Preparing the trial balance - Limitations of a trial balance

Learning Outcomes

After reading this article, you will be able to identify the purpose and process of drawing up a trial balance and explain its limitations. You will distinguish between errors that can and cannot be detected by a trial balance and describe the function of suspense accounts. You will also be able to apply this knowledge to ACCA-style exam scenarios.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand not only how to produce a trial balance, but also its practical limitations and role in error detection and correction. This article supports revision of:

• The preparation and purpose of an initial trial balance
• Types of errors revealed and not revealed by a trial balance
• The function of suspense accounts when discrepancies arise
• Correction of errors using journal entries

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which type of error will NOT cause the trial balance totals to disagree?
   1. Single-sided entry
   2. Omission of an entire transaction
   3. Posting unequal amounts for debit and credit
   4. Entering a transaction on the wrong side of both accounts

2. True or false? A suspense account may be required if total debits and credits do not match on the trial balance.

3. List two reasons why a trial balance may not detect all errors in the ledger accounts.

4. Provide an example of an error of principle and explain if it affects the agreement of the trial balance.

Introduction

A trial balance is a list of all the general ledger account balances, classified as either debits or credits, at a given date. Its main purpose is to check the mathematical accuracy of the double-entry records before preparing further reports or financial statements. However, a trial balance cannot detect every type of error. Recognising its limitations and understanding which errors it will and will not reveal is essential to ACCA FA1 success.

Key Term: trial balance
A statement setting out all the balances in the general ledger, with debit and credit totals, prepared to check arithmetic accuracy.

Limitations of the Trial Balance

A trial balance confirms that total debits and total credits in the ledger are equal. This provides some confidence that entries have been made using double entry, but does not guarantee the absence of all errors.

Errors Detected by a Trial Balance

Certain mistakes will cause the trial balance not to balance, forcing you to investigate and correct them:

• Posting only one side of a transaction (single-sided entry)
• Entering unequal amounts on debit and credit sides
• Errors in totaling ledger accounts or carrying balances to the trial balance incorrectly

Key Term: suspense account
A temporary account opened to record the difference when a trial balance does not agree, pending investigation.

Errors Not Revealed by a Trial Balance

Some errors do not affect the agreement of debits and credits. These remain hidden even if the trial balance totals match exactly:

Key Term: error of omission
Failing to record an entire transaction in both accounts, so neither a debit nor a credit appears.

Key Term: error of commission
Entering a transaction in the correct type of account, but the wrong specific account (e.g., posting a receipt to the wrong customer's account).

Key Term: error of principle
Recording a transaction in the wrong category of account (e.g., capital expenditure recorded as an expense).

Key Term: compensating error
Two or more independent errors offsetting each other, causing the trial balance to still agree.

Key Term: complete reversal of entries
Debiting the account that should have been credited and crediting the account that should have been debited; the trial balance totals remain unaffected.

Worked Example 1.1

Example:
During the year, rent of $600 was paid and posted as a debit to wages instead of rent. Will this affect the agreement of the trial balance, and what type of error is this?

Answer:
The trial balance totals will still agree, as a debit entry has been made (though to the wrong account), and the correct credit entry was made. This is an error of commission.

Worked Example 1.2

Example:
A sales invoice of $1,250 is completely omitted from the ledger. What happens to the trial balance?

Answer:
Both the debit (receivables) and credit (sales) entries are missing, so debit and credit totals remain equal. This is an error of omission and will not disrupt the trial balance.

Worked Example 1.3

Example:
After completing the trial balance, the totals do not agree. A suspense account with a credit balance of $350 is opened. What does this balance represent?

Answer:
It shows that the total debits exceed total credits by $350, and there is at least one error requiring investigation. The suspense account temporarily records this difference until all errors are identified and corrected.

Exam Warning

Be careful: Accurate trial balance totals do not prove every transaction is correct—only that the books balance arithmetically. ACCA questions often ask which types of errors are not detected by a trial balance.

Summary

The trial balance checks the arithmetic of the ledger accounts, ensuring that the sum of debit balances equals the sum of credit balances. However, it does not detect all mistakes. Errors of omission, commission, principle, reversal, and compensating errors may still exist. Suspense accounts are used temporarily when the trial balance does not balance, pending correction of such errors.

Key Point Checklist

This article has covered the following key knowledge points:

• Define the purpose of a trial balance
• Recognise that an agreed trial balance does not guarantee absence of all errors
• Identify the types of errors detected by a trial balance
• List errors NOT revealed by a trial balance
• Explain the role of suspense accounts in resolving trial balance differences
• Classify common exam question types on trial balance limitations

Key Terms and Concepts

• trial balance
• suspense account
• error of omission
• error of commission
• error of principle
• compensating error
• complete reversal of entries