GST Software
March 16th, 2019 in Finance & Accounts

Trial Balance

A trial balance is prepared for the purpose of testing how accurate a business’ books of accounts are and also to summarize its financial data. It helps in detecting accounting errors and rectifying them.

 

1. What is a Trial Balance?

A trial balance is a statement prepared by business organizations regularly for a period. It compiles the balances of all company ledgers into columns of debit account and credit account totals which are supposed to be equal to each other. Trial balance serves the purpose of ensuring the mathematical accuracy of the entries made in the books of accounts of the business.

As per the double-entry accounting system, a business maintains its journal and ledger, to which the trial balance must tally. If the total amount debited is equal to the total amount credited, then it balances the trial balance and indicates that the ledgers are free of any mathematical error. Anyhow, it does not indicate the mathematical accuracy of its accounting system. As its name suggests, a trial balance is actually a trial to check if the credit and debit balances are equal.

In case the trial balance agrees, it may be considered that there are no errors in the ledgers. However, if it disagrees, then it should be considered that there are errors in the accounting books and they must be found and rectified.

2. Objectives of a Trial Balance

The main objective of preparing a trial balance is to check the mathematical accuracy of accounting books. Some other objectives of a trial balance include:

  • Serve as a base for preparing business’ final accounts like a trading account, income statement, and balance sheet.
  • Ensure the arithmetic accuracy of accounting books by equalizing the sum total of debits to the sum total of credits in the books of accounts.
  • Provide a summary of all ledger balances. If the credit and debit balances don’t match it, then there is concluded to be an error in the books and the difference amount is transferred to a suspense account temporarily to be corrected later.

3. Ledger Accounts

Business transactions are first recorded in the general ledger. Based on the type of business transaction, the ledger accounts are debited and credited in the given accounting period before being used in the trial balance. Some accounts also may have recorded more than one business transaction. Therefore, each ledger’s ending balance which is shown in the trial balance is the net balance of amounts of all its debits and credits which were entered to that account depending on related business transactions.

4. Debit and Credit

By the end of an accounting period, the asset, loss, and expense accounts must have a debit balance each, and the liability, revenue/profit, and equity accounts must have a credit balance each. When the related business transactions make a reduction in the debit and credit balances of their respective accounts, there is an opposite effect on the ending debit and credit balances of those accounts. Thus, some asset, loss, and expense accounts may also be credited and some liability, revenue, and equity accounts may also be debited during the accounting period. In a trial balance, the account titles are placed on each column’s far left, whereas all the debit balances take the left column and all the credit balances take the right column.

5. Undetectable Errors

All debit and credit balances are added up separately after listing all ledger accounts and their balances in the trial balance. The addition is done to prove that total debits and total credits are equal to each other. This guarantees that there are not any unequal debits and credits which were entered incorrectly in the process of double-entry recording. But, a trial balance does not detect errors which are not mathematical. A trial balance would still show equality in debit and credit balances if the entry of equal debits and credits is made into wrong accounts, if compensatory errors are made in both debits and credits at the same time, or if a transaction is not recorded.

6. Trial Balance Format

S. No.

Particulars

Ledger Folio (L/F)

Debit

Credit

1.

Cash A/c

xx

2.

Purchase Ac/

xx

3.

Sales A/c

xx

4.

Capital A/c

xx

Total

xx

xx

 

A trial balance includes:

  • Heading: Includes the title and the period for which trial balance is made, organization’s name, and the instance pertaining to the ledger account balances.
  • Header Row: Includes labels regarding entered information
  • Serial Number (S. No.): Serially enumerates the particulars entered
  • Particulars: Includes names of account heads relating to the information
  • Ledger Folio (L/F): On which page number in the ledger is the related information recorded
  • Debit: The debit balance of the ledger account (if any)
  • Credit: The credit balance of the ledger account (if any)