CHAPTER 4

Trial Balance and Rectification of Errors

LEARNING OBJECTIVES
After studying this chapter, you will be able to:

state the meaning of trial balance; check the accuracy of accounting records; prepare the trial balance; identify the nature of balances in various accounts; state the different types of errors; detect and rectify errors; and appreciate the need for preparing suspense account.

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In the previous chapters, you have learnt how to record and classify the transactions in the various accounts along with balancing there of. All balances of the accounts are listed in a statement, called trial balance. It is a summary statement of all balances. This summary of balances enables us to check the arithmetical accuracy of the transactions recorded in the ledger accounts. Since every debit has a corresponding credit, the total of debits should be equal to the total of credits in the trial balance. This chapter explains the meaning and process of preparation of trial balance. It is followed by a discussion of different types of errors and their rectification. 4.1 Meaning of Trial Balance A trial balance is a summary of balances of all accounts recorded in

the ledger. The format of trial balance in given in fig. 4.1.

Trial Balance of as on 31st March 2002 Account Code Account Title Debit Amount Rs. Amount Rs.

Fig. 4.1 : Showing Format of a Trial Balance

The trial balance is prepared at the end of a chosen period which may either be monthly, quarterly, halfyearly or annually or as and when required. Since, every debit should have a corresponding credit as per the rules of the double entry system, the total of the debit and credit balances should tally. In case there is a dif ference, one has to check the correctness of the balances brought

Trial Balance as at 31 March 2002 Account Code 001 002 003 004 005 006 007 008 009 0.10 0.11 0.12 Account Title Debit Amount Rs. 45,000 5,00,000 2,05,500 60,000 1,60,000 9,000 1,10,000 30,000 1,12,000 40,000 5,000 7,5000 Credit Amount Rs.

Cash Capital Bank Office Equipment Office Car Insurance of Car Purchases Creditors Sales Debtors Drawings Salary Total

6,42,000

6,42,000

Fig. 4.2 : Trial Balance for Illustration 25 Chapter 3 on page 95

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forward from the respective accounts. This type of checking of accounts leads to ascertainment of arithmetical accuracy of the balances of various accounts in a summarized form. Besides checking the arithmetical accuracy, trial balance also aims at ascertaining the correctness of the nature of balances in relation to the type of account. All assets, expenses, receivables shall have debit balances. Similarly, all liabilities, revenues, payables will have credit balances (figure 4.2). 4.2 Objectives of Preparing a Trial Balance In order to pr ovide a summary statement view of the balances of various accounts, we need to prepare the trial balance. This also indicates the correct nature of the balances of various accounts. A trial balance is prepared to fulfill the following objectives: check the arithmetical accuracy of the ledger accounts; help in locating errors; and provide a basis for preparing the financial statements. These objectives are explained in detail hereunder: 4.2.1 To Check the Arithmetical Accuracy of Accounts A trial balance is prepared to check whether all debits and the corresponding credits are properly recorded in the ledger or not. When the totals of all the debits and credits

in the trial balance are equal, it is assumed that the posting and balancing of ledger accounts is arithmetically accurate. 4.2.2 To Help in Locating Errors Whenever the trial balance does not tally, the accountant know that errors have crept in at the stage of recording, posting, balancing, or transfer of balances. The accountant, at this stage, is faced with the problem of errors. It is immaterial whether the amount of difference is small or large. Even a small amount of difference requires careful attention to be paid to achieve accuracy in accounts. Once the errors are detected and located, these are rectified and then the corrected trial balance is prepared. 4.2.3 To Provide a Basis for the Preparation of Financial Statements Since the balances of all accounts appear in the trial balance, it provides a basis for the preparation of the financial statements. A tallied trial balance, therefore becomes the first step in the preparation of financial statements. All r evenues and expenses accounts from trial balance, are transferred to the trading and profit and loss account. All assets, liabilities and capital accounts along with the balance of the profit and loss account are shown in the balance sheet.

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4.3 Detection of Errors Revealed by the Non-agreement of Trial Balance If the trial balance does not tally, the accountant should initiate the following steps to detect and locate the errors: Recast the totals of debit and credit columns of the trial balance. Compare the account head/title and amount appearing in the trial balance, with that of the ledger to detect any difference in amount or omission of an account. Compare the trial balance of the current year with that of the previous year to check additions and deletions of any accounts and also verify whether there is a large difference in amount, which is neither expected nor explained. Re-do and check the correctness of balances of individual accounts in the ledger. Re-check the correctness of the posting in accounts from the books of original entry. If the difference between the debit and credit columns is divisible by two, there is a possibility that an amount equal to one-half of the difference may have been posted to the wrong side of another ledger account. For example, if the total of the debit column of the trial balance exceeds by Rs.1,500, it is quite possible that a credit item of

Rs.750 may have been wrongly posted in the ledger as a debit item. To locate such errors, the accountant should scan all the debit entries of an amount of Rs. 750. The difference may also indicate a complete omission of a posting. For example, the difference of Rs.1,500 given above may be due to omissions of a posting of that amount on the credit side. Thus, the accountant should verify all the credit items with an amount of Rs.1,500. If the difference is a multiple of 9 or divisible by 9, the mistake could be due to transposition of figures. For example, if a debit amount of Rs. 459 is posted as Rs.954, the debit total in the trial balance will exceed the credit side by Rs. 495 (i.e. 954459 = 495). This difference is per fectly divisible by 9. A mistake due to wrong placement of the decimal point may also be checked by this method. Thus, a difference in trial balance divisible by 9 helps in checking the errors for a transpose mistake.

4.4 Preparation of the Trial Balance The first step in the preparation of the trial balance is to balance all ledger accounts. This is done after posting of all the entries from books of original entry to the ledger. Balancing of an account is done by putting the

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difference between the two sides of an account on the side, which is short. This leads to the equalization of two sides of an account. A trial balance has four columns. The first column is the account code/number, the second
Account Code Name of the Account

column is the title/name of the account, the third and fourth columns are the debit and credit columns respectively where the amount of balance of each account is entered. It is shown in fig. 4.3.
Debit Amount Rs. Credit Amount Rs.

Capital Account Fixed Asset Accounts: Land and Buildings Plant and Machinery Equipment Furniture and Fixtures Current Asset Accounts: Cash in Hand Cash at Bank Accounts Receivables Bills Receivable Stock of Raw Materials Work in progress Stock of Finished goods Purchases Carriage inwards Carriage outwards Sales Sales Returns Purchase Returns Interest paid Commission/Discount received Salaries Long term loan Bills Payable Accounts payable Outstanding Salaries Prepaid Insurance Outstanding interest earned Advances from Customers Drawings Reserves and Surplus Provision for bad and doubtful debts Total Fig. 4.3 : Illustrative Trial Balance

xxx

xxx

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Illustration 1 Ajay started a small general store and agreed to pay a rent of Rs.500 p.m. His uncle provided him with some furniture for the shop.He invested his personal savings of Rs. 25,000 and his father gave him Rs.50,000. He named his shop as Asha General Store. The shop was inaugurated on 1 January 2002. As Ajay is educated he wanted to run his business in a professional way. He requested his friend Anand to prepare books of account for the shop. The following were the transactions of the stores in the first week: January 2002 1 Purchased goods worth Rs.10,000 from Ganesh Enterprises by paying cash. Made cash sales of Rs.7,500 to people who attended the inauguration. Opened an account with United Bank of India by depositing Rs.20,000. Made payment of Rs.2,000 to a caterer who supplied refreshments during the inauguration ceremony. Cash purchases made for Rs.30,000.

Purchased goods worth Rs.35,000 from Subhash and Co. paying Rs.5,000 cash and remaining on credit with a promise to pay in 30 days. Made a sale to Rajaram for Rs.8,000 on account. Cash sales were also made for Rs.26,000. 4 Paid license fees of Rs.400. Rent Rs.500. Purchases worth Rs.7,500. Made cash sales for Rs.9,600 5 Made a payment to Subhash and Co., Rs.5,000 by cheque. Paid postage Rs150. Withdrew for personal use Rs.7,000. Sales to Mary Export House Rs.47,600. Cash sales were for Rs.3,300 6 Paid electricity charges Rs.550 and Rs.250 to Raja who agreed to clean the shop and also worked as a shop assistant. 7 Purchased furniture and fittings from Lokesh Enterprises on credit for Rs. 36000. Record the above transactions in various subsidiary books and post them to the relevant ledger accounts and prepare the trial balance after balancing the various ledger accounts.

Solution
Books of Asha General Stores Cash Book Receipts Cash - 001,Bank- 002 Date 2002 Jan 1 1 1 Particulars Capital Loan from father Sales Total c/f L.F. Cash (Rs.) 25,000 50,000 7500 82,500 Bank (Rs.) Date 2002 Jan 1 Jan 1 Jan 2 Particulars Purchases Bank Purchases Total c/f LF Cash (Rs.) 10,000 20,000 30,000 60,000 Bank (Rs.) Payments

TRIAL BALANCE AND RECTIFICATION OF ERRORS

Jan 1 3 4 5 Total b/f Cash Sales Sales Sales 82,500 20,000 26,000 9,600 3,300 Jan 2 3 4 4 5 Total b/f Business expenses Purchases License fee Rent Purchases Subhash & Co. Postage Drawings Electricity Wages Balance c/f 60,000 2,000 5,000 400 500 7,500

119

5,000 150 7,000 550 250 38,050 1,21,400

15,000 20,000

1,21,400

20,000

Purchases Book Date 2002 Jan 3 Particulars Subhash and Co. L.F Amount Rs. 30,000 30,000 Sales Book Date 2002 Jan 3 Jan 5 Particulars Rajaram Mary Export House L.F Amount Rs. 8,000 47,600 55,600 Capital Account 003 Dr. Date 2002 Particulars J.F. Amount Rs. Date 2002 Jan1
Date 2002 Jan 2

Journal Proper
Particulars L.F Debit Amount Rs. 36,000 36,000 Credit Amount Rs.

Furniture & Fixtures Lokesh Enterprises (Purchased furniture) Total

36,000

36,000

Cr. Particulars J.F. Amount Rs. 25,000

Cash

Drawings Account 004 Dr. Date 2002 Jan 5 Particulars J.F. Amount Rs. 7,000 Date 2002 Particulars J.F. Cr. Amount Rs.

Cash

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Purchases Account 005 Dr. Date 2002 Jan 1 Jan 3 Jan2 Jan3 Jan4 Particulars Cash Subhash & Co. (creditors) Cash Cash Cash J.F. Amount Rs. 10,000 30,000 30,000 5,000 7,500 82,500 Loan Account 006 Dr. Date 2002 Particulars J.F. Amount Rs. Date 2002 Jan 1 Particulars Cash J.F. Cr. Amount Rs. 50,000 Date 2002 3 Jan 31 Dec Particulars Balance c/f J.F. Cr. Amount Rs. 82,500

82,500

Subhash and Company Account 007 Dr. Date 2002 Particulars J.F. Amount Rs. 5,000 25,000 30000 Mary Export House Account 008 Dr. Date 2002 Jan 5 Particulars Sales J.F. Amount Rs. 47,600 47,6000 Date 2002 Dec 31 Particulars balance c/f J.F. Cr. Amount Rs. 47,6000 47,6000 Date 2002 Jan 2. Particulars Purchases J.F. Cr. Amount Rs. 30,000 30000

Jan 5 Bank 31 Dec Balance c/f

Electricity Account 009 Dr. Date 2002 Jan 6 Particulars Cash J.F. Amount Rs. 550 Date 2002 Particulars J.F. Cr. Amount Rs.

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Postage Account 010 Dr. Date 2002 Jan 5 Particulars Cash J.F. Amount Rs. 150 License Fees Account 011 Dr. Date 2002 Jan 4 Particulars Cash J.F. Amount Rs. Date 2002 400 Wages Account 012 Dr. Date 2002 Jan 6 Particulars Cash J.F. Amount Rs. 250 Furniture Account 013 Dr. Date 2002 Jan 2 Particulars Lokesh Enterprises J.F. Amount Rs. 36,000 Date 2002 Particulars J.F. Cr. Amount Rs. Date 2002 Particulars J.F. Cr. Amount Rs. Particulars J.F. Cr. Amount Rs. Date 2002 Particulars J.F. Cr. Amount Rs.

Lokesh Enterprises 014 Dr. Date 2002 Particulars J.F. Amount Rs. Date 2002 Jan 2 Particulars Furniture & Fitting J.F. Cr. Amount Rs. 36,000

Sales Account 015 Dr. Date 2002 Particulars J.F. Amount Rs. 1,02,000 Date 2002 Jan Jan Jan Jan Jan Jan 1 3 4 4 5 5 Particulars Cash Cash Rajaram Cash Cash Mary Export House J.F. Cr. Amount Rs. 7,500 26,000 8,000 9,600 3,300 47,600 1,02,000

31 Dec Balance c/f

1,02,000

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Rent Account 017 Dr. Date 2002 Jan 4 Particulars Cash J.F. Amount Rs. 500 Rajaram Account 018 Dr. Date 2002 Jan 3 Particulars Sales J.F. Amount Rs. 8,000 Date 2002 Particulars J.F. Cr. Amount Rs. Date 2002 Particulars J.F. Cr. Amount Rs.

Trial Balance of Asha General Stores as on 7 January 2002 Account Account Title Cash Bank Capital Drawings Purchases Loan A/c Subash and company Mary Export House Electricity Postage License Wages Furniture and fittings Lokesh Enterprises Sales Business expenses Rent Rajaraman Total Debit Amount Rs. 38,050 15,000 25,000 7,000 82,500 50,000 25,000 47,600 550 150 400 250 36,000 36,000 1,02,000 2,000 500 8,000 2,38,000 2,38,000 Credit Amount Rs.

01 02 03 04 05 06 07 08 09 010 011 012 013 014 015 016 017 018

Illustration 2 Following balances of ledger accounts have been obtained from which you are required to prepare a trial balance: Cash Rs.41,733; Expenses Rs.12,150;

Sales Rs.1,46,616; Fixed Assets Rs.12,000; Purchases Rs 1,10,850; Accounts Receivables Rs.24,436; Capital Rs. 50,000; Creditors Rs.8,553; Merchandise Rs 4,000.

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Solution Account Title Debit Amount Rs. 41,733 12,150 12,000 1,46,616 1,10,850 24,436 4,000 50,000 8,553 2,05,169 2,05,169 Credit Amount Rs.

Cash Expenses Fixed Assets Sales Purchases Accounts Receivable Merchandise Capital Creditors Total

4.5 Errors The trial balance is prepared to check the arithmetical accuracy of accounts. If the trial balance does not tally, it implies that there are arithmetical errors in the accounts which require location, detection and rectification thereof. Even if the trial balance tallies, there may still exist some errors. There are two types of errors: (a) errors which are not revealed by the trial balance, and (b) errors which are revealed by the trial balance. Errors may happen at any of the following stages of the accounting cycle. A. At 1. 2. 3. Recording Stage Errors of principle Errors of omission Errors of commission

ii. Posting on the wrong side iii. Posting of wrong amount C. Balancing Stage 1. Wrong totaling 2. Wrong balancing D. Preparation of Trial Balance 1. Error of Omission 2. Error of Commission i. Taking wrong amount ii. Taking wrong account iii. Taking to the wrong side Errors can be classified into the following four categories on the basis of the nature of errors and explained here under. i. Errors of commission ii. Errors of omission iii. Errors of principle iv. Compensating (offsetting) errors. 4.5.1 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

B. At Posting Stage 1. Error of omission i. Complete ii. Partial 2. Error of commission i. Posting to wrong account

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received from customer (Debtor) is correctly recorded on the debit side of the cash book but while posting, the customers 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. 4.5.2 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. 4.5.2 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. Such errors are not disclosed by the trial balance. This will result in understating of income due to extra charge under maintenance and repairs account and understating the value of buildings in the balance sheet. 4.5.4 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 effect the tallying of the trial balance. For example: In a credit sale transaction, the sales account is

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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 others effect. It is to be noted that extra credit to the sales account is offset by lower credit to the creditors 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. 4.6 Classification of Errors - for the Purpose of Rectification From the point of view of rectification, errors are classified into two categories: Errors which affect the trial balance; and Errors which do not affect the trial balance. 4.6.1 Errors which Affect the Agreement of Trial Balance These errors are due to the mistake having being committed on the one side of the account. They may happen at any of the stages of the accounting process, like recording, posting, balancing, etc. such errors can be rectified by giving an explanatory note or by passing a journal entry with the help of a special account called suspense account. The nature and treatment of suspense account is discussed later in this chapter. Examples of this group of errors are: errors of partial omission; error of casting (totaling); error of carrying

forward; error of balancing; error of posting to the correct account but with wrong amount; error of posting to the correct account but on the wrong side; posting to the wrong side with the wrong amount and omitting to show an account in the trial balance. 4.6.2 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. Examples

Under casting in the sales book (less total) by Rs.1,000. Since the total of sales journal is posted to sales account in the ledger, only the sales account is credited by an amount which is lower by Rs.1,000. The individual customer accounts will be posted correctly to their debit side. To rectify this error,

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sales account is credited by an additional amount of Rs.1,000 with the comment in the particulars column as follows: Mistake in totaling the sales journal on page . Errors committed while carrying forward or balancing can also be rectified in this manner.

Rs.15,000 (the amount of error is double because instead of debit to Ajays account, his account was wrongly credited with Rs.7,500. Thus, there is a need for debiting his account by double the original amount of Rs.7,500, i.e. Rs.15,000 with the explanation Mistake in posting on 1.8.2001. The above stated procedure for correction is applicable in as situation when trial balance has not been drawn, but, errors are detected. However, all these error are generally rectified by the use of suspense account after the trial balance is prepared and tallying it through suspense account. 4.6.3 affect Errors which do not the trial balance

An amount of Rs.6,300 for credit purchases from Ashok on 16.4.2001, correctly entered in the purchases journal, but while posting, his account has been credited with Rs.3,600, thus under crediting his account by Rs.2,700. In this case since the entry has been made correctly in the purchases journal, posting to the purchases account may be assumed to be free of errors. Therefore, the error is only in Ashoks account. This can be rectified by entering additional credit of Rs.2,700 in his account with the comment in the particular column as Mistake in posting on 16.4.2001. A credit sale of Rs.7,500 to Ajay on 1.8.2001 is wrongly credited to his account. In this case, Ajay is a debtor, his account should have been debited. Since it was correctly entered in the sales journal, there is not an error in the sales account. Therefore, the error is only in Ajays account. This error can be rectified by debiting his account with

Errors which do not affect the trial balance are committed in two or more accounts. They can be rectified by passing a journal entry giving the correct debit and credit to the concerned accounts. These correcting entries can be recorded in the journal proper. Examples of these errors are: omission to pass an entry in the books of original entry; wrong amount of transaction recorded in the journal, complete omission of the posting of accounts in the ledger. Examples of these errors are: Complete omission at the recording stages of the transaction in the books of

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original entry; Recording of the transaction with the wrong amount in the books of original entries; Complete omission of posting of a transaction; Errors of principle; Posting of correct amount on the correct side but to a wrong account.

tallying of the trial balance. For example, purchase of machinery on credit for Rs.50,000 is debited to Purchases account. Actually, the Machinery account which is of a capital nature should have been debited instead of Purchases account, which is a revenue account, though the suppliers account is properly credited. To correct this error, the following journal entry will be passed.
Debit Amount Rs. Machinery A/c Dr. Purchases A/c 50,000 50,000 Credit Amount Rs.

Examples A payment of Rs.25,000 made to a supplier Classic Enterprises is wrongly recorded as payment to Classic Traders. Suppose that the following entry has been made and posted:
Debit Amount Rs. Classic Traders A/c Dr. Bank A/c (Transaction wrongly recorded ) 25,000 25,000 Credit Amount Rs.

4.7 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. 4.7.1 Utility of Suspense Account The main use of suspense account is

Here, instead of Classic Enter prises the account of Classic Traders has been wrongly debited. The correcting entry will be:
Debit Amount Rs. Classic Enterprises A/c Dr. Classic Trader A/c (to correct the wrong debit) 45,000 45,000 Credit Amount Rs.

When posted to the respective accounts, this primal entry would nullify the effect of the earlier error. We have learnt earlier that errors of principle also do not affect the

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to facilitate the preparation of financial statements. Later on errors affecting the trial balance are located, rectification entries are passed through the suspense account. 4.7.2 Preparation and Treatment of Suspense Account The following example highlights how a suspense account is used to rectify the errors. Illustration 3 Indu prepared a Trial balance of her shop for the year ended on 31 March 2001. The debit total of the trial balance was short by Rs.9,145. She transferred the deficiency to a suspense account. In April 2001, after a close examination, she found the Solution:

following errors: (i) Purchases day book for September 2000 was under cast by Rs.500. (ii) Sales day book of November 2000, was overcast by Rs.5,000 (iii) A second hand computer purchased for office use for Rs.4,050 was recorded in the office equipment account as Rs.405. (iv) A bill drawn by her for Rs.20,000 was not entered in the bills receivable book. (v) A machinery purchased for Rs.50,000 was entered in the Purchases day book. Pass the necessary journal entries to rectify the above errors to help Indu in finalizing her trial balance.

Books of Indu Journal Date Particulars Debit Amount Rs. Dr. 500 500 Credit Amount Rs.

2001 April 1

Purchases A/c Suspense A/c (being Purchases Day Book total under cast by Rs.500, now rectified) Sales A/c Suspense A/c (Sales Day Book, total overcast by Rs.5,000, now rectified) Office Equipment A/c Suspense A/c (Office equipment was under debited by Rs.3,645, now rectified)

Dr.

5,000 5,000

Dr.

3,645 3,645

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2001 April 1

Bills Receivable A/c Sundry Debtors A/c (Bill drawn completely omitted in the books, now recorded) Machinery A/c Purchases A/c (Purchases account wrongly debited instead of machinery account, now rectified) Total

Dr.

20,000 20,000

Dr.

50,000 50,000

79,145

79,145

Suspense Account Dr. Date 2001 March 31 Particulars Balance b/f (balancing figure in the trial balance) Amount Rs. 9,145 Date 2001 Apr 1 Particulars Purchases A/c Sales Office Equipment Cr. Amount Rs. 500 5,000 3,645 9,145

9,145

Illustration 4 The trial balance of Anand Dealers prepared on 31 December 2000 did not tally. The difference was placed in the suspense account on the debit side Rs. 39,180. A detailed examination of his books revealed the following mistakes: (i) A payment of Rs.20,000 to John was posted to the credit of his account. (ii) Goods returned by Amrita a regular customer for Rs.5,800 was posted to the credit of sales account (iii) Charges on renovation to the slow windows of the shop of Rs.23,640 was debited to the furniture and fixtures account

as Rs.32,460. (iv) A payment received from Rohan for Rs.49,240 was credited to Roshans account. (v) Glass purchased for show windows from Aftab suppliers on a credit for Rs.38,450 was recorded in the purchases day book. At the time of posting, their account was credited with Rs.34,850. You are required to correct the above mistakes by passing the necessary rectifying errors in the General journal and find out amount that was transferred to suspense account where the trial balance did not tally.

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Solution Date Particulars Debit Amount Rs. Dr. 40,000 40,000 Dr. Dr. 5,800 5,800 11,600 Credit Amount Rs.

2001, Dec 31

Johns A/c Suspense A/c (being wrongly credited, now rectified) Sales return A/c Sales A/c Suspense A/c (being sales account wrongly credited and sales returns account not debited, now rectified) Suspense A/c Furniture & Fixtures A/c (being furniture & fixture credited wrongly, now rectified) Roshans A/c Rohan A/c (being correction of wrong entry in Roshans account by correctly crediting Rohan) 1.Furniture and Fixture A/c Purchases A/c (being purchases account wrongly debited, now stands corrected) 2.Suspense A/c Aftab A/c (being wrong posting to Aftabs account, now rectified) Total Suspense Account

"

Dr.

8,820 8,820

"

Dr.

49,240 49,240

"

Dr.

38,450 38,450

"

Dr.

3,600 3,600

"

1,51,100

1,51,100

Dr. Date 2001 April 1 Dec. 31 Furniture & Fixtures Aftab Balance b/f 8,820 3,600 39,180 51,600 March 31 John Sales Returns Sales Particulars Amount Rs. Date 2001 Particulars

Cr. Amount Rs. 41,800 5,800 5,800 51,600

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Terms Introduced in this Chapter

Trial Balance Errors of Commission

Errors of Omission Compensating Errors Errors of Principle Suspense Account

SUMMARY WITH REFERENCE TO LEARNING OBJECTIVES 1 Meaning of Trial Balance A statement showing the extract of the balances, either credit or debit of various accounts in the ledger. 2 Objectives of Trial Balance

to check the arithmetical accuracy of the ledger accounts; to help in locating errors; to provide a basis for preparing the financial statements.

3 Preparation of Trial Balance A Trial Balance has four columns, the first column contains account code, the second column is for the title of the account, the third column is for writing the debit balance and the final column is where the credit balance of the account in the ledger is written. 4 Types of Errors There are four types of errors:

Errors of Commission Errors caused due to wrong recording of a transaction, wrong posting, wrong totaling, wrong balancing, etc.

Errors of Omission Errors caused due to omission of recording a transaction either fully or partially in the books of accounts.

Errors of Principle Errors caused due to ignoring the accounting principles which may lead to wrong classification or identification of receipts and payments between revenue and capital r eceipts and revenue expense and capital expenditure.

Compensating Errors Two or more errors committed in such a way that they nullify the effect of each other on the debits and credits.

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5 Rectification of Errors Errors affecting only one account can be rectified by giving an explanatory note or by passing a journal entry. Errors which affect two or more accounts are rectified by passing a journal entry. 6 Meaning and Utility of Suspense Account An account in which the difference in a trial balance is put temporarily till such time that errors are located and rectified. It facilitates the preparation of provisional financial statements even when the trial balance does not tally. 7 Disposal of Suspense Account When all the errors are located and rectified by passing the necessary journal entries, the suspense account automatically stands disposed off.

EXCERCISES 1. Fill in the Blanks (i) (ii) (iii) (iv) (v) 2. Errors of principle ____________ affect the Trial Balance. The equality of ___________ and ___________ of the Trial Balance does not mean that the individual accounts are also _________ All ______________ and ______________ accounts appearing in the Trial Balance are transferred to the Trading and Profit and Loss Account. If the Trial Balance does not ___________ it indicates that some ___________ have been committed. A Suspense Account facilitates the ____________ of financial statements even when the ___________ has not tallied. Which of the following errors will not affect the Trial Balance? Wrong balancing of an account Writing an amount in the wrong account but on the correct side Wrong totaling of an account None of the above Which of the following errors is an error of omission? Sale of Rs.500 was written in the purchases journal Wages paid to Mohan have been debited to his account. The total of the sales journal has not been posted to the Sales Account None of the above Purchase of office furniture for Rs.3,400 has been debited to General Expenses Account. It is: An error of commission An error of omission

Multiple Choice Questions (a) (i) (ii) (iii) (iv) (b) (i) (ii) (iii) (iv) (c) (i) (ii)

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(iii) (iv) (d) (i) (ii) (iii) (iv) (e) (i) (ii) (iii) (iv) (f) (i) (ii) (iii) (iv) (g) (i) (ii) (iii) (iv) (h) (i) (ii) (iii) (iv) (i) (i) (ii) (iii) (iv) (j) (i) (ii) (iii) (iv)

An error of principle None of the above Which of the following errors will affect the Trial Balance Account? Repair to buildings have been debited to buildings. The total of purchases journal is Rs.1,000 short. Freight paid on new machinery has been debited to the Freight account None of the above Errors of commission do not allow: Correct totaling of the Balance Sheet Correct totaling of the Trial Balance The Trial Balance to agree None of the above The preparation of a Trial Balance helps in: Locating errors of complete omission Locating errors of principle Locating errors of commission None of the above Which of the following errors is an error of principle Rs. 500 received from Ganpat has been debited to his account Purchase of Rs.1,000 has been entered in the sales journal Repairs to buildings have been debited to Buildings Account None of the above Which of the following errors is an error of principle Rs.500 received from Rakesh has been debited to his account Sales of Rs.1,000 has been entered in the Purchases journal Repairs to Machinery have been debited to Machinery Account None of the above The type of account with a normal credit balance is: An asset A drawing A revenue An expense The form listing the balances and the title of the accounts in the ledger on a given date is the : Income statement Balance Sheet Retained earnings statement Trial Balance

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3.

Indicate whether the following accounts will have debit or credit balances: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Sales Returns Carriage Inwards Purchases Outstanding Wages Capital Account Machinery Goodwill Cash in Hand Cash at Bank Bills Payable.

Short Answer Questions 4. 5. 6. 7. 8. 9. 10. State the meaning of trial balance? What is the purpose of preparing trial balance? What is the purpose of preparing Suspense account? Explain compensating errors and give two examples of such errors? Explain errors of principle and give two examples of such errors? Explain the limitations of the Trial Balance. Name the errors that do not affect the agreement of Trial Balance.

Essay Type Questions 11. Explain the meaning and Objectives of the Trial Balance. 12. What is a Trial Balance? Name the errors which affect the Trial Balance? 13. If a Trial Balance tallies, can it be concluded that there are no errors? Why? 14. Explain errors of omission and give two examples of such errors with measures to rectify them. 15. Explain errors of commission and give two examples of such errors with measures to rectify them. Problems 16. Give rectifying journal entries for the following errors: (i) A sale of goods to Mohit amounting to Rs.2,500 has been wrongly passed through the purchases book. (i) (i) (i) Rs. 15,000 paid for Furniture purchased has been charged to Purchases Account. A cheque for Rs.15,000 received from Ram K. Gupta was dishonored and has been posted to the debit of Sales Returns Account. An amount of Rs.400 due from Mukesh which was written off as a bad debt was unexpectedly recovered and was posted to the personal account of Mukesh. Rs. 12,000 paid by cheque for a printer was charged to the Office Expense Account instead of Office Equipment account.

(i)

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17.

Rectify the following errors: (i) (ii) (iii) Rs. 700 allowed as Trade in allowance has been credited to Sales Account. Rs. 1,000 paid as rent to the landlord was debited to the Landlords Account. Materials from the store for Rs.1,000 and wages of Rs.400 had been used in making tools and implements for use in the factory but no adjustments were made in the books. The purchases book was overcast by Rs.100. A sale of Rs.500 to Gupta & Co. was credited to its account.

(iv) (v) 18.

Rectify the following errors: (i) (ii) (iii) (iv) (v) Wages paid for the Construction office were debited to Wages Account, Rs.15,000 Cartage paid for the newly purchased Furniture, Rs.100 charged to the Cartage Account Furniture purchased on credit from Babu Ram for Rs.3,000 recorded as Rs.300 Wages paid Rs.2,550 were posted in the Wages Account as Rs.2,505 Purchases from Mamata Rs.1,002 were omitted from the books.

19. The trial balance of a book-keeper shows an excess of debits over credits by Rs.361. This difference is placed in the Suspense Account. Later, the following errors were discovered. (i) (ii) (iii) (iv) (v) A credit item of Rs.2490 has been debited to The personal account of Dinesh as Rs.4290 Rs.9000 paid for Furniture bought has been charged to Purchases Account A discount allowed to Ramesh has been credited to him as Rs.1450 in place of Rs.1540 The total of the returns inward book was Rs.10 short. A cheque for Rs.100 for miscellaneous expense was not posted to Miscellaneous Expenses Account. You are required to rectify the errors through Suspense Account and prepare the Suspense Account. 20. Rectify the following errors (i) (ii) (iii) (iv) (v) The total of sales book was overcast by Rs.200. Rs.4,000 paid for Furniture purchased has been charged to Office Equipment Account. Rs.450 paid to Ramesh was debited to Rameshachars Account. A sum of Rs.300 paid to Shyam Lal, the clerk, was debited to his personal account. Rs.150 paid for regular maintenance for the building was debited to the Building Account.

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21. (i) (ii)

Rectify the following errors The total of purchases book was undercast by Rs.900 Goods invoiced Rs.2,500 and entered in the sales book on December 25 were returned on December 29. Although taken into stock on December 31, no entry was passed in the books. Discount allowed to Bharat Bhushan of Rs.150 was not entered in the discount account though posted to the credit of his personal account. A payment of Rs.1,720 to Girish was debited to his account as Rs.1,270. A sum of Rs.320 written off for depreciation on an asset has not been posted to the Depreciation Account. Total of debit column of journal proper was short on the debit by Rs.360

(iii)

(iv) (v) (vi)

22. The Trial Balance of New Delhi Dealers as on 31 March 1999, showed a difference, and on scrutiny, the following discrepancies were observed. (i) (ii) (iii) (iv) (v) (vi) A sales bill for Rs.8,750 was wrongly debited to the customers account as Rs.7,850. Sales to Santosh of Rs.4,000 was entered in the sales return book but was correctly debited to Santosh. Bill received from Inderjeet Singh of Rs. 5,000 was entered in the bills payable book. An amount of Rs.6,800 owing by a customer had been omitted from the list of Sundry Debtors. Goods bought from M. Kamlesh for an amount of Rs.6,400 has been credited to his account as Rs. 8,400. Rs.987.90 received from Mushtaq was entered in the cash book as Rs.990.87. Give journal entries rectifying the above errors. 23. Will you rectify the following errors? (i) (ii) (iii) (iv) (v) (vi) Rs.900 paid for the telephone bill of the telephone at the proprietors residence was debited to Telephone Expense Account. Cash sales of Rs. 1,200 to Manohar was correctly entered in the Cash Book but was wrongly posted to account of Mohan Rs. 1,500 spent on repairs of a machine was debited to Machinery Account. The amount of Rs.1,200 written off as bad debt, was recovered and was credited to Rameshs personal account. Rs.2,000 included in the wages account was spent on the construction of a cycle shed in the factory. An amount of Rs.1,200 withdrawn by the proprietor for his personal use has been debited to the Trade Expenses Account.

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24.

Rectify the following errors: (i) A customer Suresh, returned goods of the value of Rs.700 which were not recorded in the books. (ii) The debit side of Radhey Lal, a debtor, is overcast by Rs.7,000. (iii) A cheque of Rs.1,400 received from Rajneesh & Sons was dishonored and debited to Allowances Account. (iv) A fax machine purchased for the office for Rs.6,200 was entered in the purchases book. (v) Purchase of goods from Sushil & Co. for Rs.3,800 was entered in the sales book as Rs. 4,800. (vi) A credit sale to P.Mathur of Rs. 10,000 has been wrongly passed through the purchases book. (vii) Rs. 250 being the total discount allowed to debtors has been posted to the credit of Discount Received Account.

ANSWERS Fill in the Blanks (i) (ii) (iii) (iv) (v) do not debit, credit, accurate revenue, expense tally, errors preparation, trial balance

Multiple Choice (i). (b); (ii). (c); (iii). (c); (iv). (b); (v). (c); (vi). (c); (vii). (c); (Viii). (c); (ix). (c); (x). (d). Debit or Credit Balance (i). Credit; (ii) debit; (iii) debit; (iv) credit; (v) debit; (vi) debit; (vii) debit; (viii) debit; (ix) debit; (x) credit.