Trial Balance

 

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Trial Balance

Trial balance is an abstract or list of all the ledger accounts as on a specific date showing debit and credit balances of all Ledger Accounts. Usually, Trial Balance is prepared at the end of the financial year. However it can be prepared periodically depending upon requirement of the business. It is prepared to ascertain the arithmetical accuracy of Books of Accounts.

 

Definition and Explanation

Having posted all the transactions into the ledger, it is necessary to check the correctness of the work done before proceeding further. In order to test the arithmetical accuracy of our ledger we should prepare a statement called trial balance.

A trial balance is a statement prepared by taking out the debit and credit balances of all accounts appearing in the ledger.

 

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Requirements for a Trial Balance

Companies initially record their business transactions in bookkeeping accounts within the general ledger. Depending on the kinds of business transactions that have occurred, accounts in the ledgers could have been debited or credited during a given accounting period before they are used in a trial balance worksheet. Furthermore, some accounts may have been used to record multiple business transactions. As a result, the ending balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered to that account based on all related business transactions.

Objectives and Advantages of Preparing a Trial Balance

The following are the main objectives of preparing a trial balance.

Trial balance helps in knowing the arithmetical accuracy of the accounting entries. Trial balance represents a summary of all ledger balances and, therefore, if the two sides of the trial balance tally, it is an indication of this fact that the books of accounts are arithmetically accurate.

Trial balance forms the basis for preparing financial statements such as income statement / Trading and profit and loss account and balance sheet. In case, the trial balance is not prepared, it will be almost impossible to prepare the financial statements.

 

The entire ledger is summarised in the form of a trial balance. Thus the position of a particular account can be judged simply by looking at the trial balance.

 

It shows balances of different Ledger accounts.

 

It helps to prepare Final Accounts of a business.

 

Limitations of a trial balance

 

Trial Balance only confirms that the total of all debit balances match the total of all credit balances. Trial balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been recorded at all because in such case, both debit and credit sides of a transaction would be omitted causing the trial balance totals to still agree. Types of accounting errors and their effect on trial balance are more fully discussed in the section on Suspense Accounts.

Types of Trial Balance

 

Gross Trial Balance

 

In this type of Trial Balance total of debit side of a particular account is shown in the debit column of the Trial Balance and total of credit side of a particular account is shown in the credit column of the Trial Balance. It is not in common use as it does not disclose the balance of each account.

 

According to total trial balance method two sides of each columns of the trial balance respectively. Thus we may draw the following trial balance by taking out the debit side total and credit side total of each account in the ledger.

 

Net Trial Balance

 

In this type of Trial Balance only the balances of each ledger account are shown against its name. If an account shows a credit balance then its balance is recorded in the credit amount column and vice versa. This Trial Balance is used in practice.

 

On this assumption, in place of writing against each account the debit as well as the credit total the balance alone is written. The difference between the two sides of an account is called the balance. If the debit side of an account is greater than the credit side, the balance falls on the debit side and is known as "debit balance." If the credit side of an account is greater than the debit, the balance is on the credit side and is called "credit balance."

 

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Methods of preparing Trial Balance

 

There are two methods of preparing Trial Balance.

 

Vertical or Journal form of Trial Balance.

Horizontal or Ledger form of Trial Balance.

Steps in Preparation of Trial Balance

 

Step 1

Calculate the Balances of Each of the Ledger Accounts

 

Step 2

Record Debit or Credit Balances in Trial Balance

 

Step 3

Calculate Total of the Debit Column

 

Step 4

Calculate Total of the Credit Column

 

Step 5

Check if Debit is Equal to Credit

 

You must note that as per the accounting principle:

 

All assets, expenses and receivables must have debit balances

And all Liabilities, incomes and payables must have credit balances.