How To Prepare Trial Balance?

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Tally Solutions, Nov-21-2019

Steps to prepare trial balance

Step-1 Debit and Credit Rule

The rules of debit and credit are as follows. One just needs to remember these rules to record all the transactions in the books of accounts.

  • Debit the account when the assets/expenses increase, and the liabilities/revenues decrease.
  • Credit the account when the assets/expenses decrease, and the liabilities/revenues increase.

Step-2 Journal Entry

In the journal entry system, one just needs to record the debit and credit accounts in proper order.

For example, cash is introduced into the business in form of cash. Going by the debit credit rule we will arrive the following result:

The transaction or the dual aspect involved Type of account Effect Rule of Debit and Credit
Cash Asset Account Asset increases Debit the account ( when expense/ asset increases )
Capital Liability Account Liability Increases Credit the account ( when liability/revenue increases )

The journal entry will be as follows :

Cash A/c (Dr) xxx

To Capital A/c (Cr) xxx

Step-3 Ledger Entry

Ledger entry is something which is recorded in the “T” format. And it’s from here where the Trial Balance gets its inputs. The net balance (Debit or Credit) of individual accounts forms part of Trial Balance.

Considering the above example, we can record the ledger entry as below. There are two ledger accounts affected in this transaction.

Capital Ledger Account
Debit Amount (Rs.) Credit Amount (Rs.)
Capital A/c xxx By Balance c/f
xxx
Total xxx Total xxx
Cash Ledger Account
Debit Amount (Rs.) Credit Amount (Rs.)
To balance c/f
xxx
Cash A/c xxx
Total xxx Total xxx

Step-4 Constructing Trial Balance

So it can now be easily said that the end balances of Ledger account is what forms part of the trial balance and taking forward the above example, the trial balance can be constructed in the manner as below:

Accounts Debit Credit
Cash Ledger Account
xxx
 
Capital Ledger Account  
xxx
Total xxx xxx

Difference Between Trial Balance and Balance Sheet

Basically, the trial balance is an internal document. And the balance sheet is prepared to disclose the financial affairs of the company to external stakeholders. To break it up, a balance sheet is an extension of the accounts recorded in the trial balance.

Relevance of trial balance in modern-day accounting

Although modern accounting software may have seemed to make the traditional use of the Trial Balance redundant, the reality is that it has enhanced the report.

Initially, the trial balance was used as an accountant’s report to verify if debits and credits were of equal value. In totality, it helped to verify the proper recording of business transactions.

Today, the trial balance has gone beyond that purpose and is used to identify obvious account discrepancies, ensure proper grouping of accounts for formatting purposes and finally the trial balance is used to generate auxiliary sets of books for other selective purposes.

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