Trial Balance
It is a statement that is prepared to check the arithmetical accuracy of ledger
accounts.
As mentioned, a transaction has one Dr. effect and one Cr effect equal in amount,
therefore, all the total debits should equal the total credits.
It shows that the total Dr. balance = the total Cr balance.
The Trial Balance is a statement of ledger balances on a particular date.
How A/C (s) are shown in the trial balance:
If the debit side of an A/C has greater value than the credit side, then the difference
is recorded as a debit balance.
If the credit side of an A/C has greater value than the debit side, then the difference
is recorded as a credit balance.
It is not a part of the double-entry system.
Trial Balance for the year ended….
All assets xxx
All liabilities xxx
All expenses xxx
All income xxx
Any provision xxx
Sales xxx
Purchase xxx
Sales returns xxx
Purchase return xxx
Capital xxx
Drawings xxx
Closing inventory is not shown in the trial balance.
The Trial balance helps locate arithmetic errors but cannot guarantee an error-free
ledger. It is also useful in preparing financial statements. The ledgers are
arithmetically correct if the Dr. & Cr. columns total tally.
Error of commission Correct amount, correct side, but wrong A/C of the correct class
Error of complete reversal Correct amount, correct A/C, but wrong side of each A/C
Error of omission Transaction completely omitted from the ledgers.
Error of original entry Incorrect figure used for both entries
Error of Principle Correct amount, correct side, but wrong class of A/C
Compensating errors Two or more errors cancel each other out.
A trial balance may not always tally. This might be because:
An error of addition within the TB
An error of addition in the ledger A/C
Double-entry figures differ
Only a single entry is made; instead of a double entry, both entries were made on
the same side of the ledger.
To Locate Errors:
Check TB and ledger balance addition.
Check that the ledger A/C balance is entered on the correct side (Dr. or Cr)
Check that every ledger A/C balance is entered in the trial balance
Look for a transaction equal to the difference in the totals of the TB & check for its
double entry.
Look for a transaction equal to half the difference & then check whether it has been
entered on the same side twice.
Check the double entry for each transaction after the previous trial balance was
made (last resort).
If the difference in the totals of the TB is perfectly divisible by 9, then check if an amount
has been entered without a zero (e.g., If 99 has been entered as debit instead of 990, the
difference 891 can be divided by nine perfectly, giving 99. Thus, any transactions with the
value 99 can be located and rectified)
Correction of Errors:
If the trial balance does not tally, and no errors are immediately identifiable, a suspense
A/C is prepared by making an entry to balance the trial balance (inserting the difference).
Thus, financial statements can be prepared in draft form. As and when errors are found,
they are corrected through journal entries.
These errors are corrected through the general/nominal journal. For example, cash sales of
$50 were not credited to the cash book Entry in the Journal.
Date Details Debit Credit
23/02/12 Suspense A/C Dr. 50
Sales A/C Cr. 50
(Half of the entry was made for
sales and is now corrected.)
Errors that do not affect the tallying of the trial balance (commission, compensating,
complete reversal, original entry, omission, and principle) are also corrected through the
journal by making the appropriate debits and credits to reverse the error and make the
correct entry. For example, cash sales of 250 dollars are recorded as credit sales for B
Dawg. The correction would be:
Date Details Debit Credit
Cash A/C Dr. 250
B. Dawg A/C Cr. 250
(Cash sales mistakenly recorded as
credit sales, now rectified.)
In preparing draft financial statements, if the difference between the suspense A/C is a debit
balance, it is recorded in the SOFP as an asset and a liability if the suspense A/C has a credit
balance.
As corrections are made, the profit might be affected. If any item affects the trading section
of the IS, then both the gross and net profit are affected, but if an item affects only the
P&L, it will affect only the Net Profit.
To amend the profits, a statement of corrected profit is made.
If expenses have been omitted, profit for the year will decrease with the correction, and
vice versa for income.
Correcting the profit for the year also means altering the SOFP. The needed changes
will also have to be made to all appropriate sections of the SOFP.
If the expenses have increased, then the profit will decrease, etc. Basic concepts will
have to be applied to correct profit.
The double-entry for correction of errors doe s not affect the Trial Balance
1. Errors of Commission: D Short paid us by cheque $500 on 18th May 20X8.
It was correctly entered in the cash book but was mistaken in theaccount for D. Small. We
found the error on May 3, 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 D Short 500
D Small 500
Narrative (Correction of error ofcommission.)
2. Errors of Principle: The purchase of a motor vehicle, $55,500, by cheque on 14 May
20X8, has been debited in error to a motor expenses account. In the cash book, it is shown
correctly. We find the error on May 31, 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 Motor Vehicle 55,500
Motor Expenses 55,500
Narrative (Correction of error of principle.)
3. Errors in Original Entry: Sales of $1500 to T. Biggins on May 13, 20X8, have been
entered as both a debit and credit entry of $1300 to the correct accounts. We find the error
on May 31, 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 T. Biggins 200
Sales 200
Narrative (Correction of error of original entry)
4. Errors of Omission: A firm purchased goods from T Slope for $2500 on May 13, 20X8,
but forgot to enter them into the accounts. We found the error on May 31, 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 Purchase A/c 2500
T Shop 2500
Narrative (Correction of error of omission)
5. Compensating Errors: A firms Sales Day Book added up incorrectly to $100 to much but
by coincidence so did the Purchases Day Book. We find the error on May 31 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 Sales 100
Purchase 100
Narrative (Correction of error of compensation)
6. Complete Reversal of Entries: We received a cheque from D Charles on 28 May 20X8.
However, the $2,000 is entered as a credit entry in the cash book (Bank) and a Debit entry
in the D Charles account. We found the error on May 31, 20X8.
Journal
Date Details Dr. Cr.
20X8 $ $
May 31 Bank A/c 4,000
Charles 4,000
Narrative (Correction of error of Reversal entry)