Trial balance is the list of closing balances of ledger accounts on the certain date and is the first step toward the preparation of financial statements. Ledger balances are segregated into debit balances and credit balances. The debit balance amount are listed in column with the heading debit balances and the credit balances amounts are listed in another column with the heading credit balances. The total of each of these two columns should be identical.
The following are errors which trial balance will fail to disclose:
- Error of commission: if the transaction is recorded on the right side of wrong account, it will not cause a disagreement in the trial balance;
- Error of omission: if the particular transaction is omitted altogether from the books of original entry (or recorded twice) it will not disturb the agreement of trial balance;
- Error of principle: these errors arise because of an incorrect application of the principles of accounting, for example, failure to differentiate between capital and revenue expenditure;
- Compensating errors: these errors are of neutralizing nature, that is one error is compensated by another error(s) or by errors of opposite nature;
- Recording wrong amount in the books of original entry: if transaction is wrongly recorded in the books of original entry and is subsequently posted through the ledgers, it will not cause disagreement in the trial balances.