TRIAL BALANCE & RECTIFICATION OF ERROR
TRIAL BALANCE � Trial balance is a statement & list of debit and credit balances, taken out from ledger , it also includes the balances of cash and bank taken from cash book to test the arithmetical accuracy of the books.
FEATURES OF TRIAL BALANCE � It is just a statement � Not a part of double entry system � List of balances � Can be prepared at any time on a particular date � Prepared to check the arithmetical accuracy of ledger balances � Total of debit & credit must be tally
OBJECTIVES OF PREPARING TRIAL BALANCE v To ascertain the arithmetical accuracy of ledger account v Completion of double entry system v Ledger account balances v To help in the preparation of final account
ADVANTAGES OF A TRIAL BALANCE Check upon the ledger posting Ø Arithmetical accuracy Ø Helpful for Preparation of financial statement Ø Connecting link with financial statement Ø Summaries the data Ø useful for the management Ø
METHODS OF PREPARING TRIAL BALANCE TRIAL Total method/traditional method v Balance method/modern method v Compound method
PREPARATION OF TRIAL BALANCE • Traditional Method/total method � The traditional method considers the sub-totals of each ledger account. It is prepared by presenting the sub-totals relating to each ledger account in the relevant columns in the trial balance. • Modern Method/ balance method � The modern method considers only the balances of the ledger accounts. It is prepared by presenting the balance relating to each ledger account in the relevant column in the trial
PERFORMA OF TRIAL BALANCE THE MOST COMMON FORMAT IN WHICH WE FIND A TRIAL BALANCE IS AS BELOW. Trial Balance of M/s _____ as on _____ Particulars Ledger Folio Debit Amount (in Rs) Credit Amount (in Rs) Account Head 1 Account Head 2 Account Head 3 — — — – – – xxxx Total
EXPLANATION OF PERFORMA OF TRIAL BALANCE • Header Row The heading row contains the heading for the trial balance. It consists of the details relating to name of the organisation and the instance to which the ledger account balances pertain. � • Particulars Each row in the trial balance pertains to the information relating to an account. The name of the Account head is written in the particulars column. � • L/F » Ledger Folio gives the information relating to the page number in the ledger from which the information relating to the ledger is being extracted. � • Debit amount This is the amount whose information is extracted from the ledger account. What the debit amount actually means is dependent on the method used for constructing the trial balance. � • Credit amount This is the amount whose information is extracted from the ledger account. What the credit amount actually means is dependent on the method used for constructing the trial balance. �
The following is the general ledger of. Mr. Ibrahim, containing all the ledger accounts within the accounting system. GENERAL LEDGER [BOOKS OF MR. IBRAHIM] CASH A/C DR Date 15/06/05 19/06/05 24/06/05 Particulars J/F To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c – – – 25/06/05 Amount (in Rs) 2, 000 17/06/05 12, 000 17/06/05 2, 000 18/06/05 500 21/06/05 – sub-total To Balance b/d Particulars J/F By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c – – – 2, 14, 500 Total Date 25/06/05 24, 500 Amount (in Rs) 20, 000 5, 000 1, 50, 000 10, 000 5, 000 sub-total By Balance c/d 2, 14, 500 – CR Total 1, 90, 000 – 24, 500 2, 14, 500
2 Dr cr capital account Date Particulars Amount (in Rs) J/F 15/06/05 sub-total 25/06/05 To Balance c/d By Cash a/c – 2, 000 Amount (in Rs) J/F 2, 000 sub-total 2, 000 Particulars 0 – Total Date Total 25/06/05 2, 000 By Balance b/d 2, 000 – 2, 000 Dr furniture account cr Date 17/06/05 Particulars To Cash a/c 25/06/05 Amount (in Rs) J/F – 20, 000 sub-total To Balance b/d Particulars 20, 000 Total Date 25/06/05 20, 000 sub-total By Balance c/d 20, 000 – Amount (in Rs) J/F Total 0 – 20, 000
3 Dr cr Rent paid account Date 17/06/05 Particulars To Cash a/c Amount (in Rs) J/F – 5, 000 sub-total 25/06/05 To Balance b/d Particulars sub-total 25/06/05 By Balance c/d 5, 000 – Amount (in Rs) J/F 5, 000 Total Date Total 5, 000 0 – 5, 000 Dr Bank account cr Date 18/06/05 Particulars To Cash a/c 25/06/05 Amount (in Rs) J/F – 1, 50, 000 20/06/05 24/06/05 sub-total To Balance b/d Particulars 25/06/05 1, 20, 000 – 25, 000 – 5, 000 sub-total By Balance c/d 1, 50, 000 – Amount (in Rs) J/F By Machinery a/c By M/s Ramdas & Bros. a/c 1, 50, 000 Total Date Total 30, 000 – 1, 20, 000 1, 50, 000
4 DR. CR Stock account Date 18/06/05 Particulars 10, 000 – Total DR 24/06/05 Particulars 25/06/05 MS. RAM Total ACCOUNT Date 5, 000 10, 000 12, 000 8, 000 25/06/05 20, 000 CR Particulars J/F By Goods/Stock a/c – 5, 000 – – – Total 5, 000 18/06/05 sub-total By Cash a/c By Mr. Natekar a/c Amount (in Rs) sub-total DASS Amount (in Rs) – To Balance c/d J/F 20, 000 J/F To Bank a/c 19/06/05 21/06/05 Particulars 20, 000 Date 10, 000 sub-total – To Cash a/c To M/s Ramdas & Bros. a/c Amount (in Rs) J/F Amount (in Rs) 10, 000 sub-total 10, 000 Total By Balance b/d 10, 000 – 5, 000
5. DR Machinery account CR Date 20/06/05 Particulars To Bank a/c Amount (in Rs) J/F – 25, 000 sub-total 25/06/05 To Balance b/d Particulars sub-total 25/06/05 By Balance c/d 25, 000 – Amount (in Rs) J/F 25, 000 Total Date Total 25, 000 0 – 25, 000 DR Mr. Natekar account CR Date 21/06/05 Particulars J/F To Goods/Stock a/c – Amount (in Rs) 8, 000 24/06/05 sub-total Total Date 8, 000 25/06/05 8, 000 Particulars J/F By Cash a/c – sub-total By Balance c/d Total 2, 000 – Amount (in Rs) 6, 000 8, 000
6 DR CR Wages ACCOUNT Date 21/06/05 Particulars To Cash a/c Amount (in Rs) J/F – 5, 000 sub-total 25/06/05 To Balance b/d Particulars 5, 000 Total Date sub-total 25/06/05 By Balance c/d 5, 000 – Amount (in Rs) J/F Total 5, 000 0 – 5, 000 DR COMMISSION RECEIVED ACCOUNT CR Date Particulars 25/06/05 sub-total To Balance c/d Amount (in Rs) J/F Total 24/06/05 Particulars 500 25/06/05 Amount (in Rs) J/F By Cash a/c 0 – Date – 500 sub-total 500 Total By Balance b/d 500 – 500
TRIAL BALANCE TRADITIONAL METHOD/ MODERM METOD 1. Trial Balance of M/s _____ as on _____ Particulars Cash a/c Capital a/c Furniture a/c Rent Paid a/c Bank a/c Goods/Stock a/c M/s Ramdas & Bros. a/c Machinery a/c Mr. Natekar a/c Wages Paid a/c Commission Received a/c Total L/F Debit Amount (in Rs) — — — 214, 500 0 20, 000 5, 000 1, 50, 000 20, 000 5, 000 25, 000 8, 000 5, 000 0 1, 90, 000 2, 000 0 0 30, 000 20, 000 10, 000 0 2, 000 0 500 4, 52, 500 Credit Amount (in Rs) 2. Trial Balance of M/s _____ as on _____ Particulars L/F — — — Cash a/c Capital a/c Furniture a/c Rent Paid a/c Bank a/c Goods/Stock a/c M/s Ramdas & Bros. a/c Machinery a/c Mr. Natekar a/c Wages Paid a/c Commission Received a/c Total Debit Amount (in Rs) 24, 500 Credit Amount (in Rs) 2, 000 20, 000 5, 000 1, 20, 000 5, 000 25, 000 6, 000 5, 000 2, 05, 500
DIFFERENCE BETWEEN TRIAL BALANCE & BALANCE SHEET BASIS TRIAL BALANCE Object Trial balance is prepared for knowing Objective of preparing balance mathematical accuracy of accounts sheet is to know the financial and the total amount of account position of business. balances with debit balances is equal to the total of amount of account balances with credit balances. Accounts In trial balance, all accounts balances are included. In balance sheet, only real and personal accounts balances are included. Heading Trial balance has two sides, one is debit side and other is credit side. Balance sheet has also two sides but we show assets in one side and liabilities in other side. Stock In many cases, we only include opening stock in trial balance. We only include closing stock in balance sheet. Stages of Trial balance is prepared before Preparatio making trading and profit and loss n account BALANCE SHEET Balance sheet is prepared after making trading and profit and loss account
DIFFERENCE BETWEEN TRIAL BALANCE & BALANCE SHEET BASIS TRIAL BALANCE SHEET Adjustment Entry Trial balance is prepared before adjustment entries. Balance sheet is prepared after adjustment entries. Time of Preparation Trial balance is made in the end of every month. Balance sheet is prepared at the end of a year and checked by CA. Proof It can not be used as evidence in court. It can be used as the proof in court.
TRIAL BALANCE AGREES (OR) TRIAL BALANCE IS TALLIED � Whatever may be method we use for preparing the trial balance, if the total of the debit column and the credit column are the same we say that the trial balance is tallied or the trial balance agrees. � The fact that the trial balance agrees is a preliminary assurance of absence of any mathematical errors in the preparation of the accounts
AGREEMENT OF TRIAL BALANCE IS NOT A CONCLUSIVE PROOF OF ABSENCE OF ERRORS � Agreement of Trial Balance is not the full and final proof of absence of errors, as there is always a chance for hidden errors which can be revealed only on thorough scrutiny of accounts. � E. g. : The error relating to a debit balance being shown in excess by Rs. 5, 000 may always be set off by a credit balance in another account being shown in excess by Rs. 5, 000 or a debit balance in another account being shown less by Rs. 5, 000.
TYPES OF QUESTIONS 1. treatment of cost of goods sold / adjusted purchases = op. stock + purchases – cl. Stock ü 2. correction of an incorrect trial balance ü 3. when an obvious head is missing ü
RECTIFICATION OF ERRORS
ERROR An error is a mistake. Errors arises out innocence or carelessness or lack of accounting knowledge.
TYPES OF ERROR Types of error Errors of principledisregard of fundamental principle of accounting Clerical errors Error of omission Compensating errors- THESE ARE GROUP ERRORS Trial balance errors Errors of commission Complete omission Recording wrong amount in subsidiary BOOKS WRONG TOTALLING OF SUBSIDIARY BOOKS WRONG TOTALLING & BALANCING OF LEDGER ACCOUNTS Partial omission POSTING WITH WRONG AMOUNT IN LEDGER ACCOUNT POSTING ON WRONG SIDE IN LEDGER ACCOUNT POSTING IN WRONG LEDGER ACCOUNT ERRORS OF DUPLICATION
ERRORS REVEALED BY TRIAL BALANCE § § § Omission to post an amount in to ledger Omission to post an amount in trial balance Wrong totaling or balancing of ledger account Wrong totaling of subsidiary books Posting on the wrong side Posting of wrong amount
ERRORS NOT REVEALED BY TRIAL BALANCE o o 1. Errors of omission- no recording of transaction in the books of original entry 2. Errors of commission- carelessness of accounting staff 3. Compensating errors- under posting & over posting of amount 4. Errors of principle- no proper allocation of income & expenditure between capital & revenue.
ERROR MANAGEMENT A. PREVENTION OF ERROR B. DETECTION OR LOCATION OF ERROR C. RECTIFICATION ERROR
A. PREVENTION OF ERROR Ø Errors can be prevented by continuously upgrading the knowledge of employees Ø By providing professional environment
B. LOCATION OF ERRORS � Steps to be followed 1) 2) 3) 4) 5) The difference of the two sides of the trial balance should be found out Check the balances of cash & bank account The schedules of sundry debtors & sundry creditors should be checked The totals of subsidiary books should be checked Still , if there is any error, Check thoroughly the books of original entry
LOCATION OF ERROR � � � (A) When the Trial Balance does not agree (i) Check the columnar totals of Trial Balance (ii) Check that the balances of all accounts (including cash and bank balances) in the ledger have been written and are written in the correct column of trial balance i. e. debit balance in the debit column and credit balance in the credit column. (iii) Find the exact figure of difference with trial balance and see that: (a) No account of a similar balance has been omitted to be shown in the Trial Balance or (b) A balance amount which is half of the amount of difference amount but is written on the wrong side of the trial Balance. (iv) Recheck the totals of Special Purpose Books. (v) Check the balancing of the various accounts in the ledger. (vi) If difference is still not traced, check each and every posting from the Journal and various Special Purpose Books, one by one in the ledger
(B) WHEN THE TRIAL BALANCE AGREES. You have already learnt that if the totals of the two amount columns of trial balance tally it is no conclusive proof of the accuracy of accounts. There may still be some accounting errors. These errors may not be immediately traced but may be detected at much later stage. These are rectified as and when detected. � Following are the errors which don’t affect the trial balance : (i) Omission to record a transaction in a journal or in a Special Purpose Book. For example, goods purchased on credit but are not recorded in the Purchases Book at all. � (ii) Recording a wrong amount of an item in journal or in a Special Purpose Book. For example, sale of Rs. 2550 on credit entered in the Sales Book as Rs. 5250. � (iii) Posting the correct amount on the correct side but in wrong account. For example, cash received from Jagannathan was credited to Vishvanathan. � (iv) An item of Capital Expenditure recorded as an item of Revenue Expenditure and vice-a-versa. For example, Repairs to Building was debited to Building A/c. � Why does the trial balance still agree though there may be above stated errors? Reason is that in the above cases the debits and credits are affected � simultaneously by the same amount.
Correction of Errors Error Correction Procedure 1. Journal entry is incorrect but not posted. Draw a line through the error and insert correct title or amount.
Correction of Errors Error Correction Procedure 1. Journal entry is correct Journal entry is incorrect 2. but not posted. but posted incorrectly. Draw a line through the error Draw a line through the and insert correct title or posted error and post amount. correctly.
Correction of Errors Error Correction Procedure 3. Journal entry is incorrect Journalize and post a and posted correcting entry.
3. RECTIFICATION OF ERROR � RECTIFICATION MEANS REMOVING THE MISTAKES. � ERRORS AFFECTING ONE ACCOUNT- TOTALLING ERRORS, ERROR OF POSTING, WRONG CARRY FORWARD, WRONG BALANCING, OMISSION � ERROR AFFECTING MORE THAN TWO ACCOUNTS COMPLETE OMISSION, VIOLATION OF THE
CLASSIFICATION OF ACCOUNTING ERRORS � Various accounting errors can be classified as follows : � A. On the basis of their nature � (a) Errors of omission � (b) Errors of commission � (c) Errors of principle � B. On the basis of their impact on ledger accounts � (a) One sided errors � (b) Two sided errors.
(A) ERRORS OF OMISSION As a rule, a transaction is first recorded in books of accounts. However, accountant may not record it at all or record it partially. It is called an error of omission. � For example, goods purchased on credit are not recorded in Purchases Book or discount allowed to a customer was not posted to Discount A/c in the ledger. � In the first case it is a complete omission. Therefore, both debit and credit are affected by the same amount. Therefore, it does not affect the Trial Balance. � The second example is the example of partial �
B) ERRORS OF COMMISSION When the transaction has been recorded but an error is committed in the process of recording, it is called an error of commission. Error of commission can be of the following types: � (i) Errors committed while recording a transaction in the Special Purpose books. It may be : � i. e. Recording in the wrong book for example purchase of goods from Rakesh on credit is recorded in the Sales Book and not in the Purchases Book. � i. e. Recording in the book correctly but wrong amount is written. For example, goods sold to Shalini of Rs. 4200 was recorded in the Sales Book as Rs. 2400 � In the above two cases two accounts are affected by the same amount, debit of one and the credit of the other. Therefore, trial balance will not be affected. � (ii) Wrong totalling : There may be a mistake in totalling Special Purpose Book or accounts. The totalled amounts may be less than the actual amount or more than the actual amount � First is a case of under casting and the other of overcastting. For example, the total of Purchases Book is written as Rs. 44800 while actual total is Rs. 44300, the total of Sales Day Book is written as Rs. 52500 while it is Rs. 52900. � It is a case of an error affecting one account hence it affects trial balance.
B) ERRORS OF COMMISSION � � (iii) Wrong balancing : While closing the books of accounts at the end of the accounting period, the ledger accounts are balanced. Balance is calculated of the totals of the two sides of the account. It may be wrongly calculated. For example, the total of the debit column of Mohan’s A/c is Rs. 8600 and that of credit column is Rs. 6800. The balance calculated is as Rs. 1600 while the actual balance is Rs. 1800. It has affected one account only, therefore, the Trial Balance gets affected. (iv) Wrong carry forward of balances or totals : Totals or balances are carried forward to the next page. These may be carried forward incorrectly. For example, the total of one page of the Purchases Book. of Rs. 35, 600 is carried to next page as Rs. 36500. Again the error affects one account only. Therefore, Trial Balance gets affected.
COMPENSATING ERRORS � � � Two or more errors when committed in such a way that there is increase or decrease in the debit side due to an error, also there is corresponding decrease or increase in the credit side due to another error by the same amount. Thus, the effect on the account is cancelled out. Such errors are called compensating errors. For example, Sohan’s A/c is debited by Rs 2500 while it was to be debited by Rs 3500 and Mohan’s A/c is debited by Rs 3500 while the same was to be debited by Rs 2500. Thus excess debit of Mohan’s A/c by Rs. 1000 is compensated by short credit of Sohan’s A/c by Rs. 1000. As the debit amount and the credit amount are equalised, such errors do not affect the agreement of Trial Balance, but the fact remains that there is still an error.
(A) ONE SIDED ERRORS Accounting errors that affect only one side of an account which may be either its debit side or credit side, is called one sided error. The reason of such error is that while posting a recorded transaction one account is correctly posted while the corresponding account is not correctly posted. � For example, Sales Book is overcast by Rs. 1000. In this case only Sales A/c is wrongly credited by excess amount of Rs. 1000 while the corresponding account of the various debtors have been correctly debited. � Another example of one sided error is Rs 2500 received from Ishita is wrongly debited to her account. In this case, only Ishita’s account is affected, amount in the cash-book is correctly written. This type of mistake does affect the trial balance. � (B) TWO SIDED ERRORS The error that affects two separate accounts, debit side of the one and credit side of the other is called two sided error. Example of such error is purchase of machinery for Rs. 1000 has been entered in the Purchases Book. In this case, Purchases A/c is wrongly debited while Machinery A/c has been omitted to be debited. So two
STAGES OF CORRECTION OF ERROR � A. BEFORE PREPARING TRIAL BALANCE 1) 2) 3) 4) SINGLE ACCOUNT ERROR IN TWO ACCOUNTS WITH SAME AMOUNT ERROR IN THREE ACCOUNTS ERRORS IN TWO ACCOUNT WITH DIFFERENT AMOUNT
STAGES � B. AFTER PREPARING TRIAL BALANCE BUT BEFORE FINAL ACCOUNTS a) SUSPENSE ACCOUNT 1) SINGLE ACCOUNT ERROR 2) ERROR IN TWO ACCOUNTS WITH SAME AMOUNT 3) ERROR IN THREE ACCOUNTS 4) ERRORS IN TWO ACCOUNT WITH DIFFERENT AMOUNT
STAGES � C. AFTER PREPARING FINAL ACCOUNT a) b) ERRORS AFFECTING PROFIT & LOSS ACCOUNT ERRORS AFFECTING BALANCE SHEET
METHODS OF RECTIFICATION OF ACCOUNTING ERRORS Before preparing Trial Balance � (i) instant correction � (ii) correction in the affected account � After preparing in Trial Balance � Before preparing in Trial Balance � (i) Instant correction � If the error is detected immediately after making an accounting entry, �. For example, an amount of Rs. 3500 is written as Rs. 5300. This can be corrected as 3500. after correction manager will put his initial
(II) CORRECTION IN THE AFFECTED ACCOUNTS. In case error is detected on a date later than the date on which the transaction was recorded but before the Trial Balance, the rectification will be made by making a correction in the affected account. � Illustration 1 Purchases book is overcast for the month of July, 2006 by Rs 8000. � Solution. � Accounts Affected The total of the Purchase Book is posted to the debit of Purchase A/c. Therefore Purchase A/c is affected. � Rectification: � To nullify the effect of the error, the entry of Rs 8000 will be made on the credit side of the Purchase A/c. With the words written as. “The DR amount of Purchase Book is overcast for the month of July 2006. PURCHASE ACCOUNT CR. DATE PARTICULAR S L. F AMOUN T DATE PARTICULARS AMOUNT AS PER L. F AMOU NT 8000
SUSPENSE ACCOUNT � Sometimes, it is not possible to point out errors easily, then the difference is put to an account , known as suspense account. Suspense account is shown in the trial balance. As & when errors are located, the same is debited or credited for rectifying the error & the other account which is credited or debited is the suspense account.
PROEDURE Opening of a Suspense Account is a temporary arrangement. As soon as the error that has led to Suspense Account is rectified, this account will disappear. One point needs to be noted that Suspense A/c is the result of one sided errors. So one sided errors are corrected through Suspense A/c. Completing the double entry when an error is corrected by placing the correct amount on the debit of the proper account, the credit is placed in Suspense Account or vice-a-versa. � For example, Gopal’s Account was debited short by Rs. 100. The error will be rectified through Suspense A/c by debiting Gopal A/c and crediting Suspense A/c by Rs. 100. � Journal entry for the same is as follows : Gopal Dr. 100 To Suspense A/c 100 (Gopal’s A/c debited short � is now corrected) � Similarly, while correcting as one sided error the proper account is credited with the correct amount, the debit is placed in the Suspense A/c �. For example, Sales Book for December, 2006 is undercast by Rs. 500. The error � will be rectified by debiting Suspense A/c and crediting Sales A/c. � Journal Entry for the same will be as follows : � Suspense A/c Dr 500 To Sales A/c 500 (Sales Book undercast is rectified) �
EXAMPLE - � � � � Rectify the following accounting errors through Suspense Account by making journal entries : 1. Purchase of goods from Mohit for Rs 2500 was entered in the Sales Book, however Mohit’s Account was correctly credited. 2. Cash received from Anil a debtor Rs 3200 was correctly entered in the Cash Book but was omitted to be posted to his account. 3. Sales Book was overcast by Rs 1500. 4. Cash of Rs 4000 paid to Hanif was credited to Rafique A/c as Rs 1400. 5. The total of Purchase Returns Book of Rs 3150 was carried forward as Rs 1530. 6. Namita was paid cash Rs 6500 but Sumita was debited by Rs 6000.
SOLUTION 1. Purchase A/c Dr 2500 Sales A/c Dr 2500 To Suspense A/c 5000 (Purchase of good was entered in the sale book now corrected) 2. Suspense A/c Dr 3200 To Anil A/c 3200 (Anil’s account omitted to be credited now rectified 3. Sales A/c Dr 1500 To Suspense A/c 1500 (Sales Book overcast is corrected) 4. Hanif A/c Dr 4000 Rafique A/c Dr 1400 To Suspense A/c 5400 (Cash paid to Hanif was wrongly credited to Rafique the error is now rectified) 5. Suspense A/c Dr 1620 To Purchase Returns A/c 1620 (Purchase Return Book is undercast is now rectified) 6. Namita A/c Dr 6500 To Sumita A/c 6000 To Suspense A/c 500 (Cash paid to Namita Rs 6500 was debited to Sumita by Rs 6000 is the error is rectified)
EFFECTS OF ERRORS ON THE PROFIT AND LOSS ACCOUNT & BALANCE SHEET � If the error/errors are there effect of such error would be either increase or decrease in the gross profit/ net profit. Both the account would not be correct, so it is necessary to rectify the error & arrive at the correct amount of profit. � similarly balance sheet would also not be correct if some errors are there. It also must to rectify the error at the earliest, so the balance sheet can depict a true& fair view of the business.
THANK YOU VANDANA JAIN ASSISTANT PROFESSOR COMMERCE GCCBA -42, CHANDIGARH. vandanajain. mvmj. 13@gmail. com