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The Trial Balance and Errors in the Financial Reporting System


 
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The Trial Balance and Errors in the Financial Reporting System

Overview

The trial balance

At the end of the year, once all ledger accounts have been balanced off, the closing balances are summarised on a long list of balances. This is referred to as a trial balance.

All the closing debit balances are summarised in one column and the closing credit balances in another. Given the nature of the double entry system the totals of both columns should agree. If not the discrepancy must be investigated and corrected.

This is another control in the accounting system to ensure that the balances reported in the financial statements are accurate. The layout of a trial balance is illustrated below:

Trial Balance as at 31 December 20X5

Dr

Cr

$

$

Revenue

X

Purchases

X

Administrative expenses

X

Non-current assets

X

Trade receivables

X

Cash

X

Share capital

X

Loans

X

Trade payables

X

––––

––––

X

X

The figures reported on the final trial balance will be transferred to the financial statements. It is therefore vital to adjust the trial balance for any identified errors.

Type of error

Errors where the trial balance still balances
  • Error of omission: A transaction has been completely omitted from the accounting records, e.g. a cash sale of $100 was not recorded.
  • Error of commission: A transaction has been recorded in the wrong account, e.g. rates expense of $500 has been debited to the rent account in error.
  • Error of principle: A transaction has conceptually been recorded incorrectly, e.g. a non-current asset purchase of $1,000 has been debited to the repair expense account rather than an asset account.
  • Compensating error: Two different errors have been made which cancel each other out, e.g. a rent bill of $1,200 has been debited to the rent account as $1,400 and a casting error on the sales account has resulted in sales being overstated by $200.
  • Error of original entry: The correct double entry has been made but with the wrong amount, e.g. a cash sale of $76 has been recorded as $67.
  • Reversal of entries: The correct amount has been posted to the correct accounts but on the wrong side, e.g. a cash sale of $200 has been debited to sales and credited to bank.
Errors where the trial balance does not balance
  • Single sided entry – a debit entry has been made but no corresponding credit entry or vice versa.
  • Debit and credit entries have been made but at different values.
  • Two debit or two credit entries have been posted.
  • An incorrect addition in any individual account, i.e. miscasting.
  • Opening balance has not been brought down.
  • Extraction error – the balance in the trial balance is different from the balance in the relevant account or the balance from the ledger account has been placed in the wrong column of the TB.

If there is a difference on the trial balance, then a suspense account is used to make the total debits equal the total credits:

$

$

Non-current assets

5,000

Receivables

550

Inventory

1,000

Cash

200

Payables

600

Loan

2,000

Share capital

4,000

Suspense account

150

–––––

–––––

6,750

6,750

The balance on the suspense account must be cleared before final accounts can be prepared.

Corrections to any of the six errors mentioned above will affect the suspense account.

Suspense accounts

A suspense account is an account in which debits or credits are held temporarily until sufficient information is available for them to be posted to the correct accounts.

There are two main reasons why suspense accounts may be created:

  • On the extraction of a trial balance the debits are not equal to the credits and the difference is put to a suspense account.
  • When a bookkeeper performing double entry is not sure where to post one side of an entry he may debit or credit a suspense account and leave the entry there until its ultimate destination is clarified.

Correction of errors

When correcting errors it is useful to think about:

  • What double entry should have been made:
  • What double entry was made?
  • What is the correcting journal?

For example: the purchase of a non-current asset costing $100 has been recorded by debiting $10 to the non-current assets account and crediting $100 to cash.

What should the
double entry have
been?

What was the double
entry?

Correcting journal

Dr NCA

$100

Dr NCA

$10

Dr NCA

$90

Cr Cash

$100

Dr Suspense (bal. fig)

$90

Cr Suspense

$90

Cr Cash

$100

Adjustments to profit

The correction journal may result in a change in profit, depending on whether the journal debits or credits the income statement:

Dr Statement of financial position account
Cr Statement of financial position account

No impact on profit

Dr Income statement account
Cr Income statement account

No impact on profit

Dr Income statement account
Cr Statement of financial position account

Profit decreases

Dr Statement of financial position account
Cr Income statement account

Profit increases

For this purpose the suspense account is defined as a statement of financial position account.

Created at 10/25/2012 11:36 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/29/2012 3:08 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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ACCAPEDIA - The Trial Balance and Errors in the Financial Reporting System