Definition
“Trial balance is a statement,
prepared with the debit and credit balances of ledger accounts to test the
arithmetical accuracy of the books”
As every transaction results in an equal amount of debits and
credits in the ledger, the total of all debit entries in the ledger should
equal the total of all credit entries. At the end of the accounting period, we
check the equality by preparing a two-column schedule called a trial balance,
which compares the total of all debit balances with the total of all credit
balances. The procedure is as follows:
·
List account titles in numerical order.
·
Record balances of each account, entering
debit balances in the left column and credit balances in the right column.
·
Add the columns and record the totals.
·
Compare the totals. They must be the same.
·
If the totals agree, the trial balance is in
balance, indicating that debits and credits are equal for the hundreds or
thousands of transactions entered in the ledger. While the trial balance
provides arithmetic proof of the accuracy of the records, it does not provide
theoretical proof.
OBJECTIVES OF TRAIL
BALANCE
The objectives of preparing a
trial balance are:
·
To
check the arithmetical accuracy of the ledger accounts.
·
To
locate the errors.
·
To
facilitate the preparation of final accounts.
ERRORS IN ACCOUNTING
The fundamental
principle of the double-entry system is that every debit has a corresponding
credit of equal amount and vice-versa. Therefore, the total of all debit
balances in different accounts must be equal to the total of all credit
balances in different accounts, i.e., the total of the two columns should tally
(agree).
The tallying of the
two totals (debit balances and credit balances) of the trial balance ensures
only arithmetic accuracy but not accounting accuracy. If however, the two
totals do not tally, it implies that some errors have been committed while
recording the transactions in the books of accounts. The following are the
various kinds of errors.
KINDS OF ERRORS
(CLASSIFICATION OF ERRORS)
Keeping in view the
nature of errors, all the errors committed in the accounting process can be
classified into two.
- Errors
of Principle and
- Clerical
Errors
I. Errors of
Principle
Transactions are
recorded as per generally accepted accounting principles. If any of these
principles is violated or ignored, errors resulting from such violation are
known as errors of principle. For example, Purchase of assets recorded
in the purchases book. It is an error of Principle, because the purchases book
is meant for recording credit purchases of goods meant for resale and not fixed
assets. A trial balance will not disclose errors of principle.
II. Clerical Errors
These errors arise
because of mistakes committed in the ordinary course of accounting work. These
can be further classified into three types as follows.
a)
Errors of Omission
This error arises when a transaction is
completely or partially omitted to be recorded in the books of accounts. Errors
of omission may be classified as below.
i. Error of Complete Omission: This error arises
when a transaction is totally omitted to be recorded in the books of accounts.
For example, Goods purchased from Ram completely omitted to be recorded. This
error does not affect the trial balance.
ii. Error of Partial Omission: This error arises
when only one aspect of the transaction either debit or credit is recorded. For
example, a credit sale of goods to Siva recorded in sales book but omitted to
be posted in Siva’s account. This error affects the trial balance.
b)
Errors of Commission
This error arises due to wrong recording,
wrong posting, wrong casting, wrong balancing, wrong carrying forward etc.
Errors of commission may be classified as follows:
i.
Error of Recording: This error arises
when a transaction is wrongly recorded in the books of original entry. For
example, Goods of Rs.5,000, purchased on credit from Viji, is recorded in the
book for Rs.5,500. This error does not affect the trial balance.
ii.
Error of Posting: This error arises
when information recorded in the books of original entry are wrongly entered in
the ledger. Error of posting may be
1.
Right
amount in the right side of wrong account.
2.
Right
amount in the wrong side of correct account
3.
Wrong
amount in the right side of correct account
4.
Wrong
amount in the wrong side of correct account
5.
Wrong
amount in the wrong side of wrong account
6.
Wrong
amount in the right side of wrong account, etc.
This error may or may not affect the trial
balance.
iii.
Error of Casting (Totalling) : This error arises
when a mistake is committed while totalling the subsidiary book. For example,
instead of Rs.12,000 it may be wrongly totalled as Rs.13,000. This is called overcasting.
If it is wrongly totalled as Rs.11,000, it is called undercasting.
iv.
Error of Carrying Forward : This error arises
when a mistake is committed in carrying forward a total of one page to the next
page. For example, Total of purchase book in page 282 of the ledger Rs.10,686,
while carrying forward the balance to the next page it was recorded as
Rs.10,866.
c)
Compensating Errors
The errors arising from excess debits or
under debits of accounts being neutralized by the excess credits or under
credits to the same extent of some other account is compensating error. Since
the errors in one direction are compensated by errors in another direction,
arithmetical accuracy of the trial balance is not at all affected inspite of
such errors. For example, If the purchases book and sales book are both
overcast (excess totalling) by Rs.10,000, the errors mutually compensate each
other. This error will not affect the agreement of trial balance.
Errors disclosed and not disclosed by
trial balance
If the impact of the
errors on trial balance is considered, errors may be classified into two
categories – Errors disclosed by trial balance, and Errors not disclosed by
trial balance.
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