Trial Balance Errors

Updated on February 23, 2024
Article byKhalid Ahmed
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Trial Balance Errors?

Trial Balance Errors refer to those mistakes hidden in the accounting process that the trial balance sheet cannot identify. It serves to find and correct errors before they bring discrepancies in the financial statements, as well as bring out a clear picture of a company’s financial health. 

Trial Balance Errors

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Errors like slide, balancing, and transposition during trial balances lead to the sum of credits not being equal to the sum of debits. Companies prepare it at the end of every accounting period or quarter, or semi-annually or annually. It helps accountants to check for any inadvertent discrepancies in the financial statements

Key Takeaways

  • Trial balance errors denote errors within the accounting procedures that remain undetected by the trial balance sheet.
  • Its purpose is to identify and rectify mistakes before they impact financial statements, ensuring an accurate portrayal of a company’s financial status.
  • These error types impact financial statements: omissions, commissions, balancing issues, preparation mistakes, transpositions, decimals, journalizing errors, and hidden compensations.
  • The error-correction methods one can use for financial statements: trace steps, transpose fixes, validate inputs, balance accounts, check totals, clear journal entries, or use suspense accounts.

Trial Balance Errors Explained

Trial balance errors are defined as errors that happen while recording balances and transactions in ledgers while presenting them during a trial balance. However, some errors like trial balance errors of principle do not affect the balancing of debit and credit, requiring more insightful checks to detect. It falls into the category of simple transposition error and undisclosed error, while the other is disclosed during trial balance. 

The financial transactions recorded in journals are posted to ledger accounts. Then, one formulates a trial balance, listing all account balances and their corresponding credit or debit amounts. If there is inconsistency, debit and credit are not equal to each other, then one concludes with an error. These errors signal the inadequacy of recording or missing vital accounting data in the ledger. 

One can detect these errors in accounting and rectify them by comparing ledger balances with the trial balance. Furthermore, many software solutions are available to detect these errors and correct them. It has numerous implications like wrong financial health representation, bad decision making, regulatory fines, job losses, loss of investor’s money, and even bankruptcy like that of Enron. Moreover, some errors require extra meticulous observations to expose any errors of principle or compensating errors.

These errors when detected at the trial stage helps identify serious accounting mistakes at an early stage of preparing financial statements and ensure they remain accurate, thus making financial reporting robust. They also bring to the fore the need for efficient and honest internal accounting control and autonomous audit oversight. Notwithstanding these benefits, it drastically affects the financial world, like indenturing the trust in financial reporting, legal consequences, harm to brand image, and financial losses to firms. 

Types

There are many types of errors affecting the accuracy of financial statements, as listed below:

  1. Errors of Omission – This happens when one overlooks a transaction in the subsidiary books or journal without impacting the trial balance.
  2. Errors of Commission – These emerge when an accurate amount is entered into the incorrect account. For example, when a payment is credited to the incorrect supplier’s account and is not promptly picked up by the trial balance.
  3. Balancing Errors – Such errors occur due to improper account balancing, which causes an inaccurate balance in the trial balance.
  4. Error in the Trial Balance Itself – It happens when errors are present during the trial balance preparation process, such as wrongly putting down figures, which might result in an imbalanced trial balance.
  5. Transposition Errors – These transpire when two numerals are written in reverse, as $63 written as $36, and are not picked up by the trial balance right away.
  6. Slide Errors – These result from the decimal point being moved incorrectly, transferring inaccurate amounts to the trial balance.
  7. Errors of Principle – Such errors include improper transaction journalizing. For example, charging the transportation account rather than the furniture purchase account that one does not notice in the trial balance immediately.
  8. Compensating Errors – Despite the overall impact of the inaccuracies, a trial balance is considered balanced when an overstatement in one account is balanced by an equivalent understatement in another. Such errors that compensate for other mistakes are compensating errors.

Examples

Let us use a few examples to understand the topic.

Example #1

Suppose Amanda, the accountant, saw a mismatch in the trial balance at Star Energy in Zenith City. A $10 million overstatement in revenue from a significant energy contract with Stellar Corp. resulted in an imbalance between debits and credits. An investigation revealed a network of dishonest transactions meant to hide debt and exaggerate revenues. Comet Investments and other off-balance-sheet businesses had been employed to conceal losses and provide the impression of prosperity. Amanda’s revelation set off a series of events that revealed Star Energy’s financial deceit and ultimately caused it to collapse.

Example #2

Suppose a once-respected multinational company (MNC) called Sterling Financial used a complex accounting fraud to hide more than $45 billion in debt. Executives used a gap in repurchase agreement restrictions to plan a sophisticated network of bank transactions in the Azure Islands.  Their strategy involved a sequence of well-timed asset sales and repurchase agreements meant to give the impression of sound financial standing. But in October 2023, this ornate façade came tumbling down, exposing the extent of the deceit and permanently damaging Sterling’s image.

How To Correct?

One can correct these errors in numerous ways, as shown below:

Correction MethodDescription
Trace Trial StepsCheck ledger totals against trial balance and retrace the process of compiling it to find potential discrepancies.
Employ Transpose TechniqueIf the gap between debit and credit totals is divisible by 9, there’s a likelihood of a number transposition.
Validate Ledger InputsIf the prior actions don’t resolve the issue, review the transaction entries for inaccuracies, a time-intensive yet essential process for accuracy.
Fix Wrong Balances & Recapitulate ColumnsRectify incorrect balances, recompute trial balance columns, and review journal summaries. Validate mathematical accuracy, ensuring correct totals and accurate postings.
Double-Check Trial Balance TotalsInitially, confirm trial balance column totals. If discrepancies persist, divide the difference by 9; this may reveal transposition or slide errors.
Utilize Clearly Noted Journal EntryWhen rectifying an error, ensure a well-defined journal entry with supporting documentation for future traceability and verification purposes.
Temporarily Move the Difference to SuspenseFollowing Trial Balance creation, if the discrepancy isn’t substantial, it’s provisionally moved to “Suspense Account” until errors are found and rectified.

Frequently Asked Questions (FAQs)

1. What steps do you perform to locate trial balance errors?

The following are the primary steps to take in order to find these errors:
1. Check the totals in the two columns.
2. Verify the balance of each ledger account.
3. Compute the trial balance again.
4. For any lingering mistakes, use a suspense account.

2. What are the defects of trial balance?

The following are the trial balance’s main flaws:
1. Cannot identify commission or omission mistakes.
2. Does not ensure that ledger accounts are accurate.
3. Cannot identify fundamental mistakes.

3. How many errors are in the trial balance?

The precision of the accounting system determines how many mistakes there are in a trial balance. The trial balance should be balanced, and the ledgers should include no mathematical mistakes if the accounting system is correct. This does not imply, however, that an organization’s accounting system is error-free.

4. What are the 5 limitations of trial balance?

The trial balance has five drawbacks: it can’t discover missing entries, conceal omissions, detect all errors, and reveal faults unrelated to arithmetic accuracy, such as commission or principle errors.

This has been a guide to what are Trial Balance Errors. Here, we explain the topic in detail, including its types, how to correct them, and examples. You can learn more about financing from the following articles –

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