What is Trial Balance – Its Advantages, Types, Features and How to Make
A trial balance is prepared after posting journal entries into the ledger and balancing the accounts. This balance depicts the difference between the summations on the debit side and the credit side. If the value of the debit side is more, it is called the debit balance, and if the credit side is more, it becomes the credit balance.
In a trial balance, debit and credit balances are posted in separate columns. Here, if the sum of the debit balance is equal to that of the credit balance, then bookkeeping entries are considered accurate.
Let us know more about the use of trial balance with examples!
What is Trial Balance?
Trial Balance is a financial statement summarising the debit and credit balance of the ledger accounts to verify arithmetical accuracy of financial books.
It is prepared towards the end of a financial year to draw financial statements like profit and loss accounts and balance sheets. Thus, preparing a trial balance is the first step in closing the financial books of an accounting period.
What Are the Features of Trial Balance?
The primary features of a trial balance are:
- Trial balance in accounting is a summary of all debit and credit ledger balances, including cash book
- This financial statement serves as a vital tool to establish the arithmetical accuracy of transactions in the books of accounts
- It is not a part of the Double Entry System of bookkeeping but serves only as a working reference
- This can be prepared anytime as and when required, like, weekly, monthly, quarterly and half-yearly
- It can establish a link between the profit and loss account and the balance sheet
- Trial balance is not conclusive proof of accuracy since it cannot disclose some errors like an error of principle
What Are the Purposes or Objectives of Trial Balance?
The different purposes of using a trial balance are:
1. Confirms Accuracy of Ledger Accounts
A trial balance examines whether posting and other accounting processes have been carried out without committing arithmetical errors.
2. Helps Prepare Final Accounts
Financial statements are normally prepared to refer to the trial balance; otherwise, it would turn out to be difficult. Hence, the preparation of financial statements is the second purpose of preparing a trial balance.
3. Acts as a Summary for Each Account
A trial balance is a summary of the ledger account. It helps in referring to the ledger only during the requirement of more details in respect of an account.
4. Finds Errors During Bookkeeping
Trial balance is a statement that helps in locating errors related to bookkeeping. However, it cannot disclose all errors but only the arithmetical inaccuracies.
How to Prepare a Trial Balance?
After recording transactions in the journal and posting them in the ledger, the next step in the accounting process is to prepare a trial balance.
The following steps will show the steps on how to prepare a trial balance:
Step 1: Balance All Ledger Accounts
The difference between total debit entries and total credit entries of every ledger account must be balanced.
Step 2: Prepare the Trial Balance Worksheet
Prepare a four-column worksheet referring to the trial balance format.
Step 3: Apply the Golden Rule of Accounting
The golden rule in accounting states to debit what you receive and credit what is going out. This step is mostly used to recheck whether the entries in both journal and ledger have been done correctly.
Step 4: Fill in the Amount Beside Each Account Head in the Worksheet
Fill in the trial balance worksheet with the respective account number and account heads in their respective debit or credit column.
Step 5: Add the Values of Both Columns
Calculate the sum of both debit and credit columns. In an error-free trial balance, these two summations would be equal.
Step 6: Close the Trial Balance With a Balancing Figure
Once you calculate the totals and confirm that they are the same, close the trial balance. If the totals are unmatched, find the error and rectify it with proper adjustments.
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What Are the Types of Trial Balance?
There are primarily 3 types of trial balances prepared at different accounting cycle stages. They are as follows:
1. Adjusted Trial Balance
An adjusted trial balance is prepared after completing the adjustment entries and balancing the book. It is used to prepare financial statements and make sure that errors are rectified and accurate.
2. Unadjusted Trial Balance
An unadjusted trial balance is a record of daily transactions and can balance a ledger by adjusting entries. However, it is prepared before completing journal entries with the help of a ledger.
3. Post-closing Trial Balance
A post-closing trial balance enters each and every account with zero net balance on the balance sheet. It verifies whether the debit and credit balances are identical and shows them after completing the closing entries. In addition, this type of trial balance also acts as an opening trial balance for the upcoming year.
Format of a Trial Balance with an Example
The format of a trial balance is as follows:
Trial Balance of ABC
as on…
| Heads of Accounts | L.F. | Dr. Balance (Rs.) | Cr. Balance (Rs.) |
| xxx | |||
| xxx | |||
| Total | xxx | xxx |
Trial Balance Example:
The following balances were extracted from the books of Shri S. Pal on March 31, 2022.
| Heads of Accounts | Amount (Rs.) |
| Capital | 760770 |
| Purchases | 170000 |
| Stock (April 01, 2021) | 24000 |
| Sales | 105000 |
| Sundry Debtors | 23800 |
| Discount Received | 3500 |
| Carriage Outwards | 700 |
| Cash in Hand | 3500 |
| Machinery | 124500 |
| Provision for depreciation on Machinery | 24200 |
| Drawings | 7700 |
| Returns Inward | 3500 |
| Premises | 528000 |
| Sundry Creditors | 16100 |
| Discount Allowed | 2800 |
| Carriage Inwards | 1400 |
| Cash at Bank | 17500 |
| General Expenses | 2100 |
| Bad Debts written off | 2450 |
| Provision for doubtful debts | 2380 |
A trial balance sheet based on the information provided above would look something like this:
Trial Balance of Shri S. Pal
as on March 31, 2022
| Heads of Accounts | L.F. | Dr. Balance (Rs.) | Cr. Balance (Rs.) |
| Capital | 760770 | ||
| Purchases | 170000 | ||
| Stock (April 01, 2021) | 24000 | ||
| Sales | 105000 | ||
| Sundry Debtors | 23800 | ||
| Discount Received | 3500 | ||
| Carriage Outwards | 700 | ||
| Cash in Hand | 3500 | ||
| Machinery | 124500 | ||
| Provision for depreciation on Machinery | 24200 | ||
| Drawings | 7700 | ||
| Returns Inward | 3500 | ||
| Premises | 528000 | ||
| Sundry Creditors | 16100 | ||
| Discount Allowed | 2800 | ||
| Carriage Inwards | 1400 | ||
| Cash at Bank | 17500 | ||
| General Expenses | 2100 | ||
| Bad Debts written off | 2450 | ||
| Provision for doubtful debts | 2380 | ||
| Total | 911950 | 911950 |
What Are the Errors that Can Cause a Mismatch in Trial Balance?
The different types of errors that can cause a mismatch in trial balance are as follows:
- Errors of Omission: An error of omission occurs when transactions are completely omitted from getting recorded in the books of account. Moreover, this type of error is hard to detect.
- Errors of Commission: An error of commission occurs if an amount is entered correctly but to the wrong account.
- Compensating Errors: A compensating error is a group of errors committed in such a way that one mistake compensates the other. This results in balancing a trial balance.
- Principle Error: A principal error arises due to an incorrect application of the principle of accounting and does not get disclosed by a trial balance.
- Error of Original Entry: An original entry error occurs if a double-entry transaction includes a wrong amount on both sides.
- Reversal Entry: When a double-entry transaction is entered with the correct amount but the account to be credited is debited and vice versa, it is called a reversal error.
Important Principles Used in the Preparation of a Trial Balance
The important principles used in the preparation of a trial balance are:
- All personal, real and nominal accounts are considered in preparing a trial balance
- In case an account is showing a NIL balance in the ledger, it is not posted in a trial balance
- The revenue account carries a credit balance on the balance sheet
- The purchase or consumption account carries a debit balance on the balance sheet
- Sale returns and purchase returns appear as separate accounts in a trial balance
- The opening stock balance is derived from profit and loss account as it is not available as a closing balance in the previous year’s trial balance
- All expenses carry a debit balance, and income or gains carry a credit balance
- The balancing figure of both asset and liability sides must match at the end
What Are the Accounts in a Trial Balance?
A trial balance is a financial statement containing all major accounting items like assets, liabilities, equity, revenues, incomes, expenses and losses.
The accounts of assets, expense and loss have a debit balance, whereas the accounts of liability, gain, revenue and equity have a credit balance.
What Are the Advantages of a Trial Balance?
The advantages of preparing a trial balance are:
- It helps in summarising all financial transactions of a business and proves the arithmetical accuracy of the books of account.
- The balance of a debit or credit side of any ledger account can be identified by referring to a trial balance.
- It locates or detects an error in the accounting balances.
- Trial balance proves that a double-entry system of recording transactions is being followed by an accountant.
- These financial statements serve as a summary of all ledger accounts and help in the easy preparation of final accounts.
What Are the Limitations of a Trial Balance?
The limitations of preparing a trial balance are:
- These financial statements can only be prepared if the accountant follows the double-entry system of accounting.
- It cannot show all errors or whether all journal entries have been posted correctly.
- It leads to recording both aspects of a transaction twice in the books of account.
- If the correct amount is posted on the correct side but in the wrong account, it is not reflected in a trial balance.
- A wrong amount recorded in the books of original entry and the same amount being incorrectly debited and credited cannot be identified by a trial balance.
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Final Word
Trial balance is an essential part of the accounting process and helps in preparing financial statements. It also provides a summary of the financial activities of a company, thus helping the management to make important decisions. Here, the debit and credit balances are posted separately and balanced, which also helps in rectifying errors.
FAQs
Ans: The 3 different methods of preparing a trial balance are:
• Total Method: In this method, debit and credit balances of each account are shown in two different columns.
• Balance Method: This method shows the difference between the debit side and credit side.
• CompoundMethod: This method is a combination of both the total method and balance method.
Ans: A trial balance is a summary of only the closing balances of a company’s different account heads. On the contrary, a balance sheet summarises total assets, liabilities and shareholder’s equity in the company.
Ans: In trial balance, the closing balance of an asset or liability is carried forward to the next accounting period as an opening balance. However, in case of income and expenses, closing balances are transferred to a profit and loss account at the end of the accounting period. Thus, they have a zero opening balance to carry forward to the next financial year.
Ans: A general ledger is known as a book of accounts, which provides details about accounting transactions. On the other hand, a trial balance is a list of all the accounts and balances in financing. It is used as a summary for monthly reviews and forecasting.
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