When books of accounts are prepared in accordance with the accounting principles, both the debit and credit side of the trial balance should match with each other. Even if there is a minor difference, there is some accounting error. Errors in trial balance need to be located and rectified. It is not safe to ignore even a very small error. A small difference may be as a result of various errors in accounting. There are various types of errors like an error of omission, error of commission, compensating error, an error of principle. There are various steps to locate error.
Introduction to an Accountant
An accountant must have a good understanding of accounting concepts, principles, policies and the entity’s business while performing accounting work.
It is the responsibility of an accountant and bookkeeper to locate the error in the books of accounts and rectify it at the earliest.
An accountant should follow the steps to locate errors and rectify them so that the financial statements of an entity show its true financial position.
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There are errors which affect the trial balance and also the errors which do not affect the trial balance. Errors like the wrong casting of the subsidiary books, wrong balancing of an account, posting an amount on the wrong side, writing a balance in the wrong column of the trial balance, totaling the trial balance wrongly, entering an incorrect amount in the trial balance etc. affects trial balance. Whereas errors like the error of principle, compensating error etc do not affect the trial balance.
A difference in the trial balance is an indication of an error in the books of account. So, it is very important to locate such errors and rectify them. Because in case of difference in trial balance, final accounts of an entity cannot be prepared.
Steps to locate Error in Trial Balance
- Check the totals of both the columns of trial balance.
- Check that the cash balance and bank balance, discount allowed (if any) and discount received (if any) have been written in the trial balance correctly.
- Calculate the exact difference in the trial balance. Check whether there is an omission of any ledger balance in the trial balance.
- Also, check the ledger accounts and balances again. Check the posting of ledger balances to trial balances.
- Then, check the totaling of subsidiary books. Check, if there is any difference in carrying forward and brought forward of totals. Thorough checking of subsidiary books and totals should be done. Posting to ledger accounts should also be checked thoroughly. Subsidiary books should be checked again in case the difference is 1/-, 100, 112 etc
- If the difference is very big, the balance of various accounts should be checked. This can also be checked by comparing the current trial balance with the previous year trial balance. In case the difference is so material it should be checked.
- It should be checked that the correct amount has been posted on the correct side. It is possible that the amount has been posted on the wrong side.
- If still there is a difference in trial balance, complete checking of the books should be done. Posting of all the entries (opening, closing) should be checked. It is always better to start from the nominal accounts.
Even after applying all the procedure and measures, if we are unable to detect all the errors then we shall transfer the difference to a suspense account temporarily.
Solved Example for You
What is a Suspense Account?
Answer: – In case of some errors, the debit side and credit side of trial balance do not match. A suspense account is a temporary measure for rectification of mistakes in the books of account.
In a case where we detect the errors before closing the ledger accounts, then we rectify such errors by making a posting at the debit side or credit side as the case may be. There is no need to open a suspense account in such a case.
Suspense account facilitates the passing of rectification entries in the books of account. It is also useful in completing the rectification entries having the incorrect amount. We use a suspense account to show the difference in trial balance. It also facilitates the completion of a trial balance.
We prepare a suspense account after preparation of trial balance. When the totals of the debit side and credit side of trial balance do not match each other, we transfer this difference to the suspense account. After preparation of trial balance, we need to check the books of accounts again. Errors are located and rectification entries are made as per the case.
If the errors are not rectified then suspense account will continue to show balance. In such cases, efforts are made continuously to locate such errors and rectify them as early as possible. Suspense account gets closed when all the errors are rectified and no balance left.