Definition
A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in the ledger with a view to verify the arithmatical accuracy of posting into the ledger accounts. Trial balance is an important statement in the accounting process. which shows final position of all accounts and helps in preparing the final statements. The task of preparing the statements is simplified because the accountant can take the account balances from the trial balance instead of looking them up in the ledger.
It is normally prepared at the end of an accounting year. However, an
organisation 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. In order to prepare a trial balance following steps are taken:
• Ascertain the balances of each account in the ledger.
• List each account and place its balance in the debit or credit column,
• Compute the total of debit balances column.
• Compute the total of the credit balances column.
• Verify that the sum of the debit balances equal the sum of credit balances.
If they do not tally, it indicate 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 all liabilities, revenues and payables accounts shall have credit balances .
Objectives of Preparing the Trial Balance
The trial balance is prepared to fulfill the following objectives :
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements
Preparation of Trial Balance
A trial balance can be prepared in the following three ways :
(i) Totals Method
(ii) Balances Method
(iii) Totals-cum-balances Method
1 Totals method
Under this method, total of each side in the ledger (debit and credit) is ascertained separately and shown in the trial balance in the respective columns. The total of debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on double entry system.
2 Balances Method
This is the most widely used method in practice. Under this method trial balance is prepared by showing the balances of all ledger accounts and then totaling up the debit and credit columns of the trial balance to assure their
correctness. The account balances are used because the balance summaries the net effect of all transactions relating to an account and helps in preparing the financial statements.
3Totals-cum-balances Method
This method is a combination of totals method and balances method. Under
this method four columns for amount are prepared. Two columns for writing
the debit and credit totals of various accounts and two columns for writing
the debit and credit balances of these accounts. However
Significance of Agreement of Trial Balance
It is important for an accountant that the trial balance should tally. Normally a tallied trial balance means that both the debit and the credit entries have been made correctly for each transaction. However, as stated earlier, the agreement of trial balance is not an absolute proof of accuracy of accounting records. A tallied trial balance only proves, to a certain extent, that the posting to the ledger is arithmetically correct. But it does not guarantee that the entry itself is correct.
There can be errors, which affect the equality of debits and credits, and there can be errors, which do not affect the equality of debits and credits. Some common errors include the following:
• Error in totaling of the debit and credit balances in the trial balance.
• Error in totaling of subsidiary books.
• Error in posting of the total of subsidiary books.
• Error in showing account balances in wrong column of the trial balance or in the wrong amount.
• 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 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 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
• Errors of Omission
• Errors of Principle
• Compensating Errors
Errors of Commission
These are the errors which are committed due to wrong posting of transactions, wrong totalling or balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry, etc.
For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier of goods). This transaction was correctly recorded in the cashbook. But while Trial Balance and Rectification of Errors 191 posting to the ledger, Preetpal’s account was debited with Rs. 2,500 only. This constitutes an error of commission. Such an error by definition is of clerical nature and most of the errors of commission affect in the trial balance.
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. There can be of two types:
(i) error of complete omission
(ii) error of partial omission
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 violation are known 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 lead to under/over stating of income or assets or liabilities,
Searching of Errors
If the trial balance does not tally, it is a clear indication that at least one error has occured. 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 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.
Rectification of Errors
From the point of view of rectification, the errors may be classified into the following two categories :
(a) errors which do not affect the trial balance.
(b) errors which 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 which 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 correct debit and credit to the concerned accounts. Examples of such errors are – complete omission to record an entry in the books of original entry; wrong recording of transactions in the book of accounts; complete omission of posting to the wrong account on the correct 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.
Rectification of Errors Affecting Trial Balance
The errors which affect only one account can be rectified by giving an exaplanatory note in the account affected or by recording a journal entry with the help of the Suspense Account. Suspense Account is explained later in this chapter. Examples of such errors are error of casting; error of carrying forward; error of balancing; error of posting to 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; omitting to show an account in the trial balance.
Suspese Account
Even if the trial balance does not tally due to the existence of one sided errors, accountant has to carry forward his accounting process prepare financial statements. The accountant tallies his trial balance by putting the difference on shorter side as ‘suspense account’.
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, 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, profit and loss adjustment account is debited or credited in place of accounts of expenses/losses and incomes/ gains in order to avoid impact on the income statement of next accounting period.
Conclusion
It implies that if the sum of all debits equals the sum of all credits, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate. The trial balance is a tool for verifying the correctness of debit and credit amounts. It is an arithmetical check under the double entry system which verifies that both aspects of every transaction have been recorded accurately.
