MODULE - III

Ledger and Trial

11
Balance

TRIAL BALANCE AND Notes

ACCOUNTING ERRORS

You have learnt the method of recording transactions in journal and its sub-divisions.
You have also learnt their posting to various accounts in the ledger. This process of
recording and posting continues throughout the year. At the end of the year it becomes
necessary to check the arithmetical accuracy of the books of accounts before the
preparation of final accounts. For this purpose we prepare a statement called Trial
Balance. In this unit you will learn about the preparation of Trial Balance and the
extent up to which it can be relied upon for testing the accuracy of accounts. You will
also learn about the errors that may be disclosed and that may not be disclosed by
the preparation of Trial Balance and the method of locating such errors.

OBJECTIVES
After studying this chapter, you will be able to:
• define trial balance;
• describe the objectives of preparing a trial balance;
• explain the causes of disagreement of a trial balance;
• identify the types of errors disclosed and not disclosed by a trial balance;
• describe the procedure for locating the errors;
• explain the limitations of trial balance;
• prepare the trial balance and
• explain the meaning and disposal of suspense account.
11.1 MEANING OF TRIAL BALANCE
Numerous transactions take place in business everyday. They are first recorded in
books of original entry i.e., Journal Proper or one of its sub-divisions. Then they are
posted to the appropriate accounts in the ledger. Each ledger account is balanced
periodically so as to ascertain the net effect of various transactions posted therein. In
the process, some accounts may get closed; the final accounts are prepared for
ascertaining the profit or loss and the financial position of the business. The quality and
reliability of the results obtained depend, largely on the correctness of the entries made

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Balance in various books of accounts and their ledger posting. Hence, it is necessary to ascertain
the accuracy of these entries and ledger postings before we proceed with the preparation
of final accounts. For this purpose, we prepare a statement called ‘Trial Balance’,
which shows balances of all the ledger accounts. The names of each account having
debit balances are shown in the debit column and if it shows a credit balance, the
Notes amount is entered in the credit balances column. You know that the total of the debit
balances column must tally with the total of the credit balance column, because for
every debit there is a corresponding credit and vice versa. When the two totals tally, it
is considered as a preliminary proof of the arithmetical accuracy of the accounts. It is
an assurance that entries in the journal and posting into ledger have been correctly
done and that equality between debits and credits has been maintained throughout.
However, if the two totals do not tally it implies that there are some errors in the books
of accounts.
Trial Balance can thus, be defined as a statement (or a schedule) listing, in separate
columns, the debit and credit balances of all ledger accounts on a particular date. It
indicates that the books of accounts have been prepared in accordance with the
rules of double entry and ensures, to a great extent, the arithmetical accuracy of
accounting entries. Trial Balance provides a check on arithmetical accuracy of the
recording of financial transactions in different books such as journal and the ledger.
Such a check can be performed by preparing a statement called trial balance. Trial
balance is a statement prepared by taking up the debit and credit totals or balances
of all ledger accounts on a particular date.
11.2 OBJECTIVES OF PREPARING A TRIAL BALANCE
i) To check arithmetical accuracy : With the help of trial balance we can
identify the arithmetical error, committed by the accountant or his assistant,
because in such a situation the trial balance will not agree. Under such
situations it is assumed that some errors have been committed. After identifying
such errors the same are rectified.
ii) To prepare final accounts of the enterprise : Trial balance becomes the
basis of preparing final accounts. If we do not prepare trial balance and just
start preparing final accounts, it may be possible that we forget to record
some transactions that were not recorded while preparing the final accounts
because information about the same was not available at that time.
iii) Comparative study of each account : Trial balance helps in comparing
the present balance of an account with the previous period balance. By
preparing trial balance, we can estimate whether closing balance of
accounts will increase or decrease within two accounting periods. It can
also be used as a tool to decide whether there is need to decrease the rate

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of depreciation for showing improved profit position. Balance
iv) To make financial budget : Previous years trial balance figures are also
helpful to estimate the future amount. In other words, we can make different
financial budgets with the help of trial balance.

Notes
INTEXT QUESTIONS 11.1
Given below are some statements. Some of these statements are correct and some
of these statements are incorrect. Write ‘correct’ if the statement is correct and
‘incorrect’ if it is not correct.
i. Trial Balance is an essential part of the accounting process.
ii. Trial Balance is prepared only once in a year.
iii. If the totals of the two columns of a Trial Balance are equal it means
the posting has been done correctly.
iv. Debit Balances of the accounts are written in the Debit column and
Credit balances in the credit column of the Trial Balance.
v. The Assets and Expenses accounts have the credit balance.
11.3 CAUSES FOR THE DISAGREEMENT OF A TRIAL
BALANCE
As mentioned earlier, when the Trial Balance does not tally it means that some
errors have been committed while preparing the accounts. Let us, now analyze
the errors which usually affect the Trial Balance and lead to its disagreement.
i) Omission of posting in one account : You are aware that both the debit
and credit aspects of a transaction have to be posted in the ledger
accounts. If you post it to the debit of one account and forget its posting
to the credit of the other concerned account, it is bound to affect the
Trial Balance. For example, an amount of ` 200 received from Ali, correctly
entered on the debit side of the cash book but is not posted to the credit
side of Ali’s Account, because of this error the totals of the debit column of
the trial balance will be more than the total of the credit column and hence
the trial balance will not agree.
ii) Double posting in one account : If by mistake you post an entry two
times to the debit or to the credit of an account it would result in extra debit
or credit and as such cause disagreement in the Trial Balance for example `
4000 received from Ashok were credited twice in his account will increase
the total of the credit column by ` 4000 and the trial balance will not agree.
iii) Posting in the wrong side of an account : When an entry is posted in the

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Balance wrong side of an account i.e. instead of debit side it is posted in the credit
side and vice-versa, it would also cause disagreement of the Trial Balance.
In such a situation, the difference will be for double the amount. For example,
` 300 received from Khan which is correctly entered on the debit side of
the Cash Book, but while posting it to Khan’s Account it is wrongly posted
Notes to the debit side of his account instead of the credit side. This would mean
that a debit of ` 600 (` 300 in Cash Account and ` 300 in Khan’s Account)
has no corresponding credit. With the result the total of the Credit column of
the trial balance will be lesser by ` 600.
iv) Posting wrong amount in an account : If you post an entry to the correct
side of an account but commit an error in writing the amount, this would
affect the Trial Balance. Suppose, in the above example you post the entry
correctly on the credit side of Khan’s Account but the amount is wrongly
written as ` 200. It would cause a difference of ` 100. In the Trial Balance,
the credit side will be lesser by ` 100.
v) Wrong Casting of the subsidiary books : If any subsidiary book is
overcast or undercast, it affects the concerned account in ledger. Suppose
the correct total of Sales Journal is ` 5,600, but it has been totalled as
` 5,300 when now posted to the credit of Sales Account, the Sales Account
will be short by ` 300, and the Trial Balance will not tally.
vi) Omitting to post the total of a subsidiary book : If the total of a
subsidiary book is not posted to the concerned account, it would affect the
Trial Balance. Such mistake relates only to the account where posting was
to be done and as such affects only one account. For example, if the totals
of the Sales Book ` 18,900 are not posted to the credit of Sales Account,
the credit side on the Trial Balance will be lesser by ` 18,900.
vii) Wrong totaling or balancing of an account : When an account is wrongly
totaled or wrongly balanced, this would affect the Trial Balance. Suppose
total of the debit side of Shyam’s Account has been written as ` 1,300
instead of ` 1,100. It would lead to wrong balance in Shyam’s Account.
Consequently, the debit total in the Trial Balance will be higher by ` 200.
Similarly, if the totaling is correctly done but a mistake is committed in balancing
the account, it would also cause a difference in the Trial Balance.
viii) Omission of an account from Trial Balance : You know that all accounts
which show some balance must be included in the Trial Balance. If you
forget to write the balance of any account in the Trial Balance, it will not
tally. In practice cash book balances are often omitted from Trial Balance.

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ix) Writing the balance of an account in the wrong column of the Trial Balance
Balance : If the balance of an account which is to be shown in the debit
column of the Trial Balance is actually shown in the credit column, the Trial
Balances will not tally. It will be affected by double the amount.
x) Wrong totaling of the Trial Balance : If an error is committed in totaling
the amount columns of the Trial Balance itself, the Trial Balance will not tally. Notes

Thus, you have learnt about various errors which may cause difference in the Trial
Balance. Note that these errors affect only one aspect (debit or credit). This upsets
the debit-credit equality leading to the disagreement of the Trial Balance
11.4 ERRORS NOT DISCLOSED BY TRIAL BALANCE
Agreement of the trial balance is not a conclusive proof of the accuracy of the
accounts. There may be certain errors which might have been crept into the accounts
but do not affect the agreement of the trial balance. Such errors have been discussed
below :
i) Errors of Complete Ommission : If a transaction is completely omitted
from being recorded in the books of accounts, such an omission will not
affect the agreement of the trial balance for example a credit purchase of `
6000 from Ravi was omitted from being recorded in the Purchase Book.
Because of this omission the totals of the purchases book and Ravi’s account
will not be affected and hence trial balance will also not be affected.
ii) Errors of commission : These types of errors happen due to the negligence
of accountants and cannot be located by preparing trial balance. Suppose a
sales of ` 10,000 was recorded in books as ` 100. The balances both the
accounts i.e sales accountant and cash account will be affected only by `
100 and hence the trial balance will not be affected.
iii) Compensating Errors : Suppose, an accountant posted ` 500 less in the
debit side of purchase account and at the same time he also posted ` 500
less in credit side of sales account. In this case an error has been compensated
by another error. Such errors are called compensating error and will not
affect the trial balance.
iv) Errors of principles : When an accounting principle has been violated
while recording a transaction in the books of accounts, such errors are called
errors of principle e.g. the purchase of an asset if recorded in the purchases
account will be an error of principle but since the purchase account will be
debited and the suppliers accounts will be credited with the same amount
this error will not affect the trial balance

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Balance 11.5 ERRORS DISCLOSED BY TRIAL BALANCE
If the Trial Balance does not tally, it will indicate that certain errors have been committed
which have affected the agreement of the Trial Balance. The accountant will then
proceed to locate such errors. On location such errors are rectified. Errors disclosed
by trial balance have been explained below:
Notes
i) Wrong Casting : If the total of the Cash Book or some other Subsidiary Book
is casted wrong, the Trial Balance will not tally. For example, the total of the
Purchase book has been casted ` 2000 more. When this total will be posted to
the debit side of the purchase account, it will also show an excess debit of `
2000 and hence, the Trial Balance will not agree.
ii) Posting to the Wrong Side of an Account : If instead of posting an amount
on the debit side of an account, it is posted on the credit side, or vice versa,
the Trial balance will not tally. For example, goods for ` 2,000 purchased
from Sohan. If instead of posting the amount on the credit side of Sohan’s
account it is posted to his debit, the debit side of the Trial Balance will
exceed the credit side by ` 4,000.
iii) Posting of Wrong Amount : The Trial Balance will not tally if the posting in
an account is made with an incorrect amount. For example, goods for ` 600
have been purchased from Anil. If, it has been correctly entered in the
Purchase Book or purchase account, but while posting to Anil’s account, in
credit side (correct side) the amount posted is ` 60 instead of ` 600, the
Trial Balance will not tally.
iv) Omission of Posting of One aspect of a Transaction : For example, if
` 500 has been received from Shyam and correctly entered in the Cash
Book but if it is omitted to be posted on the credit side of Shyam’s Account,
the Trial Balance will not tally.
v) Posting an amount twice in an Account : For example ` 500 has received
from Vinod and correctly entered in the Cash Book, but if it is posted twice
on the credit side of Vinod’s account, the Trial Balance will not tally.
vi) Errors of Totaling and Balancing of Accounts in the Ledger : Errors
may occur in the totaling of debit or credit sides of accounts in the
Ledger or in the balancing of accounts in the Ledger. Because the
balances of accounts are transferred to the Trial Balance, resulting in
transferring wrong balances in the Trial Balance. This will result into the
disagreement of the trial balance.

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Balance

INTEXT QUESTIONS 11.2

Fill in the blanks with suitable word or words
i. Trial Balance is said to have agreed when its _________ are equal.
ii. The agreement of Trial Balance is a proof of __________ accuracy of Notes
the ledger posting.
iii. There is a ___________ column and a _________ column for balances of
accounts in a Trial Balance.
iv. Cash in hand is written in the _________ column of the Trial Balance.
11.6 PROCESS OF LOCATING THE ERRORS
If an error exists in the books, it affects the accuracy of results of business operations
revealed by the financial statements. Therefore, the errors must be located for
rectification. The task of locating errors is, however not easy. The location of errors
will be easier if the following steps are systematically taken.
i. Check the total of the trial balance.
ii. Compare the ledger account balances carried to the trial balance.
iii. Verify the total of subsidiary books and their posting to ledger accounts.
iv. Verify that all journal entries have been correctly posted to the different
ledger accounts.
v. If you find that you have an unbalanced trial balance, in other words the
debits don’t equal the credits, it indicates that some errors have been
committed during the course of accounting process. Such errors have to be
found and corrected. The first step in finding an error is to simply add the
credit and debit columns again to verify your totals. If they still don’t agree
then subtract the smaller totals from the bigger and look for the missing
amount in the smaller column. If you find it, you’ve found your error.
vi. There are other standard techniques to track down an error in a trial balance.
If the debits and credits are not equal, see if the numeral 2 divides equally
the difference. If it does, look for an account, incorrectly in the column with
the larger total that equals half the difference. If you find this, you’ve found
your error.
vii. Another technique is to use the numeral 9 to find a transposition error. If the
numeral 9 divides evenly the difference between the credits and debits, you
have a transposition error. Go back over your credit and debit entries to try
to find your transposition error.

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Balance 11.7 PREPARATION OF A TRIAL BALANCE
After recording all financial transactions in the subsidiary books and journal proper
the same are posted into the ledger. The ledger accounts are then, balanced. The
Balances of the ledger accounts are then transferred to the relevant columns of the
trial balance to verify that the debits are equal to the credits. The trial balance is the
Notes
next step in the accounting cycle. Trial balance is not an account. It is only a statement
that lists the balances of ledger accounts including cash and bank balances. It is
prepared on a particular date. It is prepared on a sheet with two amount columns for
debit and credit balances. The accounts having debit balances are entered in the
debit amount column and the accounts having credit balances are entered in the
credit amount column. The sum of each column should be equal. It is actually the
first step in the “end of the accounting period” process. In practice the trial balance
is prepared with debit and credit balances of various accounts in the ledger along
with balances in the cash book. The following is the format of a Trial Balance :
Trial Balance of (Name of the Firm)
As on (Date of Preparation)
Name of the Account Debit Balance Credit Balance
Amount (`) Amount (`)

It can be well understood with the help of the following example.

Example: Journalise the following transactions, post them into ledger, balance
the accounts and prepare a trial balance :
Date Particulars Amount
2012 (`)
May 1 Commission received 10,000
May 2 Rent paid 5,000
May 5 Interest received 6,000
May 7 Brokerage paid 2,000

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Solution Balance
JOURNAL
Dr. Cr.
Date Particulars L.F. Dr. Cr.
(`) (`) Notes
2012
May 1 Cash Account Dr. 10,000
To Commission received Account 10,000
(Being commission received)
May 2 Rent Account Dr. 5,000
To Cash Account 5,000
(Being rent paid)
May 5 Cash Account Dr. 6,000
To Interest received Account 6,000
(Being interest received)
May 7 Brokerage Account Dr. 2,000
To Cash Account 2,000
(Being brokerage paid)

Dr. Rent Account Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2012 2012
May 2 To Cash A/c 5,000 May 31 By Balance c/d 5,000
5,000 5,000
June 1 To Balance b/d 5,000

Dr. Commission Account Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2012 2012
May 31 To Balance c/d 10,000 May 01 By Cash A/c 10,000
10,000 10,000
June 1 Balance b/d 10,000

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Balance Dr. Interest Received Account Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2012 2012
May 31 To Balance c/d 6,000 May 5 By Cash 6,000
6,000 6,000
Notes June 1 By Balance b/d 6,000

Dr. Brokerage Account Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2012 2012
May 7 To Cash 2,000 May 31 By Balance c/d 2,000
2,000 2,000
June 1 To Balance b/d 2,000

Dr. Cash Account Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount
(`) (`)
2012 2012
May 1 To Commission A/c 10,000 May 2 By Rent 5,000
May 5 To Interest May 7 By Brokerage 2,000
Received A/c 6,000 May 31 By Balance c/d 9,000
16,000 16,000
June 1 To Balance b/d 9,000

Trial Balance as on 31st May 2012

Name of Account Debit Credit
Balance (`) Balance (`)
Rent A/c 5,000
Brokerage A/c 2,000
Cash A/c 9,000
Commission A/c 10,000
Interest Received A/c 6,000
Total 16,000 16,000
11.8 LIMITATIONS OF A TRIAL BALANCE
i) As there are certain errors which are not disclosed by a trial balance.
Therefore again it can be said that the agreement of a trial balance is
not a conclusive proof of the accuracy of accounts.
ii) A trial balance gives only condensed information of each account.

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iii) It does not give the information about the profit or loss made by the business Balance
in the accounting period.
iv) If trial balance is not prepared accurately, the final accounts prepared from
such a trial balance would not be reliable.
v) It does not ensure that all the transactions have been actually recorded in the
subsidiary books. Notes
vi) It is prepared only by those enterprises which make use of double entry
system.

INTEXT QUESTIONS 11.3

Few errors have been committed in the books of Ram. State with reasons
which errors would affect the trial balance.
i. Sales ` 2500 to Shyam omitted from being recording in the books of
accounts.
ii. Purchase journal was overcast by ` 2000.
iii. Sales journal was under cast by ` 3000
iv. Amount paid to Anil wrongly posted to the debit of Sunil’s account.
v. Bank overdraft shown in the debit column in the trial balance.
vi. Sales of ` 3000 to Rohtas entered in sales journal as sales to Ram.
vii. Wages paid for installation of machine debited to wages account.
11.9 SUSPENSE ACCOUNT
When the trial balance does not agree, because of errors committed by the accountant
during the accounting process and he decides to prepare the final accounts then the
difference is written on the shorter column against an account called ‘Suspense
Account’. After wards the errors that affect the trial balance are rectified through the
suspense account. Once all such errors are rectified the suspense account opened
to artificially balance the trial balance will finally be balanced.

INTEXT QUESTIONS 11.4

I. Fill in the blanks with suitable word or words :
i. If there is the error in totaling the Subsidiary Day Books, the
totals of Trial Balance will ______________.
ii. The Trial Balance will not agree if there is an error in carrying
out _________ from ledger.
iii. Agreement of Trial Balance is not a ___________ of the correctness
of posting.

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Balance iv. When the total of the two columns of Trial Balance are not equal,
the difference is put in ___________ Account to make the Trial
Balance agree.
II. Multiple Choice Questions
i. Which of the following errors will not affect the Trial Balance.
Notes a) Wrong balancing of an account
b) Writing an amount in the wrong account but on the correct
side
c) Wrong totaling of an account
d) None of the above
ii. Which of the following is not the main objective of preparing a
Trial Balance ?
a) To check arithmetical accuracy
b) To prepare final accounts
c) To have comparative study of each account
d) To present trial balance in court as a proof of transaction
iii. Which of the following errors will affect the Trial Balance?
a) Repairs to buildings have been debited to building account
b) The total of purchases journal is Rs. 10,000 short
c) Carriage paid on new machinery has been debited to the
carriage account.
d) None of the above
iv. Which of the following errors will be disclosed by Trial Balance?
a) Error of complete omission
b) Wrong casting
c) Compensating error
d) Error of Principles
v. Which of the following errors will not be disclosed by Trial
Balance?
a) Error of complete ommission
b) Posting of wrong amount
c) Posting an amount twice in an account
d) Posting to the wrong side of an account

WHAT YOU HAVE LEARNT

• It is necessary to prepare a Trial Balance before preparing the final accounts.
It verifies the arithmetical accuracy of the books of accounts.

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• When a Trial Balance does not tally, it means there are errors in books of Balance
account. A series of steps are taken to locate such errors.
• There are certain errors which affect the Trial Balance and there are some
which do not.
• Errors of principle, errors of complete omission, certain errors of commission
in subsidiary books, and the compensating errors are not disclosed by the Notes
Trial Balance.
• The limitations of a trial balance are that it does not give the information
about the profit or loss made by the business in the accounting period
and trial balance gives only condensed information in a summary form for
each account.
• Errors :
→ Compensating Errors : A group of errors wherein the effect of an
error is counter-balanced (or compensated) by the effect of one or
more errors, as a result of which the agreement of Trial Balance
remains unaffected.
→ Errors of Principle : An error committed by ignoring or misapplying
some principle of accounting while recording a transaction in the
books of account.
→ Errors of Complete Omission : When a transaction is completely
omitted from being recorded in the books of accounts the resultant
errors are called errors of complete omission.
→ Errors of Partial Omission : When transaction is partly omitted
from being recorded in the books of accounts the resultant errors
are errors of partial ommission.
→ Errors of Commission : A clerical error committed by the
accountant while recording or posting of a transaction is called error
of commission.

TERMINAL EXERCISE
1. Why do you consider Trial Balance as a test of the arithmetical accuracy of
the books of accounts? List the errors that will be disclosed by the Trial
Balance.
2. If the Trial Balance does not tally, it means there are some errors in
books of accounts. State the procedure of locating errors.
3. State the limitations of Trial Balance.
4. Is the Trial Balance a conclusive proof of the accuracy of the books of
accounts? Discuss the errors not disclosed by the Trial Balance.

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Balance 5. Explain with examples the different types of errors that are usually committed
in recording of transactions?
6. What do you mean by Trial Balance? Discuss the objectives of preparing a
Trial Balance.
7. What is a Suspense Account? What does its appearance in Trial Balance
Notes indicate?
8. Prepare a Trial Balance of M/s Jai Jawan Jai Kisan Enterprises as on
31.12.2012 from the following balances.
Account Amount Account Amount
` `
Cash in hand 31,000 Sales A/c 76,000
Cash at Bank 12,000 Opening Stock 10,000
Capital A/c 80,000 Rent A/c 2,000
Drawings A/c 28,000 Wages A/c 6,000
Debtors A/c 20,800 Carriage Inward A/c 500
Creditors A/c 17,800 Machine A/c 1,500
Purchases A/c 62,000
Closing Stock 5,000
9. Prepare a Trial Balance as on 31.3.2013 from the following balances :
Account Amount
`
Cash in Hand 3,200
Cash at Bank 12,600
Capital A/c 27,450
Furniture A/c 12,300
Building A/c 15,000
Wages A/c 3,500
Sales A/c 20,000
Rent A/c 250
Bank Charges A/c 400
Depreciation A/c 200

ANSWER TO INTEXT QUESTIONS

11.1 (i) correct (ii) incorrect (iii)incorrect (iv) correct (v)incorrect
11.2 (i) debit and credit totals (ii) airthmatic (iii) debit, credit
(iv) debit
11.3 Errors ii), iii) and v) would affect the trial balance.

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11.4 I. (i) not agree (ii) balance (iii) proof (iv) suspense Balance
II. (i) b (ii) d (iii) b (iv) b (v) a.

ANSWER TO TERMINAL EXERCISE

Notes
8. Total of Trial Balance ` 1,73,800.
9. Total of Trial Balance ` 47,450.
ACTIVITY FOR YOU
• Ask your parents regarding the various expenditure and income of a particular
month, pass journal entries for the same and then post them in the ledger.
After closing the ledger accounts find the balances and prepare a trial balance,
which should be tallied, so as to ensure that the books of accounts prepared
by you are arithematically correct.

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
         













            







 
 
 
 
 
 
 










 MODULE - IV
Maximum Marks Hours of Studies
12 32

Depreciation, Provisions and Reserves

This module will help the learners to understand the methods of spreading the cost
of fixed assets throughout their working life using the concept of Depreciation. They
will also be able to describe the need and importance of creating Provisions and
Reserves.

Lesson 12 : Depreciation
Lesson 13 : Provisions and Reserves