Trial balance: meaning, objectives and the balance method
A trial balance is a statement of all ledger balances on a date, with debit balances in one column and credit balances in the other. It is not an account.
Objectives
- Check the arithmetical accuracy of posting and balancing.
- Give a summary of ledger balances for preparing financial statements.
- Help locate errors.
Balance method
Balance each account, then list: debit balances — assets, expenses, losses, drawings, purchases, sales returns; credit balances — capital, liabilities, incomes, gains, sales, purchases returns, provisions. Columns: S.No. | Name of account | L.F. | Debit ₹ | Credit ₹. Accounts with nil balance are left out.
Note: closing stock usually does not appear (it is found after the trial balance), unless purchases have already been adjusted for it.
Types of errors
- Errors of omission: a transaction is not recorded at all (complete omission) or is recorded in the journal but one side is not posted (partial omission).
- Errors of commission: wrong amount, wrong account of the same class (Ravi for Ravina), wrong side, wrong totalling (casting) or wrong carrying forward.
- Errors of principle: breaking an accounting principle, for example treating capital expenditure as revenue (repairs vs new machine) or debiting purchases for furniture.
- Compensating errors: two or more errors that cancel each other's effect on totals (debit short by ₹100 in one account and another debit excess by ₹100).
Rectifying errors that do and do not affect the trial balance
Errors not affecting the trial balance (two-sided)
Complete omission, recording a wrong amount in the original book, posting to a wrong account on the correct side, errors of principle, compensating errors. Rectify with a normal journal entry that cancels the wrong effect and puts the right one. Example: furniture ₹6,000 debited to purchases → Furniture A/c Dr 6,000; To Purchases A/c 6,000.
Errors affecting the trial balance (one-sided)
Wrong amount posted in one account, posting to the wrong side, omission to post one side, wrong casting of a subsidiary book, wrong balancing. Before the trial balance is prepared they are corrected by a note in the affected account. After it, they are rectified through the suspense account.
Method
- What was done (wrong entry)?
- What should have been done (correct entry)?
- Rectifying entry = cancel the wrong + record the right; use Suspense A/c for the side that is missing.
Suspense account
When the trial balance does not agree and the errors cannot be found at once, the difference is put in a suspense account so the trial balance agrees and final accounts can be prepared. If debits are short, the suspense account has a debit balance; if credits are short, a credit balance. As each one-sided error is found, the rectifying entry uses Suspense A/c. When all errors are corrected, the suspense account closes. Any balance left at the year end is shown in the balance sheet (debit balance under current assets, credit balance under current liabilities) until corrected.
Key formulas and definitions
- Trial balance agrees when Σ debit balances = Σ credit balances
- Difference in trial balance → Suspense A/c
- Rectifying entry = Correct entry − Wrong entry
- One-sided error → Suspense A/c used; two-sided error → no suspense
Worked examples
1. Credit sale of ₹4,000 to Asha was not recorded. Rectify.
Complete omission (no effect on trial balance). Asha A/c Dr 4,000; To Sales A/c 4,000.
2. Machinery repairs ₹3,000 were debited to Machinery A/c. Rectify.
Error of principle. Repairs A/c Dr 3,000; To Machinery A/c 3,000.
3. Wages ₹1,500 were posted as ₹150 in Wages A/c. Rectify after preparing the trial balance.
Wages debit short by ₹1,350 (one-sided). Wages A/c Dr 1,350; To Suspense A/c 1,350.
4. Sales book was overcast by ₹900. Rectify.
Sales credited ₹900 too much. Sales A/c Dr 900; To Suspense A/c 900.
5. Rent ₹800 paid was posted to the credit side of Rent A/c. Rectify.
Rent should be debited ₹800 but was credited ₹800 → debit ₹1,600. Rent A/c Dr 1,600; To Suspense A/c 1,600.
6. Trial balance Dr total ₹2,48,200, Cr total ₹2,50,000. Errors found: purchases ₹9,000 posted as ₹8,100; sales book overcast ₹900. Show the suspense account.
Suspense opening Dr 1,800 (debits were short). Rectify: Purchases Dr 900; To Suspense 900. Sales Dr 900; To Suspense 900. Suspense Cr side 1,800 → closes with nil.
Common mistakes
- Believing an agreed trial balance means books are error-free. Two-sided errors still hide.
- Using suspense account for errors that do not affect the trial balance.
- Correcting a wrong-side posting with only the original amount. It needs double the amount.
- Putting closing stock in the trial balance when purchases are not adjusted.