Preparing a trial balance is the ultimate step of the final preparation of accounts for an organisation. Hence, being a student of Accountancy, one must get a stronghold of this topic so that all the calculations made are correct. Let’s dive into some essential details of class 11 Accountancy chapter Trial Balance and Rectification of Errors and understand how companies make the trial balance and carry out rectification of errors.
This Blog Includes:
- What is a Trial Balance?
- Intentions of Making a Trial Balance
- Methods of Preparing Trial Balance
- Steps to Prepare the Trial Balance
- Rectification of Errors
- Types of Errors
- Steps to Identify Errors in the Trial Balance
- State the limitations of Trial Balance
- Practice Questions
What is a Trial Balance?
When a transaction is recorded as per the double-entry method, there is a credit transaction carried out for every debit entry. In other words, when one account is debited, then another account has to be credited with an equal amount. Hence, the total debit side balance of a ledger account will be equal to the total credit balance. According to accountancy class 11, this statement is called a Trial Balance. In simple terms, the trial balance is a list of debit and credit balances of the cashbook and ledger account of a company.
It is used to compile the balance of all the ledger accounts into two columns: Debit (Dr.) and Credit (Cr.). It is prepared to determine the accuracy of the company accounts. Moreover, trial balance doesn’t guarantee that the account is accurate, but offers an arithmetical precision to it.
Let’s have a look at the accounting cycle taught in class 11 accountancy.
Companies use personal, nominal, and real accounts for making the trial balance. Trial balance is usually performed at the end of the financial year by companies. But, the company can prepare it on a monthly, quarterly, or even half-yearly basis, depending upon the requirements.
Intentions of Making a Trial Balance
Here are the objectives of preparing a trial balance as per class 11 accountancy chapter trial balance and rectification of errors:
- Systematic Record: The primary motive of a trial balance is to keep a record of the entire debit and credit transaction systematically in the ledger. It is also responsible for checking if the accounts have been balanced properly or not. If both sides of balances are the same, it means that the trial balance record is correct
- To Rectify Errors: When there is a difference in the debit and credit side balances, it indicates an error in the accounting process. It is important for the management to take immediate action to correct this error.
- To Assist in Preparing Financial Statements: A company would require a trial balance for the preparation of its financial statements. The financial statement is a format in which all the revenue and expense account of the trial balance is carried forward to the Profit and Loss account. Moreover, all the assets, capital account, and liabilities are taken forward to the balance sheet.
Methods of Preparing Trial Balance
There are three methods of preparing a trial balance as per the class 11 accountancy curriculum:
- Total Method
- Balance Method
- Total-Cum Balance Method
Let us study all these methods in detail:
According to the chapter on trial balance and rectification of errors, this method calculates the total amount of debit and credit columns of an account are displayed on the respective sides of the Trial Balance. This is the main method used in for calculating trial balance and then rectify errors. The trial balance is correct if both the columns are equal, otherwise not.
It is quite a popular trial balance method used by companies. Here, the ledger accounts balance is written on the debit and credit columns of the trial balance. The total debit column balance should be equal to the total credit column balance of the trial balance.
It is a combination of the above two methods. In this system, there are four columns: debit, credit, debit balance and credit balance.
Steps to Prepare the Trial Balance
As per the class 11 chapter trial balance and rectification of errors, there is a step-by-step process used to prepare your trial balance. If the total of both debit and credit columns match, it means that the trial balance is arithmetically accurate. If not, you need to identify the errors and rectify them. The following image describes the steps used in the preparation of trial balance:
Rectification of Errors
Financial accounting is all about recording and analyzing every monetary transaction of an enterprise as per the chapter on trial balance and rectification of errors. However, at times, companies make incorrect entries or in the wrong place. The comprehensive process of rectifying such mistakes is called rectification of errors.
Types of Errors
According to trial balance and rectification of errors, there are four major types of errors committed while recoding various business transactions in the trial balance. These are errors of omission, errors of principle, errors of commission, and compensating errors. Let us take an intricate look at them-
Errors of Omission
According to the class 11 accountancy chapter, when you miss an entry while posting transactions or recoding in books, this type of error happens. There are two types in it- partial and complete omission.
Errors of Principle
This error occurs when the transactions are recorded against the principles of accounting. These errors lay a direct effect on the trial balance.
Errors of Commission
Any transaction that has a wrong amount, wrong posting, wrong carrying forward, and wrong balancing, comes under this category of errors. It is of two types- trail balance tally and trial balance did not tally.
Compensating errors are the errors that get cancelled by the effect of another mistake. There is no sub-category under this error.
Steps to Identify Errors in the Trial Balance
Derived from the chapter trial balance and rectification of errors, these steps will help you in identifying errors in a trial balance:
- Check the total amount of both columns of the trial balance.
- Recheck if the bank balance, cash balance, discount allowed and discount received are entered correctly.
- Evaluate the difference and check if there is an omission or error in the trial balance.
- Recheck the ledger balance and accounts. Also, check the posting of ledger balance to trial balance.
- Check the subsidiary account to identify any lapses in carrying forward and brought forward.
- Companies need to recheck different accounts when the difference is bigger. They can do that by comparing the current and previous year’s trial balance.
- Companies should also check if the right amount is posted on the right side of the account.
- In the case where errors cannot be identified, the difference is transferred to the suspense account. Any one-sided error found can be rectified through suspense account only.
State the limitations of Trial Balance
Here are some of the limitations of a trial balance:
- Cannot detect errors known as Errors of Complete Omission which arise when an entry is not recorded in the Journal.
- Cannot detect errors of principle that may take place in the account.
- Cannot detect errors due to wrong entry in accounts, which can lead to errors.
- Cannot detect errors known as Compensatory Errors which is the effect of one error that is cancelled by the effect of another error.
- The Trial Balance fails to reflect errors such as if the correct amount is posted in the correct side; but, in the wrong account and if wrong amount is posted in the wrong side, but in the correct account.
As you are familiar with the essential process and features of trial balance and rectification of errors, here are some important questions you must practice:
- What are the advantages of preparing a trial balance?
- What are the features of the trial balance?
- How to locate errors in the trial balance?
- Give five examples of errors of principle.
- What are the different methods of preparing the trial balance?
- What are the limitations of the trial balance?
Hopefully, this blog provided you with the study notes to ace the chapter on Trial Balance and Rectification of Errors. Apprehensive about choosing the right course after completing 12th? Reach out to our Leverage Edu experts and we will assist you in sorting your interests and preferences and finding the right course and university to steer towards a rewarding career. Sign up for a free career counselling session with us today!