Question

1. An accounting clerk prepares his trial balance as of June 30, 20-and determines that total debits equal total credits. He breathes a sigh of relief and informs his boss that his ledger is in balance and that therefore the accounts are correct. His boss, a chartered accountant, tells him that this is not necessarily the case. She asks him to prepare a list of four possible errors that could occur and yet not cause the trial balance to be out of balance. Prepare this list as if you were the accounting clerk

Answer 1

Answer:

The trial balance is the statement that reports all the debit and credit balances from the ledger accounts. Trial balance shows the arithmetical accuracy of the ledger postings in the ledger. However, some entries result in the errors of equal amount in the debit and credit side of trial balance. The accountant cannot identify these types of errors by just looking at the statement. These errors cannot be detected by the accountant easily. The list of trial balance errors can be broadly classified into two groups. They are mainly:

• Clerical Errors
• Errors Of Principles

Clerical errors are the human errors, where the human enters or omits the entry in the books. These errors are made because of the accounting staff’s negligence. If the errors are made by not following the accounting principles, then those errors are called errors of principles. For example, debiting instead of crediting and vice versa.

1. Errors of commission
2. Errors or omissions
3. Compensating errors and
4. Errors of mis posting

Errors of commission: The figures are incorrect in journal, but the posting to ledger accounts is correct, this type of error is called error of commission.

For Example, Sales of $18000, but recorded as $19000 in both journal and ledger.

Errors or omissions: If the transactions are omitted from recording in journal, then that errors are called errors of omission.

For Example, if the transaction is “Purchase of goods in cash - $400” is omitted, then it is error of omission.

Compensating errors: As the name suggests, the error is caused due to short or excess record in one account is compensated by another account short or excess record, this type of error is called compensating errors.

For Example, One account is debited $700 instead of $900, another account is credited $1300 instead of $1500, then this is called compensating error.

Errors of mis posting: Entry posted from journal to ledger account in the wrong account but correct side (Debit or Credit), it is called error of mis posting.

For Example, the amount of $200 is to be debited to one account but debited to another A/c, then the totals of debits and credits will not be affected. But there is an error.

Errors of Principles: These errors are caused due to the non-compliance of accounting principles.

For Example, the capital expenditure is recorded as revenue expenditure then it is error of principle. Debiting the wage expense account instead of debiting the plant account for the installation expense, this is called error of principle.