Introduction 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.
In this context, let us know in detail about the trial balance - its objectives and limitations will alos be dealt here accordingly.
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.
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.
Trial Balance also helps in detecting the clerical errors such as mixing up of the figures, faults in the posting, etc.
The Trial Balance also helps to prepare the final Accounts and the Balances for the financial statements are taken from the Trial Balance itself.
The Trial Balance also serves as an important summary of the total Accounting records and the ledger Accounts of the business or firm.
Trial Balance ensures that all the posting from the ledger Accounts should be done correctly without any errors. If any error is present in the Accounting, you will get to know about it in the Trial Balance. If the Debit column and Credit column don't match with each other, there is an error present in it.
Trial Balance also helps in detecting the clerical errors namely mixing up of figures, fault in posting, etc.
Trial Balance also helps in preparing the final Accounts. Trial Balance also provides the Balances for the financial statements.
Trial Balance is also being used as a summary of all Accounting records which is very useful for bookkeepers. Basically it is said that Trial Balance is a summary of all the ledger Accounts of the organization.
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:
A transaction which is entirely missing is not journalized.
If wrong amounts are written in both the Accounts.
If the posting is carried out in the wrong Account but the amount is right.
The entry which is not posted in the ledger at all.
Double posting of the entry mistakenly.
One of the main and important limitations of Trial Balance is that it does not point out every type of error. This basically means that even if you have fully Balanced Trial Balance, there will not be 100 percent accuracy of all the Accounts.
Any transaction which is missing completely and wasn't even journalised, then Trial Balance will not detect any error.
When there are wrong amounts written on both the sides of Trial Balance, it will be unable to detect the error.
If any posting was done on the wrong Account of the ledger but in the right amount, then Trial Balance will not draw attention to this error.
Any double posting of entry in the ledger Account by mistake will not be able to be identified by the Trial Balance.
A Trial Balance is a report or it is like a bookkeeping worksheet that collects the Balances of all the general ledger Accounts which is prepared by a company at the end of the financial year. Basically, it is an Account which lists the closing Balances of every Account on the Debit and Credit sides. One of the important functions of objective is that it has to ensure that all the Debit sides and Credit sides must be equal to each other. The Accounts mentioned in the Trial Balance are related to Accounting items like assets, liabilities, revenues, gains and losses, equity etc. It is being prepared by companies to make the adjusting entries to the general ledger which are necessary.
Preparation of Trial Balance is the third step or process of the Accounting process. After journalising and posting each and every entry in the ledger Accounts, Trial Balance is prepared. Accuracy of the Accounts is being judged by analysing the Trial Balance whether it is Balanced or not. Trial Balance also provides reasonable and proper assurance about the books of Accounts that they are free of any errors. The main function of Trial Balance is to check the accuracy of all the Accounts of the entity.
FAQs on Objectives and Limitations of Trial Balance
1. What is the Meaning of Trial Balance?
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?
The different types of Trial Balance are as follows:
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.
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.
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.
3. What is the advantage of Trial Balance ?
The main advantage of Trial Balance is that it acts as an indicator of the arithmetical accuracy of the ledger Accounts as because of the double entry system, every transaction results in two entries, one is Debit and the other is Credit. It also has an advantage of summarizing all the ledger Accounts and Balances.
4. What are the rules to be considered before making Trial Balance ?
There are few rules which need to be considered before preparing Trial Balance. Firstly, all the assets should be on the Debit side and all the liabilities must be on the Credit side. Secondly, all the income or gains must be put on the Credit side and all the expenses must be on the Debit side. These are very important rules to consider as these are the basic rules without which you cannot make Trial Balance.
5. What are the things which are included in Trial Balance ?
A Trial Balance generally includes a list of all the ledger Accounts. It should include Account number, Account's description and the final Debit and Credit Balance of the Account. Along with this, the final date of the Accounting period should also be there for which the report is created. Trial Balance includes the total of the Accounts and doesn't show each separate transaction.
6. What are the causes of unbalanced Trial Balance ?
There are plenty of reasons which cause Trial Balance to be unBalanced. For example, if you reverse the numbers while posting from the journal to ledger, or from the ledger to the Trial Balance, this will cause Trial Balance to not equal. On the other hand, if you make any Math errors, this can also cause a problem. If you have Credited something which has to be Debited and vice versa, or if you have done any transaction in the wrong Account, the Trial Balance will be unBalanced.