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Chapter 7:
Trial balances and correcting
errors
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What you will learn?

 Recording transactions and the trial balance

 Errors not detected by trial balance

 Errors detected by trial balance

 Correcting errors
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Recording transactions and the trial balance

The accounting system

Types Comments

The double entry system

 Record amounts paid into and out of the bank

Cash book
account

 Record small amounts of cash paid for day to day

Petty cash
expenses: buying postage stamps and teas or
book
coffee for the office

 Record amounts such as wages, sales, purchases,

General electricity, travel, advertising, rent, insurance,
ledger repairs, receivables, payables and non-current
assets

Detailed memoranda ledgers

 Record details of exactly what is owed to whom

Payables  The sum of the amounts owing to suppliers in this
ledger ledger agrees with the payables balance in the
general ledger

 Record details of exactly what is owed from whom

Receivabl  The sum of the amounts owed by customers in this
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Recording transactions and the trial balance

The trial balance
 Double entry is carried out correctly
=> The values of all debits equal to the value of all credits
 Balances on each account are worked out
=> The sum of the debit balances equals to the sum of the credit
balances

Trial balance

 Check whether something  Not detect all errors

has gone wrong with the  Only detect errors which
maintenance of double make the debit does not
entry equal to the credit entry
 Should be taken out or in other words, the trial
regularly (at least balance is incorrectly
monthly) because finding
errors in one month’s
postings is easier than that
in a whole year
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Recording transactions and the trial balance

The trial balance

Example of the trial balance:

Dr Cr

Cash 2,900 Asset

Equipment 2,000 Asset

Capital 10,000 Capital

Inventory 2,500 Asset

Payables to suppliers - - Liability

Receivables 4,000 Asset
Sales 4,000 Income

Cost of good sold 2,500 Expense

Rent 100 Expense

Total 14,000 14,000
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Errors not detected by trial balance

Types Examples

 An expense of rent was incorrectly debited to the

wages account
 The purchases daybook had been added up to
Errors of
be $8,900 when the correct total was $9,800.
commission
Both purchases and the payables control account
are posted to less than actual of $900, but the
double entry have been maintained

 An invoice from a supplier is not entered into the

Errors of
purchases daybook at all, so no entry is made for
omission
that transaction

 Rent paid of $210 is debited to the rent account

Compensati as $120 (error = $90 too little debited) and cash
ng errors sales of $540 is credited to the sales account as
$450 (error = $90 too little credited)

 The expense of rent of $350 was incorrectly

recorded in credit side of rent account and cash
Errors of
paid for rent was incorrectly recorded in debit side
principle
of cash account. Instead of adding to an
expense, the value of an asset has increased
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Errors detected by trial balance

Types Examples

 Purchase goods by cash is recorded: Debit

Purchases $100, Credit Cash $120 but
A one-sided forgetting about the sales tax of $20
error  A credit sales of $100 is debited to both
Receivables account of $100 and Sale account
of $100

Incorrect in
the production  Leaving out an account or listing it on the
of the trial wrong side of the trial balance
balance

 Electricity paid of $630 is debited to the

Transposition electricity account as $630 but is credited to the
error cash account as $360. Then the balance of
cash in trial balance is $270 too much recorded
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Correcting errors

Correcting errors

Errors not detected Errors detected

by trial balance by trial balance

 Make the trial balance  Not make the trial

not balance balance not balance
 The suspense account  The errors can be
is used to indicate the easily to correct by
amount which differ journal
among two sides in
the trial balance
 When errors are
corrected, the
suspense account can
be brought back to
zero and two columns
of the trial balance
agree
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Correcting errors
Example
The trial balance

Dr Cr

Cash 2,700

Equipment 1,800
Capital 10,000

Inventory 2,500

Payables to suppliers 2,700

Receivables 4,000

Sales 4,000

Cost of good sold 2,500

Rent 100

Wages 2,456

Total 16,056 16,700

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Correcting errors
Example
Dr Cr

Cash 2,700

Equipment 1,800
Capital 10,000

Inventory 2,500

Payables to suppliers 2,700

Receivables 4,000 The suspense
account indicates
Sales 4,000 that there was
originally more on
Cost of good sold 2,500
the credit side than
Rent 100 on the debit
side so that more
Wages 2,456 debits are needed

Suspense account 644

Total 16,700 16,700

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Correcting errors
Example

An investigation of the differences indicates some errors:

Error 1: Rent of $400 had been charged to wages
=> Error of commission
Error 2: Cash received of $200 had been assumed to be from a
customer paying an invoice in the Receivables ledger. In fact it was
a new sale
=> Error of principle
Error 3: Petty cash of $44 has been left out of the trial balance
Error 4: A sales daybook total of $820 had been debited to
receivables (customers) as $280, though had been correctly
posted to the sales account
Error 5: Discounts allowed to customer of $30 had been credited
to the sales account rather then debited to the discounts allowed
account
=> Error 3, 4 and 5 are one-sided errors
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Correcting errors
Example

Correcting errors 1 and 2 by journal:

Error 1: Rent of $400 had been charged to wages

=> Error of commission. Corrected by journal:
Dr Rent expense account $400
Cr Wage expense account $400
Error 2: Cash received of $200 had been assumed to be from a
customer paying an invoice in the Receivables ledger. In fact it was
a new sale
 Error of principle. Corrected by journal:
Dr Receivables account $200
Cr Sale $200
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Correcting errors
Example

Updated in the trial balance after correcting error 1 and 2:

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Correcting errors
Example
 The suspense account is not a real ‘T’ account; it is just a way
of tracking the errors
 Some notes to avoid making the wrong adjustments in the
suspense account:
• How are the accounts or trial balance to be
corrected?
• What side is to be adjusted and by how much?
• Having worked that out, the suspense account entry
is always on the other side
Correcting errors 3,4 and 5 by the suspense account
Error 3:
$44 has been left out of the trial balance. $44 needs to be
introduced on the debit side of the trial balance as petty cash so
the suspense account will be credited $44
Error 4:
Receivables is debited by $280 when they should have been
debited by $820. The size of the error is $540 and this needs to be
an extra debit to receivables. So the suspense account is credited
by $540
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Correcting errors
Example
Correcting errors 3,4 and 5 by the suspense account
Error 5:
$30 had been credited to sales rather than debited to discounts
allowed. The size of the error is $30 x 2 = $60. $30 will be debited
to the sales account and $30 debited into the discount account, so
the suspense account will be credited $60

Dr Suspense account Cr

Balance b/d $644 Error 3: $44 petty cash put into the trial $44
balance

Error 4: Extra $540 into receivables $540

Error 5: $30 out of sales and $30 into $60

discounts

$644 $644
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Correcting errors
Example
The trial balance after correcting all errors: