KAMPALA INTERNATIONAL

UNIVERSITY
COLLEGE OF ECONOMICS AND MANAGEMENT

NAME :

REG NO :

COURSE : BBA

COURSE UNIT : FUNDAMENTALS OF ACCOUNTING

COURSE CODE : ACC 1101

YEAR : ONE

SEMESITER : ONE

SESSION : DAY

QUESTION

Write notes on the following errors which are not detected by a trial balance and give examples in each
case

The trial balance and correction of errors

What is a suspense account , its uses the suspense account and correction of errors
Errors not detected by the trial balance;

A Trial Balance will not disclose the following errors:

The Trial Balance is not absolute proof of the accuracy of ledger accounts. It is a proof only of
the arithmetical accuracy of the postings. The total of debits may be equal to the total of credits
yet still there may be errors.

Such errors are not disclosed by a trial balance and they are:

1. Errors of Principle:

An error of principle is an error which violates the fundamentals of book-keeping. For instance,
purchase of furniture is debited to Purchase Account, instead of Furniture Account; Wages paid
for the erection of plant is debited to Wages Account, instead of Plant Account; the amount spent
on extension of building is debited to Repairs Account instead of Building Account etc. These
types of errors do not affect the total debits and total credits but affect the principle of book-
keeping.

2. Errors of Omission:

If a transaction is completely omitted, there will be no effect on the Trial Balance. When a
transaction goes completely unrecorded in both aspects or a transaction after being recorded in
the books of primary entry is not at all posted in the ledger, the error is an error of omission. For
instance, if a credit purchase is omitted to be recorded in the Purchase Day Book, then it will be
omitted to be posted both in the Purchase Account and the Supplier’s Account. This error will
not, however, result in the disagreement of Trial Balance.

3. Posting to Wrong Account:

Posting an item to wrong account, but on the correct side. For instance, if a purchase of Rs 200
from Ramu has been credited to Raman, instead of Ramu and this error will not affect the
agreement of Trial Balance. Thus, Trial Balance will not detect such an error.

4. Error of Amounts in Original Book:

If an invoice for Rs 632 is entered in Sales Book as Rs 623, the Trial Balance will come out
correctly, since the debit and credit have been recorded as Rs 623. The arithmetical accuracy is
there, but in fact there is an error.

5. Compensating Errors:

If one account in the ledger is debited with Rs 500 less and another account in the ledger is
credited Rs 500 less, these errors cancel themselves. That is, one error is neutralized by similar
error on the opposite side.

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.
Trial Balance

Trial balance refers to a part of a financial statement that records the final balances of the ledger
accounts of a company. This statement comprises two columns: debit and credit. An organisation
prepares a trial balance at the end of the accounting year to ensure all entries in the bookkeeping
system are accurate.

The term 'Trial Balance' is derived from the perspective that it acts as a test for fundamental
entries in the bookkeeping but does not perform a full audit. It is the first step in checking or
auditing business finances as it helps accountants to be sure that no mathematical error happens
before proceeding with other complex financial statements.

Why is the Trial Balance Prepared?

After closing all general ledger accounts, the trial balance is prepared at the end of the financial
year. It helps to record the income and expenditures of the business and easily complete the
preparation of the balance sheet in the next step.

Moreover, the trial balance is also prepared to detect any error in the mathematical calculation. A
key objective of preparing a trial balance is to summarise the financial transactions while
continuing with the business activities. It helps the business management to make necessary
decisions regarding changes in the finances and business activities.

Features of Trial Balance

Below is a list of features that trial balance has, helping businesses to analyse and proceed with
financial recordings accurately:

 It comprises a list of different accounts of general ledger balances, both debit and credit
amounts.

 Preparation of trial balance allows a firm to check for mathematical accuracy of the
general ledger balances.

 This statement is prepared at the end of the financial year.

 It is not a part of the final financial statements.

Limitations of Trial Balance

Even though the trial balance is an important part of the financial statement providing significant
financial details, it has certain limitations. Here they are:

 The trial balance may fail to detect errors when a journal entry contains an incorrect
amount recorded in both accounts.

 Errors of omission may go unnoticed as some transactions may not be recorded in the
journal, making it impossible for even a correctly balanced Trial Balance to reveal such
omissions.

 Any missing journal entry in the ledger will not be reflected in the Trial Balance, making
it challenging to spot such omissions.

 Correct amounts in journal entries might be misallocated under the wrong accounting
category by the accountant, a mistake that the trial balance is incapable of identifying.

How to Prepare a Trial Balance?

Here is the process to prepare trial balances in your business:

 Firstly, close all general ledger accounts to get their closing balance at the end of the
financial year.

 Prepare the worksheet of trial balance as per format. It must comprise the columns of
account names and debit and credit amounts.

 Fill in the trial balance worksheet as per the balances of the accounts. Any assets or
expense amount of the business is considered in the debit column, and any revenue or
business liabilities amount is recorded in the credit column.

 Add values accurately in each column.

 Lastly, close the trial balance worksheet. You must remember that if your total amount of
debit balance matches the total credit balance, then recordings in the trial balance have
 been done accurately. Differences in totals suggest either mathematical error or input
error of the balances.

Trial Balance Rules

While preparing a trial balance, there is a set of rules you need to follow. They are as follows:

 Assets of the business must be put down in the debit column.

 All business expenses must be written down in the debit amount column.

 Every liability of the company must be recorded in the credit column.

 All revenue and business gains will be recorded in the credit column.

Trial Balance Format

Follow this structure to understand the format of trial balance:

Name of Company

Trial Balance as on ………….. (date on which it is recorded)

Particulars L/F Debit Balance (Rs) Credit Balance (Rs)

Capital A/C *****

Cash A/C *****

Purchase A/C *****

Sales A/C *****

Furniture A/C *****

Purchase Return A/C *****

 Salaries A/C *****

Total ***** *****

An accounting error is an error in an accounting entry that was not intentional. When spotted,
the error or mistake is often immediately fixed. If there is no immediate resolution, an
investigation into the error is conducted. An accounting error should not be confused with fraud,
which is an intentional act to hide or alter entries for the benefit of the firm. Although there are
numerous types of errors, the most common accounting errors are either clerical mistakes or
errors of accounting principle.

Methods for correcting accounting errors:

Prior Period Adjustment: If an error is identified in a prior accounting period, but it does not
meet the criteria for restating financial statements, a prior period adjustment should be made.
This adjustment is recorded in the current period's financial statements to correct the error for the
historical period in which it occurred. The prior period adjustment is disclosed in the financial
statements to provide transparency.

Documentation and Disclosure: It is crucial to document and disclose any accounting errors
and their corrections in the financial statements. This helps provide clarity and transparency to
users of the financial statements. Proper documentation ensures that the errors and corrections
are properly recorded and can be referenced in the future if needed.

Journal Entry Reversal: If an incorrect journal entry was made, the most straightforward way
to correct the error is by reversing the original entry with an equal and opposite entry. This
ensures that the accounts are adjusted correctly. For example, if a $500 expense was erroneously
recorded as a debit to the wrong expense account, a reversing entry would be made to debit the
incorrect expense account and credit the correct expense account.

Journal Entry Adjustment: In some cases, a direct adjustment entry may be necessary to
correct an error. This involves creating a journal entry to fix the mistake without completely
reversing the original entry. For example, if an asset was understated by $1,000, a journal entry
would be made to increase the asset account by $1,000.

Restating Financial Statements: If an error is material and has impacted prior financial
statements, it may be necessary to restate those statements. Restating financial statements
involves correcting the errors and presenting the corrected financial information for the affected
periods. This ensures that the financial statements accurately reflect the financial position and
performance of the business.
A SUSPENSE ACCOUNT

A suspense account is a temporary account used to hold the balance of an unidentified or

unresolved discrepancy or error in the accounting records. It acts as a placeholder until the error
is identified, investigated, and corrected. The suspense account allows for the continued
balancing of the books while the discrepancy is being resolved. Here are seven common uses of
a suspense account:

Recording Bank Reconciliation Differences:

If there are discrepancies between the cash balance in the company's books and the bank
statement, a suspense account can be used to temporarily hold the difference until the
discrepancy is resolved.

Correcting Errors in Trial Balance:

If a trial balance does not balance due to an error, the imbalance can be placed in a suspense
account until the error is identified and rectified.

Unallocated Receipts or Payments:

If a payment or receipt cannot be initially assigned to a specific account, it may be temporarily

recorded in a suspense account until it can be properly allocated to the correct account.

Unidentified Invoices or Expenses:

If an invoice or expense is received but cannot be identified or allocated to the appropriate

account, it may be recorded in a suspense account until the necessary information is obtained.

Discrepancies in Inventory:

If there are discrepancies or unresolved issues with inventory counts, a suspense account can be
used to temporarily hold the adjustment until the discrepancies are resolved.

Discrepancies in Sales or Revenue:

If there are discrepancies or unresolved issues with sales or revenue, a suspense account can be
used to temporarily hold the adjustment until the discrepancies are resolved.
Unresolved Reconciliation Differences:

If there are discrepancies during the reconciliation process, such as differences in accounts
payable or accounts receivable balances, a suspense account can be used to hold the adjustment
until the discrepancies are resolved.

Examples of Suspense Account and Correction of Errors:

Suppose a company's trial balance does not balance due to a $1,000 overstatement of sales
revenue. The error could be temporarily recorded in a suspense account until the adjustment is
made to correct the revenue account.

If a company receives an unidentified payment of $500, the funds can be recorded in a suspense
account until the payment can be properly allocated to the correct customer or account.

In the process of conducting a physical inventory count, discrepancies are found, resulting in an
inventory adjustment of $2,000. The adjustment can be initially recorded in a suspense account
until the discrepancies are resolved and the inventory accounts are updated.
References

Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2020). Introduction to financial accounting
(12th ed.). Pearson.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting: Tools for business
decision-making (9th Canadian ed.). Wiley.

Warren, C. S., Reeve, J. M., & Duchac, J. E. (2020). Financial and managerial accounting (15th
ed.). Cengage Learning.

Nobes, C., & Parker, R. (2019). Comparative international accounting (14th ed.). Pearson.

Spiceland, J. D., Thomas, W. A., & Herrmann, D. (2020). Financial accounting (5th ed.).
McGraw-Hill Education.