Question

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are
compiled into debit and credit account column totals that are equal. Based on this
statement, the new accounts executive confidently presented the company’s quarterly
financial statements to his accounts manager by stating that the financial statements are
correct and complete. However, his account manager disagreed with his statement and
would like to check again his work. Explain 5 reasons to support the account manager disagreement with the new
accounts executive regarding his statement on the trial balance.

Answer 1

The financial statement may not be correct just because the trial balance debit and credit amount are equal. The trial balance does not reflect the following errors:

(1) error of principle: trial balance does not reflect the error or principle. An error of principle is an error of rules or fundamentals or accounting. For example purchase of furniture and fixture is debited to purchase account instead of asset account. These errors are not reflected by the trial balance.

(2) error of omissions: omissions means not recording a transaction entirely. As the debit and credit of the trial balance will be equal in case a transaction is omitted entirely the trial balance does not reflect the error of omission.

(3) recording transaction to wrong account: recording transaction on the correct side but in the wrong account can lead to matching of debit and credit side of the trial balance but still leads to an error. For example money received from arun is recorded in amans account. This error will not be reflected in the trial balance.

(4) error of amounts: if the wrong amount is recorded in the transaction this leads to an error of amount. These errors are not reflected on the trial balance . For example money recieved from Mohan $456 wrongly recorded as $546.

(5) compensating errors: if one account in ledger is debited with the wrong amount and another ledger is also credited with the same wrong amount then the trial balance balances mat add up even if there is an error. These errors compensate for each other and hence are not noticed in the trial balance.