The purpose of trial balance is to write down the accounts and verify their mathematical correctness. There are three types of mistakes.
1) Entry error of accounts when transferring data from primary account to ledger,
2) Entry error when transferring accounts from ledger to trial balance,
3) The calculation error.
It’s easy to find these mistakes and avoid them if careful handled. Considering the benefits of trial balance, it is seen that preparing trial balance particularly is an important task. But the trial balance also has some limitations or disadvantages. These limitations are listed below.
1. Trial Balance is not a part of Accounts:
Trial balance is neither an account nor a part of accounting. Even though, the trial balance is created to prove the mathematical accuracy of various accounts, if the accountant can confirm the accuracy of the transactions written in the books of accounts and directly write these accounts in the financial statement, then it is possible to accurately determine the true status of the organization. In this case it works even if the trial balance is not created.
2. Not all errors are confined in the trial balance:
Although trial balances are prepared to check the arithmetical correctness of the accounts, not all errors are caught in the trial balance. If the sum of both sides of the trial balance matches, then the accounting process cannot be said it is correct. Some errors are mentioned below which are not tracked in trial balance.
a) Errors of Principle: The double entry system has certain principles, through which debit-credit are determined. Errors of principle that occur when the accounting is not followed the double entry system. Accountant don’t understand the nature of the account or transaction and makes this mistake. It can be happening that accountant intentionally make this mistake. But it is normal to make this mistake unintentionally. For example, a chair was repaired. Repair Account will be debited as expense as it is nominal account. If it is debited as furniture on Real Account then it will be wrong as per accounting principle. But it will not have any adverse effect on the sum of the trial balance, i.e. the sum will match. Again, if revenue type expenditure is shown as capital expenditure, then it will also be an error of principle, both expenses are debited, the trial balance will match. This mistake will not be identified in trial balance. Thus, lack of proper knowledge of personal, real and nominal accounts may lead to errors of principle which are not easy to guess in the trial balance.
b) Clerical errors: Accountants may make mistakes while recording transactions, called clerical errors or typing mistakes. There are four types errors.
i. Errors of omission: It is possible for a transaction to occur without being written in the journal or ledger. Trial balance is unaffected by it. A transaction could occur but not be noted in the ledger or diary. Trial balance is unaffected by it. Thus, an omission error is a mistake that happens when a transaction is either not entered at all or is missing from the book of accounts.
As an illustration: (i) John purchased products from Smith for $5,000, but this transaction was not recorded in the book. (ii) Total $10,000 worth of products were bought; however, the transaction was not written in the account books.
In both case trial balance will match since transactions are not written on debit or credit side. Most of these mistakes won’t be detected by the trial balance.
ii) Errors of commission: If the original account of a transaction is written in wrong numbers, then the mistake is called error of commission.
Example: – need to write $200,000 for purchase account, but $300,000 is written. In this case, the debit balance will be more than $100,000. On the other hand, $4,00,000 is written instead of $3,00,000 as payable or any other credit balance, i.e. $1,00,000 is overwritten. This will match the trial balance, but the $100,000 will remain incorrect.
iii Compensating errors: When an error is corrected by another error without the accountant’s knowledge, it is called a self-correcting or supplementary error.
Let’s look at this:-
Example: – Need to write $200,000 as purchase but $300,000 is written. This will increase the debit amount by $100,000. On the other hand, $400,000 is written instead of $300,000 as a payable or other credit note, i.e. $100,000 is overwritten. This will match the trial balance, but $100,000 in two places will remain incorrect.
iv Errors of disposing: Error of disposing occurs when the same amount of money is transferred from the primary book of accounts (journal) to the ledger on the correct side of one account rather than another.
Example: – This would match the trial balance but remain incorrect, eg: John received $1,000 from Smith, but this $1,000 was mistakenly written to the credit side of John’s account. In this case the trial balance will match but a large error will remain in the calculation.
3. Trial balance is not unquestionable proof of accounting correctness:
When a transaction takes place, according to double entry system, the transaction is recorded in the same balance showing the debit and credit sides. As a result, the sum of debit balance and credit balance of the accounts is equal. From this it can be assumed that the mathematical accuracy of the calculation is fairly certain. But from the above discussion we have seen that a total of 5 (five) types of errors can remain even when both sides of the trial balance are matched. A trial balance cannot be said to be free from these errors without intelligently checking of the accounts again and again. So, we can say, trial balance is a rough indicator of mathematical correctness of accounts but equality of trial balance is not the only unquestionable proof of mathematical correctness of accounts.