Trial Balance and Rectification of Errors

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Test Your Understanding – I
Indicate against each amount wheather it is a debit or a credit balance, and prepare a trial balance as at March 31, 2014 based on the following balances:

Accounts Title Given
Amount
L.F. Debit
Total
Credit
Total
Capital 1,00,000     1,00,000
Drawings 16,000   16,000  
Machinery 20,000   20,000  
Sales 2,00,000     2,00,000
Purchases 2,10,000   2,10,000  
Sales return 20,000   20,000  
Purchases return 30,000     30,000
Wages 40,000   40,000  
Goodwill 60,000   60,000  
Interest received 15,000     15,000
Discount allowed 6,000   6,000  
Bank overdraft 22,000     22,000
Bank loan 90,000     90,000
Debtors        
   Nathu 55,000   55,000  
   Roopa 20,000   20,000  
Creditors :        
   Reena 35,000     35,000
   Ganesh 25,000     25,000
Cash 54,000   54,000  
Stock on April 01, 2013 16,000   16,000  
total   5,17,000 5,17,000
     
Test Your Understanding – II
Record the rectification entry for the following transactions:
1. Credit sales to Rajni Rs. 5,000 recorded in Purchases book:
This is an error of …………………………………… (Principle)
State the wrong entry recorded in the book of accounts

Dr. 5,000  
  5,000

Correct effect should have been:

Dr. 5,000  
  5,000

The rectification entry will be:

Dr. 10,000  
  5,000
  5,000
2. Furniture purchased from M/s Rao Furnishings for Rs. 8,000 was entered into
the purchases book.
This is the error of ………………………………….(Principle)
State the wrong entry recorded in the book of accounts

Dr. 8,000  
  8,000

Correct effect should have been:

Dr. 8,000  
  8,000

The rectification entry will be:

Dr. 8,000  
  8,000
3. Cash sales to Radhika Rs. 15,000 was shown as receipt of commission in the cash book.
This is the error of ……………………………………….(Principle)
State the wrong entry recorded in the book of accounts

Dr. 15,000  
  15,000

Correct effect should have been :

Dr. 15,000  
  15,000

The rectificatin entry will be:

Dr. 15,000  
  15,000
4. Cash received from Karim Rs. 6,000 posted to Nadeem.
This is the error of ………………………………….(Principle)
State the wrong entry recorded in the book of accounts:

Dr. 6,000  
  6,000

Correct effect should have been:

Dr. 6,000  
  6,000

The rectification entry will be:

Dr. 6,000  
  6,000
Test Your Understanding – III
Show the effect through Journal entries :
1. Credit sales to Mohan Rs. 10,000 were posted to his account as Rs. 12,000
This is an error of ……………………………. (Error of Commission)
The wrong effect has been :

Dr. 12,000  
  12,000

The correct effect should have been :

Dr. 10,000  
  10,000

The rectification entry will be.

Dr. 2,000  
  2,000
2. Cash paid to Neha Rs. 2,000 was not posted to her account. This is an error of ……………………………. (Error of Partial Omission)
The wrong effect has been :

Dr. 2,000  
  2,000

The correct effect should have been :

Dr. 2,000  
  2,000

The rectification entry will be :

Dr. 2,000  
  2,000
Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000.
This is an error of ……………………………. (Error of Commission)
The wrong effect has been :

Dr. 1,000  
  1,000

The correct effect should have been :

Dr. 1,600  
  1,600

The rectification entry will be :

Dr. 600  
  600
4. Depreciation written off on furniture Rs. 1,500 was not posted to depreciation account. This is an error of ……………. (Error of Partial Omission)
The wrong effect has been :

Dr. 1,500  
  1,500

The correct effect should have been :

Dr. 1,500  
  1,500

The rectification entry :

Dr. 1,500  
  1,500
Test Your Understanding – IV
Tick the Correct Answer

  1. Agreement of trial balance is affected by:
    1. One sided errors only.
    2. Two sided errors only.
    3. Both a and b. ✔
    4. None of the above.
  2. Which of the following is not an error of principle:
    1. Purchase of furniture debited to purchases account.
    2. Repairs on the overhauling of second hand machinery purchased debited to repairs account.
    3. Cash received from Manoj posted to Saroj. ✔
    4. Sale of old car credited to sales account.
  3. Which of the following is not an error of commission:
    1. Overcasting of sales book.
    2. Credit sales to Ramesh Rs. 5,000 credited to his account.
    3. Wrong balancing of machinery account.
    4. Cash sales not recorded in cash book. ✔
  4. Which of following errors will be rectified through suspense account:
    1. Sales return book undercast by Rs. 1,000. ✔
    2. Sales return by Madhu Rs. 1,000 not recorded.
    3. Sales return by Madhu Rs 1,000. recorded as Rs,100.
    4. Sales return by Madhu Rs. 1,000 recorded through purchases returns book
  5. If the trial balance agrees, it implies that:
    1. There is no error in the books.
    2. There may be two sided errors in the book. ✔
    3. There may be one sided error in the books.
    4. There may be both two sided and one sided errors in the books.
  6. If suspense account does not balance off even after rectification of errors it implies that:
    1. There are some one sided errors only in the books yet to be located. ✔
    2. There are no more errors yet to be located.
    3. There are some two sided errors only yet to be located.
    4. There may be both one sided errors and two sided errors yet to be located.
  7. If wages paid for installation of new machinery is debited to wages Account, it is:
    1. An error of commission.
    2. An error of principle. ✔
    3. A compensating error.
    4. An error of omission.
  8. Trial balance is:
    1. An account.
    2. A statement. ✔
    3. A subsidiary book.
    4. A principal book.
  9. A Trial balance is prepared:
    1. After preparation financial statement.
    2. After recording transactions in subsidiary books.
    3. After posting to ledger is complete.
    4. After posting to ledger is complete and accounts have been balanced ✔
Short Answers
1. State the meaning of a trial balance?
A trial balance is a statement showing

  1. the balances
  2. or total of debits and creits

of all the accounts in the ledger so as to verify the arithmetical accuracy of posting into the ledger accounts.






2. Give two examples of errors of principle?
While accounting entries are recorded, if any of the generally accepted accounting principels (GAAP) are violated or ignored, it results in errors. These errors are know as errors of principles. The following are the examples: (You can consider any two of these).

  1. Consider the case where amount is spent on adding new structures to the building. This falls under capital expenditure and should be debited to the asset account. Instead, if this expenditure is recorded under maintenance and repairs account, it will be treated as revenu expense. This is an error of principle.
  2. Consider the case where the machinery is purchased on credit. This has to be recorded in journal proper. If on the other hand if it is recorded under purchases book, it is an error of principle.
  3. Consider the case where in the rent is paid to the landlord. This should be recorded under rent paid. If it is recorded in the cash book as payment to landlord, it is an error of principle.
3. Give two examples of errors of commission?
Errors of commission are the errors which are committed due to

  1. wrong posting of transactions
  2. wrong totalling
  3. wrong balancing of the accounts
  4. wrong casting of the subsidiary books
  5. wrong recording of amount in the books of original entry

etc.
The following are the examples of errors of commission:(You can consider any two examples)

  1. Raj Hans Traders paid ₹ 25,000 to Preetpal Traders (the supplier). This transaction was properly recorded in the cashbook. However, Preetpal’s account was debited with ₹ 2,500 only while posting to the ledger.
  2. Credit sales to Mohan for ₹ 10,000 were recorded as ₹ 1,000 in the sales book.
  3. Credit sales to Ramesh for ₹ 5,000 was credited to his account (it should have been debited)
  4. Overcasing of sales book
  5. Wrong balancing of machinery account.
4. What are the methods of preparing trial balance?
The following are the methods of preparing trial balances.

  1. Totals method: In this method, the total of each side of the ledger account (debit and credit) is ascertained separately and shown in the trial balance in the respective columns. As the accounts are based on double entry system, the total of debit column and the total of credit column in the trial balance should agree with each other.
  2. Balances Method: In this method, the trial balance is prepared by showing the balances of all ledger accunts. The debit and credit columns are totalled up to assure their correctness. The account balances are used because the balance summarises the net effect of all transactions related to an account. This helps in the preparation of financial statements. In the trial balance, sundry debtors amount replaces the balances of individual accounts of the debtors and sundry creditors amount replaces the balances of the individual accounts of creditors.
  3. Totals-cum-balances Method: This method is a combination of totals method and balances method. It uses four columns, two columns for writing debit and credit totals of accounts and two columns for writing the dbite and credit balances of these accounts.
5. What are the steps taken by an accountant to locate the errors in the trial balance?
The following steps are taken by an accountant to locate the errors in the trial balance.

  1. Assess by recasting the totals of the debit and credit columns of the trial balance.
  2. Based on the comparision between
    1. the account head/title and amount appearing in the trial balance
    2. the account head/title and amount appearing in the ledger

    find any differences in the amount or any omission of an account

  3. Compare the trial balance of current year with the trial balance of the previous year. From this comparison, find any additions and deletions of any accounts and also check whether there is a huge diference in the amount that is neither expected nor explained.
  4. Do/re-do and check the corectness of balances of individual accounts in the ledger.
  5. Ensure by re-checking the correctness of the posting in accounts from the books of original entry.
  6. For the differences between the debit and credit columns that are divisible by 2, it is likely that an amount equal to one-half of the difference may have been posted to the wrong side of another ledger account.
  7. Gap or difference may also indicate a complete omission of a posting.
  8. Having a difference that is divisible by 9, indicates that the due to transposition of figures. For example 143 might have been posted as 134.
6. What is a suspense account? Is it necessary that is suspense account will balance off after rectification of the errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account?
the accountant has to carry forward his accounting process and prepare financial statements, even if the trial balance does not tally due to the presense of one sided errors. However, the trial balance is tallied by recording the difference on the shorter side into a separate account. This account is know as Suspense Account.
Rectification of the errors detected by the accountant results in balancing off of the suspense account. However if few of the errors are not rectified, the suspense account will not be balanced. In such cases, the balance from the suspense account will be transferred to the balance sheet. If there is a debit balance in the suspense account, it will be recorded on the assets side of the balance sheet and if there is a credit balance in the suspense account, it will be recorded on the liabilities side of the balance sheet.
7. What kinds of errors would cause difference in the trial balance. Also list examples that would not be revealed by a trial balance?
One sided errors, committed only on one side of an account i.e. either on the credit side or on the debit side, cause a differene in trial balance. This necessitates the opening of the suspense account. The following are the examples of one-sided errors.

  1. Posting on the wrong side
  2. Posting wrong amount
  3. Incorrect totalling of the subsidiary books
  4. Errors of partial Omission
8. State the limitations of trial balance?
Agreement of trial balance is not an absolute proof of accuracy of the accounting records. In otherwords it does not guaratee that the entry itself is correct. Tial balance has limitations in detecting the following errors.

  1. Errors of commission
  2. Errors of Omission
  3. Errors of Principle
  4. Compensating Errors
Long Answers
1. Describe the purpose for the preparation of trial balance.
The following is the purpose/objective of preparing the trial balance.

  1. To ascertain the arithmetical accuracy of the ledter accounts: Trial balance serves the purpose of ascertaining whether all the debits and credits are properly recorded in the ledger or not not. It also acertains that all the accounts have been correctly balanced. Trial balance reflects the summary of the ledger and lists out all the accounts and their balances. When it is confirmed that the totals of all the debit balances and credit balances in the tiral balance are equal, it is assumed that the posting and the balancing of the accounts is arithmetically correct. However, this does not necessarily implie the accuracy of the accounts. It only ensures that the all the debits and the corresponding credits are properly recorded in the ledger.
  2. To help in locating errors: When the trial balance does not tally, it indicates that there exists an error. This error might have been introduced during one of the following stages of the accounting process.
    1. Totalling of subsidiary books
    2. Posting of journal entries in the ledger
    3. Calculating account balances
    4. Carrying account balances to the trial balance
    5. Totalling the trial balance columns.

    It should be kept in mind that the equality of the debit and credit balances does not mean that the accounting is accurate. It is likely that some errors do not affect the equality of debits and credits but still exist. So, equal totals indicate that several types of errors probably have not occured.

  3. To help in the preparation of the financial statements. (Profit & Loss account and Balance Sheet): Trial balance is considered as the connecting link between accounting records and the preparation of financial statements. Once the tallied trial balance is available, we can start the preparating of the financial statements.
    1. All the revenue and expense accounts appearning in the trial balance are transferred to the trading and profit and loss account.
    2. Similarly all the assets, liabilities, capital accounts are transferred to the balance sheet.





2. Explain errors of principle and give two examples with measures to rectify them.
Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, the resulting errors are known as errors of principle. It may occur due to an incorrect classification of expenditure or receipt between capital and revenue. As it will have an impact on financial statement, it is very important to deal with these errors. If not dealt with, it may lead to under/over stating of income or assets or liabilities etc. The following are examples.

  1. Amount spent on additions to the building should be treated as capital expenditure and must be debited to the asset account. Instead of this, if this amount is debited to maintenance and repairs account, it has been recorded as a revenue expense and thus creates an error of principle.
    Thus wrong entry recorded in the book of accounts

    Dr. xxxxx  
      xxxxx

    Correct effect should have been:

    Dr. xxxxx  
      xxxxx

    The rectification entry will be:

    Dr. xxxxx  
      xxxxx
  2. If a credit purchase of machinery is recorded in purchases book instead of journal proper, it will be an error of principle.
    Thus wrong entry recorded in the book of accounts

    Dr. xxxxx  
      xxxxx

    Correct effect should have been:

    Dr. xxxxx  
      xxxxx

    The rectification entry will be:

    Dr. xxxxx  
      xxxxx
3. Explain the errors of commission and give two examples with measures to rectify them.
Errors of commission are the errors which are committed due to

  1. wrong posting of transactions
  2. wrong totalling
  3. wrong balancing of the accounts
  4. wrong casting of the subsidiary books
  5. wrong recording of amount in the books of original entry.

Errors of commission are mostly clerical in nature and most of the errors of commission affect the trial balance.
The following are examples.

  1. Raj Hans Traders paid Rs. 25,000 to Preetpal Traders. However, while recording it in the journal, Preetpal’s account was debited with Rs. 2,500 only.
    The wrong effect has been :

    Dr. 2,500  
      25,000

    The correct effect should have been :

    Dr. 25,000  
      25,000

    The rectification entry will be.

    Dr. 22,500  
      22,500
  2. Sales returns from Megha Rs. 1,600 were posted to her account as Rs. 1,000.
    The wrong effect has been :

    Dr. 1,000  
      1,000

    The correct effect should have been :

    Dr. 1,600  
      1,600

    The rectification entry will be :

    Dr. 600  
      600
4. What are the different types of errors that are usually committed in recording business transaction.
The following are the different types of errors that are usually committed in recording business transaction

  1. Errors of commission: These are the errors which are committed due to
    1. wrong posting of transactions
    2. wrong totalling
    3. wrong balancing of the accounts
    4. wrong casting of the subsidiary books
    5. wrong recording of amount in the books of original entry

    These are usually clerical in nature and most of these errors affect the trial balance.

  2. Errors of Omission: The errors of omission may be committed at the time of recording the transaction in teh books of original entry or while posting to the ledger. These are further subdivided into
    1. Error of complete Omission: In this, the transaction is completely omitted from recording in the books of original entry.
    2. Error of partial omission: In this, the transaction is partially omitted from the books.
  3. Error of principle: Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, the resulting errors are known as errors of principle. It may occur due to an incorrect classification of expenditure or receipt between capital and revenue. As it will have an impact on financial statement, it is very important to deal with these errors. If not dealt with, it may lead to under/over stating of income or assets or liabilities etc.
  4. Compensating Errors: These are the errors that occur when two or more errors are committed in such a way that the net effect fo these errors on the debits and credits of accounts is nil. These errors do not affect the tallying of the trial balance.
5. As an accountant of a company, you are disappointed to learn that the totals in your new trial balance are not equal. After going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment account has a debit balance of Rs. 15,600 on the trial balance. However, you have figured out that a correctly recorded credit purchase of pendrive for Rs 3,500 was posted from the journal to the ledger with a Rs. 3,500 debit to Office Equipment and another Rs. 3,500 debit to creditors accounts. Answer each of the following questions and present the amount of any misstatement :

  1. Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance?
  2. Is the balance of the creditors account overstated, understated, or correctly stated in the trial balance?
  3. Is the debit column total of the trial balance overstated, understated, or correclty stated?
  4. Is the credit column total of the trial balance overstated, understated, or correctly stated?
  5. If the debit column total of the trial balance is Rs. 2,40,000 before correcting the error, what is the total of credit column.
Pen-drive falls under stationery and not under assets like office equipment. This is an error of principle. Hence, posting it in the office equipment account is an error. It should have been posted under the stationery account. Another error is debiting the supplier account. It should have been credited.

  1. The balance of the office equipment account is overstated in the trial balance.
  2. The balance of the creditors account is understated by ₹ 3,500 + ₹ 3,500 = ₹ 7,000
  3. The debit column total of the trial balance is correctly stated.
  4. The credit column total of the trial balance is understated by ₹ 3,500 + ₹ 3,500 = ₹ 7,000
  5. The credit column total of the trial balance is understated by ₹ 7,000. Hence before correcting the total of the credit column will be ₹ 2,40,000 – ₹ 7,000 = ₹ 2,33,000

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