Trial Balance is prepared to check the arithmetical accuracy of the postings of ledgers. It means that the trial balance is used to check the parity between debit totals and credit totals. If both the totals are not equal, there must be some shortcomings in the postings made, and hence, rectification must be done.
Even though both the debit totals and credit totals may be equal, there are plenty of errors not disclosed by a trial balance. The errors which are not disclosed by trial balance are as follows:
- The omission of entry in daybook or subsidiary books: Imagine if an accountant completely misses posting the ledger account. It would mean that no financial transaction has been done, and this will not reflect in the ledger accounts. This omission hence will not be reflected in the trial balance. For example, A sale is made to Mr. X. The accountant forgets to make a ledger entry. This will neither be reflected in Sales Book nor in Debtor’s ledger.
- Wrong Posting to account: The accountant has posted the entry to the wrong account although to the correct side, be it debit or credit. For example, the amount paid to Mr. A debited in the daybook to Mr. A correctly, but at the time of posting, the amount was posted into the account of Mr. Y’s debit side. In trial balance, the balance of Mr. B will appear instead of Mr. A on the debit side.
- The wrong Amount Entered: It means that the accountant has correctly recorded and posted the journal entry into respective ledger accounts but with the wrong amount. For example, Furniture purchased in cash for $1000. Here, the accountant makes such an error by posting $100 instead of $1000.
- The error of Principle: If the accountant does not make the proper allocation of the ledger head at the time of posting the journal entry, such error is called the error of principle. For example, the accountant has a debited purchase account for furniture purchased by the business instead of a furniture account. Although the trial balance will match correctly, the ledger entry has been wrongly posted in this scenario.
- Compensation: When the accountant makes an excess debit or excess credit entry, although the same is neutralized by excess credit or excess debit respectively in the same or another account, such error is recognized as an error of compensation. For example, the accountant has debited the purchase account excessively by $40, and likewise, the supplier account has been excessively credited by $40. The debit entry of the purchase account is neutralized by credit entry of the supplier account in this case. This scenario is popularly referred to as the error of compensation.
- Trial Balance basically suffers from the above limitations. These limitations can be managed by hiring professionals, setting foundations for strong internal control, and hiring a professional and competent internal auditor to check and verify the accounts. The auditors play a critical role in minimizing the limitations of the audit by a long shot.