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LIMITATIONS OF TRIAL BALANCE

(Errors not Affecting or Undetected by Trial Balance)

Trial balance is taken as test of arithmetical accuracy. If both the debit and credit columns of trial balance are equal to each other, we assume that there is no mistake in the posting of journal and subsidiary books to ledger accounts, in carrying forward balances of ledger accounts to trial balance and even in the balancing of ledger accounts. This assumption is correct but should never be taken as conclusive proof of accuracy. It means that there are certain errors which remain undetected by trial balance. Both the debit and credit columns of the trial balance may be equal in spite of certain mistakes of omissions and principles. These errors may be mentioned as under:

  1. l. Errors of omission in the books of original record
  2. Errors of principle
  3. Compensating errors ·
  4. Incorrect account in the original books
  5. Posting to wrong account.

 

1. Errors of omission in the books of original record

The entire transaction is not recorded in the books of accounts; we omit to record the transaction. For example, goods returned by Mohan were taken into stock but the return was not entered in the books. The mistake cannot be discovered by trial balance, because equal amount could not be written at both the debit and credit sides of the trial balance as the entire transaction was not passed through due to omission. The error will affect the result of the business, so it should be rectified at the earliest.

If the omission is made in posting only one part of journal entry or omission is made in posting the total of the subsidiary books to ledger accounts or the total of ledger accounts to trial balance itself, the mistake will be detected. The trial balance will fail to discover the error, if the entire transaction has not been passed through journal or subsidiary book or a particular journal entry has not been posted in the ledger accounts completely.

2. Errors of principle

We maintain books of accounts according to double entry system. According to this system, every debit has got its corresponding credit. The accounts will be arithmetically correct, if the same amount is written at the debit and also at the credit side. Errors of principles may be committed, if we debit or credit a wrong account due to our ignorance. The accountant does not have the understanding of the accounting concepts and commits errors. For example, purchases of building is capital expenditure and building account should be debited but if the accountant debits purchases account instead of building account, errors of principle will be there in the accounts. The trial balance will tally. Double entry record will be complete but the mistake will continue to remain in its accounts. Errors of principles in this way are not detected by the trial balance. In the same way, if salary is paid to the Managing Director but instead of debiting salaries account. Managing Director’s personal account is debited, the errors of principle will be committed. The error will not at all be detected by the trial balance. Accountants and auditors should never take it as granted that there are no mistake after the agreement of trial balance, i.e., trial balance should not be taken as final proof of accuracy.

3. Compensating errors

It is just possible that the effect of certain error is neutralized by the effect of another error. The combined effect of the two errors will equalize the debit and credit side of trial balance inspire of errors. It can be explained with the help of the following example.

Example. Sale of goods to Mohan for $ 100 was debited to Mohan’s account with $ 10 only.

$ 100 received from Sohan was credited to Sopan’s account with $ 10 only.

In the first error, Mohan’s account was debited with $ 10 only, whereas it should have been debited with $ 100. It means that $ 90 was debited short. The effect of the enor in the trial balance will be that the total of the debit side will be $ 90 lesser.

In the second error, Sohan’s account has been credited with $ 10, whereas it should have been credited with $ 100. It shows that $ 90 have been written lesser at the credit side of Sohan’s account. As per the effect of this error, the total of the credit column of trial balance will be lesser by $ 90.

The combined effect of the two errors on the trial balance is that the first enor has reduced the total of the debit side by $ 90 and the second error has reduced the total of the credit side of the trial balance by the same amount i.e., $ 90. Reduction of $ 90 from both sides will not affect trial balance. Both sides of trial balance will tally in spite of the two errors.

4. Incorrect account in the original book

If the name of wrong account are used in the journal or subsidiary books, trial balance will not be able to detect it. For example, goods sold to Ramdhari for $ 300 was wrongly debited to Namdhari with $ 300. The mistake will not affect trial balance, because posting at the debit side of the trial balance has been made against Namdhari’s account though instead of Ramdhari’s account. In the same way, debiting or crediting wrong personal accounts cannot be detected by trial balance. 

5. Posting to wrong account

If the posting from the debit side or credit side of cash book or from purchases book or sales book or returns book is made to wrong account but at the correct side and also with the correct amount, both the debit and credit side of trial balance will be equal inspite of these errors.

Following Ledger accounts have debit balance:

  1. All assets account: i.e., cash, building and furniture etc.
  2. All expenses and losses account, i.e., wages, salaries and bad debts etc.
  3. Purchases account
  4. Sales return or returns inward account
  5. Drawings account
  6. Debtors account

Following Ledger accounts have credit balance:

  1. Capital account
  2. Liabilities accounts
  3. Reserve and funds accounts
  4. Revenue and income account
  5. Sales account
  6. Purchases return or returns outward account
  7. Creditors account

Interest on drawing account.

 

PREPARATION OF TRIAL BALANCE

The preparation of trial balance is the third step of recording business transactions in the books of accounts. The first step is to record the business transactions in subsidiary books and journal proper. The second step is to prepare ledger accounts on the basis of subsidiary books and journal. Trial balance is prepared on the following format :

Format of Trial Balance

 

Explanation of Columns

 

  1. Name of the account. This column contains list of all ledger accounts. Names of accounts are written in this column. Accounts should not be omitted. Omission of any account will throw trial balance out.
  2. L.F. (Ledger Folio). This column contains the page number of the different ledger accounts in ledger. If salaries account is prepared at page 17 of the ledger, 17 will be written in the folio column against salaries account. 
  3. Amount column. All accounts in the ledger must be enlisted in the trial balance and their total or balance or both should be written in the amount column against them.
  4. Debit column. The amount column is divided as debit and credit. If the trial balance is prepared total method, the debit total of every account or debit balance of ledger accounts (in case the trial balance prepared according to balance method) is written in the amount column. Debit balance means excess of side of an account over its credit side.
  5. Credit column. If the ledger account shows a credit balance i.e., credit side exceeds the debits the amount will be shown in the credit column (In case trial balance is prepared according to balance We will have to write the total of the credit side of the account if the trial balance is being prepared accord to total method.