To understand the to locate errors in the Trial Balance, we first need to understand what a Trial Balance is and what are the steps to create a trial balance, the different types of errors that could happen while maintaining the books of accounts and then the steps to locate the errors.
Trial Balance is a sheet of a statement, prepared with the debit and credit balances of ledger accounts to assess the arithmetical accuracy of the books of accounts. The purpose of preparing a trial balance is to ascertain the arithmetical accuracy of ledger accounts and to help in identifying errors.
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Step 1: The first step is to identify the transactions. The balances of each account in the ledger book are verified. The final balance of an account is the difference between the total of the debit entries and the credit entries.
Step 2: The second step is to record each account and place its balance in the debit or credit column.
Step 3: Ascertain the total of debit balances column.
Step 4: Calculate the total of the credit balances column.
Step 5: Determine the sum of the debit balances equals the sum of credit balances. If they do not tally, it means that there are some mistakes. So, one must check the accuracy of the balances of all accounts.
Errors are the mistakes, which are committed unintentionally while recording transactions in the books of accounts. These errors may occur in the journal, ledger or trial balance or any financial statements.
Some common errors that may happen are as follows:
Error might happen while totalling the debit and the credit balances in the trial balance.
Error in calculation of subsidiary books.
Error may occur in posting the total of subsidiary books.
Error can occur while showing account balances in the wrong column of the trial balance or any wrong amount.
Omission in showing an account balance in the trial balance.
Error while ascertaining the ledger account balance.
Error may happen while posting a journal entry, i.e., a journal entry may have been posted mistakenly to the ledger.
Error in recording a transaction in the journal by making a reverse entry, i.e., account to be debited is credited and the account to be credited is debited or an entry with the wrong amount.
Error while writing down a transaction in a subsidiary book with a wrong name or wrong amount.
On the basis of the nature of errors, they can be classified into the following four categories.
When a transaction is recorded incorrectly in the books of accounts, it is called error of commission. It includes the wrong posting of transactions, wrong calculation or wrong balancing of the accounts, the wrong casting of the subsidiary books or wrong recording of the amount in the books of original entry. Errors of commission are of four kinds:
Error of Recording: This error occurs when any transaction is incorrectly recorded in the books of original entry. Example: goods purchased from Krishna for Rs. 450 and recorded as Rs.540 in the purchase book.
Error of Casting: This error occurs when a mistake is committed in total. This mistake affects the trial balance. Example: the sales book is totalled as Rs.10000 instead of Rs.100000.
Error of Carrying Forward: It is an error that happens when a mistake is done in carrying forward a sum of one page to the next page. This kind of error affects the trial balance.
Error of Posting: When the information is incorrectly entered in the ledger from the books of original entry, it is an error of posting.
This kind of error occurs when a transaction is partially or completely left out to be recorded in the books of accounts. These can be of two types:
Error of Complete Omission: When a transaction is completely left out from recording in the books of the original record, it is an error of complete omission. This error does not affect the trial balance.
Error of Partial Omission: When an incomplete transaction is recorded in the books, it is an error of partial omission. This error affects the trial balance.
When a transaction is recorded in the books of accounts violating the accounting principles, i.e., the allocation between capital and revenue items, it is known as errors of principle. These errors do not affect the trial balance. These errors do not affect the trial balance.
When two or more than two errors cancel each other such that the debits and credits of accounts is nil, such errors are called compensating errors. These errors do not affect the tallying of trial balance.
Any difference in the trial balance, even if it is a minor mistake must be located and corrected. The following steps are taken to identify the errors:
Totalling the two columns of the trial balance again is a must.
If only one account is written instead of the number of accounts in the trial balance, then the list of such accounts should be checked and totalled again.
The balances of every account including cash and bank balances from a cash book should be checked whether they have been written in the right column of the trial balance.
The exact difference in the trial balance should be determined. The ledger should be properly checked, it is possible that a balance sheet equal to the difference has been omitted from the trial balance.
Balancing the ledger accounts repeatedly is a must.
Casting and carrying forward of Subsidiary books should be verified especially if the difference is Re1, Rs.100, etc.
If the difference in the total amount is big then the balance in all accounts should be compared with the equivalent accounts in the previous period.
Double posting of the transaction amounts should be checked. There may be chances that the posting is made on the wrong side resulting in the doubling of entry.
A complete check of the trial balance is essential if the difference remains.
If the errors are not located properly then the difference in the trial balance is temporarily transferred to a suspense account.
Errors that affect the trial balance must be located and corrected. The process to correct the errors is called rectification of errors. The purpose to rectify errors in the trial balance is to prepare correct accounting records, ascertain accurate net profit or loss for the financial period and exhibit a correct position of the organization at a particular date by preparing a Balance Sheet.
Q1. Rectify the Following Errors:
Credit Sales to Ramesh Rs.7000 were recorded as Rs.700.
Credit purchase from Suresh Rs.9000 was recorded as Rs.900.
Goods returned to Gagan Rs.4000 were recorded as Rs.400.
Goods returned to Mohan Rs.1000 were recorded as Rs.100.
Furniture purchased on credit from Mohan Rs.60000 posted as Rs.6000.
Furniture purchased on credit from Mohan for Rs.60000 posted to Rohan’s account.
Furniture purchased on credit from Mohan for Rs. 60000 posted to machinery account.
Sol. Rectification of Errors
To Sales a/c
(Being goods sold to Ramesh for Rs.7000 recorded as Rs.700, now rectified)
Purchases a/c Dr
(Being goods purchased from Suresh for Rs.9000 recorded as Rs.900, now rectified)
To Purchase Return a/c
(Being goods returned to Gagan for Rs.4000 recorded as Rs.400, now rectified)
Sales Return a/c Dr
(Being goods returned to Mohan for Rs.1000 recorded as Rs.100, now rectified)
Furniture a/c Dr
(Being error in posting to wrong account, now rectified)
(Being the error in posting to wrong account, now rectified)
Furniture a/c Dr
To Machinery a/c
(Being the error in posting furniture to wrong account, now rectified)
Q2. What do You Understand by Trial Balance?
Ans. Trial Balance is a sheet of a statement, prepared with the debit and credit balances of ledger accounts to assess the arithmetical accuracy of the books of accounts. The purpose of preparing a trial balance is to ascertain the arithmetical accuracy of ledger accounts and to help in identifying errors.
Q3. What is a Suspense Account?
Ans. Suspense account is a temporary account which is opened to balance the trial balance. If the debit side of the trial balance is more than the credit side then the difference is put on the credit side of the trial balance. In this case, ‘suspense account’ will show a credit balance. If the credit side is more than the debit side then the difference is put on the debit side of the trial balance. In such a situation, the suspense account will show a debit balance.
Q4. What do You Mean by Errors of Principle?
Ans. When a transaction is recorded in the books of accounts violating the accounting principles, i.e., allocation between capital and revenue items, it is known as errors of principle. These errors do not affect the trial balance. These errors do not affect the trial balance.