Trial balance is the sum or list of credit and debit balances drawn from multiple ledger accounts like bank balance, cash book etc. The basic rule of trial balance is that the trial balance debit and credit account and the balance drawn from the ledger should be the same or equal. This is because each transaction has a credit and debit entry or effect with double results. When an accounting period ends or at the end of each month when the accounts are reconciled and duly drawn up, it is the trial balance itself that tests whether the total credits and total debits are in a systematic pattern. If not then there is an error or inaccuracy in the ledger entry. It is the primary account statement from which many financial statements such as Balance Sheet or P&L or Trading and Profit and Loss Account are prepared.
Objectives of Trial Balance:
It is the basis for preparation of financial statements like balance sheet etc. and final P&L accounts. The trial balance format and its purposes include:
- To assess the arithmetical accuracy of ledger accounts when total credit is equal to total credit.
- Detection of ledger and journal errors or inefficiencies at multiple stages of the accounting system. Posting ledger or journal accounts with multiple entries, calculation or manual error in entering values, while aggregating subsidiary ledgers/journals, trial balance posting error, etc.
- Preparation of various financial statements like P&L account, balance sheet, other financial statements, accounting records etc.
- Entry of expenses and income is taken from ledger account for P&L account.
- Journal entries are required for the balance sheet.
Features of Trial Balance:
Trial balance is a statement of accounts and not an account in itself. It is never a part of the final financial statement.
- It consists of the sum of credit and debit balances drawn from multiple ledger accounts in trial balance format.
- Its purpose is to prove the arithmetical accuracy of its entry as the credit and debit balances in the trial balance are equal. However it does not verify the inaccuracies which require an audit to prove the inaccuracy in the credit/debit balance.
- A Trial Balance is created at the end of each accounting year. Trial Balance Sheet, if required, may be prepared monthly, half-yearly, quarterly or even weekly.
- It is the foundation of all account statements and is the bridge connecting profit and loss account, account and balance sheet.
Types of Trial Balance:
There are three different types of trial balances in different accounting stages.
- There are three trial balances-
- Adjusted Trial Balance
- Unadjusted Trial Balance
- Post Closure Trial Balance
Rules for making Trial Balance:
The rules of trial balance are-
- All liabilities should appear on the credit side and assets on the debit side.
- Profit and Income should appear on the credit side of the trial balance.
- Expenses should appear on the debit side of the trial balance.
Mistakes in Trial Balance:
Trial balance ensures that debit and credit entries are matched with arithmetic accuracy, but they do not indicate the accuracy of the ledger. Let us explore some of the mistakes that can happen in the trial balance.
Errors of Commission
This error occurs when the correct amount is in the correct class of accounts but in the wrong account. For example, Mr. C sold goods worth Rs. 1000/- to Mr. X and recorded them as goods sold in Mr. Y’s account.
Errors of Omission
These errors are errors where the transaction is not reflected or is completely abandoned. For example if goods worth Rs.1000/- Mr. B was sold and completely missed the entry in the accounts then the trial balance would still show debit and credit as match, as both debit and credit are underreported in trial balance for 1000/- .
Errors of Principle
These transactions show the correct amount but on the wrong side and class of accounts. For example, a purchase of a real estate car is incorrectly reflected in a motor vehicles expense account, a revenue expense account.
Compensating Errors
These errors occur when two or more accounts of equal value are on both the credit and debit sides. For example instead of debiting the Fixed Asset Account by Rs.50,000/-, the Sales Account (Credit Account) is credited by Rs.50,000/-.
Reversal of entries
These mistakes are caused by entering the correct accounts at the wrong places. In this case the trial balance will still remain the same. For example Mr. Rs 20,000 was received from A and it was wrongly debited to his account and a credit entry was passed to the cash book.
Errors of transposition
These entries occur when the numerical value of the correct entry is incorrectly written with the transpose value.
For example Rs 4235/- was wrongly written in place of 4523/-.
Steps to prepare Trial Balance Sheet:
The first stage of preparation of Final Financial Statement is Trial Balance, where Trial Balance is prepared from the statement of Closing Balance from General Ledger Account. The steps to prepare trial balance are:
- First, prepare the ledger account and the closing balance of each account in it. For example bank overdraft in trial balance, commission received in trial balance and normal expenses in final account, and others.
- Now post these balances in the credit and debit columns of the trial balance.
- Expenses and assets are accounted for as debit balances, while income and liabilities are treated as credit balances.
- After that calculate the total debit and credit balance.
- If the trial balance is correct then the sum of the credit and debit balances should be equal.
- In case of any difference in balance, you should rectify the trial balance error through audit of accounts.
Trial Balance Format and Examples:
Take a look at the trial balance format of a firm given below.
Ledger accounts are mentioned in the first column as shown above and their various entries are shown as credit or debit entries in the respective column.
Format of Trial Balance:
Trial Balance of ABC Ltd. as per dd/mm//yy.
| But | Particulars | L.F | Amount (Rs)Dr | Amount (Rs)Cr |
Example of Trial Balance:
ABC Limited Trial Balance 31- March 2020 (in US Dollars)
| Accounts | Debit (Dr) | Credit (Cr) |
| Cash | 1,20,280 | – |
| Accounts Receivable | 9,500 | – |
| Office Expenses | 2,500 | – |
| Prepaid Rent | 800 | – |
| Prepaid Insurance | 220 | – |
| Office furniture and equipment | 15,000 | – |
| Bank loan | – | 15,000 |
| Accounts Payable | – | 5,000 |
| Unearned Revenues | – | 9,500 |
| Capital | – | 1,21,200 |
| Drawings | 5,000 | – |
| Commission Revenue | – | 12,500 |
| Salary Expenses | 9,900 | – |
| Total | 163,200 | 163,200 |
Trial Balance Form:
Trial balance can be worked out in the following two forms.
- Ledger form where trial balance is entered as an account having credit and debit sides. Both parties have the first column with the account name, amount column, folio column, etc.
- Journal Form Where the Trial Balance takes the Journal Form which has a column for Serial Numbering, Account Name, Debit/Credit Amount, Ledger Folio Details etc., which also includes the page number on which the account is entered in the Ledger.
- However, due to the dual nature of the entry with each debtor in the Trial Balance, due to the dual nature of the entry, the Trial Balance, when correct, will always have an identical credit entry or vice versa due to the dual nature of the entry with each creditor. must match.
List of Trial Balance Items:
As seen in the format of trial balance, there are multiple credit and debit accounts. Here is a table to help classify them.
| Debit | credit |
| Total Assets (Cash in bank/ hand, Buildings and Land, Inventory, Plant and Machinery, and more.) Expenses (Freight, inward carriage expenses, rents, salary, rebates, Commission, etc.) Sundry Debtor in Trial Balance Losses (Inward returns, bad debts, depreciation, debits to P&L A/c, etc.) Purchases | Total liabilities (Unsecured/ Secured loans, Bank overdrafts, mortgage loans, outstanding bills and expenses payable, and more.) Reserves in funds, depreciation provisions, general reserves, accumulated depreciation on plant and machinery, etc. Sundry Creditors Gains (Outward returns, recovered bad debts, discount received, credits to P&L, etc.) Sales |
Modern Time Advances in Accounting and Trial Balance:
Trial balance helps in detecting any errors accurately. But with business needs becoming more diverse, financial statements need to align with business health and funding so that effective decisions can be made. Most of the businesses use advanced accounting software like Tally Prime, Tally ERP 9 etc. to maintain their books, prepare financial reports and statements and use financial data for analytical reports.
Frequently Asked Questions (FAQs):
1. What is meant by General Ledger?
The General Ledger summarizes the financial account transactions and entries in the prescribed ledger format for a period to quickly ascertain the closing balance of the period. Ledger or Journal is the primary account of the accounts. This includes real, personal, and nominal accounts and entries passed under them show the amount as a credit/debit in the Amount column.
It has two aspects i.e. credit on the right side of each account and debit on the left side, date, folio or page number on which the account appears and statement of account. Here’s how it looks.
| Date | Particulars | Journal Folio | Amount (Rs.) | Date | Particulars | Journal Folio | Amount (Rs.) | |
2. How to prepare Trial Balance in Inventory?
Inventory is the available stock of physical idle goods, the monetary value of which is maintained by the organization in the form of raw materials, packed stock, stock in packaging, processing etc. Inventory may be in incomplete or complete state and are used up in the near future. It is prepared by evaluating the inventory of sales, repaired goods, defective goods, goods in multiple processes etc.
3. What is meant by profit and loss account?
Profit and Loss Account is a financial statement that measures losses and gains of accounting periods based on its business activities and reflects the financial health or financial health of the enterprise. It is also known as Expense and Income Statement. It uses the trial balance sheet as its basis.
4. What is meant by Bad Debts in Trial Balance?
Bad debts are debts of the organization that cannot be recovered or are irreversible. Bad debts are a disadvantage for the company in terms of business and hence should be limited. It is transferred to the loss side of the P&L account and also reflected in the Trial Balance Sheet as a recoverable entry from its profits.
5. Who are the Creditors/Debtors in the Trial Balance?
Businesses run on the inflow of money and cash. Creditors and debtors are always involved in shaping the cash flow and efficient working utilization of the business. A person who supplies services or goods to a firm on credit is a sundry creditor. Similarly a sundry debtor is a person to whom the firm supplies services or goods on credit. These entries can be found in the trial balance and P&L account.
6. What is meant by Accumulated Depreciation?
All assets have a limited lifespan and low value due to wear and tear. This is called depreciation. Accumulated depreciation means the total depreciable amount of a company on its assets for a specified period.