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Detection and Rectification of Errors in Trial Balance

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What is Trial Balance?

A Trial Balance is a statement prepared with the balances of the ledger account, with a motive to verify the accuracy of the accounts. The accounts showing the debit balance are posted on the debit side of the trial balance, and the accounts showing the credit balance are posted on the credit side of the trial balance. If the total of the debit side is equal to the credit side, the accounts are presumed to be accurate.

A total summation of cash and bank balances from the cash book is also recorded in the trial balance. This record is maintained so as to assure that all the journal entries and the postings from ledger accounts are recorded properly without any mistakes. The reason for which it equates is that the double entry system prevails in the accounting system every transaction is recorded twice. So, fundamentally the total balances from the debit and credit side of a trial balance should definitely match. 

According to J.R. Batliboi – “Trial Balance is a statement, prepared with the debit and credit balances of Ledger accounts to test the arithmetical accuracy of the books”.

Effect of Errors on Trial Balance

There can be two ways in which the effect of errors can be distinguished:

1. Errors affecting Trial Balance (or errors disclosed by Trial Balance):

When the total on both the sides of Trial Balance does not agree, it represents that surely there exists some mistake or error which has an effect on the trial balance. It shows that the accountant has committed certain mistakes while recording the transactions. These are called ‘Errors disclosed by Trial Balance’ or ‘Errors which affect the agreement of Trial Balance’. For example, Double posting in an individual account, posting the wrong account or posting on the wrong side, wrong casting, etc.

2. Errors not affecting Trial Balance (or errors not disclosed by Trial Balance):

In this case, the balances from the debit and the credit side of the Trial Balance tallies, and it might seem that every book of account is accurately prepared without any error. But some of the errors or mistakes go undetected despite the fact that the balances are matching. Due to this reason, it has been said that “Trial Balance is not known as a conclusive proof of the accuracy of the books of accounts”, and there exist some errors which have no effect on the tally of the trial balance. For example, Compensating errors, errors of principle, errors of commission & omission, etc.

Detection of Errors

The debit and credit sides of the trial balances should match. But it is not always mandatory that they would tally. There could be some errors in the records, which might lead to some disparities in the total. These errors can happen unintentionally anytime while preparing Journals, Ledger Accounts, or Statements of Trial Balance. To allocate the errors and mistakes, the following steps have to be undertaken:

Step 1: Always, firstly, revise the total on both sides of the debit and credit of the Trial Balance.

Step 2: If after rechecking, the balances do not match, then the amount of difference is determined and checked if any transaction of the same amount is left unposted in any book of accounts.

Step 3: Reduce the amount of difference to half to check if any transaction of the halved figure is recorded on the wrong side of an account which might have increased the debit or credit side making the difference appear double.

Step 4: Then the amount of difference is to be checked if it gets completely divided by 9. If it can be divided completely, then it is the problem of interchange of the figures, i.e., ₹96 interchanged as ₹69, the difference of ₹27 is divisible by 9. Also, there could be a case where mistakenly 0 has been added to the original figure like ₹12 has been posted as ₹120, and the difference of ₹108 is again divisible by 9.

Step 5: Sometimes, there is a mistake in totalling and balancing books of accounts. When the amount of difference is in an estimated figure of ₹1, ₹10, ₹100, etc., instead of a specific figure like ₹46, ₹93, etc., then there is a strong chance that the total of both sides of the trial balance might have been summed up wrong or inaccurate amount is being carried forwarded.

Step 6: It is also important to check that the balances from all the ledger accounts, and subsidiary books are noted down to the correct side and with the correct amount. Also, cash and bank balances from the cash book are again recorded correctly. Because there is a higher chance that if the amount of difference is huge, then surely the balance out of any ledger account has been missed to record in the trial balance.

Step 7: Also, all the closing balances from the previous year’s financial statements are carried forward and posted in an accurate way. To check this, a comparison of the same heads from the previous year and the current year’s financial statements should be made.

Step 8: Also, if the amount is not written clearly, then again it is needed to be rechecked.

Step 9: Despite taking every conscious step if there still exists a difference in the Trial Balance, then each and every posting should be checked thoroughly. And while rechecking, a tick mark should be made in front of every transaction.

Rectification of Errors

After the errors are detected, then it is necessary to rectify these errors. There is no benefit in the detection of errors if these are not rectified. This can be categorized into two classifications, and these are as follows:

1. Rectification of Errors with no effect on Trial Balance:

These are usually called two-sided errors, i.e., two or more accounts are affected concurrently. This problem occurs when there is a wrong debit or credit entry. In the case of rectifying this type of error, it is important to undo the wrong effect of these kinds of debit & credit entries by reversing it and making a correct entry for that debit or credit. Likewise, if the account shows extra credit or less debit, then the amount should be debited from the account. And in the state of excess debit and short of credit, the amount should be credited to the concerned account. 

2. Rectification of Errors affecting Trial Balance:

These are usually known as one-sided errors, i.e., only one account is affected at a time. In case of rectifying this type of error, it is possible to just write down an explanatory note under the affected account or rectification can be made by passing a journal entry using a ‘Suspense account’, which is a temporary account formed accordingly. It is better to allocate the mistake before it is posted to the ledger account because here simply it can be rectified by just crossing the old or wrong amount and overwriting the correct amount. But not always, it can be predicted before posting, and rectification has to take place in the ledger account by putting an explanatory note or making a suspense account.

Rectification of Errors in the next Accounting Year

Rectification of Errors is made through P & L Adjustment A/c in the next accounting year. For this purpose, exclusively an account called ‘P & L Adjustment A/c’ is created, and the same is credited or debited by rectifying the errors from the previous year. So, the account is a clear indication of the net effect of rectification of every error from the last year and is transmitted to the Capital account routed through the P & L Adjustment account.

Illustration:

It was found that the trial balance of M/s Keshav Chand did not tally, and the difference was posted to the Suspense account. Prepare a suspense account and make journal entries for rectifying the following errors to calculate the difference:

1. The total of Purchase Book ₹20,000 was missed to record.

2. Depreciation of ₹1,000 was written off on machinery but was not posted to the machinery account.

3. An amount of ₹5,000 while installing a plant and machinery was mistakenly posted to the Repairs and Maintenance A/c.

4. Goods amounting to ₹30,000 was returned to Shyam and were recorded in Sales Book.

5. Salary paid to Keshav was debited to his personal account amounting ₹8,000.

Solution:

 

 



Last Updated : 05 Apr, 2023
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