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

SUBSIDIARY BOOKS

SUBSIDIARY BOOKS

STRUCTURE

1.1   Introduction

1.2   Kinds of Subsidiary books

1.3   Purpose

1.4   Kinds of Cash Book

1.5   Advantages of Subsidiary Books

1.6   Discounts & Its Types

1.7   Self Assessment Questions

1.1  Introduction

 In a business most of the transactions are related to receipt and payment of cash, sale of goods and purchase of goods. Hence separate books are maintained for recording these transactions. The journal is subdivided into different books. These books are known as Subsidiary Books. These are the books of prime or original entry. All transactions are first recorded in the subsidiary books and then posted to the ledger.

1.2  Kinds of Subsidiary books

There are different types of subsidiary books which are commonly used in any big business concern. The number of subsidiary books may vary according to the requirements of each business. The following are the special purpose subsidiary books.

(i)     Cash Book

(ii)   Purchases Book

(iii) Sales Book

(iv) Purchases Returns Book

(v)   Sales Returns Book

(vi) Bills Receivable Book

(vii) Bills Payable Book

(viii)Journal Proper

1.3. Purpose

i)  Purchases Book records only credit purchases of goods by the trader. Cash purchases of goods are not recorded in this book as these will be recorded in the cash book. Credit purchase of assets will be recorded in the journal proper and not in the purchase book.

Date	Particular	L.F.	Inward Invoice No.	Amount (Rs.)

ii) Sales Book records only the credit sale of goods. Cash sale of goods are recorded in the Cash Book and not in the Sales Book. Credit sales of assets will be recorded in the Journal Proper and not in the Sales Book.

Date	Particular	L.F.	Outward Invoice No.	Amount (Rs.)

iii) Purchases Return or Return Outward Book records the goods returned by the trader to suppliers. When we return the goods purchased to the suppliers it is recorded in the Purchase Return Book or the Return Outward Book.

Date	Name of Supplier	L.F.	Debit No.	Amount (Rs.)

iv) Sales Return Book deals with goods returned (out of previous sales) by the customers. If customers return the goods sold to them, it is recorded in the Sales Return Book or the Return Inward Book.

Date	Name of Customer	L.F.	Credit No.	Amount (Rs.)

v) Bills Receivable Book records all the bills received by the business from its customers.

vi) Bills Payable Book records all the bills accepted by the business drawn by its creditors.

vii) Cash Book is used for recording only cash transactions i.e., receipts and payments of cash. All cash & Bank Transaction are recorded in this Book eg. Cash Purchases, Cash Sales, Purchase or sale of Asset for cash, expenses paid, incomes received, money received, and money paid.

viii) Journal Proper is the journal which records the entries which cannot be entered in any of the above listed subsidiary books. The following are some of the examples of transactions which are entered in this book.

1. Opening entries and closing entries.

2. Adjusting entries

3. Transfer entries from one account to another account.

4. Rectification entries.

5. Bills of Exchange Entries

6. Credit Purchase/sale of an asset other than goods.

1.4. Cash Book

Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and payments. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side. All cash transactions are recorded in date wise sequence chronologically in the Cash Book.

Kinds of Cash Book : Depending upon the nature of business and the type of cash transactions, various types of Cash books are used. They are:

a) Single Column Cash Book

b) Double Column Cash Book

c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns.

d) Petty Cash Book.

a) Single or Simple Column Cash Book: This is the simplest form of Cash Book and is used when payments and receipts are mostly in the form of cash and where usually no cash discount is allowed or received. The ruling of Single Column Cash Book is as follows:

Date	Particular	L.F.	Amount (Dr.)	Date	Particular	L.F.	Amount (Cr.)

b) Double Column Cash Book: This type of Cash Book is used when cash transactions involving discount allowed or received are effected.

In this two column Cash Book, there is two columns of amount, one for cash and other for discount.

Date	Particular	L.F.	Discount	Cash (Dr.)	Date	Particular	L.F.	Discount	Cash (Cr.)

OR

In this two column Cash Book, there is two columns of amount, one for cash and other for Bank.

Date	Particular	L.F.	Cash	Bank (Dr.)	Date	Particular	L.F.	Cash	Bank (Cr.)

OR

In this two column Cash Book, there is two columns of amount, one for Bank and other for Discount.

Date	Particular	L.F.	Discount	Bank (Dr.)	Date	Particular	L.F.	Discount	Bank (Cr.)

c) Three Columnar Cash Book or Cash Book with Cash, Bank and Discount Columns: The three

column Cash Book is the resultant effect where in addition to cash and discount columns, bank column is also included. The ruling of a three columnar cash book is as follows:

Date	Particular	L.F.	Discount	Cash	Bank (Dr.)	Date	Particular	L.F.	Discount	Cash	Bank (Cr.)

d) Petty Cash Book: Day to Day Petty (small) expenses paid in cash are recorded in this book e.g. carriage, cartage, entertainment expenses, office expenses, postage and telegrams, stationery, etc.

1.5 ADVANTAGE OF SUBSIDIARY BOOKS

The advantages of maintaining special journals can be summarized as under:

(i)  Division of work

The division of journal resulting in division of work ensures more clerks working independently in recording original entries in day books.

(ii) Facilitate posting

Because the transactions of one nature are recorded at one place, the posting of real account is highly facilitated.

(iii) Time Saving

Due to division of work, it is possible to perform various accounting processes simultaneously. Thus, lesser time is required to complete accounting records.

(iv) Minimum frauds and errors

Systematic recording of business transactions in special journals reduces the possibility of frauds and errors. It also helps in location of errors, if any.

(v) Better information

A lot of useful data like credit sales, credit purchases, returns etc., is made available which is not possible in journal system.

(vi) Management decisions facilitated

Since transactions of a similar nature are recorded at one place, the management can have the benefit of the trend and distributional pattern in planning and making decisions.

1.6 DISCOUNTS

(a) Trade discount

Trade discount is an allowance or concession granted by the seller to the buyer, if the customer purchases goods above a certain quantity or above a certain amount. The amount of the purchase

made, is always arrived at after deducting the trade discount, i.e., only the net amount is considered. For example, if the list price (price prescribed by the manufacturers or wholesalers) of a commodity is

Rs.100, and trade discount granted by manufacturer to the wholesaler is 20% then cost price of the commodity to the wholesaler is Rs.80.

Trade discount is not recorded in the books. They are used for determining the net price.

(b) Cash Discount

For example, If Ram purchases goods worth Rs.5,000 on 30 days credit then, as per the terms of contract, he is authorized to make payment 30 days after the date of purchase. If he is offered

a cash discount of 2% on payment within 10 days and if he does so, he is entitled to deduct Rs.100 from the invoice price and pay Rs.4,900. In this case Rs.100 is cash discount. But if he does not

choose to make payment within 10 days then he will not get any cash discount. In this case he will pay Rs.5, 000 after 30 days.

Cash discount is recorded in the books. They are used for determining the net payment made or received.

1.7. Self Assessment Questions

1. What do you understand by Subsidiary books?

2. What are the advantages of Subsidiary books?

3. What is journal proper?

4. What is petty cash book?

5. What are the different kinds of Subsidiary books?

6. What do you mean by Cash book?

7. What are the kinds of Cash books?