Trial Balance: Meaning, Definition, Importance &

Rectification of Errors
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EasyNotes4U September 25, 2018

In this article, we will explain and discuss Trial Balance: Meaning, Definition, Importance &
Rectification of Errors. We will also explain How to locate the accounting errors and then how to
rectify those errors.
  

Meaning and Definitions of Trial Balance:

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Trial balance may be defined as an informal accounting schedule or statement that lists the
ledger account balances at a point in time compares the total of debit balance with the total of
credit balance.

The fundamental principle of double entry system is that at any stage, the total of debits must
be equal to the total of credits. If entries are recorded and posted correctly, the ledger will reflect
equal debits and credits, and the total credit balance will then be equal to the total debit
balances.

Every business concern prepares final accounts at the end of the year to ascertain the result of
the activities of the whole year. To ensure correct result, the concern must be free from doubt
that the books of accounts have been correctly recorded throughout the year. Trial balance is
prepared to test the arithmetical accuracy of the books of accounts. As we know that under
double entry system for each and every transaction one account is debited and other account is
credited with an equal amount. If all the transactions are correctly recorded strictly according to
this rule, the total amount of debit side of all the ledger accounts must be equal to that of credit
side of all the ledger accounts. This verification is done through trial balance.

If the trial balance agrees we may reasonably assume that the books are correct. On the other
hand, if it does not agree, it indicates that the books are not correct – there are mistakes
somewhere. The mistakes are to be detected and corrected otherwise correct result cannot be
ascertained. There are however, a few types of errors which the trial balance cannot detect. In
other words, the trial balance will agree in spite of the existence of those errors.

The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if
trial balance agrees, there may be errors or may not be errors. But if it does not agree, certainly
there are errors.

Purposes of Trial Balance:

The trial balance serves two main purposes. These are as under:

1. To check the equality of debits and credits – an arithmetical or mathematical test of

accuracy.

2. To provide information for use in preparing final accounts.

Methods of Preparing Trial Balance:

There are three methods for the preparation of trial balance. These methods are:

1. Total or gross trial balance

2. Balance or net trial balance
3. Total – cum – balance trial balance

The method 1 and 2 are described below:

Total or Gross Trial Balance:

Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all
the
  
accounts is prepared in a separate sheet of paper with two “amount” columns on the right
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hand side. The first one for debit amounts and the second
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one for credit amounts. The total of
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debit side and credit side of each account is then placed on “debit amount” column and “credit
amount” column respectively of the list. Finally the two columns are added separately to see
whether they agree of not. This method is generally not followed in practice.

Balance or Net Trial Balance:

Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit
balances and credit balances are recorded in “debit amount” and “credit amount” column
respectively and the two columns are added separately to see whether they agree or not. This is
the most popular method and generally followed.

The various Steps involved in the preparation of Trial Balance under this method are given
below:

1. Find out the balance of each account in the ledger.

2. Write up the name of account in the first column.
3. Record the account number in second column.
4. Record the debit balance of each account in debit column and credit balance in credit
column.
5. Add up the debit and credit column and record the totals.

Accounting Errors

Meaning of Accounting Errors:

Accounting errors are the mistakes committed in bookkeeping and accounting. The mistake
may be one relating to routine or one relating to principle. They may occur in entering the
transactions in the journal or subsidiary books or they may creep at the time of posting into the
ledger.

Thus, errors may be committed while recording, classifying or summarizing the accounting
transactions. The error may be the result of an act of omission or commission.

Classification of Errors:
Depending upon the nature of errors, they may be classified into the following four types:

(1) Errors of Omission;

(2) Errors of Commission;

(3) Errors of Principles; and

(4) Compensating Errors.

1. Errors of Omission:
When a transaction is not recorded by mistake in the books of accounts, it is called an error of
omission. The omission may be partial or complete.

Partial Omission may happen in relation to any subsidiary book. Here the transaction is entered
  
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subsidiary
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For example, goods returned by a customer has been entered in the sales returns book but not
posted to the credit of customer’s account. Similarly, cash paid to the supplier has been entered
in the payment side of the Cash Book but not posted to the debit of supplier’s account.

Complete omission can happen when the transaction is completely omitted from the books of
accounts. For example, a bookkeeper failed to enter an invoice from the sales day book.

2. Error of Commission:
When a transaction is entered in the books of accounts, it might be entered wrongly. It may be
entered partially or incorrectly. Such error is called an error of commission. These errors arise
often due to the ignorance or negligence or absent-mindedness of the accountant. It may be of
different types. Examples of such errors are as follows:

(a) Errors relating to subsidiary books:

These are three types:

(i) Entering the wrong amount in a subsidiary book, e.g., a purchase of Rs.430 may be entered in
the Purchase Day Book as Rs.340 due to wrong transposition of figures.

(ii) Entering the transaction in a wrong subsidiary book, e.g., a purchase transaction may be
entered in sales daybook and a sales transaction may be entered in the purchase day book.

(iii) Wrong casting or carry forward of a subsidiary book. Casting refers to the process of
totaling the daybooks periodically. A mistake in relation to totaling is called ‘error in casting’.

If there is excess totaling, the error is ‘over casting’ and short totaling is ‘under casting’.
Sometimes, error may be the result of wrong carry forward of the total from one page of the
daybook to another, e.g., the total of a page may be Rs.235 and carried forward to the next page
as Rs.325.

(b) Errors relating to ledger:

These errors may be subdivided broadly into two types. They are: errors of posting and errors in
balancing.

Error of posting may be further being subdivided as follows:

(i) Posting wrong amount on the right side of an account. Example. Sale of Rs.560 to Mr.Raja is
entered as Rs.650 in the debit side of his account from the Sales Day Book.

(ii) Posting the same amount twice to an account. Example. A cash receipt of Rs.1000 from
Mr.Ram is credited twice to his account.

(iii) Posting the correct amount to the wrong side of the right account. Example. A purchase of
goods from Mr. Raj for Rs.1000 is debited to his account [instead of crediting],

(iv) Posting wrong amount to the wrong side of right account. Example. A purchase of Rs.1000
from Mr.Sam is debited to his account as Rs. 10,000.

(v) Posting the correct amount to the wrong account but on the right side. Example. A sale of
  

goods
1 Accountingto S.Anish for Rs.1000 is wrongly debited to G.Anish
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(vi) Posting correct amount to the wrong account and on the wrong side. Example. A sale of
Rs.1000 to S.Anish is wrongly credited to G.Anish a/c.

Errors in balancing:

Errors may arise in balancing the account resulting in excess or short balance of the account.

3. Errors of Principle:
These errors occur when entries are made against the principles of accounting. Example.
Purchase of computer for office use is wrongly entered in the Purchases Day Book. Capital
expenditure should not be treated as revenue expenditure.

These errors may be committed:

(a) Due to the inability to make a distinction between revenue and capital items;

(b) Due to inability to make a difference between business expenses and personal expenses;

(c) Due to inability to make a difference between productive expenses and non-productive
expenses, e.g., wages paid for production may be debited to salaries a/c or salaries paid to
office employees may be debited to wages a/c.

4. Compensating Errors:
These are the errors, which compensate themselves in the net results, i.e., over debit of one
account is neutralized by an over credit in some other account to the same extent. Similarly a
wrong credit might have been compensated by some wrong debit in some other account.

For example, if tax paid Rs.2, 500 is debited in Tax a/c as Rs.3, 000 and interest received Rs.3,
500 is credited in the interest a/c as Rs.4, 000, the excess debit of Rs.500 in tax a/c is
compensated by an excess credit of Rs.500 in interest a/c.

This type of error may be committed in combination of different errors in different accounts.
Normally the presence of this type of errors will not be revealed by the trial balance.

Impact of Errors on Trial Balance:

The agreement of the Trail balance is proof as to the arithmetical accuracy of the books of
accounts. But it is a final proof of accuracy of books of accounts; it simply assures that for
every debit there is a corresponding and equal credit.

If trial balance does not agree, it is a clear indication that there are certain errors in the books of
accounts. Even if the trial balance agrees, there may be errors in the books of accounts.

Hence, the errors may be classified, depending upon the agreement of trial balance, as
follows:

(a) Errors that do not affect the agreement of the trial balance.

(b) Errors that affect the agreement of the trial balance.

  
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Errors that are not disclosed by Trial balance or not affect the agreement of the Trial balance are
mainly the errors of principle, errors of complete omission, errors of commission and
compensation errors.

Certain errors like entering a transaction in two subsidiary books or writing a wrong amount in a
subsidiary book or mis-posting to the wrong account but correct side, etc. locating such errors
are quite difficult and such errors can always be rectified by means of journal entries.

Errors that are disclosed by trial balance or affect the agreement of the Trial balance are mainly
the errors of wrong or omission of posting, wrong totaling of subsidiary books, wrong carry-
forward and wrong balancing of ledger accounts, etc.

Wrong posting may be in the forms of posting a wrong amount to a ledger account or posting to
the wrong side of an account or double posting.

As these errors affect mostly only one side of ledger accounts, they will be revealed by the trial
balance through disagreement of debit and credit totals.

Rectification of Errors
1. State the meaning of a trial balance?
A trial balance is a statement showing

1. the balances
2. or total of debits and creits

of all the accounts in the ledger so as to verify the arithmetical accuracy of posting into the
ledger accounts.

2. Give two examples of errors of principle?

While accounting entries are recorded, if any of the generally accepted accounting principels
(GAAP) are violated or ignored, it results in errors. These errors are know as errors of principles.
The following are the examples: (You can consider any two of these).

1. Consider the case where amount is spent on adding new structures to the building. This
falls under capital expenditure and should be debited to the asset account. Instead, if this
expenditure is recorded under maintenance and repairs account, it will be treated as
revenu expense. This is an error of principle.
2. Consider the case where the machinery is purchased on credit. This has to be recorded in
journal proper. If on the other hand if it is recorded under purchases book, it is an error of
principle.
3. Consider the case where in the rent is paid to the landlord. This should be recorded under
rent paid. If it is recorded in the cash book as payment to landlord, it is an error of
principle.

3. Give two examples of errors of commission?

Errors of commission are the errors which are committed due to

1. wrong posting of transactions

  
2. wrong totalling
1
3. wrong balancing of the accounts
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2
4. wrong casting of the subsidiary books
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 5. wrong recording of amount in the books of original entry etc.

The following are the examples of errors of commission:(You can consider any two examples)

1. Raj Hans Traders paid ₹ 25,000 to Preetpal Traders (the supplier). This transaction was
properly recorded in the cashbook. However, Preetpal’s account was debited with ₹ 2,500
only while posting to the ledger.
2. Credit sales to Mohan for ₹ 10,000 were recorded as ₹ 1,000 in the sales book.
3. Credit sales to Ramesh for ₹ 5,000 was credited to his account (it should have been
debited)
4. Overcasing of sales book
5. Wrong balancing of machinery account.

4. What are the methods of preparing trial balance?

The following are the methods of preparing trial balances.

1. Totals method: In this method, the total of each side of the ledger account (debit and
credit) is ascertained separately and shown in the trial balance in the respective columns.
As the accounts are based on double entry system, the total of debit column and the total
of credit column in the trial balance should agree with each other.
2. Balances Method: In this method, the trial balance is prepared by showing the balances of
all ledger accunts. The debit and credit columns are totalled up to assure their
correctness. The account balances are used because the balance summarises the net
effect of all transactions related to an account. This helps in the preparation of financial
statements. In the trial balance, sundry debtors amount replaces the balances of
individual accounts of the debtors and sundry creditors amount replaces the balances of
the individual accounts of creditors.
3. Totals-cum-balances Method: This method is a combination of totals method and
balances method. It uses four columns, two columns for writing debit and credit totals of
accounts and two columns for writing the dbite and credit balances of these accounts.

5. What are the steps taken by an accountant to locate the errors in the trial balance?

The following steps are taken by an accountant to locate the errors in the trial balance.

1. Assess by recasting the totals of the debit and credit columns of the trial balance.
2. Based on the comparision between
1. the account head/title and amount appearing in the trial balance
2. the account head/title and amount appearing in the ledger
find any differences in the amount or any omission of an account

3. Compare the trial balance of current year with the trial balance of the previous year. From
this comparison, find any additions and deletions of any accounts and also check whether
there is a huge diference in the amount that is neither expected nor explained.
4. Do/re-do and check the corectness of balances of individual accounts in the ledger.
5. Ensure by re-checking the correctness of the posting in accounts from the books of
original entry.
6. For the differences between the debit and credit columns that are divisible by 2, it is likely
that an amount equal to one-half of the difference may have been posted to the wrong
  
side of another ledger account.
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2
7. Gap or difference may also indicate a complete omission
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of a posting.
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 8. Having a difference that is divisible by 9, indicates that the due to transposition of figures.
For example 143 might have been posted as 134.

6. What is a suspense account? Is it necessary that is suspense account will balance off after
rectification of the errors detected by the accountant? If not, then what happens to the balance
still remaining in suspense account?
the accountant has to carry forward his accounting process and prepare financial statements,
even if the trial balance does not tally due to the presense of one sided errors. However, the trial
balance is tallied by recording the difference on the shorter side into a separate account. This
account is know as suspense account
Rectification of the errors detected by the accountant results in balancing off of the suspense
account. However if few of the errors are not rectified, the suspense account will not be
balanced. In such cases, the balance from the suspense account will be transferred to the
balance sheet. If there is a debit balance in the suspense account, it will be recorded on the
assets side of the balance sheet and if there is a credit balance in the suspense account, it will
be recorded on the liabilities side of the balance sheet.
7. What kinds of errors would cause difference in the trial balance. Also list examples that
would not be revealed by a trial balance?
One sided errors, committed only on one side of an account i.e. either on the credit side or on
the debit side, cause a differene in trial balance. This necessitates the opening of the suspense
account. The following are the examples of one-sided errors.

1. Posting on the wrong side

2. Posting wrong amount
3. Incorrect totalling of the subsidiary books
4. Errors of partial Omission

8. State the limitations of trial balance?

Agreement of trial balance is not an absolute proof of accuracy of the accounting records. In
otherwords it does not guaratee that the entry itself is correct. Tial balance has limitations in
detecting the following errors.

1. Errors of commission
2. Errors of Omission
3. Errors of Principle
4. Compensating Errors

LONG QUESTIONS:

1. Describe the purpose for the preparation of trial balance.

The following is the purpose/objective of preparing the trial balance.

1. To ascertain the arithmetical accuracy of the ledter accounts: Trial balance serves the
purpose of ascertaining whether all the debits and credits are properly recorded in the
ledger or not not. It also acertains that all the accounts have been correctly balanced. Trial
balance reflects the summary of the ledger and lists out all the accounts and their
balances. When it is confirmed that the totals of all the debit balances and credit balances
in the tiral balance are equal, it is assumed that the posting and the balancing of the
accounts is arithmetically correct. However, this does not necessarily implie the accuracy
  
1 ofLedger
Accounting the accounts. It only ensures that the all the debits
a and the corresponding credits are
2 properly recorded in the ledger.
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 2. To help in locating errors: When the trial balance does not tally, it indicates that there
exists an error. This error might have been introduced during one of the following stages
of the accounting process.
1. Totalling of subsidiary books
2. Posting of journal entries in the ledger
3. Calculating account balances
4. Carrying account balances to the trial balance
5. Totaling the trial balance columns.
It should be kept in mind that the equality of the debit and credit balances does not mean
that the accounting is accurate. It is likely that some errors do not affect the equality of
debits and credits but still exist. So, equal totals indicate that several types of errors
probably have not occurred.

3. To help in the preparation of the financial statements. (Profit & Loss account and Balance
Sheet): Trial balance is considered as the connecting link between accounting records
and the preparation of financial statements. Once the tallied trial balance is available, we
can start the preparation of the financial statements.
1. All the revenue and expense accounts appearing in the trial balance are transferred
to the trading and profit and loss account.
2. Similarly, all the assets, liabilities, capital accounts are transferred to the balance
sheet.

2. Explain errors of principle and give two examples with measures to rectify them.
Accounting entries are recorded as per the generally accepted accounting principles. If any of
these principles are violated or ignored, the resulting errors are known as errors of principle. It
may occur due to an incorrect classification of expenditure or receipt between capital and
revenue. As it will have an impact on financial statement, it is very important to deal with these
errors. If not dealt with, it may lead to under/overstating of income or assets or liabilities etc.
The following are examples.

1. The amount spent on additions to the building should be treated as capital expenditure
and must be debited to the asset account. Instead of this, if this amount is debited to
maintenance and repairs account, it has been recorded as a revenue expense and thus
creates an error of principle.
Thus wrong entry recorded in the book of accounts

Maintenance and Repairs A/cDr. xxxxx

To Cash A/c xxxxx

The correct effect should have been:

Building A/cDr. xxxxx

To Cash A/c xxxxx

The rectification entry will be:

  
Building A/cDr.
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 Maintenance and Repairs A/c xxxxx

2. If a credit purchase of machinery is recorded in purchases book instead of journal proper,

it will be an error of principle.
Thus wrong entry recorded in the book of accounts

Purchases A/cDr. xxxxx

To Seller/Creditor A/c xxxxx

Correct effect should have been:

Machinery A/cDr. xxxxx

To Seller/Creditor A/c xxxxx

The rectification entry will be:

Machinery A/cDr. xxxxx

Purchases A/c xxxxx

3. Explain the errors of commission and give two examples with measures to rectify them.
Errors of commission are the errors which are committed due to

1. wrong posting of transactions

2. wrong totalling
3. wrong balancing of the accounts
4. wrong casting of the subsidiary books
5. wrong recording of amount in the books of original entry.

Errors of commission are mostly clerical in nature and most of the errors of commission affect
the trial balance.
The following are examples.

1. Raj Hans Traders paid Rs. 25,000 to Preetpal Traders. However, while recording it in the
journal, Preetpal’s account was debited with Rs. 2,500 only.
The wrong effect has been :

Preetpal’s A/cDr. 2,500

To Cash A/c 25,000

The correct effect should have been :

Preetpal’s A/cDr. 25,000

To Cash A/c 25,000

  
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The rectification entry will be.
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 Preetpal’s A/cDr. 22,500

To Suspense A/c 22,500

2. Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000.
The wrong effect has been :

Sales Return A/cDr. 1,000

To Megha’s A/c 1,000

The correct effect should have been :

Sales Return A/cDr. 1,600

To Megha’s A/c 1,600

The rectification entry will be :

Suspense A/cDr. 600

To Megha’s A/c 600

4. What are the different types of errors that are usually committed to recording a business
transaction?
The following are the different types of errors that are usually committed in recording business
transaction

1. Errors of commission: These are the errors which are committed due to

1. wrong posting of transactions
2. wrong totalling
3. wrong balancing of the accounts
4. wrong casting of the subsidiary books
5. wrong recording of amount in the books of original entry
These are usually clerical in nature and most of these errors affect the trial balance.

2. Errors of Omission: The errors of omission may be committed at the time of recording the
transaction in teh books of original entry or while posting to the ledger. These are further
subdivided into
1. Error of complete Omission: In this, the transaction is completely omitted from
recording in the books of original entry.
2. Error of partial omission: In this, the transaction is partially omitted from the books.
3. Error of principle: Accounting entries are recorded as per the generally accepted
accounting principles. If any of these principles are violated or ignored, the resulting errors
are known as errors of principle. It may occur due to an incorrect classification of
expenditure or receipt between capital and revenue. As it will have an impact on financial
statement, it is very important to deal with these errors. If not dealt with, it may lead to
under/over stating of income or assets or liabilities etc.
  
1 4. Compensating
Accounting Ledger Errors: These are the errors that occur
a
when two or more errors are
2 committed
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a errors on the debits and credits of
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 accounts is nil. These errors do not affect the tallying of the trial balance.

5. As an accountant of a company, you are disappointed to learn that the totals in your new trial
balance are not equal. After going through a careful analysis, you have discovered only one
error. Specifically, the balance of the Office Equipment account has a debit balance of Rs.
15,600 on the trial balance. However, you have figured out that a correctly recorded credit
purchase of pendrive for Rs 3,500 was posted from the journal to the ledger with a Rs. 3,500
debit to Office Equipment and another Rs. 3,500 debit to creditors accounts. Answer each of the
following questions and present the amount of any misstatement :

1. Is the balance of the office equipment account overstated, understated, or correctly

stated in the trial balance?
2. Is the balance of the creditors account overstated, understated, or correctly stated in the
trial balance?
3. Is the debit column total of the trial balance overstated, understated, or correclty stated?
4. Is the credit column total of the trial balance overstated, understated, or correctly stated?
5. If the debit column total of the trial balance is Rs. 2,40,000 before correcting the error,
what is the total of credit column.

Pen-drive falls under stationery and not under assets like office equipment. This is an error of
principle. Hence, posting it in the office equipment account is an error. It should have been
posted under the stationery account. Another error is debiting the supplier account. It should
have been credited.

1. The balance of the office equipment account is overstated in the trial balance.
2. The balance of the creditors account is understated by ₹ 3,500 + ₹ 3,500 = ₹ 7,000
3. The debit column total of the trial balance is correctly stated.
4. The credit column total of the trial balance is understated by ₹ 3,500 + ₹ 3,500 = ₹ 7,000
5. The credit column total of the trial balance is understated by ₹ 7,000. Hence before
correcting the total of the credit column will be ₹ 2,40,000 – ₹ 7,000 = ₹ 2,33,000

  
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