The trial balance often forms the bridge that helps accountants in preparing the company’s financial statements. But they do not rely on it solely as they understand that it is not absolute proof of the accuracy of accounting records prepared.
Given that it follows double-entry bookkeeping, even though the total of the debit side is equal to the credit side, there can still be a handful of errors.
This article discusses some common errors not revealed by preparing a trial balance.
Why are some errors not revealed by preparing a trial balance?
It is imperative for trial balance users to understand that it is not absolute proof of the accuracy of the company’s journals and ledgers. It, instead, is a proof of the arithmetical accuracy of the ledgers and cannot assure you of the correctness of the ledgers.
Seven errors not revealed by a trial balance
Listed below are seven errors not revealed by a trial balance –
1. Errors of omission
An error of omission refers to a mistake where the accountant skipped the entry in its entirety. It means that both the debit and credit aspects of the transaction are skipped, and it doesn’t impact the arithmetical accuracy of the trial balance. For example, your company made a credit sale but missed out on recording it in your Sales Day Book. So it will not impact your debtors’ account and the sales account, and therefore the trial balance too.
2. Errors of Commission
The error of commission refers to a situation where the accountant enters the accounting transaction in the wrong account belonging to the same class of accounts.
For example, you made a sale to Mr. X but entered the same in the account of Mr. Y. While both accounts belong to the same asset class, the entry is technically incorrect but doesn’t impact the arithmetical accuracy, hence the trial balance, too.
3. Errors of Principle
The errors of principle are similar to errors of the commission but include general ledger accounts and not personal accounts. For example, you enter the purchase of capital machinery in the land and building account.
4. Compensating Errors
Compensating errors refer to a situation where two errors compensate for each other’s arithmetic impact.
For example, you sold items worth SGD 500 and SGD 1500 to Mr. X and Mr. Y, respectively, but ended up entering the sales value as SGD 1000 against each of their accounts. Since the overall sales value remains the same, the trial balance will remain unaffected.
5. Complete reversal errors
Complete reversal errors refer to a situation where an account that has to be debited is credited and vice versa. For example, a payment made to the creditor is credited to the creditor’s account instead of being debited. Simultaneously, the amount is also debited to the bank account instead of being credited.
6. Transportation errors
Such errors occur when the accountant carries out the double-entry correctly but ends up posting the wrong figures. For example, credit sales worth SGD 210 is incorrectly posted as SGD 120. In such cases, the arithmetic test stands correct as the debit and credit amounts remain the same.
7. Duplication errors
Duplication errors refer to a situation where a transaction is recorded twice in the ledger. In such cases, since the double-entry was made twice, the trial balance cannot figure out any discrepancy caused by them.
While trial balance is excellent for preparing financial statements, the presence of these errors can be a roadblock. Each of these errors passes undetected during the preparation of the trial balance, and it will tally nevertheless. It is why modern accountants shy away from using it for preparing the company’s financial statements.
The article is a part of our comprehensive series on “Trial balance”
For more information, contact us at Intime Accounting.