Limitations of Trial Balance

Limitations of Trial Balance

Limitations of trial balance

Though the trial balance facilitates to make sure the mathematical accurateness of the books of accounts, it is potential only when the accountant has not devoted any error. As all the errors made are not disclosed by the trial balance, it would not be regarded as decisive evidence of the accuracy of the books of accounts preserved. A trial balance gives only condensed information of each account. It does not give information about the revenue or loss made by the business in the accounting period or financial position of the business as at the close of the period.

Errors of Omission: A mistake of omission happens when a transaction is not recorded in the books of entry. In such a case the credits and debits for the transaction would balance and omitting to record it would have no contact on the trial balance.

Errors of commissions: Recording wrong figure in journal and posting a similar amount in the right sides of ledger accounts is called errors of commission and this does not hinder the harmony of trial balance. For example, merchandise purchase $ 1,100 but recorded $ 1,000 both in journal and ledger.

Errors of Principle: If profits expenditure is recorded as a capital expenditure or vice-versa it is called the error of principle. For example, the Installation cost of a new machine is accounted for debiting wage expense account instead of debiting machinery account.

Compensating Errors: Errors of this type have a propensity to nullify the effect of errors committed earlier. This is a case of multiple errors, where the errors put together tend to cancel out each other.