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Trial Balance is a statement summarizing the closing balance of all the ledger accounts, prepared with the view to verify the arithmetical accuracy of ledger posting. In Trial balance, all the ledger balances are posted either on the debit side or credit side of the statement.
The total of debit balance in trial balance should match with a total of credit balance, only then it is said to be arithmetically accurate. Trial balance is a primary source for preparing various financial statements such as Trading and Profit & Loss account, Balance sheet etc.
As the name suggests, it’s a statement prepared to ensure that journal and ledger postings are done correctly so that closing balances can be considered for preparing the final accounts and other financial statements. Trial Balance acts as a pre-check before preparing the other financial statements. The following are some of the important objectives of trial balance.
As a summary of all the ledger accounts closing balance, trial balance helps in determining the accuracy of journal and ledger posting. The trial balance is assumed to be accurate only when the total debit is equal to the credit.
If there any difference in the trial balance, it signals that journal or ledger posting is not carried out efficiently. It clearly implies that there are errors and it is high time for accountants to find and correct it. The error may have occurred at any of the following stages of accounting.
Trial balance is a bridge between accounting records and financial statements. Trial balance is the steppingstone for preparing all the financial statements such as Trading and Profit & loss account, balance sheet etc. Using the trial balance, all the income and expenses related ledger accounts are compiled to create Profit and loss account and rest are used for preparing a balance sheet.
There are different types of trial balance prepared at different stages of the accounting cycle. The following are different types of trial balance.
Preparing trial balance is one of the first steps towards preparing final accounts and other financial statements. Following are the steps to prepare trial balance:
|Check out the steps to prepare Trial Balance|
To understand better, we have illustrated a sample trial balance format.
As illustrated in the above trial balance format, all the ledger accounts are represented on the left side. The closing balance of each ledger accounts is shown in the debit side or credit side in the above trial balance example.
A trial balance could be prepared in two forms, as follows:
|Journal Form||This form of trial balance will have a format of journal folio. This includes a column for the serial number, name of the account, ledger folio, debit amount and credit amount columns in this journal form.
The Ledger folio will show the page number on which such account appears in the ledger.
|Ledger Form||This form of a trial balance will have two sides i.e. debit side and credit side. Here the ledger form of a trial balance is prepared in the form of an account.
With each side of the trial balance having particulars such as (name of the account) column, folio column and the amount column.
The trial balance must tally, irrespective of the form of a trial balance.
|Debit Side||Credit Side|
All Assets ( Cash in hand, Cash at Bank, Inventory, Land and Building, Plant and Machinery etc. )
Expenses ( Carriage Inward, Freight, Rents, rebates and rates, Salary, Commission etc. )
Losses (Depreciation, Return inwards, Profit and loss A/c (Dr.), Bad debts etc. )
All liabilities ( Bank Overdraft, Secured and unsecured loans, bills payable, Outstanding Payables or expenses, Loan on mortgage etc. )
Reserve fund, general reserve, provision for depreciation, Accumulated depreciation etc.
Gains ( Discount received, Return Outwards, Bad debts recovered, Profit and Loss (Cr.) etc. )
By now, we are clear that trial balance’s primary objective is to ascertain the accuracy and detecting of errors. With the diversity of business operation and frequent need for financial statements, most of the businesses are using accounting software for managing the books and generating financial statements. Accounting software like Tally.ERP 9, is designed to ensure that debit and credit always match at the time of recording the transaction itself. Thus, matching of the trial balance is a ‘Thing of Past’ and the traditional need for someone to depend on trial balance is eradicated.
Most businesses believe using accounting software gives a sense of reliability that once the transactions are recorded, the reporting aspect is correct and complete.