Every transaction was entered twice, once as a debit and once as an equal credit. So if every ledger balance is listed in its column, the two columns must total the same. A trial balance is that list.
What agreement proves: the two sides of each entry were equal, and the additions are right. That is genuinely useful — it catches one-sided postings, wrong additions and transposed figures in the ledger.
What agreement does not prove: that the entries were correct. An entry that debits the wrong account by the right amount leaves both columns equal and the accounts wrong. Section 3 lists the five kinds of error that survive a trial balance untouched, and they are examined more often than the ones it catches.
These are the closing balances of the same sixteen transactions, taken straight from the ledger of Unit 2.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank | 79,000 | |
| Cash | 81,000 | |
| Drawings | 5,000 | |
| Furniture | 25,000 | |
| Purchases | 75,000 | |
| Rent | 6,000 | |
| Salaries | 9,000 | |
| Sales Returns | 3,000 | |
| Suresh | 15,000 | |
| Wages | 4,500 | |
| Capital | 2,00,000 | |
| Commission | 2,500 | |
| Mehta & Co. | 16,000 | |
| Purchase Returns | 4,000 | |
| Sales | 80,000 | |
| Total | 3,02,500 | 3,02,500 |
Both columns total 3,02,500. The books are arithmetically sound.
Notice which side each kind of account sits on, because this is the quickest sanity check there is: assets and expenses on the debit side; capital, liabilities and income on the credit side. Drawings sits on the debit side even though it relates to capital, because it reduces capital. Sales Returns sits on the debit side even though it relates to income, for the same reason.
| Error | What happened | Example |
|---|---|---|
| Error of omission | The transaction was never entered at all. | An invoice lost before it reached the books. |
| Error of commission | Right amount, right side, wrong account of the same class. | ₹5,000 received from Suresh credited to Sunil’s account. |
| Error of principle | Capital and revenue confused. | Machinery bought for ₹40,000 debited to Purchases instead of Machinery. |
| Compensating errors | Two errors of equal size in opposite directions. | Salaries overstated by ₹900 and rent understated by ₹900. |
| Error of original entry | The wrong amount was journalised, so both sides carry it. | ₹4,500 of wages entered everywhere as ₹5,400. |
The error of principle is the dangerous one, because it does not merely misplace a figure — it moves an amount between the profit and loss account and the balance sheet. Debiting machinery to purchases understates profit this year and understates assets every year after.
The method is always the same: ask what entry was made, then what entry should have been made, and pass whatever converts one into the other.
| Error | Entry made | Correct entry | Rectifying entry |
|---|---|---|---|
| Machinery ₹40,000 debited to Purchases | Purchases Dr. 40,000 | Machinery Dr. 40,000 | Machinery A/c Dr. 40,000 — To Purchases A/c 40,000 |
| ₹5,000 from Suresh credited to Sunil | Sunil Cr. 5,000 | Suresh Cr. 5,000 | Sunil A/c Dr. 5,000 — To Suresh A/c 5,000 |
| Wages ₹4,500 entered as ₹5,400 | Wages Dr. 5,400 | Wages Dr. 4,500 | Cash A/c Dr. 900 — To Wages A/c 900 |
| Credit sale to Suresh ₹3,000 omitted entirely | nothing | Suresh Dr. 3,000, Sales Cr. 3,000 | Suresh A/c Dr. 3,000 — To Sales A/c 3,000 |
The third row is the one people get wrong. The overstatement is \( 5400 - 4500 = 900 \), and it was overstated on both sides — wages were debited 900 too much and cash credited 900 too much. So the correction debits cash and credits wages by 900. Reversing the whole 5,400 and re-entering 4,500 also works and is safer under exam pressure if you are unsure.
When a trial balance does not agree and the books must be closed anyway, the difference is put to a suspense account so that the totals balance and work can continue. As each one-sided error is later found, its correction is passed against suspense; when every error has been found, the suspense account closes itself to zero.
A suspense account that will not close means an error remains. Only one-sided errors touch suspense — the five errors in the table above are two-sided, so rectifying them never involves it.
The trial balance mixes two kinds of account, and the closing process separates them:
The trading account stops at gross profit, the profit and loss account carries on to net profit, and the net profit is added to capital in the balance sheet. That last step is what ties the two statements together.
Only direct items — what the goods cost to buy and to make ready for sale. Closing stock of 21,000 is given by the year-end count; it is not in the trial balance because no transaction created it.
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Purchases | 75,000 | By Sales | 80,000 |
| less Purchase Returns | (4,000) | less Sales Returns | (3,000) |
| To Wages | 4,500 | By Closing Stock | 21,000 |
| To Gross Profit c/d | 22,500 | ||
| Total | 98,000 | Total | 98,000 |
Step by step. Net purchases \( 75,000 - 4,000 = 71,000 \). Net sales \( 80,000 - 3,000 = 77,000 \). Cost of goods sold \( 71,000 + 4,500 - 21,000 = 54,500 \), where wages are added because they are a direct cost and closing stock is deducted because those goods were not sold. Gross profit \( 77,000 - 54,500 = \) 22,500.
Wages are in the trading account; salaries are not. Wages are paid to make goods saleable, salaries to run the office. Examiners rely on that distinction constantly.
Gross profit is brought down, then every indirect expense is charged and every other income added.
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Salaries | 9,000 | By Gross Profit b/d | 22,500 |
| To Rent | 6,000 | By Commission | 2,500 |
| To Net Profit | 10,000 | ||
| Total | 25,000 | Total | 25,000 |
\( 22,500 + 2,500 - 9,000 - 6,000 = \) 10,000 of net profit. It is transferred to the capital account, which is where the balance sheet picks it up.
Capital first: \( 2,00,000 + 10,000 - 5,000 = \) 2,05,000 — opening capital, plus the net profit just computed, less drawings.
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital 2,00,000 | Furniture | 25,000 | |
| + Net Profit 10,000 | Closing Stock | 21,000 | |
| − Drawings 5,000 | 2,05,000 | Suresh (debtor) | 15,000 |
| Mehta & Co. (creditor) | 16,000 | Bank | 79,000 |
| Cash | 81,000 | ||
| Total | 2,21,000 | Total | 2,21,000 |
Both sides total 2,21,000. That agreement is not a coincidence and not a check you can skip — it is the accounting equation of Unit 1 reappearing after a full year of transactions. If a balance sheet does not balance, something earlier is wrong, and the usual culprits are a missing closing stock, drawings not deducted, or net profit added with the wrong sign.
Trace one figure the whole way to see the cycle close: cash of 81,000 was computed in the ledger of Unit 2, listed in the trial balance above, and appears here unchanged, because cash is a real account and real accounts carry forward.
A year-end question almost always adds a few items below the trial balance. Each one is a transaction nobody has entered yet, so each gets two effects — one in the profit and loss account, one in the balance sheet. Missing the second is the commonest way to lose marks in the whole subject.
| Adjustment | In the trading / P&L account | In the balance sheet |
|---|---|---|
| Closing stock | Credit of the trading account | Asset |
| Outstanding expense | Added to that expense | Liability |
| Prepaid expense | Deducted from that expense | Asset |
| Accrued income | Added to that income | Asset |
| Income received in advance | Deducted from that income | Liability |
| Depreciation | Debit of the P&L account | Deducted from the asset |
| Provision for doubtful debts | Debit of the P&L account | Deducted from debtors |
| Interest on capital | Debit of the P&L account | Added to capital |
The pattern is worth stating once: an adjustment that increases an expense creates a liability or reduces an asset; one that reduces an expense creates an asset. If you can place the profit-and-loss half, the balance-sheet half follows from that sentence.