Professor Vipin 2014
Unit 6
Trial Balance and Rectification of Errors
Meaning
Trial Balance may be defined as a statement which contains balances of all ledger accounts on a
particular date.
Objectives of Trial Balance
1. To check arithmetical accuracy: Arithmetical accuracy in ledger posting means writing correct
amount, in the correct account and on its correct side while posting transactions from various
original books of accounts, such as Cash Book, Purchases Book, Sales Book, etc. It also means
not only the correct balance of ledger account but also the totals of the special purpose Books.
2. To help in preparing Financial Statements: The ultimate objective of the accounting is to prepare
financial statements i.e. Trading and Profit and Loss Account, and Balance sheet of a business
enterprise at the end of an accounting year. These statements contain balances of various
ledger accounts. As Trial Balance contains balances of all ledger accounts, in financial
statements the balances of ledger accounts are carried from the Trial balance for proper analysis
3. Helps in locating errors: If total of two columns of the trial balance agrees it is a proof of
arithmetical accuracy in the ledger posting. However, if the totals of the two columns do not
tally it indicates that there is some mistake in the ledger accounts. This prompts the accountant
to find out the errors.
4. Helps in comparison: Comparison of ledger account balances of one year with the corresponding
balances with the previous year helps the management taking some important decisions. This is
possible by using the Trial Balances of the two years.
5. Helps in making adjustments: While making financial statements adjustments regarding closing
stock, prepaid expenses, outstanding expenses etc are to be made. Trial balance helps in
identifying the items requiring adjustments in preparing the financial statements. Trial Balance
is generally prepared at the end of the year. However it can be prepared at any time during the
accounting year to check the accuracy of the posting.
Steps to Prepare Trial Balance
(i)
(ii)
(iii)
(iv)
At first ascertain the balance account wise of all the ledger accounts.
Write the name of the ledger account in the ledger account column.
Write against the name of the ledger account, the balance amount/total amount, debit
balance/total in the debit column; and credit balance/ total in the credit column.
Add the debit balance/total amount column and credit balance/total amount column.
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There are three methods of preparing Trial Balance
1. Balance Method: In this Balance method, the balance of each account (which may be debit
balance or credit balance) is extracted and written against each account; we write debit balance
in the debit column and credit balance in the credit column.
2. Total Method: In this method the total of both sides of every account in the ledger is written
against the name of the respective account without balancing them in the form of debit and
credit balances respectively.
3. Balance totals Method: Trial Balance is prepared by combining the first and second methods.
However, in practice the trial balance is prepared with debit and credit balances of various
accounts in the ledger. Normally balance method is used.
Example 1
Mr. Rajesh ledger shows the following balances. Prepare a trial balance using balance method.
Sl No
1
2
3
4
5
6
7
8
Names
Rajesh Capital A/C
Roshan A/c
Machinery A/C
Ravi A/C
Sales A/C
Wages A/C
Purchases A/C
Cash A/C
Total
Amount
60000
20000
27000
20000
70000
5000
62000
36000
150000
Solution 1
Sl
No
1
2
3
4
5
6
7
8
Number of
Accounts
Rajesh Capital A/C
Roshan A/c
Machinery A/C
Ravi A/C
Sales A/C
Wages A/C
Purchases A/C
Cash A/C
Total
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L/F Debit
Credit
60000
20000
27000
20000
70000
5000
62000
36000
150000 150000
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Professor Vipin 2014
Example 2
From the following ledger balances extracted from the books of Mr. Avinash prepare a Trial Balance as
on 31-12-2012
Sl
No
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23
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28
29
Name of the Account
Capital A/C
Plant & Machinery A/C
Debtors A/C
Interest on Loan A/C
Wages A/C
Salary A/C
Carriage Inwards A/C
Carriage outwards A/C
Sales A/C
Returns Outward A/C
Returns inward A/C
Advertisement A/C
Office Rent A/C
Insurance A/C
Furniture A/C
Buildings A/C
Bills Receivable A/C
Cash A/C
Bank A/C Dr
Commission A/C
Opening Stock A/C
Purchases A/C
Creditors A/C
Bad Debts A/C
Bills Payable A/C
Bank Loan A/C
Discount Received A/C
Interest on Investment A/C
Investment A/C
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Balance
440000
260000
100000
4000
2400
5000
1000
1400
600000
5000
4000
2900
4600
1560
45000
260000
6000
45000
70000
1000
120000
500000
500000
7000
120000
23100
20760
32000
300000
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Professor Vipin 2014
Solution 2
Sl No
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3
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15
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21
22
23
24
25
26
27
28
29
Name of the Account
Capital A/C
Plant & Machinery A/C
Debtors A/C
Interest on Loan A/C
Wages A/C
Salary A/C
Carriage Inwards A/C
Carriage outwards A/C
Sales A/C
Returns Outward A/C
Returns inward A/C
Advertisement A/C
Office Rent A/C
Insurance A/C
Furniture A/C
Buildings A/C
Bills Recievable A/C
Cash A/C
Bank A/C Dr
Commission A/C
Opening Stock A/C
Purchases A/C
Creditors A/C
Bad Debts A/C
Bills Payable A/C
Bank Loan A/C
Discount Received A/C
Interest on Investment A/C
Investment A/C
Total
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L/F Debit
Credit
440000
260000
100000
4000
2400
5000
1000
1400
600000
5000
4000
2900
4600
1560
45000
260000
6000
45000
70000
1000
120000
500000
500000
7000
120000
23100
20760
32000
300000
1740860 1740860
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Rectification of Errors and Types of Errors
Accounting Errors Can Take Following Form
1. Omission of recording a business transaction in the Journal or Special purpose Books
2. Not posting the recorded transactions in various books of accounts to the respective accounts in
ledger
3. Mistakes in totaling or in carrying forward the totals to the next page
4. Mistake in recording amount wrongly, writing it in a wrong account or on the wrong side of the
account.
Again there may be two types of accounting errors (i) That cause the disagreement of trial balance, (ii)
That do not affect the agreement of Trial Balance.
Errors of Commission
These errors by definition are of clerical nature. These errors may be committed at the time of recording
and/or posting. At the time of recording, the wrong amount may be recorded in journal which will be
carried throughout. Such errors will not affect the agreement of the trial balance. These errors may also
be committed at the time of posting, by way of posting wrong amount, to the wrong side of an account
or in the wrong account. The errors resulting in posting to wrong account will not affect agreement of
trial balance, whereas, other errors of posting will resulting disagreement of trial balance. For example,
an amount of Rs.10,000 received from customer (Debtor) is correctly recorded on the debit side of the
cash book but while posting, the customer’s account is credited with Rs.1,000. This is an error, which is
committed at the time of posting, by posting wrong amount to the account. This will result in
disagreement of trial balance, since, the credit total of the trail balance will be short by Rs. 9,000.
Errors of Omission
The errors of omission may be committed at the time of recording the transaction in the books of
original entry or while posting to the ledger. An omission may be complete or partial. Such errors are
known as errors of omission. For example, Machinery purchased for Rs. 50,000 by issuing a cheque is
recorded first in the credit side of cash book, in the bank column.
Suppose it is not posted to the debit of machinery account, it is an error of partial omission. The trial
balance will not tally. Suppose the transaction is not entered in the cash book and hence ignored
completely, this is a case of complete omission. It means as if the transaction has not taken place at all.
It will not affect the trial balance and hence the trial balance will tally. This is true only in case of
complete omission.
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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 violations are known as errors of principle.
As an illustration, Periodicity principle requires maintaining proper distinction between capital and
revenue items. An error of principle may occur due to incorrect classification of expenditure or receipts
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. For example, amount
spent on additions to the buildings should be treated as capital expenditure and must be debited to the
asset account. Instead, if this amount is debited to maintenance and repairs account, it is treated as a
revenue expense. This is an error of principle. Since instead of asset account, i.e. buildings, the
maintenance and repairs account (expense) is debited, the trial balance will still tally but would not be
correct as per generally accepted accounting principles.
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. They do not affect the tallying
of the trial balance. For example: In a credit sale transaction, the sales account is credited in excess by
say, Rs.5,000 and similarly the suppliers account in case of a credit purchase is understated by Rs.5,000,
this is a case of two errors compensating for each other’s effect. It is to be noted that extra credit to the
sales account is offset by lower credit to the creditor’s account, both being credit balance. Since, one
plus is set off by the other minus, the net effect of these two errors being of compensating nature and
do not affect the agreement of trial balance.
Rectification
An error in the books of original entry if discovered before posting to the ledger, may be corrected by
crossing out the wrong amount by a single line and writing the correct amount above the struck off
amount and putting an initial at the place.
An error in an amount posted to the correct ledger account may also be corrected in a similar way or by
making an additional posting for the difference in amount and giving an explanatory note in the
particulars column provided that trial balance is not prepared. But errors should never be corrected by
erasing. Crossing/ Erasures reduce the authenticity of accounting records and give an impression that
something is being concealed or manipulated.
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Suspense Account
In spite of best efforts, locating errors is not an easy task and may take some time. Unless detected and
located, errors cannot be corrected. To avoid delay in the preparation of financial statements, the
amount of difference of the trial balance is temporarily put in an account called “Suspense Account” so
as to tally the trial balance by putting the difference on the shorter side. When all errors are located and
rectified, the suspense account would close automatically. But in case some balance still remains in the
suspense account, due to non location of errors, it will be shown in the balance sheet on the asset side
in case of debit balance and on the liabilities side in case of credit balance.
Example 1
Rectify the following errors and ascertain the amount of difference in trial balance by preparing
suspense account
1)
2)
3)
4)
5)
6)
Credit sales to Mohan Rs. 7000 were not posted.
Credit purchase from Rohan Rs. 9000 were not posted
Goods returned to Rakesh Rs. 4000 were not posted
Goods returned from Mahesh Rs. 1000 were not posted
Cash paid to Ganesh Rs. 3000 was not posted
Cash sales Rs. 2000 were not posted.
Solution 1
Date Particulars
1 Mohan A/C
To Suspense A/C
L/F
Debit Credit
7000
7000
(Being credit sales to Mohan not posted now rectified)
2 Suspense A/C
To Rohan A/C
9000
(Being credit purchase from Mohan not posted now rectified)
3 Rakesh A/C
To Suspense A/C
4000
(Being goods returned to Rakesh not posted now rectified)
4 Suspense A/C
To Mahesh A/C
1000
(Being goods returned from Mahesh not posted now rectified)
5 Ganesh A/C
To Suspense A/C
3000
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9000
4000
1000
3000
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Professor Vipin 2014
(Being cash paid to Ganesh not posted now rectified)
6 Suspense A/C
To Sales A/C
2000
2000
(Being cash sales not posted now rectified)
Suspense Account
Date
Particulars
To Rohan A/C
To Mahesh A/C
To Sales A/C
To Difference as per Trial Balance
Amount Date
9000
1000
2000
Particulars
By Mohan A/C
By Rakesh A/C
By Ganesh A/C
2000
14000
Amount
7000
4000
3000
14000
Example 2
The trial balance of Arun on 31st December 1998 showed a difference of Rs. 580 (excess debit). It was
put to a Suspense Account and the books were closed. On going through the books in January 1999, the
following errors were discovered. Pass rectifying journal entries and prepare suspense account:
1)
2)
3)
4)
5)
6)
Rs. 540 received from Mehta was posted to the debit of his account.
Rs. 100 being purchases returns was posted to the debit of purchases account.
Discount of Rs. 200 received, entered in the cash book was not posted in the ledger.
Rs. 574 paid for repairs to motor car was debited to the motor car account as Rs. 174.
A sale of Rs. 350 to Sethi was entered in the sales book of Rs. 530
While carrying forward total of one page in Kalra’s account, the amount of Rs. 250 was written
on credit side instead of debit side.
7) The purchase of machinery on Jan 1st 1998 for Rs. 6000 was entered in purchases account.
Date Particulars
1 Suspense A/C
To Mehtha
(Being Rs. 540 received from Metha
debited to his account)
2 Suspense A/C
To Purchases A/C
To Purchases Returns A/C
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L/F Debit
Credit
1080
1080
200
100
100
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Professor Vipin 2014
(Being purchases returns Rs. 100
posted to the debit side of
purchases a/c)
3 Suspense A/C
To Discount A/C
200
200
(Being discount received but not
posted to discount a/c)
4 Repairs A/C
To Motor Car A/C
To Suspense A/C
574
174
400
(Being repairs to motor car Rs. 574
wrongly debited as Rs. 174)
5 Sales A/C
To Sethi
180
180
(Being sales of Rs. 350 to Sethi
entered in the Sales book as Rs. 530)
6 Kalra A/C
To Suspense A/C
(Being Kalra a/c credited by Rs. 250
instead of being debited by Rs. 250)
7 Machinery A/C
To Purchases A/C
500
500
6000
6000
(Being purchases of machinery
debited to purchases a/c of
machinery a/c)
Suspense Account
Date Particulars
To Mehta
To Purchases
To Purchases Returns A/C
To Discount A/C
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Amount Date Particulars
1080
By Balance b/d
100
By Repairs A/C
100
By Kalra
200
1480
Amount
580
400
500
1480
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