POA SECTION 7 PART 3

TRIAL BALANCE AND ERRORS

At the end of this lesson students will be able to

✓ Outline the disadvantages of the Trial Balance

✓ Describe each Accounting error
✓ Distinguish between errors that affect the Trial Balance and those not affecting the
Trial Balance
✓ Explain the need for the Suspense Account
✓ Outline the steps to correct an Accounting Error
 INTRODUCTION

• What is a Trial Balance?

WHAT IS A TRIAL BALANCE?

• A trial balance is actually a list of debit and credit balances

extracted from the accounts and does not form part of the
double entry system.

• A trial balance is a bookkeeping or accounting report that lists

the balances in each of an organization's Ledger Accounts.
(Accounts with zero balances will likely be omitted.)
 Name of the Business
Trial Balance as at (Day Month Year)
INTRODUCTION TO ACCOUNTING ERRORS
• A trial balance that agrees, (Debit Side = Credit Side) does not mean there are no
errors in the ledger accounts. It merely shows that the total debits equal the total
credits. In fact, there are many errors that do not affect the equality on the Trial
balance.

• In other words, even if the totals of both sides of the trial balance agree, there can
still be plenty of errors which are not disclosed by the trial balance.
THERE ARE TWO TYPES OF ACCOUNTING ERRORS:
ERRORS NOT REVEALED BY THE TRIAL BALANCE

• Errors of Omission – This error takes place when a transaction is not entered in
the books at all. Since it is completely omitted from the books it does not affect
the debit or the credit total of the trial balance.

Example
❖The Purchase of a motor vehicle on credit from Massy Motors $90 500 was not
recorded in the books

❖A cash bill for payment of Electricity worth $600 was omitted from the books
ERRORS NOT REVEALED BY THE TRIAL BALANCE
• Errors of Principle – This error occurs when a transaction is entered in the wrong
category or type of account. Even though a debit and a credit is made, the wrong
category was used.

Example
❖ Purchases of a Computer (Real account) was recorded in the Purchases Account
(Nominal Account)

❖ Repairs of the motor vehicle (Nominal Account)was wrongly debited in the Motor
vehicle account (Real Account)
ERRORS NOT REVEALED BY THE TRIAL BALANCE

• Errors of Commission – one of the entry posted/placed to wrong account that

belongs to the same category.

Example
❖Sale of goods on credit to Jahiem Clarke was posted to Jahiem Pancham Account

❖Advertising expenses was wrongly recorded in the Salary Account

ERRORS NOT REVEALED BY THE TRIAL BALANCE

• Errors of Compensation/ Offsetting Errors – Errors on the debit side of one

account may be offset by errors of the same amount on the credit side of
another account.

Example
❖The Sales Account and the Purchases account were both understated by $100
❖Both Discounts allowed and Discounts received were overcast by $56
ERRORS NOT REVEALED BY THE TRIAL BALANCE

• Errors of Original Entry – the original amount was wrongly entered in the books
of original entry (Journals) and the wrong amount was correctly posted to the
Ledger Accounts using the double entry system.

Example
Rent received of $5400 was credited in the Rent Received Account as $4500
Total credit purchases of $367 was posted to the Purchases account as $376
ERRORS NOT REVEALED BY THE TRIAL BALANCE

• Error of Reversal of Entries – transactions are entered in the accounts using

double entry system but they are entered in complete reversal. An account that
should be debited is credited and vice versa.

Example
❖Payment of Insurance by cheque was wrongly debited to the Bank account and
credited in the Insurance Account
❖Sale of goods to Tanjiro was debited in the sales account and credited in the
debtors account
HOW ARE THESE ERRORS CORRECTED?

1. Identify the error that was found

2. Identify the two accounts affected by the error
3. Identify which one is Debited and which one is Credited
4. Create General Journal Entry to correct the Error
5. Post the entry to the two accounts
CORRECTION PART 1: THE GENERAL JOURNAL

Name of the Business

The General Journal

Date Details Debit $ Credit $

Year
Month Day Account(s) to be debited xxx
Account(s) to be credited xxx
To record the correction of an error
ERRORS REVEALED BY THE TRIAL BALANCE
These Errors cause one side of the Trial balance to be bigger than the other

• Arithmetic Errors – The balances on the debit side and/or the credit side of the
trial balance were calculated wrongly. There can also be a miscalculation while
preparing and balancing the ledger accounts.

• Posting Errors – This takes place when a transaction is recorded using two debit
entries OR two credit entries instead of one debit and one credit.
ERRORS REVEALED BY THE TRIAL BALANCE
These Errors cause one side of the Trial balance to be bigger than the other

• Incomplete Double Entry – This error occurs when ONLY one entry was made
instead of two. Also known as Single entry. It means that a debit was made with no
credit OR a credit was made with no debit.

• Correct Double entry but different amounts – a transactions may be recorded

correctly using the double entry system but the debit amount (money value) is
different from the credit amount (money value) when it supposed to be the same.
 CORRECTION OF ERRORS AFFECTING THE TRIAL BALANCE –
USE OF SUSPENSE ACCOUNT
Suspense Account
➢ A temporary ledger account created to balance the Trial Balance in the short term so that the Financial
Statements can be prepared

➢ If the smaller side of the trial balance is the debit side it means that the Suspense Account will have a
debit balance. This debit balance is carried into the Balance Sheet under the Current Assets Section

➢ If the smaller side of the trial balance is the credit side it means that the Suspense Account will have a
credit balance This credit balance goes into the Balance Sheet under the Current Liabilities Section

➢ Once all the errors have been corrected this account is automatically closed (balance c/d and Balance
b/d is zero)
 CORRECTION OF ERRORS AFFECTING THE TRIAL BALANCE –
USE OF SUSPENSE ACCOUNT

1. Identify the error that was found

2. Identify the accounts affected (one account affected will be the suspense account)
3. Identify which account should be Debited and which one is credited
4. Create General Journal Entry to correct the error
5. Post the entry to the two accounts
6. Remember once all the errors have been corrected the Suspense account is
automatically closed (balance c/d and Balance b/d is zero)
CORRECTION PART 1: THE GENERAL JOURNAL

Name of the Business

The General Journal

Date Details Debit $ Credit $

Year
Month Day Account(s) to be debited xxx
Account(s) to be credited xxx
To record the correction of an error

REMEMBER

One of the Accounts affected WILL be the Suspense Account!!! It will either be Debited or Credited
 CORRECTION PART 2: THE SUSPENSE ACCOUNT
Name of the Business
The Suspense Account

Date Details $ Date Details $

Year Year
Month Day Month Day

REMEMBER

• It will either be Debited or Credited at the start to show the Difference from the Trial Balance
• It will debited and credited depending on the error being corrected
• After all errors are corrected the closing balance should be ZERO
ERRORS AND THEIR EFFECT ON THE FINANCIAL STATEMENTS
Types of
accounts Income Statement Balance Sheet
Gross Profit and Net Profit Net Profit affect the Capital Section of the
Expense
Balance Sheet
Accounts
Gross Profit and Net Profit Net Profit affect the Capital Section of the
Revenue
Balance Sheet
Accounts
Capital Section of the Balance Sheet
Capital
Opening and Inventory affect Gross Profit The Fixed Assets and Current Assets Sections
Assets

The Long term Labilities and the current

Liabilities Liabilities Sections

Drawings The Capital Section of the Balance Sheet

Return Inwards and Return Outwards affect
Return of Goods
Gross Profit
SO, WHAT HAVE YOU LEARNT?