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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.

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