Trial Balance

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Learning Objectives

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• To understand the meaning of Trial Balance

• To know how to prepare Trial balance

• To find out the errors while preparing Trial balance and methods to locate them

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Trial Balance

It is a list of all the General ledger accounts (both revenue and capital) contained in the ledger of a business.

It contain the name of the nominal ledger account and the value of that nominal ledger account.

The value of the nominal ledger will hold either a debit balance value or a credit balance value.

The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column.

The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.

The name comes from the purpose of a trial balance which is to prove that the value of all the debit value balances equal the total of all the credit value balances.

Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a business's performance.

If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts.

This error must be found before a profit and loss statement and balance sheet can be produced.

The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.

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• To have balance of all accounts of the ledger in order to avoid the necessity of going through all pages of ledger to find it out

• To have a proof that double entry of each transaction has been recorded because of its agreement

• To have arithmetic accuracy of accounts

• To have material for preparing profit and loss account and balance sheet

Objectives of Trial Balance

Preparation of Trial balance

Total method• Under this method, two sides of the

accounts are totalled.

• The total of the debit side is called the“debit total” and the total of the creditside is called the “credit total”.

• Debit totals are entered on the debitside of the Trial Balance while the credittotal is entered on the credit side ofthe Trial Balance.

• If a particular account has total in oneside, it will be entered either in thedebit column or the credit column asthe case may be.

Balance Method

• Under this method, all the ledgeraccounts are balanced or the differenceof each account is extracted.

• If debit side of an account is bigger inamount than credit side, the difference isput in the debit column of Trial balance

• If the credit side is bigger, the differenceis written in credit column of trialbalance

• The balances may be either “debit-balance” or “credit balance”.

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Trial Balance Errors

• A trial balance onlychecks the sum ofdebits against the sumof credits.

• That is why it does notguarantee that thereare no errors.

• There are classes oferrors that are notdetected by the trialbalance.

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Error of original entry

Error of omission

Error of reversal

Error of commission

Error of principle

Compensating errors

Transposition Error

Error of Original Entry

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– When both sides of a transaction include the wrongamount to a ledger account.

– Example:• If a purchase invoice for Rs. 210 is entered as Rs.120, this will

result in an incorrect debit entry (to purchases), and anincorrect credit entry (to the relevant creditor account), bothfor Rs. 90 less, so the total of both columns will be Rs. 90less, and will thus balance.

– Example:• A credit sale of Rs. 2000 to James wrongly posted to her

account as Rs 200. The effect of this error will be that thefigure of sundry debtors will be reduced by Rs. 1800 lessthan the total of credit side of Trial balance.

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• An error caused by switching the position of two adjacentdigits.

• Since the resulting error is always divisible by 9,accountants use this fact to locate the mis-entered number.

• When two adjacent numbers are transposed, the resultingmathematical error will always be divisible by 9 (e.g. (72-27)/9 = 5).

• Example:– If a credit purchase of Rs 465 from Joe is wrongly written as Rs

564 in purchase book, such error will not be disclosed by theTrial balance . As posting on both the debit side of purchaseaccount and credit side of Joe account will be with wrongamount of Rs 564 , so Trial balance will agree. The result isdivisible by 9. (i.e. (564-465)/9=11)

Transposition Error

Error of Omission

• When a transaction is completely omittedfrom the accounting records.

• As the debits and credits for the transactionwould balance, omitting it would still leave thetotals balanced and agreement of Trialbalance will not be affected in any way.

• A variation of this error is omitting one of theledger account totals from the trial balance.

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Error of Reversal

• When entries are made to the correctamount, but with debits instead of credits,and vice versa.

• Example: If a cash sale for Rs. 100 is debitedto the Sales account, and credited to the Cashaccount. Such an error will not affect thetotals.

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Error of Commission

• When the entries are made at the correctamount, and the appropriate side (debit orcredit), but one or more entries are made tothe wrong account of the correct type.

• Example– If fuel costs are incorrectly debited to the postage account (both

expense accounts). This will not affect the totals.

– Example– If a purchase of Rs 500 from James has been credited to Joe

instead of James, it will not affect the Trial balance, so the Trialbalance will not detect any error.

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• When the entries are made to the correct amount, andthe appropriate side (debit or credit), as with an errorof commission, but the wrong type of account is used.

• Such errors arise when an asset is treated as anexpense or vice versa or a liability is treated as anincome or vice versa

• Example:– If fuel costs (an expense account), are debited to stock (an

asset account). This will not affect the totals.– Rs. 6550 spent on extension of building wrongly debited to

Repairs Account instead of Building Account will affect theagreement of Trial balance.

Error of principle

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Compensating errors

• Multiple unrelated errors that would individually leadto an imbalance, but together cancel each other out.

• These results compensate themselves in the net resultsi.e. over debits or under debits of various accountsbeing neutralised by over credits or under credits tosame extent of other accounts

• Example:– Under posting of Rs 500 on the debit side of a certain

account would be compensated by under posting of Rs 100on the credit side of another account and an omission ofcredit posting of Rs . 400 to a third account. This error mayalso be neutralised by over posting of Rs. 500 on debit sideof some other account or accounts.

Disagreement of Trial Balance

• An item omitted to be posted from a subsidiary book intothe ledger

• Example:– A purchase of Rs 1000 from Mike omitted to be credited to her

account. As a result of this error , the figure of sundry creditorsto be shown in the trial balance will be reduced by Rs 1000 andthe total of the credit side of the trial balance will be Rs. 1000less as compared to the debit side of trial balance.

• Posting an amount to a wrong side of ledger account• Example:

– Rs. 50 discount allowed to a customer wrongly posted to thecredit side of Trial balance instead of debit side of discountaccount. As a result of this error , credit side of trial balance willexceed by Rs. 100 (double the amount of this error)

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Disagreement of Trial Balance

• Wrong additions or balancing of ledger accounts– Example: While balancing capital account at the end of the

financial year, credit balance of Rs 89000 wrongly taken as Rs79000. as a result of this error , the credit total of trial balancewill be short by Rs. 10,000.

• Wrong totalling of subsidiary books– Example: Sales book is overcast by Rs. 10. As a result of this

error credit side of Trial balance will be Rs. 10 too much becausesales account will appear at a higher figure on credit side of Trialbalance.

• An item in subsidiary book posted twice to a ledger account– Example: Payment of Rs.1000 to creditor Paula posted twice to

his account.

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Disagreement of Trial Balance

• Omission of a balance in the account in trialbalance– Example: cash and bank balance may have been omitted to be

included in trial balance.

• Balance of some account wrongly entered in theTrial balance– Example: A balance of Rs. 513 in Stationary account wrongly

entered as Rs 315 in Trial balance.

• Error in totalling of trial balance– Example: The balance of commission earned account wrongly

shown to the debit side instead of credit side of Trial balance.

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Example

– Error: A credit sale of Rs 1000 to Joe has been correctly entered in sales book but Joe account has been debited to only Rs 100 only

– Solution: James Account has been less debited to for Rs 900 , so the debit side of trial balance will be short by Rs 900

– Error: The total of bills payable book , Rs 5000 has been posted to the credit of Bills receivable account

– Solution: This error will not affect the agreement of the Trial balance because the posting of bills payable book has been made to the correct side but in wrong account. The credit given to Bills receivable account instead of bills payable account does not affect the agreement of Trial balance.

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A book keeper taking out a trial balance as on 30th June 2014 found that it did not agree. He proceeded to check the entries and discovered the following errors:

Example

• Error: Rs 2500 paid to James has been wrongly posted to Joe

• Solution: This error will not affect the agreement of Trial balance because amount paid has been posted to right side though wrong account

• Error: Rs 100 owing by a customer has been omitted from list of sundry debtors

• Solution: Sundry debtors have been shown in the Trial balance with a less amount of Rs 100, so debit side of Trial balance is short by Rs. 100

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Example

• Error: The discount column of cash book representing discount allowed to customer has been over added by Rs 10

• Solution: Discount account has been given an excess debit of Rs10 so debit side of Trial balance exceeds Rs 10

• Error: Goods worth Rs 100 taken by proprietor omitted to be recorded in the books.

• Solution: This error will have no agreement of the Trial balance the dual aspect of the entry has been omitted. Neither of the two accounts involved in this transaction has been given debit or credit.

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Example

• Depreciation on furniture Rs 1000 had not been posted to depreciation account

• Depreciation on furniture has not been debited to Depreciation account, so debit side of Trial balance will be Rs 100 short.

• The total of sales book has been added Rs 1000 short

• Sales account has been given less credit for Rs 1000 so credit side of Trial balance would be short of Rs 1000

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Date (2014) Transactions Amount (Rs.)

August 1 Started Business with cash 45,000

August 1 Paid into bank 25,000

August 2 Goods purchased for cash 15,000

August 3 Purchase of furniture and payment by cheque 5,000

August 5 Sold goods for cash 8,500

August 8 Sold goods to James 4,000

August 10 Goods purchased from Joe 7,000

August 12 Goods Returned to Joe 1,000

August 15 Goods Returned by James 200

August 18 Cash received from James Rs. 3760 and discount allowed to him 40

August 21 Withdrew from bank for private use 1,000

August 21 Withdrew from bank for use in the business 5,000

August 25 Paid telephone rent for one year 400

August 28 Cash paid to Joe in full settlement of his account 5,940

August 30 Paid for stationary 200

August 30 Paid for Rent 1,000

August 30 Paid for Staff 2,500

Conceptual Application Numerical