What is the trial balance?
The trial balance is a list of account balances at a particular point in time. It is usually prepared after all the ledger accounts have been prepared and balanced.
The trial balance has columns for the names of the accounts, debit balances and credit balances.
Purpose of the trial balance
Arithmetical accuracy of entries
It checks the arithmetical accuracy of the entries in the accounts. Accounting is based on the double-entry principle, that is, each debit entry must have a corresponding credit entry. If this principle has been correctly applied, the totaĺ of all debit entries will be equal to the total of the credit entries. If they are not equal, there is an error, and the debit and credit totals in the trial balance will not agree.
Basis for preparation of final accounts
The balances in the trial balance are used to draw up the income statement and the statement of financial position.
Errors that do not affect the agreement of the trial balance
The agreement of the trial balance totals may suggest there are no errors in the accounts. However, some errors do not prevent the agreement of the debit and credit totals of the trial balance. In other words, some errors go undetected even though there is agreement in the trial balance. The errors are:
Error of principle
This error occurs when a transaction is entered on the correct side of the wrong type of account. The account prepared does not belong to the same category or class as the correct account. For example, the purchase of machinery, an asset, is wrongly debited to the machinery maintenance account, an expense. They do not belong to the same class of accounts. One is an asset account, the other is an expense account.
Error of omission
This type of error is as a result of the complete omission of a transaction from the books of accounts. The trial balance totals will agree because neither the debit entry nor the credit entry is recorded. This is possible if the transaction does not pass through the books of prime entry due to the misplacement of the source document, e.g., a lost invoice.
Error of commission
This error occurs when a transaction is entered in the wrong account within the correct type or class of accounts. For instance, cash received from Matt is credited to the account of Mark. They belong to the same class of accounts-they are both personal accounts. Note that the entry is posted to the correct side (credit), but in the wrong type of account
Compensating error
This happens when an error in one account cancels out the error in another account. A given amount may overstate the credit total in one account while the same amount overstates the debit total in another account. For example, the motor vehicle expenses account is debited with $300 instead of $100. This means the debit total in the trial balance will be overstated by $200. If at the same time, the sales account is credited with $700 instead of $500, the credit total in the trial balance will be overstated by $200. The trial balance will agree as the credit and the debit totals have been overstated by the same amount ($200).
Error of complete reversal of entry
This type of error occurs when the double-entry principle has been reversed. The account that should be debited is credited while the account to be credited is debited. The trial balance totals will agree because the same amount is posted to the debit and credit sides. For example, cash sales is debited to the sales account and credited to the cash account. The correct entry should be: debit cash account (receiver) and credit sales account (the giver)
Error of original entry
This occurs when the double entry is observed correctly with the incorrect amount. The incorrect amount is posted to both the debit side and credit side in the appropriate accounts. For example, instead of entering $150 on both debit and credit sides of two accounts, $50 is entered on both sides. The trial balance debit and credit totals will agree even though both sides have been understated by $100.