A Trial Balance is a statement that shows the total of debit and credit balances of accounts. The total of debit amounts shall be equal to the credit amounts for the trial balance to tally. Hence, it verifies the arithmetical accuracy of the postings in the ledger accounts. Trial Balance Accounting is thus an integral part of financial accounting.
Trial Balance Accounting and Searching of Errors
Trial balance accounting is significant in the preparation of final accounts. It involves summarizing of all the ledger accounts. When the debit amounts are equal to the credit amounts in the trial balance, we say that the trial balance has tallied. A tallied Trial Balance in trial balance accounting is the proof of the arithmetical accuracy of the ledger accounts though it is not an absolute proof. However, it does not disclose some errors which affect the debit amounts and credit amounts equally.
Some of the errors in the preparation of accounts are:
- Wrong totaling of the debit amounts and the credit amounts in the Trial Balance.
- Error in the total of Subsidiary books.
- Wrong posting of the total of Subsidiary books in the ledger.
- Omitting an account balance in the Trial Balance.
- Showing the account balances in the wrong column or with the wrong amount in the Trial Balance.
- Wrong calculation of the account balance.
- Error in posting a journal entry to the ledger
- Recording a transaction incorrectly in the Journal.
- Recording a transaction incorrectly in the Subsidiary Books
Classification of Errors
We can classify the above errors in the following categories:
- Errors of Commission: Errors due to the wrong posting of transactions to the ledger, wrong totaling of accounts, wrong balancing of accounts, the wrong casting of the day books, or wrong recording of the amount in the journal or the day books are errors of commission. These are of clerical nature and mostly affect the trial balance.
- Errors of Omission: The error of omission usually occurs at the time of recording a transaction in the journal or subsidiary books or at the time of posting to the ledger. These are of two types, error of complete omission and error of partial omission. When the accountant completely omits to record a transaction, it is the error of complete omission. On the other hand, suppose he records the transaction in the subsidiary book but forgets to post it in the ledger, this is the error of partial omission.
- Compensating Errors: When the net effect of two or more errors is nil, these are Compensating errors. These do not affect the trial balance.
- Errors of Principle: We record the journal entry of the transactions as per the accounting conventions and principles. The errors resulting due to the violation of these are errors of principle. A wrong classification of expenditure or income between capital and revenue is an error of principle.
Searching for Errors
When the trial balance does not tally, we need to search and find out the errors and correct them to prepare the financial statements. Following are the steps to locate the errors:
- Recheck the totals of debit and credit columns of the trial balance.
- Equate the account head in the trial balance with the ledger to check the difference in the amount or complete omission of the account.
- Compare the trial balance with that of the previous year to see the additions and deletions of accounts. If there is a major difference in any account balance, verify it for correctness.
- Balance the ledger accounts once more.
- Check the postings to the ledger from the journal entries or the subsidiary books.
- A difference may indicate the complete or partial omission of a posting. For example, a difference in the debit side may indicate that an amount has been recorded in the books of original entry but has been omitted to be posted on the debit side of an account.
- A difference of an amount divisible by two between the debit and credit side of the trial balance indicates a possibility of the wrong posting of an amount equal to half of the difference on the wrong side of another ledger account. For example, the total of the credit side of the trial balance is more by ₹1000. In this case, we shall scan all the credit entries with an amount of ₹500.
Solved Example for You
Q: Classify the following errors:
- A pays ₹5000 to B for the purchase of goods. The entry in the Cashbook is correct but posting in the ledger is only with ₹500.
- Credit purchases ₹10000 not recorded in the purchases book.
- Cash book is overcast by ₹1000 and Purchases Book is undercast by ₹1000.
- The purchase of machinery ₹50000 recorded in the Purchases Book.
- Sales Book is undercast by ₹250
- The purchase of furniture ₹20000 is not posted in the furniture account and an income of ₹20000 is also not posted.
- Error of Commission
- Error of Omission
- Compensating Error
- Error of Principle
- Error of Commission
- Compensating Error