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Saturday, February 27, 2010

Disposal of Suspense Account

There will be no balance left in suspense account if all the errors are located and rectified. Sometime, all the errors may not be rectified then, there will be still some balance in the suspense account which should be transferred to the balance sheet i.e. debit balance in asset side whereas credit balance in the liability side of balance sheet.

Suspense Account

Sometimes, trial balance does not agree due to some errors which have not been found yet. At the same time, if we are required to prepare final acounts as soon as possible, the trial balance is rectified temporally by writing amount in lighter side under the name of 'Suspense Account'. If the credit side is short, the suspense account will be credited and if the credit side is bigger, this account will be debited. The amount standing to the debit or credit of suspense account represents the net effect of one sided error.

One sided error

When one sided errors are located after the preparation of trial balance, they are rectified by passing journal entries. One account either debited or credited and another is suspense account either in debit or credit side. Suspense account is used to rectify only these errors which affect the trial balance. If the rectified account is debited in the entry suspense account will be credited to complete the double entry and vice versa.

Rectification of Errors

As error is a mistake and rectification denotes act of correcting the errors that have already committed in the books of accounts. In other words, rectification of error is a complex job of removing the effect of an error by replacing with correct situation which requires a sound knowledge of the fundamental principles of book-keeping and accounting. Whenever an error is found, it must be rectified because if the errors are not rectified, the profit, the profit or loss and financial position shown by final account will not be accurate.

Methods of Rectifying Errors:
Rectification of errors in the books of account by rubbing or cutting or tearing or putting ink or t-pex etc, reduces the authenticity of accounting records. They may be not be valid too. So, the appropriate methods rectifying errors must be applied. Generally errors are rectified by the following ways:
  1. If an error is located in the subsidiary books before posting in ledgers wrong figure should be truck off and correct figure should be written above the wrong figure by drawing a straight line over the wrong figure.
  2. If a wrong figure has been posted in ledger account, it also may be rectified by neatly crossing out the wrong figure by a single line and writing correct figure above the crossed figure.
  3. If the errors are located after a long time (after closing of books of accounts), it must be rectified by passing journal entries.

Friday, February 19, 2010

Errors not Disclosed by a Trial Balance

It is important to note that the agreement of a trial balance does not prove that all the books of accounts are free of accounting errors in all cases. There may be some errors ever though two sides of a trial balance will agree. It means some errors as given are not disclosed by the trail balance.
  1. Errors of omission: When two aspects debit or credit of a transaction are omitted to record in journal, then they are also not posted to ledger and trial balance. A trial balance is effected by the equal amount.
  2. Errors of commission: When a transaction has been recorded but has been wrongly entered in the books of original entry or posted in the ledger, then it is called an error of commission. Such errors are the result of carelessness of accountants. Errors of commission committed by posting wrong amount of wrong side by totaling or balancing wrong amount in subsidiary books of ledger accounts by making wrong entry in journal or ledger etc. Example, if goods purchased $2010 from John is entered in purchase account as $1020 again John account will be credited by same amount. Both sides have been effected by equal amount so the trial balance shall agree.
  3. Compensating errors: When an error committed previously has been neutralized by another error committed later on, such error is called compensating error. This type of error does not affect the trial balance.
  4. Errors of principles: An error of principle is an error which violets the fundamentals of book-keeping. In other words, such errors are committed when fundamental principles of book-keeping and accountancy are not followed by the accounting staff wrong allocation of expenditure between capital and revenue excess or inadequate provision for depreciation, over or under valuation of stock, furniture purchases is recorded in purchase account etc. are errors of principles.

Errors Disclosed by a Trail Balance

The following errors are revealed by the trial balance showing disagreement.
  1. Posting of wrong amount: Sometimes, wrong amount is posted in one of the two accounts. For example goods sold of $500 are correctly entered in credit side of sales account but it was debited in cash account as $550. There is a difference in amount of $50. As a result trial balance shows the disagreement.
  2. Posting on the wrong side: When an item is by mistake posted on the wrong side of an account in the ledger, it would cause disagreement in the trial balance. Suppose, wages paid of $1500. In this case, wages account must be debited by $1500. But wages account was debited accurately however cash account was also debited instead of crediting it. It created the excess amount in debit side.
  3. Wrong totaling of subsidiary books: When there is error in totaling of subsidiary books, that will cause disagreement of trial balance. Suppose sales book has been totaled $1000 instead of $1050.
  4. Wrong totaling or balancing of ledger account: Sometimes, errors may be committed in writing totaling or balancing of ledger account the trial balance will disagree.
  5. Ommission to post an amount into ledger: When an aspect of transaction is omitted to post in ledger account, the trial balance shows disagreement. For example, cash paid for interest $200. Interest account was debited by the same amount but it was omitted to credit in cash account.
  6. Ommission to enter an amount in trial balance: If an amount is omitted to enter in trial balance while transferring from ledger balances, then the trial balance shows disagreement.

Types of Errors

Errors are committed knowing or unknowing which greatly affect the financial position of the particular organization. Generally there are two types of errors i.e. error of principles and clerical errors. Errors which are aroused when the fundamental principles of book-keeping and accountancy are not followed by the accountants called errors of principles. They may be committed either intentionally or unintentionally. Such errors are not disclosed by trail balance clerical errors are committed due to carelessness, negligence and frauds of accountants. Clerical errors can also be further divided into two i.e.
  1. Errors Disclosed by a Trail Balance
  2. Errors not Disclosed by a Trail Balance

Accounting Errors

An accounting errors refers to a mistake of books of account. In the course of recording transaction in books of account i.e. journal, subsidiary books, ledgers, many errors may be committed by the carelessness of accountants or account holders. However, some errors are committed by accountants or account holders intentionally are called fraud. Fraud is an intentionally committed to deceived some related stakeholders or for the benifits of personal or group.

Thursday, February 18, 2010

Reasons for not agreeing trial balance:

The debit total of trial balance should be equal to credit total. Sometimes, they are not equal and it is assumed that there are some errors in books of account. Some of the reasons of errors may be as follows:
  1. Trial balance will disagree if a transaction is posted in one side of an account and omitted to post it in the another side of another account.
  2. If wrong amount is posted in ledger accounts, the trial balance will not agree.
  3. When an amount is posted wring side say in debit side instead of credit side, the trial balance will not agree.
  4. Sometime, a transaction may be posted twice in the ledger accounts. As a result, the total of a trial balance will not be equal.
  5. Disagreement of a trial balance may be caused by the wrong totaling or balancing of ledger accounts.
  6. While totaling the figure of subsidiary books there may arise some errors that will cause disagreement of trial balance.
  7. Omission to post a ledger balance also causes the disagreement of a trial balance.
  8. If there is wrong in totaling of trial balance, a trial balance will disagree.
  9. Another cause of disagreement of a trial balance may be the error made in carrying forward the total from one page to another.

Saturday, February 13, 2010

3. Mixed Method:

This is the combination of total and balance methods. Total and balance methods of preparing trial balance are performed in same sheet. The amount column is divided two for total and two for balance method.

2. Balance Method

Balance method of preparing trial balance is very common. It is prepared with the help of ledger balances. First of all, all ledger accounts are balanced at the end of the year. A balance is the difference between the two sides of an account. If the debit side of an account is bigger, then insert the difference on the credit side of the account but it is known as 'debit balance'. On the other hand, if credit side of an account is bigger, then insert the difference on the debit side of the account. It is known as 'credit balance'. Now, the debit balance shall be entered in the debit and credit balance in the credit column of trial balance. The total of both debit and credit side must be equal.

1. Total Method

Under this method, trial balance is prepared with the debit and credit totals of all the ledger accounts. First of all, totals of all ledger accounts are found. Later on, debit totals of ledger accounts are transferred to debit column of trial balance and credit totals are transferred to credit column of trial balance. After then, the sum of both debit and credit columns of trial balance are found. The grand total of both columns should be equal. This method of preparing trial balance is not popular because it does help on preparation of final accounts. Final accounts are prepared from the ledger balances but not from totals of debit and credit.

Methods of Preparation of Trial Balances:

A trial balance may be prepared under following three methods:
  1. Total Method.
  2. Balance Method.
  3. Mixed Method.

Thursday, February 11, 2010

Ruling of Trial Balance

Trial balance does not have any special format. It is simply a vertical presentation of ledger balance in the form of the table. Serial number, names of the ledger accounts, ledger folio, debit ledger balance and credit balance are kept on the trial balance.

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