Errors disclosed and not disclosed by Trial Balance:
Even though accountants put in their best effort to record transactions in a business’s books, errors are bound to occur. This is especially true for businesses having a large number of day-to-day transactions. Accounting errors, if left unattended, can distort the financial position of a business. Therefore, it is very important that these errors be identified by the accountant and rectified as soon as they are found.
Agreement of Trial Balance is not conclusive proof of accuracy
We know that Trial Balance is prepared to check the arithmetical accuracy of entries. The agreement of trial balance acts as a check on the arithmetical accuracy of the books of original entry and the ledger, but it is not conclusive proof of the absolute accuracy of accounts. This is so because even when the trial balance agrees, certain errors may be present in the account books which are not disclosed by Trial Balance.
As far as the agreement of trial balance is concerned, errors in accounting can be broadly classified into two types:
A) Errors that affect the agreement of trial balance
B) Errors that do not affect the agreement of trial balance
A) Errors disclosed by Trial balance
In general, Trial Balance discloses any error which affects one side of the account. Such errors are disclosed by the trial balance because the total of the debit and credit sides of the trial balance will not agree.
The agreement of trial balance is affected by the following errors:
1. Errors of Partial Omission:
When a transaction is partially omitted from the books of account, it is referred to as an error of partial omission. Errors caused by partial omission have an effect on the trial balance and can be discovered easily because the debits and credits will not match in the preparation of the trial balance.
Examples can be:
- Omitting to post an individual amount or an entry from a subsidiary book
- Omitting to post the totals of a subsidiary book
- Omitting to write cash book balance in the trial balance
- Omitting to write the balance of an account in the trial balance
2. Certain Errors of Commission:
These errors occur because of wrong recording/posting either wholly or partially of the amount in the book of Original Entry or ledger accounts or wrong computations, wrong totalling, wrong balancing, and wrong casting of subsidiary books. For example, Rs. 20,000 is paid to a supplier and the same is recorded in the cash book. However, while posting to the ledger account, the supplier’s account is debited by Rs. 2,000. Such type of errors may arise due to the carelessness of the clerks. Most of the time, these errors will get reflected in the Trial Balance. But depending on the type of error, some errors may not affect the agreement of trial balance. These are discussed in the below paragraphs.
Examples of errors that will be disclosed by Trial Balance are:
- The wrong casting of subsidiary books
- Posting the wrong amount in the ledger
- Posting an amount on the wrong side
- The wrong balance of an account
- Writing a balance on the wrong column of the trial balance
- Error in carrying forward the total of one page to the next page
- Double posting to a single account
- Error in carrying a balance of an account to the trial balance
B) Errors not disclosed by Trial Balance
As stated earlier, the agreement of trial balance is not conclusive proof of accuracy. Its agreement does not prove that all transactions have been correctly analyzed and recorded in the proper accounts and that all transactions have been actually recorded in the books of original entry.
Certain errors may still be present even when the debit and credit totals of the Trial balance agree. These are called errors that do not affect the agreement of trial balance.
1. Errors of Complete Omission:
If a transaction has not been recorded at all in the books of original entry, it shall not affect the agreement of the trial balance. For example, if Rs. 5,000 has been received back from a customer to whom goods are sold and the entry has not been recorded in the Returns Inward Book, neither the customer’s account will be credited nor the Returns Inward account will be debited. There will be no debit and credit and hence, the trial balance will agree even though there is an error.
2. Certain Errors of Commission:
Sometimes Errors of Commission may not be disclosed in the trial balance. For example, if a transaction is debited or credited to a wrong account but with the correct amount and on the correct side of the ledger, the trial balance will remain unaffected.
For example, on receipt of Rs. 12,000 from customer X, cash is debited and instead of customer X, customer Y’s account is credited with Rs. 12,000. The impact of this on the debit and credit side will be the same and, therefore, this kind of error won’t be reflected in Trial Balance.
3. Compensating errors:
When two or more errors are committed in such a manner that the effect of these errors on the debits and credits is nil, these errors are referred to as compensating errors. For example, A’s account, which was supposed to be debited for Rs. 500, was credited for Rs. 500, and B’s account, which was supposed to be credited for Rs. 500, was debited for Rs. 500. These two errors will cancel out the effect of each other. Both sides of the trial balance will be equally affected. As a result, unless a thorough investigation is conducted, these errors are difficult to identify.
4. Errors of principle:
An error of principle is when a transaction is recorded in accounts in contravention of accounting principles. For example, when a revenue expenditure is recorded as capital expenditure and vice versa. Suppose on purchase of a computer (i.e., fixed asset), the office expenses account is debited instead of the fixed asset account.
Errors of principle do not affect the agreement of trial balance because the amount gets recorded on the correct side (debit/credit), though in the wrong account.
Examples can be:
- Treating a revenue expense as a capital expense
- Treating a capital expense as a revenue expense
- Treating the sale of fixed assets as an ordinary sale
- Furniture purchased is debited to the purchase account.
- The building sold is credited to the sales account.
- Commission paid for the purchase of land is debited to the commission account.
5. Recording Wrong Amount in Subsidiary Books:
If a wrong amount is written in subsidiary books, then entries on both the debit and credit sides will be on the basis of the wrong amount and then the trial balance will naturally agree.
6. Errors of Duplication:
Errors of this type are made when an entry in the book of Original Entry is recorded twice and hence, is also posted twice to the ledger. Such errors do not affect the trial balance as debits and credits will be equal. To prevent such errors, clerks should adopt a practice of distinctively marking the invoices and other vouchers after they have been entered in the book of Original Entry. Moreover, duplicate invoices should be maintained in separate files and must also be stamped “duplicate” so that they don’t get mixed with the original ones.
Whenever there is a difference in the trial balance even by a small amount, the errors involved must be identified. A small amount may be the net result of a number of errors and it is not safe to ignore a difference in trial balance howsoever small it may be. Similarly, for errors not disclosed by trial balance, attention should be paid to the internal process of accounting, fundamental principles of recording transactions, and maintenance of ledger books, etc. so that such errors can be identified and rectified.
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