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Trial Balance

Definition: Trial Balance is a statement that assembles the balances of all ledger accounts in a definite format. It records both debit balance as well as credit balances from the ledger accounts, including cash and bank balances on a stated date. It is inclined with the purpose of testing the analytical or arithmetical accuracy of the books of accounts of a business.

Content: Trial Balance

  1. Format of Trial Balance
  2. Methods of preparing Trial Balance
  3. What is Adjusted Trial Balance?
  4. Uses of Trial Balance
  5. Objectives of Trial Balance
  6. Features of Trial Balance
  7. Difference between Trial Balance and Balance Sheet
  8. Illustration
  9. Key points to remember
  10. Conclusion

Format of Trial Balance

Trial Balance of M/s ABC for the year ended 31/03/2019

ParticularsDebit balances (₹)Credit balances (₹)
(A) Expenses and Losses
Wagesxx-
Rentxx-
Royaltyxx-
Purchases of materialxx-
Commission paidxx-
Stationary expensesxx-
Carriage inwardsxx-
Carriage outwardsxx-
Discount givenxx-
postage expensesxx-
Salaryxx-
Interest paidxx-
Losses due to accidentxx-
All other losses and expensesxx-
(B) Income and gain
Rent received-xx
Interest received-xx
Sales-xx
Discount Received-xx
Commission received-xx
All other receipts-xx
(C) Assets
Plants and machineryxx-
Land and buildingxx-
Furniture and fixturexx-
Cashxx-
Debtorsxx-
Vehiclesxx-
Stock of materialsxx-
Bills receivablexx-
Other assetsxx-
(D) Liabilities
Capital-xx
Creditors-xx
Loans from others-xx
Bills payables-xx
Loans from the financial institutions-xx
Other liabilities-xx
Totalxxxxxxxx

Methods of preparing Trial Balance

It can be arranged in the following three ways:

methods of preparing trial balance

1. Total Method

In this method, both debit and credit side in the ledger is totalled; then, they are reported in the trial balance in specific columns. The sum of the debit column and the credit column should be equivalent. However, this method is not broadly used.

2. Balance Method

This method is widely used in the formation of trial balance. Trial Balance is arranged by reporting the balances of all ledger accounts; then, the debit and credit column of it is totalled, i.e., in this method, balances of both debit and credit sides of the ledgers are recorded. As the balance analysis, the net effect of all transactions pertaining to a particular account, balances are captured as a foundation for preparing a trial balance. In addition to this, it helps in the preparation of final accounts.

3. Total Cum Balance Method

This method is a four-column method of preparing a trial balance. In this method, the trial balance is made by combining the above two methods. However, this method is also not broadly accepted because it is very time consuming and creates duplication of work.

What is Adjusted Trial Balance?

Before finalizing the financial statement’s accuracy and truthfulness at the end of the year, books of accounts are rechecked once. If required, some adjusting entries are passed and posted in the respective ledger accounts. After that, an adjusted trial balance is prepared, including the entries that were not entered in the original trial balance, such as accrual income, accrual expenses, various allowances, etc.

Uses of Trial Balance

It is an advantageous tool because:

  • It discloses that overall debits are equal to overall credits.
  • It is an analysis of General ledger balances and needs to be examined to identify that it looks correct. If accounts are accompanying very higher or lower balances than normal, then a Journal posting to a General ledger requires to be scrutinized, as it can be placed to a wrong account.
  • It acts as a support in adapting other accounting reports, like balance sheet and income statement.
  • It manages to get a preliminary profit figure. If it is listed in the direction of the General ledger, which is in charge of a chart of accounts, then a subtotal can be computed after the owner’s equity account or a proprietorship nature and earlier than the accounts of an expense and income nature.
  • If the subtotal of a debit side is higher than the credit side’s subtotal, the variation is considered profit, and if the credit side exceeds the debit side, it is considered a loss.

Objectives of Trial Balance

The following are Objectives of the Trial Balance:

  • It is a summary of all the transactions posted in the ledger accounts and discloses the net position at a glimpse.
  • Preparation of it is evidence of the arithmetical accuracy of the books of accounts.
  • It forms the base for preparing the financial statement of the company, i.e., profit and loss account and balance sheet.
  • It helps in locating the various errors in the accounts.

Features of Trial Balance

The following are some of the features of the Trial Balance:

  • Trial Balance plays the role in checking and testing the arithmetical certainty of the entries posted from the journal to the ledger. If both debit and credit tallies, it is assumed that entries are correct.
  • It is arranged for a specific date.
  • Trial Balance is a total of all ledger accounts and can be made any time during the year to find out the difference or error made in an entry.
  • Companies adopting a double-entry system of accounting can only prepare a trial balance, although it is not a part of the double-entry system.
  • Trial Balance contains the closing Balances of all the ledger accounts maintained.
  • Trial Balance is made in a tabular form containing a column – Particular, Debit (₹), Credit (₹).
  • If any difference arises in Trial Balance, it indicates the mistake of the transaction and needs to be checked and corrected.

Difference between Trial Balance and Balance Sheet

Basis for comparisonTrial BalanceBalance Sheet
Need for preparationIt is arranged to test the analytical accuracy of the transactions posted from a ledger.It is inclined to identify the financial status of a company at a specific period of time.
Types of accountsAll kinds of accounts, i.e., personal, real and nominal accounts are reported.Only real and personal accounts
are reported.
ContentsEntire accounts of the ledger are presented.Balances of only those ledger accounts are presented which
have not been settled till the
arrangement of trading, profit and loss
account and balance sheet.
Closing stockUsually, the closing stock does not arrive in the trial balance although the opening stock arrives.Only the closing stock arrives on the asset side of the balance sheet.
HeadingThe headlines of the columns in
the trial balance is "Debit balance "and "Credit balance".
The headlines in the balance sheet are " Liabilities" and "Assets".
PeriodicityIt can be inclined periodically, i.e., at the end of the quarter/ month
or half-yearly.
It is usually inclined at the end of the
financial year.
AdjustmentsAdjustments regarding prepaid
income, outstanding expenses etc., are not required in it.
Adjustments associated with specified
items are precisely necessary to
formulate a balance sheet.
MandatoryPreparation of it is not compulsory.Preparation of balance sheet is
obligatory for companies registered under Companies Act.

Illustration

  • Question

The following balances are derived from the ledger balances of an M/S ABC on 31/03/2019. Prepare Trial Balance as on that date.

ParticularsAmount(₹)ParticularsAmount(₹)
1. Drawings2200012. Purchases151800
2. Creditors9800013. Capital58000
3. Debtors12000014. Bills payable18000
4. Loan from x3000015. Bills receivable15400
5. Opening Stock960016. Furniture12000
6. Investments3500017. Cash in hand2800
7. Sales 29320018. Taxes9000
8. Sales return200019. Salaries29000
9. Travelling expenses1120020. Purchase returns3200
10. Trading expenses800021. Commission paid1200
11. Rent1200022. Discount earned15000
23. Bank overdraft42000

  • Solution

Trial Balance of M/S ABC as on 31/03/2019

ParticularsDebit (₹)Credit (₹)
Drawings22000-
Capital-58000
Creditors-98000
Debtors120000-
Bills receivable15400-
Furniture12000-
Opening stock96000-
Cash in hand2800-
Investments35000-
Taxes9000-
Sales-293200
Salaries29000-
Sales return2000-
Purchase return-3200
Travelling expenses11200-
Commission paid1200-
Trading expenses8000-
Discount earned-15000
Rent 12000-
Bank overdraft42000
Purchases151800-
Total527400527400

Key points to remember

  • It is a record of ledger balances.
  • Errors revealed by it are the omission of posting an entry, posting an incorrect amount, posting amount on the incorrect side, twice posting of amount, errors in balancing the ledger accounts.
  • Errors not revealed by it are an error of commission, compensatory error, an error of principle, etc.
  • When Trial Balance doesn’t get tallied, balances and totals of various ledger accounts must be checked.

Conclusion

Trial Balance is a catalogue of ledger balances following the principle of the double-entry system of book-keeping and accountancy, i.e., every debit entry must have an equivalent credit entry on a precise date. If both sides get tallied, that means the books are arithmetically accurate and are free from all the errors.

Related Terms:

  1. Cash Book
  2. Ledger
  3. Rectification of Errors
  4. Journal Entries
  5. Sales Management

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