TRIAL BALANCE & RECTIFICATION OF ERRORS

TRIAL BALANCE & RECTIFICATION OF ERRORS

STRUCTURE

7.1 Introduction

7.2 Meaning & Definition

7.3 Objectives of Preparing Trial Balance

7.4 Limitations of Trial Balance

7.5 Methods of Preparing Trial Balance

7.1 INRODUCTION

According to the dual aspect concept, the total of debit balance must be equal to the credit balance. It is a must that the correctness of posting to the ledger accounts and their balances be verified. This is done by preparing a trail balance.

7.2 MEANING AND DEFINITION

Trial balance is a statement prepared with the balances or total of debits and credits of all the accounts in the ledger to test the arithmetical accuracy of the ledger accounts. If the total of the debit and credit amount columns of the trail balance are equal, it is assumed that the posting to the ledger in terms of debit and credit amounts is accurate.

“Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books” – J.R. Batliboi.

7.3. OBJECTIVES

The objectives of preparing a trial balance are:

i. To check the arithmetical accuracy of books of accounts.

ii. To locate the errors.

iii. Helpful in preparing final accounts.

7.4. LIMITATIONS

The following are the important limitations of trail balances:

(i) The trail balance can be prepared only in those concerns where double entry system of book- keeping is adopted. This system is too costly.

(ii) A trail balance is not a conclusive proof of the arithmetical accuracy of the books of account. It the trail balance agrees, it does not mean that now there are absolutely no errors in books. On the other hand, some errors are not disclosed by the trail balance.

(iii) It the trail balance is wrong, the subsequent preparation of Trading, P&L Account and Balance Sheet will not reflect the true picture of the concern.

7.5 METHODS

A trial balance can be prepared in the following methods.

i. The Total Method: In this method, the debit and credit totals of each account are shown in the two amount columns. (one for the debit total and the other for the credit total).

ii. The Balance Method: In this method, only the balances of an account either debit or credit, as the case may be, are recorded against their respective accounts.

The balance method is more widely used, as it supplies ready figures for preparing the final accounts.

A specimen of the Trial Balance is given as follows:

Trial Balance of ABC Ltd.

as on ..................

S. no.	Name of Account	L.F.	Debit (Rs.)	Credit (Rs.)

Note: Accounts of all assets, expenses, losses and drawings are debit balances. Accounts of incomes, gains, liabilities and capital are credit balances.

Illustration 7.1: The following Trial Balance has been prepared wrongly. You are asked to prepare the Trial Balance correctly.

Name of Accounts	Debit Balance (Rs.)	Credit Balance (Rs.)
Cash in hand		7,000
Purchases returns	8,000
Wages	8,000
Establishment expenses	12,000
Sales returns		7,000
Capital	22,000
Carriage outwards		2,000
Discount Received	1200
Commission Earned	800
Machinery		20,000
Stock		10,000
Debtors	8,000
Creditors		12,000
Sales		44,000
Purchases	1,28,000
Bank Overdraft		1,14,000
Manufacturing Expenses	14,000
Loan from Ashok	14,000
Carriage Inward	1,000
Interest on Investment		1,000
TOTAL	2,17,000	2,17,000

Solution: Correct Trial Balance as on ……..

Name of Accounts	Debit Balance (Rs.)	Credit Balance (Rs.)
Cash in hand	7,000
Purchases returns		8,000
Wages	8,000
Establishment expenses	12,000
Sales returns	7,000
Capital		22,000
Carriage outwards	2,000
Discount Received		1200
Commission Earned		800
Machinery	20,000
Stock	10,000
Debtors	8,000
Creditors		12,000
Sales		44,000
Purchases	1,28,000
Bank Overdraft		1,14,000
Manufacturing Expenses	14,000
Loan from Ashok		14,000
Carriage Inward	1,000
Interest on Investment		1,000
TOTAL	2,17,000	2,17,000