Unit 05 - Trial Balance

Financial and Management Accounting Unit 5
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
Manipal University Jaipur Page No.: 106

• 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
5.2 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.e., profit and loss
account, cash flow statement, and balance sheet.
5.3 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.
5.4 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.

Pro-forma of Trial Balance under Totals Method

TRIAL BALANCE As On _________
Debit Totals Rs. Credit Total Rs.
Total Total
In the balance method, the net balance of every ledger account is taken.
Pro-forma of Trial Balance under Balance Method

TRIAL BALANCE as on _________
Accounts Debit balances Credit balances
Rs. Rs.
Total
The balance method gives a gist of the account and hence the second
method is popular.
5.5 Tips for Preparing a Trial Balance

The following hints must be remembered for preparing a trial balance.
• Assets have debit balance
• Liabilities have credit balance
• Expenses and losses have debit balance
• Incomes and gains have credit balance
• Capital has credit balance
• Drawings have debit 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.
Amount Amount
Date Particulars Date Particulars
Rs. Rs.
1-4-04 To Balance b/d 50,000 6-4-04 By Cash 5,000
2-4-04 To Sales 45,000 10-4-04 By Kumar 29,000
16-4-04 To Mohan 35,000 14-4-04 By Purchases 50,000
26-4-04 To Sales 10,000 18-4-04 By Creditors 20,000
20-4-04 By Furniture 5,000
22-4-04 By Wages 500
By Printing 1,000
By Commision 2,000
30-4-04 By Electricity 500
By Telephone 1,000
By Salaries 4,000
By Balance 22,000
c/d
1,40,000 1,40,000
1-5-04 To Balance b/d 22,000
Building Account
Amount Amount
Rs. Rs.
1-4-04 To Balance b/d 2,00,000 30-4-04 By Balance c/d 2,00,000
1-5-04 To Balance b/d 2,00,000
Furniture Account
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1-4-04 To Balance b/d 10,000 30-4-04 By Balance c/d 15,000
20-4-04 To Cash 5,000
15,000 15,000
1-5-04 To Balance b/d 15,000

Bank Fixed Deposit Account

Amount Amount
Rs. Rs.
1-4-04 To Balance b/d 1,00,000 30-4-04 By Balance c/d 1,07,000
12-4-04 To Interest 7,000
1,07,000 1,07,000
1-5-04 To Balance b/d 1,07,000
Stock Account
Amount Amount
Rs. Rs.
1-4-04 To Balance b/d 25,000 30-4-04 By Balance c/d 25,000
1-5-04 To Balance b/d 25,000
Creditor’s Account
Amount Amount
Rs. Rs.
18-4-04 To Cash 20,000 1-4-04 By Balance b/d 35,000
30-4-04 To Balance c/d 15,000
35,000 35,000
1-5-04 By Balance b/d 15,000
Capital Account
Amount Amount
Rs. Rs.
30-4-04 To Balance c/d 3,50,000 1-4-04 By Balance b/d 3,50,000
35,000 3,50,000
1-5-04 By Balance b/d 3,50,000
Purchases Account
Amount Amount
Rs, Rs.
4-4-04 To Kumar 30,000 30-4-04 By Balance c/d 95,000
14-4-04 To Cash 50,000
To Sarin 15,000
95,000 95,000
1-5-04 To Balance b/d 95,000

Sales Account
Amount Amount
Rs. Rs.
30-4-04 To Balance c/d 95,000 2-4-04 By Cash 45,000
8-4-04 By Mohan 40,000
26-4-04 By Cash 10,000
95,000 95,000
1-5-04 By balance b/d 95,000
Kumar Account
Amount Amount
Rs. Rs.
10-4-04 To Cash 29,000 4-4-04 By Purchases 30,000
To Discount 1,000
30,000 30,000
Note: There is no balance and hence his account will not appear in trial balance
Repairs Account
Amount Amount
Rs. Rs.
6-4-04 To Cash 5,000 30-4-04 By Balance c/d 5,000
5,000 5,000
1-5-04 To Balance b/d 5,000
Mohan Account
Amount Amount
Rs. Rs.
8-4-04 To Sales 40,000 16-4-04 By Cash 35,000
30-4-04 By Balance c/d 5,000
40,000 40,000
Discount Received Account

Amount Amount
Rs. Rs.
30-4-04 To Balance c/d 1,000 10-4-04 By Kumar 1,000
1,000 1,000
1-5-04 By Balance b/d 1,000

Interest on Fixed Deposit Account

Amount Amount
Rs. Rs.
30-4-04 To Balance c/d 7,000 12-4-04 By Bank FD 7,000
7,000 7,000
1-5-04 By Balance b/d 7,000
Wages Account
Amount Amount
Rs. 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
Rs. Rs.
22-4-04 To Cash 1,000 30-4-04 By Balance c/d 1,000
1,000 1,000
Commission Account
Amount Amount
Rs. Rs.
22-4-04 To Cash 2,000 30-4-04 By balance c/d 2,000
2,000 2,000
1-5-04 To balance b/d 2,000
Electricity Account
Rs. 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
Amount Amount
Rs. Rs.
1,000 1,000
Salaries Account
Amount Amount
Rs. Rs.
4,000 4,000
Sarin’s Account
Amount Amount
Rs. Rs.
30-4-04 To balance c/d 15,000 28-4-04 By Purchases 15,000
15,000 15,000
1-5-04 By balance b/d 15,000
Solution:
TRIAL BALANCE AS ON 30TH APRIL, 2004
Debit balances Amount Credit balances Amount
Rs. Rs.
Cash 22,000 Creditors 15,000
Building 2,00,000 Capital 3,50,000
Furniture 15,000 Sales 95,000
Bank FD 1,07,000 Discount received 1,000
Stock 25,000 Interest on FD 7,000
Purchases 95,000 Sarin 15,000
Repairs 5,000
Mohan 5,000
Wages 500
Printing 1,000
Commission 2,000
Salaries 4,000
Telephone 1,000
Electricity 500
Total 4,83,000 Total 4,83,000
5.6 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
Illustration 2: On 31st December, 2004, the following were the assets and
liabilities of a firm:
(1) Cash at bank – Rs. 50000
(2) Furniture – Rs. 48000
(3) Plant and machinery – Rs.200000
(4) Debtors – Rs.100000
(5) Stock in trade – Rs. 20000
(6) Creditors – Rs. 50000
(7) Bank loan – Rs. 45000
On 1st January, 2005, the assets and liabilities have to be brought in. The
following entry is recorded in the journal proper.
Ledger Debit Credit

Date Particulars
Folio Rs. Rs.
1-1-05 Cash at Bank A/c Dr 50000
Furniture A/c Dr 48000
P and M A/c Dr 200000
Debtor’s A/c Dr 100000
Stock in trade A/c Dr 20000
To Creditors A/c 50000
To Bank Loan A/c 45000
To Capital A/c (Difference) 323000
(Being assets and liabilities of the
previous year brought in)
Similarly, a newly set up business may commence its activities with some
assets and liabilities. Then the assets are debited and liabilities are credited
and the difference is transferred to capital account.
Opening journal entries
In the case of running business, all the assets and liabilities of the previous
year should be brought down to the current year. Therefore, an entry is
drawn debiting all assets account individually and crediting liabilities account
individually and the difference being credited to capital account.
Closing entries
Closing entries are passed at the end of accounting period. All expenses
and income accounts are closed by transferring them to the respective

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:
Salaries paid during the year are closed by transferring to P & L

account
P & L account Dr
To Salaries’ account.
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.
5.7 Errors and Their Rectification

An error is an unintentionally committed mistake. If the trial balance does
not tally (i.e., 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 5.1 depicts the types
of errors.

Types of Errors
Errors disclosed by Errors not disclosed by

trial balance trial balance
Errors of commission Errors complete omission
Errors of partial omission Errors of principle
Compensatory errors
Figure 5.1: 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.
5.8 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.

Example: Cash received from Rama Rs. 1150 is posted to

Rama’s ledger account as Rs. 1500, while it is correctly
recorded in cash account.
RAMA’S ACCOUNT
By cash a/c
1500
Wrong amount
Rectification entry
Rama’s account Dr. Rs. 350
To suspense account Rs. 350
Being excess credit given to Rama’s account rectified
2. Posting to the wrong side of an account

This error is committed while posting entries from subsidiary books to
ledger.
Example: Sales made to Krishna Rs. 5000 is transferred to the

credit side of Krishna’s account in the ledger.
KRISHNA’S ACCOUNT
By sales a/c 5000
Rectification entry:
Krishna’s account Dr. Rs. 10000
To suspense account Rs. 10000
Being excess in Krishna’s account rectified

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.
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.
TRIAL BALANCE
PURCHASE BOOK
Debit Credit
Cash xxx
ABC ltd xxxx Sales xxxx
MNC ltd xxxx Purchase 5700
PQR ltd xxxx
______
Total 5800
WRONG
AMOUNT
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: 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
2000
Omitted
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.

5. Omitting an account altogether from being shown in the trial

balance
Example: Advertisement account, which shows a debit balance, is

completely omitted from trial balance.
ADVERTISEMENT ACCOUNT
To cash a/c xxxx By balance c/d xxxx
Total xxxx Total xxxx
To balance b/d xxxx
TRIAL BALANCE
Particulars Debit Credit
Advertisement
Omitted
Advertisement expense a/c Dr.
To suspense a/c
Being debit balance in advertisement account accounted.
6. Posting an amount to a correct account more than once

This results in an imbalance in the trial balance.
Example: Receipt from sundry debtors of Rs.50000 was

accounted twice in sundry debtors account.
SUNDRY DEBTORS A/C
By cash a/c 50000
By cash a/c 50000
ENTERED
TWICE
Suspense a/c Dr. Rs. 5000
To sundry debtors a/c Rs. 5000
Being excess debit in sundry debtors account rectified.

7. Posting an item to the same side of two different ledger accounts

If two accounts are debited or credited for the same transaction, this
type of error occurs.
Example: Furniture purchased should be debited to furniture account

only. If it is posted to furniture account and purchases account, then
the difference arises in the trial balance.
FURNITURE ACCOUNT
By cash a/c xxxxx
PURCHASE ACCOUNT
By cash a/c xxxxx
Omitted
Suspense a/c Dr. xxxxx
To purchase a/c xxxxx
Being wrong debit given to purchase account rectified.
Activity 1:
1. Telephone expenses of Rs. 2500 is entered in cash account but not
posted to the ledger. How do your rectify?
2. Interest paid on loan of Rs. 2116 is wrongly posted twice in the interest
account, first as Rs. 2611 and second as Rs. 2161. How do you rectify
this transaction?

Activity 1: Solution
1. 2.
Telephone Expense a/c Dr 2500 To rectify the first posting the entry
To Suspense a/c 2500 is:
(Being telephone expenses omitted in Suspense a/c Dr.495
ledger accounted) 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.2161
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.2656
To Interest paid a/c 2656
Being excess debit in interest paid a/c
(495 + 2161) rectified.
5.9 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 PURCHASE ACCOUNT
Date Suppl L Inv Rs. To
iers’ F No. Jairam xxx
name
Jairam
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.1730 may have been entered as
Rs.1370 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.360 (1730-1370) should be added to

purchases account and to the respective supplier’s account.
PURCHASE BOOK PURCHASE ACCOUNT
Date Suppl L Inv Rs. To
iers’ F No. xxx 1370
name
XXX 1370
Correct
Correct
amount is
amount is
Rs.1730
Rs.1730
The error can be detected only when the original invoice is

referred to after getting the complaint from the supplier.
Purchases a/c Dr. Rs. 360
To suppliers a/c Rs. 360
Being deficit amount added to rectify the account.

3. Error of principle – While drawing journal entries, often error of

principle is committed and this goes unnoticed because it does not affect
the total of trial balance.
Example:
Wages paid to workers
engaged in the construction of
building????
➢ Wages paid to workers engaged in the construction of building

should be debited to building account and not wages account.
➢ If the building account is debited, the value of the asset
appears in the balance sheet and the expenditure is actually
capitalised.
➢ In case the wages are treated as usual revenue expenditure,
they are deducted from profit.
➢ The error here is wages account is debited and not building
account.
Building a/c Dr.
To wages a/c
Being wrong debit given to wages account rectified.
Similarly, treating income as liabilities, providing insufficient provision for

bad and doubtful debts, inadequate depreciation against assets, etc.
come under errors of principle. They must be rectified by applying the
correct principles of accounting.

4. Compensating errors –- It is also called off-setting error. Compensating

error is one which is counter balanced by another error.
Example:
➢ Mr. X account was debited Rs. 100 as against Rs.1000 while the
account of Mrs. X account was debited Rs.1000 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 Mrs. X’s account

Dr Cr Dr Cr
To cash 100 To cash 1000
Instead of Rs.1000 Instead of Rs.100
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.
5.10 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

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.500 is credited to Ramanan’s accounts.
9. Wages paid Rs.500 is recorded as Rs.150000.
10. Wages of Rs.500 paid for installation of machinery is debited to Wages
a/c.
11. Furniture purchased for cash Rs.5000 is not recorded in the journal.
_______

Suggest the rectification entry in each case

12. Sales account is under cast by Rs. 45.
13. Returns inwards book is over cast by Rs. 9.
14. Salary paid to Gopal is debited to his personal account.
15. Discount received Rs.50 is transferred to the debit side of discount
account.
16. An invoice of purchase for Rs.760 is entered as Rs.670.
Illustration 3:
An accountant finds that the trial balance of his client did not tally and it
showed an excess credit of Rs. 69.74. He transferred it to a suspense
account and later discovered the following errors.
a) Rs. 44.37 paid to Anand has been credited to his account as Rs. 34.37.
b) A purchase of Rs. 145.50 has been posted as Rs. 154.50 to the
purchases account.
c) An expenditure of Rs. 158 on repairs has been debited to the buildings
account.
d) Rs. 80 was allowed by B as discount which has not been entered in the
books.
e) A sum of Rs. 125.05 realised on the sale of old furniture has been
posted to the sales account.
Give journal entries to rectify the errors and show the suspense account as
it would appear after adjustments.
Solution:
Date Particulars LF Debit Credit
(Rs.) (Rs.)
1 Anand’s account Dr 78.74
To suspense account 78.74
(Being wrong amount, wrongly
credited to Anand’s a/c rectified)
Suspense account Dr
2 To Purchases account 9.00
(Being over debit of purchase a/c 9.00
rectified)

3 Repairs account Dr 158.00

To Buildings account 158.00
(Being wrong debit given to building
account rectified)
4 B’s account Dr 80
To Discount received a/c 80
(Being discount received from B,
omitted earlier, brought to account)
5 Sales account Dr 125.05
To old furniture account 125.05
(Being sale of old furniture wrongly
transferred to sales account
rectified)
Suspense Account
Amount Amount
Rs. Rs.
To Difference in trial 69.74 By Anand’s a/c 78.74
balance
To Purchases a/c 9.00
78.74 78.74
Note:
1. The entry should have been:
Anand’s a/c Dr. 44.37

To Cash a/c Rs.44.37
Being cash paid to Anand accounted
When amount is paid to Anand, his account should have been debited.
On the other hand, his account was credited for a wrong amount of
Rs. 34.37. Hence there has been excess credit to the extent of
Rs. 78.74 (44.37 + 34.37). To rectify this double error we need to debit
Anand’s account to the extent of Rs.78.74 and credit suspense account.

2. Purchases account was over debited by Rs. 9 (Rs. 154.50 –

Rs. 145.50). To rectify this error we need to credit purchase account to
the extent of Rs.9 and debit suspense account.
3. Repairs spent on building are by mistake debited to building account.
This is error of principle. Repairs account is debited and buildings
account is credited to rectify the error.
4. Discount received from B has not been taken to records. This is an error
of omission. Therefore, it is now brought to accounts. This has not
affected the trial balance.
5. When old furniture is sold, the furniture account should have been
credited. On the other hand, sales account was credited against the
principle of accounting. To rectify the error, sales account is debited and
old furniture account is credited.
Illustration 4:
The trial balance of Evergreen Co Ltd., as taken on 31st December, 2002 did
not tally and the difference was carried to suspense account. The following
errors were detected subsequently.
a) Sales book total for November was under cast by Rs. 1200.
b) Purchase of new equipment costing Rs. 9475 has been posted to
Purchases a/c.
c) Discount received Rs.1250 and discount allowed Rs. 850 in September
2002 have been posted to wrong sides of discount account.
d) A cheque received from Mr. Longford for Rs. 1500 for goods sold to him
on credit earlier, though entered correctly in the cash book has been
posted in his account as Rs. 1050.
e) Stocks worth Rs. 255 taken for use by Mr Dayananda, the Managing
Director, have been entered in sales day book.
f) While carrying forward, the total in Returns Inwards Book has been
taken as Rs. 674 instead of Rs. 647.
g) An amount paid to cashier, Mr. Ramachandra, Rs. 775 as salary for the
month of November has been debited to his personal account as
Rs. 757.
Pass journal entries and draw up the suspense account.

Solution:
Journal Proper of Evergreen Co Ltd.
Date Particulars LF Debit Credit
Rs. Rs.
31-12-2002 Suspense account Dr 1,200
To Sales account 1,200
(Being under casting of sales book
rectified)
31-12-2002 New Equipment account Dr 9,475
To Purchases account 9,475
(Being wrong debit given to
purchases account rectified)
31-12-2002 Discount allowed account Dr 1,700
Suspense account Dr 800
To Discount received account 2,500
(Being discount received and
discount allowed posted to wrong
sides of discount account rectified)
31-12-2002 Suspense account Dr 450
To Longford’s account 450
(Being short credit given to Longford
rectified)
31-12-2002 Sales account Dr 255
To Suspense account 255
(Being stock used for personal
purpose wrongly credited to sales
account rectified)
31-12-2002 Suspense account Dr 27
To Returns Inwards account 27
(Being excess debit given to returns
inwards account to the extent of
Rs27, now rectified)
31-12-2002 Salary account Dr 775
To Ramachandra‘s account 757
To Suspense account 18
(Being the wrong debit of salary to
the personal account of
Ramachandra now rectified)

Note:
In illustration 4 sub question (c): Discount received Rs.1250 is posted on the
wrong side of discount account. Discount received (income) should be
credited and discount allowed (expenses) should be debited. Instead of
crediting the discount received account, it has been wrongly debited. To
rectify this error, we need to credit discount received account to the extent of
Rs.2500 (Rs.1250+ Rs.1250).
In the same context, discount allowed (which is an expense) should be
debited, instead it is credited. To rectify the error, we need to debit discount
allowed to the extent of Rs.1700 (850 +850). The difference between
discount received and discount allowed account is transferred to suspense
account.
Dr SUSPENSE ACCOUNT Cr
Amount Amount
Particulars Particulars
Rs. Rs.
To Sales account 1,200 By Sales 255
To Discount received a/c 800 By Salary 18
To Longford 450 By Balance c/d 2,204
To Returns Inwards a/c 27
Total 2,477 Total 2,477
5.11 Summary
Let us recapitulate the important concepts discussed in this unit:
• Trial balance 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 to
verify whether the entries in books of accounts are authentically correct.
• As the primary and secondary books are maintained on the double entry
concept, the balances in the trial balance must tally.
• Totals method and balance method are the two techniques of preparing
trial balance. In the first method, the totals of debits and credits of every
account are shown in the trial balance.
• GAAP supports financial accounting to use accrual basis of accounting.
Under accrual basis of accounting, revenues are recognised when
earned without regard to the timings of cash receipts.

• Expenses are recognised when incurred without regard to the timings of

cash disbursement
5.12 Glossary
Accounting error: A mistake in the books of accounts.
Compensatory errors: Two errors which offset the effect of each other.
Error of commission: Errors like wrong totalling, wrong balancing, posting
of wrong amount, and posting on wrong side.
Error of principle: Not following an accounting principle.
Rectification: The process of correcting the accounting error.
Trial balance: A list of all ledger account balances as on a given date.
5.13 Terminal Questions

1. Prepare a trial balance from the following
Amount Amount
Particulars Particulars
Rs. Rs.
Drawings 10,000 Interest on investments 200
Stock on 1—1-92 46,000 Sundry Debtors 36000
Purchases 1,50,200 Sundry Creditors 29,000
Purchases return 600 Wages 25,000
Cash in hand 3400 Salaries 14,000
Bank Balance 22660 Capital 1,14,000
Freehold expenses 38600 Income tax 1600
Trade expenses 840 Discount allowed 6300
Printing Stationery and 1640 Discount received 4600
advertisement
Professional charges 280 Sales 2,08,950
Commission received 3300 Sales return 550
Investments as on 1st 4000 Bills receivable 3200
Jan @ 10%
Office furniture 3050 Bills payable 10000
Rent rates and 4000 Provision for bad debts 670
insurance
Total 371320 Total 371320

2. The following trial balance was extracted from the books of Chetan, a
small businessman. Do you think it is correct? If not, rewrite it in the
correct form.
Debits Rs. Credits Rs.
Stock 8250 Capital 10000
Purchases 12750 Sales 15900
Returns outwards 700 Returns inwards 1590
Discount received 800 Discount allowed 800
Wages and salaries 2500 Scooty 1750
Rent and rates 1850 Carriage charges 700
Sundry debtors 7600 Sundry creditors 7250
Bank Overdraft 2450 Bills payable 690
3. Rectify the following errors:
a. Purchases from Padma Rs.191 posted to her account as Rs.119
b. Purchases from Lata credited to her account as Rs.117
c. Salaries Rs.400 posted to salaries account as Rs.300
d. A cash sales of Rs.430 to Rita posted as Rs.43
5.15 Answers
Self Assessment Questions

1. True
2. False
3. True
4. True
5. True
6. Suspense a/c
7. Journal proper
8. Error of commission
9. Error of commission
10. Error of principle
11. Error of complete omission
12. Suspense a/c 45
To sales a/c 45
13. Suspense a/c 9
Sales returns a/c 9

14. Salaries a/c

To Gopal a/c
15. Suspense a/c 100
Discount a/c 100
16. Purchases a/c 90
To Suspense a/c 90
Terminal Questions
1. Trial balance total - 371320
2. Trial balance total - 37790
Suspense a/c Dr. 72 Salary a/c Dr 100
To Padma’s a/c 72 To Suspense a/c 100
Being wrong posting in Padma’s a/c Being salary amount debited by
rectified. additional amount.
Suspense a/c Dr. 54 Suspense a/c Dr 387
To Lata’s a/c 54 To Sales a/c 387
Being wrong posting in Lata’s a/c Being entry in sales account rectified.
rectified.
5.14 Case Study

Trail Balance
The trial balance of RN is given below.
Trial Balance, 30 April, 2011
Debit balances Credit balances
Account
Rs. Rs.
Equipment 16,800
Supplies 1,740
Debtors 7,100
Cash 13,400
Creditors
Share Capital 1,900
Revenue from Services 15,000
Salaries Expense 120 16,020
Electricity Expense 270
Telephone Expense 900
Rent Expense 250
Total 40,580 32,920

Mr. RN was displeased with the difference in the trial balance and asked his
accountant to make a through check of the books.
The account’s thorough check revealed the following errors:
(a) A purchase of supplies of Rs.180 was posted as credit to Supplies.
(b) On computing the balance of Debtors, a debit of Rs.1,700 was
omitted.
(c) The totalling of credits to Debtors was understated by Rs.900.
(d) A cash payment of Rs.2,700 was recorded as a debit of Rs.7,200 to
cash.
(e) The balance of Salaries Expense was Rs.1,200.
Mr. RN has requested you to suggest corrections and prepare a corrected

trial balance.
• Source : Narayanaswamy, R., Financial Accounting, A Managerial
Perspective 3/e, PHI
Answer to Case Study

The required corrections are as follows:
(a) Supplies: This error had the effect of reducing the balance in the
account by twice that amount. So add Rs.360.
(b) Debtors: Add the omitted debit of Rs.1,700 to the balance.
(c) Debtors: Deduct short credit of Rs.900.
(d) Cash: Deduct wrong debit of Rs.7,200 and correct credit of Rs.2,700.
(e) Salaries Expense: Copy the correct balance of Rs.1,200 to the trial
balance.
The corrected trial balance.

Trial Balance, 30th April, 2011
Account Debit balances Credit
Rs. balances
Rs.
Equipment 16,800
Supplies (Rs.1,740 + Rs.360) 2,100
Debtors (Rs.7,100 + Rs.1,700 – Rs.900) 7,900
Cash (Rs.13,400 – Rs.2,700 – Rs.7,200) 3,500
Creditors 1,900

Share Capital 15,000

Revenue from Services 16,020
Salaries Expense 120
Electricity Expense 270
Telephone Expense 900
Rent Expense 250
Total 32,920 32,920
References:
• Narayanaswamy, R., Financial Accounting, A Managerial Perspective

3/e, PHI
• Jain, S. P. & Narang K. L., Financial Accounting, Kalyani Publishers
E-Reference:
• www.phindia.com/narayanaswamy – retreived on December 22nd 2012

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Financial and Management Accounting Unit 5

Unit 5 Trial Balance

Manipal University Jaipur Page No.: 106

• describe the methods of preparing a trial balance

5.2 Meaning of Trial Balance

5.3 Objectives of Preparing a Trial Balance

5.4 Methods of Preparing a Trial Balance

Manipal University Jaipur Page No.: 107

Pro-forma of Trial Balance under Totals Method

Pro-forma of Trial Balance under Balance Method

5.5 Tips for Preparing a Trial Balance

Manipal University Jaipur Page No.: 108

Manipal University Jaipur Page No.: 109

Bank Fixed Deposit Account

Manipal University Jaipur Page No.: 110

Discount Received Account

Manipal University Jaipur Page No.: 111

Interest on Fixed Deposit Account

5.6 Adjusting Entries

Ledger Debit Credit

Manipal University Jaipur Page No.: 114

Salaries paid during the year are closed by transferring to P & L

After the closure of accounting year, there might be a few more

5.7 Errors and Their Rectification

Manipal University Jaipur Page No.: 115

Errors disclosed by Errors not disclosed by

Figure 5.1: Types of Errors

5.8 Errors Disclosed by Trial Balance

Manipal University Jaipur Page No.: 116

Example: Cash received from Rama Rs. 1150 is posted to

2. Posting to the wrong side of an account

Example: Sales made to Krishna Rs. 5000 is transferred to the

Manipal University Jaipur Page No.: 117

Example: Purchases book total is Rs. 5800. If it is totalled as

4. Failing to post an entry from the subsidiary book to the ledger

Manipal University Jaipur Page No.: 118

5. Omitting an account altogether from being shown in the trial

Example: Advertisement account, which shows a debit balance, is

6. Posting an amount to a correct account more than once

Example: Receipt from sundry debtors of Rs.50000 was

Manipal University Jaipur Page No.: 119

7. Posting an item to the same side of two different ledger accounts

Example: Furniture purchased should be debited to furniture account

Manipal University Jaipur Page No.: 120

5.9 Errors not Disclosed by Trial Balance

Example: If purchase of goods from Jairam on credit is not

Manipal University Jaipur Page No.: 121

The difference of Rs.360 (1730-1370) should be added to

The error can be detected only when the original invoice is

Manipal University Jaipur Page No.: 122

3. Error of principle – While drawing journal entries, often error of

➢ Wages paid to workers engaged in the construction of building

Similarly, treating income as liabilities, providing insufficient provision for

Manipal University Jaipur Page No.: 123

4. Compensating errors –- It is also called off-setting error. Compensating

Mr. X’s account Mrs. X’s account

Instead of Rs.1000 Instead of Rs.100

5.10 Steps to Locate the Errors

Manipal University Jaipur Page No.: 124

When errors are located, they should be rectified by passing rectification