Understanding Trial Balance: Meaning, Objectives, and Formats

Trial Balance Meaning

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company in a company’s bookkeeping system are mathematically correct.

In s simple terms, Trial Balance is a statement which is prepared in a Separate Papers by taking up all the ledger account balances on a particular date in order to verify the arithmetical accuracy of the account in the ledger and putting the Debit in one side and Credit in another.

Definition of trial Balance 

According to J. R. Batliboi - "Trial Balance is a statement prepared with debit and credit balance of ledger account to verify the arithmetical accuracy of the books.

Basic Principle of Trial Balance

Since it is double entry, bookkeeping hence, asset and expense are debit balances and liabilities and income are credit balances. In case of arithmetical inaccuracy identify or clerical or principal errors and rectify.

Total debit entries = Total credit entries

1. For each debit entry there is a credit entry.
2. For each credit entry there is a debit entry.

Is a statement prepared with debit and credit balances of the ledger account and cash book balance to test the arithmetical accuracy of books? It is list of debit and credit balances taken out from the ledger It includes the balances of cash and bank and bank taken from the cash book

1. It the total of Debit entries is greater; it is called a Debit balance.
2. If the total of Credit entries is greater, it is called a Credit balance.

Feature of Trial Balance

1. It is list of balance of ledger account and cash book
2. It is not a part of the double entry system of bookkeeping. It is a result of double entry system of bookkeeping. It is only a working paper.
3. It can be prepared on any date
4. It verifies the arithmetical accuracy of posting of entries from the journal to the ledger.
5. It is not a conclusive proof of the accuracy of the books of accounts since some errors are not disclosed by the trial balance

Objective of Trial Balance

1. To have all balances of all the accounts of the ledger at one place.
2. To have a check whether the transactions has been recorded by using double entry principle.
3. To have arithmetic accuracy of other books of accounts because of the agreement of the trial balance.

Purpose of Trial Balance

1. Arithmetical accuracy - Given the nature of double entry system, every transaction will result in two entries of equal and opposite nature. Trial balance lists all the accounts as on a particular date, the debit total of a trial balance must match to the credit total. Therefore, a trial balance is an indicator of the arithmetical accuracy of the books of accounts. 
2. Bird’s eye view – A trial balance is a summary sheet listing all ledgers and balances. Hence it provides a bird eye view of the accounting transactions of an organization.
3. Prerequisite for preparation of financial statements – An organization needs to know profit or loss and financial position at year end. And thus, to prepare financial statements, trial balance is prerequisite. All stakeholder also needs this information. It is the first step towards closure of accounts for a particular period.

DEBIT	CREDIT
Assets	Income or Revenue
Expenses	Liabilities
Drawing	Capital

Methods of Trial balance

Total Method 

Under this method, Trial balance is prepared by taking up the totals of both Debit and Credit of all ledger accounts. In this method ledger accounts are not balanced. They are totalled these totals are entered in the debit and credit columns. The grand total of debit column will be equal of the credit column. The format of a trial balance under this method is as follows –

Trial Balance as on …. (Closing date)

Particulars (Name of the Accounts)	L.F.	Dr. Total of a/c amount	Cr. Total of a/c amount

Balance Method 

Under this method, Trial balance is prepared by taking up the balance of each ledger account. In this method, the closing balances of ledger account are tabulated in a separate statement. The brought down balances are brought to this statement. All debit balances are shown in the debit column and all credit balances in the credit column. This method is more commonly used one. The format of trial balance under this method is as follows

Trial balance as on …. (Closing date)

Particulars (Name of the Accounts)	L.F.	Debit balance amount	Credit balance amount

By taking the debit or credit balance of all ledger accounts including cash and bank account these balances are entered separately in two columns.

1. Debit balances are places in ‘Debit Column’
2. Credit balances are placed in ‘Credit Column’

If debit side sum is greater than (>) Credit side sum – Debit balance

If credit side sum is greater than (>) Debit side sum – Credit balance

Trial balance is prepared on a particulars date which should be written on the top.

Format and preparation of trial Balance

Trial balance of XYZ co as on 

Steps in Making of Trial Balance

In order to prepare a trial balance following steps are taken 

1. Ascertain the balances of each account in the ledger
2. List each account and place its balance in the debit or credit column, as the case may be, if an account has a zero balance, it may be included in the trial balance with zero in the column for its normal balance.
3. Compute the total of debit balances column
4. Compute the total of credit balances column
5. Verify that sum of the debit balances equals the sum of credit balances.

If they do not tally, it indicates that there are some errors. So, one must check the correctness of the balances of all accounts. It may be noted that all assets’ expenses and receivables account shall have debit balances whereas all liabilities, revenue and payables accounts shall have credit balances.

Preparing of Trial Balance

For example – we have some ledgers

Dr.							Cr.
Date	Particular	J.F.	Amount	Date	Particular	J.F.	Amount
				1st Jan	By Cash a/c		20,000
	To Balance c/d		20,000
	Total		20,000		Total		20,000
					By balance b/d		20,000

Now, the capital account and cash account ledger would be noted down in trial balance

Trial Balance of ABC & Co … as on January,2025

Particulars	L.F.	Debit	Credit
Cash account		20,000
Capital account			20,000
Total		20,000	20,000

Errors revealed by the Trial Balance

The errors revealed are those errors which cause the trial balance totals to disagree i.e., do not balance.

There are four types of errors revealed by a trial balance

1. Posting to the wrong side of an account - Posting on the wrong side of an account and posting of a wrong amount to a ledger account also creates disagreement of the trial balance.
2. Errors in calculation and balancing - Errors in casting or totaling of subsidiary books or accounts or if there is any error in the balancing the ledger account also came disagreement of trial balance.
3. Incorrect amounts entered on one entry - If any item is posted twice in a ledger account from subsidiary book or put a ledger balance on the wrong column, the trial balance will not agree.
4. Omission of one entry - Omission of posting of an entry from the subsidiary book.
5. Error of Miss posting - When wrong posting is made to a wrong account instead of a correct one although amount is correctly recorded e.g., Sold goods to B but wrongly debited to D’s Account-Trial balance will agree.
6. Compensating Error - When one error is compensated by another error e.g., Discount allowed P 100 not debited to discount allowed account whereas interest received P100 but not created to interest account-trail balance will agree

How do we locate all of the above errors?

1. Check day book totals or checking journal entries
2. Check additions of ledger accounts, ensure each balance is correct
3. Check all ledger account balances have been recorded in the trial balance
4. Check all balances have been entered in the trial balance on the correct side
5. Check additions have been done correctly.

Suspense Account 

If the agreement of trail balance is disturbed due to the existence of some error or errors in the books of account, the difference is transferred to the suspense account. When the error or errors are found out and rectified the suspense account is to be closed.

Hints For Preparation of Trail Balance:

1. Debit Side = Assets + Expenses + debtors.
2. Credit Side =Liabilities + Income + Creditors.

Advantage and Disadvantage of trial balance 

Advantage

1. It verifies the arithmetical correctness of posting of entries from journal to ledger
2. It is helpful in preparation of trading account, profit & loss account and balance sheet.

Limitation

1. It is not a conclusive proof of absolute accuracy of the books of accounts
2. Some errors may remain undetected and may not be disclosed by the trial balance for example – error of principle and compensating errors
3. Transaction completely omitted

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