Accounts Trial Balance
The Closing Balances all Ledger Accounts are recorded in a statement form, called Trial Balance.
Trial Balance is a summarized statement of Closing Balance of all Ledger accounts (including cash and bank balances taken from cash book), at a certain point of time (normally at close of month or accounting period). Trial Balance ensures arithmetical accuracy of the books of accounts (that is why name is ‘Trial’ Balance).
In every transaction, the total debits and credits are equal. So, in a Trial Balance, total of debit balances will be equal to total of credit balances of all the Ledger Accounts taken together.
The net balances (net of Debit & Credit) of each ledger is shown at the end of Ledger Account, as Balance C/d. The balance is carried to Trial Balance Statement
- Credit Balance : The Balance C/d in Debit side of Ledger Account, represents the Balancing entry of the Ledger Account, when Credit Totals are more than the Debit Totals (i,e the Ledger Account has Credit Balance). Such Balance is carried in Credit Column in Trial Balance
- Debit Balance : The Balance C/d in Credit side of Ledger Account, represents the Balancing entry of the Ledger Account, when Debit Totals are more than the Credit Totals (i,e the Ledger Account has Debit Balance). Such Balance is carried in Debit Column in Trial Balance
Objectives of Trial Balance
The Trial Balance, when tallied, gives indication of arithmetical accuracy of the books of accounts. It helps to prepare the Final Accounts, i.e. Trading Account, Profit & Loss Account and Balance Sheet
Methods of preparing Trial Balance
Though, for preparation of Final Accounts, only the net balance of each account is required, Trial Balance may be prepared in different methods & forms, showing Total Figures, Net Balance Figures, or a combination of both, in respect of each Ledger Account, to get a better picture of summaries of balances and transaction totals.
- Total Method: Showing both Debit & Credit and credit total of each ledger account. However, such Trial Balance is not very handy to prepare Final Accounts as the net Balance is not readily available.
- Balance Method: Under this method, only balance of each account of ledger is recorded in trial balance either in debit or credit column, as this case may be.
- Total and Balance Method: This is the combination of above two methods. The debit and credit total of each account and also balances of each account are recorded. This is more revealing and useful to prepare Final Accounts.
- Elimination of Equal Totals Method: The accounts whose debit totals are equal to credit totals i.e. the accounts which have no balances are eliminated. Such accounts are not recorded in Trial Balance.
Forms of Trial Balance
- Closing Balance Form : The most popular form is to write the Net Closing Balance of Ledger Accounts in respective (Debit / Credit) columns for each Ledger Account. This helps to ensure the accuracy (Debit & Credit Totals must be equal) and also helps to prepare Final Accounts. This form represents the Trial Balance as on a specified Date.
- Extended Form : The extended form contains 3 sections for amount columns, Opening Balance, Transactions & Closing Balance. It shows the Balances and Transaction summaries for a specified period.
- Opening Balance : The Opening Balance Column (Debit / Credit) shows the Opening Balance as on the start of the specified Period
- Transactions : Transaction column shows the totals of transaction (Debit / Credit) for the specified period
- Closing Balance : The Closing Balance Column (Debit / Credit) shows the Closing Balance as at the end of the specified Period
The extended form of Trial Balance is much more informative and gives a complete picture of the status at the beginning of a period, transactions summaries during the period, and the status at the end of the period.
Errors detected by Trial Balance
Trial Balance helps to ensure correctness of Accounts and detects certain types of errors in Books of Accounts. Some types of errors like casting & totaling, posting etc can be detected by Trial Balance, as the Trial Balance will not Tally in such cases.
The following errors can be identified in Trial Balance
- Error is casting / carrying : When there is omission in carrying forward of a total balance from one page to the other, the balance will be wrong and the Trial Balance will not tally.
- Omission of balance: If the balance of an account is ignored totally in the trial balance, the trial balance will not tally.
- Mistake of subsidiary books: If the total of a subsidiary book is wrongly carried forward, the trial balance will disagree.
- Incorrect summation: If the columns of trial balance are summed up incorrectly, the trial balance will not agree.
- One side entry : If only one side of an transaction, either Dr. side or Cr. Side, is entered or any one account is entered doubly, trial balance will not tally.
- Wrong Side entry: If either debit side or credit side of an transaction is wrongly entered, the Trial Balance will not agree.
Errors not detected by Trial Balance
Some errors can not be detected in Trial Balance, as Trial Balance will still tally in case of some type of errors.
- Errors of Omission: Even If a transaction is not recorded at all or omitted wholly or partly in the books of original entry, the Trial Balance will still agree. Such error of omission does not affect the Trial Balance.
- Errors of Commission: If a transaction is recorded incorrectly either wholly or partly, in the books of original entry, errors of commission arises. (e.g. a credit sale of Rs.2,132 was recorded as Rs.2,312). Such error does not affect the agreement of trial balance.
- Errors of Principle: Errors committed due to wrong application of the principles of Accounting, (e.g. asset purchased is recorded in purchase account).
- Compensating Errors: Whenone error is compensated by another error of opposite nature. (Purchase books and Sales books both are under cast by Rs.500).
- Errors of Mis-posting: Amount posted to a wrong ledger will not disturb the agreement of the Trial Balance.
- Errors of multiple entry or posting: If both aspects of transaction are entered or posted more than once in the books of original entry, the Trial Balance will still agree.
If the two sides of Trial Balance do not agree even after scrutinizing, it implies that there are certain one-sided errors in the books of account.
If it is not possible to locate the errors immediately, a temporary ledger account known as “Suspense Account is created and the amount of difference in the Trial Balance is entered in the Suspense Ledger Account. If the debit side of Trial Balance exceeds the credit side, the difference in the trial balance is transferred to the credit side of the Suspense Account and vice-versa.
Suspense Account is a temporary account, created to make the Trial Balance tally, to go ahead with preparation of Final Accounts, for making adjustments on detection of mistakes, at future stage. As mistakes are gradually located, rectification Journal entries are made through the Suspense Account. Finally, when all the errors are located and rectified, the Suspense Account will be automatically balanced and closed, and will be removed from Trial Balance.
Trial Balance Preparation
The Trial Balance shows the list of all ledger accounts showing respective Ledger Balances. The total of Debit & Credit Balances of all ledger accounts will be equal. If Trial Balance does not tally, the totals will be equalised by posting the difference in Suspense Account.
Steps of Preparation of Trial Balance
- Debit Balances : The Debit balances of all accounts, normally relating to: (a) Assets; (b) Expenses; (c) Losses; (d) Drawings; and (e) Debtors, are placed in the debit column of the Trial Balance.
- Credit Balances : The Credit balances of all accounts, normally relating to: (a) Liabilities; (b) Income and Revenue; (c) Gain; and (d) Creditors, are placed in the Credit column of the Trial Balance.
Generally, closing stock figures do not appear in the Trial Balance, because a separate ledger account for Closing Stock is normally not opened in General Ledger. The Closing Stock value is normally directly posted to Trading Account.
Trial Balance of Ram As on 31.3.2021
|Ledger Account||L.F.||Debit Balance (Rs.)||Credit Balance (Rs.)|
|Cash in hand||20,000|
|Cash at bank||60,000|
Trial Balance vs Balance Sheet
The Final Trial Balance and the Balance Sheet show the Closing balance of Accounts. However, there is subtle difference in the Format and purpose of these two statements as explained here.
|Trial Balance||Balance Sheet|
|Stage of Preparation||Trial Balance is prepared after preparation of ledger and before preparation of final account.||After preparing Trial Balance, Balance Sheet is prepared from balances of Trial Balances.|
|Time of Preparation||Trial balance is normally prepared on a particular date, at any stage, to check the accuracy of Books.||Balance Sheet is normally prepared at a specified period end (monthly, quarterly, half yearly or year end)|
|Requirement||There is no statutory or legal requirement of preparation of Trial Balance. It is optional.||Preparation of Balance Sheet is mandatory.|
|Purpose||Trial Balance helps us to know the arithmetical accuracy of the posted entries from journal to ledgers.||Balance Sheet shows financial position of the business.|
|Information||A Trial Balance is a summary of all General Ledger Balances as on a particular date.||Balance Sheet is a summary of only assets and liabilities as on a particular date.|
|Errors||Difference in Trial Balance indicates errors in account books.||Balance Sheet is prepared after correction of errors.|
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