A Trial Balance That Tallies Even When the Books Are Wrong
Sanjay runs a hardware shop in Gaya and keeps his books on the double-entry system. On 31 March his trial balance shows totals of ₹4,62,000 on each side, and his accountant says the books must therefore be correct. Sanjay's nephew, a commerce student, checks the ledger and finds five problems. First, a credit sale of ₹12,000 to Mohan was written as ₹1,200 in the sales book and also posted as ₹1,200 to Mohan's account. Second, rent of ₹6,000 for Sanjay's own house, paid from the business bank account, was debited to the Rent account. Third, a purchase of ₹9,500 from Bihar Steel was completely left out of both the purchase book and the supplier's account. Fourth, goods worth ₹4,000 taken home by Sanjay's family were recorded as a credit sale to a customer. Fifth, ₹2,500 received from Mohan was correctly entered in the cash book but posted to Sohan's account. The profit for the year is shown as ₹68,000.
1. For each of the five items, state whether the trial balance would still agree and whether the reported profit is affected. Explain the reason in each case.
Read the worked answer
All five items leave the trial balance in agreement, and each shows a different type of error.
- Sale of ₹12,000 recorded as ₹1,200 in both books - an error of partial omission on both sides. Sales (credit) and Mohan (debit) are each short by the same ₹10,800, so the two totals still match. Profit is understated by ₹10,800.
- Owner's house rent debited to Rent A/c - an error of principle. A debit exists, so the trial balance agrees, but a personal expense has been charged to the business. Profit is understated by ₹6,000.
- Purchase of ₹9,500 omitted entirely - an error of complete omission. Neither Purchases (debit) nor Bihar Steel (credit) is recorded, so the totals still agree. Profit is overstated by ₹9,500.
- Goods of ₹4,000 taken by the owner shown as a sale - the debtor is debited and Sales credited, so the trial balance agrees. Sales are overstated and drawings are missing; profit is overstated by ₹4,000.
- ₹2,500 posted to the wrong customer - an error of commission. A debit of the right amount exists, merely under the wrong name, so the totals agree and profit is unaffected, though two debtor balances are wrong.
Conclusion: a tallied trial balance proves only the arithmetical equality of debits and credits, not the accuracy of the books.
2. Compute the corrected net profit and state two balance-sheet figures that will also change.
Read the worked answer
Corrected profit calculation, starting from the reported ₹68,000:
| Item | Effect | Adjustment |
|---|---|---|
| (1) Sale and debtor short by ₹10,800 | profit understated | + ₹10,800 |
| (2) Personal rent treated as business expense | profit understated | + ₹6,000 |
| (3) Purchase of ₹9,500 omitted | expense missing | − ₹9,500 |
| (4) Goods of ₹4,000 taken by owner shown as sale | profit overstated | − ₹4,000 |
| (5) Wrong customer | no effect on profit | nil |
₹68,000 + ₹10,800 + ₹6,000 − ₹9,500 − ₹4,000 = ₹71,300.
The logic is that a missing expense raises profit and an unrecorded income lowers it; each error is corrected by its own effect, not by its size.
Two balance-sheet changes:
- Sundry debtors rise by ₹10,800 (Mohan's account) and the two debtors Mohan and Sohan are each misstated by ₹2,500 in opposite directions.
- Drawings rise by ₹4,000 plus ₹6,000 = ₹10,000, which reduces the owner's capital; and sundry creditors rise by ₹9,500 for Bihar Steel.
3. Pass the journal entries needed to rectify items (1), (2), (3), (4) and (5).
Read the worked answer
Since the trial balance agrees, no suspense account is needed - every correction is a complete double entry.
(1) Sale under-recorded Mohan's A/c … Dr 10,800 To Sales A/c 10,800
(2) Personal rent wrongly debited to Rent Drawings A/c … Dr 6,000 To Rent A/c 6,000
(3) Purchase omitted Purchases A/c … Dr 9,500 To Bihar Steel's A/c 9,500
(4) Goods taken by owner recorded as a sale - two things must happen: cancel the sale and record the drawings. Drawings A/c … Dr 4,000 Sales A/c … Dr 4,000 To Customer's A/c 4,000 To Purchases A/c 4,000
(5) Amount posted to the wrong customer Sohan's A/c … Dr 2,500 To Mohan's A/c 2,500
Reasoning to note: in (2), the Rent account had been debited when it should not have been, so it must be credited; drawings is the correct debit. In (4), crediting Purchases rather than Sales is right because the goods left the business at cost, not at selling price - crediting Sales would create profit on goods the owner consumed himself.