Guest Author - Consuelo Herrera, CAMS, CFE
BusinessDictionary.com, states that in a double entry bookkeeping, it is the aggregate of all debit and credit balances at the end of an accounting period that:
(1) Shows if the general ledger is in balance (total debits equal total credits) before making closing entries,
(2) Serves as a worksheet for making closing entries, and
(3 Provides the basis for making draft financial statements.
The act of totaling debit balance and credit balances to confirm that total debits equal total credits.
The trial balance is the statement of all the balances from the ledger and cashbook on a given date. It is useful because it brings up the presence of some errors during the process of journalizing or posting.
Although debits may equal credits, this does not necessarily mean that there were no errors in the recording of the transactions. It does not mean that transactions were recorded accurately. Some common mistakes that do not prevent a trial balance for meeting the conditions that total debits are equal to total credits are: Including an entry twice, a transaction not included at all, or included for an incorrect amount.
Errors that may be exposed by the trial balance are:
o Errors of calculation, making errors in arithmetic
o Errors of omission of one entry or recording only half an entry, such as a debit without a corresponding credit or, vice versa
o Posting to the wrong side of an account. For example recording both entries on the same side such as two debits instead of a debit and a credit
o Errors in amounts, such as recording one or more amounts incorrectly.
There are errors that cannot be detected by the trial balance:
o Errors of commission– The correct amount has been entered but it has affected the wrong vendor or debtor. For example: Two vendors with the same last name. One of them would have an incorrect balance, J. Smith as opposed to R. Smith.
o Errors of omission– When a transaction is completely omitted from the accounting records
o Errors of principle– If an amount is entered in the wrong type of account. For instance recording the purchase of a fixed asset as an expense.
o Transposition Errors– The correct amount should have been $519 not $591. Usually only this type of affects one side of the entry mistakes which makes it difficult to detect the error if it has affected both sides of the equation. The clue in a transposition is that the difference in account balances or trial balance totals is evenly divisible by 9. Whit a transposition, the digits have been switched around. (591 - 519 = 72, which is evenly divisible by 9. 72/9 = 8)
o Errors of original entry – If the original entry is incorrect. For example, a purchase of $125 was recorded as $225. Both the debit side and the credit side reflect $225. If this purchase was on credit, both the purchases account and the payable would be overstated.
o Compensation errors– This happens when errors effectively cancel each other out. For example, when both the debit and the credit sides have been added a given amount too much. Sales account was added up to be $150 more than it actually is and the purchase account was also added up to be $150 more than it actually is, then these errors will compensate each other when the trial balance is prepared.
o Complete reversal of entries - if double entries are completely reversed, i.e. we debit an account, which should be credited, and credit an account, which should be debited, then the trial balance will still balance, even though the transaction has been recorded, completely incorrectly.
Correcting Trial Balance Errors
Corrections to double entry accounts should be made via the journal so that a permanent record of the mistake is recorded and how it was corrected.
