Multiple Choice
When a company makes a periodic payment on an installment note, what is the effect on the financial statements?
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2. Transaction Analysis
Trial Balance
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Which of the following statements is true of a trial balance?
A
A trial balance is prepared to verify that total debits equal total credits in the ledger accounts.
B
A trial balance proves that all transactions have been recorded correctly.
C
A trial balance lists only the revenue and expense accounts.
D
A trial balance is a financial statement presented to external users.
Verified step by step guidance1
Understand the purpose of a trial balance: A trial balance is a tool used in accounting to ensure that the total debits equal the total credits in the ledger accounts. It is not a financial statement presented to external users, but rather an internal document used for verification.
Clarify the misconception about transaction accuracy: A trial balance does not prove that all transactions have been recorded correctly. It only verifies the mathematical equality of debits and credits, meaning errors such as omitted transactions or incorrect account postings may still exist.
Identify the accounts included in a trial balance: A trial balance lists all accounts in the ledger, including assets, liabilities, equity, revenue, and expenses. It does not exclusively list revenue and expense accounts.
Distinguish between internal and external use: A trial balance is not a financial statement presented to external users. Financial statements such as the income statement, balance sheet, and cash flow statement are prepared for external reporting purposes.
Conclude the correct statement: Based on the analysis, the correct statement is that a trial balance is prepared to verify that total debits equal total credits in the ledger accounts.
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