Post a Comment

A trial balance is a two-column schedule that is used to check the arithmetic accuracy of a posting in the ledger.

Since for every debit entry, there is a corresponding credit entry in the accounts for every transaction, the trial balance is expected to agree.

However, the agreement of the trial balance is not an exact confirmation of the accuracy of the posting in the ledger, it is only a preliminary confirmation of the arithmetic accuracy of the posting in the ledger.

This is because some errors can not be disclosed through the trial balance. 

The following are six errors that cannot be disclosed or detected through the trial balance:

1. Error of Omission

2. Error of original entry

3. Error of commission

4. Error of principle

5. Compensating errors

6. Error of complete reversal of the entry

Let's take a closer look at each of them individually.

1. Error of omission: This type of error occurs when a financial transaction is completely omitted. 

Since the transaction is completely omitted, the debit and credit aspects of the transaction will be left out.

As a result, the error will have no impact on the trial balance agreement. For instance, suppose an N6000 credit sale was not recorded in the sales account.

The totals of the sales account and debtors will not be impacted as a result of this omission, and the trial balance will remain balanced.

2. Error of original entry:  This error occurs when the wrong amount is posted to an account. 

In other words, the error of the original entry occurs when the amount entered in the books of account is different from the original amount on the source document.

For example, if N3000 is entered into the books as sales instead of  N500.

The error of the original entry would not affect the trial balance because the wrong amount was debited and credited.  

3. Error of commission: This occurs when the correct amount is posted to the incorrect account in the same ledger.

It occurs when financial transactions are misrecorded in the same ledger.

An example is Money paid to one creditor, James Ltd, but debited to another creditor account, Samuel Ltd  The trial balance will agree because both James Ltd and Samuel Ltd are creditors.

4. Error of principle: This type of error occurs when an accounting principle has been violated while recording a transaction in the books of account.

It's an error that happens when you post to a different category of accounts.

An example would be recording the purchase of assets in a purchase account.

Even though an error was made, the trial balance will still agree because the purchase account will be debited and the suppliers' accounts will be credited with an equal amount.

5. Compensating error: As its name suggests, this occurs when an error in one account or set of accounts is compensated by another error in one account/group of accounts.

To put it another way, compensating errors arise when two errors with the same amount cancel each other out.

Another way of thinking about compensating error is that it is an error that occurs when errors in the debit postings of different transactions are cancelled out by errors in the credit postings so that it has no effect on the agreement of the trial balance.

Suppose, for example, an accountant undercast sales account by N100 and at the same time undercast purchases account by N100. In this case, an error has been compensated by another error. 

6. Error of Complete reversal entry: This occurs when the debit and credit entry recorded for a particular entry is reversed.

In other words, It occurs when the debit is sent to credit and credit is sent to debit

An error of complete reversal entry occurs when any of the following happens

  • Asset accounts are credited, instead of debited; Asset accounts are debited, instead of credited.
  • Expense accounts are credited, instead of debited; Expense accounts are debited, instead of credited
  • Revenue accounts are debited, instead of credited; Revenue accounts are credited, instead of debit.
  • Capital accounts are debited, instead of credited; Capital accounts are credited, instead of debit.
  • liability accounts are debited, instead of credited; liability accounts are credited, instead of debited

For emphasis, there are six undetectable errors in the trial balance viz; Error of Omission, Error of original entry, Error of commission, Error of principle, Compensating errors, Error of complete reversal of the entry

Please share this article with your friends and colleagues if you find it useful.

Also, don't forget to subscribe to my blog so you can be notified whenever a new post is published.

To put your knowledge to the test, kindly take this quiz.

The sale of goods worth N 450,000 to TR Limited was entered into the account of TRR Ventures. What type of error is this?

Error of Principle
The error in the original entry
Complete reversal of entries
Error of commission

see explanation

Error of commission occur occurs when the correct amount is posted to the incorrect account in the same ledger. For example, money that has been received from a customer is credited properly to the accounts receivable account, but to the wrong customer.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter