3. Trial Balance

TRIAL 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/bank Drawings Purchases Furniture, Building etc. Opening stock/Closing stock Rent, printing & stationary, salaries etc. Loans given Preliminary expenses Sales returns P & L a/c (loss)

Trial balance –credit balances  Capital Creditors, Bank overdraft, Bills payable etc. Sales Purchase Returns Discount received, interest received etc. Provision for bad & doubtful debts Outstanding expenses P & 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.

Locating Trial Balance Errors What if it doesn’t balance ? -----------------------------ERROR Is the addition correct? Are all accounts listed? Are the balances listed correctly? DEBITS

CREDITS

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.

The Trial Balance : Errors

Errors affecting trial balance Errors not affecting trial balance

9

Errors affecting trial balance Incorrect additions Incorrect recordings Incorrect debit and credit Incorrect ledger balance Incorrect debit and credit in ledger Incorrect posting Incorrect missing of transaction 10

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 balancing 3) Incorrect amounts entered on one entry 4) Omission of one entry.

Errors not affecting trial balance Transaction is not journalised A correct journal entry is not posted A journal entry is posted twice Incorrect accounts are used in journalising or posting Offsetting errors are made in recording the amount of a transaction 12

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 Balance After 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 Date Particulars To Rectification (8650-7650)

JF Amnt

Date

Particulars

JF Amnt

1000

Return Inward A/c Dr

Cr

Date Particulars To Rectification (7650-7560)

JF Amnt

90

Date

Particulars

JF Amnt

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 To Suspense A/c

Dr

1500 1500