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Trial Balance and Rectification of Errors:

Trial Balance and Rectification of Errors are not independent of each other. The trial balance is prepared:

  1. After the preparation of the ledger books and
  2. Before the preparation the trading profit and loss account of the firm.

The need for rectifying accounting errors arises after the preparation of the trial balance. The trial balance is crucial for the identification of such errors before proceeding with its rectification. In this article, read all about trial balance and rectification of errors.

Introducing Trial Balance

The trial balance, as mentioned above, is prepared after preparing the journal and ledger books. It is a simple double entry accounting statement that typically attempts to balance out every account that has been opened in the ledger and compile it into two categories.

The trial balance has two columns – the debit as well as the credit columns which are meant to tally after all the entries. A tallied trial balance grants the accountant the permission to go ahead with the trading profit and loss account with all the accurate and effective data thus available.

What is the purpose of preparing a trial balance?

Before moving onto the preparation of the trading profit and loss account of a firm, it is of paramount importance to check the precision and correctness of the ledger accounts so prepared. If a trading profit and loss account were prepared with errors originating from the ledger accounts, there could be consequential errors that do not cause the firm’s financial balance sheet to tally at the end of the accounting year. This can, in turn, lead to the wastage of financial resources, wastage of valuable time and hinder the process of financial decision making.

The trial balance avoids such accounting mishaps by helping in identifying the existence of accounting errors in the ledgers before proceeding to the trading profit and loss account.

How does the trial balance indicate an error?

In case of an accounting error in the ledger, the debit and credit columns in the trial balance will not tally. In other words, when the trial balance does not tally, it indicates that an error exists in one of the ledgers.

What is the basic trial balance format?

There are two ways of preparing a trial balance. Each method is different than the other in many aspects.

  1. The Balance Method – is prepared only after balancing out all the accounts of the ledgers. This method is more commonly used due to its simplicity in understanding and a higher level of accuracy.
  2. Total Amount Method – considers the total debit amount as well as the total credit amount in every ledger account. It does not necessarily have to be prepared after balancing the ledgers.

The basic format for the balance method of trial balance is demonstrated as follows:

Sl No. Account Name Ledger Folio Debit Balance Credit balance
1

2

3

4

5

6

7

8

9

10

11

12

13

Purchases account

Sales account

Capital account

Drawings account

Salary account

Purchase return account

Sales return account

Bank account

Bank loan account

Discount allowed account

Discount received account

Depreciation account

Asset account

1

2

3

4

5

6

7

8

9

10

11

12

13

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

abcd abcd

Introducing Accounting Errors

In simple words, errors that occur while accounting is known as accounting errors. These errors are often non-fraudulent and have no ill-intention. Accounting errors, in other words, are also known as unintentional accounting mistakes that are usually the outcome of stress, excessive accounting workload, poor accounting knowledge, ignorance or even fatigue.

These accounting errors can happen either while entering information into the journals or while preparing the ledgers. Such accounting errors are usually detected and rectified after preparing the trial balance and are hence prevented from affecting further financial reports.

What are the various accounting errors?

There are 2 broad ways of classifying accounting errors:

1. Errors that do not affect the tallying of the trial balance – for example the error of complete omission, the error of principle, compensation error, and the error of recording.

2. Errors that do affect the tallying of the trial balance – for example the error of partial omission, the error of carrying forward, and the error of casting

Further, there are 2 broad categories of the various types of errors:

I. Errors of Principle

If any entry into the journals or ledgers is recorded without abiding by the principles and rules of the Generally Accepted Accounting Principles (GAAP), such errors are classified as errors of principle. In other words, ignoring or violating the Generally Accepted Accounting Principles can lead to errors of principle.

Errors of principle often have a considerable impact on the financial statements and reports.

II. Clerical Errors

Clerical errors, on the other hand, refer to minor and unintentional mistakes made by the accountants and clerks during the normal course of accounting tasks. They may or may not have an impact on the agreement of the trial balance. Clerical errors are of 3 kinds:

a. Error of omission

When a transaction has been omitted either partially or completely in a double entry, it leads to an error of omission. The error of omission is further categorized into:

  • Complete omission – errors resulting from complete omission occurs when a transaction has been completely omitted from being recorded in either the journal entry or the ledger account.
  • Partial omission – errors resulting from partial omission occurs when only one aspect (either the debit or credit) of a transaction is posted to the ledger account

b. Error of commission

When an error occurs due to wrongful recording, wrongful casting, wrongful posting or wrongful carry forward, it is known as an error of commission. The error of commission is further categorized into:

  • Recording error – errors resulting from recording transactions wrongly in the subsidiary journal books were known as recording errors.
  • Casting error – errors resulting from totalling the subsidiary books wrongly were known as casting errors.
  • Posting error – errors resulting from posting journal transactions wrongfully into the ledgers are known as posting errors
  • Carrying forward error – errors that result from mistakes while carrying forward of the total from the previous page to the next page is known as carrying forward error.

c. Compensating errors

Compensating errors refer to the error that arises when two or more errors are recorded in a manner in which the total impact of the recorded errors is nullified in the trial balance.

For example: error in sales accounts by overstating Rs. 50,000 and an error in the supplier’s account by understating Rs. 50,000. The impact of the trial balance is neutralized

Trial Balance and Rectification of errors – the correlation

Usually, when an error is made and later detected, it is often best suggested to overwrite the error with the righteous information. In accounting, this practice is considered as an offensive malpractice and must not be taken to at any cost.

Rectifying accounting errors can be broadly classified into two parts:

1. Rectification of 2 sided errors – These refer to the rectification of those errors that do not affect the agreement (tallying) of the trial balance.

For example

Credit purchase of Rs. 10,500 from LMN Ltd was recorded in the sales books.

If the error of recording was:

LMN Ltd A/C                                         Dr                  10,500         –

To Sales A/C                                                               –          10,500

The corrected entry would be:

Purchases A/C                                         Dr                 10,500         –

To LMN Ltd A/C                                                      –          10,500

The rectified entry would be:

Purchases A/C                                         Dr                  10,500        –

Sales A/C                                                 Dr                   10,500        –

To LMN Ltd A/C                                                      –           21,000

2. Rectification of 1 sided errors – These refer to the rectification of those errors that do have an impact on the agreement and tallying of the trial balance. Such errors can be rectified either:

  • After the preparation of the trial balance

1 sided errors detected after the preparation of the trial balance can be rectified by transferring the difference in the trial balance into the Suspense A/C. The suspense account is a temporary account that is created in order to transfer any difference in the total balance from the trial balance into it until errors are located and rectified.

  • Before the preparation of the trial balance

1 sided errors detected before the preparation of the trial balance can be rectified by either crediting or debiting the respective accounts with the respective amount and accompanying it with an explanatory note in the particulars column.

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