Errors in the trial balance

How to spot obvious errors in the trial balance

Bookkeeper needs extra caution before starting preparing Income Statement and Balance Sheet

You can catch few very obvious errors in contrast to accounting concept by observing trial balance carefully.

1. Reviewing Accounts with adverse balances.

Just to make it understandable it I am coming down to basics of accounting. Trail balance is set of accounts used to record financial transactions of any individual or business. Each transaction has two sides of accounting entry, one is debit and other is credit.

You also know that each account is debited or credit based on the nature of transactions. A financial transaction can be part any of the following 5 groups:

• Asset Accounts
• Liability Accounts
• Equity Accounts (Owners Funds)
• Revenue Accounts
• Expense Accounts

Each these of these group has its own nature in terms of accounting. If one account in a groups is debited or other account has to be credited. In perfect world. Some accounts should always a debit balance and other credit balance.

So the first and foremost important review is to observe accounts with adverse balances. Just to make it easy and understandable. I giving below what type balance applies to which account group:

• Asset Accounts - Debit Balance
• Liability Accounts - Credit Balance
• Equity Accounts (Owners Funds) -Credit Balance
• Revenue Accounts - Credit Balance
• Expense Accounts - Debit Balance

In case of any of account has adverse balance. That needs to be reviewed and proper supporting should be made handy for future references.

2. Understanding Contra Accounts and respective balances.

Examine Accounts normally have contra accounts. A contra account is an account with opposite balance of its related account. A contra account is directly related to Asset, Liability, Equity, Revenue and Expense account.

Go through the below stated examples to make it more understandable:

3. Asset Contra accounts.
1. Fixed Assets (Contra Account - Accumulated Depreciation)
4. Accounts Receivable (Contra Account - Allowance for Doubtful Accounts)
5. Liability Contra accounts.
1. Bonds Payable (Contra Account - Discount on Bonds Payable)
6. Equity Accounts( Contra Account -Treasury Stock)
1. Equity Accounts( Contra Account -Drawings)
1. Retained Earnings (Contra Account - Dividends Declared )
7. Revenue Contra accounts.
1. Sales Accounts (Contra Account - Sales Discounts and Sales Returns)
8. Expense Contra accounts.
1. Purchases (Contra Account - Purchase Discounts and Purchase Returns)

Accounts with adverse balances can be correct it true that they are always incorrect, but you are required to take a note of all such exception balances. As an accountant you are supposed to take note of all such

Cases and bring to the notice of the management in your periodic MIS Reports.

As wrote in the beginning this is first step in reviewing trail balance. I hope this will be helpful to team and in case of any questions please revert back.

To keep posted be in touch to know more for:

9. How to review Accounts Receivables?
10. How to review Accounts Payables?
11. How to do Bank Reconciliations?

Article by: Sonia Singhal : Sonia is working as Team Leader with Actuit India. Outsource to Actuit India and concentrate more on your core business. For Details how you save by outsourcing please visit our website.