Trial balance is an accounting or bookkeeping report that lists balances from a company’s general ledger accounts. The debit balances ‘and the credit balances are listed under their respective fields. The sum of these columns should be the same.
The preparation of trial balance occurs periodically, mostly at the end of every accounting period. The primary purpose of producing this statement is to confirm that there are no unequal journal entries in the books which can hamper the process of preparing any financial report.
Trial balance helps a company to detect if there are any mathematical mistakes in their double-entry accounting system. In a trial balance statement, where debit and credit side of it is equal, it is considered as balanced. Additionally, it ensures that there are no errors in the ledger. However, this does not qualify that it is free of mistakes. For instance, improper entries and missing entries from ledgers are still considered as accounting errors which are not detected by a trial balance.
Auditors often ask for the annual trial balance before commencing their audit. It helps them to transfer the account balances to their software. Furthermore, they may even ask for an electronic version to make this copying process easy and time-saving.
A trial balance example is –
How To Prepare A Trial Balance
The preparation of trial balance initially requires closing balances of general ledger accounts. A trial balance is prepared after entering every financial transaction into the journals and then concisely mentioning them on ledger statements. After this follow the below-mentioned steps to make a trial balance –
Before commencing, you need to ensure that all ledger accounts are balanced. It requires adding up debit entries and credit entries and finding the difference between them.
Prepare a worksheet with headers like account name, number, debit and credit balances.
Fill up this worksheet by transferring the data from ledger accounts. Enter the data in their respective columns accurately.
After finishing the entries, add-up the amounts of debit and credit columns. In case, the total on both sides are the same; it creates an error-free balance.
In case of a difference in debit and credit balance, you have to find out the mistake and then rectify it.
Mistakes to avoid
Here are some common mistakes that everyone makes while preparing a trial balance –
Entering details in wrong accounts or columns like entering details of the debit account in credit and vice-versa.
Making transposition errors
Mistakes made while transferring the data from ledger to trial balance statements
Making miscalculations while balancing an account
A trial balance format is given below for better understanding
Rule of Trial Balance
The trial balance rules that you have to follow while preparing one is –
All assets must be on the debit side
All expenses and losses must be on the debit side
All liabilities must be on the credit side
All income and gain must be on the credit side
Trial Balance Items List
The list of debit and credit items in trial balance is as follows –
The debit side of it will feature entries from accounts like assets, drawings accounts, expense accounts, cash balance, bank balance, losses, purchases, and sundry debtors, among others.
The credit side of it will feature entries from liabilities, capital accounts, income accounts, sales, sundry creditors, gains and reserves.
Methods of Preparing A Trial Balance
There are two chief methods of preparing trial balance, these are –
Total method: Here, entries from each debit and credit side are summed up and then placed at the bottom of each side. The total of each column should be the same.
Balance method: Here, the balances of every ledger accounts are presented in the trial balance.
Advantages of Trial Balance
The benefits of trial balance are –
Arithmetical Accuracy: Trial balance indicates the arithmetical accuracy of the accounts of a company. Due to the double-entry system, every transaction has two equal yet opposite entries at every step. Hence, at every point, the debit side must match the credit side. Moreover, trial balance lists accounts as per date.
Comprehensive: Trails balance is technically a summary of all ledgers. Hence, it offers a more holistic view of a company’s accounts and transactions within a specific period.
Prerequisite for Preparing Financial Statements: Every company needs to know its financial status at the end of a fiscal year, and trial balance is quintessential in that respect. Its streamlines the process of preparing other financial statements. Shareholder of a company often asks for it as it offers a comprehensive study of the accounts of a company.
Preparing trial balance is essential for every company to be it small or big, and for commerce students, it is a vital chapter. Apart from knowing the preparation of trial balance and other aspects of it, students can visit the official website of Vedantu to learn more on different subjects of commerce.
1. What is The Trial Balance?
A trial balance is a list comprising closing balances of various ledger accounts of a company. Usually, it is prepared at the end of a financial year, and it aids in drafting other financial statements. Companies can also produce this periodically.
2. How to Prepare a Trial Balance
A trial balance is prepared by transferring data from ledger accounts. A trial balance statement has two sides – debit and credit. You have to enter data as per their nature on each side and then add them to complete your trial balance preparation. However, remember both sides of a trial balance must be equal.
3. How to do a Trial Balance?
To do a trial balance properly, you have to know trial balance items list first. The debit side of it includes assets, expense accounts, drawings accounts, bank balance, cash balance, purchases, sundry debtors any losses, and surpluses. In contrast, the credit side includes liabilities, capital accounts, income accounts, sundry creditors, sales, gains, and reserves. Once you identify the ledger accounts, transpose their balances accordingly in a trial balance.