Trial Balance and Rectification of Errors

A trial balance is a statement showing the balances or totals of debits and credits of all ledger accounts. Its purpose is to check the arithmetical accuracy of ledger posting.

Two examples of errors of principle from the chapter are:
- Purchase of furniture wrongly debited to purchases account.
- Repairs on overhauling of second hand machinery purchased wrongly debited to repairs account.

These violate the accounting principle of correct classification between capital and revenue items.

Two examples of errors of commission are:
- Overcasting of sales book.
- Credit sales to Ramesh ₹ 5,000 credited to his account (wrong posting/wrong recording amount).

These are clerical errors such as wrong posting, wrong totalling, wrong balancing, or wrong casting.

The chapter states that trial balance may be prepared in three ways:
1. Totals method
2. Balances method
3. Totals-cum-balances method

If the trial balance does not tally, the accountant should:
- Recast the totals of debit and credit columns.
- Compare the account titles and amounts in the trial balance with the ledger.
- Compare the current trial balance with the previous year’s trial balance.
- Re-check the balances of individual ledger accounts.
- Re-check the postings from the books of original entry.
- If the difference is divisible by 2, check whether an amount equal to half the difference has been posted to the wrong side.
- Check whether the difference is due to a complete omission of a posting.
- If the difference is a multiple of 9, check for transposition of figures or wrong decimal placement.

A suspense account is an account in which the difference in the trial balance is temporarily put until the errors are found and rectified.

It is not necessary that the suspense account will always balance off after rectification of the errors detected. If some errors are still undiscovered, the suspense account will show a remaining balance. That balance is carried forward to the next accounting period and eliminated when the remaining errors are located and rectified.

Errors that may cause a difference in the trial balance are mainly one-sided errors, such as:
- Error in totalling the trial balance columns
- Error in totalling subsidiary books
- Error in posting the total of subsidiary books
- Wrong amount or wrong column in trial balance
- Omission of an account balance in the trial balance
- Error in balancing or carrying forward ledger accounts
- Posting to the wrong side or with the wrong amount
- Recording a transaction with wrong amount in one-sided postings

Examples not revealed by a trial balance include:
- Wrong debit to the wrong account but equal credit posted correctly
- Recording equal debit and credit of an incorrect amount
- Errors of principle
- Compensating errors

These may still make the trial balance tally even though the books are wrong.

The main limitation of a trial balance is that agreement does not prove correctness of all accounting records. Even if it tallies, there may still be errors of principle, compensating errors, or other mistakes that do not disturb the equality of debits and credits. So a trial balance only gives an arithmetical check, not complete accuracy.

The purpose of preparing a trial balance is:
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of financial statements such as the Profit & Loss Account and Balance Sheet.

Errors of principle occur when accounting entries violate accepted accounting principles, usually by wrong classification of items between capital and revenue.

Examples:
- Purchase of furniture debited to purchases account.
- Repairs on overhauling of second hand machinery purchased debited to repairs account.

Rectification:
- If furniture purchase was wrongly debited to purchases account, the correct entry is to debit Furniture A/c and credit Purchases A/c.
- If repairs on overhauling of second hand machinery were wrongly debited to repairs account, the correct entry is to debit Machinery A/c and credit Repairs A/c.

These errors generally do not affect the trial balance because the debit and credit totals remain equal, but they do affect the financial statements.

Errors of commission are clerical errors such as wrong posting, wrong totalling, wrong balancing, wrong casting, or recording the wrong amount.

Examples from the chapter:
- Credit sales to Mohan ₹ 10,000 recorded as ₹ 12,000.
- Credit sales to Mohan ₹ 10,000 posted to Ram’s account.

Rectification:
- If the amount was recorded as ₹ 12,000 instead of ₹ 10,000, the excess ₹ 2,000 is removed by crediting Mohan’s A/c or debiting Sales A/c as appropriate.
- If the amount was posted to the wrong account, pass a journal entry from the correct account to the wrong account.

Some errors of commission affect the trial balance; others may not, depending on whether one or both sides are affected.

The chapter classifies errors into four types:
- Errors of commission
- Errors of omission
- Errors of principle
- Compensating errors

A correct credit purchase of pendrive for ₹3,500 should have been:
- Pendrive/Office Equipment A/c Dr. ₹3,500
- To Creditors A/c ₹3,500

But it was posted as:
- Office Equipment A/c Dr. ₹3,500
- Creditors A/c Dr. ₹3,500

So:
- Office Equipment is overstated by ₹3,500 because it received the correct debit.
- Creditors is understated by ₹3,500 because it should have been credited, but was debited instead.
- The debit total is affected by both wrong debits, so it is overstated by ₹7,000.
- The credit total is correctly stated because no credit entry was made instead of the required creditors credit.

If the debit total before correction is ₹2,40,000, and the debit side is overstated by ₹7,000, then the correct debit total should be:
$2,40,000 - 7,000 = 2,33,000$

Since the trial balance must balance after correction, and the error caused an excess debit of ₹7,000, the credit column total before correction would be:
$2,40,000 - 7,000 = 2,33,000$

So the corrected credit total is ₹2,33,000. The book-style answer expected here is that the original credit total corresponding to the balanced trial balance would be ₹2,33,000.

These are errors of omission. The rectification entries are:

(i) Credit sales to Mohan ₹7,000 were not recorded:

Mohan’s A/c Dr. ₹7,000
To Sales A/c ₹7,000

(ii) Credit purchases from Rohan ₹9,000 were not recorded:

Purchases A/c Dr. ₹9,000
To Rohan’s A/c ₹9,000

(iii) Goods returned to Rakesh ₹4,000 were not recorded:

Rakesh’s A/c Dr. ₹4,000
To Sales Returns A/c ₹4,000

(iv) Goods returned from Mahesh ₹1,000 were not recorded:

Purchases Returns A/c Dr. ₹1,000
To Mahesh’s A/c ₹1,000

These are errors of commission due to wrong amount. The rectification entries are:

(i) Credit sales to Mohan ₹7,000 recorded as ₹700:
Mohan’s A/c Dr. ₹6,300
To Sales A/c ₹6,300

(ii) Credit purchases from Rohan ₹9,000 recorded as ₹900:
Purchases A/c Dr. ₹8,100
To Rohan’s A/c ₹8,100

(iii) Goods returned to Rakesh ₹4,000 recorded as ₹400:
Rakesh’s A/c Dr. ₹3,600
To Sales Returns A/c ₹3,600

(iv) Goods returned from Mahesh ₹1,000 recorded as ₹100:
Purchases Returns A/c Dr. ₹900
To Mahesh’s A/c ₹900

These are errors of commission due to excess amount. The rectification entries are:

(i) Credit sales to Mohan ₹7,000 recorded as ₹7,200:
Sales A/c Dr. ₹200
To Mohan’s A/c ₹200

(ii) Credit purchases from Rohan ₹9,000 recorded as ₹9,900:
Rohan’s A/c Dr. ₹900
To Purchases A/c ₹900

(iii) Goods returned to Rakesh ₹4,000 recorded as ₹4,040:
Rakesh’s A/c Dr. ₹40
To Sales Returns A/c ₹40

(iv) Goods returned from Mahesh ₹1,000 recorded as ₹1,600:
Purchases Returns A/c Dr. ₹600
To Mahesh’s A/c ₹600

These are errors of commission / wrong posting. The rectification entries are:

(a) Salary paid ₹5,000 debited to employee’s personal account:
Salary A/c Dr. ₹5,000
To Employee’s A/c ₹5,000

(b) Rent paid ₹4,000 posted to landlord’s personal account:
Rent A/c Dr. ₹4,000
To Landlord’s A/c ₹4,000

(c) Goods withdrawn by proprietor ₹1,000 debited to sundry expenses account:
Drawings A/c Dr. ₹1,000
To Sundry Expenses A/c ₹1,000

(d) Cash received from Kohli ₹2,000 posted to Kapur’s account:
Kohli’s A/c Dr. ₹2,000
To Kapur’s A/c ₹2,000

(e) Cash paid to Babu ₹1,500 posted to Sabu’s account:
Babu’s A/c Dr. ₹1,500
To Sabu’s A/c ₹1,500

These are errors of principle. The rectification entries are:

(a) Credit sales to Mohan ₹7,000 recorded in purchases book:
Sales A/c Dr. ₹7,000
To Purchases A/c ₹7,000

(b) Credit purchases from Rohan ₹9,00 recorded in sales book:
Purchases A/c Dr. ₹900
To Sales A/c ₹900

(c) Goods returned to Rakesh ₹4,000 recorded in sales return book:
Sales Returns A/c Dr. ₹4,000
To Purchases Returns A/c ₹4,000

(d) Goods returned from Mahesh ₹1,000 recorded in purchases return book:
Purchases Returns A/c Dr. ₹1,000
To Sales Returns A/c ₹1,000

(e) Goods returned from Nahesh ₹2,000 recorded in purchases book:
Purchases Returns A/c Dr. ₹2,000
To Purchases A/c ₹2,000

For overcasting of subsidiary books, only the account affected by the total is corrected:

(a) Sales book overcast by ₹700:
Suspense A/c Dr. ₹700
To Sales A/c ₹700

(b) Purchases book overcast by ₹500:
Suspense A/c Dr. ₹500
To Purchases A/c ₹500

(c) Sales return book overcast by ₹300:
Sales Returns A/c Dr. ₹300
To Suspense A/c ₹300

(d) Purchase return book overcast by ₹200:
Purchases Returns A/c Dr. ₹200
To Suspense A/c ₹200

For undercasting of subsidiary books:

(a) Sales book undercast by ₹300:
Sales A/c Dr. ₹300
To Suspense A/c ₹300

(b) Purchases book undercast by ₹400:
Purchases A/c Dr. ₹400
To Suspense A/c ₹400

(c) Return inwards book undercast by ₹200:
Suspense A/c Dr. ₹200
To Sales Returns A/c ₹200

(d) Return outwards book undercast by ₹100:
Suspense A/c Dr. ₹100
To Purchases Returns A/c ₹100

These are errors of omission. The rectification entries are:

(a) Credit sales to Mohan ₹7,000 not posted:
Mohan’s A/c Dr. ₹7,000
To Suspense A/c ₹7,000

(b) Credit purchases from Rohan ₹9,000 not posted:
Purchases A/c Dr. ₹9,000
To Rohan’s A/c ₹9,000

(c) Goods returned to Rakesh ₹4,000 not posted:
Rakesh’s A/c Dr. ₹4,000
To Suspense A/c ₹4,000

(d) Goods returned from Mahesh ₹1,000 not posted:
Purchases Returns A/c Dr. ₹1,000
To Mahesh’s A/c ₹1,000

(e) Cash paid to Ganesh ₹3,000 not posted:
Ganesh’s A/c Dr. ₹3,000
To Cash A/c ₹3,000

(f) Cash sales ₹2,000 not posted:
Cash A/c Dr. ₹2,000
To Sales A/c ₹2,000

The suspense account effect shows the difference in trial balance as ₹2,000 excess credit.

These are errors of commission due to wrong amounts. The rectification entries are:

(a) Credit sales to Mohan ₹7,000 posted as ₹9,000:
Sales A/c Dr. ₹2,000
To Mohan’s A/c ₹2,000

(b) Credit purchases from Rohan ₹9,000 posted as ₹6,000:
Rohan’s A/c Dr. ₹3,000
To Purchases A/c ₹3,000

(c) Goods returned to Rakesh ₹4,000 posted as ₹5,000:
Sales Returns A/c Dr. ₹1,000
To Rakesh’s A/c ₹1,000

(d) Goods returned from Mahesh ₹1,000 posted as ₹3,000:
Mahesh’s A/c Dr. ₹2,000
To Purchases Returns A/c ₹2,000

(e) Cash sales ₹2,000 posted as ₹200:
Cash A/c Dr. ₹1,800
To Sales A/c ₹1,800

The net difference in trial balance is ₹5,800 excess debit.

These are errors of commission / wrong posting to wrong accounts. The rectification entries are:

(a) Credit sales to Mohan ₹7,000 posted to Karan:
Mohan’s A/c Dr. ₹7,000
To Karan’s A/c ₹7,000

(b) Credit purchases from Rohan ₹9,000 posted to Gobind:
Rohan’s A/c Dr. ₹9,000
To Gobind’s A/c ₹9,000

(c) Goods returned to Rakesh ₹4,000 posted to Naresh:
Rakesh’s A/c Dr. ₹4,000
To Naresh’s A/c ₹4,000

(d) Goods returned from Mahesh ₹1,000 posted to Manish:
Manish’s A/c Dr. ₹1,000
To Mahesh’s A/c ₹1,000

(e) Cash sales ₹2,000 posted to commission account:
Commission A/c Dr. ₹2,000
To Sales A/c ₹2,000

The errors are one-sided and suspense account is used.

(a) Credit sales to Mohan ₹7,000 posted to the credit of his account:
Suspense A/c Dr. ₹7,000
To Mohan’s A/c ₹7,000

(b) Credit purchases from Rohan ₹9,000 posted to the debit of his account as ₹6,000:
Wrong effect gives debit to Rohan and no credit to purchases. Correcting difference:
Rohan’s A/c Dr. ₹15,000
To Purchases A/c ₹9,000
To Suspense A/c ₹6,000

(c) Goods returned to Rakesh ₹4,000 posted to the credit of his account:
Rakesh’s A/c Dr. ₹8,000
To Suspense A/c ₹8,000

(d) Goods returned from Mahesh ₹1,000 posted to the debit of his account as ₹2,000:
Suspense A/c Dr. ₹3,000
To Mahesh’s A/c ₹3,000

(e) Cash sales ₹2,000 posted to the debit of sales account as ₹5,000:
Cash A/c Dr. ₹2,000
To Sales A/c ₹2,000
Sales A/c Dr. ₹7,000
To Suspense A/c ₹7,000

Net difference in trial balance = ₹3,000 excess debit.