INTRODUCTION TO TRIAL BALANCE
Trial Balance is a simple listing of Nominal Accounts with Debit Balances posted into Debit and Credit Balances posted into Credit Columns. It ensures that for every debit amount, there is an equal credit amount and vice versa. This means the sum of the debit entries should be equal to the sum of the credit entries. Trial Balance tests the arithmetical accuracy of the books of accounts.
PROCESS OF PREPARING A TRIAL BALANCE
There are two methods of preparing a trial balance
- Total Method
- Balance Method
Total Method (also called Gross Trial Balance) gives the sum total of all debits and credits of all ledger accounts and are shown in Debit and Credit columns of the Trial Balance. Hence balancing of ledger accounts does not arise.
In Balance Method, all ledger accounts are balanced and these balances are taken for the preparation of Trial Balance. Various ledger accounts are grouped as shown below.
|Account Grouping||What is shown as Debit||What is Shown as Credit|
|Assets and Liabilities||All Assets, Withdrawal from Capital||All Liability, Capital|
|Expenses (Losses), Incomes (Gains)||Expenses or Losses||Incomes and Gains|
|Trading Accounts||Opening Stock, Purchases, Sales Returns||Sales, Purchase Returns|
|Surplus and Reserves||Surplus||Reserves|
RULES OF TRIAL BALANCE FOR DIFFERENT TYPES OF ACCOUNTS
|Name of the Account||Debit||Credit|
|Duty on Purchases||YES|
|Cash on Hand||YES|
|Cash at Bank||YES|
|Discount or Commission Allowed||YES|
|Loan to a Person / Business||YES|
|Discount or Commission Received||YES|
|Loan from Bank||YES|
ERRORS IN TRIAL BALANCE
Trial Balance is prepared from Debits and Credits of a Ledger and may contain errors. These errors are classified into two types.
- Errors which do not affect the agreement of the Trial Balance (Two Sided Errors)
- Errors which affect the agreement of the Trial Balance (One Sided Errors)
In both cases the agreement means arithmetic agreement or accuracy of the debits and credits.
Types of Two Sided Errors
- Omitting an entry altogether from the subsidiary book
- Writing an entry in the wrong subsidiary book
- Posting to wrong heads of accounts but on the correct side
- Errors of Principle
- Compensating Errors
- Writing wrong amount in a subsidiary book
Types of One Sided Errors
- Wrong casting and carry forwards
- Wrong balancing of an account
- Posting the amount in wrong side of the account
- Posting wrong amount on the correct side of an account
- Omission to post an account from subsidiary book to ledger
- Omission of an account balance from the trial balance
- Omission to post the total of the subsidiary books to the ledger
- Posting the same amount twice in an account
- Writing the balance of an account on the wrong side of the trial balance
- Wrong totaling of the trial balance
- Omission in taking the cash book balance to the trial balance
STEPS TO LOCATE ERRORS
- Check Out Totals: Add the two columns of the trial balance
- Ensure Inclusion of all Balances: See that the ledger balances are taken to trial balance correctly and are entered on appropriate columns
- Recompute the Ledger Balances: It is done to check the error that may have been made in the balancing
- Check the total of Debtors and Creditors: Check the schedule of Sundry Debtors and Sundry Creditors
- Check the cash and balances are written in the trial balance
- Check the postings from the book of original entry into the ledger accounts
- Check the errors in terms of twice entries
RECTIFICATION OF ERRORS
Errors once found, should be rectified in the ledger accounts. The rectified entries are to be done as fresh entries after crossing out the wrong entries. The entries passed through the journal proper for rectifying the errors in the books of accounts are called Rectifying Entries. Errors may be one sided or two sided.
Rectification of One Sided Errors: These types of errors will cause for the disagreement of the trial balance as this error is committed only on one aspect of transaction. This does not require any journal entries for rectification but requires physical correction of wrong figures or an opposite entry in the same account. Example: Rs. 1000 received from Pratap was entered by mistake in the debit side of the account. If we assume that the cash book has been written correctly so that the error is only in the account of Pratap he should have been credited and not debited. This is rectified by entering Rs. 2000 on the credit side of the account
Rectification of Two Sided Errors: These types of errors affect both sides of the account, hence a complete rectification is necessary. Example: Purchase of vehicle for Rs. 500000 has been entered in the purchase book. Account of the supplier has been credited by Rs. 500000 which is correct. Debit given to purchase account is wrong as it should have been given to the Vehicle Account. The transaction is shown below.