Short Answer Type Questions<\/span><\/p>\nQuestion 1.
\nState the meaning of Trial Balance?
\nAnswer:
\nMeaning o Trial Balance : All the businessmen after completion of postings from Journal or Subsidiary Books to the Ledger, want to verify accuracy of the posting. For this purpose a statement is prepared wherein the balances of all the accounts in the Ledger are incorporated.<\/p>\n
The statement so prepared is called \u2018Trial Balance’. Accounts show ing debit balances are put on the debit side of the trial balance and the accounts showing credit balances are put on its credit\u00a0 side. If the total of the debit side of the trial balance is equal to that of its credit side, it is presumed that the posting to the ledger is accurate.<\/p>\n
The reason for agreement of the trial balance is that under the double entry system, each transaction is recorded two times. once on the debit side of an account and again on the credit side of another account. Thus, the total of all the entries on the debit side of all the accounts must be equal to the total of all the entries on the credit side of all the accounts. If the total of both the sides of a trial balance are equal, it is proved that the books are atleast arithmetically correct.<\/p>\n
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Definitions of Trial Balance :
\nAccording to Carter, \u201cTrial Balance is the list of debit and credit balances, taken out from ledger. It also includes the balances of cash and bank taken from cash book.\u201d<\/p>\n
According to William Pickles, \u201cThe statement prepared with the help of ledger balances, at the end of financial year (or at any other date) to find out whether debit total agrees with credit total is called Trial Balance.”<\/p>\n
Question 2.
\nGive two examples of errors of principle.
\nAnswer:
\nErrors of Principle – When some fundamental principle of accountancy is violated while recording a transaction, the error is termed as error of principle. These errors are committed in those cases where a proper distinction between capital and revenue items is not made, i.e., a capital expenditure is treated as a revenue expenditure or vice- versa.<\/p>\n
These errors may be of two types :
\n(a) When a capital expenditure is treated as revenue expenditure –
\nFor example, if the purpose of furniture is treated as an ordinary purchase and is thus debited to purchase account instead of furniture account, it will be an error of principle. Similarly, if amount spent on the extension of building is debited to repairs account instead of building account, it is also an error of principle.<\/p>\n
(b) When a revenue expenditure is treated as capital expenditure – For example, if the amount spent on the repair of an old machinery is debited to machinery account instead of repairs account.<\/p>\n
Question 3.
\nGive two examples of errors of commission.
\nAnswer:
\nErrors of Commission – If a wrong amount is entered either in the journal or in the subsidiary books, the Trial Balance will tally because the same amount (though wrong) will be posted in both the accounts affected by the transaction.<\/p>\n
For example, sale of goods to Ram on credit of Rs. 420 has been entered in the Journal as Rs. 240. When the entry is posted to Ledger, double entry will be completed with Rs. 240, Ram being debited with 240, and sales account being credited with Rs. 240. In spite of the inaccuracy in both the accounts, the Trial Balance will tally.<\/p>\n
Examples are purchase book is under-cast be Rs. 2,000 or the sales book is over-cast by Rs. 3,000. Errors that do not effect the Trial Balance are purchase being recorded as Rs. 1,000 instead of Rs. 10,000 or purchase being recorded in sales book.<\/p>\n
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Question 4.
\nWhat are the methods of preparing Trial Balance?
\nAnswer:
\nPreparation of a Trial Balance – A Trial Balance may be prepared at any time, say, at the end of every month, quarter, half-year or year. Usually it is prepared at the end of the accounting period, as a preparation of Final Account. It may be noted it is always prepared to verify the arithemetical accuracy of the ledger accounts before the particular date and not for a particular period.<\/p>\n
There are two methods used for the preparation of Trial Balance :
\n(i) Balance Method
\n(ii) Total Amount Method<\/p>\n
(i) Balance Method – In order to prepare a trial balance under this method, all the accounts showing debit balances in the ledger are put on the debit side of the trial balance and the accounts showing credit balance are put on its credit side. If, however, and account shows no balance, i.e., the debit and credit totals of an account are equal, the account is not included in the trial balance. After this, the debit and credit columns of the trial balance are totalled and if the total is equal, it is said that the trial balance has tallied. It may be noted that a trial balance under this method can be prepared only when all the ledger accounts have been balanced<\/p>\n
(ii) Total Amount Method – Under this method, the total amount of debit side of each ledger account is put on the debit side of the trial balance. It may be noted that a trial balance under this method can be prepared immediately after the completion of posting to the ledger.<\/p>\n
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Question 5.
\nWhat are the steps taken by an accountant to locate the errors in the trial balance?
\nAnswer:
\nSteps to locate or detect the errors – If the trial balance does nottally, steps must be taken to locate the errors which are causing discrepancy. The following steps may be taken, one after another, to locate the error :
\nSteps –
\n(1) Recheck the totals of both the debit and credit columns of the trial balance.<\/p>\n
(2) The exact figure of difference in the trial balance should be ascertained. After this, the subsidiary books should be gone through to see if any item of that amount remains unposted. For example, if the difference is of Rs. 6,800, all the entries of Rs. 6,800 should be scanned to ensure that they have been duly posted,<\/p>\n
(3) The difference should be halved to find out of some figure equal to half the difference has been posted on the wrong side of an account thereby making the difference double. For example, if the total of debit side of the trial balance exceeds by Rs. 6,800, it is possible that a credit item of Rs. 3,400 may have been posted to the debit side of the ledger account.<\/p>\n
(4) The difference in,the trial balance should be divided by 9. If the difference is completely divisible, it can be a mistake of transposition of figures. For example, if the figure of 47 is written as 74, the different is of Rs. 27. This figure is completely divisible by 9. Likewise, if\u20180\u2019 is added against a figure, the difference will also be divisible by 9. For example, if the figure of 13 is written 130, the difference Rs. 117 which is completely divisible by 9.<\/p>\n
(5) In case, the difference is in a round figure, say Rs. 1, Rs. 10, Rs. 100 etc. there will be a possibility of wrong totalling or wrong carry forwards of the totals of a subsidiary book or there will be an error in the balancing of an account. Flence. the totalling and balancing must be checked.<\/p>\n
(6) Check with the help of the ledger whether the balance of each and every account including the balancing must be checked.<\/p>\n
(7) Check whether all the closing balances from the previous year\u2019s balance sheet have been correctly carried forward and recorded in respective, ledger accounts.<\/p>\n
(8) Check the figures which are not clearly written.<\/p>\n
(9) If the difference is of a very big amount, it is just possible that the balance of a certain ledger account may not have been included in the trial balance. This can be detected by comparing the trial balance of the current year with that of the previous year. Also, if the figures of accounts under the same head show abnormal variation, the account should be rechecked to find out the cause of variation.<\/p>\n
(10) If, in spite of all the above efforts, there is still a difference in the trial balance, a complete checking of the postings of all the entries will be necessary. A check mark (\u2713) should be placed at the right of each amount to show that the item has been checked. It should also be checked that the totals of the subsidiary books have been posted to the relevant accounts in the ledger.<\/p>\n
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Question 6.
\nWhat is suspense account? Is it necessary that is suspense account will balance off after ratification of errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account?
\nAnswer:
\nMeaning of suspense account – Sometimes, in spite of best efforts of an accountant, all the errors are not located and the trial balance does not tally, In such a situation, to avoid the delay in the preparation of final accounts, the difference in the trial balance is placed to a newly opened account known as \u201cSuspense Account\u201d and the trial balance tallies. If the debit side of the trial balance exceeds the credit side, the difference will be put on the credit side of the suspense account. After including the balance of suspense account in the trial balance, it will appear to be tallied.<\/p>\n
Later, when the errors are located, the rectification entries will be passed with the help of the suspense account. Therefore, when all the errors have been located and rectified the suspense account will automatically stand closed. If suspense account still shows a balance, it will be taken in the balance sheet – on the assets side if it shows a debit balance or on the liabilities side if it shows a credit balance.<\/p>\n
Question 7.
\nWhat kinds of errors would cause difference in the trial balance. Also list examples that would not be revealed by trial balance.
\nAnswer:
\nTypes of Errors : All errors may be classified into the following two categories :
\n(1) Errors affecting trial balance (or errors disclosed by trial balance).
\n(2) Errors not affecting trial balance (or errors not disclosed by trial balance).<\/p>\n
(1) Errors affecting trial balance (or errors disclosed by trial balance) – If the trial balance does not tally, it will indicate that certain errors have been committed which have affected the agreement of the trial balance. The accountant will then proceed to find out the errors and ultimately the errors will be located. Such errors are called \u2018errors disclosed by trial balance’ or \u2018errors which affect the agreement of trial balance.\u2019 Until such errors are rectified, the trial balance will not agree. Some of the examples of such errors are as follows :<\/p>\n
(i) Wrong Casting – If the total of the cash book or some other subsidiary book is wrong, the trial balance will not tally. For example, the total of the purchase book has been added Rs. 7,000 in excess. When this total will be posted to the debit side of the purchase account, it will also show an excess debit of Rs. 7,000 and hence, the trial balance will not tally.<\/p>\n
(ii) Posting to the wrong side – If instead of posting an amount on the debit side of an account, it is posted on the credit side, or vice versa, the trial balance will not tally. For example, goods for Rs. 6,000 have been purchased from Gopal. If instead of posting the amount on the credit side of Gopal\u2019s account it is posted to his debit, the debit side of the trial balance will exceed by Rs. 8.000.<\/span><\/p>\n(iii) Posting of wrong amount – The trial balance will not tally if the posting in an account is made with an incorrect amount. For example, goods for Rs. 800 have been purchased from Mahendra. If it has been correctly entered in the purchase book but while posting to Mahendra\u2019s credit, the amount posted is Rs. 80 instead of Rs. 800, the trial balance will not tally.<\/p>\n
(iv) Omission of posting of one side of an entry – For example, if Rs. 600 have been received from Geeta and correctly entered in the cash book, but if it is omitted to be posted on the credit side of Geeta\u2019s account, the trial balance will not tally.<\/p>\n
(v) Double posting in a single account – For example, if Rs. 900 have been received from Shyam Lai and correctly entered in the cash book, but if it is posted twice on the credit side of Shyam Lai\u2019s account, the trial balance will not tally.<\/p>\n
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(vi) Errors of posting in wrong account – If, while posting from the books of original entry, posting is made to a wrong account but on the correct side, the error will not affect the agreement of trial balance. If, for example, goods are sold to Ram on credit but Shyam\u2019s account is debited in place of Ram\u2019s account in ledger, the trial balance would tally in spite of errors in both the accounts.<\/p>\n
(2) Errors not affecting trial balance (or errors not disclosed by trial balance)
\nExamples of errors not revealed by the trial balance are the following :<\/p>\n
\n- Errors of Omission<\/li>\n
- Errors of Commission<\/li>\n
- Compensating errors<\/li>\n
- Errors of Principles.<\/li>\n<\/ul>\n
Question 8.
\nState the limitations of Trial Balance.
\nAnswer:
\nMain objective of preparing a trial balance is to check the accuracy of the accounts. However, the equality of debits and credits of trial balance does not mean that there are absolutely no errors in the books of accounts. There may be number of errors which may remain undetected in spite of the agreement of a trial balance. As such, it is true that \u201cTrial Balance is not a conclusive proof of the accuracy of book of accounts\u201d. There are certain errors which do not affect, the agreement of the trial balance. Such errors are also called limitations of trial balance: These are the following errors :<\/p>\n
\n- Errors of Omission<\/li>\n
- Errors of Commission .<\/li>\n
- Compensating errors<\/li>\n
- Errors of Principles<\/li>\n
- Errors of posting in wrong account.<\/li>\n<\/ul>\n
Sometimes in spite of best efforts of an accountant, all the errors are not located and the trial balance does not tally. So, the trial balance has certain limitations.<\/p>\n
Long Answer Type Questions<\/span><\/p>\nQuestion 1.
\nDescribe the purpose for the preparation of Trial Balance.
\nAnswer:
\nThe following are the purposes of preparing a trial balance :
\n(1) To ascertain the arithmetical accuracy of the ledger accounts.
\n(2) To help in locating errors.
\n(3) To obtain a summary of the ledger accounts.
\n(4) To help in the preparation of final accounts.<\/p>\n
(1) To ascertain the arithmetical accuracy of the ledger accounts –
\nThe trial balance provides a useful check upon the ledger postings. If a trial balance tallies, it is proved that the posting to the ledger accounts is correct. In other words, it ensures that both the aspects of each transaction have been posted into the ledger, i.e., debit aspects have been posted on the debit side and the corresponding credit aspects on the credit side.<\/p>\n
(2) To help in locating errors – If a trial balance does not tally, it indicates that some errors have occurred and the accountant will then proceed to locate such errors. Even a small difference in the trial balance is to be given the same importance and attention as a large difference because it may be possible that there may be a number of errors which have of setted the effect of one another, resulting in a small composite difference.<\/p>\n
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(3) To obtain a summary of the ledger accounts – A trial balance serves as a summary of all the ledger accounts. Scanning the trial balance enables one to know the assets, liabilities, expenses, incomes etc.<\/p>\n
(4) To help in the preparation of final accounts – As the trial balance contains the list of all the ledger accounts, it provides a basis for further processing of accounting data, i.e., preparation of final accounts namely, Trading and Profit & Loss Account and a Balance Sheet.<\/p>\n
Question 2.
\nExplain errors of principle and give two examples with measures to rectify them.
\nAnswer:
\nErrors of Principle – If any of the generally accepted accounting principles is violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipts between capital and revenue.<\/p>\n
For example, amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the assets account. Instead, if this amount is debited to maintenance and repairs account, it is treated as a revenue expense. This is an error of principle.<\/p>\n
Similarly, if a credit purchases of machinery is recorded in purchase book is an example of error of principle, or rent paid to landlord is recorded in cash book posted or recorded in journal proper.<\/p>\n
Two examples of errors of principles are as under :
\n(1) When an account has wrongly been debited in place of another account.
\nExample : Machinery purchased for Rs. 9,000 has been debited to Purchases A\/c.
\nSolution : This error affects the two accounts in the following manner –
\n<\/p>\n
While rectifying this mistake Machinery A\/c will be debited because it was not debited earlier and the Purchases A\/c will be credited because it was wrongly debited.
\n<\/p>\n
<\/p>\n
III. By comparing the correct entry and the wrong entry it will be ascertained that Machinery A\/c should be debited and the Purchases A\/c should be credited, as it has been w rongly debited earlier.
\n<\/p>\n
(2) When an account has wrongly been credited in place of another account.
\nExample : Rs. 8,000 being the sale proceeds of old furniture has been credited to Sales A\/c.
\nSolution : This error affects the two accounts in the following manner –<\/p>\n
\nWhile rectifying this mistake Sales A\/c will be debited because it has been,credited by mistake and the Furniture A\/c will be credited because it was credited earlier.
\n
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\nIII. By comparing the correct entry and the wrong’ entry it will be ascertained that Sales A\/c should be debited because it has been wrongly credited earlier and Furniture account should be credited. Rectifying entry which must be passed now.<\/p>\n
Question 3.
\nExplain the errors of commission and give tw o examples with measures to rectify them.
\nAnswer:
\nErrors of Commission – The errors committed due to wrong posting of transactions, wrong totalling or balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of the amount in the books of original entry, etc. For example, Mohan paid Rs. 15,000 to Gopal Traders (a supplier of goods). This tansactions was correctly recorded in the cash book, but Gopal Trader\u2019s account was debited with Rs. 1,500 only. This is an error of commission as it is an error of clerical nature and reflected in trial balance.<\/p>\n
<\/p>\n
Two examples of errors of commission may be cited as follows :
\n(1) When there is a short debit in one account and a short credit in anoher account.
\nExample : Goods purchased from Sahil for Rs. 4,000 was entered in Purchase Book as Rs. 400 only.
\nSolution : Effect of error –
\n
\nWhile rectifying this mistake Purchases A\/c will be debited by Rs. 3,600 because there will be a short debit in Purchases A\/c and Sahil\u2019s A\/c will be credited because it has been credited by a lesser amount.
\n<\/p>\n
(2) When there is an excess debit in one account and an excess credit in another account.
\nExample : Goods sold to Rakesh for Rs. 3,800 on credit was recorded in Sales Book as Rs. 8,300.
\nSolution : Effect of error
\n<\/p>\n
While rectifying this mistake Rakesh will be credited by Rs. 4,500 because it has been \u2018excess debited\u2019 by a similar amount and Sales A\/c will be debited by Rs. 4,500 because it has been \u2018excess credited\u2019 by a similar amount.
\n<\/p>\n
Notes :
\n(1) Students can adopt any of the two methods discussed as above, because rectifying entry in both the methods will be similar.
\n(2) In the examination the students should pass only the rectifying entries.<\/p>\n
Question 4.
\nWhat are the different types of errors that are usually f committed in recording business transactions.
\nAnswer:
\nFrom the rectification point of view, all errors can be \u201e classified into the following two categories (types) :
\n(A) Two-sided Errors
\n(B) One-sided Errors<\/p>\n
(A) Two-sided Errors – Errors which affect two accounts simultaneously are called two-sided errors. Such errors may\u00a0 include the following types of errors :<\/p>\n