Accounts Dated 31 st May 2017 Trial Balance & Rectification of Errors.

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1 Institute of Corporate Studies 21/2, E.C. Road, Dehradun , CS Foundation/ CA CPT Accounts Dated 31 st May 2017 Trial Balance & Rectification of Errors. Meaning of Trial Balance: Trial balance is a statement containing the balances of all ledger accounts at any given date, arranged in the form of debit and credit columns, placed side by side. Objective of preparing Trial Balance: The various objectives of preparing Trial Balance are as follows: (i) To check arithmetical accuracy in posting of accounting transactions. (ii) To help in preparing final accounts i.e. the Trading account, the profit and Loss account and the Balance Sheet (iii) To help in locating errors, and (iv) To help in comparison Preparation of Trail Balance: It is prepared at the end of the accounting year. However, it can be prepared at anytime during the accounting year to check the accuracy of the posting. Following steps are taken to prepare the Trial Balance: (i) Balance all the ledger accounts (ii) Ascertain the amount of cash in hand and cash at Bank by balancing the cash books (iii) Write the name of the account in the Name of Account column and its balance in the respective debit or credit column. (iv) Where the accounts are not balanced (e.g. accounts of expenses, loses gains and income) nut directly transferred to Trading or Profit and Loss A/c, the total of the expenses and losses is written in the debit column of the trial balance and the revenue account in the credit column of the Trial Balance. Total the two columns after writing the balance of all accounts. Total of the two columns should be equal.

2 Important Hints for preparing a Trial Balance: Generally capital revenue and liabilities accounts have the credit balance. Therefore, they appear in the credit column of Trial Balance. The assets and expenses accounts have the debit balance. Therefore they appear in the debit column of the Trial Balance. Trial Balance and errors: If the Trial Balance is in agreement i.e. the total of its two columns are equal, it can be reasonably presumed that have been correctly made and have been posted correctly in the ledger. If the totals of the Trial Balance are not equal, it means there are some errors either in recording or in posting of the business transactions. The disagreement of the Trial Balance maybe due to the following reasons: (i) The balancing of an account is incorrect (ii) An amount has been posted on the wrong side of the account. (iii) The total of subsidiary book is wrong (iv) An amount entered in a subsidiary book is not posted to the ledger account concerned. (v) The posting in an account is with an incorrect amount and (vi) There may be mistake in carrying balances from the ledger accounts to the trial balance. Limitations of Trial Balance (errors not disclosed by trial balance): Though the agreement of Trial Balance proves the arithmetical accuracy of posting yet there are some errors which may remain undiscovered in spite of this agreement. This is the reason why agreement of Trial Balance is not a conclusive proof of the correctness of recording and posting of accounting transactions. Errors not disclosed by Trial Balance are discussed below: a) Errors of Omission: If a transaction has been completely omitted to be recorded in the books of original entry like Journal, Purchase Book, Sales Book etc. it will not affect the agreement of trial balance because it does not upset the equitation Debits Credits. b) Errors of Commission: Such errors arise when wrong amount is written in books of original entry. Suppose goods worth Rs. 500 sold to X on credit by wrong amount say Rs. 300, entered in the Sales Book. c) Errors of Posting: These will when an amount is posted to wrong account, but on the correct side. d) Compensating Errors: Such errors cancel out on e another and thus enable the trial balance to tally Suppose an excess debit of Rs. 50 had been made in A s account and them time an excess credit of Rs. 50 is made in B s account. The two errors will compensate each other and the Trial Balance will tally.

3 e) Errors of principle: If an expense is treated as an asset or vice versa or an income is treated as liability the Trial Balance will agree in spite of such mistakes. Trial Balance and Suspense A/c: Suspense accounts are an imaginary account which is opened to tally the trial Balance so that final account may be prepares. When a trial balance does not match the difference is taken to suspense account to temporarily tally in latter on errors are detected and rectified in the course and suspense a/c is subsequently eliminated. Suspense A/c is fitted on the side of the Trial Balance with lesser amount. TYPES OF ERRORS 1. Errors of Omission: a) Partial Omission: This type of error arises particularly when the transaction is recorded in subsidiary books but it is not posted in the ledger. E.g. (i) Goods sold to the customer but not debited to customer a/c (ii) Goods return to creditor but not debited to creditor a/c b) Complete Omission: When the transition is not recorded at all in the books of accounts, it is called error of complete omission. E.g. Goods sold to A not recorded at all. 2. Errors of Commission: These errors arise due to ignorance, lack of accounting knowledge and careless of accountants. E.g. (i) Purchase of Rs. 3,500 recorded in purchase book as Rs. 5,300 (ii) Purchase entered in sales day book (iii) Wrong totaling any subsidiary books (iv) Errors of carry forward (v) Errors of posting (vi) Errors due to wrong balancing 3. Compensating Errors: These are errors that cancel each other and because of this they are not easy to discover. They may be dissimilar in nature but are of a similar amount. So that balance is agreed in spite of such errors. E.g. (i) Under casting of purchase book and sales book by a similar amount (ii) Under posting in salary account by Rs. 200 and over posting in rent a/c by Rs. 200

4 4. Errors of Principle: Such error is one where a transaction is recorded in total disregard to the fundamental principles of double entry e.g. (i) Furniture purchase of credit wrongly debited in purchase day book (ii) Ordinary repairs charged to building (iii) Sale of fixed assets has been passed through the sales book (iv) Excess provision for bad debts, discount on debtors, depreciation Practical Problem 1. Rectify the following errors: a) Goods worth Rs. 20,000 returned by Naresh were taken into stock, but no entry was passed in the books b) A credit purchase of goods worth Rs. 8,200 from Rajan was not passed in day books although the goods were taken into stock. c) Goods costing Rs. 500 (sale price Rs. 600) distributed as free sample were not recorded at all 2. Pass the necessary journal entries to rectify the following errors. a) A credit purchase of Rs. 560 from Arun was recorded as Rs. 650 b) A credit purchase of Rs. 560 from Rakesh was recorded as purchase from Rajesh c) A credit purchase of Rs. 560 from Priya was recorded in the Sales Book d) A Bills Receivable of Rs. 500 received from Tejpal was entered in the Bills Payable book e) A credit sale of old furniture to Sheetal for Rs. 560 was entered in the Sales Book for Rs. 650 f) A cash purchase of Rs. 560 from Mukesh was recorded was recorded as Rs Rectify the following errors: a) Repairs mode on Building for 50,000 were debited to Building A/c. b) Rent paid Rs. 12,000 to Landlord was debited to landlord A/c c) Wages paid for installation of Machinery of Rs. 7,000 was debited in Wages A/c d) Salary paid to Accountant (Mr. Ram) of Rs. 15,000 was debited to Ram A/c e) Rs. 32,000 paid for purchase of Computer was charged to office expenses A/c

5 f) Amount of Rs. 7,500 withdrawn by proprietor for personal use was debited to Miscellaneous Expenses A/c g) Rs. 50,000 spent on erection of building was debited to Repairs A/c h) Sale of old machinery for Rs. 25,000 was passed through day book.