In the earlier units, we have learnt the concept of accounting and how the business transactions are recorded in the books of accounts. The books of accounts are recorded on the basis of double entry system of book-keeping. This means that every debit should have corresponding credit. So, when the list of debit and credit are prepared, it must tally and this list of balances is known as Trial balance. We will come to know more about trial balance in this unit.
Meaning of Trial Balance
You know that, according to double entry system of book-keeping all the transactions are first recorded through journal, subsidiary books like cash book, sales / Purchase books etc. Then posting are made to the respective ledger accounts and ledger accounts are then balanced. Thus, we get ledgers with debit balance or with credit balance or some ledgers with no balance. Now, It is desirable to verify whether all the entries made in the books of accounts are correct or not. For this purpose a list of debit and credit balances of all the ledger accounts are prepared on a particular date. This list is known as Trial Balance.
So, a Trial Balance is a statement which contain the debit and credit balances of all the ledger accounts, prepared on a particular date to verify whether the entries in the books of accounts are arithmetically correct or not. If the trial balance agree i.e. the total of debit column is equal to the total of credit column of the trial balance, it can be assumed that books of accounts are arithmetically correct. If the trial balance donot agree, it means mistakes have been done in recording the transction.
objectives of trial balance
The Objectives of Preparing a Trial balance may be stated as under
1. To ascertain the accuracy of books of accounts: The trial balance helps in ascertaining the accuracy of the books of accounts. If the trial balance is correct then one can be sure that the books of accounts are arithmetically correct.
2. Helps in Preparation of Final Accounts: Final accounts are prepared on the basis of information given in the Trial Balance.
3. It Help in locating errors: Trial balance helps in locating errors as disagreement of trial balance is a clear indication of errors committed during the course of making entries
4. Balances at a glance : Trial balance helps the trader to know the balance of different ledger at a glance. So he can save his time and energy in finding out the balance of a particular ledger account.
A. Types of Trial Balance:1. Gross Trial balance: Gross Trial balance is made with the debit and credit totals of the various ledger accounts.
There are two types of Trail balance. They are discussed as follows:
2. Net Trial balance: Net trial balance is made with the debit and credit balances of the various ledger account.
B. Preparation of Trail balance:
The preparation of trial balance is based on the double entry system of book-keeping, that is, for every debit in one account; there is a corresponding credit in some other account. It implies that the total of the debit balance of the account should equal to the credit balance of the account. When debit side of the trial balance tally with its credit side, we can say that the entries are correctly made in the ledger accounts. If there is any difference between debit side and the credit side, it means there is some error in the ledger accounts. Thus, the trial balance is made for verifying the correctness of the entries in the books of accounts.
There are two types of Trial balance which we had discussed above.
1) Gross Trial Balance(debit and credit totals of the various ledger accounts)
2) Net Trial balance (debit and credit balances of the various ledger accounts)
The Trial balance can be prepared as follows:
Trial balance as on…………
The following are the nature of the balances of the various ledger accounts:
a. Capital account : It shows a credit balance.
b. Drawings account : It shows a debit balance
c. Sundry debtors : The accounts of sundry debtors show a debit balance
d. Sundry Creditors account : The accounts of sundry creditors show a credit balance
e. Bank account : Bank account may show a debit balance or credit balance. When the bank account shows a debit balance, it means that cash is available in the bank. If it shows credit balance, it means bank overdraft.
f. Cash account: It always shows a debit balance.
g. Purchase account: It shows a debit balance.
h. Sales account: It shows a credit balance.
i. Purchase Returns account: It shows a credit balance.
j. Sales Returns account: It shows a debit balance
k. Opening Stock : It shows a debit balance
l. Closing Stock: Closing stock will not appear in the trial balance.
m. Fixed Asset accounts: It shows a debit balance.
n. Investment account: it shows a debit balance
o. Bills payable account: It shows a credit balance.
p. Bills receivable account: It shows a debit balance
q. Income and gains account: It shows a credit balance
r. Expense and Loss account: It shows a debit balance
SOURCE : NCERT BOOK, Financial Accountancy-1, Unit : Trial Balance & Rectification of Error, pg no : 183
The preparation of Trial balance can be explain with the following exercise.
From the following balances from the books of Mohan
as on 31st March, 2008, prepare a Trial Balance.
Trial Balance of Mohan as on 31st December, 2008
In the above sections we learnt that Trial balance is prepared to verify whether the entries in the books of accounts are arithmetically correct or not. If all the transactions are correctly made, then the total of both the sides of trial balance will tally. But it may happen that the person, who is given the work of journalizing and posting, could make some mistakes and as a result the trail balance will not tally. At the same time there could be some errors which are not disclosed by the trial balance. But presence of such errors does not result in disagreement of trial balance. So, let’s discuss about the errors in the following sections.
When the Trial Balance does not agree, it means that there is a mistake. There may be more than one mistake also. So, the next step is to locate the errors or errors. To locate the errors, the following steps should be followed-
1. Check the additions of debit and credit sides of the Trial Balance.
2. Check if there is any ‘transportation error’ or ‘slide error’. A transportation error is an error where the digits of an amount are misplaced. For example, an amount of Rs. 3,273 is written as Rs. 3,237. A ‘slide error’ is an error where the decimal is misplaced. For example, Rs. 125.50 is written as Rs. 12.55. To locate errors, the difference of debit and credit totals is to be divided by 9. If the difference in the Trial Balance is fully divisible by 9, it may be a case of transportation or slide error.
3. Compare the closing balance of each ledger account with the amount in Trial Balance.
4. Check the opening balance of each ledger account with the amount in the previous year’s balance Sheet.
5. Check the balance brought down or balance carried forward to the next page of each ledger account.
6. Check the totalling and balance carried down in each ledger account.
7. Divide the difference in Trial Balance by 2 and if this new figure is found in the Trial Balance, it may be a case that the amount is written in the wrong side.
8. Check the totals in Day Books, Purchase Day Book and Sales Day Book.
9. Check the posting from the subsidiary books including the Day Books, to the ledger accounts.
Measure for undetected error: After observing the above procedures to detect the reason for disagreement in the Trial Balance, if the error is not located, then the difference in the Trial Balance is transferred temporarily to an account known as ‘Suspense Account’.
Suspense Account: Suspense account is a temporary device to make the Trial Balance agree when its two sides shows two different figures due to some undetected error. The amount by which the Trial Balance does not agree is the amount of suspense account. This is the amount of suspense in the deficit side of the Trial Balance. If debit side is heavier than credit side, the amount of difference is written on the credit side, under the heading ‘suspense account’. On the other hand, if credit side is heavier than the debit side, the amount of difference is written on the debit side under the heading ‘suspense account’.
Suspense account is purely a temporary device to make equal the debit and credit sides of Trial Balance. It is neither a real account, nor a personal account, nor a nominal account. It only represents the amount of error. So, effort should be made to wipe out or cancel the suspense account as early as possible.
Errors can be divided into two types, and further classified into three types:
1. Principle Error: If the transactions are recorded not according to the fundamental principles of double entry system of book-keeping, the error is known as Principle Error.
2. Clerical Error: Clerical Errors can be divided as follows:
a) Errors of Omission: When a transaction is omitted partially or completely which is supposed to be recorded in the subsidiary books, it is known as Error of Omission. For example, credit sales to Lakhan of Rs. 20,000 not entered in the sales book.
b) Errors of Commission: Errors committed in the process of recording, totalling, balancing subsidiary books are called Errors of Commission. For e.g.: Posting of a wrong amount but on the correct side or for example, Vikram & co. paid Rs. 10,000 to Ram Traders. The transaction is recorded correctly in the cash book but Ram's account was debited with Rs. 1000 only.
c) Compensating Error: When one mistake is set off by another error, these errors are known as compensating errors. For Example: if salaries account is undercast by Rs. 1000 and wages account is overcast by Rs. 1000; both the errors will compensate each other and there will be no effect on the agreement of the Trial Balance.
A. One-sided Error: As it affects only one account, no entry is required to be passed. The error can be rectified by simply correcting the posting. For example: Rent paid Rs. 500 is posted as 5000.So, while rectifying the error ,first we have to show the correct entry then the wrong entry is shown in the books. Now, compare the wrong entry with the correct one and rectify the same.
Here, Rent account is debited in excess. The excess debit of Rs. 4500 is to be reversed.
No entry is passed as it is one sided error. Credit Rent account with ‘By excess debit Rs.4500’.
B. Two- Sided Error: Two sided error affects both the aspects of transaction equally i.e. Credit aspect and Debit aspect. Here two or more accounts are affected. The rectification of this error can be made by first passing the correct entry, then show the wrong entry which is already passed in the books. After this, by comparison of the correct entry and the wrong entry, rectification of entry can be passed. For example, salary paid to Rani, typist, wrongly debited to her personal account Rs.2000
In the above example, Rani Account is wrongly debited and salary account is not debited. So, the rectification of error will affect these both accounts.
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