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What your trial balance can tell you about your accounting errors

by , 25 May 2015
If you run a business, you have a legal obligation to present your financial statements annually to SARS within six months after your financial year end.

And you know that the first step to creating them is your trial balance. It's the main tool you should use to prepare statements as required by IFRS and The Companies Act.

But if your trial balance is incorrect, your financial statements will also be. And that could lead you to declare incorrect taxes which will land you with penalties and interest.

Read on to find out about both the common and the uncommon errors on a trial balance and what they're telling you, so you can submit correct statements...

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How sure are you that your trial balance is error free?
If it isn't, your financial statements will also be incorrect. This means
·         Your accounting practices won't meet IFRS;
·         You could declare incorrect taxable income to SARS, which means fines and penalties;
·         Your company won't be compliant with the Companies Act of 2008 and the Income Tax Act; and
·         You'll give an incorrect picture of your company's finances – and look guilty of fraud!
But don't despair. We'll help you tackle the problems in drawing up an income statement and balance sheet with this one tool.


Four errors your trial balance will show
Your trial balance checks the accuracy in your books.
When it doesn't balance, ask yourself the following:
         Did you leave out one entry?
         Did you record the correct amount in the books?
         Did you post an entry into the wrong side of the ledger?
         Did you leave out a ledger balance from the trial balance?
To identify these errors, check all your entries in the ledger carefully.
But there are eight types of errors your trial balance can't reveal. Read on to find out what they are…

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Eight possible errors your trial balance won't pick up
You can spot the common errors on the trial balance where the figures don't balance. But there are uncommon errors that won't affect the balance at all. These are where you:
1.       Overstate an account by R1 000 on the debit side. And you also overstate the creditors account by R1 000.
2.       Completely leave out a transaction from the books, so it doesn't affect both the debit and credit side of the ledger;
3.       Record a transaction to the wrong account e.g. credit to ABC (Pty) Ltd instead of XYZ (Pty) Ltd;
4.       Allocate an expense to the wrong account. For example, if you post repairs to buildings to buildings account;
5.       Make an error of original entry. For example, you enter R340 on both the debit and credit side, where the figure was actually R400;
6.       Reverse entries. For example, when you debit the account to be credited and credit the account to be debited.
7.       Record an entry twice on both the debit and credit side;
8.       Make a transposition error. For example, you're supposed to enter R97 but you switch these two figures, and enter R79 on both the debit and credit side of the ledger.
But you can find some of these errors by seeing:
  • Improper balances in some accounts;
  • A variation between revenue and expense accounts and balance sheet accounts; and
  • The rise of unregistered documents, complaints from customers and suppliers, etc.
Now that you know what these possible errors are, you can make sure your trial balance is correct and works for you. Now you can submit correct financial statements. And you'll never have to declare wrong taxes again.
P.S. To find out everything you need to know about preparing your trial balance, and eliminate accounting errors, simply consult the Practical Accountancy Loose Leaf Service here…

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