CHAPTER AT A GLANCE
- Trial Balance
- Characteristics or Features of Trial Balance
- Objectives or Functions of Trial Balance
- Difference between Trial Balance by Balancing Method and Trial Balance by Total Method
- Hints for Preparing Trial Balance
- Limitations of Trial Balance
- Classification of Errors
- Errors of Principle
- Clerical Errors
- Errors of Omission
- Errors of Commission
- Compensating Errors
- Errors Disclosed or not Disclosed by Trial Balance
- Rectification of Trial Balance
- Objectives of Rectification of Errors
- Rectification of errors before preparation of Trial Balance
- Rectification of Errors after preparation of Trial Balance but before preparation of Final Account
- Suspense Account
- Correction of Errors in next Accounting Year
Introduction
In the previous chapters you learned the principles of double entry system, recording transaction in the book of prime entry (Journal) and posting them into principle book (ledger). The next step in our progress towards the financial statements is the trial balance.
Before transferring the relevant balances at the year end to the income statement and putting closing balances carried forward into the statement of financial position, it is usual to test the accuracy of the double entry bookkeeping records by preparing a trial balance. This is done by taking all the balances on every account at one place called Trial Balance.
Trial Balance
| Quick Review: A trial balance is a list of all debit and credit balances of ledger account. It is prepared to check that the total of debit balances is the same as the total of credit balances and offer reassurance that the double entry recording from day books has been done correctly. |
Due to the nature of double entry, the total of the debit balances will be exactly equal to the total of the credit balances. Therefore the total of the debit balance must tally with the credit balance. In case, there is a difference, one has to check the correctness of the balances brought forward from the respective accounts. Trial balance can be prepared in any date provided accounts are balanced.
Characteristics or Features of a Trial Balance
- It is a list of balances of Ledger Accounts and Cash Book.
- It is not a part of the Double Entry System of Book Keeping. It is a result of Double Entry System of Book Keeping. It is only a working paper.
- It can be prepared on any date.
- It verifies the arithmetical accuracy of posting of entries from the Journal to the Ledger.
- It is not a conclusive proof of the accuracy of the books of accounts since some errors are not disclosed by the Trial Balance, for example, error of principle.
Objectives or functions of a Trial Balance
- To Ascertain the Arithmetical Accuracy of Ledger Accounts: The Trial Balance enables one io establish whether posting and other accounting processes have been carried out without committing arithmetical errors.
- To Help Prepare the Final Accounts: Financial Statements are prepared from the Trial Balance. Preparation of Financial Statements, therefore, is the second objective of preparing a Trial Balance.
- Summary of Each Account: The Trial Balance offers a summary of the Ledger.
- The Ledger may have to be referred to only when more detail is required in respect of an account.
- To Help in Locating Errors: The Trial Balance helps in locating errors in Book Keeping work. It should, however, be borne in mind that it does not disclose all the errors in Book Keeping but only the arithmetical inaccuracies
Methods of Preparing a Trial Balance
A Trial Balance may be prepared by following either the Balance Method or the Totals Method.
- Balance Method: In this method, only the debit or credit balances are entered separately in the two columns. This is known as the Net Trial Balance. This is the commonly used method of preparing a Trial Balance because it facilitates the preparation of the final accounts.
- Totals Method: In this method, the total of each side of the account is entered respectively in the debit and credit columns of the Trial Balance. Such a Trial Balance is known as the Gross Trial Balance.
A specimen of Trial Balance follows:
TRIAL BALANCE
as on …
| Heads of Account | L.F. | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|
| (Total or Balance) | (Total or Balance) | ||
| Rs. | Rs. | ||
While preparing a Trial Balance, the following points should be borne in mind:
- It is prepared on a particular date which should be written on the top.
- In the first column, the name of the account is written.
- In the second column, Ledger Folio, i.e., the page number of the Ledger where the balance appears, is written.
- In the third column, the total of the debit side of the account concerned or the debit balance, if any, is entered.
- In the fourth column, the total of the credit side or the credit balance is written.
- The two columns are totalled at the end.
Consider the following ledger account:
Question 1:
XYZ Traders began its operations on August 1, 2024. The following transactions occurred during the first week of business. Prepare the Journal entries for each transaction and provide a narration for each entry.
- August 1, 2024: Rahul invested Rs. 800,000 in cash to start XYZ Traders.
- August 2, 2024: Purchased furniture worth Rs. 50,000 from M/s Furniture Mart on credit.
- August 3, 2024: Bought goods for cash Rs. 100,000.
- August 4, 2024: Sold goods on credit to Sunil Enterprises for Rs. 60,000.
- August 5, 2024: Paid Rs. 30,000 cash to M/s Furniture Mart as partial payment.
- August 6, 2024: Received Rs. 40,000 in cash from Sunil Enterprises.
- August 7, 2024: Rahul withdrew Rs. 5,000 for personal use.
- August 7, 2024: Paid office rent Rs. 10,000 in cash.
- August 7, 2024: Purchased a computer for office use for Rs. 40,000, paying Rs. 20,000 in cash and the rest on credit.
- August 7, 2024: Deposited Rs. 50,000 into the bank account for business purposes.
| Account Name | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Cash Account | 685,000 | |
| Capital Account | 800,000 | |
| Furniture Account | 50,000 | |
| Furniture Mart Account | 20,000 | |
| Purchases Account | 100,000 | |
| Sales Account | 60,000 | |
| Sunil Enterprises Account | 20,000 | |
| Drawings Account | 5,000 | |
| Rent Account | 10,000 | |
| Computer Account | 40,000 | |
| Bank Account | 50,000 | |
| Total | 940,000 | 940,000 |
Question 2: Comprehensive Transaction Recording
XYZ Limited conducted the following transactions during the month of July 2024. Prepare the necessary journal entries and provide narrations for each entry:
- July 1, 2024: The business owner, Mr. Sharma, invested Rs. 1,200,000 in cash.
- July 3, 2024: Purchased inventory worth Rs. 300,000 on credit from ABC Suppliers.
- July 5, 2024: Sold goods costing Rs. 50,000 to DEF Traders for Rs. 75,000 on credit.
- July 7, 2024: Paid salaries to employees amounting to Rs. 20,000 in cash.
- July 10, 2024: Received a bank loan of Rs. 500,000.
- July 12, 2024: Purchased office equipment for Rs. 150,000, paying Rs. 100,000 in cash and the balance on credit.
- July 15, 2024: Returned defective inventory worth Rs. 20,000 to ABC Suppliers.
- July 18, 2024: Received Rs. 40,000 from DEF Traders in partial settlement of their account.
- July 20, 2024: Paid Rs. 100,000 to ABC Suppliers, settling the remaining balance.
- July 25, 2024: Paid electricity bill of Rs. 5,000 and water bill of Rs. 2,000 in cash.
| Account Name | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Cash Account | 1,000,000 | |
| Capital Account | 1,200,000 | |
| ABC Suppliers Account | 175,000 | |
| Purchases Account | 280,000 | |
| Sales Account | 75,000 | |
| Rent Account | 15,000 | |
| Utilities Account | 7,000 | |
| Salaries Account | 30,000 | |
| Bonuses Account | 5,000 | |
| Office Equipment Account | 150,000 | |
| Bank Loan Account | 500,000 | |
| Purchase Returns Account | 20,000 | |
| Drawings Account | 20,000 | |
| Commission Income Account | 5,000 | |
| Total | 1,507,000 | 1,975,000 |
Question 3: Complex Transactions with Discounts
ABC Industries conducted the following transactions in August 2024. Prepare journal entries for each transaction, including compound entries where applicable:
- August 1, 2024: The owner, Ms. Verma, invested Rs. 500,000 in cash and Rs. 200,000 in machinery into the business.
- August 2, 2024: Purchased raw materials for Rs. 150,000 from XYZ Suppliers, availing a trade discount of 10%.
- August 3, 2024: Sold products worth Rs. 100,000 to PQR Ltd., offering a cash discount of 5% for payment within 10 days. PQR Ltd. paid on August 10.
- August 5, 2024: Received a cheque for Rs. 80,000 from RST Co. for an outstanding invoice, deposited on August 6.
- August 8, 2024: Paid rent of Rs. 15,000 and utilities of Rs. 5,000 via bank transfer.
- August 12, 2024: Returned defective raw materials worth Rs. 10,000 to XYZ Suppliers.
- August 15, 2024: Purchased office supplies for Rs. 10,000 in cash.
- August 18, 2024: Paid salaries of Rs. 30,000 and bonuses of Rs. 5,000 in cash.
- August 20, 2024: Ms. Verma withdrew Rs. 20,000 in cash for personal use.
- August 25, 2024: Received Rs. 5,000 as commission income credited directly to the bank account.
| Account Name | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Cash Account | 590,000 | |
| Capital Account | 500,000 | |
| Machinery Account | 200,000 | |
| XYZ Suppliers Account | 125,000 | |
| Purchases Account | 125,000 | |
| Sales Account | 95,000 | |
| RST Co. Account | 80,000 | |
| Rent Account | 15,000 | |
| Utilities Account | 5,000 | |
| Purchase Returns Account | 10,000 | |
| Office Supplies Account | 10,000 | |
| Salaries Account | 30,000 | |
| Bonuses Account | 5,000 | |
| Drawings Account | 20,000 | |
| Commission Income Account | 5,000 | |
| Total | 1,000,000 | 1,000,000 |