Trial Balance

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Trial Balance
The Trial balance & Errors is a tool for verifying the correctness of debit and credits amounts. It is an arithmetical check below the double-entry machine which verifies that each component of every transaction has been recorded accurately.

Meaning of Trial Balance

A trial balance is a statement showing the balances, or a total of debits and credits, of all the accounts in the ledger intending to verify the arithmetical accuracy of posting into the ledger accounts. Trial balance is an essential statement in the accounting method as it indicates the final position of all money owed and helps in getting ready the final statements. The project of making ready the statements is simplified due to the fact the accountant can take the balances of all money owed from the trial balance alternatively of going through the complete ledger. It might also be referred to that the trial stability is usually prepared with the balances of accounts.

It is normally prepared at the end of an accounting year. However, an organization may prepare a trial balance at the end of any chosen period, which may be monthly, quarterly, half-yearly or annually depending upon its requirements.

There are the following steps required for preparing Trial Balance:

  • Ascertain the balances of each account in the ledger.
  • List each account and place its balance in the debit or credit column, as the case may be. (If an account has a zero balance, it may be included in the trial balance with zero in the column for its normal balance).
  • Compute the total debit & credit balances.
  • Verify that the sum of the debit balances equals the sum of credit balances. If they do not tally, it indicates that there are some errors. So one must check the correctness of the balances of all accounts. It may be noted that all assets expenses and receivables account shall have debit balances whereas all liabilities, revenues and payables accounts shall have a credit balance.

The objective of Preparing the Trial Balance

The Trial balance is prepared to full-fill the following objectives:

To ascertain the arithmetical accuracy of the ledger accounts

As stated earlier, the purpose of repairing a trial balance is to ascertain whether all debits and credit are properly recorded in the ledger or not and that all accounts have been correctly balanced. As a summary of the ledger, it is a list of the accounts and their balances. When the totals of all the debit balances and credit balances in the trial balance are equal, it is assumed that the posting and balancing of accounts are arithmetically correct. However, the tallying of the trial balance is not conclusive proof of the accuracy of the accounts. It only ensures that all debits and the corresponding credits have been properly recorded in the ledger.

To help in locating errors

When a trial balance does not tally (that is, the totals of debit and credit columns are not equal), we know that at least one error has occurred. The error (or errors) may have occurred at one of those stages in the accounting process: (1) Calculating of subsidiary books, (2) Posting of journal entries in the ledger, (3) Calculating account balances, (4) Carrying account balances to the trial balance, and (5) Calculating the trial balance columns.

It may be noted that the accounting accuracy is not ensured even if the totals of debit and credit balances are equal because some errors do not affect the equality of debits and credits.

For example, the book-keeper may debit a correct amount in the wrong account while making the journal entry or in posting a journal entry to the ledger. This error would cause two accounts to have incorrect balances but the trial balance would tally. Another error is to record an equal debit and credit of an incorrect amount. This error would give the two accounts incorrect balances but would not create unequal debits and credits.

As a result, the fact that the trial balance has tallied does not imply that all entries in the books of original record (journal, cash book, etc.) have been recorded and posted correctly. However, equal totals do suggest that several types of errors probably have not occurred.

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. For preparing a financial statement, one need not refer to the ledger. In fact, the availability of a tallied trial balance is the first step in the preparation of financial statements. All revenue and expense accounts appearing in the trial balance are transferred to the trading and profit and loss account and all liabilities, capital and assets accounts are transferred to the balance sheet.

Preparation of Trial balance

Totals Method

Under this method, the entire of every side within the ledger (debit and credit) is ascertained separately and shown within the balance within the respective columns. The total debit column of the balance should accept as true with the entire credit column within the balance because the accounts are supported by the double-entry system. However, this method isn’t widely utilized in practice, because it doesn’t help in assuming the accuracy of balances of varied accounts and preparation of the financial statements.

Trial Balance as of March 31, 2018

( Using Totals Method)

 Account Title L.F. Debit Total Rs. Credit Total Rs.
Mohan     60,000.00
Rohan        40,000.00 60,000.00
Machinery        20,000.00   3,000.00
Rahul        75,000.00 55,000.00
Sales     70,000.00
Cash      1,00,000.00 57,000.00
Wages          5,000.00  
Depreciation          3,000.00  
Purchases        62,000.00  
    3,05,000.00 3,05,000.00

Balances Method

This is the foremost widely used method in practice. Under this method, the balance is prepared by showing the balances of all ledger accounts then totalling up the debit and credit columns of the balance to assure their correctness. The account balances are used because the balance summarises the internet effect of all transactions concerning an account and helps in preparing the financial statements. It may be noted that within the balance, normally in situ of balances in individual accounts of the debtors, a figure of sundry debtors is shown, and in place of individual accounts of creditors, a figure of sundry creditors is shown.

Trial Balance as of March 31, 2018

( Using Balances Method)

 Account Title L.F. Debit Total Rs. Credit Total Rs.
Mohan’s Capital     60,000.00
Rohan’s Capital     20,000.00
Machinery      17,000.00  
Rahul      20,000.00  
Sales     70,000.00
Cash       43,000.00  
Wages         5,000.00  
Depreciation         3,000.00  
Purchases       62,000.00  
    1,50,000.00 1,50,000.00

Totals-cum-balances Method

This method may be a combination of the totals method and therefore the balances method. Under this method, four columns for amount are prepared. Two columns for writing the debit and credit totals of varied accounts and two columns for writing the debit and credit balances of those accounts. However, this method is additionally not utilized in practice because it’s time-consuming and hardly serves any additional or special purpose.

Trial Balance as of March 31, 2018

( Using Total-cum-Balances Method)

 Account Title L.F. Debit Total Rs. Credit Total Rs. Debit Balance Rs. Credit Balance Rs.
Mohan’s Capital     60,000.00   60,000.00
Rohan’s Capital      40,000.00 60,000.00   20,000.00
Machinery      20,000.00   3,000,00 17,000,00  
Rahul      75,000.00 55,000,00 20,000,00  
Sales     70,000.00   70,000.00
Cash    1,00,000.00 57,000,00 43,000,00  
Wages         5,000.00     5,000.00  
Depreciation         3,000.00     3,000.00  
Purchases       62,000.00   62,000.00  
    3,05,000.00 3,05,000.00 1,50,000.00 1,50,000.00


Significance of Agreement of Trial Balance

It is important for an accountant that the balance should tally. Normally a tallied balance means both the debit and therefore the credit entries are made correctly for every transaction. However, as stated earlier, the agreement of the balance isn’t absolute proof of the accuracy of accounting records. A tallied balance only proves, to a particular extent, that the posting to the ledger is arithmetically correct. But it doesn’t guarantee that the entry itself is correct. There are often errors, which affect the equality of debits and credits, and there are often errors, which don’t affect the equality of debits and credits. Some common errors include the following:

  • Error in totalling the debit and credit balances in the trial balance.
  • Error in totalling of subsidiary books.
  • Error in posting of the total of subsidiary books.
  • Error in showing account balances in the wrong column of the trial balance, or the wrong amount.
  • The omission in showing an account balance in the trial balance.
  • Error in the calculation of a ledger account balance.
  • Error while posting a journal entry: a journal entry may not have been posted properly to the ledger, i.e., posting made either with the wrong amount or on the wrong side of the account or in the wrong account.
  • Error in recording a transaction in the journal: making a reverse entry, i.e., account to be debited is credited and amount to be credited is debited, or an entry with the wrong amount.
  • Error in recording a transaction in the subsidiary book with the wrong name or wrong amount.

Classification of Errors

Keeping in view the nature of errors, all the errors can be classified into the following four categories:

Errors of Commission

These are the errors that are committed due to wrong posting of transactions, wrong totalling or wrong balancing of the accounts, the wrong casting of the subsidiary books, or wrong recording of the quantity within the books of original entry, etc. For example, Mohan Traders paid Rs. 25,000 to Sures Traders (a supplier of goods). This transaction was correctly recorded in the cashbook. But while posting to the ledger, Preetpal’s account was debited with Rs. 2,500 only. This constitutes an error of commission. Such a mistake by definition is of clerical nature and most of the errors of commission affect the balance.

Errors of Omission

The errors of omission could also be committed at the time of recording the transaction within the books of original entry or while posting to the ledger. These are often of two types: i) error of complete omission, ii) error of partial omission. When a transaction is totally omitted from recording within the books of the first record, it’s a mistake of complete omission.

For example, credit sales to Mohan Rs. 10,000, not entered in the sales book. When the recording of a transaction is partly omitted from the books, it is a mistake of partial omission. If within the above example, credit sales had been duly recorded within the sales book but the posting from the sales book to Mohan’s account has not been made, it would be an error of partial omission.

Errors of Principle

Accounting entries are recorded as per the widely accepted accounting principles. If any of those principles are violated or ignored, errors resulting from such violation are referred to as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue. This is very important because it will have an impact on financial statements. It may cause under/overstating of income or assets or liabilities, etc.

For example, the quantity spent on additions to the buildings should be treated as cost and must be debited to the asset account. Instead, if this amount is debited to the upkeep and repairs account, it’s been treated as a revenue expense. This is an error of principle. Similarly, if a credit purchase of machinery is recorded in the purchases book instead of the journal proper or rent paid to the landlord is recorded in the cash book as payment to the owner, these errors of principle. These errors do not affect the trial balance.

Compensating Errors

When two or more errors are committed in such how that the internet effect of those errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors don’t affect the tallying of the balance.

For example, if the purchases book has been overcast by Rs. 10,000 resulting in the excess debt of Rs. 10,000 in purchases account and sales returns book is undercast by Rs. 10,000 resulting in short debit to sales returns account could also be a case of two errors compensating each other’s effect. One plus is about off by the opposite minus, internet effect of those two errors is nil then they are doing not affect the agreement of balance.

Searching for Errors

If the trial balance does not tally, it is a clear indication that at least one error has occurred. The error (or errors) needs to be located and corrected before preparing the financial statements.

If the trial balance does not tally, the accountant should take 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 2, 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 Rs. 1,500, 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. 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 the 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. 954 – 459 = 495). This difference is divisible by 9. A mistake due to the 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 transposed mistake.

Rectification of Errors

From the point of view of rectification, the errors may be classified into the following two categories :
(a) errors that do not affect the trial balance.
(b) errors that affect the trial balance.
This distinction is relevant because the errors which do not affect the trial balance usually take place in two accounts in such a manner that it can be easily rectified through a journal entry whereas the errors which affect the trial balance usually affect one account and a journal entry is not possible for rectification unless a suspense account has been opened.

Rectification of Errors that do not affect the Trial Balance

These errors are committed in two or more accounts. Such errors are also known as two-sided errors. They can be rectified by recording a journal entry giving the right debit and credit to the concerned accounts.

Examples of such errors are – complete omission to record an entry within the books of original entry; wrong recording of transactions within the book of accounts; complete omission of posting to the incorrect account on the right side, and errors of principle.
The rectification process essentially involves:
• Cancelling the effect of wrong debit or credit by reversing it; and
• Restoring the effect of correct debit or credit.
For this purpose, we need to analyse the error in terms of its effect on the accounts involved which may be:
(i) Short debit or credit in an account; and/or
(ii) Excess debit or credit in an account.
Therefore, rectification entry can be done by :
(i) debiting the account with a short debit or with excess credit,
(ii) crediting the account with an excess debit or with short credit.

Rectification of Errors Affecting Trial Balance

The errors which affect just one account are often rectified by giving an explanatory note within the account affected or by recording a journal entry with the assistance of the account.

Examples of such errors are the error of casting; error of carrying forward; error of balancing; error of posting to correct account but with the wrong amount; error of posting to the right account but on the incorrect side; posting to the incorrect side with the incorrect amount; omitting to point out an account within the balance. An error in the books of original entry, if discovered before it is posted to the ledger, may be corrected by crossing out the wrong amount by a single line and writing the right amount above the crossed amount and initialling it.

An error during an amount posted to the right ledger account can also be corrected in a similar way, or by making a further posting for the difference in the amount and giving an explanatory note in the particulars column. But errors should never be corrected by erasing or overwriting reduces the authenticity of accounting records and provides an impact that something is being concealed. A better way, therefore, is by noting the correction on the acceptable side for neutralising the effect of the error.

Suspense Account

Even if the trial balance does not tally due to the existence of one-sided errors, the accountant has to carry forward his accounting process to prepare financial statements. The accountant tallies his trial balance by putting the difference on the shorter side as a ‘suspense account’.

In the above case, the difference in trial balance has arisen due to one-sided error. In a real situation, there can be many other such one-sided errors that cause a difference in the trial balance and thus result in the opening of the suspense account. Till all errors affecting agreement of trial balance are not located it is not possible to rectify them and tally the trial balance in such a situation, is shown in the Suspense account, makes the total of debit and credit columns and proceeds further with the accounting process.

When the errors are located and the specific accounts and amounts involved are identified, the amounts are transferred from the suspense account to the relevant accounts thereby closing the suspense account. Thus, the suspense account is not placed in any particular category of accounts and is just a temporary phenomenon. affecting agreement of trial balance are not located it is not possible to rectify them and tally the trial balance in such a situation, is shown in the Suspense account, make the total of debit and credit columns and proceed further with the accounting process.

While rectifying one-sided errors using suspense account, the following steps are taken:
(i) Identify the account affected due to error.
(ii) Ascertain the amount of excess debit/credit or short debit/credit in the affected account.
(iii) If the error has resulted in excess debit or short credit in the affected account, credit the account with the amount of excess debit or short credit.
(iv) If the error has resulted in excess credit or short debit in the affected account, debit the account with the amount of excess credit or short debit.
(v) Complete the journal entry by debiting or crediting the suspense account as another account affected otherwise.

Rectification of Errors in the Next Accounting Year

If some errors committed during an accounting year are not located and rectified before the finalisation of financial statements, the suspense account cannot be closed and its balance will be carried forward to the next accounting period. When the errors committed in one accounting year are located and rectified in the next accounting year, the profit and loss adjustment account is debited or credited in place of accounts of expenses/losses and incomes/gains to avoid impact on the income statement of the next accounting period. You will learn about this aspect at an advanced stage of your studies in accounting.

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