Account 6 Marks Question

The errors that lead to the differences in the Trial Balance are termed as one-sided errors. These are those errors that affect only one account. Below are given the errors that cause differences in the Trial Balance.

• Wrong casting of any account, this is termed as the error of casting.
• Wrong carrying forward of the balances from previous year’s books or from one end of page to another. These types of errors are termed as the errors in carrying forward.
• If entries are posted in the wrong side of accounts.
• Posting of a wrong amount in account, this is termed as the error of posting.
• If entries are recorded partially, i.e., the entries are not recorded completely, then due to the error of partial omission, Trial Balance does not agree.

Here are a few examples that would not be revealed in a Trial Balance:

• Sales to Mr. X, omitted to be recorded in the Sales Day Book.
• Purchases made from Mukesh, recorded in Mahesh’s Account, who is an other creditor.
• Wages paid for construction of building, recorded in the Wages Account.

Trial Balance: It is a statement prepared with the help of ledger balances at the end of financial year to test the arithmetical accuracy of books of accounts.
Balancing of Trial Balance does not ensure the accuracy of books of Accounts..
Errors which remain undetected even if trial balance agrees:

1. Errors of omission: If a transaction remains unrecorded in Journal or subsidiary books.
2. Errors of comission: When wrong amount is entered either in journa! or subsidiary books.
3. Compensating Errors: If the effect of one error is neutralised by the effect of some other error.
4. Errors of principle: When fundamental principle of accountancy is violated while recording a transaction.

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Note: As per the solution Suspense Account shows a credit balance of ₹ 50. However, as per the answer given in the book, it is a credit balance of ₹ 2050. In order to match answer with the book item (b) is taken as, ‘Purchases return to Sahu ₹ 2,000 were not posted to Sahu’s Account.’ Thus, the rectifying entry for this error will be as:

Sahu’s A/c	Dr.	2,000
To Suspense A/c		2,000

Solution is as follows.

Keeping in view their nature, errors can be classified into following four categories:

1. Errors of Omission.
2. Errors of Commission.
3. Errors of Principle.
4. Compensating Errors.

Errors not affecting the Trial Balance or Two-sided Errors are those errors which do not affect the agreement of Trial Balance. Such errors are not disclosed by the Trial Balance. Following are the examples of such errors:

1. Errors of Principle, i.e., errors which arise due to incorrect application of principles of accounting. Suppose on purchase of a typewriter or printer, Office Expenses Account is debited, Trial Balance will still match.
2. Compensating Errors: If the effect of one error is cancelled by the effect of some other error or errors, Trial Balance will still match. Suppose, an amount of ₹ 10 received from A is not credited to his account and the total of the Sales Book is ₹ 10 in excess, the omission of credit to A's Account will be made up by the increased credit to the Sales Account; the Trial Balance will still match.
3. Errors of complete omission.
4. Posting correct amount on the correct side but in wrong account.
5. Recording wrong amount in the books of original entry (but the recorded amount is correctly debited and credited).
6. Recording both aspects of a transaction twice in the books of account.

When Trial Balance does not agree, i.e., when the total of the debit column does not match that of the credit column, then the difference of the Trial Balance is transferred to a temporary account in order to avoid delay in preparation of the financial statements. This temporary account is termed as Suspense Account. If the debit column falls short of the credit column, then the Suspense Account is debited and if the credit column falls short of the debit column then the Suspense Account is credited.
If all the errors are detected and rectified, then the Suspense Account automatically gets closed (i.e. becomes zero). However, if still there exists any difference, then it should be transferred to the Balance Sheet. If the Suspense Account shows a debit balance, then it is shown in the Assets side and if the Suspense Account shows a credit balance, then it is shown in the Liabilities side of the Balance Sheet.

1. The following are the causes that make a Trial Balance incorrect.

1. Incomplete posting of Journal Entry.
2. Posting in the wrong side of Account.
3. Wrong totalling of Subsidiary Books.
4. Wrong balance of Account.
5. Omission of total of Subsidiary book into Account.
6. Wrong totalling of the Trial Balance.

2.  

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''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.'' -CarterObjectives 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 Locating Errors: The Trial Balance helps in locating errors in maintaining Book of Account. It should, however, be kept in mind that it does not disclose, i.e., show all the errors in Book Keeping except the arithmetical inaccuracies.

Two methods of preparation of Trial Balance:

1. Totals Method.
2. Balances Method.

The important purposes for the preparation of Trial Balance are explained with the help of the following points.

1. Ascertaining the arithmetical accuracy: When the total of all debit balance accounts are equal to all credit balance accounts, it is assumed that at least posting from journal to the respective accounts is arithmetically correct.
2. Summarising the ledger accounts: Trial Balance acts as a consolidated statement, providing a comprehensive list of all the accounts. Thus, a Trial Balance provides a summarised version of each account.
3. Preparing final accounts: As the Trial Balance provides a summarised version of each account, so different accounts can be directly transferred to Trading, Profit and Loss Account, and Balance Sheet without referring to different ledgers.
4. Locating and rectifying errors: If the Trial Balance does not agree, it indicates the occurrence of arithmetical error, which can be easily located. However, Trial Balance only helps in locate and rectify arithmetical error and not other types of errors.

Suspense Account: Sometimes, in spite of best efforts of an accountant, all the errors are not located and the Trial Balance does not tally. In such a situation, to avoid the delay in the preparation of final accounts, the difference in the Trial Balance is placed to a newly opened account known as “Suspense Account”' and the Trial Balance tallies. If the debit side of the Trial Balance exceeds the credit side, the difference will be put on the credit side of the suspense account and if the credit side of the Trial Balance exceeds the debit side, suspense account will be debited. After including the balance of suspense account in the Trial Balance, it will appear to be tallied.

According to the nature of errors committed, errors are classified into the following four categories:

1. Errors of Commission: The errors that are committed because of wrong posting of transactions, wrong balancing of accounts, wrong casting of subsidiary books, wrong totaling or wrong recording of amount in the books are all error of commission. These errors affect the agreement of the trial balance.
2. Errors of Omission: These errors are of two types and are committed when a transactions is partially or completely omitted to be recorded in the books.

1. Error of complete omission: When a transaction is completely omitted to be recorded in the books of accounts or to be posted in the respective ledgers, it is an error of complete omission. Such errors do not affect the agreement of the trial balance.
2. Error of partial omission: When a transaction is partially omitted while recording in the books or amounts or partially omitted from posting in the ledger, it is an error of partial omission. Such errors affect the agreement of the trial balance.

3. Errors of Principle: Accounting transactions are to be recorded following certain principles. If any of the principle of accounting entries are violated or ignored and the error occurring due to such violation is called error of principle.
4. Compensating errors: When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors.

Errors of commission refer to those errors that are committed when transactions are recorded with wrong amounts, wrong balancing is done, wrong posting and/or wrong carrying forwarded is done. The following examples will illustrate the process of understanding and rectification of such errors.

1. Let us consider the first example. Sales made to Mr. X of ₹ 10,000 recorded as 1,000 from invoice.

In this case, Mr. X’s account has been debited with ₹ 1,000 instead of ₹ 10,000; hence, the error of commission is committed. This requires a further debit of ₹ 9,000, in order to rectify this error of commission. This will be rectified by passing the following entry:



(Goods sold to Mr X of ₹ 10,000 was wrongly posted as ₹ 1,000,now rectified)

2. Purchase book was undercast by ₹ 10,000.

This error can be rectified in any of the following two stages:

1. If an error is located before preparing trial balance, then ₹ 10,000 should be recorded in the debit side of Purchases Account.
2. If an error is located after preparing Trial Balance, then the following entry need to be recorded.

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1. Purchases Book has been overcasted by ₹ 1,000. Since it is an error of casting that means individual creditors accounts have been posted correctly and only the total of purchases book has been posted incorrectly to the debit side of Purchases Account. Thus, Purchases Account will be rectified by recording ₹ 1,000 on the credit side of Purchases Account.

2. Purchases from Ram ₹ 20,000 has been omitted to be posted to his account. This mistake is happened only in Ram’s Account which means that the total of Purchases Book is correct. Thus, in order to rectify this error ₹ 20,000 should be posted on the credit side of Ram’s Account.

3. Purchase from Shyam ₹ 15,000 has been posted to the debit side of his account. It implies that there is no mistake in Purchases account, however, Shyam’s account has been wrongly debited with ₹ 15,000 instead of crediting. Thus, rectification will be done by posting the double amount (₹ 30,000) on the credit side of Shyam’s Account.

4. Purchases made from Ghanshayam ₹ 10,000 have been posted to his account as ₹ 1,000. It is a mistake at the time of posting in the ledger account which implies that there is no mistake in the Purchases Account. In this case, Ghanshyam’s Account was credited with lesser amount. So, ₹ 9,000 more will be credited to his account for rectification of this error.

5. Purchases made from Sitaram ₹ 5,000 have been posted to his account as ₹ 50,000. It implies that his account is credited with an excess amount of ₹ 45,000 (50,000 - 5,000). Thus, in order to rectify this error ₹ 45,000 is debited to Sitaram’s Account.

We can prepare the Trial Balance in the following three ways:

1. Totals Method:

In this totals method, we ascertain the total of each side in the ledger i.e. debit and credit, separately and show them in the respective columns in the Trial Balance. Here also the total of the column with debit totals should tally with the total of the column of the credit totals. The dual aspect concept holds true in this case also.

However, totals method is not in use widely as it does not determines the accurate balances of the accounts and thus, also does not help in the preparation of the Financial statements or final accounts.

2. Balances Method:

In this method, we total the debit side and the credit side of the accounts and balance them. We then write these debit or credit balances of the ledger accounts in the respective debit and credit columns in the Trial Balance. A trial balance tallies when the total of the debit column is equal to the total of the credit column.

This method is the most common method as it shows the net effect and also helps in the preparation of the financial statements. Usually, in the trial balance instead of showing the individual accounts of the debtors and creditors, we show Sundry Debtors and Sundry Creditors accounts, respectively.

3. Totals-cum-Balances Method:

In this method, we prepare four columns. In two columns we write debit and credit totals of accounts and in the other two columns, we write the debit and credit balances of accounts. This method consumes a lot of time and is a duplicate of work. Hence, it is rarely in use.

If the Trial Balance agrees, then it should not be taken for granted, that there is absolutely no errors. In fact, there do exist some errors that are not revealed by a Trial Balance. Such ineffectiveness of the Trial Balance is termed as the limitations of Trial Balance. The various limitations of the Trial Balance are given below:

1. It does not assist to detect errors that arise if an entry is not recorded in the Journal. Such errors are termed as the Errors of Complete Omission.
2. If the effect of one error is cancelled by the effect of another error, then it cannot be ascertained by the Trial Balance. Such types of errors are termed as Compensatory Errors, which are rare to find.
3. If correct amount is posted in the correct side; however, in the wrong account and if wrong amount is posted in the wrong side, but in the correct account, then the Trial Balance fails to reflect these errors.
4. If there arises any error of principle, like capital expenditure mistakenly regarded as revenue expenditure or vice-versa, then such errors may not be revealed in form of mismatch between the two columns of the Trial Balance.
5. If any transaction is recorded wrongly in the books of original entry, then such mistakes lead to the errors of recording which are not revealed by Trial Balance.

Note: Closing Stock of ₹ 3,30,000 will not appear in Trial Balance, because it has not been accounted yet.

Solution is as follow:

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 Locating Errors: The Trial Balance helps in locating errors in maintaining Book of Account. It should, however, be kept in mind that it does not disclose, i.e., show all the errors in Book Keeping except the arithmetical inaccuracies.

Note: Since, the Trial Balance does not tally, thus, the difference of ₹ 3,820 is transferred to the Credit Balance Column of Trial Balance.