Trial Balance and Rectification of Errors

Correct effect should have been :

The rectificatin entry will be:

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.

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.

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.

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.

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.

1. Posting on the wrong side
2. Posting wrong amount
3. Incorrect totalling of the subsidiary books
4. Errors of partial Omission

1. Errors of commission
2. Errors of Omission
3. Errors of Principle
4. Compensating Errors

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.

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

   Maintenance and Repairs A/cDr.	xxxxx
   To Cash A/c		xxxxx

   Correct effect should have been:

   Building A/cDr.	xxxxx
   To Cash A/c		xxxxx

   The rectification entry will be:

   Building A/cDr.	xxxxx
   Maintenance and Repairs A/c		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

   Purchases A/cDr.	xxxxx
   To Seller/Creditor A/c		xxxxx

   Correct effect should have been:

   Machinery A/cDr.	xxxxx
   To Seller/Creditor A/c		xxxxx

   The rectification entry will be:

   Machinery A/cDr.	xxxxx
   Purchases A/c		xxxxx

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 :

   Preetpal’s A/cDr.	2,500
   To Cash A/c		25,000

   The correct effect should have been :

   Preetpal’s A/cDr.	25,000
   To Cash A/c		25,000

   The rectification entry will be.

   Preetpal’s A/cDr.	22,500
   To Suspense A/c		22,500

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

   Sales Return A/cDr.	1,000
   To Megha’s A/c		1,000

   The correct effect should have been :

   Sales Return A/cDr.	1,600
   To Megha’s A/c		1,600

   The rectification entry will be :

   Suspense A/cDr.	600
   To Megha’s A/c		600

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.

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