Chapter 14 – Trial Balance & Errors
Trial Balance: The Trial Balance is a statement prepared with the debit and credit balances of all ledger accounts to check the arithmetical accuracy of the books of accounts.
Characteristics of a Trial Balance
It is a list of balances of all ledger accounts and the cash book.
It is just a statement, and not an account.
It is neither a part of double entry system,nor does it appear in the actual books of accounts.
It can be prepared at any time during the accounting period,say at the end of every month or every quarter.
It is always prepared on a particular date and not for a particular period.
It is prepared to check the arithmetical accuracy of the ledger accounts.
If the books are arithmetically accurate,the total of all debit balances of a trial balance will be equal to the total of all credit balances.
A tallied Trial Balance is not a conclusive proof of the accuracy of the books of accounts since certain type of errors remain even when the Trial Balance tallies.
Objectives of Preparing Trial Balance:
To ascertain arithmetical accuracy: The primary objective is to ensure that the total of all debit balances equals the total of all credit balances, indicating arithmetical accuracy in ledger posting and balancing.
To help in locating errors: While it doesn’t detect all errors, a discrepancy in the trial balance total points towards certain types of errors, making their detection easier.
To summarise ledger accounts: It provides a consolidated list of all account balances at a glance, acting as a summary of the ledger.
To aid in preparing financial statements: The balances presented in the trial balance are directly used to prepare the Trading Account, Profit & Loss Account, and Balance Sheet.
Preparation of Trial Balance:
Steps in preparing a Trial Balance:
Ascertain the balance of each ledger account: This involves balancing all individual ledger accounts e.g., Cash A/c, Bank A/c, Capital A/c, Purchases A/c, Sales A/c, Debtors A/c, Creditors A/c, etc..
Identify debit and credit balances:
Debit Balances: Assets, Expenses, Losses, Drawings.
Credit Balances: Liabilities, Capital, Incomes, Gains.
Draw a two-column statement: Prepare a statement with columns for “Particulars” (Account Name), “L.F.” (Ledger Folio), Debit Amount (₹)”, and “Credit Amount (₹)”.
List all accounts: Enter the name of each ledger account and its final balance in the appropriate debit or credit column.
Total the columns: Sum up the debit column and the credit column.
Tallying the Trial Balance: If the total of the debit column equals the total of the credit column, the trial balance is said to be “tallied,” indicating arithmetical accuracy.
Errors of Book:
Errors in accounting refer to unintentional mistakes or omissions made in the process of recording, classifying, and summarising financial transactions. They are distinct from fraud, which is intentional misrepresentation.
Types of Errors:
Errors can be broadly classified into two categories:
- Errors that affect the Trial Balance (One-sided Errors): These errors cause the debit side of the trial balance to not match the credit side. They are usually discovered when the trial balance fails to tally. A Suspense Account is often used to temporarily balance the trial balance until these errors are located and rectified.
Examples include:
- Errors in Casting (Totalling): Incorrect totalling of subsidiary books.
- Example: Sales book total undercast by ₹1,000.
- Errors in Balancing: Incorrectly calculating the balance of a ledger account.
- Errors in Posting:
- Posting to the wrong side: Debiting an account instead of crediting it, or vice versa.
- Posting the wrong amount: Posting ₹500 instead of ₹5,000.
- Omission of posting to one account: Not posting a transaction from the journal to one of the concerned ledger accounts.
- Double posting to one account: Posting the same amount twice to a single account.
- Errors in Carrying Forward: Incorrectly carrying forward totals from one page to another.
- Errors in Transposition: Reversing the order of digits e.g., ₹54 recorded as ₹ The difference is usually divisible by 9.
- Errors in Sliding: Misplacing the decimal point e.g., ₹5,000 recorded as ₹
- Errors that do not affect the Trial Balance (Two-sided Errors): These errors do not prevent the trial balance from tallying because they affect both the debit and credit aspects equally, or they are entirely omitted. These errors are harder to detect and require careful scrutiny of the books.
Examples include:
- Errors of Complete Omission: A transaction is not recorded anywhere in the books.
- Errors of Principle: A transaction is recorded violating an accounting principle.
- Compensating Errors: Two or more errors cancel each other out.
- Posting to the wrong account but on the correct side and with the correct amount:g., Sales to X debited to Y’s account.
Suspense Account
A Suspense Account is a temporary ledger account opened in accounting to temporarily hold unidentified differences or incomplete transactions, particularly when a Trial Balance does not tally. Its primary purpose is to allow accountants to finalize the Trial Balance and proceed with preparing financial statements, while simultaneously providing time to investigate and rectify the underlying errors causing the discrepancy.
Question:
|
Particulars |
Amount |
Particulars |
Amount |
| Capital
Drawings Debtors Creditors Land & Building Plant Stock on 1-4-2022 Factory Expenses Office Expenses Purchases Return Stationery Freight |
2,50,000
24,000 57,000 28,500 1,80,000 1,20,000 22,800 16,600 7,700 6,000 500 2,500 |
Purchases
Sales Miscellaneous Expenses Miscellaneous Receipts Bad Debts Bills Receivable Loan from X Interest on X’s Loan Cash in Hand Goodwill |
2,15,300
3,80,000 8,200 3,600 7,100 5,000 20,000 3,000 8,400 10,000 |
Solution:
| S. No. | Account Name | Debit (₹) | Credit (₹) |
| 1. | Capital | 2,50,000 | |
| 2. | Drawings | 24,000 | |
| 3. | Debtors | 57,000 | |
| 4. | Creditors | 28,500 | |
| 5. | Purchases | 2,15,300 | |
| 6. | Sales | 3,80,000 | |
| 7. | Miscellaneous Expenses | 8,200 | |
| 8. | Miscellaneous Receipts | 3,600 | |
| 9. | Land & Building | 1,80,000 | |
| 10. | Plant & Machinery | 1,20,000 | |
| 11. | Stock (Opening) | 22,800 | |
| 12. | Bad Debts | 7,100 | |
| 13. | Factory Expenses | 16,600 | |
| 14. | Bills Receivable | 5,000 | |
| 16. | Loan from X | 20,000 | |
| 18. | Interest on X’s Loan | 3,000 | |
| 19. | Office Expenses | 7,700 | |
| 20. | Cash in Hand | 8,400 | |
| 22. | Goodwill | 10,000 | |
| 23. | Stationery | 500 | |
| 24. | Freight | 2,500 | |
| Total | 6,88,100 | 6,88,100 |