3.1 The trial balance (3)
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1.
Describe two limitations of using a trial balance as a means of ensuring the accuracy of financial records.
- Does not guarantee accuracy: A trial balance only confirms that debits and credits are equal, but it doesn't guarantee that all transactions have been correctly recorded. For example, a transaction could be incorrectly posted to the wrong account.
- Errors of Omission: The trial balance will not detect errors of omission, where a transaction has not been recorded at all. The debits and credits may still balance, but the financial records are incomplete.
- Errors of Principle: Similarly, errors of principle, where a transaction is recorded in the wrong account, will not be detected by a trial balance. The debits and credits may balance, but the financial statement will be incorrect.
2.
Question 1
The following balances were extracted from the books of ABC Company on 31st December 2023:
- Cash at Bank: £12,500
- Cash on Hand: £500
- Accounts Receivable: £28,000
- Inventory: £15,000
- Accounts Payable: £10,500
- Loan from Bank: £25,000
- Capital: £40,000
- Revenue: £75,000
- Rent Expense: £6,000
- Salaries Expense: £12,000
Prepare a trial balance for ABC Company as at 31st December 2023.
Answer 1
ABC Company
Trial Balance
As at 31st December 2023
| Debit | Credit |
| Cash at Bank | £12,500 |
| Cash on Hand | £500 |
| Accounts Receivable | £28,000 |
| Inventory | £15,000 |
| Accounts Payable | £10,500 |
| Loan from Bank | £25,000 |
| Capital | £40,000 |
| Revenue | £75,000 |
| Rent Expense | £6,000 |
| Salaries Expense | £12,000 |
3.
Explain the difference between a compensating error and an omission error. How will each type of error affect the trial balance?
Compensating Error: A compensating error occurs when a debit and a credit error of the same monetary amount are made in the accounting records. For example, if £100 is debited instead of credited, and £100 is credited instead of debited, the total debits and total credits remain the same. This results in the trial balance being balanced.
Omission Error: An omission error occurs when a transaction is completely failed to be recorded in the ledger. For example, a £50 sales transaction is never entered. This results in either a debit or a credit difference in the trial balance, leading to an imbalance. The total debits will be less than the total credits (or vice versa), causing the trial balance to be unbalanced.
Effect on Trial Balance:
| Compensating Error: Trial Balance will be balanced. |
| Omission Error: Trial Balance will be unbalanced. |