Types of Errors in 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. The Double entry System is a reason behind such an agreement between the debit and the credit side.

Definition of Trial Balance:

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

“Trial Balance is a list of debit and credit balances, taken out from the ledger. It also includes the balances of cash and bank taken from cash book.” – Carter

“The Statement prepared with the help of ledger balances, at the end of the financial year to find out whether debit total agrees with credit total is called Trial Balance.” – William Pickles

Meaning of Errors in Trial Balance:

Errors in Trial Balance are mistakes made during the accounting process that cannot always be detected by the trial balance. These errors are classified under two heads:

1. Errors disclosed by a trial balance: If the trial balance does not tally, it shows that the accountant has committed certain mistakes while recording the transactions. These are due to the lack of attention.
2. Errors not disclosed by a trial balance: The agreement of trial balance not always necessarily shows an accuracy check. There may be a number of errors that cannot be disclosed by the trial balance as the debit and credit side shows equal value. Such errors are known as limitations of Trial Balance.

Types of Errors not disclosed by a Trial Balance:

1. Errors of Omission: Errors of Omission occur when a transaction is fully skipped. This means that the transaction has not been recorded either in the Journal or in Subsidiary Books. Under such a situation, the agreement of trial balance remains unaffected, as the transaction has neither been entered in the debit side nor the credit side of any account.

Example: Goods worth ₹8,000 sold to Mohan has not been recorded at all. This will not affect the agreement of the trial balance, as neither it has been recorded on the debit side of Mohan’s account nor on the credit side of the sales account.

2. Errors of Commission: Errors of Commission occur when a wrong amount has been recorded either in the Journal or in Subsidiary Books. The trial balance, despite such errors, still continues to tally because the same wrong amount has been recorded on both sides of the accounts.

Example: A cash purchase of ₹250 has been recorded in the Journal as ₹520. When this transaction is posted in the ledger account, the amount of ₹ 520 is entered as purchase being debited with ₹520 and cash being credited with ₹520. No error can be detected by the trial balance.

3. Errors of Principle: Errors of Principle occur when Accounting Principles are not applied or are violated while recording a transaction. These errors are of two types:

• When capital expenditure is treated as revenue expenditure.

Example: Furniture worth ₹ 50,000 purchased is wrongly debited to the purchase account, instead of the Furniture account. Despite such Errors of Principle, the trial balance shows an agreement.

• When a revenue expenditure is treated as capital expenditure.

Example: Amount of ₹2,000 spent on repair of old machinery being debited to machinery account, instead of repair account.

4. Compensating Errors: When the wrong amount posted in one account is compensated by the wrong posting of the same amount in another account is called Compensating Errors.

Example: Ram’s account is debited by ₹400, instead of ₹500 and Sham’s account is credited by ₹600, instead of ₹700. The trial balance doesn’t show any disagreement due to the shortage of ₹100 being recorded on both sides of the account.