Chapter 6 Trail Balance and Rectification of Errors

A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts. The task of preparing the statements is simplified because the accountant can take the balances of all accounts from the trial balance instead of going through the whole ledger. The trial balance is prepared to fulfill the following objectives : 1) To ascertain the arithmetical accuracy of the ledger accounts. 2) To help in locating errors. 3) To help in the preparation of the financial statements. (Profit & Loss account and Balance Sheet).

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Exercise 1

•  Q1 State the meaning of a trial balance? Ans: Trial Balance is the list of debit and credit balances, taken out from ledger. It also includes the balances of cash and bank taken from the cash book. Trial Balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books. Q2 Give two examples of errors of principle? Ans: 1) Purchase of furniture is debited to purchase account instead of furniture account. 2) If the amount spent on the repair of an old machinery is debited to the machinery account instead of the repairs account. Q3 Give two examples of errors of commission? Ans: 1) Purchase of goods from Ravi for ₹ 5,000 on credit entered in the purchase book as ₹500. 2) Sale of goods to Ram on credit for ₹ 420 has been entered in the journal as ₹240. Q4 What are the methods of preparing trial balance? Ans: a) Total Method: In this method, ledger accounts are not balanced. They are totaled. These totals are entered in the debit and credit columns. b) Balance Method: Under this method, the closing balances of ledger accounts are tabulated in a separate statement. The brought down balances are  brought to this statement. Q5 What are the steps taken by an accountant to locate the errors in the trial balance? Ans: Step1: Recheck the totals of both the debit and credit amount columns of the Trial balance. Step2: The exact figure of difference in the Trial Balance should be ascertained. After this, the subsidiary books should be gone through to see if any item of that amount remains unposted Step3: The difference should be halved to find out if some figure equal to half the difference has been posted on the wrong side of an account thereby making the difference double. Step4: The difference in the Trial Balance should be divided by 9. If the difference is completely divisible, it can be a mistake of transportation of figures. Step5: In case, the difference is in a round figure, say ₹1, ₹10, ₹100 etc. There will be a possibility of wrong totalling or wrong carry forwards of the totals of a subsidiary book or there will be an error in the balancing of an account. Step6: Check with the help of the Ledger whether the balance of each and every account including the balances of Cash and Bank have been included in the Trial Balance on the correct side and with the correct amounts. Step7: Check whether all the closing balances from the previous year’s Balance Sheet have been correctly carried forward and recorded in respective ledger accounts. Step8: Check the figures which are not clearly written. Step9: If the difference is of a very big amount, it is just possible that the balance of a certain Ledger account may not have been included in the Trial Balance. Step10: If, in spite of all the above efforts, there is still a difference in the Trial Balance, a complete checking of the postings of all the entries will be necessary. Q6 What is a suspense account? Is it necessary that is suspense account will balance off after rectification of the errors detected by the accountant? If not, then what happens to the balance still remaining in the suspense account? Ans: Suspense Account : Sometimes, inspired by the best efforts of an accountant, all the errors are not located and the Trial Balance does not tally. In such a situation, to avoid the delay in the preparation of final accounts, the difference in the trial balance is placed to a newly opened account known as “Suspense Account” and the Trial Balance tallies. If the debit side of the Trial Balance exceeds the credit side, the difference will be put on the credit side of the suspense account and if the credit side of the Trial Balance exceeds the debit side, the suspense account will be debited. After including the balance of suspense account in the Trial Balance, it will appear to be tallied. Q7 What kinds of errors would cause differences in the trial balance. Also list examples that would not be revealed by a trial balance? Ans: 1) Wrong Casting 2) Posting to the Wrong Side 3) Posting of Wrong Amount 4) Omission of Posting of One Side of an Entry 5) Double Posting in a Single Account 6) Errors of Totalling and Balancing of Accounts in the ledger. Q8 State the limitations of trial balance? Ans: A trial balance has some limitations : 1) It does not prove that all transactions have been recorded 2) It does not prove that the ledger is correct 3) Numerous errors may exist even though the trial balance columns agree 4) It cannot find the missing entry from the journal 5) It cannot find the missing entry from the ledger 6) It cannot protect the repeated postings 7) It cannot protect the offsetting errors 8) It cannot protect the errors of principles 9) It cannot protect the errors of commission 10) It cannot protect the errors of omission In short, a trial balance does not guarantee freedom from recording errors.

Exercise 2

•  Q1 Describe the purpose for the preparation of trial balance. Ans: Trial balance is not the financial statements and it could not be submitted to the key end users instead of financial statements. This statement is prepared for the purpose of drafting financial statements, reviewing errors, checking mathematically correctness of entry, and so on. Normally at the end of the period, the accountant might need to prepare the financial statements and other related financial reports for management. Accountants need to make sure that the ledgers are correctly entered according to the accounting equation so that the financial statements are mathematically correct. This is the reason why an accountant needs to prepare a trial balance. In short, trial balance is prepared for the purpose of identifying and detecting errors that enter in general ledgers. It is also used as the working papers for accountant and auditors in drafting financial statements. As mentioned above, if the debit side is over the credit side, that means the accounting entry is not mathematically correct. In this case, the accountant needs to double check his accounting entries and classification. Maybe the amount of the specific transaction is not equally entered between the debit side and credit side. Or maybe the classification is not correctly classified with respect to accounting equations. It is important to note that trial balance could not detect all the errors that make during the entry. For example, the elimination of entities both in debit and credit still makes trial balance reconcile. Trial balance is prepared in four or five columns and lists down all closing general ledgers by ranging the ledgers from assets account to liabilities and equity. Income statements account like revenues and expenses are listed down subsequently after equity. This is to make sure that the preparer of financial statements is easy to identify which items belong to assets, liabilities, equity, revenues and expenses. The main important element that should include in this statement is the account name, reference, balance before adjustment, adjusting entry, and balance after adjustments. Sometimes, this statement is printed out along with the five financial statements for management purposes. But it is generally not. Q2 Explain errors of principle and give two examples with measures to rectify them. Ans: When some fundamental principle of Accountancy is violated while recording a transaction, the error is termed as error of principle. These errors are committed in those cases where a proper distinction between capital and revenue items is not made, i.e., a capital expenditure is treated as a revenue expenditure or vice-versa. These errors may be of two types:- a) When a capital expenditure is treated as revenue expenditure. For example, if the purchase of furniture is treated as an ordinary purchase and is thus debited to purchase account instead of furniture account, it will be an error of principle. Similarly, if the amount spent on the extension of a building is debited to a repairs account instead of a building account, it is also an error of principle. b) When a revenue expenditure is treated as capital expenditure For example, if the amount spent on the repair of an old machinery is debited to the machinery account instead of the repairs account. Measures to Rectify Errors of Principle If an irrelevant account has been debited instead of the correct account: Debit the account that should have been debited. Credit the account that has been erroneously debited. Q3 Explain the errors of commission and give two examples with measures to rectify them. Ans: Errors of Commission: If a wrong amount is entered either in the Journal or in the Subsidiary Books, the Trial Balance will tally because the same amount (though wrong) will be posted in both the accounts affected by the transaction. For example, sale of goods to Ram on credit for ₹420 has been entered in the Journal as ₹240. When the entry is posted to Ledger, Double Entry will be completed with ₹240, Ram being debited with ₹240, and sales account being credited with ₹240. In Spite of the inaccuracy in both the accounts, the Trial Balance will tally. Measures to Rectify Errors of Commission Let us consider the first example. Sales return from Megha Rs 1,600 were posted to her account as Rs 1,000. This is an error of commission. The rectification entry for the above error will be Suspense A/c     Dr.             600 To Megha                                       600 (Being sales return from Megha Rs 1,600 were posted to her account as Rs 1,000 now rectified) Let us consider the second example. Cash received from Karim Rs 6,000 posted to Nadim. This is an error of commission. The rectification entry for the above error will be Nadim               Dr.              6000 To Karim                                         6000 (Being cash received from Karim Rs 6,000, wrongly posted to Nadim’s account now rectified). Q4 What are the different types of errors that are usually committed in recording business transactions? Ans: Keeping in view the nature of errors, all the errors can be classified into the following four categories :- (i) Errors of Omission: The errors of omission are generally committed at the time of recording the transaction in the books of original entry or while posting to the ledger. This can further be classified in two different categories (a) Error of complete omission (b) Error of partial omission When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission and when the recording of transaction is partly omitted from the books, it is an error of partial omission. (ii) Errors of Commission: These are the errors which are committed due to wrong posting of transactions, wrong totaling or balancing of the accounts, wrong casting of the subsidiary books or wrong recording of amount in the books of original entry etc. (iii) Errors of Principle: Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue. This is very important because it will have an impact on financial statements. It may lead to under/over stating of income or assets or liabilities etc. (iv) Compensating Errors: When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Q5 As an accountant of a company, you are disappointed to learn that the totals in your new trial balance are not equal. After going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment account has a debit balance of 15,600 on the trial balance. However, you have figured out that a correctly recorded credit purchase of pendrive for 3,500 was posted from the journal to the ledger with a 3,500 debit to Office Equipment and another 3,500 debit to creditors accounts. Answer each of the following questions and present the amount of any misstatement : (a) Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance? (b) Is the balance of the creditors account overstated, understated, or correctly stated in the trial balance? (c) Is the debit column total of the trial balance overstated, understated, or correclty stated? (d) Is the credit column total of the trial balance overstated, understated, or correctly stated? (e) If the debit column total of the trial balance is 2,40,000 before correcting the error, what is the total of credit column. Ans: According to the given information, trial balance does not agree. Pen-drive is wrongly debited to office equipment account, instead of stationery account and supplier account is debited instead of crediting. Due to these mistakes, the following errors are committed: The balance of office equipment is overstated by Rs. 3,500. The balance of creditors account is understated by Rs. 7,000. The total of the debit column of the trial balance is correctly stated. The total of the credit column of the trial balance is understated by Rs. 7,000. If the total of the debit column of the trial balance is Rs. 2,40,000 before rectifying error, the total of the credit column of the trial balance is Rs. 2,33,000 (i.e., Rs. 2,40,000 - Rs. 7,000).

Exercise 23

•  Q1 Tick the Correct Answer Agreement of trial balance is affected by: (a) One sided errors only. (b) Two sided errors only. (c) Both (a) and (b). (d) None of the above. Ans: (c) Both (a) and (b). Q2 Which of the following is not an error of principle: (a) Purchase of furniture debited to purchases account. (b) Repairs on the overhauling of second hand machinery purchased debited to repairs account. (c) Cash received from Manoj posted to Saroj. (d) Sale of old car credited to sales account. Ans: (c) Cash received from Manoj posted to Saroj. Q3 Which of the following is not an error of commission: (a) Overcasting of sales book. (b) Credit sales to Ramesh  5,000 credited to his account. (c) Wrong balancing of machinery account. (d) Cash sales not recorded in cash book. Ans: (d) Cash sales not recorded in cash book. Q4 Which of following errors will be rectified through suspense account: (a) Sales return book undercast by Rs. 1,000. (b) Sales return by Madhu Rs. 1,000 not recorded. (c) Sales return by Madhu Rs. 1,000 recorded as Rs. 100. (d) Sales return by Madhu Rs. 1,000 recorded through purchases returns book. Ans: (a) Sales return book undercast by Rs. 1,000. Q5 If the trial balance agrees, it implies that: (a) There is no error in the books. (b) There may be two sided errors in the book. (c) There may be one sided error in the books. (d) There may be both two sided and one sided errors in the books. Ans: (b) There may be two sided errors in the book. Q6 If suspense account does not balance off even after rectification of errors it implies that: (a) There are some one sided errors only in the books yet to be located. (b) There are no more errors yet to be located. (c) There are some two sided errors only yet to be located. (d) There may be both one sided errors and two sided errors yet to be located. Ans: (a) There are some one sided errors only in the books yet to be located. Q7 If wages paid for installation of new machinery is debited to wages Account, it is: (a) An error of commission. (b) An error of principle. (c) A compensating error. (d) An error of omission. Ans: (b) An error of principle. Q8 Trial balance is: (a) An account. (b) A statement. (c) A subsidiary book. (d) A principal book. Ans: (b) A statement. Q9 A Trial balance is prepared: (a) After preparation financial statement. (b) After recording transactions in subsidiary books. (c) After posting to ledger is complete. (d) After posting to ledger is complete and accounts have been balanced. Ans: (d) After posting to ledger is complete and accounts have been balanced.