Page Number : 227
Short answers :
Question 1 : State the meaning of a Trial Balance?
Answer : Trial Balance is a statement prepared with debit and credit balances of all accounts in ledger, to verify the arithmetical accuracy of the accounts. It is prepared after balancing all the accounts of ledger. There are two columns in a Trial Balance: debit and credit. While debit side includes all the debit balances, credit side includes all the credit balances of the accounts. It also helps in preparing financial statements, as it is a summarise version of the ledger. It is generally prepared on monthly or yearly basis.
Question 2 : Give two examples of errors of principle?
Answer : 'Errors of principle' refer to those errors that are committed when recording of transactions is done against the accounting principle. Below given are the examples of error of principle
1. Wages paid for construction of building debited to Wages Account
In this transaction, wages paid for the construction of building is a capital expenditure and accordingly building account should have been debited. However, in this case, it is treated as revenue expenditure and is debited to Wages Account. This error violates the accounting principle.
2. Amount spent on repair of machinery debited to Machinery Account
In this transaction, amount of repair is a revenue expenditure and not a capital expenditure. It should have been debited as 'Repairs', but was wrongly debited to the Machinery Account.
Question 3 : Give two examples of errors of commission?
Answer : Errors of Commission refer to those errors that are committed when transactions are recorded with wrong amounts; wrong balancing or wrong posting and/or wrong carrying forwarding is done. Below given are the examples of error of commission.
1. Goods purchased worth Rs 20,000 on credit are recorded in the Purchases Book as Rs 10,000.
This transaction should have been recorded in the Purchases Book with an amount of Rs 20,000; however, it was recorded as Rs 10,000. This is an error due to wrong recording of amount.
2. Total of Sales Book is carried forward as Rs 5,000 instead of Rs 500.
In this case, wrong amount is carried forwarded from one accounting period to another or from an end of one page to the beginning of another page. This is referred to as an error of carrying forward.
Question 4 : What are the methods of preparing trial balance?
Answer : Below are diagrammatically explained methods to prepare Trial Balance.
Let us understand these methods of preparing Trial Balance with the help of an abstract account of Mr. A.
1. Totals method: According to the Totals method, the total of debit and credit sides of an account is shown in the debit and credit columns of the Trial Balance. If the total of the debit column and the total of credit column of Trial Balance are equal, then the Trial Balance is said to agree, otherwise not.
For example, in the above example, the total of the debit side of Mr. A Account, i.e., Rs 1,10,000 is shown in the debit column of the Trial Balance and the total of the credit side of Mr. A Account, i.e., Rs 1,10,000 is shown in the credit column of the Trial Balance. The total of debit column and the total of the credit column of the Trial Balance are equal to each other.
3. Balance method: According to the Balance method, the balance of ledger accounts is shown in the debit and credit column of the Trial Balance. The balance of ledger may be either debit balance or credit balance. In the former case, the debit side of an account exceeds its credit side; whereas, in the latter case the credit side exceeds the debit side of the account. The sum total of the balances in the debit column of the Trial Balance must be equal to the sum total of the balances in the credit columns of the Trial Balance. It is a commonly used method.
4. For example, Mr A's account shows a debit balance of Rs 10,000, as the total of the debit side (Rs 1,10,000) exceeds the total of the credit side (Rs 1,00,000). The debit balance of Rs 10,000 will be shown in the debit column of the Trial Balance.
5. Total cum balance method: It is a combination of both of the above methods, i.e., Totals method and Balance method.
Question 5 : What are the steps taken by an accountant to locate the errors in the trial balance?
Answer : The following are various steps that an accountant takes to locate the errors in the Trial Balance.
1. Re-totalling of the debit and the credit columns of the Trial Balance to locate the difference in the total of both the columns.
2. Checking whether any account is omitted to be recorded with the exact difference amount.
3. Half the difference, then check whether any amount is posted in the wrong column of the Trial Balance.
4. Divide the difference by 9, if it is completely divisible, it is an error of transposition of figure, i.e. 546 is written as 645.
5. If there exist differences especially of Rs 1, Rs 10, Rs 100, Rs 1000, etc., it suggests that the casting of Subsidiary Books should be checked once again.
6. If difference still exists and it is not possible to detect the reason for the difference, then for the time being, the difference is transferred in the suspense account in order to proceed further. Otherwise, a complete checking is suggested.
Question 6 : What is a suspense account? Is it necessary that suspense account will balance off after rectification of the errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account?
Answer : When Trial Balance does not agree, i.e., when the total of the debit column does not match that of the credit column, then the difference of the Trial Balance is transferred to a temporary account in order to avoid delay in preparation of the financial statements. This temporary account is termed as Suspense Account. If the debit column falls short of the credit column, then the Suspense Account is debited and if the credit column falls short of the debit column then the Suspense Account is credited.
If all the errors are detected and rectified, then the Suspense Account automatically gets closed (i.e. becomes zero). However, if still there exists any difference, then it should be transferred to the Balance Sheet. If the Suspense Account shows a debit balance, then it is shown in the Assets side and if the Suspense Account shows a credit balance, then it is shown in the Liabilities side of the Balance Sheet.
Question 7 : What kinds of errors would cause difference in the trial balance? Also list examples that would not be revealed by a trial balance?
Answer : The errors that lead to the differences in the Trial Balance are termed as one-sided errors. These are those errors that affect only one account. Below are given the errors that cause differences in the Trial Balance.
1. Wrong casting of any account, this is termed as the error of casting.
2. Wrong carrying forward of the balances from previous year's books or from one end of page to another. These types of errors are termed as the errors in carrying forward.
3. If entries are posted in the wrong side of accounts.
4. Posting of a wrong amount in account, this is termed as the error of posting.
5. If entries are recorded partially, i.e., the entries are not recorded completely, then due to the error of partial omission, Trial Balance does not agree.
Here are a few examples that would not be revealed in a Trial Balance:
1. Sales to Mr. X, omitted to be recorded in the Sales Day Book
2. Purchases made from Mukesh, recorded in Mahesh's Account, who is an other creditor
3. Wages paid for construction of building, recorded in the Wages Account
Question 8 : State the limitations of trial balance?
Answer : If the Trial Balance agrees, then it should not be taken for granted, that there is absolutely no errors. In fact, there do exist some errors that are not revealed by a Trial Balance. Such ineffectiveness of the Trial Balance is termed as the limitations of Trial Balance. The various limitations of the Trial Balance are given below.
1. It does not assist to detect errors that arise if an entry is not recorded in the Journal. Such errors are termed as the Errors of Complete Omission.
2. If the effect of one error is cancelled by the effect of another error, then it cannot be ascertained by the Trial Balance. Such types of errors are termed as Compensatory Errors, which are rare to find.
3. If correct amount is posted in the correct side; however, in the wrong account and if wrong amount is posted in the wrong side, but in the correct account, then the Trial Balance fails to reflect these errors.
4. If there arises any error of principle, like capital expenditure mistakenly regarded as revenue expenditure or vice-versa, then such errors may not be revealed in form of mismatch between the two columns of the Trial Balance.
5. If any transaction is recorded wrongly in the books of original entry, then such mistakes lead to the errors of recording which are not revealed by Trial Balance.
Page No.: 228
Long answers :
Question 1 : Describe the purpose for the preparation of trial balance.
Answer : The important purposes for the preparation of Trial Balance are explained with the help of the following points.
1. Ascertaining the arithmetical accuracy- When the total of all debit balance accounts are equal to all credit balance accounts, it is assumed that at least posting from journal to the respective accounts is arithmetically correct.
2. Summarising the ledger accounts- Trial Balance acts as a consolidated statement,
providing a comprehensive list of all the accounts. Thus, a Trial Balance provides a summarised version of each account.
3. Preparing final accounts- As the Trial Balance provides a summarised version of each account, so different accounts can be directly transferred to Trading, Profit and Loss
Account, and Balance Sheet without referring to different ledgers.
4. Locating and rectifying errors- If the Trial Balance does not agree, it indicates the occurrence of arithmetical error, which can be easily located. However, Trial Balance only helps in locate and rectify arithmetical error and not other types of errors.
Question 2: Explain errors of principle and give two examples with measures to rectify them.
Answer : Errors of Principle refer to those errors that are committed when recording of transactions in the original book of entry is done against the accounting principle. These errors are not reflected in the Trial Balance. These errors are committed when proper distinction is not made between capital expenditure and revenue expenditure, or vice versa or between capital income and revenue income or vice versa.
The following examples will illustrate the process of understanding and rectification of such errors.
Let us consider first example. Wages paid for construction of building are debited to Wages Account.
Wrong entry made is:
In this case, Wages paid for the construction of building should be treated as a capitalexpenditure and accordingly should be debited to the building account. However, the Wages Account is wrongly debited. Thus, the correct entry that should have been made is:
(Wages paid for construction of building)
In order to rectify this error, the rectifying entry should be:
(Wages paid for construction of building was debited to Wages Account, now rectified)
The second example of errors of principle is the sale of old machinery recorded as sales.
Wrong entry made:
(Sales of old machinery, recorded as sales)
In this case, the sale of old machinery should not be recorded as sales; in fact the Machinery Account should be credited. Thus, the correct entry that should have been made is:
In order to rectify this error, Sales Account will be debited, as it is wrongly credited and machinery will be credited, as it willnot be recorded in the books. Thus, the rectifying entry will be:
Question 3 : Explain the errors of commission and give two examples with measures to rectify them.
Answer : Errors of commission refer to those errors that are committed when transactions are recorded with wrong amounts, wrong balancing is done, wrong posting and/or wrong carrying forwarded is done. The following examples will illustrate the process of understanding and rectification of such errors.
1. Let us consider the first example. Sales made to Mr. X of Rs10,000 recorded as 1,000 from invoice.
In this case, Mr. X's account has been debited with Rs 1,000 instead of Rs 10,000;hence, the error of commission is committed. This requires a further debit of Rs 9,000, in order to rectify this error of commission. This will be rectified by passing the following
(Goods sold to Mr X of Rs 10,000 was wrongly posted as Rs 1,000,now rectified)
2. Purchase book was undercast by Rs 10,000.
This error can be rectified in any of the following two stages:
a. If an error is located before preparing trial balance, then Rs 10,000 should be recorded in the debit side of Purchases Account.
b. If an error is located after preparing Trial Balance, then the following entry need to be recorded.