Objectives and Limitations of Trial Balance

Bookmark added to your notes.
View Notes

What are Objectives and Limitations of Trial Balance

When it comes to the double entry system in accounting, the debit is always equal to the credit. This refers to the fact that each individual account is matched in a perfect manner. It also refers to the fact that all the accounts of the entity should match perfectly. One manner in which this accuracy can be checked is with the help of the Trial Balance of the respective company.

[Image will be uploaded soon]

Trial Balance

Trial Balance is similar to a bookkeeping worksheet which the company makes during the end of the financial year. It refers to an account which tends to list the closing balance of every account on the debit or credit side respectively. Amongst the main objective of the trial balance is ensuring that the sum total of all the debits is equal to the sum total of all the credits.

The third step of the accounting process is to prepare the trial balance. Once the journalizing and posting of the entries is done in the ledgers, the bookkeepers would make the trial balance. A full balanced trial balance makes sure that there is an arithmetic accuracy of the respective accounts. The trial balance also provides reasonable assurance that the account books are free from any sorts of clerical errors too.

For example, the bookkeeper records the entries for the credit sales in the journal or the book. However, he does not make the corresponding entries in the account of the creditor by mistake. While making the trial balance, the difference would show up between these amounts of the debtor and the creditor. The bookkeeper would be able to rectify his mistake by taking a look at the trial balance.

Objectives of Trial Balance

Given below are the objectives of the trial balance and the reasons why it is prepared.

  1. The trial balance makes sure that the posting from the ledgers is carried out in the correct manner. In case there are any arithmetic errors present in the accounting, then it would automatically get reflected in the trial balance. This can be determined if the total from the debit column and the total of the credit column do not match.

  2. Trial balance also helps in detecting the clerical errors such as mixing up of the figures, faults in the posting, etc.

  3. The trial balance also helps to prepare the final accounts and the balances for the financial statements are taken from the trial balance itself.

  4. The trial balance also serves as an important summary of the total accounting records and the ledger accounts of the business or firm.


Limitations of Trial Balance

Trial balance is an essential account, especially for the bookkeepers. However, there are certain limitations of the trial balance too. The main limitation of the trial balance is that it does not find out all kinds of errors. This means that even if there is a fully balanced trial balance, it would not assure that there is 100% accuracy in all the accounts. There are several kinds of errors that the trial balance does not draw attention to. These errors are as follows:

  1. A transaction which is entirely missing is not journalized.

  2. If wrong amounts are written in both the accounts.

  3. If the posting is carried out in the wrong account but the amount is right.

  4. The entry which is not posted in the ledger at all.

  5. Double posting of the entry mistakenly.

FAQ (Frequently Asked Questions)

1. What is the Meaning of Trial Balance?

Ans: Trial balance refers to the list of all the ledger accounts, including both capital and revenue, that are contained in the business ledger. This consists of the names of every nominal ledger account and the value of that specific nominal ledger balance. Every nominal ledger account holds either a debt or a credit balance. The values of the debit balance are listed in the debit column and the values of the credit balance are listed in the credit column of the ledger. The trading statements for the profits and losses, balance sheet, and several other financial reports are then created with the help of the ledger accounts that are listed on that same balance.

2. What are the Different Types of Trial Balance?

Ans: The different types of trial balance are as follows:

1. Unadjusted trial balance: It is prepared before the adjusting journal entries are completed. This trial balance tends to reflect the activities that are recorded from the everyday transactions and used for analyzing the accounts while preparing the adjusting entries.

2. Adjusted trial balance: It is completed when the adjusting entries are finished. This type of trial balance consists of the final balances in all of the accounts and is used in the preparation of the financial statements.

3. Post-closing trial balance: This trial balance tends to show the balances once the closing entries are completed. This is the starting balance for the upcoming year.