❖ Trial Balance and Errors

If the Trial Balance agrees, then it should not be taken for granted that there is

absolutely no errors. In fact, there do exist some errors that are not revealed by a

Trial Balance like, wrong recording, transaction omitted to be recorded in the books

of journal and complete omission of posting of a transaction from journal to ledger.

However, errors like, incomplete posting of journal into ledger, posting of wrong

amount in an account from journal to ledger, wrong balancing of ledgers etc. can be

detected with help of a Trial Balance, as in the presence of these errors the Trial

Balance will not agree.

❖ Objectives of Rectifying Errors

• Keeping the books of accounts free from errors

• Ascertaining true profit and loss

• Ascertaining true financial position of the business

• Making authenticity and reliability of the accounting information

❖ Types of Errors
❖ Principle Errors
These errors occur on account of violation of accounting principles. These happen due
to ignorance or lack of proper knowledge of accounting principles. These are not
disclosed by the Trial Balance. The following circumstances give rise to such errors.
• When revenue expenditures are considered as capital expenditures or vice versa.
• When revenue receipts are considered as capital receipts or vice versa
• When household expenses are considered as business expenses or vice versa
• When expenses paid for the subsequent accounting period or for the preceding
accounting period are considered as an expense of the current period, etc.
Examples:
• Purchase of machinery was recorded as purchases of goods.
• Purchases of house hold items were considered business expenses.

❖ Errors of Omission
These errors are committed when:
• a transaction is completely omitted to be recorded in the books of original
entry (i.e. Journal Book) and/or
• a transaction is recorded in the books of original entry but omitted to be
posted in its respective accounts.
Examples:
• Sold goods for Rs 2,000 to Prakash were not recorded in the Sales Book.
• Rs 500 paid as salary was not recorded anywhere.
• Cash Rs 250 was deposited in the bank but omitted to be posted.

❖ Errors of Partial Omission

These errors are committed when: a transaction is partially posted and/or
• total of subsidiary books or balances of accounts are omitted to be
forwarded from one page/place to the other page/place.

Examples
Sold goods for Rs 5,000 to Anshu were only posted in the Sales Account but omitted
to be posted in Anshu’s account.
 • Total of the Purchases Book is Rs 550 in page no. 12 but omitted to be
forwarded to page no. 13.
• Balance of Depreciation Account of Rs 1,500 at the end of May omitted to be
forwarded to the next month.

❖ Errors of Commission

These are manual errors unconsciously committed by the clerks and the accountants.
These are committed while:
• journalising with wrong amount
• posting with wrong amount but in correct account posting in wrong account
• totaling (wrong casting) of Subsidiary books
• forwarding wrong total of Subsidiary books from one page to another
balancing (errors in balancing) of the ledgers

Errors of Trial Balance

Errors Examples
Commission

Journalising with When the transaction is No effect Sold goods of Rs 2,000 on

wrong amount recorded with the (same)
cash but were wrongly
wrong amount both in the
debit and credit side in the recorded in the Sales
Journal Book Book as Rs 200

When the transaction is Effects Sold goods of Rs 2,000 for

recorded with different
cash were recorded in the
wrong amounts both in the
debit and credit side in the Cash Account as Rs
Journal Book 20,000 and in the Sales
Account as Rs 200
 When the transaction is Effects Sold goods of Rs 2,000 on
recorded with wrong cash were recorded in the
amounts either in the debit Sales Account with the
or in the credit side in the correct amount but in the
Journal Book Cash Account as Rs 200

Posting in wrong When posting from No Effect Paid commission of Rs 500

account
Journal is done in the wrong for purchases of goods
account but in the right
were wrongly debited to
column (debit or credit)
the Purchases
Account instead of
Commission Account.

When posting from Effects Paid commission of Rs 500

on Purchases was wrongly
Journal is done in the right
credited to the Commission
account but in the wrong
Account instead of debiting.
column (debit or credit)

When posting from May or May The total of Sales Book

Subsidiary Book is done in
the wrong account Not Effect Rs 12,000 was posted to
Purchases Account instead
of Sales Account

Posting of wrong When posting from May or May Sale of goods to Rakesh Rs
amount 500 were correctly posted
Journal is done in the correct Not Effect
in the Sales Account but
account but with the wrong
posted in the Rakesh
amount
Account with wrong
amount of Rs 50
 Error in totaling When the total of the Effects Sales Book undercast by
(casting of Subsidiary Books (Sales Book, Rs 200
Purchases Book, etc) are
Subsidiary Books)
wrong, i.e. wrong casting

Error in forwarding When the wrong total of Effects The total of the Sales Book
Subsidiary Book is forwarded Rs 2,020 on page no. 11 was
from one page to another. In wrongly forwarded to page
other words, when wrong no. 12 as Rs 2200
balance is carried forwarded.

Errors while While balancing the accounts Effects Machinery Account shows
balancing the balance of Rs 5,000 instead
ledgers of Rs 5,500

❖ Compensating Errors
When effects of one error are cancelled by the effects of another error of an equal
amount, then compensating errors are committed. For example, Mr. A’s Account
was credited by Rs 2,000 instead of 200 and Mr. B’s Account was credited by Rs 200
instead of 2,000. In this case, the error in Mr. A’s Account will be compensated by
the error in Mr. B’s Account.

❖ Detection and Rectification of Errors

The different stages in which errors can be detected and rectified are:
• Before preparation of Trial Balance
• After preparation of Trial Balance but before Financial Statements are prepared
• After preparation of Financial Statements
❖ Classification of Errors

❖ Rectification of Errors Before Preparation of Trial Balance

• One Sided Errors

These errors affect only one account. These errors can be rectified either by
passing necessary journal entries or by making necessary adjustments in the
accounts by giving explanatory notes.
• Two Sided Errors
These errors affect more than one account simultaneously. These errors are

generally rectified by passing necessary Journal entries, as it is easier than

rectifying by giving explanatory notes.

❖ Rectification of Errors After Preparation of The Trial Balance but Before

Preparation of Financial Statements

• One Sided Errors

If Trial Balance does not agree, then the difference between the debit and credit
side is shown by opening Suspense Account.
Suspense Account is shown unless the errors are rectified.
• Two Sided Errors
These errors are rectified by passing necessary rectifying Journal entries without
opening Suspense Account

❖ Suspense Account

When the Trial Balance does not agree, i.e., when the total of the debit column does

not match with that of the credit column, then this difference is transferred to a
 temporary account in order to avoid delay in preparation of the Financial Statements.

This temporary account is termed as Suspense Account.

• If the debit column falls short of the credit column, then the Suspense Account is
debited.
• If the credit column falls short of the debit column then the Suspense Account is
credited.

❖ Rectification of Errors After Preparation of Financial Statements

In this case, the Suspense Account is transferred to the next accounting period.
When these errors are rectified (in the next accounting period), the effect of
rectification is shown by debiting or crediting Profit and Losses Adjustment Account.

❖ Locating Errors in the Trial Balance

In case of one sided errors, when the Trial Balance does not agree, then following
flow chart helps in locating the errors.