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!
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.
The primary features of a trial balance are:
The different purposes of using a trial balance are:
A trial balance examines whether posting and other accounting processes have been carried out without committing arithmetical errors.
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.
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.
Trial balance is a statement that helps in locating errors related to bookkeeping. However, it cannot disclose all errors but only the arithmetical inaccuracies.
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.
There are primarily 3 types of trial balances prepared at different accounting cycle stages. They are as follows:
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.
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.
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.
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 |
The different types of errors that can cause a mismatch in trial balance are as follows:
The important principles used in the preparation of a trial balance are:
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.
The advantages of preparing a trial balance are:
The limitations of preparing a trial balance are:
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.
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.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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