Trial balance

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What is a trial balance? – The third phase of accounting

Trial Balance is a source of locating errors of the ledger. Trial Balance is the third phase of the accounting cycle. Before processing for further accounting it is necessary to check the accuracy of the work being done. So trial balance provides the basis to check the accuracy of a ledger.

The Trial Balance consists of a two-column statement of debit and credit balances which are derived from the ledger. The total of debit & credit balances should be equal; otherwise, the entire previous work up till ledger will not be considered accurate.

A Trial Balance is an informal accounting statement which is prepared with the help of ledger account balances on a particular date to summarize the records and to check the arithmetical accuracy of the books of accounts.

Explanation

The next stage, after the completion of the postings, is the extraction from the books of all balances on a statement called the trial balance. It is not an account, just a list of all the debit and credit balances.

The financial information, classified and grouped in the various ledger accounts is now totaled on each account, and the debit and credit balances listed on the trial balance, including the final balance of the cash account.

Trial-balance-explanation-example-purpose

There is no particular order for the grouping of the account balances, but to avoid omission it is suggested that the final cash balance should be extracted first, and the remainder of the ledger balances may then be listed in either page or book sequence.

There is no complication about double entry here, at this stage, it has been completed. Debit balances are merely listed on the debit of the trial balance, and credit balances on the credit.

Objectives

  1. It verifies that all the debits & credits are correctly posted and accurately calculated.
  2. Through trial balance, financial statements can be prepared.
  3. Some of the errors are highlighted by trial balance and these can be rectified before the preparation of final accounts.
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Purpose of preparation of a Trial Balance

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 evidence of the ledger’s arithmetical accuracy.

It is emphasized that the trial balance is not an account. It is not part of the double-entry, but merely a list of debit and credit balances taken from the books, normally at the end of a specific trading period (which may be a month, six months or often one year) for the purpose of:

  • checking the arithmetical accuracy of the postings, and
  • rendering the work of the accountant or bookkeeper easier in the making up of financial summaries, often with a view to the preparation of revenue trading accounts, together with a balance sheet.

Note that only the balances of the accounts are bought on to the trial balance. For example, the debit balance of $1,352 is extracted from the cash account, and not the two totals for receipts and payments.

The sales account is totaled to show total sales of $2,125 for the month, which in effect is the credit balance taken to the trial balance. Similarly with the purchases, and so on.

If no mistakes have been made in posting the cash book to the various ledger accounts (debit for credit and vice versa), the sum total of the debit balances on the trial balance should equal the sum total of the credit balances.

Example

Let us see if the following trial balance of a trading business can illustrate this fact:

Trial Balance and purpose of its preparation

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 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 the 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.

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In addition to the 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 the above trial balance:

  1. Asset accounts like cash, accounts receivable, inventory, furniture, etc. show the position of the assets at the end of the accounting period.
  2. 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.
  3. 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 evidence of the arithmetical accuracy of the ledger, it also serves as a summary of all transactions made since the end of the previous accounting period.

TRIAL BALANCE TOTALS DO NOT AGREE

If the trial balance totals do not agree, you should try to find the error. It is often useful to calculate the difference between the totals. You may find that this gives a figure that you can find in the original list of balances and which you have either not included in the trial balance, or have not included in your addition of the trial balance figures.

If this is not the case, try halving the difference (if it is ‘even’) and seeing if a balance of that amount has been included in the wrong side of trial balance, where it will have a double impact in the discrepancy.

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Finally, try dividing the difference by nine. If it divides exactly, you may have made a transposition error, for example entering 1985 rather than 1895.

Remember this

Errors which will leave the trial balance totals equal are as follows:

  • mistakes of the same amounts in both the debit and credit entries
  • omitting the transaction altogether
  • the wrong ledger being debited with the correct amount.

Errors which will cause the trial balance totals to be unequal are as follows:

  • arithmetic error when totaling the balances of the ledger
  • correct amount on one side and an incorrect amount on the other, i.e. DR 540 but CR 504 by mistake
  • not including both entries, i.e. only writing an entry on one side, and omitting the other
  • including both entries on the same side, i.e. instead of a DR and a CR you have two CR entries.

Focus points

  • The trial balance is not an account. It is simply a list of debit and credit balances assembled by the bookkeeper to prove the arithmetical accuracy of the postings.
  • Every account balance in the books is brought on to the trial balance, including the closing balance of cash in hand.
  • When the trial balance does not balance:
    • Check the trial balance additions again. Your figures may be out of alignment.
    • Check all additions again, in particular those in the cash book, and those of the purchases and sales accounts.
    • Make sure that the closing cash balance has been brought to the debit of the trial balance.
    • Check the double-entry of all postings in the books, debit for credit, and re-check the extraction of the balances to their correct side of the trial balance.
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