If the totals of debit and credit money columns of trial balance are same it, is presumed that the accounting process is accurate.
But the agreement of both debit and credit money columns of trial balance does not necessarily prove that there is no error in the accounting process.
Because there might have some undetected errors despite the agreement of trial balances. These are called the limitations of trial balance.
The undetected errors of this type are generally divided into two groups:
- Clerical errors, and
- Errors of principles.
Clerical Errors in Trial Balance
The errors occurred due to negligence of the employees of the accounts department are clerical errors. These errors are of four types.
- Errors of omissions,
- Errors of commission,
- Errors of misposting, and
- Compensating errors.
They are described below;
Errors of omissions
If any transaction is omitted from being recorded in journal and ledger, it is called error of omission.
Goods purchased from Karin $5,000. If this transaction is not accounted for, still then trial balance may agree. Because an equal sum of money has been omitted from records of debit and credit accounts.
Errors of commissions
Recording incorrect figure in journal and posting the same amount in the correct sides of ledger accounts is called errors of commission and this does not hamper the agreement of trial balance.
merchandise purchase $ 1,100 but recorded $ 1,000 both in journal and ledger.
Errors of mis-posting
Posting of an entry from journal to ledger inadvertently in correct side of wrong account is called misposting. This type of misposting creates no hindrance in equalizing totals of debit and credit column of trial balance.
If a short or excess amount is posted in one side of an account and if equal sum of short or excess amount is posted in another side of other account, it is called compensating errors.
This is called so because wrong posting of one account is compensated by wrong posting of the same amount in another account and this does not hamper equalizing totals of trial balance.
Abu account is debited to $400 wrongly instead of $500. On the other hand Subo account is credited by $800 instead of $900. As a result $100 short has been written in both sides of accounts and thereby agreement of trial balance is not hampered. But actually there lies mistakes in the accounts.
Errors of Principle in Trial Balance
If a revenue expense is recorded as a capital expenditure or vice-versa it is called error of principle.
Installation cost of a new machine is accounted for debiting wage expense account instead of debiting machinery account.
Causes of Disagreement of Trial Balance
The causes for which totals of both sides of trial balance disagree are as follows:
- Omission of account from posting in the ledger inadvertently.
- Posting from journal to ledger in the wrong account.
- One account out of two accounts of transaction is accounted for.
- Recording twice in a particular account of a transaction inadvertently.
- Recording wrong amount i.e. short or excess amount in the ledger accounts at the time of posting from journal to ledger.
- Committing mistakes in balancing of ledger account.
- Committing mistakes in recording amount of ledger balance in trial balance.
- Committing mistake in writing ledger balances in the trial balance i.e. debit balance in the credit money column or credit balance in the debit money column.
- Committing mistake in casting totals of debit and credit money columns of trial balance.
If totals of both side money columns are not equal, it is to be presumed that there are some mistakes in accounting process. The reasons for disagreement are to be defected.
For this purpose the following measures are to be adopted to detect the errors and frauds.
- At the outside casting of trial balance is to be checked carefully.
- Thereafter, it is to be ensured that all ledger accounts have been posted in the trial balance properly.
- It is to be ensured that all the transactions have properly been posted from journal to ledger.
- Calculation of totals of ledger accounts and balancing of ledger accounts are to be checked properly.
- Verification of correct posting of debit and credit ledger balances is needed.
- It is to be checked that totals of cash and bank account and balancing and inclusion of these balances in trial balance have been made properly.
- It is to be checked that casting of purchase journal, sales journal and other subsidiary journals are correct and these are posted in the ledger accounts properly.
- Current trial balance is to be compared with the past one.
- It is to be observed that the totals of accounts receivable and accounts payable and recorded amount of the same accounts in trial balance are same.