Trial Balance And Rectification Of Errors With Examples - Accounting

Here we discuss about Trial Balance And Rectification of Errors With Examples. But first you should know about the Rectification of Errors and why we need to rectify these errors.

Rectification of Errors or Correction of Errors means that we make correction of our wrong recorded Transactions that recorded either wrong posting or recorded correctly but with wrong amount.

Trial Balance Definition And Meaning In Accounting

We know that Trial Balance shows arithmetical accuracy of the books of accounts. But the arithmetical accuracy of the books of account does not mean that types of accounts are free from errors and mistakes. Actually, there are certain types of errors due to which even the total of Debit equal to total of Credit, but still there are specific errors which must be needed to rectify in order to give true and fair view of financial statements.

Types of Rectification of Errors

A Trial Balance will not Balance if there are:

1.   Errors Causing Disagreement of Trial Balance

2.   Errors  Not Causing Disagreement of Trial Balance

So, there are basically two types of Errors which we want to rectify. We Discuss these one by one.

1. Errors Causing Disagreement of Trial Balance

Ø The debit side or credit side of the Trial Balance is understated or overstated

For Example, Goods sold to Mr. X for Rs.5000 wrongly entered in Sales's Ledger as Rs.3000, then the balance is understated or under casting. Similarly, if we enter the amount as Rs.6000, then the Balance Carried Down (B/C) is overstated or over casting by Rs.1000.

In this Trial Balance does not agree arithmetically.

Ø Partially Omission of the Transactions

When the Debit side or Credit Side of the transaction is not recorded. In other words, only two aspect of the transaction is recorded.

For Example, Goods sold for Rs.5000 to Mr. A was written in Sales’ Ledger correctly but we forgotten to record in Mr. A (Our Debtor), then there is partially omission of transaction.

Ø Wrong Posting in Ledger by Mistake

When we pass wrong entries in the Journal either by amount or by accounts by mistake in either sides of the transactions.

(i) For Example, we record the correct amount in the Sales’ Ledger but we debit the wrong amount (figure) in Mr. A’s Ledger, then there is wrong posting of the entry in Mr. A’s Ledger.

(ii) When an owner withdraws Cash Rs. 5000 for Personal Use but enter the wrong amount in Drawings Account as Rs. 500 but record correct amount in Cash Account then the trial balance will not agree.

(iii) Mr. A Sold Purchased Machinery worth Rs. 3000 From Mr. B for Cash. He posted this Business Transaction only in Machinery Account but forget to post to Cash Book, then in this case, it is a Journal Entry posted partially, so it is not a complete entry causing disagreement of a Trial Balance. 

2. Error Not Causing Disagreement of Trial Balance

ü Error of Omission

It means completely omission of the transactions from the books of accounts. In this case, errors do not affect the Debit and Credit side of the Trial Balance. For Example, goods sold to Mr. A for Rs.5000 was omitted from the books of accounts does not affect the two sides of Trial Balance.

ü Error of Commission

Transactions recorded in the wrong account of the same nature. For Example, sold goods to Mr. A recorded in Mr. B’s Ledger. As the Mr. A and Mr. B both are our Debtors but we record the transactions in the wrong account of the same class.

In this case, even though the correct amounts are recorded in the accounts so Trial Balance does show this kind of error and agree the two balances.

ü Error of Principle

Recording of a transaction in two different classes of Accounts. This error occurs due to the wrong application of Accounting Principles. For Example, treating capital expenditures as revenue expenditures. When an asset is being installed, all the expenditures paid for it are capitalized, so these expenditures can not be considered as revenue expenditures. Since amounts are correctly recorded and on the correct side (Debit Side) but in the wrong class, so there is Error of Principle but Trial Balance does not show this error because debit and credit balances are arithmetically agreed.

ü Compensatory Errors

Error occurs in the amount of two opposite sides of two accounts and set off the effects in the net result and hence Trial Balances agree. For Example, purchase goods for Rs.7000 from Mr. A but recorded in Purchases’ Ledger as Rs.5000. Now the Debit Balance of Trial Balance is overstated by Rs.1000. Similarly, sales to Mr. of Rs.6000 is recorded but wrongly enter amount in Sales Ledger as Rs.5500 and also in another transaction, we entered the amount of fees received as 7500 in fees revenue account instead of recording Rs.8000. So the credit side of Trial Balance is understated by Rs.1000. Hence the effect of two results is concealed in the Trial Balance.

Suspense Account

As we know there are certain hidden types of errors due to which there are possibilities that our Trial Balance agree but our accounts do not provide true and fair view information to our Financial Statements.

We also know that, there are some errors causing disagreement in Trial Balance. After the disagreement in Trial Balance, Final Accounts can not be prepared accurately. So to reconcile the Debit and Credit Balances of Trial Balance, Suspense Account is created. "

What is A Suspense Account?

The Suspense account is recorded in the side where it is needed to agree the Trial Balance. Suspense Account is created in order to control the further delay in the preparation of Final Accounts. This account is closed after rectifying all errors by passing necessary Journal Entries.

So it is all about the Trial Balance And Rectification Of Errors With Examples.