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Trial Balance and Rectification of Errors 6
he
I n the earlier chapters, you have learnt about the
is
basic principles of accounting that for every debit
there will be an equal credit. It implies that if the
sum of all debits equals the sum of all credits, it is
bl
L EARNING OBJECTIVES presumed that the posting to the ledger in terms
After studying this chapter, of debit and credit amounts is accurate. The trial
you will be able to : balance is a tool for verifying the correctness of
pu
• state the meaning of debit and credit amounts. It is an arithmetical
trial balance; check under the double entry system which verifies
be T
• enumerate the objectives that both aspects of every transaction have been
of preparing trial
recorded accurately. This chapter explains the
re
balance ;
meaning and process of preparation of trial balance
o R
• prepare trial balance;
and the types of errors and their rectification.
• explain the types of
errors;
6.1 Meaning of Trial Balance
tt E
• state various process
of locating errors ; A trial balance is a statement showing the
balances, or total of debits and credits, of all the
C
• identify the errors which
affect the agreement of accounts in the ledger with a view to verify the
trial balance and those
which do not affect the
arithmatical accuracy of posting into the ledger
no N
agreement of trial accounts. Trial balance is an important statement
balance; in the accounting process as it shows the final
• rectify the errors position of all accounts and helps in preparing the
without preparing final statements. The task of preparing the
©
suspense account; statements is simplified because the accountant
and
can take the balances of all accounts from the trial
• rectify the errors with balance instead of going through the whole ledger.
suspense account.
It may be noted that the trial balance is usually
prepared with the balances of accounts.
, 182 Accountancy
Trial Balance of ......as on March 31, 2009
Account Title L.F Debit Credit
Balance Balance
Rs. Rs.
d
he
is
Total
Fig. 6.1 : Showing format of a trial balance
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It is normally prepared at the end of an accounting year. However, an
organisation may prepare a trial balance at the end of any chosen period,
pu
which may be monthly, quarterly, half yearly or annually depending upon its
requirements.
In order to prepare a trial balance following steps are taken:
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• Ascertain the balances of each account in the ledger.
re
• List each account and place its balance in the debit or credit column, as
o R
the case may be. (If an account has a zero balance, it may be included in
the trial balance with zero in the column for its normal balance).
• Compute the total of debit balances column.
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• Compute the total of the credit balances column.
• Verify that the sum of the debit balances equal the sum of credit balances.
C
If they do not tally, it indicate that there are some errors. So one must check
the correctness of the balances of all accounts. It may be noted that all
assets expenses and receivables account shall have debit balances whereas
no N
all liabilities, revenues and payables accounts shall have credit balances
(refer figure 6.2).
6.2 Objectives of Preparing the Trial Balance
©
The trial balance is prepared to fulfill the following objectives :
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements. (Profit & Loss account
and Balance Sheet).
, Trial Balance and Rectification of Errors 183
Account Title L.F. Debit Credit
Balance Balance
Rs. Rs.
• Capital 9
d
• Land and Buildings 9
• Plant and Machinery 9
• Equipment 9
he
• Furniture and Fixtures 9
• Cash in Hand 9
• Cash at Bank 9
• Debtors 9
is
• Bills Receivable 9
• Stock of Raw Materials 9
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• Stock of Finished Goods 9
• Purchases 9
• Carriage Inwards 9
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• Carriage Outwards 9
• Sales 9
• Sales Return 9
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• Purchases Return 9
• Interest Paid 9
re
o R
• Commission/Discount Received 9
• Salaries 9
• Long Term Loan 9
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• Bills Payable 9
• Creditors 9
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• Advances from Customers 9
• Drawings 9
Total xxx xxx
no N
Fig. 6.2 : Illustrative trial balance
6.2.1 To Ascertain the Arithmetical Accuracy of Ledger Accounts
©
As stated earlier, the purpose of preparing a trial balance is to asceitain whether
all debits and credit are properly recorded in the ledger or not and that all
accounts have been correctly balanced. As a summary of the ledger, it is a list
of the accounts and their balances. When the totals of all the debit balances
, 184 Accountancy
and credit balances in the trial balance are equal, it is assumed that the posting
and balancing of accounts is arithmetically correct. However, the tallying of the
trial balance is not a conclusive proof of the accuracy of the accounts. It only
ensures that all debits and the corresponding credits have been properly recorded
in the ledger.
d
6.2.2 To Help in Locating Errors
he
When a trial balance does not tally (that is, the totals of debit and credit columns
are not equal), we know that at least one error has occured. The error (or errors)
may have occured at one of those stages in the accounting process: (1) totalling
of subsidiary books, (2) posting of journal entries in the ledger, (3) calculating
is
account balances, (4) carrying account balances to the trial balance, and (5)
totalling the trial balance columns.
It may be noted that the accounting accuracy is not ensured even if the
bl
totals of debit and credit balances are equal because some errors do not affect
equality of debits and credits. For example, the book-keeper may debit a correct
amount in the wrong account while making the journal entry or in posting a
pu
journal entry to the ledger. This error would cause two accounts to have
incorrect balances but the trial balance would tally. Another error is to record
be T
an equal debit and credit of an incorrect amount. This error would give the
two accounts incorrect balances but would not create unequal debits and
re
credits. As a result, the fact that the trial balance has tallied does not imply
o R
that all entries in the books of original record (journal, cash book, etc.) have
been recorded and posted correctly. However, equal totals do suggest that
tt E
several types of errors probably have not occured.
6.2.3 To Help in the Preparation of the Financial Statements
C
Trial balance is considered as the connecting link between accounting records
and the preparation of financial statements. For preparing a financial
no N
statement, one need not refer to the ledger. In fact, the availability of a tallied
trial balance is the first step in the preparation of financial statements. All
revenue and expense accounts appearing in the trial balance are transferred
to the trading and profit and loss account and all liabilities, capital and assets
©
accounts are transferred to the balance sheet.
(Preparation of the financial statements is explained in chapters, 9 and 10).
Trial Balance and Rectification of Errors 6
he
I n the earlier chapters, you have learnt about the
is
basic principles of accounting that for every debit
there will be an equal credit. It implies that if the
sum of all debits equals the sum of all credits, it is
bl
L EARNING OBJECTIVES presumed that the posting to the ledger in terms
After studying this chapter, of debit and credit amounts is accurate. The trial
you will be able to : balance is a tool for verifying the correctness of
pu
• state the meaning of debit and credit amounts. It is an arithmetical
trial balance; check under the double entry system which verifies
be T
• enumerate the objectives that both aspects of every transaction have been
of preparing trial
recorded accurately. This chapter explains the
re
balance ;
meaning and process of preparation of trial balance
o R
• prepare trial balance;
and the types of errors and their rectification.
• explain the types of
errors;
6.1 Meaning of Trial Balance
tt E
• state various process
of locating errors ; A trial balance is a statement showing the
balances, or total of debits and credits, of all the
C
• identify the errors which
affect the agreement of accounts in the ledger with a view to verify the
trial balance and those
which do not affect the
arithmatical accuracy of posting into the ledger
no N
agreement of trial accounts. Trial balance is an important statement
balance; in the accounting process as it shows the final
• rectify the errors position of all accounts and helps in preparing the
without preparing final statements. The task of preparing the
©
suspense account; statements is simplified because the accountant
and
can take the balances of all accounts from the trial
• rectify the errors with balance instead of going through the whole ledger.
suspense account.
It may be noted that the trial balance is usually
prepared with the balances of accounts.
, 182 Accountancy
Trial Balance of ......as on March 31, 2009
Account Title L.F Debit Credit
Balance Balance
Rs. Rs.
d
he
is
Total
Fig. 6.1 : Showing format of a trial balance
bl
It is normally prepared at the end of an accounting year. However, an
organisation may prepare a trial balance at the end of any chosen period,
pu
which may be monthly, quarterly, half yearly or annually depending upon its
requirements.
In order to prepare a trial balance following steps are taken:
be T
• Ascertain the balances of each account in the ledger.
re
• List each account and place its balance in the debit or credit column, as
o R
the case may be. (If an account has a zero balance, it may be included in
the trial balance with zero in the column for its normal balance).
• Compute the total of debit balances column.
tt E
• Compute the total of the credit balances column.
• Verify that the sum of the debit balances equal the sum of credit balances.
C
If they do not tally, it indicate that there are some errors. So one must check
the correctness of the balances of all accounts. It may be noted that all
assets expenses and receivables account shall have debit balances whereas
no N
all liabilities, revenues and payables accounts shall have credit balances
(refer figure 6.2).
6.2 Objectives of Preparing the Trial Balance
©
The trial balance is prepared to fulfill the following objectives :
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements. (Profit & Loss account
and Balance Sheet).
, Trial Balance and Rectification of Errors 183
Account Title L.F. Debit Credit
Balance Balance
Rs. Rs.
• Capital 9
d
• Land and Buildings 9
• Plant and Machinery 9
• Equipment 9
he
• Furniture and Fixtures 9
• Cash in Hand 9
• Cash at Bank 9
• Debtors 9
is
• Bills Receivable 9
• Stock of Raw Materials 9
bl
• Stock of Finished Goods 9
• Purchases 9
• Carriage Inwards 9
pu
• Carriage Outwards 9
• Sales 9
• Sales Return 9
be T
• Purchases Return 9
• Interest Paid 9
re
o R
• Commission/Discount Received 9
• Salaries 9
• Long Term Loan 9
tt E
• Bills Payable 9
• Creditors 9
C
• Advances from Customers 9
• Drawings 9
Total xxx xxx
no N
Fig. 6.2 : Illustrative trial balance
6.2.1 To Ascertain the Arithmetical Accuracy of Ledger Accounts
©
As stated earlier, the purpose of preparing a trial balance is to asceitain whether
all debits and credit are properly recorded in the ledger or not and that all
accounts have been correctly balanced. As a summary of the ledger, it is a list
of the accounts and their balances. When the totals of all the debit balances
, 184 Accountancy
and credit balances in the trial balance are equal, it is assumed that the posting
and balancing of accounts is arithmetically correct. However, the tallying of the
trial balance is not a conclusive proof of the accuracy of the accounts. It only
ensures that all debits and the corresponding credits have been properly recorded
in the ledger.
d
6.2.2 To Help in Locating Errors
he
When a trial balance does not tally (that is, the totals of debit and credit columns
are not equal), we know that at least one error has occured. The error (or errors)
may have occured at one of those stages in the accounting process: (1) totalling
of subsidiary books, (2) posting of journal entries in the ledger, (3) calculating
is
account balances, (4) carrying account balances to the trial balance, and (5)
totalling the trial balance columns.
It may be noted that the accounting accuracy is not ensured even if the
bl
totals of debit and credit balances are equal because some errors do not affect
equality of debits and credits. For example, the book-keeper may debit a correct
amount in the wrong account while making the journal entry or in posting a
pu
journal entry to the ledger. This error would cause two accounts to have
incorrect balances but the trial balance would tally. Another error is to record
be T
an equal debit and credit of an incorrect amount. This error would give the
two accounts incorrect balances but would not create unequal debits and
re
credits. As a result, the fact that the trial balance has tallied does not imply
o R
that all entries in the books of original record (journal, cash book, etc.) have
been recorded and posted correctly. However, equal totals do suggest that
tt E
several types of errors probably have not occured.
6.2.3 To Help in the Preparation of the Financial Statements
C
Trial balance is considered as the connecting link between accounting records
and the preparation of financial statements. For preparing a financial
no N
statement, one need not refer to the ledger. In fact, the availability of a tallied
trial balance is the first step in the preparation of financial statements. All
revenue and expense accounts appearing in the trial balance are transferred
to the trading and profit and loss account and all liabilities, capital and assets
©
accounts are transferred to the balance sheet.
(Preparation of the financial statements is explained in chapters, 9 and 10).
