1. The Trial Balance 7707
The trial balance is extracted at the end of an accounting period — typically monthly or annually. It does not prove the accounts are completely free of error (as we will see shortly), but it does confirm that every debit has a matching credit and that no arithmetic mistakes have been made in the ledger.
Which Accounts Have Debit Balances? Which Have Credit Balances?
Debit Balances (Dr column)
- All asset accounts (cash, bank, inventory, equipment, vehicles, debtors)
- All expense accounts (wages, rent, electricity, depreciation)
- Drawings account
- Sales returns (returns inwards)
- Purchases account
Credit Balances (Cr column)
- All liability accounts (loans, overdraft, creditors)
- Capital account
- Sales (revenue) account
- Income accounts (discount received, rent received)
- Purchases returns (returns outwards)
📐 Worked Example 1 — Extracting a Trial Balance
The following balances were extracted from the ledger of Sadia Traders on 31 December 2026. Prepare the trial balance.
Cash PKR 12,500 | Bank PKR 68,000
Trade receivables PKR 84,000 | Inventory PKR 96,000
Equipment PKR 120,000 | Motor vehicle PKR 85,000
Sales PKR 480,000 | Purchases PKR 295,000
Wages PKR 72,000 | Rent PKR 24,000
Electricity PKR 9,500 | Discount received PKR 4,000
Returns inwards PKR 5,000 | Returns outwards PKR 3,000
| Account | Dr PKR | Cr PKR |
|---|---|---|
| Capital | 320,000 | |
| Drawings | 45,000 | |
| Cash | 12,500 | |
| Bank | 68,000 | |
| Trade receivables | 84,000 | |
| Inventory | 96,000 | |
| Equipment | 120,000 | |
| Motor vehicle | 85,000 | |
| Trade payables | 62,000 | |
| Bank loan | 50,000 | |
| Sales | 480,000 | |
| Purchases | 295,000 | |
| Wages | 72,000 | |
| Rent | 24,000 | |
| Electricity | 9,500 | |
| Discount received | 4,000 | |
| Returns inwards | 5,000 | |
| Returns outwards | 3,000 | |
| TOTALS | 919,000 | 919,000 ✓ |
2. Limitations of the Trial Balance — Errors It Does NOT Reveal 7707
| Error Type | Definition | Example |
|---|---|---|
| Error of Omission | A transaction is completely omitted — not recorded in any account at all. Both the debit and credit entries are missing, so the trial balance still balances. | A credit sale of PKR 18,000 to Tariq & Co is never entered in any book. |
| Error of Commission | A transaction is recorded in the correct type of account but in the wrong account of that type. The double entry is complete but in the wrong person's name. | A payment received from Hassan is credited to the account of Hussain (same type — both debtors — but wrong person). |
| Error of Principle | A transaction is recorded in the fundamentally wrong type of account — treating a capital item as revenue or vice versa. | The purchase of a delivery van PKR 200,000 is debited to Motor Expenses (revenue) instead of Motor Vehicles (capital/asset). |
| Error of Original Entry (Error of Transposition) |
The correct accounts are used and the correct sides are debited and credited, but the wrong amount is entered in both accounts. | A sale of PKR 5,400 is recorded as PKR 4,500 in both the Sales Account and the customer's account. |
| Compensating Error | Two or more separate errors that exactly cancel each other out — one error overstates the debit side by the same amount that another overstates the credit side. | Wages account is overcast by PKR 10,000 AND Sales account is also overcast by PKR 10,000 — errors cancel and trial balance balances. |
| Complete Reversal of Entry | The correct accounts and correct amount are used, but the debit and credit entries are swapped — what should be debited is credited and vice versa. | When receiving cash from a debtor, Cash is credited and the Debtor is debited — the complete opposite of the correct entry. |
🧠 Memory Aid — Six Errors Not Revealed (OPPCRC)
Omission | Principle | Poriginal entry | Commission | Reversal | Compensating
Think: "Our Poor Pupils Can't Recall Correctly"
— Entering a debit but forgetting the credit (or vice versa)
— Entering different amounts on the debit and credit sides
— Miscasting (adding up) a ledger account incorrectly
— Extracting a balance on the wrong side of the trial balance
These errors cause the Dr and Cr totals to differ — the trial balance will not balance.
3. Correcting Errors Using the General Journal 7707
The Two-Step Approach to Correcting Errors
Step 2: Record the correct entry as it should have been originally.
These two steps can often be combined into a single journal entry. Always check that after the correction, the affected accounts show the right balance.
📐 Worked Example 2 — Correcting All Six Error Types
Correction: Simply record the missing entry.
Dr Tariq & Co (Trade Receivables) 18,000 / Cr Sales 18,000
Narration: Credit sale to Tariq & Co omitted from books — now recorded.
Correction: Remove from wrong account, place in right account.
Dr Hussain 12,000 / Cr Hassan 12,000
Narration: Payment from Hassan PKR 12,000 incorrectly credited to Hussain — transferred to correct account.
Correction: Move from wrong type of account to correct type.
Dr Motor Vehicles 200,000 / Cr Motor Expenses 200,000
Narration: Van purchase PKR 200,000 incorrectly posted to Motor Expenses — transferred to Motor Vehicles (capital asset).
Correction: Record the difference of PKR 900 in both accounts.
Dr Trade Receivables 900 / Cr Sales 900
Narration: Sale of PKR 5,400 incorrectly recorded as PKR 4,500 — shortfall of PKR 900 now corrected.
Correction: Reverse the wrong entry then record correctly — or combine into one entry for double the amount.
Dr Cash 30,000 / Cr Nadia & Co 30,000
Narration: Receipt from Nadia & Co PKR 15,000 completely reversed — corrected by doubling the entry to cancel wrong and record correctly.
4. Effect of Errors on Profit and Net Assets 7707
| Error Type | Effect on Profit | Effect on Net Assets |
|---|---|---|
| Sale of PKR 18,000 omitted | Profit understated by PKR 18,000 | Net assets understated (debtor missing) |
| Van charged to Motor Expenses (error of principle) | Profit understated (expenses overstated by PKR 200,000) | Net assets understated (asset missing) |
| Sale recorded as PKR 4,500 instead of PKR 5,400 | Profit understated by PKR 900 | Net assets understated |
| Error of commission (Hassan/Hussain) | No effect on profit | No effect on net assets — only debtor names affected |
| Complete reversal of receipt from Nadia | No effect on profit | No effect on net assets — cash and debtor both wrong but cancel |
📐 Worked Example 3 — Corrected Profit Calculation
A business reported a profit of PKR 95,000. The following errors were later discovered. Calculate the corrected profit.
(i) A credit sale of PKR 22,000 was completely omitted.
(ii) Motor van PKR 180,000 was debited to Motor Expenses (error of principle).
(iii) Purchases of PKR 8,600 were recorded as PKR 6,800 (error of original entry).
(iv) A payment of PKR 5,000 received from Asif was credited to Arif's account (error of commission).
Reported profit PKR 95,000
Add: omitted sale (i) PKR 22,000
Add: van to expenses (ii) PKR 180,000
Less: purchases understated (iii) (PKR 1,800)
Corrected profit PKR 295,200
5. The Suspense Account 7707
If Dr total > Cr total → the difference is a credit in the suspense account
If Cr total > Dr total → the difference is a debit in the suspense account
The suspense account is closed when all errors causing the imbalance are found and corrected. It should never appear in published financial statements.
📐 Worked Example 4 — Opening and Clearing a Suspense Account
The trial balance of Waheed Trading showed Dr total PKR 548,000 and Cr total PKR 544,000 — a difference of PKR 4,000. A suspense account was opened. The following errors were then discovered:
(i) The purchases journal was undercast (under-added) by PKR 2,000.
(ii) A payment of PKR 3,000 for stationery was entered in the cash book correctly but no entry was made in the stationery account.
(iii) Sales returns of PKR 1,000 were entered on the wrong side of the sales returns account (Dr side instead of Cr side — wait, returns inwards should be Dr so this means Cr instead of Dr).
Dr total exceeds Cr total by PKR 4,000 → Cr suspense PKR 4,000
Suspense Account: Cr PKR 4,000
Purchases account is understated by PKR 2,000 on Dr side.
Journal: Dr Purchases 2,000 / Cr Suspense 2,000
Suspense now: Cr 4,000 − Cr 2,000 = Cr 2,000 remaining
Cash book (Cr) was correct — only the debit side (Stationery Account) was missing.
Journal: Dr Stationery 3,000 / Cr Suspense 3,000
Suspense now: Cr 2,000 − Cr 3,000 → Dr 1,000 balance
Should be Dr — entered as Cr. Difference = 2 × 1,000 = 2,000 short on Dr side.
Journal: Dr Sales Returns 2,000 / Cr Suspense 2,000 — wait, suspense is Dr 1,000 so we need Dr suspense 1,000.
Correction: Dr Sales Returns 2,000 / Cr Suspense 1,000...
Let us show the suspense account fully:
| Dr Date | Details | PKR | Date | Details | PKR Cr |
|---|---|---|---|---|---|
| Opening | Difference in TB | 4,000 | |||
| (i) | Purchases (undercast) | 2,000 | |||
| (ii) | Stationery (omitted Dr) | 3,000 | |||
| (iii) | Sales Returns (wrong side) | 1,000 | |||
| 1,000 | 9,000 | ||||
The suspense account has not yet cleared — Dr 1,000 vs Cr 9,000 indicates further errors remain. This is intentional for teaching: in practice, all errors must be found before the suspense account closes to zero.
📝 Exam Practice Questions
Q1 [2 marks] — State two limitations of the trial balance as a method of checking accounting records.
2. The trial balance will not reveal errors of commission — where a transaction is posted to the correct type of account but the wrong specific account (e.g. one debtor's account instead of another), since the overall debit and credit totals remain equal.
Q2 [4 marks] — Identify the type of error in each case and prepare the journal entry to correct it.
(a) Electricity expense PKR 9,000 was debited to the Buildings account.
(b) A cheque for PKR 14,500 received from Imran & Bros was credited to the account of Iqbal & Sons.
(c) A cash sale of PKR 7,200 was recorded as PKR 2,700 in both accounts.
(d) Wages PKR 25,000 — the debit entry was made correctly but no credit entry was made in the Cash account.
Dr Electricity 9,000 / Cr Buildings 9,000
Narration: Electricity PKR 9,000 incorrectly posted to Buildings — transferred to correct account.
(b) Error of commission (wrong debtor account)
Dr Iqbal & Sons 14,500 / Cr Imran & Bros 14,500
Narration: Receipt from Imran & Bros incorrectly credited to Iqbal & Sons — transferred to correct account.
(c) Error of original entry (wrong amount both sides — transposition)
Dr Cash 4,500 / Cr Sales 4,500
Narration: Cash sale recorded as PKR 2,700 instead of PKR 7,200 — shortfall of PKR 4,500 now corrected.
(d) This error DOES cause trial balance to fail (single entry — missing Cr).
Dr Suspense 25,000 / Cr Cash 25,000
Narration: Wages PKR 25,000 — credit entry omitted from Cash account — now corrected.
Q3 [4 marks] — A business reported net profit of PKR 62,500 before the following errors were discovered. Calculate the corrected net profit.
(i) Rent received PKR 8,000 was credited to the Sales account.
(ii) A purchase of PKR 12,400 was completely omitted from the books.
(iii) A vehicle PKR 95,000 was debited to Repairs and Maintenance account.
(iv) A credit sale of PKR 4,300 was recorded in both accounts as PKR 3,400.
(ii) Purchase omitted PKR 12,400 → expenses understated → profit overstated → deduct PKR 12,400
(iii) Vehicle to Repairs PKR 95,000 → expenses overstated → profit understated → add PKR 95,000
(iv) Sale understated by PKR 900 (4,300 − 3,400) → profit understated → add PKR 900
Reported profit: PKR 62,500
Less omitted purchase: (12,400)
Add vehicle error: 95,000
Add sale undercast: 900
Corrected profit: PKR 146,000
Q4 [5 marks] — The trial balance of Zainab Traders showed a difference of PKR 6,500 (Cr exceeds Dr). A suspense account was opened. The following errors were later found:
(i) The sales journal was overcast by PKR 4,000.
(ii) A payment to a supplier, Rauf & Co, PKR 2,500 was entered in the cash book only — no entry in Rauf & Co's account.
(iii) Discount allowed PKR 1,500 was entered on the credit side of the Discount Allowed account instead of the debit side.
Write the journal entries to correct each error and show the suspense account after all corrections, confirming it is fully cleared.
(i) Sales journal overcast PKR 4,000:
Dr Sales 4,000 / Cr Suspense 4,000
(Sales Cr was too high — reduce it; Suspense Cr reduces the Dr balance)
(ii) Rauf & Co — cash book Cr correct, no Dr in Rauf's account:
Dr Rauf & Co (Trade Payables) 2,500 / Cr Suspense 2,500
(iii) Discount Allowed on wrong side (Cr instead of Dr):
Correction = 2 × 1,500 = 3,000 on Dr side. Other side to Suspense.
Dr Discount Allowed 3,000 / Cr Suspense 3,000 — but wait: Suspense Dr balance = 6,500; we need to clear it with Cr entries totalling 6,500. Cr entries so far: 4,000 + 2,500 = 6,500. Suspense is fully cleared by corrections (i) and (ii). Correction (iii) does not affect suspense as both sides of the Discount Allowed correction are within the same ledger — Dr Discount Allowed 3,000, Cr Suspense... recalculate: 6,500 − 4,000 − 2,500 = 0. Suspense cleared.