Trial Balance: Classification of Errors, Location of Errors, and Rectification of Errors

The errors in accounting take place due to wrong posting of transactions, wrong totaling or wrong balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry.  All such errors in accounting can be classified into the following four categories:

• Errors of Commission
•  Errors of Omission
•  Errors of Principle
•  Compensating Errors

The error of commission: An error of commission in accounting is when an incorrect entry is made in financial records. For example, (i) Recording a debit or credit to the correct account but to the wrong subsidiary account or ledger (ii) Entering the correct amount but in the wrong account,(Amount received from A is credited to B) (iii)  subtracting instead of adding  (iv) Misclassifying a transaction (Misclassification refers to the act of assigning an individual or something to the wrong group or category).

 Errors of Omission:

The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. These errors can be (i) errors of complete omission and (ii) errors of partial omission. Some examples include forgetting to record a paid invoice, not recording a sale of a product or service, not reporting expenses, and not adjusting inventory quantities. When a transaction is completely omitted from recording in the books of the original record, it is an error of complete omission.

Errors of Principle:  

Accounting entries are recorded as per the generally accepted accounting principles. If any of GAAP principles are violated or ignored, errors resulting from such violation are known as errors of principle. This type of error is also known as an input error because the number is correct, but it’s recorded in the wrong account.  For example, an error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue such as recording an equipment purchase as an operating expense. Recording personal expenses as business expenses is an example of an error of principle because the transaction affects the same type of account. Debiting expenses paid for machinery installation to the expenses account also violates accounting principles because the expenses are treated as revenue expenditure instead of capital expenditure.

 Compensating 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 accounts is nil, such errors are called compensating errors. Compensating errors are also known as equalizing errors because the trial balance will always be tallied and does not have any difference. They can be misleading because a compensating error is an accounting error that offsets another accounting error, resulting in no net impact on an organization’s financial statements.

Location of Errors

Errors in a trial balance can occur at various stages of the accounting process like incorrect totaling of debit/credit side, posting mistake from journal to ledge, incorrect carrying from ledger to trial balance, recording in the wrong account or with the wrong amount, a transaction may be omitted from the books of accounts, etc.  Such error (or errors) needs to be located and corrected before preparing the financial statements.

If the trial balance does not tally, the accountant should take the following steps to detect and locate the errors:

• Redo the totals of the debit and credit columns of the trial balance.

• Match each account head/title in the ledger and the amount appearing in the trial balance. You may detect any difference in the amount or omission of an account.

• Compare the trial balance of the current year with that of the previous year and find out any additions and deletions in any accounts. If the difference in amount is unexpectedly large and cannot be explained, search for the cause of the difference.

• Review the correctness of balances of individual accounts in the ledger.

• Review the correctness of the posting in accounts from the books of original entry.

• It is possible that that an entry might be posted on the wrong side (ex: instead of debit posted in credit) of another ledger. One of the strategies is to identify such a mistake by dividing the difference in debit and credit columns by 2.  There is a possibility that an amount equal to one-half of the difference may have been posted to the wrong side of another ledger account. For example, if the total of the debit column of the trial balance exceeds Rs. 5000, then a credit item of Rs.2500 (half of 5000) may have been wrongly posted in the ledger as a debit item. To locate such errors, you should examine all the debit entries of an amount of Rs. 2500.

• The difference might have happened in the above example because of a complete omission of a posting of Rs.2500 in the debit side. So, you should verify all the credit items with an amount of Rs.2500.

• Similarly, if the difference is a multiple of 9 or divisible by 9, the mistake could be due to Transposition figures. For example, if a debit amount of Rs. 85 is posted as Rs.58, the debit total in the trial balance will exceed the credit side by Rs.27 (i.e. 85-58=27). This difference is divisible by 9. In this case, you can suspect a mistake due to the wrong placement of the decimal point may also be checked by this method.  Thus, a difference in trial balance divisible by 9 helps in checking the errors for a Transposition figure mistake.

How to rectify the errors?

From the point of view of rectification, the errors may be classified into the following two categories:

(a) Errors that do not affect the trial balance.

(b) Errors that affect the trial balance.

Rectification of Errors not Affecting the Trial Balance:

Errors that do not affect the trial balance are also known as two-sided errors because they affect two or more accounts at the same time. To rectify these types of errors you can pass a journal entry to correct the debit and credit:

We can rectify these by passing a journal entry giving the correct debit and credit to the accounts. To rectify an error, we need to cancel the effect of the wrong debit or credit by reversing it and restoring the effect of the correct debit or credit.

Reverse the wrong entry: Reverse the impact of the incorrect debit or credit on the account.

Restore the correct entry: Restore the correct debit or credit entry to the account.

For this purpose, we need to analyze the error in terms of its effect on the accounts involved which may be:

(i) Short debit or credit in an account; and/or

 (ii) Excess debit or credit in an account.

Therefore, rectification entry can be done by:

(i) Debiting the account with short debit or with excess credit,

(ii) Crediting the account with excess debit or with short credit.

For example,

• Credit sales of Rs.100000/- to ABC Ltd are not recorded in the sales book. This is an error of commission. The rectification for the above credit sales is:

Debit ABC Ltd: Rs.100000

Credit Sales Account: Rs.100000

• If Credit sales to ABC Ltd Rs 100000 were recorded as Rs.10000 in the sales book.

This is an error of commission. The rectification for the above credit sales is:

Debit ABC Ltd: Rs.90000.

The rectification for the above credit sales is:

Rectification of Errors Affecting the Trial Balance

These errors affect only one account. Thus, these are one-sided errors. We can rectify these errors by giving an explanatory note in the account or by passing a journal entry with the help of Suspense A/c.

The process of rectification is as follows:

Identify the account having the error. If there is an excess credit and shortage on the debit side, then the difference should be debited from the account with the difference amount as determined earlier. If the difference is found due to excess debit side and shortage of credit, then credit the account with the difference.

At last, the rectification is completed by debiting or crediting the suspense account.

Example:

The account made a provision of depreciation of Rs.20000 for Office furniture. However, the depreciation written off on furniture Rs.20000 is not recorded in the Furniture account.

Rectification entry for the above error:

Record the journal entry by debiting and crediting the following accounts:

Debit the depreciation expense account. This will appear on the income statement at the end of the accounting period.

Credit the Furniture account. This will be reflected on the balance sheet (assets side).

Depreciation expenses A/c Dr. 20000 (Narration: the amount of depreciation omitted post)

Furniture A/c. Cr.20000 (Narration: the amount of depreciation omitted post)

Here are some steps you can take to rectify errors that affect a trial balance, if you’re not sure how to categorize a transaction, you can temporarily record it in a suspense account until you can identify the correct account.

Partial payments

If a client makes a partial payment and you’re not sure which invoice it’s for, you can move the payment to a suspense account until you can identify the invoice.

Unidentified payments:

If you receive a payment but can’t identify the customer, you can move the payment to a suspense account and match it to unpaid invoices.

Error correction

If you find an error in an account, you can pass a journal entry through a suspense account to correct it.

A suspense account is a general ledger account where you temporarily record ambiguous transactions (you’re not sure how to classify a transaction) or there are discrepancies in a trial balance. If the debit side of the trial balance is short, then the amount is placed on the debit side of the trial balance debit Suspense account and similarly, if the credit side of the trial balance is short then that amount is placed on the credit of suspense account. The amount of money in a suspense account is called the suspense balance.

Close the suspense account: Once you’ve tracked down the error and corrected it, you can close the suspense account:

For example, you have identified a short of Rs.10000/- on the debit side of the trial balance and you are not able to categorise this amount.  So you have placed Rs.10000 on the credit side of the trial balance as debit suspense. Later you have found out that a table purchased for Rs.10000 was not recorded in the furniture account.

Now you will make a journal entry as follows;

Debit: Rs.10000/- furniture account

Credit: Rs.10000/- Suspense account

 After passing the above entries Suspense Balance in the general account becomes nil and the debit outstanding in the furniture head increased by Rs.10000/-.