A Trial Balance is prepared to check the arithmetical accuracy of ledger accounts. However, even if the trial balance agrees, some errors may still exist. Therefore, it is important to detect and rectify errors to ensure the correctness of accounting records. Errors are mistakes committed while recording, posting, totalling, or balancing accounting transactions. These errors may affect the agreement of the trial balance or may not affect it at all.
There can be two ways in which the effect of errors can be distinguished:
A. Errors Affecting the Trial Balance
- Errors of Posting – Posting an amount incorrectly to the ledger (wrong amount or wrong side).
- Errors in Totalling – Mistakes in adding ledger accounts.
- Errors in Balancing – Incorrect calculation of ledger balances.
- Omission of Balance – Failure to record an account balance in the trial balance.
- Wrong Amount in Trial Balance – Writing incorrect figures in the trial balance.
B. Errors Not Affecting the Trial Balance
- Errors of Omission – A transaction completely omitted from the books.
- Errors of Commission – Posting to the wrong account of the same class.
- Errors of Principle – Violation of accounting principles (e.g., capital expenditure treated as revenue expenditure).
- Compensating Errors – Two or more errors cancel each other’s effect.
- Errors of Duplication – Recording the same transaction twice.
Detection of Errors
The debit and credit sides of the trial balances should match. But it is not always mandatory that they would tally. There could be some errors in the records, which might lead to some disparities in the total. These errors can happen unintentionally anytime while preparing Journals, Ledger Accounts, or Statements of Trial Balance. To allocate the errors and mistakes, the following steps have to be undertaken:
Step 1: Always, firstly, revise the total on both sides of the debit and credit of the Trial Balance.
Step 2: If after rechecking, the balances do not match, then the amount of difference is determined and checked if any transaction of the same amount is left unposted in any book of accounts.
Step 3: Reduce the amount of difference to half to check if any transaction of the halved figure is recorded on the wrong side of an account which might have increased the debit or credit side making the difference appear double.
Step 4: Then the amount of difference is to be checked if it gets completely divided by 9. If it can be divided completely, then it is the problem of interchange of the figures, i.e., ₹96 interchanged as ₹69, the difference of ₹27 is divisible by 9. Also, there could be a case where mistakenly 0 has been added to the original figure like ₹12 has been posted as ₹120, and the difference of ₹108 is again divisible by 9.
Step 5: Sometimes, there is a mistake in totalling and balancing books of accounts. When the amount of difference is in an estimated figure of ₹1, ₹10, ₹100, etc., instead of a specific figure like ₹46, ₹93, etc., then there is a strong chance that the total of both sides of the trial balance might have been summed up wrong or inaccurate amount is being carried forwarded.
Step 6: It is also important to check that the balances from all the ledger accounts, and subsidiary books are noted down to the correct side and with the correct amount. Also, cash and bank balances from the cash book are again recorded correctly. Because there is a higher chance that if the amount of difference is huge, then surely the balance out of any ledger account has been missed to record in the trial balance.
Step 7: Also, all the closing balances from the previous year's financial statements are carried forward and posted in an accurate way. To check this, a comparison of the same heads from the previous year and the current year's financial statements should be made.
Step 8: Also, if the amount is not written clearly, then again it is needed to be rechecked.
Step 9: Despite taking every conscious step if there still exists a difference in the Trial Balance, then each and every posting should be checked thoroughly. And while rechecking, a tick mark should be made in front of every transaction.
Rectification of Errors
After the errors are detected, then it is necessary to rectify these errors. There is no benefit in the detection of errors if these are not rectified. This can be categorized into two classifications, and these are as follows:
1. Rectification of Errors with no effect on Trial Balance: These are usually called two-sided errors, i.e., two or more accounts are affected concurrently. This problem occurs when there is a wrong debit or credit entry. In the case of rectifying this type of error, it is important to undo the wrong effect of these kinds of debit & credit entries by reversing it and making a correct entry for that debit or credit. Likewise, if the account shows extra credit or less debit, then the amount should be debited from the account. And in the state of excess debit and short of credit, the amount should be credited to the concerned account.
2. Rectification of Errors affecting Trial Balance: These are usually known as one-sided errors, i.e., only one account is affected at a time. In case of rectifying this type of error, it is possible to just write down an explanatory note under the affected account or rectification can be made by passing a journal entry using a 'Suspense account', which is a temporary account formed accordingly. It is better to allocate the mistake before it is posted to the ledger account because here simply it can be rectified by just crossing the old or wrong amount and overwriting the correct amount. But not always, it can be predicted before posting, and rectification has to take place in the ledger account by putting an explanatory note or making a suspense account.
Rectification of Errors in the next Accounting Year
Rectification of Errors is made through P & L Adjustment A/c in the next accounting year. For this purpose, exclusively an account called 'P & L Adjustment A/c' is created, and the same is credited or debited by rectifying the errors from the previous year. So, the account is a clear indication of the net effect of rectification of every error from the last year and is transmitted to the Capital account routed through the P & L Adjustment account.
Illustration:
It was found that the trial balance of M/s Keshav Chand did not tally, and the difference was posted to the Suspense account. Prepare a suspense account and make journal entries for rectifying the following errors to calculate the difference:
1. The total of Purchase Book ₹20,000 was missed to record.
2. Depreciation of ₹1,000 was written off on machinery but was not posted to the machinery account.
3. An amount of ₹5,000 while installing a plant and machinery was mistakenly posted to the Repairs and Maintenance A/c.
4. Goods amounting to ₹30,000 was returned to Shyam and were recorded in Sales Book.
5. Salary paid to Keshav was debited to his personal account amounting ₹8,000.
Solution:
