Download TRIAL BALANCE AND ACCOUNTING ERRORS 11 and more Exercises Accounting in PDF only on Docsity!
Notes
TRIAL BALANCE AND
ACCOUNTING ERRORS
You have learnt the method of recording transactions in journal and its sub-divisions. You have also learnt their posting to various accounts in the ledger. This process of recording and posting continues throughout the year. At the end of the year it becomes necessary to check the arithmetical accuracy of the books of accounts before the preparation of final accounts. For this purpose we prepare a statement called Trial Balance. In this unit you will learn about the preparation of Trial Balance and the extent up to which it can be relied upon for testing the accuracy of accounts. You will also learn about the errors that may be disclosed and that may not be disclosed by the preparation of Trial Balance and the method of locating such errors.
After studying this chapter, you will be able to:
- define trial balance;
- describe the objectives of preparing a trial balance;
- explain the causes of disagreement of a trial balance;
- identify the types of errors disclosed and not disclosed by a trial balance;
- describe the procedure for locating the errors;
- explain the limitations of trial balance;
- prepare the trial balance and
- explain the meaning and disposal of suspense account.
11.1 MEANING OF TRIAL BALANCE
Numerous transactions take place in business everyday. They are first recorded in books of original entry i.e., Journal Proper or one of its sub-divisions. Then they are posted to the appropriate accounts in the ledger. Each ledger account is balanced periodically so as to ascertain the net effect of various transactions posted therein. In the process, some accounts may get closed; the final accounts are prepared for ascertaining the profit or loss and the financial position of the business. The quality and reliability of the results obtained depend, largely on the correctness of the entries made
OBJECTIVES
MODULE - III Ledger and Trial Balance
Notes
in various books of accounts and their ledger posting. Hence, it is necessary to ascertain the accuracy of these entries and ledger postings before we proceed with the preparation of final accounts. For this purpose, we prepare a statement called ‘Trial Balance’, which shows balances of all the ledger accounts. The names of each account having debit balances are shown in the debit column and if it shows a credit balance, the amount is entered in the credit balances column. You know that the total of the debit balances column must tally with the total of the credit balance column, because for every debit there is a corresponding credit and vice versa. When the two totals tally, it is considered as a preliminary proof of the arithmetical accuracy of the accounts. It is an assurance that entries in the journal and posting into ledger have been correctly done and that equality between debits and credits has been maintained throughout. However, if the two totals do not tally it implies that there are some errors in the books of accounts. Trial Balance can thus, be defined as a statement (or a schedule) listing, in separate columns, the debit and credit balances of all ledger accounts on a particular date. It indicates that the books of accounts have been prepared in accordance with the rules of double entry and ensures, to a great extent, the arithmetical accuracy of accounting entries. Trial Balance provides a check on arithmetical accuracy of the recording of financial transactions in different books such as journal and the ledger. Such a check can be performed by preparing a statement called trial balance. Trial balance is a statement prepared by taking up the debit and credit totals or balances of all ledger accounts on a particular date.
11.2 OBJECTIVES OF PREPARING A TRIAL BALANCE
i) To check arithmetical accuracy : With the help of trial balance we can identify the arithmetical error, committed by the accountant or his assistant, because in such a situation the trial balance will not agree. Under such situations it is assumed that some errors have been committed. After identifying such errors the same are rectified. ii) To prepare final accounts of the enterprise : Trial balance becomes the basis of preparing final accounts. If we do not prepare trial balance and just start preparing final accounts, it may be possible that we forget to record some transactions that were not recorded while preparing the final accounts because information about the same was not available at that time. iii) Comparative study of each account : Trial balance helps in comparing the present balance of an account with the previous period balance. By preparing trial balance, we can estimate whether closing balance of accounts will increase or decrease within two accounting periods. It can also be used as a tool to decide whether there is need to decrease the rate
MODULE - III Trial Balance & Accounting Errors Ledger and Trial Balance
Notes
wrong side of an account i.e. instead of debit side it is posted in the credit side and vice-versa, it would also cause disagreement of the Trial Balance. In such a situation, the difference will be for double the amount. For example, 300 received from Khan which is correctly entered on the debit side of the Cash Book, but while posting it to Khan’s Account it is wrongly posted to the debit side of his account instead of the credit side. This would mean that a debit of 600 (300 in Cash Account and 300 in Khan’s Account) has no corresponding credit. With the result the total of the Credit column of the trial balance will be lesser by 600. **iv) Posting wrong amount in an account :** If you post an entry to the correct side of an account but commit an error in writing the amount, this would affect the Trial Balance. Suppose, in the above example you post the entry correctly on the credit side of Khan’s Account but the amount is wrongly written as 200. It would cause a difference of 100. In the Trial Balance, the credit side will be lesser by 100. v) Wrong Casting of the subsidiary books : If any subsidiary book is overcast or undercast, it affects the concerned account in ledger. Suppose the correct total of Sales Journal is 5,600, but it has been totalled as 5,300 when now posted to the credit of Sales Account, the Sales Account will be short by 300, and the Trial Balance will not tally. **vi) Omitting to post the total of a subsidiary book :** If the total of a subsidiary book is not posted to the concerned account, it would affect the Trial Balance. Such mistake relates only to the account where posting was to be done and as such affects only one account. For example, if the totals of the Sales Book 18,900 are not posted to the credit of Sales Account, the credit side on the Trial Balance will be lesser by 18,900. **vii) Wrong totaling or balancing of an account :** When an account is wrongly totaled or wrongly balanced, this would affect the Trial Balance. Suppose total of the debit side of Shyam’s Account has been written as 1, instead of 1,100. It would lead to wrong balance in Shyam’s Account. Consequently, the debit total in the Trial Balance will be higher by 200. Similarly, if the totaling is correctly done but a mistake is committed in balancing the account, it would also cause a difference in the Trial Balance. viii) Omission of an account from Trial Balance : You know that all accounts which show some balance must be included in the Trial Balance. If you forget to write the balance of any account in the Trial Balance, it will not tally. In practice cash book balances are often omitted from Trial Balance.
MODULE - III Trial Balance & Accounting Errors Ledger and Trial Balance
Notes
ix) Writing the balance of an account in the wrong column of the Trial Balance : If the balance of an account which is to be shown in the debit column of the Trial Balance is actually shown in the credit column, the Trial Balances will not tally. It will be affected by double the amount.
x) Wrong totaling of the Trial Balance : If an error is committed in totaling the amount columns of the Trial Balance itself, the Trial Balance will not tally.
Thus, you have learnt about various errors which may cause difference in the Trial Balance. Note that these errors affect only one aspect (debit or credit). This upsets the debit-credit equality leading to the disagreement of the Trial Balance
11.4 ERRORS NOT DISCLOSED BY TRIAL BALANCE
Agreement of the trial balance is not a conclusive proof of the accuracy of the accounts. There may be certain errors which might have been crept into the accounts but do not affect the agreement of the trial balance. Such errors have been discussed below :
i) Errors of Complete Ommission : If a transaction is completely omitted from being recorded in the books of accounts, such an omission will not affect the agreement of the trial balance for example a credit purchase of ` 6000 from Ravi was omitted from being recorded in the Purchase Book. Because of this omission the totals of the purchases book and Ravi’s account will not be affected and hence trial balance will also not be affected.
ii) Errors of commission : These types of errors happen due to the negligence of accountants and cannot be located by preparing trial balance. Suppose a sales of 10,000 was recorded in books as 100. The balances both the accounts i.e sales accountant and cash account will be affected only by ` 100 and hence the trial balance will not be affected.
iii) Compensating Errors : Suppose, an accountant posted 500 less in the debit side of purchase account and at the same time he also posted 500 less in credit side of sales account. In this case an error has been compensated by another error. Such errors are called compensating error and will not affect the trial balance.
iv) Errors of principles : When an accounting principle has been violated while recording a transaction in the books of accounts, such errors are called errors of principle e.g. the purchase of an asset if recorded in the purchases account will be an error of principle but since the purchase account will be debited and the suppliers accounts will be credited with the same amount this error will not affect the trial balance
Trial Balance & Accounting Errors MODULE - III Ledger and Trial Balance
Notes
Fill in the blanks with suitable word or words i. Trial Balance is said to have agreed when its _________ are equal. ii. The agreement of Trial Balance is a proof of __________ accuracy of the ledger posting. iii. There is a ___________ column and a _________ column for balances of accounts in a Trial Balance. iv. Cash in hand is written in the _________ column of the Trial Balance.
11.6 PROCESS OF LOCATING THE ERRORS
If an error exists in the books, it affects the accuracy of results of business operations revealed by the financial statements. Therefore, the errors must be located for rectification. The task of locating errors is, however not easy. The location of errors will be easier if the following steps are systematically taken. i. Check the total of the trial balance. ii. Compare the ledger account balances carried to the trial balance. iii. Verify the total of subsidiary books and their posting to ledger accounts. iv. Verify that all journal entries have been correctly posted to the different ledger accounts. v. If you find that you have an unbalanced trial balance, in other words the debits don’t equal the credits, it indicates that some errors have been committed during the course of accounting process. Such errors have to be found and corrected. The first step in finding an error is to simply add the credit and debit columns again to verify your totals. If they still don’t agree then subtract the smaller totals from the bigger and look for the missing amount in the smaller column. If you find it, you’ve found your error. vi. There are other standard techniques to track down an error in a trial balance. If the debits and credits are not equal, see if the numeral 2 divides equally the difference. If it does, look for an account, incorrectly in the column with the larger total that equals half the difference. If you find this, you’ve found your error. vii. Another technique is to use the numeral 9 to find a transposition error. If the numeral 9 divides evenly the difference between the credits and debits, you have a transposition error. Go back over your credit and debit entries to try to find your transposition error.
Trial Balance & Accounting Errors
INTEXT QUESTIONS 11.
MODULE - III Ledger and Trial Balance
Notes
11.7 PREPARATION OF A TRIAL BALANCE
After recording all financial transactions in the subsidiary books and journal proper the same are posted into the ledger. The ledger accounts are then, balanced. The Balances of the ledger accounts are then transferred to the relevant columns of the trial balance to verify that the debits are equal to the credits. The trial balance is the next step in the accounting cycle. Trial balance is not an account. It is only a statement that lists the balances of ledger accounts including cash and bank balances. It is prepared on a particular date. It is prepared on a sheet with two amount columns for debit and credit balances. The accounts having debit balances are entered in the debit amount column and the accounts having credit balances are entered in the credit amount column. The sum of each column should be equal. It is actually the first step in the “end of the accounting period” process. In practice the trial balance is prepared with debit and credit balances of various accounts in the ledger along with balances in the cash book. The following is the format of a Trial Balance : Trial Balance of (Name of the Firm) As on (Date of Preparation) Name of the Account Debit Balance Credit Balance Amount () **Amount** ()
It can be well understood with the help of the following example. Example: Journalise the following transactions, post them into ledger, balance the accounts and prepare a trial balance : Date Particulars Amount 2012 (`) May 1 Commission received 10, May 2 Rent paid 5, May 5 Interest received 6, May 7 Brokerage paid 2,
MODULE - III^ Trial Balance & Accounting Errors Ledger and Trial Balance
Notes
Dr. Interest Received Account Cr Date Particulars J.F. Amount Date Particulars J.F. Amount ( ) ( ) 2012 2012 May 31 To Balance c/d 6,000 May 5 By Cash 6, 6,000 6, June 1 By Balance b/d 6,
Dr. Brokerage Account Cr Date Particulars J.F. Amount Date Particulars J.F. Amount ( ) ( ) 2012 2012 May 7 To Cash 2,000 May 31 By Balance c/d 2, 2,000 2, June 1 To Balance b/d 2,
Dr. Cash Account Cr Date Particulars J.F. Amount Date Particulars J.F. Amount ( ) ( ) 2012 2012 May 1 To Commission A/c 10,000 May 2 By Rent 5, May 5 To Interest May 7 By Brokerage 2, Received A/c 6,000 May 31 By Balance c/d 9, 16,000 16, June 1 To Balance b/d 9,
Trial Balance as on 31 st^ May 2012 Name of Account Debit Credit Balance () **Balance** () Rent A/c 5, Brokerage A/c 2, Cash A/c 9, Commission A/c 10, Interest Received A/c 6, Total 16,000 16,
11.8 LIMITATIONS OF A TRIAL BALANCE
i) As there are certain errors which are not disclosed by a trial balance. Therefore again it can be said that the agreement of a trial balance is not a conclusive proof of the accuracy of accounts. ii) A trial balance gives only condensed information of each account.
MODULE - III^ Trial Balance & Accounting Errors Ledger and Trial Balance
Notes
iii) It does not give the information about the profit or loss made by the business in the accounting period. iv) If trial balance is not prepared accurately, the final accounts prepared from such a trial balance would not be reliable. v) It does not ensure that all the transactions have been actually recorded in the subsidiary books. vi) It is prepared only by those enterprises which make use of double entry system.
Few errors have been committed in the books of Ram. State with reasons which errors would affect the trial balance. i. Sales 2500 to Shyam omitted from being recording in the books of accounts. ii. Purchase journal was overcast by 2000. iii. Sales journal was under cast by 3000 iv. Amount paid to Anil wrongly posted to the debit of Sunil’s account. v. Bank overdraft shown in the debit column in the trial balance. vi. Sales of 3000 to Rohtas entered in sales journal as sales to Ram. vii. Wages paid for installation of machine debited to wages account.
11.9 SUSPENSE ACCOUNT
When the trial balance does not agree, because of errors committed by the accountant during the accounting process and he decides to prepare the final accounts then the difference is written on the shorter column against an account called ‘Suspense Account’. After wards the errors that affect the trial balance are rectified through the suspense account. Once all such errors are rectified the suspense account opened to artificially balance the trial balance will finally be balanced.
I. Fill in the blanks with suitable word or words : i. If there is the error in totaling the Subsidiary Day Books, the totals of Trial Balance will ______________. ii. The Trial Balance will not agree if there is an error in carrying out _________ from ledger. iii. Agreement of Trial Balance is not a ___________ of the correctness of posting.
Trial Balance & Accounting Errors
INTEXT QUESTIONS 11.
MODULE - III Ledger and Trial Balance
INTEXT QUESTIONS 11.
Notes
- When a Trial Balance does not tally, it means there are errors in books of account. A series of steps are taken to locate such errors.
- There are certain errors which affect the Trial Balance and there are some which do not.
- Errors of principle, errors of complete omission, certain errors of commission in subsidiary books, and the compensating errors are not disclosed by the Trial Balance.
- The limitations of a trial balance are that it does not give the information about the profit or loss made by the business in the accounting period and trial balance gives only condensed information in a summary form for each account.
- Errors : → Compensating Errors : A group of errors wherein the effect of an error is counter-balanced (or compensated) by the effect of one or more errors, as a result of which the agreement of Trial Balance remains unaffected. → Errors of Principle : An error committed by ignoring or misapplying some principle of accounting while recording a transaction in the books of account. → Errors of Complete Omission : When a transaction is completely omitted from being recorded in the books of accounts the resultant errors are called errors of complete omission. → Errors of Partial Omission : When transaction is partly omitted from being recorded in the books of accounts the resultant errors are errors of partial ommission. → Errors of Commission : A clerical error committed by the accountant while recording or posting of a transaction is called error of commission.
- Why do you consider Trial Balance as a test of the arithmetical accuracy of the books of accounts? List the errors that will be disclosed by the Trial Balance.
- If the Trial Balance does not tally, it means there are some errors in books of accounts. State the procedure of locating errors.
- State the limitations of Trial Balance.
- Is the Trial Balance a conclusive proof of the accuracy of the books of accounts? Discuss the errors not disclosed by the Trial Balance.
Trial Balance & Accounting Errors
TERMINAL EXERCISE
MODULE - III Ledger and Trial Balance
Notes
- Explain with examples the different types of errors that are usually committed in recording of transactions?
- What do you mean by Trial Balance? Discuss the objectives of preparing a Trial Balance.
- What is a Suspense Account? What does its appearance in Trial Balance indicate?
- Prepare a Trial Balance of M/s Jai Jawan Jai Kisan Enterprises as on 31.12.2012 from the following balances. Account Amount Account Amount
- Prepare a Trial Balance as on 31.3.2013 from the following balances : Account Amount ` Cash in Hand 3, Cash at Bank 12, Capital A/c 27, Furniture A/c 12, Building A/c 15, Wages A/c 3, Sales A/c 20, Rent A/c 250 Bank Charges A/c 400 Depreciation A/c 200
11.1 (i) correct (ii) incorrect (iii)incorrect (iv) correct (v)incorrect 11.2 (i) debit and credit totals (ii) airthmatic (iii) debit, credit (iv) debit 11.3 Errors ii), iii) and v) would affect the trial balance.
Trial Balance & Accounting Errors
ANSWER TO INTEXT QUESTIONS
MODULE - III Ledger and Trial Balance
MODULE - IV
Depreciation, Provisions and Reserves
This module will help the learners to understand the methods of spreading the cost of fixed assets throughout their working life using the concept of Depreciation. They will also be able to describe the need and importance of creating Provisions and Reserves.
Lesson 12 : Depreciation
Lesson 13 : Provisions and Reserves
Maximum Marks Hours of Studies 12 32
