Limitations of Trial balance
Today in this free online accounting training class we will discuss:
- Limitations of Trial Balance
- Errors of Trial Balance
- Errors that Trial Balance cannot recognize
Trial Balance helps to find out errors from journal and ledger. As we discussed earlier the debit and credit column of Trial Balance may balance with numerous error that means the equality of trial balance does not ensure that journalizing or posting is being processed accurately. There could be many error exists although both side could be equal in trial balance. These errors or mistakes are referred as limitations of trial balance. Some common limitations of trial balance are:
- Error of Omission of Transaction: A transaction is totally omitted from the account as a result as a result there is no debit or credit account. Omission of any transaction will not lead any effect so the trial balance will maintain the equality but omission of any transaction is a limitation of trial balance. For example: Sale of 5000 USD is omitted from the accounting statement. That means there will be no record of the event and since none of the sides-debit and credit will be affected for this omission so trial balance will not recognize the error but will show equality on both sides.
- Error of Principle: Any entry recorded in journal or ledger but in wrong account is referred as error of principle. For example: Sale of 2000 USD Goods at cash. Here by mistake the accountant writes Sale as Debit and Cash as Credit. Since trial balance works with figures so such mistake could not be figured out.
- Error of duplication: Journal entry is posted twice. Though this is a marked limitation of trial balance but having this error the equality of trial balance will remain same. Example: Purchase of goods at 2000 USD recorded twice in journal.
- Error of Incorrect Entry: Posing of any incorrect entry. For example car purchased for the owner which is a personal event is recorded in business account.
- Error of compensating: Error in one side in journalizing or posting is compensated by the same amount of the journalizing or posting. For example: The account receivable and account payable are both compensated by 1500 USD.