11. Trial Balance

A trial balance is a summary of balances of all accounts recorded in the ledger. The format of trail balance is as fallows :
Trial Balance of M/s…………
as on 31st Jan., 2005
According to J. R. Batliboi trial balance is a statement, prepared with debit and credit balances of ledger accounts to test the arithmetical accuracy of the books.
The trail balance is prepared at the end of a chosen period which may be monthly, quarterly, half-yearly or annually or as and when required. Since every debit should have a corresponding credit as per the rules of the double entry system, the total of debit and credit balances should tally. In case there is a difference, the correctness of the balances brought forward is to be checked from the respective accounts. This type of checking of accounts leads to ascertaining of arithmetical accuracy of the balances of various accounts in a summarised form. Besides checking the arithmetical accuracy, trial balance also aims at ascertaining the correctness of the nature of balance in relation to the type of account. All assets, expenses receivables shall have debit balances. Similarly, all liabilities, revenues, payables will have credit balance.
Functions of trial balance
The following are the functions of preparing a trial balance :
Helps in the Detection of Errors: Trial balance helps in locating errors of posting and casting from the subsidiary books to ledger.
Ascertains the Arithmetical Accuracy of Ledger Account : It provides a check on arithmetical accuracy of posting in ledger accounts when the total of debit balance and credit balance are equal.
Helps in Preparation of Final Accounts : Final accounts can be easily prepared with the help of trial balance.
Preparation of Trial balance
A trial balance may be prepared by the following methods :
Balance Method : According to this method, the balance of each account is written. This is known as net trial balance method. Balancing of accounts is done by putting the difference between the debit and credit sides of accounts. This is the most popular method among the enterprises.
Total Amount Method : According to this method, the total of both the sides of the accounts are taken in the trial balance. The total amount of debit and credit sides should tally each other. According to this method trial balance can be prepared immediately after the completion of posting the accounts to the ledger.
Total and Balance Combine Method : This is the combination of Balance method and total method. But this method is not generally followed because it consumes more time.
Points to be kept in mind
While preparing trial balance…
(i) Capital account shows a credit balance and kept on credit side.
(ii) Drawing account shows debit balance and it is kept on debit side.
(iii) As all the liabilities show credit balance, their balances should be kept on credit side. Liabilities include creditors, bills payable, bank overdraft, etc.
(iv) All the assets have debit balances. They should be written on the debit side of trail balance. Assets include cash, bank balance, bills receivables, debtors, stock, furniture, machinery/plant, land, patents, goodwill, etc.
(v) (a) Purchases account shows a debit balance.
(b) Purchases returns account shows a credit balance.
(c) Sales account shows a credit balance.
(d) Sales returns account shows a debit balance.
(e) All income and profits show credit balance, as such they should be written on credit side.
(f) All expenses and losses show a credit balance and hence should be shown on credit side.
Errors
Errors are of the following two types :
Errors
1. affecting the final balance (or errors disclosed by the trial balance).
2. Errors not affecting the trial balance (or errors not disclosed by trial balance).
errors affecting trial balance
In case the trial balance does not tally, it indicates that certain errors have been committed which have affected the agreement of trial balance. Some of these errors are as bellows :
(i) Wrong balancing of an account.
(ii) Wrong casting of subsidiary books.
(iii) Posting an entry on wrong side of an account.
(iv) Any account is credited or debited more than once.
(v) Omission of one aspect of any entry.
(vi) Omission in posting or entering any entry in the trial balance.
(vii) Totalling the trial balance wrongly.
(viii) Omitting to write the cash book balance in the trial balance.
(ix) Writing any balance in the wrong column of the trial balance.
(x) Wrong amount is posted to an account.
Errors not affecting trial balance
Errors of Omission : These errors may be due to posting to wrong account, or posting on the wrong side of an account or posting of wrong amount. These omissions will not affect the trial balance in any way because neither have these transactions been entered on the debit side nor on the credit side.
Errors of Commission : In case a wrong amount is entered in the original books of recording, the trial balance will tally because the same amount will be posted in both the accounts affected by the transaction. For example, purchases of goods from Hari on credit for Rs. 45000 has been entered in the journal as 54000. When the entry is posted to the ledger, double entry will be completed with Rs. 54000, being Purchases A/c debited with Rs. 54000 and Hari being credited with Rs. 54000. Inspite of the inaccuracy in both the accounts, the trial balance will tally.
Compensating Errors : When the effect of one error is compensated by the effect of some other error, it is called the case of compensating errors. For example, at the time of posting the credit side of Hari’s account Rs. 900 were posted in the place of Rs. 9000 and at the time of posting on the credit side of Gopal’s account by Rs. 9000 are posted instead of by Rs. 900. These two mistakes will compensate the effect of each other and inspite of errors in the accounts of Hari and Gopal, the trial balance will tally.
Errors of Principle : If some fundamental principle of accountancy is followed at the time of entering a transaction, this type of error is known as error of principle. These errors are committed in such cases as proper distinction between goods account and assets account is not made i.e. purchases of fixed assets is treated purchases account. These errors are of the following types :
Capital Expenditure Treated as Revenue Expenditure : In case the purchases of fixed assets is treated as ordinary expenditure and purchases account is debited in place of assets account, it is a case of error of principle. Similarly if some amount spent on extension of building is debited to repairs account instead of building account, it will be also be a case of errors of principle.
Revenue Expenditure Treated as Capital Expenditure : In case an amount spent on repairs of an old building is debited to the building account instead of repairs account, it is also known as error of principle.
Errors of Posting to Wrong Accounts: At the time of posting entries from original books, posting is done with a wrong account but on the correct side, such errors will not affect the agreement of trial balance. Suppose, goods purchased on credit from Varun are credited to Lagan, the trial balance would tally despite the fact that there are errors in both the accounts.
Suspense account
Inspite of the best efforts made by the accountants locating of errors is not easy and it may take some more time to detect them. Until detected or located, errors can not be corrected. In order to avoid unnecessary delay in the preparation of Trial Balance, the amount of difference is temporarily put in an account, known as ‘suspense account’ in order to tally the trial balance by putting the difference on the shorter side. When all errors are detected and rectification entries have been made, the suspense account automatically stands closed. But under the circumstances balance still remains in the suspense account due to non-detection of errors. It is shown in the balance on the liabilities side when there is credit balance and when there is debit balance, it is shown on the assets side.
Detection of errors
In case a trial balance does not agree, following steps are taken to locate the errors:
(i) Recheck the totals of both the debit and credit sides of trial balance.
(ii) Check whether all the closing balances from the previous year’s balance sheet have been correctly carried forward and recorded in the respective ledger accounts.
(iii) When the difference is in a round figure, say Rs. 1000, Rs. 10,000, Rs. 1,00,000 etc, there is a possibility of wrong totalling or wrong carry forwards or the totals of subsidiary books or there is an error in the balancing of an account. As such, the totalling and balancing need to be checked.
(iv) Check with the help of the ledger if the balance of each and every account including the balances of cash and bank have been written in the trial balance on the correct sides and with correct amounts.
(v) If the difference between the debit and credit columns is divisible by two, there is a possibility that an amount equal to one-half of the difference may have been posted to wrong side of another ledger account. For example, if the total of credit column of the trial balance exceeds by Rs. 50,000, it is quite possible that a debit item of Rs. 25,000 may have been wrongly posted in the ledger as a credit item. To find out such errors, one should scan the credit entries of the amount of Rs. 2500.
(vi) Compare the trial balance of the current year with that of the previous to check additions and deletions of accounts and also verify if there is a large difference in amounts, which are neither expected nor explained.
(vii) If the difference is a multiple of 9 or divisible by 9, the mistake could be due to transposition of figure. Suppose a debit amount of Rs. 954 is posted as 459 the credit total in the trial balance will exceed the debit side by Rs. 495 (954–459 = 495). The difference is a perfect divisible by 9. A mistake on account of wrong placement of the amount may also he checked by this method. In this way, a difference in trial balance, divisible by 9 helps in checking the errors for a transposition mistake.
(viii) The mistake may be on account of a complete omission of a posting. Suppose, the difference is of Rs. 98000 due to omission of a posting of the amount on debit side. For this accountant should verify all the credit items with an amount of Rs. 98000.