The trial balance is prepared to check the arithmetical accuracy of account. If the trial balance does not tally, it implies that there are arithmetical errors in the accounts which require location, detection and rectification thereof. Even if the trial balances tallies, they may still have some errors.
Errors may happen at any of the following stages of the accounting cycle
At recording stage;
- Errors of principle
- Errors of commission
- Errors of omission
At posting stage;
Errors of omission
Errors of commission
- Posting to wrong account
- Posting on the wrong side
- Posting of wrong amount
At balancing stage;
- Wrong totaling
- Wrong balancing
Classification of Errors
Errors can be classified into four major categories on the basis of the nature of error as discuss below;
- Errors of Commission
- Errors of omission
- Errors of principle
- Errors of compensation
Errors of Commission: These errors by definition are of clerical in nature. These errors may be committed at the time of recording and/or positing. At the time of recording, the wrong amount may be recorded in journal which will be carried throughout. These errors may also be committed at the time of posting, by way of posting, wrong amount, to the wrong side of an account or in the wrong account.
An amount of N10,000 received from a customer (Debtor) is correctly recorded on the debit side of the cash book, but while posting the customer’s account is credited with N1,000. This is an error which is committed at the time of posting, by posting wrong amount to the account. This will result in disagreement of trial balance, since the credit total of the trial balance will be short by N9,000.
Errors of Omission: These errors may be committed at the time of recording the transaction in the books of original entry. While posting to the ledger. An omission may be complete or partial. Such errors are known as errors of omission.
Errors of Principle: Accounting entries are recorded as per their generally accepted accounting principle. If any of these principles are violated or ignored, errors resulting from such violations are known as errors of principle. As an illustration, periodicity principle requires maintaining proper distinction between capital and revenue items. This error may occur due to incorrect classification of expenditures or receipts between capital and revenue.
Compensation Errors: When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of account is nil, such errors are called compensation errors. They do not affect the tallying of the trial balance.
Correction of Errors
The following are methods of correcting each type of error;
- Omission: The correct debit and credit entries must be made.
- Commission: A double entry to correct the error must be made, e.g. debit S. Smith and credit T Smith
- Principle: A double entry to correct the error must be made e.g. debit office expenses and credit plant and machinery.
- Compensating: This error is corrected by reversing the two errors and post debit and credit to correct the errors.
- During 2011, the sales day book for the month of May has been short cash by N100
- The total of N25 in the distant column on the debit side of the cash book for August has not been posted. As a result of this, the trial balance will be N100 short on the credit side and N25 short on the debit side. To make the books balance, an entry is therefore made as follows.
Correction of errors
Dec. 31 N
Difference in books 75
The first of these two errors is found and corrected as follows;
Suspense A/c 100
This corrects the sales account and now leaves a debit balance on the suspense account of N25 waiting for the next error to be revealed.
When the second mistake is found, the entries are
Discount allowed 25
Suspense A/c 25
The suspense account is now closed. Seen that so long as there is a balance on the suspense account, there are still some errors not found
The trial balance of the books of a company taken out as on 31st July 2007 did not balance. A detailed checking of the books disclosed the following errors;
- Purchases returns for April N100 posted to the debit of purchase account
- Sales day book for May under-cast by N10
- Discounts received in June, N120, posted to the wrong side of discount.
- A sale of N25 to JIB Ltd was correctly entered in the sales book, but was posted as credit of JIB Ltd in the sales ledger as N5.50
- N500 paid for repairs to machinery was entered in the total column of the petty cash book, but not extended in the appropriate analysis column, the total which was posted.