What is a Trial Balance?
A trial balance is a list of all account balances taken from the accounting ledgers at a specific date, with the purpose to check whether the total debit balance is equal to the total credit balance. The principle of double entry ensures that the two totals (i.e. debit balances and credit balances) should match at any particular date. If the totals are not equal there must be some error or mistake in the bookkeeping.
To prepare a trial balance, first balance all the ledger accounts, including the cash book. Then list the balances with the debit balances and credit balances in separate columns. The total of the debit balances should equal the total of the credit balances. If the total is equal, the trial balance agrees.
Limitations of a trial balance:
As stated above, if the total of debit and credit balances do not match, there must be a mistake somewhere in the bookkeeping. Unfortunately, even if a trial balance agrees, it does not mean that there are no errors because there are six types of errors that do not affect the agreement of the trial balance. They are as follows
Errors of Omission
An error of omission occurs when an accounting entry is completely overlooked in the books of accounts. The omission won’t affect the trial balance because neither debit nor credit balance are entered for the transaction.
Errors of Commission
Under error of commission, an accounting transaction is entered in the wrong account head but in the same class as to the correct account head. Example: the payment of an electricity bill is posted by mistake to telephone account. Both electricity and telephone accounts are classified under expense accounts.
Errors of Principle
An error of principle is caused by a transaction posted into a wrong account head having a different classification from that of the correct account. For instance, payment for petrol for a vehicle has been debited to Motor Vehicles account (a fixed asset account) instead of to Motor Vehicle Running Expenses account (an expense account).
Errors of original entry
A completely wrong amount is posted in a book of prime entry for a transaction. Example: a sales invoice for $200 is entered in the sales journal as $20.
Reverse posting of transactions
Under this error, an account which should have been debited is incorrectly posted as credit entry, and the account which should have been credited is debited. Example: a payment received from a debtor is again debited to debtor’s account (instead of crediting it) and credited to Bank account (instead of debiting it).
In compensating errors, two or more than two errors cancel each other out and thus are difficult to trace. Example: an invoice for $1100 in the sales journal is posted to the customer’s account as $1000. At the same time, the sales journal total is understated by $100. The debit balance on the customer’s account and the credit balance on Sales account will both be understated by $100.
If you are still stuck with the above errors or are unable to balance your trial balance, seek help from Singapore’s accounting service to get a tighter grip on your finances.