ELEMENTARY FINANCE
- 0N LINE
Lesson 4 - Trial Balance & The Rectification of Errors
Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.
About the class- Monthly
Lesson 4 - Trial Balance and Rectification of Errors
We have seen so far, that all business transactions are first entered in the journal or Subsidiary Books and then posted to the ledger. We have also seen that every amount entered on the debit side of an account has a corresponding entry on the credit side of another account. Hence, it is but logical, that the total of the entire debit balances should agree with the total of all the credit balances.
In this chapter we will learn a few things on the following:
- What is a Trial Balance?
- Objectives of a Trial Balance
- Specimen of a Trial Balance
- Different types of Errors
- Steps to locate Errors
- Rectification of Errors
- Suspense Account
What is a Trial Balance?
After the entries in the journal are posted to the ledger, it is balanced. The debit and credit balances of the various accounts are tabulated and a statement known as the Trial Balance is prepared. In other words, the summary of balances is known as the Trial Balance. The trial balance shows the arithmetical accuracy of the accounting work.
Objectives of a Trial Balance
- It helps to check the arithmetical accuracy of the books.
- The financial statements are prepared based on the trial balance.
- It provides a summary of the ledger.
- Conclusions can be derived from a comparative study of two Trial Balances.
Serial No. Particulars LF Debit Credit
Rs. Ps. Rs. Ps.
Schedule of Debtors
When the goods are sold on credit, the buyer's account in the ledger will be debited. In order to avoid writing all the debtors' accounts individually in the Trial Balance, a list of debtors will be prepared and totalled. These totals will be taken to the trial balance under the heading Sundry Debtors. This list of debtors is known as the 'Schedule of debtors'.
Schedule of Creditors
Just as goods are sold to a number of customers on credit, there will also be a number of suppliers from whom goods are bought on credit. A separate account is maintained for each creditor. The accounts of all the creditors are totalled and the resultant amount is entered in the trial balance, under the heading Sundry Creditors. This list of creditors is known as the 'Schedule of Creditors'.
The debit side of the trial balance should be equal to the credit side of the trial balance. When both the sides tally, the arithmetical accuracy of the trial balance can be assumed.
Different types of Errors in the Trial Balance
The equalising of the two sides of the trial balance, is not the conclusive proof of the complete correctness of the books. There are certain errors, which will not affect the agreement of a trial balance.
Errors disclosed by the Trial Balance
- Error in casting: Errors in casting occur in the subsidiary books. This can be overcasting, where the totals are wrongly added on the higher side or undercasting, where the totals are wrongly added on the lower side.
- Errors in carrying forward or bringing forward the totals from one page to another.
- Errors in posting from subsidiary book to the ledger.
- Error in balancing: While balancing the ledger accounts the balance shown in the account may be higher or lower than the correct amount.
- Errors in the preparation of the Debtors Schedule and the Creditors Schedule.
- Forgetting to carry forward a balance of an account to the trial balance.
Errors not disclosed by the Trial Balance
- Errors of complete omission: If a transaction is not recorded, there will be no entry on the debit and credit side. Hence, the trial balance will agree. These errors are errors of omission, which are not disclosed by the balance sheet.
- Errors of amounts in original books: The trial balance will not be affected in such cases, because the same amount will be shown on both the sides of the trial balance.
- Posting to wrong accounts with correct amount and on the correct side, will not affect the trial balance.
- Compensatory Errors: Here one error is compensated or counter balanced by another. Underposting on one side is compensated by overposting on the other.
- Error of Principle: When transactions are recorded in contravention of the accounting principles, the errors are said to be errors of principle. For eg: when amounts spent or received are wrongly allocated between revenue and capital.
- Errors of duplication: Where entries are made twice in the journal and are posted twice to the ledger, the trial balance will tally and the error will not be disclosed.
Steps to locate Errors
- When there is a difference in the trial balance, by even a small amount, the error has to be located. Here are a few steps:
- Retotal the debit and credit columns of the trial balance. Recheck the totals of the Schedule of Debtors and Schedule of Creditors.
- Check that the cash and bank balances have been included.
- Divide the difference in trial balance by two and see if some figure equal to that (half the difference) appears in the trial balance. A balance could have been placed on the wrong side, creating the difference.
- Divide the difference by 9 .If it is evenly divisible, it is possible that some figures have been transposed.
- Check that there is no mistake in the balancing of the various accounts.
- Recheck the totals of the subsidiary books.
- If there is a large difference, compare the figures of the trial balance of the corresponding date of the previous year. Recheck any account that shows a very huge difference.
- If the difference is still not found, check the postings of all the accounts, starting from the posting of the subsidiary books.
- Check whether any item has been left unposted.
- Check whether all accounts are opened with the correct balances.
- Check Nominal accounts, Real accounts and Personal accounts in that order.
When errors are located after some time, their rectification can be done by passing a rectification entry and not by means of crossing the wrong amount and inserting the right one.
- A short debit is to be rectified by further debiting the account.
- Excess debit is to be rectified by crediting the excess amount to the account.
- Short credit is to be rectified by further crediting the account.
- Excess credit is to be rectified by debiting the excess amount to the account.
Rectification by Journal Entries
Some errors require rectification through journal entry. This happens when the amounts are equal and one account has to be debited and another credited through rectification.
An Example :-
A purchase of Rs.600 has been entered as Rs.400 in the Purchases Day Book. The rectification entry will be:
Purchases a/c Dr. 200
To Suppliers a/c 200
(Being rectification of wrong amount entered in the Day Book)
(The above is a case of short debit to Purchase a/c and short credit to Suppliers account).
Error of Principle
** Rs.400 spent on repairs to machinery debited to Machinery account. Here the amount should be debited to repairs account but has been debited to machinery account. The rectification entry will be
Repairs a/c Dr 400
To Machinery a/c 400
(Being transfer of repairs wrongly debited to Machinery a/c)
** An amount of Rs 400 paid by S.Ram has been credited to the account of K.Ram. Rectification entry will be
K.Ram a/c Dr 400
To S.Ram a/c 400
(Being the wrong credit now rectified)
Suspense Account
In order to avoid delays in the preparation of final accounts due to differences in the Trial Balance, the differences are placed in an account called the Suspense Account. When mistakes are located they are rectified by debiting or crediting the suspense account as the case may be. When all the errors are rectified, the Suspense Account will be closed.