Ram
a/c Cr. 55,000
Q6. Is it possible to use the letter of credit for trade within the
country?
Ans. Yes
Q7. In which type of letter of credit, pre and post-shipment advance is allowed to avail?
Ans. Green Clause LC
Q8. Which bank requests for confirmation of a letter of credit
to the confirming bank?
i) Advising bank ii) Negotiating bank iii) Opening bank iv) Reimbursing bank
Ans. iii
Q9. Which bank sends a letter of credit to the beneficiary?
a)Issuing
bank ii) Negotiating bank iii) Reimbursing bank iv) Advising bank
Ans. iv
Q10. Case Study
M/s Porcupine Industries, a manufacturer of solar panels
wants to import solar cells from U.S. based company named Apple Lighting Inc.
in India for total cost of USD 10000. The Apple lighting Inc. who is banking
with HSBC Bank, has issued an invoice stating that the sale transaction must be
backed by a letter of credit. Therefore, M/s Porcupine Industries approached
its bank SBI to open of letter of credit in foreign currency USD. The SBI’s
correspondent bank in the U.S. is City Bank, New York.
i)What
is the name of the letter of credit issuing bank?
ii)Who
is the beneficiary of the letter of credit in this case?
iii)Who
is advising the bank in this case?
iv)Who
is the negotiating bank in this case?
v)Who
is confirming bank in this case?
Ans. i) SBI ii)
Apple Lighting Inc. iii) City bank iv) HSBC v) City bank
