UNIT 11 TRIAL BALANCE Structure 11.0. Objectives 11.1 Introduction U2 Whatis a Trial Balance? 113 Preparation of a Trial Balance 11.4 Preparation of Trial Balance from a Given List of Balances 11.5 Causes for the Disagreement of a Triai Balance 11.6 Locating Errors when the Trial Balance Disagrees 11.7. Errors not Disclosed by Trial Balance 418 Advantages of a Trial Balance 11.9 Limitations of a Trial Balance 11.10 Let Us Sum Up 11.11 Key Words 11.12 Some Useful Books 11.13 Answers to Check Your Progress 11.14 Terminal Questions/Exercises 11.0 OBJECTIVES After studying this unit, you should be able t define trial balance prepare trial balance from a given set of balances explain the causes of disagreement of a trial balance describe the procedure for locating the errors describe the types of errors which remain undisclosed by the trial balance © explain the advantages and limitations of trial balance 11,1 INTRODUCTION ‘You have leamt the method of recording transactions in journal and its sub-divisions. You have also learnt theis 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 account before the final accounts can be prepared. For this purpose we prepare a statement called Trial Balance. You were given some idea about preparation of Trial Balance in Unit 6. {x this unit you will study more about the preparation of Trial Balance and the extent upto which it can be relied upon for testing the accuracy of accounts. You will also learn about the errors that will be disclosed by ‘Trial Balance and the method of locating such errors. 11.2 WHATISA TRIAL BALANCE? ‘Numerous transactions take place in business everyday. They are first recorded in some books of original entry i, Journal Proper oP 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, while the others may show a debit or a credit balance. Based on these balances, 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 in various books of account. Hence, it is necessary to ascertain the accuracy of these entries before we proceed with the preparation of final accounts. For this purpose, we prepare a statement calied ‘Trial Balance’, which showsBooks of Account—II a2 balances of all the ledger accounts. As you studied in Unit 6, the ruling of trial balance is similar to that of journal. We write the name of each account in the particulars column. Ifthe account shows a debit balance, its amount is entered in the debit balances column and ifit shows a credit balance the amount is entered in the credit balances column. You know that the total ofthe debit balances column must tally with the total ofthe credit balances 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 entries in the book’ of accounts. It is an assurance that posting into ledger has been correctly done and that equality between debits and credits has been maintained throughout. If, however, the two totals do not taly it implies that there are errors in the books of account. 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 whether or not the books of account have been written in accordance with the rules of double entry and ensures, to a great extent, the arithmetical accuracy of accounting entries. 11.3 PREPARATION OF A TRIAL BALANCE Atthe outset, itis necessary to note that Trial Balance is a statement of balances. Its, reparation does not involve passing of any journal entries. We simply balance Various accounts in the ledger and list all accounts which show some balance, whether it is debit or credit. You are aware that when cash book is maintained, the ledger does not contain cash and bank accounts. Hence, cash and bank balances are taken from the cash book. Ifthe number of personal accounts is large, you may prepare separate statements of balances for all debtors and creditors and show only the total debtors and total creditors in the trial balance. Let us now take a comprehensive example covering all types of transactions, record them in appropriate books, post them into ledger, and prepare atrial balance. Look at Illustration 1. ft shows the accounting process right upto the preparation of Trial Balance, Dlustration 1 The following is the Balance Sheet of Kapil Dev as on March 31, 1987. Lisbilies Rs, Assets Rs. Capital $0,000 Cash in hand 15,000 [Loan from bank 8,000 Stock ‘50,000 Due to Saluja Bros. 15,000 Due from Khanna 1,500 Due from Mitta 2/500 Furniture 4000 73,000 73,006 ‘The following transactions took place during April, 1987: Re, April 2 Paid wages and salaries 6,000 72 Camhsaies ofbicylés 3,000 * 3. Purchased 20 bieyeles on creit from Mehra CycleCo.@ Rs.600 per bicycle 12,000 * 5. Sold 30 bicycles to Mitl @ 900 per bicycle 27,000 * & Paid to Saluja Bros. in fll setlement of their account 14,600 * 10. Received from Mita 2 bicycles as defective, and sent hima credit note 1.800 713 Pad rent 1.750 * 15 Purchased from Saluja Bros. on credit 20 cycle rims @ Rs, 100cach 22000 20 cycles hubs @ Rs. 20 cach 400 * 18 Soidto Rao LO bicycles @ Rs. 800 per bicycle 5000 * 20, Returned to Saja Bros. 10 ele hubs being ercked 200 > 21 Rap returned 2 bicycles, and sent him credit note 1,6002 4 as > 8 "30 30 ‘Mita paid Purchased one typewriter on credit from Kulub Typewriter Co, Cash sales Khanna paid no hope of getting the balance Rao paid Discoust allowed Paid to Mehta Cycle Co.on account Rs, 14,000 6,500 3.500 1,000 6,200 200 10,000 Prepare Journal Proper and the subsidiary books involved. Show their postings into ledger and prepare a Trial Balance. CASH BOOK br. ce Date [Parteaiae [LF] Discount PPericulars [LF]Dicoant] Cash ‘| I! E Rs ri] rs ro Balance bya By Wagesand ra sales Ave Salas Ae 6.000 » raft stat By Saja Bros 400 | 14,600 + asfrosals A/c By Rene 1790 * 2s|roKhanna By Mehra Cyse Co 10000 + aafroRao 200 Balance fa 10350 700 00/4700 May To lance ba PURCHASES JOURNAL Date | Panicaars Invoice No | OF Tnount 1987 ws sare 3| Metracyle Co, 12.000 = 15 | sata Bros, 2400 30 Tos 14,400 PURCHASES RETURNS JOURNAL Dae) Partcais DetitNote | LF Tait Ne 1987 Rs AApr20 | Sau Bros. “30 oul 300 ee SALES JOURNAL Daw] Parco Tivolce Ro [LEC Amount 1987 Rs. Age. $ | sina 21000 "18 | Rao 8,000 "ie Toul 35,000 Trial Balance 83Books of Account—II 84 SALES RETURNS JOURNAL Date] Particulars Credit Note No | LE, Amount 1987 Rs ‘Apr.10 | Mint 1,800 "2t | Rao 1,500 > 30 Total 3,400 JOURNAL Date | Particulars Le. Dr. ce. ‘Amount | Amount 1987 Rs Re Ape} Gash Ave Dr 15,000 Stock A/e Dr. 30,000 Khanna Dr. 1,500 Mittal Dr 21500 Furniture A/e Dr 000 50,000 8.000 To Saluja Bros. 15,000 ‘(Opening balances of assets and * 24 | Typewriter AZe Dr 6,500 ‘To Kutub Typewriter Co, 6,500 (Being purchase of typewriter on edit) > 28 | Bac Debs A/e Dr. 500 "To Khanna 500 (Being amount sll due from ‘Khanna, now written offs bad debt) 30 Total '80,000 | 80,000 LEDGER Capital Account Dr. cr. 1987 Rs, [1987 Rs. ‘Apr.30 | To Balance e/d 50.000 |Apr.1 | By Balance b/d 50,000 May 1 | By Balance 6/6 50,000 Saluja Bros. Account 1987 Rs. [1987 Rs Apr. 8 | ToCash Ave 14,600 ]Apr..1 | By Balance b/d 15,000 "8 | ToDiscount Ale ‘400 |” 15 | By Purchases A/c 2,400, * 20 | To Returns Outward A/e 200 + 30 | ToBalanceess 2,200 17,400 May 1| By Balance b/a 2,200Bank Loan Account 1987 Rs]1987 Rs ‘Apr.30 | To Balance e/d 8,000] Apr.1. | By Balance b/d 8,000 8,000|May 1 | By Balance b/d $000 Mehra Cycle Co, Account 1987 Rs]1987 Rs, ‘Apr.30 | ToCash A/e 10,000] Apr.3. | By Purchases A/e 12,000 * 30 | ToBalance e/a 2,000] 12,000 12,000 May 1 | By Balance 6/8 2,000, Khanna’s Account 1987 Rs] 1987 Rs Apel | ToBalance b/d 1,500) Apr. 28 | By Cash Ale 1,000, 30 | By Bad Debts A/e '300 1,509 7.500 Mitta’s Account 1987 Rs]1987 Rs Apr.1 | To Balanceb/d 2,500) Ape 10 | By Returns Inward A/e 1,800 v's) | ToSales Ae 27/000] * 22 |ByCash A/c 14,900 30 | By Balance e/d 13,700 729,500} 29,500 May1 | ToBalance b/d 13,700 Rao's Account 1987 ws [1987 Rs. ‘Ape.18,| To Sales Ave 8,000] Apr. 21 }By Returns Inward A/e 1,600 "30 |By Cash Ave 6200 * 30 |By Discount A/e ‘200 3,000] 3,000 1987 Rs, Apel | ToBalance b/d By Balancec/d 4,000 May1 } ToBalance b/d ‘Typewriter Account 1987 Rs] 1987 Bs. ‘Ape.24 | To Kutub Type- Apr. 30 | By Balance e/d 6,500 writer Co, 6,300] May 1 | ToBalance b/d 6,300] ‘Trial Balance as86 Books of Account—H ‘Stock Account 1987 Rs]1987 Rs. ‘Apr.1 | To Balance b/d 50,000] Apr. 20 By Balance ot 50,000 May1 | To Balance b/d '50,000} Sales Account 1987 Rs. [Apr. 2 | ByCash Ale 3,000 25 | ByCash Ave 3,500 * 30 | By Sundries—as per Sales Book 35,000 Purchases Account 1987 Rs, ‘Apr.30 | To Sundries~as per Purchases Book 14,400 Returns Outwards Account 1987 Rs. = JApr-30) By Sundries— as pesReturns Ourwards Book 200 ‘Returns Inwards Account 1987 Re ‘Ape.30 | To Sundries— as per Returns Inwards Book 3,400} ‘Wages & Salaries Account 1987 Rs, Apr.2 | ToCash A/e 6,000| Rent Account 1987 Rs Ape.13 | To Cash ave 1,750] Bad Debts Account 1987 Rs. Apr.28 | To Gupta 500Discount Account 1987 Rs [1987 Rs. ‘Apr.30_ | To Sundries— [Apr. 30 [By Sundries— as per Cash Book 200 ‘as per Cash Book 400 Kutub Typewriter Co, a Rs. fos? Rs Apso | TeBalance etd 5500_{apr.24 [By Typewriter A/e 6,500 ‘Trial Balance as on April 30, 1987 Name of Account Le. Dr. ce. Balances | Balances Rs Rs Cashin hand 10,350 Capital 50,000 Saluja Bros 2,200 Bank Loan 8,000 Mehra Cydle Co 2,000 Kutub Typewriter Co. 6,500 Mitta 13,700 Furniture 4,000 Typewriter 6,500 Stock 50,000 Sales 41,500 Purchases 14,400 Returns Ouwards 200 Returns Invards 3,400 ‘Wages & Salaries 6,000 Rent 1,750 Bad Debts 500 Discount Allowed 200 Discount Received 400 Total 1.10,800 | _1,10,800 Note: 1 You should know that the Trial Balance can also be prepared on the basis ofthe tolls ofall debits and credit in various accounts. Bu, this method is not followed any more. Hence it has not been discussed, 2. Inthisilustration you will find that some accounts have not been balanced, Is because these are all nominal accounts which are tobe closed by transfer to the Trading and Profit & Loss Account. You wil learn about it in Block 4 11.4 PREPARATION OF TRIAL BALANCE FROM A GIVEN LIST OF BALANCES Normally when a trial balance is to be prepared, you have full details of ledger accounts with you. You can, therefore, easily ascertain whether a particular account hasa debit balance or credit balance, and prepare the Trial Balance without any difficulty. But, sometimes, you are given only a list of balance. The nature of each, balance is not mentioned. in other words, itis not clearly indicated whether the account is showing a debit balance or credit balance. Can you prepare a Trial Trial Balance 87Books of Account—Ht Balance in such a situation? No! you can't unless you know the nature of each balance, You will not know whether to show a particular balance in the debit column or in the credit column of the Trial Balance. Hence, when you are asked to prepre a Trial Balance from a given list of balances and itis not clearly indicated whether a particular account has a debit balance or credit balance, you will first have todetermine the nature of each balance. In this ‘exercise your knowledge of rules of debit and credit should help you. For example, you are aware that in case of nominal accounts all expenses and losses are debited and all incomes and gains are credited. Hence, accounts like salaries, wages, etc., will show debit balances and the accounts like interest received, discount received, etc., will show credit balances. Similarly, you know the rules for real and personal accounts. The accounts of assets like cash in hand, machinery, etc., will show debit balances and accounts like capital, creditors, etc, will show credit balances. For convenience, however, a few guidelines may help you to determine quickly the nature of each balance. They are: a) Allaccounts of expenses (including purchases) and losses will be debit balances. b) Allaccounts of incomes (including sales) and gains will be credit balances. ©) Allaccounts of assets will be debit balances. d) All accounts of liabilities will be credit balances, ©) Capital Account will normally be a credit balance. f) Drawings Account will be a debit balance. The difficulty may arise with regard to items like commission, discount, rent and interest, because these can take the form of expenses as well as incomes. In such cases, the nature of balance is usually indicated by mentioning (Dr.) or (Cr.) against each item, or the word ‘received’ or ‘paid’ is usually added. So you can treat them correctly without much difficulty. If, however, there is one item for which no such indication is given and you find it difficult to identify the nature of its balance, you just proceed with the preparation of Trial Balance. At the time of totalling the amount columns in the trial balance, you will find that the total of one column is less than the other. This implies that the unindicated balance pertains to the column which is short. For example, there is an item of commission Rs. 300. But itis not indicated whether itis paid or received. When you prepare the trial balance, you find that the debit total is short by Rs. 300. This means that Commission Account has a debit balance. Now, if you show it as such in the Trial Balance, it will tally. Look at Ilustration 2. The Trial Balance has beei prepared from a given list of balances where the nature of each balance is not indicated. Study illustration carefully and note how each item has been shown in the Trial Balance Mlustration 2 Prepare a Trial Balance from the following balances taken from the books of Sudhakar as on March 31, 1987. Re Rs Capital 1,86,000 Discount Received 360 ‘Stock (1-4-86) 49,200 Bills Payable 12270 Sales 2,493,600 Sundry Creditors 31,110 Gas & Water 2,520 Returns Outwards 19,200 Land & Builsings 60,000 Bank Charges 3,000 Machinery 55470 Drawings 14550 Debtors 107400 Trade Expenses 2970 ‘Commission (Dr) 4410 Cash 2,400 Prant 30810 Bank 15,780 Carriage 3370 Purchases 96,480 Rent Received 1,290 Rates & Taxes 2,520 Insurance 3,180 Furniture 3,750 Returns inwards 5,970 Bills Receivable 410 Salaries 19,640Solution: Trial Balance as on March 31, 1987 Le. | Name of Account Dr. ce. Balances | Balances RS BS, Capital = | 180,000 Stock (1-4-1986) 49,200 - Sales — | 243,600 Gas and Water - Land & Buildings 60,000 5 Machinery 35,470 - Debtors 1.07,400 = Commission (Dr) 4410 7 Plant soso - Carriage 3.70 = Rent Received - 1290 Salaries 19,640 - Insurance 3,180 - Returns Inwards 5970 = Discount Received - 360 Bills Payable = 12270 Sundry Creditors 31,110 Returns Outwards = 19.200 Bank Charges 3,000 Drawings 14,550 ‘Trade Expenses 2970 - Cash 2,400 = Benk 15,780 = Purchases 96.480 - Rates & Taxes 2,520 - Furniture 3.750 = ls Receivable 4410 = Total 487830 | 487,830 In Illustration 2 the Trial Balance has tallied ie., the total of debit balances is equal to the total of credit balances. This implies that each balance has been entered in the appropriate amount column. However, you require constant practice to determine the correct nature of items. Hence, another illustration is given where the accountant has not been able to correctly place the balances and, consequently, the Trial Balance does not tally. Look at Illustration 3. The total of debit balances (Rs. 10,83,600) is different from the total of credit balances (Rs. 7.16,400). Itis because a number of balances have been entered in the wrong zmount columns. To c one example, stock (an asset) isa debit balance but it has been wrongly entered in the credit column. Now. go through all items and identify those which have not been correctly shown in the given Trial Balance. Then, study the Revised Trial Balance and note how they are actually shown, This should help you gain cl ity about the nature of various balances. Trial Balance 89Books of Account—Il 90 Mlustration 3 Given below is a Trial Balance prepared by an inexperienced accountant and the Trial Balance has not tallied, Rewrite the Trial Balance. ‘Trial Balance of Buddhu & Co. as on December 31, 1987 Name of Account LE Dr. ce. Balances | Balances Bs Rs Capital = | 112,600 Buildings 1,70,000 - Motor Car - 30,000 Sales 6,00,000 - Purchases = | 340,000 Furniture 25,000 - Stock S 44,000 Bank Overdraft fs Cash Interest on Bank Loan - 400 Discounts Received 2,600 7 Discounts Allowed - 4,600 Salaries 14,000 Wages 7 12,000 Printing & Stationery 4,000 - Investments 10,000 = Advertisement 6,000 S Legal Charges: 2,000 Audit Fees 1,000 - Bad Debis = Debtors _ Creditors — | 1ns00 Total 10,83,600__| 7.16800Solution: Trial Balance Revised Trial Balance of Buddhu & Co. ‘as on December 34, 1987 br. cr Name of the Account LE.| Balances Balances Remarks Re Rs. Capital = 1,12,600 - Buildings 1,70,000 - Asset Dr Motor Car | 30.000 - Asset Dr. Sales - 6,00,000 Income Cr, Purchases 3,40,000 = | Expense Dr. Furninore - Asset Dr. Stock - Asset Dr. Bank Overdraft = 12,000 | Liability Cr. Cash 3,000 = Asset Dr Interest on Bank Loan 00 | Expense Dr, Discounts Received 2,600 Income Cr. Discounts Allowed 4,600 ~ | Expense De. Salaries 14.900 - 2 Wages 12,000 - Printing & Stationery 4,000 - 2 Tevestments 10,000 - Asset Dr Advertisement 6.000 — | Expense Ds. Legal Charges 2,000 - Audit Fees 1,000 - Bad Debis 3,000 = Debtors 231,000 - Asset Dr Creditors - 1.72800 | Liability Cr. Total 30000 | __ono000 Check Your Progress-A. 1 Define Trial Balance 2 Mention against each item whether it will generally show a debit balance or a credit balance. item Nature of Balance : (Debit or Credit) a) Opening Stock b) Bad Debts ©) Carriage Inwards 4) Carriage Outwards - e) Retums Inwards f) Returns Outwards g) Loan from Bank h) Drawings i) Goodwill 3) Bill Payable k) Cash at Bank 1) Interest on Loan m) Discount Allowed n) Freehold Premises 0) Insurance p) Salaries Payable 1Renweoracen! 11.5 CAUSES FOR THE DISAGREEMENT OF A TRIAL BALANCE As mentioned earfier, when the Trial Balance does not tally it means that there are errors in the books of account, Let us now analyse the errors which usually affect the Trial Balance and lead to its disagreement. 1 Omission of posting in one account: You are aware that both the debit and credit aspects of a transaction have to be posted in the ledger accounts. ff you ost it to the debit of one account and forget its posting to the credit of the other concerned account, itis bound to affect the Trial Balance. For example, an amount of Rs. 200 received from Ali, correctly entered on the debit side of the ‘cash book but is not posted to the credit side of Ali's Account. This error shall result inthe lower credit and hence the Trial Balance will not tally. 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, If, however, the whole entry is posted twice i, both the debit and the credit aspects are posted twice, it won’t affect the Trial Balance. Itis because both the debit and the credit sides will be equally affected. 3 Posting on the wrang side of an account: When an entry is posted on the wrong, side of an account i,, instead of debit side itis posted on the credit side, it ‘would also cause disagreement in the Trial Balance. In such a situation, the difference will be for double the amount. For example, Rs. 300 received from Khan which is correctly entered on the debit side of the Cash Book, but while posting it t6 Khan’s Account it is wrongly posted to the debit side instead of the credit side. This would mean that a debit of Rs, 600 (Rs. 300 in Cash Account and Rs, 300 in Khan's Account) has no corresponding credit. So, in the Trial Balance, the credit side wil! be lower by Rs. 600. 4 Posting wrong amount in an account: If you post an entry to the correct side of aan 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 put as Rs. 200. It would cause a difference of Rs. 100. In the Trial Balance, the credit side will be lower by Rs. 100. 5 Wrong totalling of the subsidiary book: If any subsidiary book is overcast or undercast, it affects the concerned account in ledger. Suppose the correct total of Sales Journal is Rs. 5,600, but itis actually totalled as Rs. 5,300. You know that the total of Sales Journal is posted to the credit side of the Sales Account. So, the Sales Account will be short by Rs. 300, and the Trial Balance will not tally. 6 Omitting to post the total of a subsidiary book: Ifthe total of a subsidiary book is not posted to the concerned account, it would affect the Trial Balance. Such mistake relates only co the account where posting was to be done and as such affects only one account. Take for example, the Sales Journal. Ifits total of Rs, 18,900 is not posted to the credit of Sales Account, the credit side on the Trial Balance will be lower by Rs. 18,900. 7 Wrong totalling or balancing of an account: When an account is wrongly totalled or wrongly balanced, this would affect the Trial Balance. Suppose the debit side of Shyam’s Account is totalled as Rs. 1,300 instead of Rs. 1,100. It ‘would lead to wrong balance in Shyam’s Account. Consequently, the debit total in the Trial Balance will be higher by Rs. 200. Similarly, ifthe totalling is correctly done but a mistake is committed in balancing the account, it would also cause a difference in the Trial Balance. 8 Omission of an account from Trial Balance: You know that all accounts which show some balance must be included in the Trial Balance. Ifyou 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. 9 Writing tte batance of an account on the wrong side 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. twill be affected by double the amount. You noticed such error in respect of 2 ‘many items in Illustration 3. a ee10 Wrong totalling of the Trial Balance: If a mistake is committed in totalling the ‘amount columns of the Trial Balance itself, the Trial Balance will not tally. Thus, you lear about various errors which may Cause differences in the Trial Balance. Note that these errors affect only one aspect (debit or credit). This upsets the debit-ereit correspondence leading tothe disagreement ofthe Trial lance. 11.6 LOCATING ERRORS WHEN THE TRIAL BALANCE DISAGREES When a Trial Balance disagrees, an attempt must be made to locate the errors and rectify them. Ifall errors are rectified and the Trial Balance is revised, it will aly. ‘You will learn about rectification of errors in Unit 20. Here we shall discuss only the procedure for locating the errors. The following routine procedure is usually adopted for locating the errors, a) Check the totals of both the debit and the credit columns of the Trial Balance. b) Ifthe difference still persists, ascertain the exact amount of difference; and then i) See whether an account having that balance has been omitted from the Trial Balance. Suppose the debit column in Trial Balance is short by Rs. 630, itis just possible that an account with a debit balance of Rs. 630 has not been entered in the Trial Balance. fi) Check whether an account with a balance equal to that difference has been entered twice in the Trial Balance. iii) Take the half amount of difference, see whether there is any account with such balance in the Trial Balance and, if so, check whether itis entered in the correct column or not. Ifan account with a debit balance of Rs. 315 has been entered in the credit column, the debit column becomes short by Rs. 630. ©) Verify whether (i) the balances of all the accounts are included in the Trial Balance, (i) they are entered in the correct column, and (ii) their amounts have been correctly written. Ifno errors are found upto this stage, or the errors located have been duly corrected, but still the Trial Balance does not tally, there is need to take further action. You may take the following steps: 4) Check the totals of the lists of sundry debtors and sundry creditors. ©) Check the totals and balances of all accounts in the ledger. f) Check the totals and the postings of all subsidiary books. £) Check the postings of all amounts equal to the difference in Trial Balance. Itis, possible that a posting has been omitted. Similarly, check the postings of all ‘amounts equal to half the difference. Itis possible that the amount has been posted on the wrong side of the concerned account. hh) See that correct amounts have been brought forward from the previous pages. i) Verify that all opening balances have been correctly entered in various accounts. i) Compare the current year’s Trial Balance with that of the previous year. Any variation noticed should be carefully checked. ‘The procedure outlined above, if carefully followed, should normally reveal all the errors. The errors are then rectified and a Revised Trial Balance is prepared. lino other errors exist, the Revised Trial Balance is likely to tally. However, ifthe Revised Trial Balance also does not tally, there is no alternative but to recheck the entire accounting work done during the year. Sometimes, all these efforts fail to reveal the errors. In such a situation, the difference may be placed to the debit or credit of a Suspense Account (as the case may be) and you may proceed with the preparation of the final accounts. Later on, as and when the errors come to light, they will be corrected through proper rectifying entries in the journal about which you will learn in Unit 20. W7 ERRORS NOT DISCLOSED BY TRIAL BALANCE ‘As stated earlier, the Trial Balance is only a reasonable proof (not a conclusive proof) of the arthmetical accuracy of accounting entries, There is no guarantee that ‘Trial Balance 93Books of Account—Il when the Trial Balance has tallied, there will be no errors left. As a matter of fact, there are a number of errors which do not affect the Trial Balance at all. They are: 1 Errors of Principle: When a transaction has not been recorded as per the rules of debit and credit, or some other accounting principle has been ignored, the ‘errors so arising are called ‘Errors of Principle’. Example of such errors are: i) A credit purchase of a fixed asset recorded in the Purchases Journal instead of the Journal Proper: This results in debiting the Purchases Account instead of the concerned fixed asset account. It means that a capital expenditure has been created as a revenue expenditure. This is an error of principle. This does not disturb the debit-credit correspondence. Hence, the Trial Balance will not be affected. ii) An expenditure incurred on repairs of machinery debited to Machinery ‘Account: As per rules it should have been debited to Machinery Repairs Account, as itis a revenue expenditure. Debiting to Machinery Account amounts to treating it as a capital expenditure. Itis therefore an error of principle. This also does not affect the Trial Balance because the debit has been duly recorded, though in the wrong account. iii) Salary paid to Shyam recorded in the Cash Book as a payment to Shyam: This results in debiting Shyam’s personal account instead of the Saiaries ‘Account. This is also an error of principle and does not affect the Trial Balance. 2. Exrors of Omission: When a transaction is completely or partially omitted to be recorded in books of account, itis called an ‘Esror of Omission’. If the transaction is omitted to be recorded in the subsidiary books or its posting is completely omitted, itis called an ‘Error of Complete Omission’. If, however, the posting is done in one account, but omitted to be done in the other, itis called an ‘Error of Partial Omission’. For example, if credit purchase of goods from Shyam is not recorded in the Purchases Journal or a credit purchase of furniture from Ram is duly recorded in the Journal Proper but no posting is done in any of the two accounts involved, then these will be termed as errors of complete omission. If the purchase of goods from Shyam is recorded in the Purchases Journal but is omitted to be posted in Shyam’s Account, it will be called an error of partial omission. Other examples of partial omission are: omission in carrying forward the total from one page to the other, omission to balance an account, and so on. The errors of complete omission do not affect the Trial Balance. But the errors of partial omission would certainly cause disagreement of the Trial Balance because they would lead to either short debit or short credit. ! 3 Some Errors of Commission: When an error is committed in recording a transaction in the subsidiary book with a wrong amount, or is committed in posting it to a wrong account or to the wrong side of an account, itis called an ‘Error of Comission’. Errors like double posting, wrong totalling of an account, wrong carry forward, wrong balancing, et. are also regarded as errors of commission. Such errors will generally affect the Trial Balance. But, if an error of commission is committed white recording a transaction in any of the subsidiary books, it shall not affect the Trial Balance because both the debit and the credit are equally affected. Suppose, a machine of Rs. 5,000 purchased on credit from Gavtam is recorded in the journal for Rs. 5,500, It means both the debit and the credit have been recorded for Rs. 5,500. Hence, the Trial Balance remains unaffected. 4 Compensating Errors: Those errors which nullify the effect of each other are called ‘Compensating Errors’. In other words, compensating errors refer to such a group of errors wherein the effect of one error is compensated by the effect of another error or errors. Such errors do not affect the Trial Balance. For example, while posting an entry of Rs. 200 to the debit of Ram’s personal account, we wrongly wrote Rs. 400. Then, while posting an entry of Rs. 500 to the debit of some other account we wrote Rs. 300. the first error will result in a higher debit of Rs, 200 whereas the second error will result in a lower debit of Rs. 200. Thus, the effect of the first error is nullified by the effect of the second error.So the Trial Balance will not be affected. Take anotehr example. The Purchases Journal is overcast by Rs. 1,000 which means the Purchases Account will be debited in excess by Rs. 1,000. The Sales Journal also, by mistake, is on overcast by Rs. 1,000 which means the Sales Account will be credited in excessbyRs. 1,000. These two mistakes, together, result in excess debit of Rs. 1,000 as Tela Balance well as an excess credit of Rs. 1,000. Thus, they cancel out each other and the Trial Balance remains unaffected, Cheek Your Progress—B 1 Select one of the following alternatives and tick the correct auswer. a) Overcasting of Purchases Journal would affect: i) Sales Account () fi) Purchases Account ) iii) Supplier's Account and Purchases Account oy 'b) Sales to Benson Rs. 500 posted to his account as Rs. 50 would affect: i) Sales Account C) ii) Benson's Account () it) Cash Account C) ©) Sales to Gill recorded in Purchases Journal would affect: ’) Sales Account a) ii) Sales Account, Purchases Account and Gill's Account () iil) Purchases Account and Gills Account ) 4) Purchases made on credit not recorded at all would affect: i) Purchases Account () ii) Supplier's Account ) iil) Purchases Account and Supplier's Account ) ©) Amount paid to Billu posted to the credit side of his account would affect: i) Billu’s Account ) ii) Cash Account () iii) Cash Account and Billu’'s Account t) f) Amount received from Sita Ram posted to the credit of Mela Ram would affect * i) Sita Ram’s Account () fl) Mela Ram’s Account () iii) Sita Ram's Account and Mela Ram's Account O 2. Give two examples of errors of principle. 3. Give two exmples of compensating errors. 4A few errors committed in Ahluwalia's books of account are given below. State which errors would affect the Trail Balance. a) Sales of Rs. 950 to Ram completely omitted from books of account. 'b} Purchases of Rs. 720 from Shyam entered in the Purchases Journal as Rs.700. ©) Purchases Journal is overcast by Rs, 1,000. 4) Sales Returns Sournal is undercast by Rs. 200. ©) Amount paid to Agarwal wrongly posted to the debit of Mittal’s Account. ' f) Bank overdraft shown under debit column in the Trial Balance. 2) Sales of Rs. 500 to Sadiq entered in Sales Journal as sales to Mushtaq. h) Wages paid for installation of machinery debited to Wages Account. 11.8 ADVANTAGES OF A TRIAL BALANCE ‘The following advantages acrue frm a Tal Balance: tis a reasonable proof of the arithmetical accuracy of accounting entries. If the ‘two sides of a Trial Balance tally, itis an indication that the books of account are arithmetically correct. Of course, there may stil be some errors left. 2. Itcontains the balances of all ledger accounts on a particular date. Thus it serves asa summary of the results of all transactions during the period. The position of 95Books of Account—It each account can be judged simply by looking at the Trial Balance. The ledger may be referred only if some further details are required in respect of a particular account. ; 3. Itacts asa basis for preparing the final accounts ie. Profit & Loss Account and the Balance Sheet. Of course, one can prepare these statements even by taking | each balance directly from the ledger. But, that will be too cumbersome, 4 Regular preparation of a trial balance ensures that the accounting staff will work carefully. They will keep the accounts up to date and strive hard to avoid. mistakes. | 11.9 LIMITATIONS OF A TRIAL BALANCE ‘The following an be considered asthe Hiitations of Tal Balance: Trial balance does not disclose all types of errors. Certain types of errors remain undetected even when the Trial Balance tallies. Hence, itis not a conclusive proof of the accuracy of the books of account. 2A Trial Balance does not provide any additional information. You cannat have anyy idea about the net result of the trading activity or about the financial position directly from the Trial Balance. Thus, the Trial Balance serves a limited purpose only. ‘Notwithstanding the limitations expressed above, the Trial Balance serves a useful purpose as a preparatory step in the preparation of final accounts, 11.10 LETUSSUM UP 1 Itis necessary to prepare a Trial Balance before preparing the final accounts. It verifies the arithmetical accuracy of the books of account. 2. Whena Trial Balance does not tally, it means there are errors in books of account. A series of steps are taken to locate errors. 3. There are certain errors which affect the Trial Balance and there are some which do not. 4. 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. 5 Though the Trial Balance has its limitations, itis useful in ensuring the arithmetical accuracy of the books of account. 11.11 KEYWORDS ‘Compensating Errors: A group of errors wherein the effect of an erroris counter-balanced (or compensated) by the effect of one or more errors, as a result 1 Cf which the agreement of Trial Balance remains unaffected. Errors of Principle: An error committed by ignoring or misapplying some principles of accounting while recording a transaction in the books of account. ; Errors of Complete Omission: An error committed in completely omitting to record a transaction in the books of account. Errors of Partial Omission: An error committed in omitting to post one aspect of an entry in the ledger. Exrors of Commission: A clerical error committed while recording or posting of a transaction. 11.12 SOME USEFUL BOOKS Frank Wood. Book-keeping and Accounts (London: Pitman, 1986) Chapters 6 & 21. Greweal, T'S. Double Entry Book-keeping (New Delhi: Sultan Chand & Sons, 1987) 96 Chapter 7.‘Maheshwari, SN. Principles and Practice of Accountancy (New Delhi: Arya Book ‘Teial Balance Depot, 1986) Chapters 6 & 16. Patil, V.A. and Korlahalli, J.S. Principles and Practice of Book-keeping (New Delhi; R.Chand & Co, 1985) Chapter 14, 11.13 ANSWERS TO CHECK YOUR PROGRESS A2 @) Debit (b) Debit (©) Debit (@) Debit (©) Debit () Credit (®) Credit (a) Debit (@_ Debit (j) Credit (k) Debit () Debit (m) Debit (a) Debit (0) Debit (P) Credit Bi@) ii () it © ii © iit © i (iii B 4 Errors (c), (d) and (f) would affect the Trial Balance, 11.14 SELF-ASSESSMENT QUESTIONS/EXERCISES Questions 1 Why do you regard Trial Balance as a test of the arithmetical accuracy of the books of account? List the errors that will be disclosed by the Trial Balance. 2. Ifthe Trial Balance does not tally, it means there are some errors in books of account. How are the errors located? Describe the procedure fully. 3. Isthe Trial Balance a conclusive proof of the agcuracy of the books of account? Discuss the errors not disclosed by the Trial Balance. 4° Whatare the different types of errors that are usually committed in recording transactions? Explain with examples. 5 State the advantage of preparing a Trial Balance. Also give its limitations, if any. Exercises 1 On January 1, 1987 the balance of Tanali Traders stood as follows: Cash inhand Rs. 2,000; Cash at bank Rs. 12,300; Stock in trade Rs. 51,700; Furniture Rs. 8,200; Debtors Rs. 6,600 (Shyam Rs. 3,500, Shanker Rs, 2,600, Laxman Rs, 500); Creditors Rs. 7,100 (Reddy & Co. Rs. 3,020, Kishore Rs. 4,080); Capital Rs. 73,700. ‘Their transactions during the month of January were as follows: 1987 Rs. Jan, 1 Borrowed from Globe Finance Co 10,000 "Bought goods for ash 2,300 2 Purchased from Reddy & Co 5,500 > 3 Paid into bank 9,000 5. Received cheque from Shyam 3,500 * 6 Sold goods for cash 1,200 " 7 Sold'to Shanker 8 Paid Kishore by cheque Discount received * 9 Received cheque from Shanker on account 79 Received credit note from Reddy & Co. for goods returned to them "10. Sold goods to Thomas 10,000 10 Drew eash from the benk 1,000 "12 Purchased postage stamps 300 * 14 Bought of Bose & Sons 9.300 16 Paid Globe Finance & Ca by cheque in par payment of oan 5/000 17 Received cash from Laxman 500 21 Paid Reddy & Co, by cheque 6,000 23. Carvinge paid 100 24 Withdrew cash for private expenses 1,500 28 Paid saaresin cash ‘300 7 30 Rent dve totandiord 500 * 31 Purchased furniture on credit from Joseph 00 31 Paid interest to Globe Finance Co. 100 Enter the above transactions in the appropriate books, post them into ledger and prepare a Trial Balance. (Answer: Cash in hand Rs. 600, Cash at bank Rs. 15,800, Trial Balance Total Rs. 3,13,600) 97Books of Aecount—I 2 From the details given below prepare a Trial Balance as at March 31, 1987. Rs, Rs. Purchases 80,000 Salaries & Wages 42,500 Discount Dr.) 6,500 Sales 1,50,000 Traveling Expenses 2,500 Carriage Outwards 22s ‘Carvinge Inwards 1375 Repairs 1,500 Insurance 750 Miscellaneous Expenses 215 Commission Paid 1.625 Buildings 20,000 Rent and Rates 2500 Machinery 00 ‘Cashin hand 125 Horses and Carts 2500) ‘Cashat bank 13,625 Stock in Trade (I-4-86) 29,500 Sundry Debtors 16,025 Capital 68,525 Sundry Creditors 10,500 (Answer: Total of Trial Balance Rs. 2,29,025.) 3. From the following details prepare a Trial Balance as on June 30, 1987, Rs Rs. Opening Stock 40,000 Drawings 10,900 archases 0,000 Wages Sales 429,000 Salaries 11/000 Purchase Retur 1290 ‘Outstanding Expenses 1,000 Sales Returns| 21300 Prepaid Expenses 750 (Carriage Invards 1500 Postage 900, Carriage Ourwards Discount Received 375 Bank Overdrait Discount Allowed 1,000 Cash Bed Debts 750 Capital Sundry Debtors . 1,00,000 Sundry Creditors Interest 3,500 Loans Interest Received '300 Investments Provisions for Bad Debts 41,750, ‘Accrued Income Furniture & Fixture 71500 Machinery (Answer: Total of Trial Balance. Rs. 6,61,300.) 4 The following Trial Balance is incorrectly drawn up and shows adifference of Rs, 5,180, Rewrite it correcting the errors. Lakshman Singh & Co, ‘Thal Balance a on Devember 31, 1987 Dr or. Name of Account ur, Balances Balances ®, me Bank Overdraft 606 Depreciation 330 Bank 3,300 Wages 166 Insurance : 20 Fixtures 1708 ‘a 20200 Sock (1-1-87) 356 Rates 208 cash 120 Stock (31-12-87) 900 ! Sales 8600 Purchases 5200 Drawings 350 Premises 16,980 Insurance 306 Ditlerence 180 Toul 32500, 32.500 (Answer: Total of Trial Balance Rs. 29,460.) ae (Bint: Stock (31-12-87) will not be shown in the Trial Balance.)3 Owing to three obvious errors the fotiowing Trial Balance does not agree. Correct ‘Trial Balance the errors and prepare a Trial Balance as on March 31, 1987 Rs. Rs. Stock on 1-4-1986 20000 Loan Accont : 30,000 Purchases 98,000 Debiors 84,000 Wages 30,000 Capital 100,000 Rent, Rates & Taxes 2,000 Provision for Salaries 16,000 Bed Debts 5,600 General Expenses 1,800 Discount Allowed 1,000 Plant and Machinery 39.000 Creditors ‘40,000 Furniture & Fixtures 16,000 Cash at Bank 10,000 Sales 2,57,200 Returns on Sales 4,000 Cost of Lease 0,000 646,000 2,19,600, (Answer: Total of the Trial Balance Rs. 4,32,800.) 6 —_Aninexperienced accountant provides you with the following Trial Balance. In ‘case you find it to be incorrect prepare it again so as to remove its defects. ‘Trial Balance as on June 30,1987 Dr. [Name of Account LE. Balances Balances 5 Re Rs Stock (opening) 10,500 31; 1/800 Bank Overdraft 1,500 Capital 45,000 Furniture 12,000 Discount Allowed 90 Sales 39.000 Loan from Suresh 2,400 Carsiage Inwards 270 Bills Receivable 3,000 Purchases 24,000 Salaries 3,300 Investments 3,000 Interest on Investments 1,650 Returns Inwards ° 900 Returns Outwards 300, Insurance Premium 360 Interest on Loan 30 Advertseasent 41,200 Drawings 1,500 Total 91,650 (Answer: Total of Trial Balance Rs. 91,650) 7 From the following transactions of Shanker, write up Journal Proper and the other subsidiary books involved. Show their postings into ledger and prepare a Trial Balance, 1987 Rs. Mar. 1 Assests: Cashin hand 1,000 (Cash at bank 34,000 ‘Stock of goods 20,000 Machinery 50,000 Furniture 5,000 Sudhir ow 5,000 9°Books of Account—II Rs Naveen owes 12,500 Liabilities: > Loan 20,000 » Sum owing to Samuel 10,000 2 Bought goods on credit from Naresh 5,000 73 Cashsales 2,000 4 Sold goods to Raman 5000 * 5) Received from Sudhir in settlement of his account 5,000 * 6 Payment made to Samuel by cheque, in fll settlement 9,950 * 9 Old funiture sold for cash 500 10 Cash purchases 4,000 1 Naveen pays by cheque which was deposited into bank 12,500 11 Paid for repairs vo machinery ‘500 13 Paid carriage on these goods 16 Received cheque from Raman 17 Paid to Shyam by cheque 18 Bank intimates that cheque of Raman has been returned unpaid "19 Cashsales "21 Cash deposited into bank "25. Paid municipal taxes in cash 26 Old newspaper sold "28 Paid for advertisements * 31 Paid rentby cheque (Answer: Cash in hand Rs, 2,800; Cash at bank Rs, 33,450; Total of Trial Balance Rs. 1,32,600.). ° 13. Purchased goods from Shyam ind out the opening capital before working on the problem. INote: These questions will help you to understand the unit better. Try to write answers for them. But d not submit your answers to the University. These ae for your practice only.