Errors and Preparation of Trial Balance

Here we detail about the four types of errors in preparation of trial balance, i.e., (i) Errors of Omission, (ii) Errors of Commission, (iii) Errors of Principle, and  (iv) Compensating Errors.

Types of Error

I. Errors of Omission:

Errors of omission may be caused at the time of recording the transactions in the books of original entry or at the time of posting to the ledger. Errors of omission arise when a business transaction is completely or partially omitted to be recorded in the books of accounts.

(i) Complete Omission:

Complete omission means the transaction which is completely omitted to be recorded in the books of original entry and thus cannot be posted in ledger or though recorded in the journal/journal proper but omitted to be posted in the ledger completely. These errors do not affect the agreement of trial balance.

Example 1:

Goods sold to M/s Anil on credit but not recorded in the sales book.

Example 2:

Machinery purchased from M/s Rahim Traders on credit recorded in the journal proper but omitted to be posted.

(ii) Partial Omission:

Errors of partial omission mean errors of omission other than the errors of complete omission. In other words, when a transaction is partly recorded in ‘he books of accounts, it is known as error of partial omission. These errors hamper the agreement of trial balance.

Example 1:

Goods sold to Harish on credit recorded in the sales book but omitted to be posted to Harish’s Account.

Example 2:

Machinery Account was omitted to be balanced.

II. Errors of Commission:

Errors of commission mean and include errors caused due to wrong recording of transactions, wrong casting of the subsidiary books, wrong totaling or balancing of the accounts, wrong posting and wrong carry forward. These errors may or may not hamper the agreement of trial balance.

(i) Error of Recording:

Error of recording arises when a transaction is recorded in the books of original entry incorrectly. These errors do not hamper the agreement of trial balance.

Example 1:

Goods worth Rs. 2,000 sold to Jitin on credit has been recorded in the sales book for Rs. 20,000.

Example 2:

Goods worth Rs. 2,000 purchased from Mohan on credit has been recorded in the purchase book for Rs. 200.

(ii) Error of Casting of Subsidiary Books:

Error of casting arises due to wrong totaling of some subsidiary books including cash book. These errors hamper the agreement of trial balance.

Example 1:

Sales book has been short totaled by Rs. 1,500. Due to this error, Sales Account shall show short balance of Rs. 1,500. Resultantly, credit side of the trial balance shall be decreased by Rs. 1,500.

Example 2:

Cash book has been totalled in excess by Rs. 11,000 on the debit side. Due to this error, Cash Book shall show an excess balance of Rs. 11,000. Resultantly, debit side of the trial balance shall be increased by Rs. 11,000.

(iii) Error of Totalling or Balancing of Accounts:

Error of balancing arises due to wrong balancing of some ledger accounts. These errors hamper the agreement of trial balance

Example 1:

Furniture Account has been balanced in excess by Rs. 1,000. Due to this error, there would be an excess debit balance in Furniture Account. Resultantly, debit side of the trial balance shall be increased by Rs. 1,000.

Example 2:

Creditors Account has been balanced short by Rs. 2,000. Due to this error, Creditors Account shall be shown under the credit balance of trial balance with Rs. 2,000 short. Resultantly, credit side of the trial balance shall be decreased by Rs. 2,000.

(iv) Error of Posting:

Error of posting arises when a transaction is correctly recorded in the books of original entry including journal but posted wrongly in ledger accounts. These errors may or may not hamper the agreement of trial balance.

Errors of posting may be further classified as under:

(a) Posting to the wrong side but correct account:

In this case, posting is made in the correct account but on the wrong side. These types of errors hamper the agreement of trial balance.

Example:

Goods sold to Kavita for Rs. 2,500 on credit. Instead of posting on the debit side of Kavita’s Account, it has been posted to the credit side of Kavita’s Account. Due to this error, instead of showing debit balance of Rs. 2,500, Kavita’s Account shall show a credit balance of Rs. 2,500. Resultantly, credit side of the trial balance shall be increased by Rs. 5,000. Rs. 2,500 for not showing under the debit balance and Rs. 2,500 for wrong showing under the credit balance.

(b) Posting to the wrong account but correct side:

In this case, posting is made to the wrong account but on the correct side. These errors do not hamper the agreement of trial balance.

Example:

Goods sold to Shabir for Rs. 10,500 on credit. Instead of posting on the debit side of Shabir’s Account, it has been posted to the debit side of Kabir’s Account. Due to this error, instead of showing debit balance of Rs. 10,500 in Shabir’s Account, Kabir’s Account shall show a debit balance of Rs. 10,500. Resultantly, agreement of trial balance shall not be affected.

(c) Posting of wrong amount:

In this case, posting is made with the wrong amount but in the correct account and correct side. These errors hamper the agreement of trial balance.

Example:

Goods sold to Shiva for Rs. 10,000. Instead of posting an amount of Rs. 10,000 on the debit side of Shiva’s Account, the amount has been posted as Rs. 1,000 on the debit side of Shiva’s Account. Due to this error, Shiva’s Account shall show a reduced debit balance of Rs. 9,000 (i.e., difference between Rs. 10,000 and Rs. 1,000). Resultantly, total of trial balance shall not agree.

(d) Posting twice in a account:

In this case, posting is made twice in the correct account and correct side. These errors hamper the agreement of trial balance.

Example:

A sum of Rs. 5,000 is paid to Rohan. Instead of posting an amount of Rs. 5,000 once on the debit side of Rohan’s Account, the amount has been posted twice on the debit side of Rohan’s Account. Due to this error, Rohan’s Account shall show an excess debit balance of Rs. 5,000. Resultantly, total of trial balance shall not agree.

(v) Error in Carrying Forward:

Error in carrying forward arises when a mistake is occurred in carrying forward a total from one to the next page. These errors hamper the agreement of trial balance.

Example:

Total of purchases book is Rs. 3,500, however, it has been carried forward as Rs. 5,300.

III. Errors of Principle:

Errors of principle mean and include, errors caused due to violation of generally accepted accounting principles viz. incorrect allocation between capital and revenue items. It is worth mentioning that proper allocation between these two items is very important in the sense that improper allocation would lead to wrong and misleading results through financial statements.

These errors would lead to understatement/overstatement of assets or expenses or liabilities or incomes. These errors do not disturb the agreement of trial balance.

There may be two possibilities of occurrence of these errors viz:

(i) Treating capital items as revenue items and

(ii) Treating revenue items as capital items.

(i) Treating Capital Items as Revenue:

In this case, capital items are wrongly treated as revenue items. These errors do not hamper the agreement of trial balance.

Example 1:

Purchase of machinery worth Rs. 23,000 debited to wages.

Example 2:

Receipts of Rs. 1, 00,000 on account of a specific fund credited as income of the business.

(ii) Treating Revenue Items as Capital:

In this case, revenue items are wrongly treated as capital items. These errors do not hamper the agreement of trial balance.

Example 1:

Paid Rs. 200for repair of old machinery but debited to machinery.

Example 2:

Receipts of Rs. 12,000 on account of interest on investments wrongly treated as capital.

IV. Compensating Errors:

When two or more errors are committed in such a way that the effect of one error is compensated by the effect of other, it is known as compensating errors. It is worth mentioning that the net impact of these errors on the debits and credits of an account is nil. These errors do not disturb the agreement of trial balance.

Example 1:

A sum of Rs. 1,000 was paid to Rohit on 1.1.2011 but was posted in Rohit’s Account as Rs. 100. Similarly, a sum of Rs. 100 paid to Rohit on 31.3.2011 was posted in Rohit’s Account as Rs. 1,000. In this case, it can be observed that error of 1.1.2011 was compensated by the error of 31.3.2011.

Example 2:

On 1.2.2011, goods worth Rs. 10,000 were sold to Ram but were posted to Rahim’s Account with Rs. 100. Similarly, on 1.3.2011, goods worth Rs. 100 were sold to Nitin but Rs. 10,000 were posted to Jitin’s Account. In this case, it can be observed that the error of 1.2.2011 was compensated by the error of 1.3.2011.

From the above it can be observed that there are some errors which can be revealed by the preparation of trial balance and some errors which cannot be revealed by the preparation of trial balance. Stated in other words, errors which affect the trial balance can be revealed by trial balance and errors which do not affect the trial balance are not revealed by the trial balance.

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