Calculation of a Trial Balance: Possible Errors
The purpose of the trial balance step of the accounting cycle is to ascertain whether or not an error has occurred during the bookkeeping process. Double-entry bookkeeping is self-correcting as a result of the debits and credits system, but there are still a number of ways in which errors can occur. Some of the most common examples are discussed below.
Errors of Original Entry and Omission
An error of original entry occurs when a bookkeeper or accountant inputs the wrong original information into both sides of the financial ledger. For example, if a sale was made for $23 but written down as $32, both sides of the column will be equal and will pass the test of self-correction while remaining inaccurate. An error of omission is similar in the sense that it is invisible to the self-correction system; in this case, the entire transaction is simply not recorded, leading to an inaccurate total balance of the company’s equity and payouts.
Errors of Reversal
An error of reversal occurs when a bookkeeper inputs the wrong debits and credits into each column; for example, a sale might be debited to the cash account (as though money had been spent) and credited to the purchases account (as though a purchase had been made, rather than a sale). In a case such as this, the error would not appear on a trial balance, but it would dramatically affect the company, leading them to believe they had lost rather than gained the money resulting from that particular sale.
Errors of Transposition
This type of error occurs when two adjacent digits are switched during the bookkeeping process. It is easy to imagine how this happens! Only imagine Bob Cratchett alone late at night in Scrooge’s office, scribbling away, and it becomes clear that clerical errors and human fallibility go hand in hand. However, accountants have come up with an easy solution for this type of error: the resulting inconsistency is always divisible by 9, so the sum in question is also divided by 9 to determine the digit which has been switched. This allows for location and correction of the error.
When several transactions are entered incorrectly but together balance one another out and thus remain undetected, the resultant error is called a compensating error. So, for example, when two digits are switched, as in an error of transposition, 36.94 might become 63.94 in the debits column. Concurrently, an error of original entry might have another transaction in which 94.63 has been incorrectly entered as 63.94 into the credits column. Now 63.94 has been improperly entered into both sides, and will balance out at the end of the day.
One of the major pitfalls of accounting is the presence of clerical errors. However, in this day and age most small companies can rely upon computer programs to spot and rectify these errors, as their books are simple enough to be easily sorted. Larger companies may still run into trouble – but as they are more monetarily successful, they will surely be able to overcome this issue!