The trial balance is quite simple to understand and quite simple to do. How if I find error during the construction? What should I do? Easy, do not be overwhelmed. I am going to take you through in step-by-step way, simple and easy explanations to make sure you can follow.
Okay, “Trial Balance” is just a listing of all the ledger balances at a particular moment in time. You list the balances in two columns one for the debit balances and one for the credit balances. If all the ledger divisions have been correctly posted your two columns will balance. Remember, for every transaction there have been two postings, a debit and a credit, so the sum of all the debits should equal the sum of all the credits. See example opposite.
The trial balance is:
- a way of checking the accuracy of all previous postings
- a source, in a useful summary form, for putting together the firm’s final accounts later on.
Note: there will be pence as well as pounds in a real life trial balance, but we have omitted them to keep things simple.
How To Extract A Trial Balance And Fix The Errors?
What you need:
- the ledger (including of course the cash book and petty cash book, which are both part of the ledger).
- a sheet of A4 paper.
Preparation: Make sure that all the folio columns have been entered in all the ledger accounts. Enter them now if necessary.
Extracting a trial balance and fixing errors step-by-step:
- Head your blank sheet ‘Trial balance as at [date]’. Rule two cash columns down the right hand side. Head them, ‘Debit’ and ‘Credit’.
- List the balances of every single ledger account, including the cash book and petty cash book. Put each one in the correct column of your trial balance (debit, or credit).
- Total up the two columns. If they balance, the job is done! If not, continue the next steps.
- Look for an error of complete omission of an account balance in the trial balance, or of one side of a posting in the ledger. You should spot this if you look for a figure equal to the error.
- If this fails, look for an error due to something being entered on the wrong side of the trial balance, or to both sides of a transaction being posted to the same side in the ledger. Divide the discrepancy in your trial balance by two, and look for a figure which matches this.
- If this fails, look for an error of transposition. Is the discrepancy divisible by nine? If so, there could well be such an error. If these methods all fail, the error could be in the totalling up, or in under- or overstating one side of a transaction, or a mixture of errors.
- Check through the ledger again to look for any folio column omissions.
- Check off each ledger balance against the trial balance. Have you recorded it on the correct side? Tick each in pencil as you go. If this does not solve the problem, proceed to step 9.
- Re-check the addition of all your ledger columns, and balance each account. If this still doesn’t solve the problem proceed to step 10.
- Check that the values in the posting of both sides of each transaction are equal. Start at the first page of the ledger and work through to the end. Tick each in pencil as you go.
If you have carried out all the steps accurately, the trial balance will now balance!.
Note: a small error need not hold up the preparation of final accounts; you can post the error to a ‘Suspense Account‘ to save time. When eventually the error is tracked down a “Statement Of Amended Profit Or Loss” can be drawn up.
The Four Column Trial Balance
A variation of the trial balance described above is the four column version. This is simply one with two debit columns and two credit columns. In fact the page is most usefully split down the middle so that each side can have its own debit and credit columns. On one side you enter all the balances relating to the revenue accounts. On the other side you enter those which relate to the balance sheet. On each side you total up the debit and credit columns separately to give either a debit or credit balance. If things are right the debit balance on one side will equal the credit balance on the other.
The Trial Balance Errors
In general, there are eleven types of error, which we can be summarized as follows:
- Errors of omission
- Errors of commission
- Compensating errors
- Errors of principle
- Errors of original entry
- Errors of reversal
- Errors of posting to the wrong side of ledger
- Errors of omitting one side of dual posting
- Errors of over/understating one side
- Errors of summation (‘casting errors‘)
- Errors of transposition
An error of commission, original entry or reversal will become apparent when a customer or supplier, whose account has been wrongly affected, informs you. He/she will certainly be quick to let you know if the error is to his/her disadvantage.
Errors Revealed And Errors Not Revealed By Trial Balance
The trial balance will immediately show that there is an error if it does not balance. However, it will not guarantee that the posting is error free if it does. In other words, things cannot be right if it does not balance, but can still be wrong if it does!
Furthermore, a failure to balance does not tell us where in the posting the error or errors exist. So while the trial balance performs something of an error-checking role, it is not a foolproof one.
Errors not revealed by a trial balance:
- Errors of complete omission, where neither debit nor credit has been entered.
- Compensating errors, where errors of equal value cancel each other out.
- Errors of commission posting to the wrong accounts, though to the correct sides of the correct ledger division.
- Errors of reverse posting: the debit entry of a transaction has been wrongly posted to the credit side, and vice versa.
- Errors of principle, for example posting of an asset to an expenses account.
Errors which will be revealed by a trial balance:
- Errors arising from both parts of the double entry (debit/credit) being posted to the same side (e.g. debit).
- Errors of partial omission, for example, where only one side of a transaction was posted, such as the credit side but not the debit side, or vice versa.
- Errors in adding up.
- Errors of transposition, where digits have been accidentally reversed, for example 54 has been written as 45. See page 149 for how to identify this error.
- Errors due to under- or overstating one side of the transaction.
- Errors of original entry, for example when making a mistake while entering a sales invoice into the sales day book.
In General, the right way to correct errors: no figure should ever be crossed out anywhere in the accounts. If allowed it could hide embezzlement. Of course, genuine mistakes are made, but there is a special way of putting them right. If an error is found it must be recorded in the journal, together with whatever additions or subtractions are needed to the accounts to put matters right.
Looking And Correcting For Errors In The Trial Balance Step-By-Step
- If the trial balance fails, look for a figure equal to the error amongst all the balances. If such a figure appears once only, its dual posting may have been omitted from the trial balance (though it may also be included in a larger posting), or that figure may have been missed out when summing the column.
- Next, divide the discrepancy by 2. Look for a figure equal to the quotient of the calculation in the trial balance. If the error is due to something being posted on the wrong side, this will show it up.
- Check whether the discrepancy is divisible by 9. If it is, it may be due to an error of transposition.
- Check your addition of the columns.
- Check that each of the balances in turn have been correctly copied from the ledger accounts.
- Check the balances of the ledger accounts.
Treatment Of Minor Errors
If an error reflected in the trial balance is small (e.g. £30) and it is hard to trace, it is permissible to add it to current liabilities or current assets under the heading suspense account just so that compilation of final accounts can go ahead. But you should never do this when the error is large. When you find the error, correct it in the journal as described (see example on opposite page).
Of course, the true profit or loss figure may be distorted as a result of this error. That is why it is only permissible to handle small errors in this way. When the error is later discovered and corrected, a statement of corrected net profit can be written up to supplement the year’s final accounts.