Financial Accounting Unit 5

Unit 5 Trial Balance and Rectification of Errors

Structure:
5.1 Introduction
Objectives
5.2 Trial Balance
5.3 Error in Accounting
Classification of Errors
Errors that are Disclosed in the Trial Balance
Errors that are not Disclosed in theTrial Balance
Rectification of Errors
5.4 Summary
5.5 Glossary
5.6 Terminal Questions
5.7 Answers

5.1 Introduction
In the last unit, you learnt about preparation of the various subsidiary books
such as purchase book, sales book, purchases return book, sales return
book, bills receivable book and bills payable book. You were acquainted
with various types of cash books, knowledge of preparation of petty cash
book and posting of journal entries in ledger accounts. The trial balance is
an arithmetic check of the double entry system. By attempting Activity 2 in
Unit 4 you would have gained a fair idea on how to prepare Trial balance.
In this unit, you will study the meaning and need of trial balance, the
principles behind the preparation of Trial balance, classification of errors and
how to rectify the errors by opening suspense account.
Objectives:
After studying this unit, you should be able to:
 define the meaning of Trial Balance
 explain the objectives and principles behind the preparation of Trial
Balance
 identify errors in accounting and classify the errors
 identify and rectify the errors that are disclosed in trial balance
 identify and rectify the errors that are not disclosed in the trial balance
 explain rectification of errors
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5.2 Trial Balance

A trial balance is a list of debit and credit balances of all the ledger accounts
prepared on any particular date to verify whether the entries in books of
account are authentically correct.
If the trial balance does not balance, then you should
1) check that there are no errors in the addition of each account
2) check that there is an entry in both a debit and credit account and
3) the same figure was entered for both the debit and credit entry.
There are errors that can be made in accounts, which will not be highlighted
with a trial balance.
Example Cause Effect
Purchased goods worth If a transaction is completely Trial balance
Rs.2000 from M/s omitted from the books and it was would still
Syntex Ltd. This not entered either, as a debit balance
transaction was totally entry or credit entry.
omitted to enter.
This transaction will not affect
both debit and credit side of
books of accounts
Journal entry for the If there were two entries made but Trial balance
above transaction is: one of them was made into the would still
Purchases a/c Dr wrong account. balance
To M/s. Syntex Instead of crediting M/s Syntex
account M/s Systech account was
credited
Credit purchases from If the entries were made on the Trial Balance
M/s. Syntex were wrong side of the account for both would still
recorded as credit sales entries. balance
Instead of crediting M/s. Syntex
account, it was debited.

Objectives of Trial Balance:

The objectives of trial balance are as follows:
 To check the arithmetical accuracy of accounting entries posted in the
ledger
 To help in locating errors
 To provide a basis for financial statement

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 To bring balances all the accounts in the ledger in one place so that the
balance of any particular account can be found out easily without going
through the ledger
Principle behind the Preparation of Trial Balance
The preparation of the trial balance is based on the fundamental principle of
double entry book-keeping. For every debit in one account, there is a
corresponding credit in some other account. On the contrary, if there is any
difference between the total debits and the total credits given to all the
accounts, we can conclude that there are some mistakes in the books of
account. However a trial balance provides a means for verifying the
correctness of entries in the books of account.
Proforma of Trial Balance
TRIAL BALANCE as on _________
Debit balance Credit Balance
Particulars
Rs. Rs.
Cash 10,000
Creditors 10,000
Total 10,000 10,000

Note all asset account and expenses have debit balance and all liability
accounts and income hold credit balance.

Illustration 1
Illustration 7 of Unit 4 is repeated here. Using this we shall now prepare trial
balance of M/s Rao & Co.
2004 Particular Rs.
January 1 Rao commenced business with 5,000
January 2 Bought goods for cash 2,500
January 3 Bought office furniture for cash 500
January 4 Paid for postage 10
January 5 Purchased goods from Rajkumar 2,000
January 7 Sold goods for cash 150
January 8 Bought goods from Rahim 400
January 9 Sold goods to Suresh 400

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January 10 Sold goods to Nayak 300

January 11 Purchased goods for cash 350
January 13 Received cash from Nayak 250
January 15 Paid cash to Rahim 400
January 17 Returned goods to Rajkumar 200
January 20 Suresh returned goods 50
January 22 Paid salaries 150
January 25 Sold goods for cash 500
January 26 Rao withdrew for personal use 800
January 27 Paid for stationery 100
January 29 Paid rent 225
January 31 Received commission 50

Trial Balance of M/s Rao & Co for the period Jan 2004
Particulars Dr Cr
Capital 5000
Drawings 800
Purchases 5250
Sales 1350
Sales return 50
Cash 915
Office furniture 500
Suresh’s a/c 350
Nayak’s a/c 50
Postage 10
Salaries 150
Stationery 100
Rent 225
Commission received 50
Purchase return 200
Rajkumar a/c 1800
Total 8400 8400

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Illustration 2: The following is a trial balance as on 31st December 2003

prepared by a freshly recruited accounts executive. You are required to
re-write it in its correct form.
Rs. Rs.
Capital 24,000
Stock (1-1-2003) 8,500
Furniture 2,600
Purchases 8,950
Cash at Bank 7,300
Carriage 300
Sales 22,500
Buildings 12,000
Return inwards 1,900
Return outwards 350
Trade expenses 1,000
Discount Received 970
Salary 3,000
Office Rent 2,270
_______ _______
60,020 35,620

Solution:
Particulars Dr Cr
Capital 24000
Stock (1-1-2003) 8500
Furniture 2600
Purchases 8950
Cash at Bank 7300
Carriage 300
Sales 22500
Building 12000
Return inwards 1900
Return outwards 350
Trade Expenses 1000
Discount received 970
Salary 3000
Office rent 2270
Total 47820 47820

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Self Assessment Questions

1. A trial balance is a list of debit and credit balance of all the _______
accounts.
2. Select the item that has debit balance
a. Capital
b. Drawings
c. Purchase return
d. Commission received
3. Is the preparation of trial balance a necessity? Give reasons for your
answer.
Activity 1:
Given in the table are various types of accounts. Mention whether it
carries debit or credit balance.
Name of the account Debit / credit balance
Capital
Drawings
Creditors
Bills Payable
Bank overdraft
Loans from others
Outstanding expenses
Pre received incomes
Reserves for future expenses or losses
All items of incomes
Cash in hand or at bank
Assets such as furniture, buildings, plant, machinery,
tools, stock of goods, etc.
Debtors, Bills receivable.
Loans given to others
Investments made
All expenses such as wages, carriage, insurance,
salaries, printing and stationery, advertising,
commission paid, interest paid, etc.
Prepaid insurance, rent or any prepaid expenses.
Outstanding incomes
Losses like depreciation, loss in the revaluation of
assets or sale of assets.
Any other asset

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5.3 Errors in Accounting

In the process of recording a large number of transactions in the books of
accounts, errors are likely to creep in.
 Error may arise either while recording the transactions in the books of
original entry or while writing up the ledger accounts or while preparing
the trial balance.
 Errors in the books of accounts arise either due to the negligence or
carelessness of the book-keepers in recording the transactions in the
books of accounts.
 Errors in accounting mean unintentional mistakes committed by the
book-keepers in the books of accounts.

5.3.1 Classification of Errors

1. Errors of Omission: The error of omission is one where a transaction
has not been recorded in the books of account either wholly or partially.
When the transaction has been completely omitted in the books of
accounts, it is an error of complete omission.
For example, if a credit purchase of goods is omitted to be entered in the
purchase book, it is an error of complete omission. Such an error will not
affect the trial balance and the omission will not even be apparent. But
sometimes it is apparent from the balance of an account that an entry
has been omitted e.g., the rent account may show that the rent for the
12th month has not been paid. This type of error can be detected by
careful observation.
Partial Omission: If one of the items or aspects of a transaction
recorded in a subsidiary book is omitted to be posted from the subsidiary
book to a ledger account, the error is an error of partial omission. For
e.g. if salaries paid to clerks recorded in the cash book is omitted to be
posted to salaries account in the ledger, the error is an error of partial
omission.
2. Errors of Commission: Error of commission refers to errors resulting
from something, which ought not to be done. In other words, when a
transaction has been recorded but has been wrongly entered in the
books of original entry or posted in the ledger, error of commission is
said to have been made.

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For example a purchase invoice for Rs. 1,320 was entered in the
purchase book as Rs. 1,230. Such an error may be intentional or
unintentional. This type of error usually occurs in the process of totalling,
postings, carries forward and balancing of subsidiary books.
3. Errors of Principle: If a transaction is recorded in the books of account
against the fundamental principle of double entry book keeping the error
is known as error of principle. Such errors arise when the entries are not
recorded according to the fundamental principles of accountancy.
For example, wrong allocation of expenditure between capital and
revenue, ignoring the outstanding assets and liabilities, valuation of
assets against the principles of book-keeping.
4. Compensating Errors or off-setting Errors: A compensating error or
off-setting error is one which is counter balanced by any other error or
errors.
For example, if A’s account was to be debited for Rs. 100 but was
debited for Rs. 10 while B’s account which was to be debited for Rs. 10
was debited for Rs. 100. Thus, both the accounts have been debited for
a total sum of Rs. 110 which amount ought to have been debited.
5. Errors of Duplication: Such errors arise when an entry in a book of
original entry has been made twice and has also been posted twice.
5.3.2 Errors that are Disclosed in the Trial Balance
In brief, a one sided error may be defined as an error which affects only one
aspect (either the debit aspect or credit aspect) of a transaction. To be more
elaborate and clear, a one-sided error may be defined as an error for the
rectification of which
(i) one or more accounts have only to be debited or
(ii) one or more accounts have only to be credited or
(iii) one or more accounts have to be debited and one or more credits
have to be credited, but the amount of debit required to be given to
one or more accounts is not equal to the amount of credit required to
be given to one or more accounts.
A one-sided error can also be defined as an error which affects the
agreement of the trial balance and so, is disclosed by the trial balance.

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The following are the examples of one-sided errors:

1. Omission to post an item from a subsidiary book to a ledger
account. For e.g. :
 Omission to post a credit sale to the customer’s account from the
sales book;
 Omission to post a credit purchase to the supplier’s account from the
purchases book;
 Omission to post the salaries paid to the salaries account from the
cash book.
2. Posting an item to the wrong side of the correct ledger account.
For e.g. :
 A credit purchase from a supplier might have been posted to the
debit side of his account;
 Commission received might have been posted to the debit side of
commission account;
 Discount allowed to a customer might have been debited to his
account.
3. Posting an item to the wrong side of a wrong ledger account.
For e.g. :
 A credit sale of goods to Ram might have been posted to the credit
side of Rao’s account;
 Return of goods by A might have been posted to the debit side of
B’s account.
4. Posting a wrong amount to the correct side of the correct ledger
amount.
For e.g. :
 Goods sold to X on credit for Rs.940 might have been debited to his
account as Rs.490;
 A credit purchase of Rs.504 from B might have been credited to his
accountant as Rs.405;
 The total of purchases book for the month of June, 2004, Rs.879
might have been posted to the debit of purchases amount as
Rs.789.

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5. Posting a wrong amount to the wrong side of the correct ledger

account.
For e.g. :
 A return of goods worth Rs.50 by a customer, say, M, might have
been posted to the debit side of his account as Rs.15;
 A credit sale of goods worth Rs.550 to N might have been posted to
the credit side of his account as Rs.515.
6. Posting a wrong amount to the correct side of a wrong ledger
account.
For e.g. :
 a return of goods worth Rs.30 by Ramnath might have been posted
to the credit side of Raghunath’s account as Rs.13;
 a cash of Rs.500 received from Shah might have been posted to the
credit of Shah as Rs 400.
7. Posting a wrong amount to the wrong side of a wrong ledger
account.
For e.g. :
 a credit purchase of goods worth Rs.500 from Rahim might have
been posted to the debit side of Rasheed’s account as Rs.400;
 cash of Rs.200 paid to Smith might been posted to the credit of
Smith & Co’.s account as Rs.210.
5.3.3 Errors that are not Disclosed in the Trial Balance:
In brief, a two-sided error may be defined as an error which affects both the
aspects (i.e., the debit aspect and the credit aspect) of a transaction. To be
more elaborate and clear, a two-sided error may be defined as an error for
the rectification of which
(i) one account has to be debited and the other account has to be
credited with an equal amount or
(ii) two or more accounts have to be debited and two or more accounts
have to be credited and the amount of debit required to be given to two
or more accounts is equal to the amount of credit that is required to be
given to two or more accounts.
A two sided error can also be defined as an error which does not affect the
agreement of the trial balance and so, is not disclosed by the trial balance.

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The following are examples of two sided errors:

1. Omission to record a transaction in a subsidiary book. For e.g. :
 A credit purchase of goods might not have been recorded in the
purchases book;
 A return of goods to a supplier might not have been recorded in the
purchases return book.
2. Entering a transaction in two subsidiary books. For e.g. :
 A return of goods by a customer might have been recorded in the
sales returns book as well as in purchases book;
 A credit sale of goods might have been recorded in the sales book
as well as in purchases returns book.
3. Entering a transaction in a wrong subsidiary book. For e.g.
 A bill receivable received from a customer might have been recorded
in the bills payable book;
 A credit sale of goods might have been passed through
(i.e., recorded in) the purchases book.
4. Entering a wrong amount in the correct subsidiary book. For e.g. :
 credit sale of goods worth Rs.570 to a customer might have been
entered in the sales book as Rs.517;
 a discount of Rs.40 allowed to a customer might have been entered
in the cash book as Rs.30.
5. Omission to post both the aspect of a transaction to ledger
accounts from a subsidiary book. For e.g. :
 Omission to post the entry passed in the journal proper for the goods
withdrawn by the proprietor for his personal use to drawings account
and to purchases account;
 Omission to post a credit purchase of furniture from the journal
proper to the furniture account and to the seller's account.
6. Posting the correct amount to the correct side of a wrong ledger
account. For e.g.,
 A return of goods by B. Shah might have been posted to the credit of
B. Sham's account from the purchases book;
 A bill payable issued to Rao might have been posted to the debit of
Row's account.

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7. Errors of principle (i.e., recording a transaction against the

fundamental principle of accounting). For e.g.
 A credit sale of old machinery to X might have been passed as a
credit sale of goods;
 A credit purchase of furniture might have been passed as a credit
purchase of goods;
 Amount spent on repairs to building might have been debited to
buildings account;
 Cash received in respect of a book debt written off as bad debts in
the previous year might have been credited to the personal account
of the debtor.
8. Transaction of one year recorded in another year. For e.g. :
 Cash received from a customer, say X, on 31st December, 2003
might have been entered in the cash book on 1st January, 2004;
 Cash received from a customer, say Y, on 1st January, 2004, might
have been entered in the cash book as having been received on
31st December, 2003;
 A credit purchase of goods from Bose on 28th December, 2003
might have been passed in the books on 3rd January, 2004, though
the goods were included in the closing stock of the year 2003.
5.3.4 Rectification of Errors
When the trial balance does not agree, we will conclude that there is some
error in the books of account and the same errors are rectified. But the
question is how to rectify the error?
Errors in the books of account should not be rectified by erasing the wrong
entries and writing the correct entries once the accounts are complete
because it reduces the reliability of the entries in the books and also makes
the books untidy. So it must be rectified either by means of necessary
adjustments in the concerned accounts or by means of journal entries.
Moreover rectification of errors depends on the stage at which the errors are
detected.
In case of an error affecting one account we have to go to the relevant
account(s) and put the figure on the right side of the account. No journal
entry is necessary.

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A suspense account is an account, which is opened when the trial balance

does not tally and in which the difference in the trial balance is entered to
tally the trial balance.
Illustration 3
1. The sales account is under cast by Rs.20,000.

Rectification entry will be:

Suspense a/c Dr. 20,000
To sales a/c 20,000
(Sales a/c was credited less to the extent of Rs.20,000 rectified)

2. Cash received from A posted to B’s account Rs.7,000. Here both A and
B accounts are affected by an equal amount. The rectification entry to
be passed will be:

The rectification entry will be

‘B’s A/c Dr. 7,000
To ‘A’s A/c 7,000
(Cash received from A wrongly credited to B now rectified)

3. Salary paid Rs.1,000 has been posted to Rent account.

The rectification entry will be:

Salary A/c Dr. 1,000
To Rent A/c 1,000
(Salary paid wrong debited to Rent Account, now rectified)

4 Purchases Account under cast by Rs.1,500.

The rectification entry will be:

Purchase A/c Dr. 1,500
To Suspense A/c 1,500
(Purchase a/c was debited less to the extent of Rs.1500 rectified)

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5. Cash received from Ram Rs. 650 was debited in his account.

The rectification entry will be:

Suspense A/c Dr. 1,300
To Ram’s A/c 1,300
(Ram’s a/c wrongly debited To rectify, his account has to be credited by
double amount)

Self Assessment Questions

4. Multiple Choice questions:
(1) A credit purchase from a supplier might have been posted to the
debit side of his account
a) Posting an item to the wrong side of a wrong ledger account.
b) Posting an item to the wrong side of the correct ledger
account.
c) Posting a wrong amount to the correct side of the correct
ledger amount.
d) Posting a wrong amount to the correct side of the wrong
ledger amount.
(2) A credit sale of goods might have been recorded in the sales
book as well as in purchases returns book.
a) Entering a transaction in a wrong subsidiary book.
b) Entering a transaction in two subsidiary books
c) Entering a wrong amount in the correct subsidiary book
d) Posting the correct amount to the correct side of a wrong
ledger account
5. Fill in the blanks:
1. Credit sale of goods worth Rs.570 to a customer might have been
entered in the sales book as Rs.517 is ________________.
2. Omission to post both the aspect of a translation to ledger accounts
from a subsidiary book is a _______________ error.
3. Choose the odd choice for transaction of one year recorded in
another year.
a. Cash received from a customer, say, X, on 31st December, 2003
might have been entered in the cash book on 1st January, 2004;

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b. Cash received from a customer, say, Y, on 1st January, 2004,

might have been entered in the cash book as having been
received on 31st December, 2003;
c. A credit purchase of goods from Bose on 28th December, 2003
might have been passed in the books on 3rd January, 2004,
though the goods were included in the closing stock of the year
2003.
d. Cash received in respect of a book debt written off as bad debts
in the previous year might have been credited to the personal
account of the debtor.

5.4 Summary
Let us summarise the important topics that have been explained in this unit -
 A trial balance is a list of debit and credit totals, or a list of debit and
credit balances of all the ledger accounts prepared on any particular
date to verify whether the entries in books of account are authentically
correct.
 The preparation of the trial balance is based on the fundamental
principle of double entry book-keeping.
 The error of omission is one where a transaction has not been recorded
in the books of account either wholly or partially.
 Error of commission refers to errors resulting from something, which
ought not to be done.
 Errors of Principle refer to a transaction that is recorded in the books of
account against the fundamental principle of double entry book keeping.
 A compensating error or off-setting error is one which is counter
balanced by any other error or errors.
 Errors must be rectified either by means of necessary adjustments in the
concerned accounts or by means of journal entries.
 A suspense account is an account, which is opened when the trial
balance does not tally and in which the difference in the trial balance is
entered to tally the trial balance.

5.5 Glossary
1) Trial Balance: A separate statement is prepared to test the accuracy of
the ledger balances.

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2) Double Entry: For every debit in one account, there is a corresponding

credit in some other account.
3) Errors: Unintentional mistakes committed by the book-keepers.
4) One sided errors: One sided errors are omission to post an item from a
subsidiary book to a ledger account, posting an item to the wrong side of
the correct ledger account, posting an item to the wrong side of a wrong
ledger account, posting a wrong amount to the correct side of the correct
ledger amount, posting a wrong amount to the wrong side of the correct
ledger account, posting a wrong amount to the correct side of a wrong
ledger account, posting a wrong amount to the wrong side of a wrong
ledger account.
5) Two sided errors: Two sided errors are omission to record a
transaction in a subsidiary book, entering a transaction in two subsidiary
books, entering a transaction in a wrong subsidiary book, entering a
wrong amount in the correct subsidiary book, omission to post both the
aspect of a transaction to ledger accounts from a subsidiary book,
posting the correct amount to the correct side of a wrong ledger account,
errors of principle, transaction of one year recorded in another year.

5.6 Terminal Questions

1. Explain the objectives of Trial Balance.
2. Briefly explain the principles behind the preparation of Trial Balance.
3. Explain the classification of errors.
4. Make a list of examples of errors that are disclosed in the Trial Balance.
5. What is a suspense account?

5.7 Answers
Self Assessment Questions
1. Ledger
2. (b)
3. Yes. It facilitates the preparation of financial statement.
4. (1) b (2) b
5. (1) entering a wrong amount in the correct subsidiary book
(2) Two sided
(3) d

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Terminal Questions
1. A Trial balance has many objects. They are: 1. To check the arithmetical
accuracy of accounting entries posted in the ledger. For more details,
refer section 5.2.
2. The preparation of the trial balance is based on the fundamental
principle of double entry book-keeping. For more details, refer
section 5.2.
3. Errors in accounting mean unintentional mistakes committed by the
book-keepers in the books of accounts. In short, errors mean
unintentional mistakes in accounts. For more details, refer section 5.3.
4. A one-sided error can also be defined as an error which affects the
agreement of the trial balance, and so, is disclosed by the trial balance.
For more details, refer section 5.3.
5. A suspense account is an account, which is opened when the trial
balance does not tally and in which the difference in the trial balance is
entered to tally the trial balance.For more details, refer section 5.4.
References:
 R. L. Gupta, Radhaswamy (2010). Financial Accounting. S. Chand and
Company
 Maheshwari S. N. and S. K. Maheshwari, (2009), Advanced
Accountancy, Vikas Publishing House.
 Jain and Narang (2009). Financial Accounting, S. Chand and Company.
 M. C. Shukla (2010). Advanced Accountancy. S. Chand and Company.

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