TRIAL BALANCETRIAL BALANCE

Trial Balance

What is a trial balance?

It is an internal document. It is a listing of all the accounts with their related

balances.Before computers, it provided a check on accuracy by

showing whether total debits equal total credits.

Trial balance

A Trial balance is a statement showing the list of debit & credit balances of ledger accounts as on a particular date.

It serves as a link between books of accounts and the profit & loss a/c & Balance sheet.

Rule: Debit balances: assets, drawings, expenses & loses Credit balances: liabilities, capital, incomes & gains

Trial balance – Debit balances

Cash/bankDrawingsPurchasesFurniture, Building etc.Opening stock/Closing stockRent, printing & stationary, salaries etc.Loans givenPreliminary expensesSales returnsP & L a/c (loss)

Trial balance –credit balances

Capital Creditors, Bank overdraft, Bills payable etc.SalesPurchase ReturnsDiscount received, interest received etc.Provision for bad & doubtful debtsOutstanding expensesP & L a/c (profit)Reserve fund

Trial balance

The total of these debit & credit balances must be equal. If the totals do not tally, it indicates that there is some error.

DEBITS CREDITS

Locating Trial Balance Errors

What if it doesn’t balance ?

-----------------------------ERROR

Is the addition correct?Are all accounts listed?Are the balances listed correctly?

Locating Trial Balance Errors

Divide the difference by two.Is there a debit/credit balance for this

amount posted in the wrong column?Check journal postings.Review accounts for reasonableness.Computerized accounting programs

usually prohibit out-of-balance entries.

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The Trial Balance : Errors

Errors affecting trial balance

Errors not affecting trial balance

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Errors affecting trial balance

Incorrect additionsIncorrect recordingsIncorrect debit and creditIncorrect ledger balanceIncorrect debit and credit in ledgerIncorrect postingIncorrect missing of transaction

There are FOUR types of errors revealed by a trial balance:

1) Posting to the wrong side of an account.2) Errors in calculation and balancing3) Incorrect amounts entered on one entry4) Omission of one entry.

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Errors not affecting trial balance

Transaction is not journalisedA correct journal entry is not postedA journal entry is posted twiceIncorrect accounts are used in journalising

or postingOffsetting errors are made in recording

the amount of a transaction

A trial balance will not disclose the following types of errors: (Errors not revealed by the trial balance)

1) Errors of omission Complete omission of a transaction, because neither a

debit nor a credit is made.

2) Errors of commission This happens when original figure incorrectly entered. (Correct double entries but incorrect

amounts were recorded)

3) Compensating errors This happens where errors cancel out each other. (eg an

error of Rs 100 is exactly cancelled by another Rs 100 error elsewhere).

4) Errors of principles This happens when the wrong type of account had been

used (eg the purchase of a motor van is debited to a expense account, such as motor expenses, rather than a fixed asset account)

5) Complete reversal of entries This happens when an account should be debited but

was credited (and vice versa)

Rectification of errors:

This depends upon the stage at which the errors are detected. These stages are:

Before preparation of the Trial BalanceAfter the Trial Balance but before the

preparation of the final accounts

Before preparation of the Trial Balance

Till this time the ledger accounts are not closed, therefore it is easy to rectify errors at this stage. There can two types of such errors:

Errors where no journal entry is possible for its rectification: we have to go to the relevant account(s) and put the figure on the right side of the account. No journal entry is necessary.

Complete journal entry can be passed for its rectification: In this case rectification is done with the help of a journal entry. Such rectification entries are passed in the journal proper.

EX. Goods returned by Ram & Co. worth Rs 7650 has been posted in the Return Inward (sales return) A/c as Rs 7560 and in Ram & Co. A/c as Rs 8650.

Ram & Co A/c

Dr Cr

Return Inward A/c

Dr Cr

Date Particulars JF Amnt Date Particulars JF Amnt

To Rectification

(8650-7650) 1000

Date Particulars JF Amnt Date Particulars JF Amnt

To Rectification

(7650-7560) 90

Where rectification can be done with passing of journal entry

Ex: Cash received from Ram posted to Shyam A/c Rs 7000.

Sol: Shyam A/c Dr 7000

To Ram A/c 7000

(Cash received from Ram wrongly entered to Shyam’s A/c, rectification done)

Ex: Salary paid Rs 6000 has been posted to Rent A/c

Sol: Salary A/c Dr. 6000

To Rent A/c 6000

After the Trial Balance but before the preparation of the final accounts

This means the ledger a/cs are already closed. To rectify such errors, journal entries are passed.

In other words if an account is to be debited for rectification, another account has to credited by the same amount, otherwise the Trial Balance will not tally.

In case the error is difficult to detect, the difference is put to an artificial account created temporarily to make the Trial Balance tally. Such an artificial account is known as Suspense account.

Suspense Account

The existence of the ‘Suspense A/c’ in the Trial Balance means there exist an error. Once this error is detected, it is rectified by passing journal entries. Upon rectification of all such errors, the Suspense account is automatically eliminated from the Trial Balance.

EX: Purchase account under cast by Rs 1500

Here we have only one account, but to complete the journal entry, two accounts at least are needed. This unknown side is taken care by the suspense account. Rectification entry:

Purchase A/c Dr 1500

To Suspense A/c 1500