Meaning of trial balance: A statement showing the abstract of the balance (debit/credit) of various accounts in the ledger.
Objectives of trial balance: The main objectives of preparing the trial balance are (i) to ascertain the arithmetical accuracy of the ledger accounts; (ii) to help in locating errors; and (iii) to help in the preparation of the final accounts.
Preparation of trial balance by the balance method: In this method, the trial balance has three columns. The first column is for the head of the account, the second column for writing the debit balance and the third for the credit balance of each account in the ledger.
Various types of errors:
- Errors of commission: Errors caused due to wrong recording of a transaction, wrong totaling, wrong casting, wrong balancing, etc.
- Errors of Omission: Errors caused due to omission of recording a transaction entirely or party in the books of account.
- Errors of Principle: Errors arising due to wrong classification of receipts and payments between revenue and capital receipts and revenue and capital expenditure.
- Compensating errors: Two or more errors committed in such a way that they nullify the effect of each other on the debits and credits.
Rectification of errors: Errors affecting only one account can be rectified by giving an explanatory note or by passing a journal entry. Errors which affect two or more accounts are rectified by passing a journal entry.
Meaning and utility of suspense account: An account in which the difference in the trial balance is put till such time that errors are located and rectified. It facilitates the preparation of financial statements even when the trial balance does not tally.
Disposal of suspense account: When all the errors are located and rectified the suspense account stands disposed off.