1.0 INTRODUCTION
Trial Balance is the statement of debit and credit totals or
balances extracted from the various accounts in the ledger in order to
ascertain the correctness of all the entries in the ledger book.
You should note that "the agreement of a trial balance is
not a conclusive proof of the accuracy of entries made in the accounts".
It only gives an indication of the arithmetical accuracy of the accounts.
The
trial balance may be some types of errors remaining undisclosed in the
accounts. These types of errors are known as compensating errors or errors that
will not affect the agreement of the trial balance.
2.0 OBJECTIVES
At the end of this note, you should be able to:
• explain the following compensating errors:
1. Errors of Commission
2. Errors of Omission
3. Errors of Principle
4. Errors of Duplication
5. Errors of original Entry
6. other compensating errors and
7. Complete reversal of entries.
• explain those errors that will affect the agreement of the
trial balance
• explain the location of errors and its detection techniques
• explain suspense Account.
3.0 MAIN CONTENT
3.1 Trial Balance II - Errors
3.2 Compensating Errors
From the trial balance, the final Accounts {Trading and profit
and Loss Accounts or the income and Expenditure Account} and the balance sheet are
prepared. However, the trial balance is a proof only of the arithmetical
accuracy of the postings in the ledger; it is merely prima facie evidence that
the ledgers have been correctly made. Certain classes of errors cannot be
revealed by the trial balance because the errors do not affect the totals used
in drawing up the trial balance. These errors are known as compensating errors.
The following are examples of compensating errors, which are
not revealed by a trial balance:
3.2.1 Errors of Commission
Where the correct amount is entered in the correct type of
account but in the wrong account, e.g. N=200:00 paid for rent entered as
repairs, or where a sale of N=450:00 to John entered in the account of Johnson.
Both the accounts considered are personal accounts. With this error, the trial
balance will still balance.
3.2.2 Errors of Omission
Where a transaction has been completely omitted from the books
e.g. a sale of N=800:00 worth of goods to Musa was completely omitted from the
books. No entry in sales account and Musa's Personal Account. This error will
not affect the agreement of the trial balance.
3.2.3 Errors of Principle
Where an item is entered in the wrong class of account. The
purchase a fixed asset may be treated as
a trading expense and therefore the profit will be incorrect and the balance
sheet will not show the true position of the business e.g. the purchase of a
duplicating machine N500:00 is debited to purchases account in error instead of
being debited to a Duplicating Machine Account, this error will not affect the
agreement of the trial balance.
3.2.4 Errors of Duplication
Where the same transaction is made twice or more times in the
books.
3.2.5 Errors of Original Entry
Where the original figure is wrong. Wrong value for a transaction
may be recorded on both side of the ledger accounts involved in the
transaction, e.g. a sale of N=425:00 to L. Akin. Was entered in the books as
N=524:00. The trial balance total will still agree with this error.
3.2.6 Other Compensating Errors
Errors made in the ledger accounts which balance out one
another will not affect the agreement of the trial balance totals, e.g. if the
capital account was overstated with N=150:00 and the purchases account was also
overstated with N=150:00, then these two errors would not affect the trial
balance.
3.2.7 Complete Reversal of Entries
If the correct accounts are used but items recorded on the
wrong sides e.g. salaries paid by cash, N=1,800:00 was entered as salaries
account credited N=1,800:00 and cash account debited N=1,800:00 instead of
salaries account debited N=1,800:00 and cash account credited N=1,800:00.
3.3 Errors Affecting the Agreement of the Trial Balance
If the totals of a trial balance do not agree, it might be due
to one or more of the following errors.
I. An item omitted to be posted from a subsidiary book into
the ledger e.g. A purchase of N=1000:00 from a trader was omitted and not
credited to his account.
II. Posting of a wrong amount to a ledger account e.g. a
credit of N=2,000:00 to Olu was wrongly posted to his account as N=200:00.
III. Posting an amount to the wrong side of the ledger account
e.g. N=50:00 discount allowed to a customer wrongly posted to the credit
instead of the debit of the Discount Account.
IV. Wrongly additions or balancing of ledger accounts i.e.
while balancing capital Account at the end of the financial year, credit
balance of N89,000 = was wrongly taken as N9,000 =.
V. Omission of a balance of an account in the trial balance
e.g. cash and Bank balances may have been omitted to be included in the trial
balance.
VI. Balance of an account wrongly entered in the trial
balance.
VII. Balance of an account entered in the wrong column of the
trial balance.
VIII. An error in the totaling of the trial balance will bring
the disagreement of the trial balance.
3.4 Location of Errors and Its Detection Techniques
Where a trial balance disagrees, the following steps would be
taken to locate the causes of the differences:
I. Re-check the totals of the trial balance and ascertain the
exact amount of difference in the trial balance.
II. Divide the difference of the trial balance by two and find
out if there is any balance of the same amount in the trial balance. It may be
that such a balance might have been recorded on the wrong side of the trial
balance, thus causing a difference of double the amount.
III. If the mistake is not located by the above steps, see
that the balances of all accounts including cash and bank balances have been
included in the trial balance.
IV. See that the opening balances have been correctly brought
forward in the current year's book.
V. if the difference is evenly divisible by 9, the error may
be due to transposition or transplacement of figures. A transposition occurs
when 57 is recorded as 75, or 197 as 791 and so on.
A trans placement takes place
when digits of the numbers are moved to the left or right.
When N 5,694 = is recorded as
N56.94 or N 569.40=.
VI. If the above listed steps fail to detect the errors, check
your work as follows:
a. Check the totals of the subsidiary
books paying particular
attention to "carry
forwards".
b. Check the postings made from the
journal or subsidiary books into the ledger.
c. Re-check the balances extracted
from the ledger
d. Re-cast the list of balances.
You should note that if all
these above efforts fail to locate the errors, the whole subsidiary books must
be cast, and if necessary, all postings in the ledger must be re-checked.
3.5 Suspense Account In Connection with a Trial Balance
As the trial balance preparation is the first step in the
preparation of annual accounts, no final accounts must be prepared unless the
trial balance is balanced. In order to be able to prepare a draft annual
account before the cause of disagreement of the two sides of the trial balance
is discovered, it is made to balance by raising on the short side a SUSPENSE
ACCOUNT.
The suspense account is raised by inserting the amount of the
difference between the two sides of the disagreed trial balance and opening a
suspense account in the ledger and either debiting or crediting it depending on
which side of the trial balance is short.
EXAMPLE
TRIAL BALANCE OF………………AS AT…………………
If the errors are not located before the final Accounts are
prepared, the Suspense Account balance in this case N=600 = will be shown on
the liabilities side of the balance sheet. If the Suspense Account has a debit
balance it will be shown on the Assets side of the balance sheet.
The error must however be located and the Suspense Account
eliminated if the figure is a material one. Where the errors are disclosed,
they must be corrected, each one being supported by a Journal.
4.0 CONCLUSION
We must be conscious always of the fact that the agreement of
a trial balance is not conclusive evidence that the ledger entries are correct.
The smallest difference between the totals of the trial
balance should be investigated which may lead to the discovery of very great
mistakes. There are ways whereby errors in the accounts can be detected, but it
is best to ensure right from the outset that entries and postings are correctly
made.
5.0 SUMMARY
In this note, you should agree that the agreement of a trial
balance is not an absolute proof of the correctness of all ledger postings
because of the following compensating errors:
1. Errors of Commission
2. Errors of Omission
3. Errors of Principle
4. Errors of Duplication
5. Errors of Original Fran/
6. Other compensating errors and
7. Complete Reversal of Entries
If the totals, of a trial balance do not agree, it might be
due to some errors. If those errors are not located before the preparation of
the final
Accounts and balance sheet, a Suspense Account is raised by
inserting the amount of the difference between the two sides of the disagreed
trial balance and open a Suspense Account in the ledger and either debiting or
crediting it depending on v. Inch side of the trial balance is short.
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