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Unit 05 - Trial Balance - MBA Notes
MBA Notes
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Master's in Business Administration (MBA001)
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Unit 5 Trial Balance
Structure:
5 Introduction
Objectives
5 Meaning of Trial Balance
5 Objectives of Preparing a Trial Balance
5 Methods of Preparing a Trial Balance
5 Tips for Preparing a Trial Balance
5 Adjusting Entries
5 Errors and Their Rectification
5 Errors Disclosed by Trial Balance
5 Errors not Disclosed by Trial Balance
5 Steps to Locate the Errors
5 Summary
5 Glossary
5 Terminal Questions
5 Answers
5 Case Study
5 Introduction
In the previous unit we have learnt the first function of accounting,
i., recording, which is done in journal and subsidiary books. We have also
discussed the second function of accounting, i., classifying, which is done
in the ledger.
The next function of accounting is summarising. As we have understood, the
objective of summarising is to know the net result of operations. This
requires the preparation of final accounts – profit and loss account and the
balance sheet. The preliminary document prepared to facilitate the
preparation of financial statements is called trial balance. In this unit, we will
learn about trial balance in detail.
Objectives:
After studying this unit, you should be able to:
• explain the meaning of trial balance
• analyse the objectives of preparing a trial balance
- describe the methods of preparing a trial balance
- explain the meaning of adjusting entries
- identify and rectify the errors that are not disclosed by trial balance
- describe the steps to locate the errors
- prepare trial balance after incorporating adjustments
5 Meaning of Trial Balance
Trial balance is a statement containing the various ledger balances on a
particular date. It 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.
It is the source document for preparing final accounts i., profit and loss
account, cash flow statement, and balance sheet.
5 Objectives of Preparing a Trial Balance
Objectives of preparing a trial balance are as follows:
- To check the arithmetic accuracy of the entries made. In double entry,
every debit has an equivalent credit. So if the debits and credits do not
tally in a trial balance, it indicates that the books of account are not
arithmetically accurate.
- To identify and rectify errors in the books of accounts.
- To prepare trading account, profit and loss account, and balance sheet.
- It is a summarised ledger.
5 Methods of Preparing a Trial Balance
There are two methods of preparing a trial balance. They are:
- Totals method
- Balance method
In the totals method, the totals of debits and credits of every account are
shown in the trial balance.
Illustration 1:
The following are the ledger accounts of Mr. X as on 31st December, 1998.
Prepare a trial balance.
Dr. Cash Account Cr.
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
1-4-
2-4-
16-4-
26-4-
To Balance b/d
To Sales
To Mohan
To Sales
50,
45,
35,
10,
6-4-
10-4-
14-4-
18-4-
20-4-
22-4-
30-4-
By Cash
By Kumar
By Purchases
By Creditors
By Furniture
By Wages
By Printing
By Commision
By Electricity
By Telephone
By Salaries
By Balance
c/d
5,
29,
50,
20,
5,
500
1,
2,
500
1,
4,
22,
1,40,000 1,40,
1-5-04 To Balance b/d 22,
Building Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
1-4-04 To Balance b/d 2,00,000 30-4-04 By Balance c/d 2,00,
1-5-04 To Balance b/d 2,00,
Furniture Account
Date Particulars Amount
Rs.
Date Particulars Amount
Rs.
1-4-
20-4-
To Balance b/d
To Cash
10,
5,
30-4-04 By Balance c/d 15,
15,000 15,
1-5-04 To Balance b/d 15,
Bank Fixed Deposit Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
1-4-
12-4-
To Balance b/d
To Interest
1,00,
7,
30-4-04 By Balance c/d 1,07,
1,07,000 1,07,
1-5-04 To Balance b/d 1,07,
Stock Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
1-4-04 To Balance b/d 25,000 30-4-04 By Balance c/d 25,
1-5-04 To Balance b/d 25,
Creditor’s Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
18-4-
30-4-
To Cash
To Balance c/d
20,
15,
1-4-04 By Balance b/d 35,
35,000 35,
1-5-04 By Balance b/d 15,
Capital Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
30-4-04 To Balance c/d 3,50,000 1-4-04 By Balance b/d 3,50,
35,000 3,50,
1-5-04 By Balance b/d 3,50,
Purchases Account
Date Particulars
Amount
Rs,
Date Particulars
Amount
Rs.
4-4-
14-4-
To Kumar
To Cash
To Sarin
30,
50,
15,
30-4-04 By Balance c/d 95,
95,000 95,
1-5-04 To Balance b/d 95,
Interest on Fixed Deposit Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
30-4-04 To Balance c/d 7,000 12-4-04 By Bank FD 7,
7,000 7,
1-5-04 By Balance b/d 7,
Wages Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
22-4-04 To Cash 500 30-4-04 By Balance c/d 500
500 500
1-5-04 To Balance b/d 500
Printing Account
Date Particulars Amount
Rs.
Date Particulars Amount
Rs.
22-4-04 To Cash 1,000 30-4-04 By Balance c/d 1,
1,000 1,
1-5-04 To Balance b/d 1,
Commission Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
22-4-04 To Cash 2,000 30-4-04 By balance c/d 2,
2,000 2,
1-5-04 To balance b/d 2,
Electricity Account
Date Particulars Amount
Rs.
Date Particulars Amount
Rs.
30-4-04 To Cash 500 30-4-04 By balance c/d 500
500 500
1-5-04 To balance b/d 500
Telephone Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
30-4-04 To Cash 1,000 30-4-04 By balance c/d 1,
1,000 1,
1-5-04 To balance b/d 1,
Salaries Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
30-4-04 To Cash 4,000 30-4-04 By balance c/d 4,
4,000 4,
1-5-04 To balance b/d 4,
Sarin’s Account
Date Particulars
Amount
Rs.
Date Particulars
Amount
Rs.
30-4-04 To balance c/d 15,000 28-4-04 By Purchases 15,
15,000 15,
1-5-04 By balance b/d 15,
Solution:
TRIAL BALANCE AS ON 30TH APRIL, 2004
Debit balances Amount
Rs.
Credit balances Amount
Rs.
Cash 22,000 Creditors 15,
Building 2,00,000 Capital 3,50,
Furniture 15,000 Sales 95,
Bank FD 1,07,000 Discount received 1,
Stock 25,000 Interest on FD 7,
Purchases 95,000 Sarin 15,
Repairs 5,
Mohan 5,
Wages 500
Printing 1,
Commission 2,
Salaries 4,
Telephone 1,
Electricity 500
Total 4,83,000 Total 4,83,
5 Adjusting Entries
Adjusting entries are journal entries passed for making some adjustments
in the books. There will not be a business transaction.
- Opening journal entries
- Closing entries
- Transferring entries
revenue accounts, such as trading account and profit and loss account. The
accounts of assets and liabilities will not be closed because they continue to
exist further.
Example:
After the closure of accounting year, there might be a few more
transactions, which are not incorporated into the journal or ledger, owing to
omission and practical difficulties. For example, closing stock should be
valued on the last day of the accounting period.
Transferring entries
When the balance of one account is transferred to another account,
transferring entry is made.
For instance: Drawings made by the proprietor are credited to capital
account.
5 Errors and Their Rectification
An error is an unintentionally committed mistake. If the trial balance does
not tally (i., if the total of debit balances is not equal to the total of credit
balances) it is a clear indication that there are some errors in the preparation
of accounts. The errors may be committed at various stages –
- Journalising
- Posting
- Casting (totalling)
- Balancing
- Transferring to trial balance
However, a mere tallying of the trial balance does not ensure an error free
statement. There are certain errors such as errors of omission, error of
principle, and compensating errors, which are not disclosed by trial balance.
Whereas errors of casting, posting to wrong side of an account or posting a
wrong amount can be detected by trial balance. Figure 5 depicts the types
of errors.
Salaries paid during the year are closed by transferring to P & L
account
P & L account Dr
To Salaries’ account.
Figure 5: Types of Errors
Rectification of errors
It is the process of correcting the mistakes done in the books of accounts.
Errors either disclosed or not disclosed by trial balance, have to be
corrected or rectified in order to obtain the correct picture of profit or loss
and financial position.
5 Errors Disclosed by Trial Balance
The errors that are disclosed by trial balance can be easily located. If the
trial balance does not tally, the accountant has to proceed with spotting
errors. For this purpose a temporary account called Suspense account is
opened. To this account total amount of difference in the trial balance is
transferred. The balance in the account can be mitigated as and when the
errors get rectified. Therefore, the suspense account gets debited or
credited as the case may be on rectification of these types of errors. The
following are the errors which are disclosed by trial balance.
1. Posting a wrong amount
This mistake may occur while posting an entry from subsidiary book to
ledger.
Types of Errors
Errors not disclosed by
trial balance
Errors complete omission
Errors of principle
Compensatory errors
Errors disclosed by
trial balance
Errors of commission
Errors of partial omission
3. Totalling incorrectly
Both under casting and over casting are detected by trial balance. If any
account is totalled incorrectly, it is reflected in the trial balance.
4. Failing to post an entry from the subsidiary book to the ledger
If an entry made in the subsidiary book does not get posted to the
ledger, the trial balance will not tally.
Example: Purchases book total is Rs. 5800. If it is totalled as
Rs. 5700 or Rs. 5900, the difference will be shown in the trial
balance.
Example: Rent paid Rs. 2000 is recorded in cash account but is not
posted to the rent account at all.
RENT ACCOUNT
To cash a/c
Rectification Entry:
Rent a/c Dr. Rs. 2000
To suspense a/c Rs. 2000
Being the error of failing to post rent paid in rent account rectified.
PURCHASE BOOK
ABC ltd xxxx
MNC ltd xxxx
PQR ltd xxxx
______
Total 5800
TRIAL BALANCE
Debit Credit
Cash xxx
Sales xxxx
Purchase 5700
2000
Omitted
WRONG
AMOUNT
5. Omitting an account altogether from being shown in the trial
balance
6. Posting an amount to a correct account more than once
This results in an imbalance in the trial balance.
Example: Advertisement account, which shows a debit balance, is
completely omitted from trial balance.
ADVERTISEMENT ACCOUNT
To cash a/c
Total
xxxx
xxxx
By balance c/d
Total
xxxx
xxxx
To balance b/d xxxx
TRIAL BALANCE
Particulars
Advertisement
Debit Credit
Example: Receipt from sundry debtors of Rs was
accounted twice in sundry debtors account.
SUNDRY DEBTORS A/C
By cash a/c
By cash a/c
50000
50000
Rectification entry:
Advertisement expense a/c Dr.
To suspense a/c
Being debit balance in advertisement account accounted.
Rectification Entry:
Suspense a/c Dr. Rs. 5000
To sundry debtors a/c Rs. 5000
Being excess debit in sundry debtors account rectified.
Omitted
####### ENTERED
####### TWICE
Activity 1: Solution
1.
Telephone Expense a/c Dr 2500
To Suspense a/c 2500
(Being telephone expenses omitted in
ledger accounted)
2.
To rectify the first posting the entry
is:
Suspense a/c Dr.
To Interest paid a/c 495
Being excess debit (2611-2116) in
interest a/c rectified.
To rectify the second posting the
entry is:
Suspense a/c Dr.
To Interest paid a/c 2161
Being excess debit in interest paid a/c
rectified.
The two entries can be clubbed as:
Suspense a/c Dr.
To Interest paid a/c 2656
Being excess debit in interest paid a/c
(495 + 2161) rectified.
5 Errors not Disclosed by Trial Balance
There are four errors which do not affect trial balance and it is difficult to
locate them. A brief description of the four errors is offered in the following
paragraphs.
1. Error of complete omission – Error of omission occurs when a
transaction is completely omitted from the books of accounts.
Example: If purchase of goods from Jairam on credit is not
recorded either in the general journal or in the purchases book, it is
termed as error of omission.
PURCHASE BOOK
Date Suppl
iers’
name
L
F
Inv
No.
Rs.
Jairam
PURCHASE ACCOUNT
To
Jairam xxx
Omitted Omitted
Since both aspects – debit and credit – of the transaction are missing, the
trial balance is not affected at all. To rectify such errors, the transaction
should be recorded when it is traced.
2. Error of commission – If the errors wrong posting, wrong casting,
wrong calculation etc., are committed in the books of original entry or
ledger, it is said to be error commission.
Example: Purchase invoice of Rs may have been entered as
Rs in the purchases book itself, then, in the subsequent
ledger accounts the same mistake continues and thereby cannot be
disclosed by trial balance.
The difference of Rs (1730-1370) should be added to
purchases account and to the respective supplier’s account.
PURCHASE BOOK
Date Suppl
iers’
name
L
F
Inv
No.
Rs.
XXX 1370
Correct
amount is
Rs.
PURCHASE ACCOUNT
To
xxx 1370
Correct
amount is
Rs.
The error can be detected only when the original invoice is
referred to after getting the complaint from the supplier.
Rectification entry:
Purchases a/c Dr. Rs. 360
To suppliers a/c Rs. 360
Being deficit amount added to rectify the account.
4. Compensating errors – - It is also called off-setting error. Compensating
error is one which is counter balanced by another error.
5 Steps to Locate the Errors
The following steps help to locate the errors. In spite of the efforts, if the
difference in the trial balance persists, a suspense account may be created
and subsequently the suspense account can be eliminated as and when the
errors are located and rectification is made.
- Check the total on both debit side and credit side of the trial balance.
- Check the total of debtors and creditors accounts.
- Find out whether all ledger balances are carried to trial balance.
- Verify the total of all the ledger accounts.
- Divide the amount of difference in the trial balance by 2 and see if
Example:
➢ Mr. X account was debited Rs. 100 as against Rs while the
account of Mrs. X account was debited Rs as against the
correct amount of Rs. 100.
➢ The first error is compensated by the second error and therefore
the trial balance is not affected. This comes to light only at a later
stage or on receipt of the complaint.
Mr. X’s account
Dr Cr
To cash 100
Mrs. X’s account
Dr Cr
To cash 1000
Instead of Rs Instead of Rs.
Rectification entry:
Mr. X’s account Dr. 900
To Mrs. X’s account Rs. 900
Being deficit amount debited in Mr. X’s account and excess amount
debited in Mrs. X’s account rectified.
any item of the debit or credit side equal to that amount has been
posted to the opposite side.
- Check whether the opening balances are brought down correctly
from the previous accounting period.
- Compare with trial balance of the previous year to find out if there
are any items missing.
- Where the difference in the trial balance is divisible by 9 then the
difference is likely to be due to misplacement of figures like 12 for
21, 24 for 42, 36 for 63, etc.
When errors are located, they should be rectified by passing rectification
entries and not by overwriting. Rectification entries are recorded in general
journal or journal proper.
Self Assessment Questions
1. All revenue accounts are closed at the end of an accounting period.
(True/False)
2. Assets and liabilities accounts are closed at the end of accounting year.
(True/False)
3. Error of principle is not disclosed by trial balance. (True/False)
4. Error of commission is disclosed by trial balance. (True/False)
5. Suspense account is the difference between debit total and credit total
of a trial balance. (True/False)
6. The sum of errors in accounting is transferred temporarily to
_________ account.
7. The book in which rectification entries are passed is ____________.
Identify the type of error
8. Amount paid to Rama Rs is credited to Ramanan’s accounts.
9. Wages paid Rs is recorded as Rs.
10. Wages of Rs paid for installation of machinery is debited to Wages
a/c.
11. Furniture purchased for cash Rs is not recorded in the journal.
_______
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Unit 05 - Trial Balance - MBA Notes
Course: Master's in Business Administration (MBA001)
211 Documents
Students shared 211 documents in this course
University: Manipal University Jaipur
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Financial and Management Accounting Unit 5
Manipal University Jaipur Page No.: 106
Unit 5 Trial Balance
Structure:
5.1 Introduction
Objectives
5.2 Meaning of Trial Balance
5.3 Objectives of Preparing a Trial Balance
5.4 Methods of Preparing a Trial Balance
5.5 Tips for Preparing a Trial Balance
5.6 Adjusting Entries
5.7 Errors and Their Rectification
5.8 Errors Disclosed by Trial Balance
5.9 Errors not Disclosed by Trial Balance
5.10 Steps to Locate the Errors
5.11 Summary
5.11 Glossary
5.12 Terminal Questions
5.13 Answers
5.14 Case Study
5.1 Introduction
In the previous unit we have learnt the first function of accounting,
i.e., recording, which is done in journal and subsidiary books. We have also
discussed the second function of accounting, i.e., classifying, which is done
in the ledger.
The next function of accounting is summarising. As we have understood, the
objective of summarising is to know the net result of operations. This
requires the preparation of final accounts – profit and loss account and the
balance sheet. The preliminary document prepared to facilitate the
preparation of financial statements is called trial balance. In this unit, we will
learn about trial balance in detail.
Objectives:
After studying this unit, you should be able to:
• explain the meaning of trial balance
• analyse the objectives of preparing a trial balance
Discover more from:
- Discover more from: