Limitations of a trial balance

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The limitations of a trial balance

We have seen that the trial balance is a method used to test the accuracy of the accounting records. 

Therefore, if the two columns of the list are not equal, there must be an error in recording the transactions in the accounts. 

However, the trial balance will not disclose the following types of errors.

  • The complete omission of a transaction, because neither a debit nor a credit is made.

  • The posting of a debit or credit to the correct side of the ledger, but to a wrong account.

  • Compensating errors (e.g. an error of $500 is exactly cancelled by another $500 error elsewhere).

  • Errors of principle, e.g. cash from receivables being debited to receivables account and credited to cash at bank instead of the other way round.

These errors will be discussed again in the chapter “Correction of Errors”.

Closing Inventories

A business will purchase goods to sell during the year. It is unlikely that all of these goods will have been sold by the year end. 

The goods still held at the year end are known as closing inventories. 

These are an asset of the business and so should be included in the statement of financial position. 

Also, these inventories will be included in the cost of sales calculation. 

When a business determines its profit for the year it should match the sales revenue earned to the cost of goods it sold.

The double-entry for closing inventories is: -

Dr Inventories (SOFP)
Cr Closing Inventories (COS)

Closing inventories will be discussed in further detail in the chapter “Inventories”.

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