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CHAPTER 4

Trial Balance and Rectification of Errors

LEARNING OBJECTIVES

After studying this chapter, you will be able to:

● state the meaning of trial balance;

● check the accuracy of accounting records;

● prepare the trial balance;

● identify the nature of balances in various accounts;

● state the different types of errors;

● detect and rectify errors; and

● appreciate the need for preparing suspense account.


114 ACCOUNTANCY

In the previous chapters, you have the ledger. The format of trial balance
learnt how to record and classify the in given in fig. 4.1.
transactions in the various accounts
Trial Balance of ……… as on 31st March 2002
along with balancing there of. All
balances of the accounts are listed in Account Account Debit
Code Title Amount Amount
a statement, called trial balance. It is Rs. Rs.
a summary statement of all balances.
This summary of balances enables us
to check the arithmetical accuracy of
the transactions recorded in the ledger Fig. 4.1 : Showing Format of a Trial Balance
accounts. Since every debit has a
corresponding credit, the total of debits The trial balance is prepared at the
should be equal to the total of credits end of a chosen period which may
in the trial balance. This chapter either be monthly, quarterly, half-
explains the meaning and process of yearly or annually or as and when
preparation of trial balance. It is required. Since, every debit should
followed by a discussion of different have a corresponding credit as per the
types of errors and their rectification. rules of the double entry system, the
total of the debit and credit balances
4.1 Meaning of Trial Balance should tally. In case there is a
A trial balance is a summary of dif ference, one has to check the
balances of all accounts recorded in correctness of the balances brought

Trial Balance as at 31 March 2002


Account Account Title Debit Credit
Code Amount Amount
Rs. Rs.
001 Cash 45,000
002 Capital 5,00,000
003 Bank 2,05,500
004 Office Equipment 60,000
005 Office Car 1,60,000
006 Insurance of Car 9,000
007 Purchases 1,10,000
008 Creditors 30,000
009 Sales 1,12,000
0.10 Debtors 40,000
0.11 Drawings 5,000
0.12 Salary 7,5000
Total 6,42,000 6,42,000
Fig. 4.2 : Trial Balance for Illustration 25 Chapter 3 on page 95
TRIAL BALANCE AND RECTIFICATION OF ERRORS 115

forward from the respective accounts. in the trial balance are equal, it is
This type of checking of accounts leads assumed that the posting and
to ascertainment of arithmetical balancing of ledger accounts is
accuracy of the balances of various arithmetically accurate.
accounts in a summarized form.
Besides checking the arithmetical 4.2.2 To Help in Locating Errors
accuracy, trial balance also aims at Whenever the trial balance does not
ascertaining the correctness of the tally, the accountant know that errors
nature of balances in relation to the have crept in at the stage of recording,
type of account. All assets, expenses, posting, balancing, or transfer of
receivables shall have debit balances. balances. The accountant, at this
Similarly, all liabilities, revenues, stage, is faced with the problem of
payables will have credit balances errors. It is immaterial whether the
(figure 4.2). amount of difference is small or large.
4.2 Objectives of Preparing a Trial Even a small amount of difference
Balance requires careful attention to be paid
to achieve accuracy in accounts.
In order to pr ovide a summary Once the errors are detected and
statement view of the balances of located, these are rectified and then
various accounts, we need to prepare the corrected trial balance is
the trial balance. This also indicates prepared.
the correct nature of the balances of
various accounts. A trial balance is 4.2.3 To Provide a Basis for the
prepared to fulfill the following Preparation of Financial
objectives: Statements
● check the arithmetical accuracy Since the balances of all accounts
of the ledger accounts; appear in the trial balance, it provides
● help in locating errors; and a basis for the preparation of the
● provide a basis for preparing the financial statements. A tallied trial
financial statements. balance, therefore becomes the first
These objectives are explained in step in the preparation of financial
detail hereunder: statements.
All r evenues and expenses
4.2.1 To Check the Arithmetical accounts from trial balance, are
Accuracy of Accounts transferred to the trading and profit
A trial balance is prepared to check and loss account. All assets,
whether all debits and the liabilities and capital accounts along
corresponding credits are properly with the balance of the profit and loss
recorded in the ledger or not. When account are shown in the balance
the totals of all the debits and credits sheet.
116 ACCOUNTANCY

4.3 Detection of Errors Revealed Rs.750 may have been wrongly


by the Non-agreement of Trial posted in the ledger as a debit
Balance item. To locate such errors, the
If the trial balance does not tally, the accountant should scan all the
accountant should initiate the debit entries of an amount of Rs.
following steps to detect and locate the 750.
errors: ● The difference may also indicate
a complete omission of a
● Recast the totals of debit and
posting. For example, the
credit columns of the trial
difference of Rs.1,500 given
balance.
above may be due to omissions
● Compare the account head/title
of a posting of that amount on
and amount appearing in the
the credit side. Thus, the
trial balance, with that of the
accountant should verify all the
ledger to detect any difference in
credit items with an amount of
amount or omission of an
Rs.1,500.
account.
● If the difference is a multiple of
● Compare the trial balance of the
9 or divisible by 9, the mistake
current year with that of the
could be due to transposition of
previous year to check additions
figures. For example, if a debit
and deletions of any accounts
amount of Rs. 459 is posted as
and also verify whether there is
Rs.954, the debit total in the
a large difference in amount,
trial balance will exceed the
which is neither expected nor
credit side by Rs. 495 (i.e. 954-
explained.
459 = 495). This difference is
● Re-do and check the correctness
per fectly divisible by 9. A
of balances of individual
mistake due to wrong placement
accounts in the ledger.
of the decimal point may also be
● Re-check the correctness of the
checked by this method. Thus,
posting in accounts from the
a difference in trial balance
books of original entry.
divisible by 9 helps in checking
● If the difference between the
the errors for a transpose
debit and credit columns is
mistake.
divisible by two, there is a
possibility that an amount equal 4.4 Preparation of the Trial Balance
to one-half of the difference may
have been posted to the wrong The first step in the preparation of the
side of another ledger account. trial balance is to balance all ledger
For example, if the total of the accounts. This is done after posting of
debit column of the trial balance all the entries from books of original
exceeds by Rs.1,500, it is quite entry to the ledger. Balancing of an
possible that a credit item of account is done by putting the
TRIAL BALANCE AND RECTIFICATION OF ERRORS 117

difference between the two sides of an column is the title/name of the


account on the side, which is short. account, the third and fourth columns
This leads to the equalization of two are the debit and credit columns
sides of an account. A trial balance has respectively where the amount of
four columns. The first column is the balance of each account is entered. It
account code/number, the second is shown in fig. 4.3.

Account Name of the Account Debit Credit


Code Amount Amount
Rs. Rs.
Capital Account ✔
Fixed Asset Accounts:
● Land and Buildings ✔
● Plant and Machinery ✔
● Equipment ✔
● Furniture and Fixtures ✔
Current Asset Accounts:
● Cash in Hand ✔
● Cash at Bank ✔
● Accounts Receivables ✔
● Bills Receivable ✔
● Stock of Raw Materials ✔
● Work in progress ✔
● Stock of Finished goods ✔
● Purchases ✔
● Carriage inwards ✔
● Carriage outwards ✔
● Sales ✔
● Sales Returns ✔
● Purchase Returns ✔
● Interest paid ✔
● Commission/Discount received ✔
● Salaries ✔
● Long term loan ✔
● Bills Payable ✔
● Accounts payable ✔
● Outstanding Salaries ✔
● Prepaid Insurance ✔
● Outstanding interest earned ✔
● Advances from Customers ✔
● Drawings ✔
● Reserves and Surplus ✔
● Provision for bad and doubtful debts ✔
Total xxx xxx
Fig. 4.3 : Illustrative Trial Balance
118 ACCOUNTANCY

Illustration 1 3Purchased goods worth Rs.35,000


Ajay started a small general store and from Subhash and Co. paying
agreed to pay a rent of Rs.500 p.m. Rs.5,000 cash and remaining on
His uncle provided him with some credit with a promise to pay in
furniture for the shop.He invested his 30 days. Made a sale to Rajaram
personal savings of Rs. 25,000 and his for Rs.8,000 on account. Cash
father gave him Rs.50,000. He named sales were also made for Rs.26,000.
his shop as Asha General Store. The 4 Paid license fees of Rs.400.
shop was inaugurated on 1 January Rent Rs.500. Purchases worth
2002. As Ajay is educated he wanted Rs.7,500. Made cash sales for
to run his business in a professional Rs.9,600
way. He requested his friend Anand to 5 Made a payment to Subhash
prepare books of account for the shop. and Co., Rs.5,000 by cheque.
The following were the transactions of Paid postage Rs150. Withdrew
the stores in the first week: for personal use Rs.7,000.
Sales to Mary Export House
January 2002 Rs.47,600. Cash sales were for
1 Purchased goods worth Rs.3,300
Rs.10,000 from Ganesh 6 Paid electricity charges Rs.550
Enterprises by paying cash. and Rs.250 to Raja who agreed
Made cash sales of Rs.7,500 to to clean the shop and also
people who attended the inaugu- worked as a shop assistant.
ration. Opened an account with 7 Purchased furniture and fittings
United Bank of India by depo- from Lokesh Enterprises on
siting Rs.20,000. credit for Rs. 36000.
2 Made payment of Rs.2,000 to a Record the above transactions in
caterer who supplied refresh- various subsidiary books and post
ments during the inauguration them to the relevant ledger accounts
ceremony. Cash purchases and prepare the trial balance after
made for Rs.30,000. balancing the various ledger accounts.

Solution
Books of Asha General Stores
Cash Book
Receipts Payments
Cash - 001,Bank- 002
Date Particulars L.F. Cash Bank Date Particulars LF Cash Bank
2002 (Rs.) (Rs.) 2002 (Rs.) (Rs.)
Jan 1 Capital 25,000 Jan 1 Purchases 10,000 –
1 Loan from father 50,000 Jan 1 Bank 20,000 –
1 Sales 7500 Jan 2 Purchases 30,000 –
Total c/f 82,500 – Total c/f 60,000
TRIAL BALANCE AND RECTIFICATION OF ERRORS 119

Jan Total b/f 82,500 – Jan Total b/f 60,000


1 Cash 20,000 2 Business 2,000
expenses
3 Sales 26,000 3 Purchases 5,000
4 Sales 9,600
5 Sales 3,300 4 License fee 400

4 Rent 500
Purchases 7,500
5 Subhash & Co. 5,000
Postage 150
Drawings 7,000
Electricity 550
Wages 250
Balance c/f 38,050 15,000
1,21,400 20,000 1,21,400 20,000

Purchases Book Journal Proper


Date Particulars L.F Amount Date Particulars L.F Debit Credit
2002 Rs. Amount Amount
2002 Rs. Rs.
Jan 3 Subhash and Co. 30,000
Jan 2 Furniture & 36,000
30,000 Fixtures
Lokesh 36,000
Sales Book Enterprises
(Purchased
Date Particulars L.F Amount furniture)
2002 Rs.
Total 36,000 36,000
Jan 3 Rajaram 8,000
Jan 5 Mary Export 47,600
House
55,600

Capital Account 003


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.

Jan1 Cash 25,000

Drawings Account 004


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.

Jan 5 Cash 7,000


120 ACCOUNTANCY

Purchases Account 005


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 1 Cash 10,000 3 Jan Balance c/f 82,500
Jan 3 Subhash & Co. 30,000 31 Dec
(creditors)
Jan2 Cash 30,000
Jan3 Cash 5,000
Jan4 Cash 7,500
82,500 82,500

Loan Account 006


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 1 Cash 50,000

Subhash and Company Account 007


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 5 Bank 5,000 Jan 2. Purchases 30,000
31 Dec Balance c/f 25,000
30000 30000

Mary Export House Account 008


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 5 Sales 47,600 Dec 31 balance c/f 47,6000

47,6000 47,6000

Electricity Account 009


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 6 Cash 550
TRIAL BALANCE AND RECTIFICATION OF ERRORS 121

Postage Account 010


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 5 Cash 150

License Fees Account 011


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 4 Cash 400

Wages Account 012


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 6 Cash 250

Furniture Account 013


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 2 Lokesh 36,000
Enterprises

Lokesh Enterprises 014


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 2 Furniture 36,000
& Fitting

Sales Account 015


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
31 Dec Balance c/f 1,02,000 Jan 1 Cash 7,500
Jan 3 Cash 26,000
Jan 4 Rajaram 8,000
Jan 4 Cash 9,600
Jan 5 Cash 3,300
Jan 5 Mary Export 47,600
House
1,02,000 1,02,000
122 ACCOUNTANCY

Rent Account 017


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 4 Cash 500

Rajaram Account 018


Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2002 Rs. 2002 Rs.
Jan 3 Sales 8,000

Trial Balance of Asha General Stores as on 7 January 2002


Account Account Debit Credit
Title Amount Amount
Rs. Rs.
01 Cash 38,050
02 Bank 15,000
03 Capital 25,000
04 Drawings 7,000
05 Purchases 82,500
06 Loan A/c 50,000
07 Subash and company 25,000
08 Mary Export House 47,600
09 Electricity 550
010 Postage 150
011 License 400
012 Wages 250
013 Furniture and fittings 36,000
014 Lokesh Enterprises 36,000
015 Sales 1,02,000
016 Business expenses 2,000
017 Rent 500
018 Rajaraman 8,000
Total 2,38,000 2,38,000

Illustration 2 Sales Rs.1,46,616; Fixed Assets


Following balances of ledger accounts Rs.12,000; Purchases Rs 1,10,850;
have been obtained from which you are Accounts Receivables Rs.24,436;
required to prepare a trial balance: Capital Rs. 50,000; Creditors Rs.8,553;
Cash Rs.41,733; Expenses Rs.12,150; Merchandise Rs 4,000.
TRIAL BALANCE AND RECTIFICATION OF ERRORS 123

Solution ii. Posting on the wrong side


Account Title Debit Credit iii. Posting of wrong amount
Amount Amount C. Balancing Stage
Rs. Rs.
1. Wrong totaling
Cash 41,733 2. Wrong balancing
Expenses 12,150
Fixed Assets 12,000 D. Preparation of Trial Balance
Sales 1,46,616 1. Error of Omission
Purchases 1,10,850 2. Error of Commission
Accounts 24,436 i. Taking wrong amount
Receivable ii. Taking wrong account
Merchandise 4,000
Capital 50,000
iii. Taking to the wrong side
Creditors 8,553 Errors can be classified into the
Total 2,05,169 2,05,169 following four categories on the basis
of the nature of errors and explained
4.5 Errors here under.
i. Errors of commission
The trial balance is prepared to check
ii. Errors of omission
the arithmetical accuracy of accounts.
iii. Errors of principle
If the trial balance does not tally, it
iv. Compensating (offsetting)
implies that there are arithmetical
errors.
errors in the accounts which require
location, detection and rectification 4.5.1 Errors of Commission
thereof. Even if the trial balance tallies,
there may still exist some errors. There These errors by definition, are of
are two types of errors: (a) errors which clerical nature. These errors may be
are not revealed by the trial balance, committed at the time of recording
and (b) errors which are revealed by and/or posting. At the time of
the trial balance. Errors may happen recording, the wrong amount may be
at any of the following stages of the recorded in journal which will be
accounting cycle. carried throughout. Such errors will
not affect the agreement of the trial
A. At Recording Stage balance. These errors may also be
1. Errors of principle committed at the time of posting, by
2. Errors of omission way of posting wrong amount, to the
3. Errors of commission wrong side of an account or in the
B. At Posting Stage wrong account. The errors resulting in
1. Error of omission posting to wrong account will not affect
i. Complete agreement of trial balance, whereas,
ii. Partial other errors of posting will resulting
2. Error of commission disagreement of trial balance. For
i. Posting to wrong account example, an amount of Rs.10,000
124 ACCOUNTANCY

received from customer (Debtor) is errors of principle. As an illustration,


correctly recorded on the debit side of Periodicity principle requires
the cash book but while posting, the maintaining proper distinction
customer’s account is credited with between capital and revenue items. An
Rs.1,000. This is an error, which is error of principle may occur due to
committed at the time of posting, by incorrect classification of expenditure
posting wrong amount to the account. or receipts between capital and
This will result in disagreement of trial revenue. This is very important
balance, since, the credit total of the because it will have an impact on
trail balance will be short by Rs. 9,000. financial statements. It may lead to
under/over stating of income or assets
4.5.2 Errors of Omission or liabilities, etc. For example, amount
The errors of omission may be spent on additions to the buildings
committed at the time of recording the should be treated as capital expen-
transaction in the books of original diture and must be debited to the asset
entry or while posting to the ledger. An account. Instead, if this amount is
omission may be complete or partial. debited to maintenance and repairs
Such errors are known as errors of account, it is treated as a revenue
omission. For example, Machinery expense. This is an error of principle.
purchased for Rs. 50,000 by issuing a Since instead of asset account, i.e.
cheque is recorded first in the credit buildings, the maintenance and
side of cash book, in the bank column. repairs account (expense) is debited,
Suppose it is not posted to the debit of the trial balance will still tally but
machinery account, it is an error of would not be correct as per generally
partial omission. The trial balance will accepted accounting principles.
not tally. Suppose the transaction is Such errors are not disclosed by
not entered in the cash book and hence the trial balance. This will result in
ignored completely, this is a case of understating of income due to extra
complete omission. It means as if the charge under maintenance and repairs
transaction has not taken place at all. account and understating the value of
It will not affect the trial balance and buildings in the balance sheet.
hence the trial balance will tally. This
is true only in case of complete 4.5.4 Compensating Errors
omission. When two or more errors are
committed in such a way that the net
4.5.2 Errors of Principle effect of these errors on the debits and
Accounting entries are recorded as per credits of accounts is nil, such errors
the generally accepted accounting are called compensating errors. They
principles. If any of these principles are do not effect the tallying of the trial
violated or ignored, errors resulting balance. For example: In a credit sale
from such violations are known as transaction, the sales account is
TRIAL BALANCE AND RECTIFICATION OF ERRORS 125

credited in excess by say, Rs.5,000 and forward; error of balancing; error of


similarly the suppliers account in case posting to the correct account but with
of a credit purchase is understated by wrong amount; error of posting to the
Rs.5,000, this is a case of two errors correct account but on the wrong side;
compensating for each others effect. posting to the wrong side with the
It is to be noted that extra credit to the wrong amount and omitting to show
sales account is offset by lower credit an account in the trial balance.
to the creditor’s account, both being
credit balance. Since, one plus is set 4.6.2 Rectification
off by the other minus, the net effect An error in the books of original entry
of these two errors being of if discovered before posting to the
compensating nature and do not affect ledger, may be corrected by crossing
the agreement of trial balance. out the wrong amount by a single line
and writing the correct amount above
4.6 Classification of Errors - for the struck off amount and putting an
the Purpose of Rectification initial at the place.
From the point of view of rectification, An error in an amount posted to
errors are classified into two the correct ledger account may also be
categories: corrected in a similar way or by making
● Errors which affect the trial an additional posting for the difference
balance; and in amount and giving an explanatory
● Errors which do not affect the note in the particulars column
trial balance. provided that trial balance is not
prepared. But errors should never be
4.6.1 Errors which Affect the corrected by erasing. Crossing/
Agreement of Trial Balance Erasures reduce the authenticity of
accounting records and give an
These errors are due to the mistake
impression that something is being
having being committed on the one
concealed or manipulated.
side of the account. They may happen
at any of the stages of the accounting Examples
process, like recording, posting,
balancing, etc. such errors can be ● Under casting in the sales book
rectified by giving an explanatory note (less total) by Rs.1,000. Since
or by passing a journal entry with the the total of sales journal is
help of a special account called posted to sales account in the
suspense account. The nature and ledger, only the sales account is
treatment of suspense account is credited by an amount which
discussed later in this chapter. is lower by Rs.1,000. The
Examples of this group of errors are: individual customer accounts
errors of partial omission; error of will be posted correctly to their
casting (totaling); error of carrying debit side. To rectify this error,
126 ACCOUNTANCY

sales account is credited by an Rs.15,000 (the amount of error


additional amount of Rs.1,000 is double because instead of
with the comment in the debit to Ajay’s account, his
particulars column as follows: account was wrongly credited
“Mistake in totaling the sales with Rs.7,500. Thus, there is a
journal on page ….” need for debiting his account by
double the original amount of
Errors committed while carrying
Rs.7,500, i.e. Rs.15,000 with
forward or balancing can also be
the explanation “ Mistake in
rectified in this manner.
posting on 1.8.2001”.
● An amount of Rs.6,300 for credit
The above stated procedure for
purchases from Ashok on
correction is applicable in as
16.4.2001, correctly entered in
situation when trial balance has
the purchases journal, but while
not been drawn, but, errors are
posting, his account has been
detected. However, all these
credited with Rs.3,600, thus
error are generally rectified by
under crediting his account by
the use of suspense account
Rs.2,700.
after the trial balance is
In this case since the entry has
prepared and tallying it through
been made correctly in the
suspense account.
purchases journal, posting to
the purchases account may be 4.6.3 Errors which do not
assumed to be free of errors. affect the trial balance
Therefore, the error is only in
Ashok’s account. This can be Errors which do not affect the trial
rectified by entering additional balance are committed in two or more
credit of Rs.2,700 in his account accounts. They can be rectified by
with the comment in the passing a journal entry giving the
particular column as “Mistake correct debit and credit to the
in posting on 16.4.2001”. concerned accounts. These correcting
● A credit sale of Rs.7,500 to Ajay entries can be recorded in the journal
on 1.8.2001 is wrongly credited proper. Examples of these errors are:
to his account. In this case, Ajay omission to pass an entry in the books
is a debtor, his account should of original entry; wrong amount of
have been debited. Since it was transaction recorded in the journal,
correctly entered in the sales complete omission of the posting of
journal, there is not an error in accounts in the ledger. Examples of
the sales account. Therefore, the these errors are:
error is only in Ajay’s account. ● Complete omission at the
This error can be rectified by recording stages of the
debiting his account with transaction in the books of
TRIAL BALANCE AND RECTIFICATION OF ERRORS 127

original entry; tallying of the trial balance. For


● Recording of the transaction example, purchase of machinery on
with the wrong amount in the credit for Rs.50,000 is debited to
books of original entries; Purchases account. Actually, the
● Complete omission of posting Machinery account which is of a
of a transaction; capital nature should have been
● Errors of principle; debited instead of Purchases account,
● Posting of correct amount on the which is a revenue account, though
correct side but to a wrong the suppliers account is properly
account. credited. To correct this error, the
following journal entry will be passed.
Examples
Debit Credit
A payment of Rs.25,000 made to a Amount Amount
supplier Classic Enterprises is wrongly Rs. Rs.
recorded as payment to Classic Machinery A/c Dr. 50,000
Traders. Suppose that the following Purchases A/c 50,000
entry has been made and posted:
4.7 Suspense Account
Debit Credit
Amount Amount In spite of best efforts, locating errors
Rs. Rs. is not an easy task and may take some
Classic Traders A/c Dr. 25,000 time. Unless detected and located,
Bank A/c errors cannot be corrected. To avoid
(Transaction wrongly 25,000 delay in the preparation of financial
recorded )
statements, the amount of difference
of the trial balance is temporarily put
Here, instead of Classic Enter -
in an account called “Suspense
prises the account of Classic Traders
Account” so as to tally the trial balance
has been wrongly debited. The
by putting the difference on the shorter
correcting entry will be:
side. When all errors are located and
Debit Credit rectified, the suspense account would
Amount Amount close automatically. But in case some
Rs. Rs. balance still remains in the suspense
Classic Enterprises A/c Dr. 45,000 account, due to non location of errors,
Classic Trader A/c 45,000 it will be shown in the balance sheet
(to correct the wrong debit)
on the asset side in case of debit
balance and on the liabilities side in
When posted to the respective
case of credit balance.
accounts, this primal entry would
nullify the effect of the earlier error. 4.7.1 Utility of Suspense Account
We have learnt earlier that errors
of principle also do not affect the The main use of suspense account is
128 ACCOUNTANCY

to facilitate the preparation of financial following errors:


statements. Later on errors affecting (i) Purchases day book for
the trial balance are located, September 2000 was under cast
rectification entries are passed by Rs.500.
through the suspense account. (ii) Sales day book of November
2000, was overcast by Rs.5,000
4.7.2 Preparation and Treatment (iii) A second hand computer
of Suspense Account purchased for office use for
The following example highlights how Rs.4,050 was recorded in the
a suspense account is used to rectify office equipment account as
the errors. Rs.405.
(iv) A bill drawn by her for
Illustration 3 Rs.20,000 was not entered in
Indu prepared a Trial balance of her the bills receivable book.
shop for the year ended on 31 March (v) A machinery purchased for
2001. The debit total of the trial Rs.50,000 was entered in the
balance was short by Rs.9,145. She Purchases day book.
transferred the deficiency to a Pass the necessary journal entries
suspense account. In April 2001, after to rectify the above errors to help Indu
a close examination, she found the in finalizing her trial balance.

Solution:
Books of Indu Journal

Date Particulars Debit Credit


Amount Amount
Rs. Rs.
2001 Purchases A/c Dr. 500
April 1 Suspense A/c 500
(being Purchases Day Book total under
cast by Rs.500, now rectified)

Sales A/c Dr. 5,000


Suspense A/c 5,000
(Sales Day Book, total overcast by
Rs.5,000, now rectified)

Office Equipment A/c Dr. 3,645


Suspense A/c 3,645
(Office equipment was under debited
by Rs.3,645, now rectified)
TRIAL BALANCE AND RECTIFICATION OF ERRORS 129

2001 Bills Receivable A/c Dr. 20,000


April 1 Sundry Debtors A/c 20,000
(Bill drawn completely omitted in the
books, now recorded)

Machinery A/c Dr. 50,000


Purchases A/c 50,000
(Purchases account wrongly debited
instead of machinery account, now rectified)

Total 79,145 79,145

Suspense Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2001 Rs. 2001 Rs.
March Balance b/f 9,145 Apr 1 Purchases A/c 500
31 (balancing Sales 5,000
figure in the Office 3,645
trial balance) Equipment
9,145 9,145

Illustration 4 as Rs.32,460.
The trial balance of Anand Dealers (iv) A payment received from Rohan
prepared on 31 December 2000 did not for Rs.49,240 was credited to
tally. The difference was placed in the Roshan’s account.
suspense account on the debit side Rs. (v) Glass purchased for show
39,180. A detailed examination of his windows from Aftab suppliers
books revealed the following mistakes: on a credit for Rs.38,450 was
recorded in the purchases day
(i) A payment of Rs.20,000 to John book. At the time of posting,
was posted to the credit of his their account was credited with
account. Rs.34,850.
(ii) Goods returned by Amrita a You are required to correct the
regular customer for Rs.5,800 above mistakes by passing the
was posted to the credit of sales necessary rectifying errors in the
account General journal and find out amount
(iii) Charges on renovation to the that was transferred to suspense
slow windows of the shop of account where the trial balance did not
Rs.23,640 was debited to the tally.
furniture and fixtures account
130 ACCOUNTANCY

Solution
Date Particulars Debit Credit
Amount Amount
Rs. Rs.
2001, John’s A/c Dr. 40,000
Dec 31 Suspense A/c 40,000
(being wrongly credited, now rectified)
Sales return A/c Dr. 5,800
Sales A/c Dr. 5,800
" Suspense A/c 11,600
(being sales account wrongly credited
and sales returns account not debited,
now rectified)
Suspense A/c Dr. 8,820
" Furniture & Fixtures A/c 8,820
(being furniture & fixture credited wrongly,
now rectified)
Roshan’s A/c Dr. 49,240
" Rohan A/c 49,240
(being correction of wrong entry in Roshan’s
account by correctly crediting Rohan)
1.Furniture and Fixture A/c Dr. 38,450
" Purchases A/c 38,450
(being purchases account wrongly debited,
now stands corrected)
2.Suspense A/c Dr. 3,600
" Aftab A/c 3,600
(being wrong posting to Aftab’s account,
now rectified)

Total 1,51,100 1,51,100

Suspense Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2001 Rs. 2001 Rs.
April 1
Furniture & Fixtures 8,820 March 31 John 41,800
Dec. Aftab 3,600 Sales Returns 5,800
31 Balance b/f 39,180 Sales 5,800

51,600 51,600
TRIAL BALANCE AND RECTIFICATION OF ERRORS 131

Terms Introduced in this Chapter ● Errors of Omission


● Compensating Errors
● Trial Balance ● Errors of Principle
● Errors of Commission ● Suspense Account

SUMMARY WITH REFERENCE TO LEARNING OBJECTIVES

1 Meaning of Trial Balance


A statement showing the extract of the balances, either credit or debit of various
accounts in the ledger.

2 Objectives of Trial Balance


● to check the arithmetical accuracy of the ledger accounts;
● to help in locating errors;
● to provide a basis for preparing the financial statements.

3 Preparation of Trial Balance


A Trial Balance has four columns, the first column contains account code, the
second column is for the title of the account, the third column is for writing the
debit balance and the final column is where the credit balance of the account in the
ledger is written.

4 Types of Errors
There are four types of errors:
● Errors of Commission
Errors caused due to wrong recording of a transaction, wrong posting, wrong
totaling, wrong balancing, etc.
● Errors of Omission
Errors caused due to omission of recording a transaction either fully or
partially in the books of accounts.
● Errors of Principle
Errors caused due to ignoring the accounting principles which may lead
to wrong classification or identification of receipts and payments between
revenue and capital r eceipts and revenue expense and capital
expenditure.
● Compensating Errors
Two or more errors committed in such a way that they nullify the effect of
each other on the debits and credits.
132 ACCOUNTANCY

5 Rectification of Errors
Errors affecting only one account can be rectified by giving an explanatory note or
by passing a journal entry. Errors which affect two or more accounts are rectified
by passing a journal entry.

6 Meaning and Utility of


Suspense Account
An account in which the difference in a trial balance is put temporarily till such
time that errors are located and rectified. It facilitates the preparation of provisional
financial statements even when the trial balance does not tally.

7 Disposal of Suspense Account


When all the errors are located and rectified by passing the necessary journal entries,
the suspense account automatically stands disposed off.

EXCERCISES

1. Fill in the Blanks


(i) Errors of principle ____________ affect the Trial Balance.
(ii) The equality of ___________ and ___________ of the Trial Balance does
not mean that the individual accounts are also _________
(iii) All ______________ and ______________ accounts appearing in the Trial
Balance are transferred to the Trading and Profit and Loss Account.
(iv) If the Trial Balance does not ___________ it indicates that some
___________ have been committed.
(v) A Suspense Account facilitates the ____________ of financial statements
even when the ___________ has not tallied.
2. Multiple Choice Questions
(a) Which of the following errors will not affect the Trial Balance?
(i) Wrong balancing of an account
(ii) Writing an amount in the wrong account but on the correct side
(iii) Wrong totaling of an account
(iv) None of the above
(b) Which of the following errors is an error of omission?
(i) Sale of Rs.500 was written in the purchases journal
(ii) Wages paid to Mohan have been debited to his account.
(iii) The total of the sales journal has not been posted to the Sales Account
(iv) None of the above
(c) Purchase of office furniture for Rs.3,400 has been debited to General
Expenses Account. It is:
(i) An error of commission
(ii) An error of omission
TRIAL BALANCE AND RECTIFICATION OF ERRORS 133

(iii) An error of principle


(iv) None of the above
(d) Which of the following errors will affect the Trial Balance Account?
(i) Repair to buildings have been debited to buildings.
(ii) The total of purchases journal is Rs.1,000 short.
(iii) Freight paid on new machinery has been debited to the Freight
account
(iv) None of the above
(e) Errors of commission do not allow:
(i) Correct totaling of the Balance Sheet
(ii) Correct totaling of the Trial Balance
(iii) The Trial Balance to agree
(iv) None of the above
(f) The preparation of a Trial Balance helps in:
(i) Locating errors of complete omission
(ii) Locating errors of principle
(iii) Locating errors of commission
(iv) None of the above
(g) Which of the following errors is an error of principle
(i) Rs. 500 received from Ganpat has been debited to his account
(ii) Purchase of Rs.1,000 has been entered in the sales journal
(iii) Repairs to buildings have been debited to Buildings Account
(iv) None of the above
(h) Which of the following errors is an error of principle
(i) Rs.500 received from Rakesh has been debited to his account
(ii) Sales of Rs.1,000 has been entered in the Purchases journal
(iii) Repairs to Machinery have been debited to Machinery Account
(iv) None of the above
(i) The type of account with a normal credit balance is:
(i) An asset
(ii) A drawing
(iii) A revenue
(iv) An expense
(j) The form listing the balances and the title of the accounts in the
ledger on a given date is the :
(i) Income statement
(ii) Balance Sheet
(iii) Retained earnings statement
(iv) Trial Balance
134 ACCOUNTANCY

3. Indicate whether the following accounts will have ‘debit’ or ‘credit’ balances:
(i) Sales Returns
(ii) Carriage Inwards
(iii) Purchases
(iv) Outstanding Wages
(v) Capital Account
(vi) Machinery
(vii) Goodwill
(viii) Cash in Hand
(ix) Cash at Bank
(x) Bills Payable.

Short Answer Questions


4. State the meaning of trial balance?
5. What is the purpose of preparing trial balance?
6. What is the purpose of preparing Suspense account?
7. Explain compensating errors and give two examples of such errors?
8. Explain errors of principle and give two examples of such errors?
9. Explain the limitations of the Trial Balance.
10. Name the errors that do not affect the agreement of Trial Balance.

Essay Type Questions


11. Explain the meaning and Objectives of the Trial Balance.
12. What is a Trial Balance? Name the errors which affect the Trial Balance?
13. If a Trial Balance tallies, can it be concluded that there are no errors?
Why?
14. Explain errors of omission and give two examples of such errors with
measures to rectify them.
15. Explain errors of commission and give two examples of such errors with
measures to rectify them.

Problems
16. Give rectifying journal entries for the following errors:
(i) A sale of goods to Mohit amounting to Rs.2,500 has been wrongly
passed through the purchases book.

(i) Rs. 15,000 paid for Furniture purchased has been charged to
Purchases Account.
(i) A cheque for Rs.15,000 received from Ram K. Gupta was dishonored
and has been posted to the debit of Sales Returns Account.
(i) An amount of Rs.400 due from Mukesh which was written off as a
bad debt was unexpectedly recovered and was posted to the personal
account of Mukesh.
(i) Rs. 12,000 paid by cheque for a printer was charged to the Office
Expense Account instead of Office Equipment account.
TRIAL BALANCE AND RECTIFICATION OF ERRORS 135

17. Rectify the following errors:


(i) Rs. 700 allowed as Trade in allowance has been credited to Sales
Account.
(ii) Rs. 1,000 paid as rent to the landlord was debited to the Landlord’s
Account.
(iii) Materials from the store for Rs.1,000 and wages of Rs.400 had been
used in making tools and implements for use in the factory but no
adjustments were made in the books.
(iv) The purchases book was overcast by Rs.100.
(v) A sale of Rs.500 to Gupta & Co. was credited to its account.

18. Rectify the following errors:


(i) Wages paid for the Construction office were debited to Wages Account,
Rs.15,000
(ii) Cartage paid for the newly purchased Furniture, Rs.100 charged to
the Cartage Account
(iii) Furniture purchased on credit from Babu Ram for Rs.3,000 recorded
as Rs.300
(iv) Wages paid Rs.2,550 were posted in the Wages Account as Rs.2,505
(v) Purchases from Mamata Rs.1,002 were omitted from the books.

19. The trial balance of a book-keeper shows an excess of debits over credits
by Rs.361. This difference is placed in the Suspense Account. Later, the
following errors were discovered.
(i) A credit item of Rs.2490 has been debited to The personal account of
Dinesh as Rs.4290
(ii) Rs.9000 paid for Furniture bought has been charged to Purchases
Account
(iii) A discount allowed to Ramesh has been credited to him as Rs.1450
in place of Rs.1540
(iv) The total of the returns inward book was Rs.10 short.
(v) A cheque for Rs.100 for miscellaneous expense was not posted to
Miscellaneous Expenses Account.
You are required to rectify the errors through Suspense Account and
prepare the Suspense Account.

20. Rectify the following errors


(i) The total of sales book was overcast by Rs.200.
(ii) Rs.4,000 paid for Furniture purchased has been charged to Office
Equipment Account.
(iii) Rs.450 paid to Ramesh was debited to Rameshachar’s Account.
(iv) A sum of Rs.300 paid to Shyam Lal, the clerk, was debited to his
personal account.
(v) Rs.150 paid for regular maintenance for the building was debited to
the Building Account.
136 ACCOUNTANCY

21. Rectify the following errors


(i) The total of purchases book was undercast by Rs.900
(ii) Goods invoiced Rs.2,500 and entered in the sales book on December
25 were returned on December 29. Although taken into stock on
December 31, no entry was passed in the books.
(iii) Discount allowed to Bharat Bhushan of Rs.150 was not entered in
the discount account though posted to the credit of his personal
account.
(iv) A payment of Rs.1,720 to Girish was debited to his account as
Rs.1,270.
(v) A sum of Rs.320 written off for depreciation on an asset has not been
posted to the Depreciation Account.
(vi) Total of debit column of journal proper was short on the debit by
Rs.360

22. The Trial Balance of New Delhi Dealers as on 31 March 1999, showed a
difference, and on scrutiny, the following discrepancies were observed.
(i) A sales bill for Rs.8,750 was wrongly debited to the customer’s account
as Rs.7,850.
(ii) Sales to Santosh of Rs.4,000 was entered in the sales return book
but was correctly debited to Santosh.
(iii) Bill received from Inderjeet Singh of Rs. 5,000 was entered in the
bills payable book.
(iv) An amount of Rs.6,800 owing by a customer had been omitted from
the list of Sundry Debtors.
(v) Goods bought from M. Kamlesh for an amount of Rs.6,400 has been
credited to his account as Rs. 8,400.
(vi) Rs.987.90 received from Mushtaq was entered in the cash book as
Rs.990.87.

Give journal entries rectifying the above errors.

23. Will you rectify the following errors?


(i) Rs.900 paid for the telephone bill of the telephone at the proprietor’s
residence was debited to Telephone Expense Account.
(ii) Cash sales of Rs. 1,200 to Manohar was correctly entered in the
Cash Book but was wrongly posted to account of Mohan
(iii) Rs. 1,500 spent on repairs of a machine was debited to Machinery
Account.
(iv) The amount of Rs.1,200 written off as bad debt, was recovered and
was credited to Ramesh’s personal account.
(v) Rs.2,000 included in the wages account was spent on the construction
of a cycle shed in the factory.
(vi) An amount of Rs.1,200 withdrawn by the proprietor for his personal
use has been debited to the Trade Expenses Account.
TRIAL BALANCE AND RECTIFICATION OF ERRORS 137

24. Rectify the following errors:


(i) A customer Suresh, returned goods of the value of Rs.700 which
were not recorded in the books.
(ii) The debit side of Radhey Lal, a debtor, is overcast by Rs.7,000.
(iii) A cheque of Rs.1,400 received from Rajneesh & Sons was dishonored
and debited to Allowances Account.
(iv) A fax machine purchased for the office for Rs.6,200 was entered in
the purchases book.
(v) Purchase of goods from Sushil & Co. for Rs.3,800 was entered in the
sales book as Rs. 4,800.
(vi) A credit sale to P.Mathur of Rs. 10,000 has been wrongly passed
through the purchases book.
(vii) Rs. 250 being the total discount allowed to debtors has been posted
to the credit of Discount Received Account.

ANSWERS

Fill in the Blanks


(i) do not
(ii) debit, credit, accurate
(iii) revenue, expense
(iv) tally, errors
(v) preparation, trial balance

Multiple Choice
(i). (b); (ii). (c); (iii). (c); (iv). (b); (v). (c); (vi). (c); (vii). (c); (Viii). (c); (ix).
(c); (x). (d).

Debit or Credit Balance


(i). Credit; (ii) debit; (iii) debit; (iv) credit; (v) debit;
(vi) debit; (vii) debit; (viii) debit; (ix) debit; (x) credit.