A Trial Balance is said to disagree when the total of its debit column is not equal to the total of its credit column. Under the double-entry bookkeeping system, every financial transaction should have equal debit and credit effects. Therefore, unequal debit and credit totals indicate that an error has occurred in the accounting records or in the preparation of the Trial Balance.
When a Trial Balance disagrees, the error must be identified and corrected before the Profit and Loss Statement and Balance Sheet are prepared. Adjustments should also be checked to ensure that every debit entry has a corresponding equal credit entry.
However, an important limitation of a Trial Balance is that it only checks the total of debits against the total of credits. Even if the Trial Balance agrees, it does not guarantee that the accounting records are completely free from errors. Certain errors do not affect the equality of debit and credit totals and therefore cannot be detected by a Trial Balance.
Error of Original Entry
An error of original entry occurs when an incorrect amount is entered on both sides of a transaction. Since the same wrong amount is recorded as both debit and credit, the Trial Balance continues to agree.
For example, if a purchase invoice of £21 is incorrectly recorded as £12, the Purchases Account is debited by £12 and the creditor’s account is credited by £12. Both sides are understated by £9, but the debit and credit totals remain equal.
Error of Omission
An error of omission occurs when a transaction is completely omitted from the accounting records. Since neither the debit entry nor the credit entry is recorded, the Trial Balance remains balanced.
A variation may occur when one ledger account total is omitted from the Trial Balance. In such a situation, the Trial Balance will not agree because only one ledger balance has been excluded from the statement.
Error of Reversal
An error of reversal occurs when the correct amount is recorded but the debit and credit entries are reversed. The account that should have been debited is credited, while the account that should have been credited is debited.
For example, a cash sale of £100 may be incorrectly debited to the Sales Account and credited to the Cash Account. Since both debit and credit entries of £100 have been recorded, the Trial Balance remains balanced.
Sometimes, an error of reversal may be identified when an account shows an abnormal balance, such as a cash account having a credit balance.
Error of Commission
An error of commission occurs when an entry is made for the correct amount and on the correct debit or credit side, but it is posted to the wrong account of the same type.
For example, fuel expenses may be incorrectly debited to the Postage Account. Both fuel and postage are expense accounts. Therefore, the total debit and credit amounts remain unaffected and the Trial Balance continues to agree.
Such an error may also arise because of confusion while recording revenue and capital expenditure.
Error of Principle
An error of principle occurs when the correct amount is entered on the correct debit or credit side but the wrong type or class of account is used.
For example, fuel cost, which is an expense, may be incorrectly debited to Stock Account, which is an asset account. The debit entry is still recorded and the corresponding credit entry remains unchanged. Therefore, the Trial Balance continues to agree.
The main difference between an error of commission and an error of principle is that an error of commission involves the wrong account of the correct type, whereas an error of principle involves the wrong type of account.
Compensating Errors
Compensating errors are two or more unrelated errors that individually would cause the Trial Balance to disagree but collectively cancel the effect of each other.
For example, one error may overstate a debit balance, while another unrelated error may overstate a credit balance by the same amount. The effects of the two errors compensate for each other and the Trial Balance remains balanced.
Exam Focus
A Trial Balance disagrees when total debit balances are not equal to total credit balances. Such disagreement indicates an accounting or posting error that must be identified before final financial statements are prepared.
However, the agreement of a Trial Balance does not prove complete accuracy of accounting records. A Trial Balance generally cannot detect errors of original entry, complete omission, reversal, commission, principle, and compensating errors.
Remember that an error of commission involves the wrong account of the same type, while an error of principle involves the wrong type or class of account. Compensating errors cancel each other’s effect and therefore do not disturb the agreement of the Trial Balance.