02_TrialBalance

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Trial Balance

What is Trial Balance?

Trial Balance is the list of all the balances appearing in the ledger accounts and cash book at any given

date.

The balances in the ledger account may be either a debit balance or a credit balance. The debit balances

are entered in one column and credit balances in another.

When total debits are equal to total credits, it is said that the trial balance is balanced. Balanced trial

balance is only an indication that there is an arithmetical accuracy of accounts. There is no guarantee that

there are no errors, once trial balance is tallied.

Characteristics It is a statement or a list.

It is a summary of all accounts, with debit and credit balances.

The total of debit balances and credit balances must be equal.

It is the only base for preparation of final accounts.

It can be prepared at any time.

Advantages

Preparation of final accounts becomes easy.

One can rely on the results derived out of trial balance, when the total of debits is equal to the total

of credits.

Some accounting flaws in respect of postings can, easily, be detected by preparing trial balance.

The work of an accountant becomes easy for ascertaining the profitability and financial position

with the preparation of trial balance.

Accounts with Debit Balances

Assets, Expenses, Loss, Drawing

1. Asset accounts - Land account, building account, machinery account, and furniture account,


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debtors account, stock account, bills receivable etc

2. Expense & Loss accounts - Salaries account, wages account, rent account, carriage account,

discount account, bad debts account, depreciation account, purchases account, return inward

account (sales return account) etc.

3. Drawing account

Accounts with Credit Balances

Liability, Income, Gain, Capital

1. Liabilities accounts - Creditors account, loan account, mortgage account, bills payable account,

bank overdraft account, all types of reserves and funds accounts.

2. Income & Gain accounts - Interest realized account, rent collected account, discount received

account, sales account, return outward account (purchase return account) etc.

3. Capital account

Trial Balance Errors

1. Errors of Omission

The errors committed by not recording a transaction either in the book of original entry or

in the ledger book are errors of omission. Such an omission may be either complete or

partial.

Complete Omission - Complete omission takes place if a transaction is not recorded in the

journal at all. For example, goods sold to John for $ 10,000 were not recorded in the sales

book at all. A complete omission of transaction may occur due to many reasons such as

sales invoice misplaced or lost.

Partial Omission- Partial omission occurs if a financial transaction is recorded only

partially. For example, partial error of omission occurs if goods sold to John for $ 4000 is

recorded in sales book but failed to be posted in John's account.

2. Errors of Commission

The errors which are committed while recording or posting a transaction are called errors

of commission. Errors of commission may take place either in the journal or in the

subsidiary books, or in the ledger. Such errors include posting wrong amounts, posting on

wrong side of accounts, wrong totaling or carrying forward, and wrong balancing. For

example, if purchase of goods for $ 10,000 is entered as $ 1000 in the journal or in the

ledger, such error is called errors of commission.

3. Errors of Duplication

Errors of duplication are those errors which arise because of double recording. Double

posting of a transaction from journal or subsidiary books to ledger also create such errors.

For example, goods sold to John, but this transaction is wrongly entered twice or more in

the sales book or wrongly posted twice or more in John's account then it is called the

errors of duplication.

4. Errors of Principle

Errors of principle are those errors which occur by violating the principles of accounting.

Errors of principle may occur due to wrong allocation between capital and revenue

expenditure, or wrong valuation of assets. For example, debiting the wage account instead


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of machinery account for the wage paid to the mechanics used for the installation of

machine and debiting the customer's account instead of cash account for the cash sales

made. Errors of principle may also occur due to wrong valuation of assets by higher level

staff.

Incorrect provision for depreciation, bad debts or doubtful debts.

5. Compensating Errors

Compensating errors refer to two or more errors which mutually compensate the effects

of one another. If one error balances the effect of another error, then the two error are

called compensating errors. For example, goods sold for $ 5000, but wrongly posted to the

customer's account as $ 500. Similarly, goods purchased for $ 5000, but by chance,

wrongly posted to the supplier's account as $ 500 . The errors in the personal account are

compensated by each other, as $ 4500 short on the debit side of the customer's account

and on the credit side of the supplier's account.

Disagreement of Trial Balance

Reasons - Error of omission or Error of commission

Go through the trial balance to find out the errors.

Check the total of trial balance carefully.

See whether balances of all ledger accounts are included in the trial balance and they are placed

in the right columns.

Check the balance of ledger accounts and see they are correctly drawn out.

Suspense Account

Unless the difference in the trial balance is quickly settled, it is usual to put the difference to an account

called suspense account in order to balance the trial balance. If the debit side is short, suspense account

will be debited and if the credit side is short, suspend account will be credited saying "difference in trial

balance". Mistakes which do not affect the trial balance are not entered through suspense account. Whenall the mistakes have been corrected, the suspense account will show a nil balance.

** Lease Hold Premise is an asset

The accounts are listed in the order they appear in the ledger - assets, liabilities, capital, drawing,

revenue & expense.

Documents

02_TrialBalance