Financial Accounting

    • A trial balance is a summary of all the General Ledger Balances outstanding as on a particular date. All the debit balances from the ledgers are shown on one side, and all the credit balances are shown on the other side. This results in the total of the debit side being equal to the total of the credit side. If the two sides do not match, is should be obvious that there must be some error. The trial balances prepared to ensure the arithmetical accuracy of the records of a business. Certain errors may not effect the agreement of the trial balance as the erroneous entries may not violate the dual aspect concept. Errors may be classified as follows.

    Errors disclosed by a Trial Balance

    • The errors which cause a mismatch in the trial balance totals are frequently referred to as errors disclosed by a Trial balance. The various errors which cause a mismatch in the trial balance may be
    1. Wrong totaling in a subsidiary book
    2. Wrong calculation of balances in a ledger account
    3. Partial omission of an entry
    4. Posting an aspect of a transaction more than once
    5. Debit entries wrongly recorded as credit entries or vice verse
    6. Errors in totaling the debit column or the credit column of the trial balance
    7. Balances of ledger accounts are wrongly transferred to the trial balance
    8. Omitting to include an account’s balance in the trial balance.
    • When the trial balance disagrees, and there is sufficient time to scrutinize the books to detect the errors, a suspense account is included in the trial balance and used to balance the trial balance. And the preparation of the Profit and Loss account and Balance sheet is proceeded with.

    Errors not disclosed by the Trial Balance

    1. Omission of the recording of a transaction from the books of accounts
    2. Recording a transaction at an amount which is totally different from the actual amount
    3. Compensating error
    4. Posting of an aspect of a transaction on the correct side of a wrong account
    5. Recording both aspects of a transaction more than once in the books of accounts
    6. Errors of principle
    7. Omission/mistakes of extension and carry forward.
    • The process of preparation of financial statements by the accountants involves making certain adjustment entries. Adjustment entries involve the recording of additional information regarding the value of the closing inventory, prepaid expenses, outstanding expenses, depreciation on fixed assets, etc. Also, provisions may be required to be made for bad debts, discounts proposed to be given, discounts expected to be received as per the companies norms. Thus striking a trial balance and the rectification of errors is the first step towards preparation of final accounts of an organization.