Chapter 6 Trail Balance and Rectification of Errors

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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:

1. The balance of office equipment is overstated by Rs. 3,500.
2. The balance of creditors account is understated by Rs. 7,000.
3. The total of the debit column of the trial balance is correctly stated.
4. The total of the credit column of the trial balance is understated by Rs. 7,000.
5. 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).

Trial Balance Total = ₹ 5,17,000

State the wrong entry recorded in the book of accounts

Correct effect should have been:

The rectification entry will be:

State the wrong entry recorded in the book of accounts

Correct effect should have been:

The rectification entry will be:

State the wrong entry recorded in the book of accounts

Correct effect should have been:

The rectification entry will be:

State the wrong entry recorded in the book of accounts

Correct effect should have been:

The rectification entry will be:

This is an error of Commission.
The wrong effect has been:

The correct effect should have been:

The rectification entry will be.

This is an error of Partial Commission.
The wrong effect has been:

The correct effect should have been:

The rectification entry will be.

This is an error of Commission.
The wrong effect has been:

The correct effect should have been:

The rectification entry will be.

This is an error of Commission.
The wrong effect has been:

The correct effect should have been:

The rectification entry will be.

(c) Both (a) and (b).

(c) Cash received from Manoj posted to Saroj.

(d) Cash sales not recorded in cash book.

(a) Sales return book undercast by Rs. 1,000.

(b) There may be two sided errors in the book.

(a) There are some one sided errors only in the books yet to be located.

(b) An error of principle.

(b) A statement.

(d) After posting to ledger is complete and accounts have been balanced.