Account 4 Marks Question

Errors of Principle: When some fundamental principle of Accountancy is violated while recording a transaction, the error is termed as error of principle. These errors are committed in those cases where a proper distinction between capital and revenue items is not made, i.e., a capital expenditure is treated as a revenue expenditure or vice-versa. These errors may be of two types-

1. When a Capital expenditure is treated as revenue expenditure: For example, if the purchase of furniture is treated as an ordinary purchase and is thus debited to purchase account instead of furniture account, it will be an error of principle. Similarly, if amount spent on the extension of building is debited to repairs account instead of building account, it is also an error of principle.
2. When a revenue expenditure is treated as capital expenditure: For example, if the amount spent on the repair of an old machinery is debited to machinery account instead of repairs account.

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Solution is as follows:

The important purposes for which the trial balance was prepared are explained with the help of the following points:
Ascertain the arithmetical accuracy of ledger accounts: The trial balance helps to ascertain whether all the debits and credits are roperly recorded in the ledger. When the debit and the credit balances are equal, it is said that the posting and the balancing of the accounts is arithmetically correct. However, the tallying of the trial balance cannot be considered as a conclusive proof of accuracy of the books.
Helps in locating errors: When a trial balance does not tally, it helps in detecting or locating the errors. The error may have occurred at any one of the stages of an accounting process; namely,

1. Totaling of the subsidiary books.
2. Posting of journal entries in the ledger.
3. Calculating account balances.
4. Carrying account balances to the trial balance.
5. Totaling the trial balance columns.

Helps in the preparation of the financial statements: Trial balance is a statement which lists the debit and credit balances of all ledger accounts and helps in the preparation of the financial statements. Hence, it is considered as a connecting link between the accounting records and the preparation of financial statements.

Trial balance is a statement prepared to check the arithmetical accuracy of transactions recorded in the journal, posted into the ledger and balanced in the ledger accounts. The balance of ledger accounts shows the difference between the total of the debit items and credit items in an account. Personal, real and nominal accounts are considered for preparing the trial balance. Generally, it is prepared at the end of an accounting year. However, it may be prepared at the end of any chosen period, which may be monthly, quarterly, half yearly or annually depending upon when it is required. It helps in the preparation of the financial statements.

Errors of Commission refer to those errors that are committed when transactions are recorded with wrong amounts; wrong balancing or wrong posting and/ or wrong carrying forwarding is done. Below given are the examples of error of commission.

1. Goods purchased worth ₹ 20,000 on credit are recorded in the Purchases Book as ₹ 10,000.

This transaction should have been recorded in the Purchases Book with an amount of ₹ 20,000; however, it was recorded as ₹ 10,000. This is an error due to wrong recording of amount.

2. Total of Sales Book is carried forward as ₹ 5,000 instead of ₹ 500.

In this case, wrong amount is carried forwarded from one accounting period to another or from an end of one page to the beginning of another page. This is referred to as an error of carrying forward.

1. Salary of ₹ 5,000 paid to Rahul was not posted to Salaries Account.

2. Sales to Amrish of ₹ 1,430 posted to his account as ₹ 1,340.

3. Sales to Vijay of ₹ 2,470 posted to his account as ₹ 2,740.

4. Purchases from Pal of ₹ 1,430 posted to his account as ₹ 1,340.

Errors of Omission: If a transaction remains altogether unrecorded either in the Journal or in Subsidiary Books, it will be termed as an error of omission. Such an error will not affect the agreement of a Trial Balance, as neither the transaction has been entered on the debit side of an account nor on the credit side of any other account. For example, suppose goods for ₹ 2,000 have been sold to Ram on credit and the transaction was omitted to be recorded in the books. The omission will not affect the Trial Balance in any way, because neither has it been recorded on the debit side of Ram's account nor on the credit side of sales account.

Plant and Machinery	Dr. Balances
Discount Allowed	Dr. Balances
Bank Overdraft	Cr. Balances
Sales	Cr. Balances
Interest Paid	Dr. Balances
Bad Debts	Dr. Balances

Purchases Return	Cr. Balances
Furniture	Dr. Balances
Bank Loan	Cr. Balances
Discount allowed	Dr. Balances
Capital	Cr. Balances
Drawings	Dr. Balances
Return Inwards	Dr. Balances
Bills Receivable	Dr. Balances

Solution is as follows:

''A Trial Balance is a statement, prepared with the debit and credit balances of the Ledger Accounts to test the arithmetical accuracy of the books.'' -J.R. Batliboi ''A Trial Balance is the list of debit and credit balances, taken out from the Ledger. It also includes the balances of cash and bank taken from the Cash Book.'' -CarterPurpose of a Trial Balance:

1. Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.
2. Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. If the totals of the trial balance do not agree, the differences may be investigated and resolved before financial statements are prepared. Rectifying basic accounting errors can be a much lengthy task after the financial statements have been prepared because of the changes that would be required to correct the financial statements.
3. Trial balance ensures that the account balances are accurately extracted from accounting ledgers.
4. Trail balance assists in the identification and rectification of errors.

"A Trial Balance is a statement, prepared with the debit and credit balances of the Ledger Accounts to test the arithmetical accuracy of the books.”Objectives or Functions of Trial Balance:

1. To Ascertain the Arithmetical Correctness of Ledger Accounts: The Trial Balance enables one to establish whether posting and other accounting processes have been carried out without committing arithmetical errors.
2. To Help Prepare the Final Accounts: Financial Statements are prepared from the Trial Balance. Preparation of Financial Statements, therefore, is the second objective of preparing a Trial Balance.
3. Summary of Each Account: The Trial Balance is a summary of each Ledger Account. The ledger account may have to be referred only when more detail is required in respect of an account.
4. To help in the preparation of Final Accounts: As the trial balance contains the list of all the Ledger accounts, it provides a basis for further processing of accounting data, ie., preparation of final accounts namely Trading and Profit & Loss Account and a Balance Sheet.