Benefits and limitations of a trial balance

The benefits and limitations of a Trial Balance

A trial balance is a list of all the accounts which have an outstanding balance.  It checks the arithmetic to see if the total of the debits is equal to the total of the credits.  It is not able to check that all entries are made or that they were posted to the correct account.   If it balances it is probably correct.  If a trial balance doesn’t balance it’s caused by one of the following reasons: -

Posting error - this is where two debits or two credits have been made

Unequal Entry – this is where the debit and credit entries were made for different amounts

Partial Omission – only one entry has been made i.e. debit but no credit entry

Addition error – an account has simply been added up incorrectly

Transposition error – the balance of an account has been transferred to the trial balance incorrectly

PUPAT should help you remember this

If these errors occur a suspense account may be used to temporarily fix the accounts.

If it does balance then it may still have errors.  These are also listed: -

Commission – an entry is made in the wrong persons account

Reversal of entry – the debit and credit have been done the wrong way round

Original entry – entries made on the correct sides of the correct accounts but the wrong amount

Principle – one entry was made into the wrong classification of account (e.g. asset instead of expense)

Omission – transaction was completely missed – no debit and no credit made

Compensating – two or more errors have been made which cancel each other out

CROPOC should help with remembering this one

The trial balance reveals some errors but not all and does not tell us where the error is.  As a result we use control accounts and bank reconciliation as further methods to verify the accuracy of the accounts.