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

Particulars	Debit balances (₹)	Credit balances (₹)
(A) Expenses and Losses
Wages	xx	-
Rent	xx	-
Royalty	xx	-
Purchases of material	xx	-
Commission paid	xx	-
Stationary expenses	xx	-
Carriage inwards	xx	-
Carriage outwards	xx	-
Discount given	xx	-
postage expenses	xx	-
Salary	xx	-
Interest paid	xx	-
Losses due to accident	xx	-
All other losses and expenses	xx	-
(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 machinery	xx	-
Land and building	xx	-
Furniture and fixture	xx	-
Cash	xx	-
Debtors	xx	-
Vehicles	xx	-
Stock of materials	xx	-
Bills receivable	xx	-
Other assets	xx	-
(D) Liabilities
Capital	-	xx
Creditors	-	xx
Loans from others	-	xx
Bills payables	-	xx
Loans from the financial institutions	-	xx
Other liabilities	-	xx
Total	xxxx	xxxx

Methods of preparing Trial Balance

It can be arranged in the following three ways:

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 comparison	Trial Balance	Balance Sheet
Need for preparation	It 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 accounts	All kinds of accounts, i.e., personal, real and nominal accounts are reported.	Only real and personal accounts are reported.
Contents	Entire 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 stock	Usually, 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.
Heading	The headlines of the columns in the trial balance is "Debit balance "and "Credit balance".	The headlines in the balance sheet are " Liabilities" and "Assets".
Periodicity	It 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.
Adjustments	Adjustments regarding prepaid income, outstanding expenses etc., are not required in it.	Adjustments associated with specified items are precisely necessary to formulate a balance sheet.
Mandatory	Preparation 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.

Particulars	Amount(₹)	Particulars	Amount(₹)
1. Drawings	22000	12. Purchases	151800
2. Creditors	98000	13. Capital	58000
3. Debtors	120000	14. Bills payable	18000
4. Loan from x	30000	15. Bills receivable	15400
5. Opening Stock	9600	16. Furniture	12000
6. Investments	35000	17. Cash in hand	2800
7. Sales	293200	18. Taxes	9000
8. Sales return	2000	19. Salaries	29000
9. Travelling expenses	11200	20. Purchase returns	3200
10. Trading expenses	8000	21. Commission paid	1200
11. Rent	12000	22. Discount earned	15000
		23. Bank overdraft	42000

• Solution

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

Particulars	Debit (₹)	Credit (₹)
Drawings	22000	-
Capital	-	58000
Creditors	-	98000
Debtors	120000	-
Bills receivable	15400	-
Furniture	12000	-
Opening stock	96000	-
Cash in hand	2800	-
Investments	35000	-
Taxes	9000	-
Sales	-	293200
Salaries	29000	-
Sales return	2000	-
Purchase return	-	3200
Travelling expenses	11200	-
Commission paid	1200	-
Trading expenses	8000	-
Discount earned	-	15000
Rent	12000	-
Bank overdraft		42000
Purchases	151800	-
Total	527400	527400

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.