TRIAL BALANCE NOTES

A Trial Balance is a two-column schedule listing the titles and balances of all the accounts in the order in which they appear in the ledger. The debit balances are listed in the left-hand column and the credit balances in the right-hand column. In the case of the General Ledger, the totals of the two columns should agree.

We, now, know the fundamental principle of double entry system of accounting where for every debit, there must be a corresponding credit. Therefore, for every debit or a series of debits given to one or several accounts, there is a corresponding credit or a series of credits of an equal amount given to some other account or accounts and viceversa. Hence, according to this principle, the sum total of debit amounts must equal the credit amounts of the ledger at any date. If the various accounts in the ledger are balanced, then the total of all debit balances must be equal to the total of all credit balances. If the same is not true then the books of accounts are arithmetically inaccurate.

It is, therefore, at the end of the financial year or at any other time, the balances of all the ledger accounts are extracted and are recorded in a statement known as Trial Balance and finally totalled up to see whether the total of debit balances is equal to the total of credit balances. A Trial Balance may thus be defined as a statement of debit and credit totals or balances extracted from the various accounts in the ledger books with a view to test the arithmetical accuracy of the books.

The agreement of the Trial Balance reveals that both the aspects of each transaction have been recorded and that the books are arithmetically accurate. If both the sides of Trial Balance do not agree to each other, it shows that there are some errors, which must be detected and rectified if the correct final accounts are to be prepared. Thus, Trial Balance forms a connecting link between the ledger accounts and the final accounts.

4.2    OBJECTIVES OF PREPARING TRIAL BALANCE

The following are the main objectives of preparing the trial balance:

  • To check the arithmetical accuracy of books of accounts: According to the principle of double entry system of book-keeping, every business transaction has two aspects, debit and credit. So, the agreement of the trial balance is a proof of the arithmetical accuracy of the books of accounts. However, it is not a conclusive evidence of their accuracy as their may be certain errors, which the Trial Balance may not be able to disclose.
  • Helpful in preparing final accounts: The trial balance records the balances of all the ledger accounts at one place which helps in the preparation of final accounts, i.e. Trading and Profit and Loss Account and Balance Sheet. But, unless the trial balance agrees, the final accounts cannot be prepared. So, if the trial balance does not agree, errors are located and necessary corrections are made at the earliest, so that there may not be unnecessary delay in the preparation of the final accounts.
  • To serve as an aid to the management: By comparing the trial balances of different years changes in figures of certain important items such as purchases, sales, debtors etc. are ascertained and their analysis is made for taking managerial decisions. So, it serves as an aid to the management.

4.3    LIMITATIONS OF TRIAL BALANCE

The following are the main limitations of the Trial Balance:

  • Trial Balance can be prepared only in those concerns where double entry system of accounting is adopted.
  • Though trial balance gives arithmetic accuracy of the books of accounts but there are certain errors, which are not disclosed by the trial balance. That is why it is said that trial balance is not a conclusive proof of the accuracy of the books of accounts.
  • If trial balance is not prepared correctly then the final accounts prepared will not reflect the true and fair view of the state of affairs of the business. Whatever conclusions and decisions are made by the various groups of persons will not be correct and will mislead such persons.

4.4   METHODS OF PREPARATION OF TRIAL BALANCE

A trial balance can be prepared by the following two methods:

  1. Total method: In this method, the debit and credit totals of each account are shown in the two amount columns (one for the debit total and the other for the credit total).
  2. Balance Method: In this method, the difference of each amount is extracted. If debit side of an account is bigger in amount than the credit side, the difference is put in the debit column of the Trial Balance and if the credit side is bigger, the difference is written in the credit column of the Trial Balance.

A specimen of the Trial Balance is given as follows:

TRIAL BALANCE OF …………… AS ON ……………..
Serial No. Name of the Account Dr. Balance Rs. Cr. Balance Rs.
 

 

      

Of the two methods of the trial balance preparation, the second is usually used in practice because it facilitates the preparation of the final accounts.

ACCOUNTING ERRORS

If the two sides of a trial balance agree it is a prima facie evidence of the arithmetical accuracy of the entries made in the Ledger. But even if the trial balance agrees, it does not necessarily mean that the accounting records are free from all errors, because there are certain types of errors, which are not revealed by a Trial Balance. Therefore a Trial Balance should not be regarded as a conclusive proof of accuracy of accounts.

In accounting an error is a mistake committed by the book-keeper (Accountant/Accounts Clerk) while recording or maintaining the books of accounts. An error is an innocent and non-deliberate act or lapse on the part of the persons involved in recording business transactions. It may occur while the transactions are originally recorded in the books of original entries i.e. Journal, Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book and Cash Book, or while the ledger accounts are posted or balanced or even when the trial balance is prepared. These errors may affect the arithmetical accuracy of the trial balance or may defeat the very purpose of accounting. These errors can be classified as follows:

  1. Clerical errors
  2. Errors of Principle

A brief description of the above errors is given below:

(a)      Clerical errors

Clerical errors are those errors, which are committed by the clerical staff during the course of recording business transactions in the books of accounts. These errors are:

  1. Errors of omission
  2. Errors of commission
  3. Compensating errors
  4. Errors of duplication

Errors of omission: When business transaction is either completely or partly omitted to be recorded in the books of prime entry it is called an ‘error of omission’. When a business transaction is omitted completely, it is called a ‘complete error of omission”, and when a business transaction is partly omitted, it is called a “partial error of omission”. A complete error of omission does not affect the agreement of trial balance whereas a partial error of omission may or may not affect the agreement of trial balance.

Omission of recording a business transaction either completely or partly, omission of ledger posting, omission of casting and balancing of an account and omission of carrying forward are some examples of the errors of omission.

An example of a complete error of omission is goods purchased or sold may not be recorded in the purchase book or sales book at all. This error will not affect the trial balance. An example of a partial error of omission is goods purchased for Rs. 5,500 recorded in Purchase Book for Rs. 550. This is a partial error of omission. This error will also not affect the agreement of trial balance. Another example of a partial error of omission is that if goods purchased for Rs. 5,500 is recorded in the Purchase Book for Rs. 5,500 but the personal account of the supplier is not posted with any amount on the credit side in the ledger, it is a partial error of omission and it will affect the agreement of trial balance.

Error of commission: Such errors are generally committed by the clerical staff due to their negligence during the course of recording business transactions in the books of accounts. Though, the rules of debit and credit are followed properly yet some mistakes are committed. These mistakes may be due to wrong posting of a business transaction either to a wrong account or on the wrong side of an account, or due to wrong casting (addition) i.e. over-casting or under-casting or due to wrong balancing of the accounts in the ledger.

Compensating errors: Compensating errors are those errors, which cancel or compensate themselves. These errors arise when an error is either compensated or counter-balanced by another error or errors so that of the other on the debit or credit side neutralizes the adverse effect of one on credit side or debit side. For example, overposting on one side may be compensated by under posting of an equal amount on the same side of the same account or over posting of one side of an account may be compensated by an equal overprinting on the opposite side of some other account. But these errors do not affect the trial balance.

Errors of duplication: When a business transaction is recorded twice in the prime books and posted in the Ledger in the respective accounts twice, the error is known as the ‘Error of Duplication’. These errors do not affect the trial balance.

(b)     Errors of principle

When a business transaction is recorded in the books of original entries by violating the basic/fundamental principles of accountancy it is called an error of principle. Some examples of these errors are:

  • When revenue expenditure is treated as capital expenditure or vice-versa, e.g. building purchased is debited to the purchase account instead of the building account.
  • Revenue expenses debited to the personal account instead of the expenses account, e.g. salary paid to Mr. Ashok, a clerk, for the month of June, debited to Ashok’s account instead of salary account. These errors do not affect the Trial Balance.

The disagreement of the Trial Balance will disclose the following errors:

  • An item omitted to be posted from a subsidiary book into the Ledger i.e. a purchase of Rs. 6,000 from Satpal omitted to be credited to his account. As a result of this error, the figure of sundry creditors to be shown in the Trial Balance will reduce by Rs. 6,000 and the total of the credit side of the Trial Balance will be Rs. 6,000 less as compared to the debit side of the Trial Balance.
  • Posting of wrong amount to a ledger account i.e. credit sale of Rs. 12,000 to Nisha wrongly posted to her account as Rs. 1,200. The effect of this error will be that the figure of sundry debtors will reduce by Rs. 10,800 and the total of the debit side of the Trial Balance will be Rs. 10,800 less than the total of the credit side of the Trial Balance.
  • Posting an amount to the wrong side of the ledger account i.e. Rs. 150 discount allowed to a customer wrongly posted

to the credit instead of the debit of the Discount Account. As a result of this error, the credit side of the Trial Balance will exceed by Rs. 300 (double the amount of the error).

  • Wrong additions or balancing of ledger account, i.e. while balancing Capital Account at the end of the financial year, credit balance of Rs. 1,89,000 wrongly taken as Rs. 1,79,000. As a result of this error, the credit total of the Trial Balance will be short by Rs. 10,000.
  • Wrong totalling of subsidiary books, i.e. Sales Book is overcast by Rs. 1,000. As a result of this error, Credit side of the Trial Balance will be excess by Rs. 1,000 because Sales Account will appear at a higher figure on the credit side of the Trial Balance.
  • An item in the subsidiary book posted twice to a ledger account, i.e. a payment of Rs. 9,000 to a creditors posted twice to his account.
  • Omission of a balance of an account in the Trial Balance, i.e. cash and bank balances may have been omitted to be included in the Trial Balance.
  • Balance of some account wrongly entered in the Trial Balance i.e. a balance of Rs. 614 in Stationery Account wrongly entered as Rs. 416 in the Trial Balance.
  • Balance of some account written to the wrong side of the

Trial Balance, i.e., balance of Commission Earned Account wrongly shown to the debit side instead of the credit side of the Trial Balance.

  • An error in the totalling of the Trial Balance will bring the disagreement of the Trial Balance.

Illustration 4.2: Ramniwas, a book-keeper, taking out a trial balance as on 31st March 2005, found that its debit and credit columns did not agree. He proceeded to check the entries and discovered the following errors:

  1. A credit sale of Rs. 1,000 to Ajay had been correctly entered in the Sales Book but Ajay’s Account had been debited with Rs. 100 only.
  2. The total of the Bills Payable Book Rs. 5,000 had been posted to the credit of Bills Receivable Account.
  3. 2,500 paid to Ram had been wrongly posted to Shyam.
  4. 100 owing by a customer had been omitted from the list of debtors.
  5. The discount column of the Cash Book representing discount allowed to customer has been over-added by Rs. 10.
  6. Goods worth Rs. 100 taken by the proprietor omitted to be recorded in the books.
  7. Depreciation on furniture Rs. 100, had not been posted to Depreciation Account.
  8. The total of Sales Book had been added Rs. 1,000 short.

Which of the above errors caused the totals of the Trial Balance to disagree and by how much did the totals differ?

Solution: The effect of the above noted errors on the Trial Balance will be as follows:

  1. Ajay’s account has been given fewer debits for Rs. 900, so the debit side of the Trial Balance would be short by s. 900.
  2. This error will not affect the agreement of the Trial Balance because the posting of the Bills Payable Book has been made to the correct side but in the wrong Account. The credit given to Bills Receivable Account instead of Bills Payable Account does not affect the agreement of the Trial Balance.
  3. This error will not affect the agreement of the Trial Balance because the amount paid has been posted to right side through to a wrong account.
  4. Sundry debtors have been shown in the Trial Balance with a less amount of Rs. 100, so debit side of the Trial Balance is short by Rs. 100.
  5. Discount Account has been given an excess debit of Rs. 10 so debit side of the Trial Balance exceeds by Rs. 10.
  6. This error will have no affect on the agreement of the Trial Balance because the dual aspect of the entry has been omitted i.e., neither of the two accounts involved in this transaction has been given debit or credit.
  7. Depreciation of furniture has not been debited to

Depreciation Account, so debit side of the Trial Balance will be short by Rs. 100.

  1. Sales Account has been given less credit for Rs. 1,000, so credit side of the Trial Balance would be short by Rs. 1,000.

The combined affect of all the errors is that the credit side of the Trial Balance would exceed the debit side by Rs. 90.

4.6    STEPS FOR LOCATION OF ERRORS

Whenever a Trial Balance disagrees, the following steps should be taken to locate the causes of the difference:

  1. Recheck the total of the Trial Balance and ascertain the exact amount difference in the Trial Balance.
  2. Divide the difference of the Trial Balance by two and find out if there is any balance of the same amount in the Trial Balance. It may be that such a balance might have been recorded on the wrong side of the Trial Balance, thus causing a difference of double the amount.
  3. If the mistake is not located by the above steps, the difference in the Trial Balance should be divided by 9. If the difference is evenly divisible by 9, the error may be due to transposition or transplacement of figures. A transposition occurs when 57 is written as 75, 197 as 791 and so on. A transplacement takes place when the digits of the numbers are moved to the left or right e.g. when Rs. 5,694 is written

as Rs. 56.94 or s. 569.40. If there is a transposition or transplacement of figures, the search can be narrowed down to numbers where these errors might have been made.

  1. See that the balances of all accounts including cash and bank balances have been included in the Trial Balance.
  2. See that the opening balances have been correctly brought forward in the current year’s books.
  3. If the difference is of a large amount, compare the Trial Balance of the current year with that of the previous year and see that the figures under similar head of account are approximately the same as those of the previous year and whether their balances fall on the same side of the Trial Balance. If the difference between the previous year figures and the current year figures is large one, establish the causes of difference.
  4. If the above listed steps fail to detect the errors, check your work as follows:
    • Check the totals of the subsidiary books paying particular attention to carry forwards.
    • Check the posting made from the Journal or subsidiary books in the ledger.
    • Re-check the balances extracted from ledger.
    • Re-cast the list of balances.

If all the efforts fail to locate the errors, all the books of primary entry (subsidiary books) must be cast, and, if necessary, the postings to the ledger should be re-checked.

4.7     SUMMARY

As air, food and water are indispensable to life, Trial Balance is indispensable to accounting. It serves as a lubricant for the smooth movement and completion of the accounting cycle. Moreover, it forms a useful connecting link between ledger accounts and final accounts. The agreement of a Trial Balance is not a conclusive proof as to the absolute accuracy of the books. It only gives an indication of the arithmetical accuracy. Even if both the sides of trial Balance agree to each other yet there may be some errors in the books of accounts.

4.8     KEYWORDS

Trial Balance: A Trial Balance is a statement of debit and credit balances extracted from all the ledgers with a view to ascertain arithmetical accuracy of posting of all transactions into the respective ledgers.

Clerical Errors: Those errors which are committed by the clerical staff during the course of recording business transactions in the books of accounts is known as clerical errors.

Compensating Errors: Compensating errors are those errors which cancel or compensate themselves.

Errors of Principle: When a transaction is recorded in the books of accounts by violating the basic principle of accounting, it is called an error of principle.

4.9     SELF ASSESSMENT QUESTIONS

  1. What do you mean by a Trial Balance? Discuss the objectives and methods of preparing a Trial Balance.
  2. Is the agreement of Trial Balance a conclusive proof of the accuracy of books of accounts? If not, what are the errors, which remain undetected by the Trial Balance?
  3. In case of disagreement of the Trial Balance in what order you would follow to locate the errors?
  4. The cashbook of Mr. Sheru shows Rs. 8,364 as bank balance on 31st December 2005. But you find that this does not agree with the balance as shown by passbook. On scrutiny you find the following discrepancies:
    • On 15th 2005 the payment side of cashbook was undercast by Rs. 100.
    • A cheque for Rs. 131 issued on 25th December 2005 was taken in cash column.
    • One deposit of Rs. 150 was recorded in cash book as if there is not bank column therein.
    • On 18th 2005 the debit balance of Rs. 1,526 as on the previous day was brought forward as credit balance.
    • Of the total cheques amounting to Rs. 11,514 drawn in last week of December 2005, cheques aggregating Rs. 7,815 encashed in December.
    • Dividends of Rs. 250 collected by bank and subscription of Rs. 200 paid by it were not recorded in cash book.
    • One outgoing cheque of Rs. 350 was recorded twice in the cash book.
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