Trial Balance: Meaning, Objectives, Preparation, Format & Example
Last Updated : 03 May, 2024
Trial Balance is basically a statement having a debit side and a credit side where all the debit balances of journal entries and ledger postings are recorded on the debit side of the trial balance, and all the credit balances of journal entries and ledger postings are recorded on the credit side of the trial balance. These postings are recorded in the trial balance to verify and check for the correctness of the journal entries and ledger postings. This is because if the debit and credit side of the trial balance agrees, then it is assumed that the journal, subsidiary books, and ledgers are correctly and properly maintained.
The main reason for the trial balance to match is the 'Double Entry System' of accounting. According to the double entry system, every transaction is recorded twice, once on the debit side and the other on the credit side. So, for every debit entry, there is a corresponding credit entry. Though it is not conclusive proof of the correctness of all books of accounts because there can be some errors despite the fact that the total of both sides of the trial balance is matching.
According to Carter - "Trial Balance is the list of debit and credit balances, taken out from ledger. It also includes the balances of cash and bank taken from cash book."
Objectives of Trial Balance
The objectives or the significance of trial balance is as follows:
1. It Summarizes the Ledger Accounts:
Ledger accounts are made to record all the transactions related to the assets, liabilities, expenses, and income of the business with the help of a journal. So, all the debit and credit side balances of ledgers are transferred to the debit and credit side of the trial balance, respectively. So, now from the trial balance, it becomes easy to get concrete information of what is the actual status of the assets, liabilities, expenses or income rather than having abstract access to information. So, trial balance provides the summary for the ledger accounts.
2. It Helps in Determining the Arithmetical Accuracy of the Ledger Accounts:
The aim of the trial balance is to check if all the ledger postings are done in a correct and accurate manner. This can be assessed using the balances of both the debit and credit side of the trial balance. Because if the total on both sides agrees or equates, then it means that ledger postings are posted in an accurate manner. It also confirms the rules of the double entry system that all the entries have a double effect.
3. It Guides in Preparing Final Accounts:
For every businessman, it is important to know the financial health of their business. This can be ascertained by preparing financial accounts like Trading Account, Profit and Loss Account, and Balance Sheet. So, there comes the role of Trial Balance. Once, all the journal entries have been passed, ledger postings have been recorded, and the trial balance matches, then all the financial accounts are prepared, thereby that the balances in the trial balance become the base for recording all the accounting data further in the final accounts.
4. It Helps in Allocating the Errors:
It is important for the trial balance to tally, but if it does not tally, it implies that certainly there are some errors in the books of accounts. So, it would help to first make the businessman aware that maybe a few postings have not been well posted or posted with the wrong amount or in the wrong account, and many other possible errors could be there. So, once the errors are allocated, then corrections could be done to remove the errors.
How to Prepare Trial Balance?
The statement for trial balance can be prepared at any time in the business like at the end of a financial year, for half yearly, at the end of a quarter, or at the end of every month. But most often trial balance is prepared at the end of the financial year so that it can be ensured that books of accounts are maintained with complete accuracy. The statement for trial balance is not prepared as such for a particular period rather it is prepared on a set date. Following are the three methods for preparing the statement for trial balance:
1. Balance Method
While preparing the statement of trial balance under this method, all the ledger accounts with the debit balances are carried forward to the debit side of the trial balance and all the ledger accounts with the credit balances are carried forward to the credit side of the trial balance. As the name suggests, it is a method related to the balances, so the balances are available in the ledger account at the end after all the adjustments are carried forward to the trial balance. Also, if any of the ledger accounts do not show any balance i.e. the total on both the debit and the credit side is the same, then there is no need to carry it to the trial balance. So, in the end, if the debit and credit side of the trial balance matches, it can be said that the trial balance has been well prepared.
2. Total Amount Method
While preparing the statement of trial balance under this method, unlike the balance method, not only balances rather the total amount on the debit side of the ledger account is transferred to the debit side of the trial balance and the total amount on the credit side of the ledger account is transferred to the credit side of the trial balance. Under this method, the statement for trial balance can be prepared promptly after posting all the entries to ledger accounts before any adjustments are made to them.
3. Total-cum-Balances method
Under this method, two methods - 'Balance Method' and 'Total Amount Method' are combined to prepare the statement of trial balance. It implies that in total, four columns are prepared, two columns are for recording the debit and credit balances of ledger accounts and two columns are for recording the debit and credit totals of various ledger accounts. This method is rarely used and not so frequently used while making the statement for the trial balance.
Example of Trial Balance
Following are the ledger balances of Ram Das Pvt. Ltd. as on the date 31 March, 2022. Prepare the Trial Balance using the following balances.
Solution:
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Part B