Chapter 6: Trial Balance and Rectification of Errors

Ans: A trial balance is a bookkeeping spreadsheet which carries the balances of all ledgers arranged into debit and credit account column totals that are equal on both sides. The trial balance is generally prepared once a year, usually at the end of the fiscal period. The key goal of preparing a trial balance is to make sure that the entries in an organization's bookkeeping process are monetarily correct. According to William Pickles, "the statement is prepared using ledger balances, at the end of the fiscal year to determine whether the debit total agrees with the credit total is known as trial balance.” 

Ans: The two following examples of errors of principle are as follows:

i. Incorrect casting : The total of the purchase book has been increased by Rs. 7000. As soon as the total is posted on the purchase account's debit column, it will exceed the debit side by a small amount of Rs. 7000, and the trial balance will not agree.

ii. Incorrect posting of amount: ABC was charged Rs. 900 for goods. It should have been correctly entered in the book, but the amount was misappropriated as Rs. 90 instead of Rs. 900 while posting to ABC's credit column. As a result, the trial balance will not agree.

Ans: The following are two examples of errors of commission:

i. Incorrect amount posted: Mohit purchased goods for Rs. 9000. However, if the amount posted to Mohit's credit in the purchase book is Rs. 900 instead of Rs. 9000, the trial balance will be different.

ii. Posting on the wrong side: Ram has sold me goods for Rs. 5000. Instead of posting it to the credit side of Ram's account, the entry was recorded on the debit side, causing the trial balance to increase the credit by Rs. 5000. 

Ans: The following methods are used to prepare trial balance:

i. Balance Method: The balance method enters only the amounts that show balances in the trial balance, along with the amount of balances. The amount displaying the debit balance is written on the trial balance's debit side, and the amount displaying the credit balance is recorded on the trial balance's credit side.

ii. Total amount Method: In this method, the sum total of the debit and credit sides of each account is individually written in the trial balance's debit and credit columns.

iii. Total and balance Method: In this method, the balance and total of both sides of the account are displayed in the same trial balance side by side.

Ans: An accountant will take the following steps to locate errors in the trial balance:

i. To double-check the Dr. and Cr. Side additions.

ii. Examine the ledger to see if there is any account with a balance equal to the difference between the trial balance and the current balance.

iii. To double-check the initial balances.

iv. To reassess the ledger account balances.

v. To double-check that the posting in the ledger account corresponds to the journal and other books of original entry.

vi. If the potential error cannot be found or located, the difference between the trial balances is transferred to a temporary account known as the suspense account.

Ans: The suspense account is the account that is created when there are errors in the trial balance and the balances on the debit and credit sides do not match. As a result, this account records the difference between both sides of the trial balance in order to record the difference under its heading. The discrepancy between the amounts in the debit and credit columns is caused by an error in the accounting process.

It is not required that a suspense account shall balance off after rectification of the errors found by an accountant. If the errors for which the suspense account is opened, once those errors get rectified then only the suspense account automatically gets closed. But if the errors are not rectified the balance will still remain in the suspense account.

Ans: The types of errors that can impact in the difference in trial balance are given below:

i. Error of Omission

ii. Error of Commission 

iii. Error of Principle

iv. Compensating Errors

Errors could occur in the following situations: - 

i. When the subsidiary book displays either the undercast or overcast amount.

ii. When no posting has been made to one of the accounts involved in the transaction.

iii. When a post is made on the incorrect side of an account.

iv. When an incorrect amount is posted in any column.

Ans: The trial balance has the following limitations: 

i. It is not a conclusive proof of accuracy: The trial balance does not provide assurance of the correctness of the accounting process when the debit and credit sides may even match evenly.

ii. It does not reveal the error in the books of original entry: The trial balance cannot point out the error in any of the trial balance's specific accounts when it is simply indicated by the sides of the trial balance not being evenly matched with one another.

iii. It does not reveal any operational results: There may be cases where transactions were forgotten and not recorded at all. As a result, their impact on the debit and credit sides of the respective accounts was not recorded, causing the trial balance to match evenly. As a result, such operational errors cannot be recorded.

Ans: The following is the goal of preparing the trial balance:

i. It allows you to check the arithmetic accuracy of ledger accounts.

ii. It also aids in the detection of posting errors in necessary accounts.

It also aids in summarizing the accounts.

iv. It aids in the completion of final accounts.

v. Finally, it aids in determining the necessary adjustments to be made in the future.

Ans: When an accounting error is made while recording a transaction, it violates the fundamental principles of accounting and is referred to as an error of principle. Here are two examples:

i. Incorrect item posting: When an item is posted to the debit side of an account instead of the credit side, or vice versa. To correct this type of error, we must journalize the entry correctly, i.e. items on the debit side must be posted to the credit side of an account and vice versa.

ii. Incorrect posting of amount: Incorrect posting of an amount in an account must be corrected by posting the original amount in that account.