L11- Trial balance Flashcards
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.
Trial balance is considered as a test of arithmetical accuracy of the books of accounts because It is prepared in accordance with the rules of double entry which states that for every debit there is a corresponding credit and vice versa so in a trial balance, the total of the debit balances column must tally with the total of the credit balances column. When the two totals tally, 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. If the two totals do not tally it implies that there are some errors in the books of accounts.
The errors that will be disclosed by the trial balance are -
1. Wrong Casting : If the total of the Cash Book or some other Subsidiary Book is casted wrong, the Trial Balance will not tally.
2. Posting to the Wrong Side of an Account : If instead of posting an amount on the debit side of an account, it is posted on the credit side, or vice versa, the Trial balance will not tally.
3. Posting of Wrong Amount : The Trial Balance will not tally if the posting in an account is made with an incorrect amount.
4. Omission of Posting of One aspect of a Transaction
5. Posting an amount twice in an Account
6. Errors of Totaling and Balancing of Accounts in the Ledger
If the Trial Balance does not tally, it means there are some errors in books of accounts. State the procedure of locating errors.
If the Trial Balance does not tally, it means there are some errors in books of accounts. The procedure of locating errors are -
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.
State the limitations of Trial Balance.
- 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.
- A trial balance gives only condensed information of each account.
- 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.
Is the Trial Balance a conclusive proof of the accuracy of the books of
accounts? Discuss the errors not disclosed by the 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
Explain with examples the different types of errors that are usually committed in recording of transactions?
- Wrong Casting : If the total of the Cash Book or some other Subsidiary Book is casted wrong, the Trial Balance will not tally. For example, the total of the Purchase book has been casted ` 2000 more. When this total will be posted to the debit side of the purchase account, it will also show an excess debit of ` 2000 and hence, the Trial Balance will not agree.
- Posting to the Wrong Side of an Account : If instead of posting an amount on the debit side of an account, it is posted on the credit side, or vice versa, the Trial balance will not tally. For example, goods for ` 2,000 purchased from Sohan. If instead of posting the amount on the credit side of Sohan’s account it is posted to his debit, the debit side of the Trial Balance will exceed the credit side by ` 4,000.
- Posting of Wrong Amount : The Trial Balance will not tally if the posting in an account is made with an incorrect amount. For example, goods for ` 600 have been purchased from Anil. If, it has been correctly entered in the Purchase Book or purchase account, but while posting to Anil’s account, in credit side (correct side) the amount posted is ` 60 instead of ` 600, the Trial Balance will not tally.
- Omission of Posting of One aspect of a Transaction : For example, if ` 500 has been received from Shyam and correctly entered in the Cash Book but if it is omitted to be posted on the credit side of Shyam’s Account, the Trial Balance will not tally.
- Posting an amount twice in an Account : For example ` 500 has received from Vinod and correctly entered in the Cash Book, but if it is posted twice on the credit side of Vinod’s account, the Trial Balance will not tally.
- Errors of Totaling and Balancing of Accounts in the Ledger : Errors may occur in the totaling of debit or credit sides of accounts in the Ledger or in the balancing of accounts in the Ledger. Because the balances of accounts are transferred to the Trial Balance, resulting in transferring wrong balances in the Trial Balance. This will result into the disagreement of the trial balance.
What do you mean by Trial Balance? Discuss the objectives of preparing a Trial Balance
Trial Balance can 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.
The objectives of preparing a trial balance are -
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
iv) To make financial budget : Previous years trial balance figures are also helpful to estimate the future amount. In other words, we can make different financial budgets with the help of trial balance.
What is a Suspense Account? What does its appearance in Trial Balance indicate?
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.
list the causes for the disagreement of a trial balance
the causes for the disagreement of a trial balance are -
1. omission of posting in one account - If you post it to the debit of one account and forget its posting to the credit of the other concerned account, it is bound to affect the Trial Balance.
2. Double posting in one account : If by mistake you post an entry two times to the debit or to the credit of an account it would result in extra debit or credit and as such cause disagreement in the Trial Balance
3. Posting in the wrong side of an account : When an entry is posted in the wrong side of an account i.e. instead of debit side it is posted in the credit side and vice-versa, it would cause disagreement of the Trial Balance. In such a situation, the difference will be for double the amount.
4. 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.
5. Wrong Casting of the subsidiary books : If any subsidiary book is overcast or undercast, it affects the concerned account in ledger.
6. 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
7. 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.
8. 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.
explain how to make a trial balance?
