1. What is Trial Balance?
Trial Balance is a statement summarizing the closing balance of all the ledger accounts, prepared with the view to verify the arithmetical accuracy of ledger posting. In Trial balance, all the ledger balances are posted either on the debit side or credit side of the statement.
The total of debit balance in trial balance should match with a total of credit balance, only then it is said to be arithmetically accurate. Trial balance is a primary source for preparing various financial statements such as Trading and Profit & Loss account, Balance sheet etc.
2. Trial Balance Objective
As the name suggests, it’s a statement prepared to ensure that journal and ledger postings are done correctly so that closing balances can be considered for preparing the final accounts and other financial statements. Trial Balance acts as a pre-check before preparing the other financial statements. The following are some of the important objectives of trial balance.
- To ascertain the arithmetical accuracy of ledger accounts:As a summary of all the ledger accounts closing balance, trial balance helps in determining the accuracy of journal and ledger posting. The trial balance is assumed to be accurate only when the total debit is equal to the credit.
- Helps to Locate ErrorsIf there any difference in the trial balance, it signals that journal or ledger posting is not carried out efficiently. It clearly implies that there are errors and it is high time for accountants to find and correct it. The error may have occurred at any of the following stages of accounting.
- Posting journal entries to the ledger account
- Totaling of Subsidiary books
- Calculation errors
- Posting of Balance from Ledger account to trial balance
- Error in totalling Trial balance and so on …
- Helps to prepare Financial StatementTrial balance is a bridge between accounting records and financial statements. Trial balance is the steppingstone for preparing all the financial statements such as Trading and Profit & loss account, balance sheet etc. Using the trial balance, all the income and expenses related ledger accounts are compiled to create Profit and loss account and rest are used for preparing a balance sheet.
3. Type of Trial Balance
There are different types of trial balance prepared at different stages of the accounting cycle. The following are different types of trial balance.
4. How to Prepare Trial Balance
Preparing trial balance is one of the first steps towards preparing final accounts and other financial statements. Following are the steps to prepare trial balance:
- Preparing ledger accounts to determine the closing balance of each account.
- Post the ledger Accounts into trial balance and place the balance in the debit or credit column. The format of the trial balance is explained in the next section.
- All the assets and expenses should have debit balance while liabilities and income should have credit Balance.
- Calculate the total of the debit balance
- Similarly, compute the total of the credit column
- Finally, the sum of debit balance should match the sum of credit balance.
- If there is any difference, the process of error rectification should be started. Errors could be of commission errors, errors of omissions, errors of principle, compensating error and so on…
5. Trial Balance Example and Format
To understand better, we have illustrated a sample trial balance format.
As illustrated in the above trial balance format, all the ledger accounts are represented on the left side. The closing balance of each ledger accounts is shown in the debit side or credit side in the above trial balance example.
6. Trial Balance Relevance in Modern Day Accounting
By now, we are clear that trial balance’s primary objective is to ascertain the accuracy and detecting of errors. With the diversity of business operation and frequent need for financial statements, most of the businesses are using accounting software for managing the books and generating financial statements. Accounting software like Tally.ERP 9, are designed to ensure that debit and credit always match at the time of recording the transaction itself. Thus, matching of the trial balance is a ‘Thing of Past’ and the traditional need for someone to depend on trial balance is eradicated.
Most businesses believe using accounting software gives a sense of reliability that once the transactions are recorded, the reporting aspect is correct and complete.