The basic purpose of preparing a trial balance is to test the arithmetical accuracy of the ledger. If all debit balances listed in the trial balance equal the total of all credit balances, it is an evidence of the ledger’s arithmetical accuracy. Let us see if following trial balance of a trading business can illustrate this fact:
The above trial balance shows that on march 31, 2016, the total of debit balances in the ledger is $260,116 which is equal to the the total of credit balances. This fact provides a reasonable assurance that every debit entry in the ledger accounts does have a corresponding credit entry and that no arithmetical error has been made during balancing process. It also shows that all accounts that have a non-zero balance have been duly reported in the trial balance on its correct side i.e., those having debit balance are reported in the debit column and those having credit balance are reported in the credit column.
In addition to above, trial balance performs another important function. If you go over the above trial balance again, you will realize that this list of balances is in fact also a summary of all transactions made during the accounting period.
Let us analyze the contents of above trial balance:
- Asset accounts like cash, accounts receivable, inventory, furniture etc. show the position of the assets at the end of the accounting period.
- Liability and owner’s equity accounts like accounts payable and capital show the position of liabilities and capital at the end of the accounting period.
- Accounts relating to expenses (purchases, wages, carriage, rent etc.) show the total of their respective items over the accounting period. Looking at the balance of any of these accounts, the accountant or business owner can know what has been spent on various expense items during the accounting period to which the trial balance relates. Similarly the balances of accounts relating to income or revenue show income earned from each source in the accounting period to which the trial balance relates.
We can say that a trial balance not only provides an evidence of arithmetical accuracy of ledger, it also serves as a summary of all transactions made since the end of the previous accounting period.