Monday, October 22, 2012

AHSEC - Class 11: Trial Balance and Rectification of Errors

Unit – 4: Trial Balance and Rectification of Errors
Q.1. Define Trial Balance. Mention its objectives and features.                 2001, 2005, 2006, 2007, 2009, 2010, 2015
Ans: Trial Balance: After posting the accounts in the Ledger, a statement is prepared to show separately the debit and credit balances and to check the arithmetic accuracy of the accounts of a certain periods such a statement is known as the Trial Balance.
The agreement of a Trial balance ensures arithmetical accuracy only.  A concern can prepare Trial balance at any time, but its preparation as on the closing date of an accounting year is compulsory.
According to M.S. Gosav “Trial balance is a statement containing the balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of ledger postings”.
Objectives of trial balance
a)      To Ascertain the Arithmetical Accuracy of Ledger Accounts.: The agreement of a Trial balance ensures arithmetical accuracy of books of books of accounts.
b)      To help in preparing Final Accounts: Financial statements are normally prepared on the basis of the Trial Balances.
c)       Summary of Each Account: The trial balance offers a summary of the Ledger. The ledger may have to be referred to only when more detail is required in respect of an account.
d)      To Help in Locating Errors: The Trial Balance helps in locating errors in books-keeping work.
Features of trial balance

The following are the important features of a Trial balances:
a)      A Trial balance is prepared as on a specified date.
b)      It contains a list of all ledger account including cash account.
c)       It may be prepared with the balances or totals of Ledger accounts.
d)      Total of the debit and credit amount columns of the Trial balance must tally.
e)      Tallying of Trial balance is not a conclusive profit of accuracy of accounts.
Q.2. Mention various uses and limitations of trial balance.                         2008, 2015          
Ans: The uses of the trial balance as follows:
a)      It provides a check on the accuracy of the ledger account balances, ensuring that entries have been made correctly.
b)      It proves the arithmetical accuracy of accounts.
c)       It makes preparation of the final accounts easier.
d)      It is the connecting link between the ledger accounts and the financial statements.
e)      It summarises the data. Trial balance reduces the large number of personal accounts into sundry debtors and sundry creditors.
Limitations of trial balance
a)      The Trial balance can be prepared only in those concerns where double entry system of book- keeping is adopted. This system is too costly.
b)      A Trial balance is not a conclusive proof of the arithmetical accuracy of the books of account.
c)       It the Trial balance is wrong, the subsequent preparation of Trading, P&L Account and Balance Sheet will not reflect the true picture of the concern.
Q.3. Explain various methods of preparing trial balance. Distinguish between balance method and total method. 2010
Ans: METHODS OF PREPARING TRIAL BALANCE: A Trial balance refers to a list of the ledger balances as on a particular date. It can be prepared in the following manner:
1.       Total Method: According to this method, debit total and credit total of each account of ledger are recorded in the Trial balance.
2.       Balance Method: According to this method, only balance of each account of ledger is recorded in Trial balance. Some accounts may have debit balance and the other may have credit balance. All these debit and credit balances are recorded in it. This method is widely used.
3.       Compound Method: This method presents both the balance and total method in the same trial balance. There are four columns for balances and totals.
Difference between Balance Method and Total method of preparing trial Balance:
Trial Balance By Balance Method
Trial Balance by Total Method
1) It can be prepared after all the Ledger accounts have been balanced.
1) It can be prepared immediately after the completion of posting from books of original entry to the Ledger.
2) It shows the balances of all the accounts in the Ledger.
2) It shows the total amounts of the debit and credit sides in each Ledger Accounts.
3) It considers only those accounts which show a balance. If an account shows no balance it will not be considered.
3) It considers all accounts of the Ledger.

Q.4. Explain the rules of Preparing Trial Balance and Its Format.
Ans: While preparing the trial balance from the given list of ledger balances, following rules should be taken into care:
1.       The balances of all assets account, expenses and losses account, drawings, cash and bank balances are placed in the debit column of the trial balance.
2.       The balances of all liabilities account, incomes and gains account and Capital balances are placed in the credit column of the trial balance.
Specimen of Trial balances
Debit Account Items.
Credit Account Items.
Land and Building
Plant and Machinery
Furniture and Fixtures
Cash in Hand
Cash at Bank
Bills Receivable
Stock of Raw Materials
Work in Progress
Stock of Finished Goods
Prepaid Insurance
Carriage Inwards
Carriage Outwards
Sales Return
Interest Paid
Outstanding Interest Earned

Purchase Return
Commission / Discount Received
Long Term Loan
Bills Payable
Outstanding Salaries
Advances from Customers
Reserve Fund
Provision For Doubtful Debts



Q.5. What are various types of Errors? Explain them with reference of the following: 
Ø  Errors disclosed by trial balance                         2009
Ø  Errors not disclosed by trial balance                 1997, 2000, 2002, 2004, 2006, 2008
Ans: A. Errors of Commission: These are the errors which are committed due to the wrong posting of wrong transaction, wrong totaling or balancing of the accounts, wrong casting of the subsidiary books. Such errors are called Errors of Commission.                      2007, 2010
B. Errors of Omission: The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. These can be of two types:          2007, 2007
i) Errors of complete omission
ii) Errors of partial commission
When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission. When a transaction is partially omitted from posting in ledger, it is an error of partial omission.
C. Error of principle: Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue. 1998, 2007
D. Compensating errors: When two or more errors are committed in such a way that the effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the tally of the trial balance.
Trial balance disclosed some of the errors and does not disclosed some other errors. This is given below.
A) Errors disclosed by the Trial Balance
i)     Wrong totaling of subsidiary books
ii)    Posting of an amount on the wrong side
iii)  Omission to post an amount into ledger
iv)  Double posting or omission of posting
v)   Posting wrong amount
vi)  Error in balancing
B) Errors not disclosed by the Trial Balance
i)        Error of principle
ii)       Error of omission
iii)     Errors of Commission
iv)     Recording wrong amount in the books of original entry
v)      Compensating errors
Q.6. What is Suspense account? Write its utility.                             2006, 2009
Ans: Suspense: If the trial balance does not tally due to the existence of one sided errors accountant has to carry forward his accounting process prepare financial statements. The accountant tallies his trial balance by putting the difference on the shorter side as “suspense account”.
Utility of Suspense Account: The main use of suspense account is to facilitate the preparation of financial statements. Later on errors affecting the trial balance are located; rectification entries are passed through the suspense account.
Q.7. What are the steps to be taken to discover errors when trial balance does not agree?
Ans: Whenever a trial balance disagrees the following steps can be taken to discover the errors:
1.       Divide the difference by two and find out if some figure equal to that (half the difference) appears in the trial balance. It is possible that such item might have been recorded on the wrong side of mal balance, causing double the difference.
2.       If the mistake is not located, the difference should be divided by 9 and if difference is evenly divisible by 9 the error be due to transportation of figures, e.g. Rs. 590 wrongly recorded as 950, the difference is (950-590) 360 and it is evenly divisible by 9.
3.       The next step is to recheck the debit and credit totals of trial balance to satisfy that trial balance has been cast correctly.
4.       If mistake remains undetected, make sure that balances or totals of all the ledger accounts have been correctly shown in the trial balance. Special care should be taken to ensure that cash or bank balances have been duly incorporated in the mal balance.
5.       The next step should be to recheck that all the closing balances from preceding year's balance sheet were correctly carried forward and recorded in respective accounts in the ledger.
6.       Further the totaling and balancing of the ledger accounts should be redone so as to be sure that there is no mistake on that account.
7.       Check the totals of schedule of debtors and creditors and find out that the balances have been included in the list.
8.       If difference is round sum, it is advisable to check casting and carry forwards. But if the difference is odd sum the balancing should be checked minutely.
9.       Even then if error is not located, all the accounts should be checked thoroughly.