Meaning of Trial Balance

Define the Trial Balance
Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements. Ledger balances are segregated into debit balances and credit balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities, capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial balance must equal to the sum of all credit balances. Purpose of a Trial Balance
  • Trial
    Balance acts as the first step in the preparation of financial
    statements. It is a working paper that accountants use as a basis while
    preparing financial statements.
  • Trial balance ensures that for
    every debit entry recorded, a corresponding credit entry has been
    recorded in the books in accordance with the double entry concept of
    accounting. If the totals of the trial balance do not agree, the
    differences may be investigated and resolved before financial statements
    are prepared. Rectifying basic accounting errors can be a much lengthy
    task after the financial statements have been prepared because of the
    changes that would be required to correct the financial statements.
  • Trial balance ensures that the account balances are accurately extracted from accounting ledgers.
  • Trail balance assists in the identification and rectification of errors.
Construction of Trial Balance
Construct a Trial Balance
Following is an example of what a simple Trial Balance looks like:
ABC LTD Trial Balance as at 31 December 2011
Account Title Debit Credit
$ $
Share Capital 15,000
Furniture & Fixture 5,000
Building 10,000
Creditor 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General and Administration Expense 2,000
Total 30,000 30,000
  • Title provided at the top shows the name of the entity and accounting period end for which the trial balance has been prepared.
  • Account Title shows the name of the accounting ledgers from which the balances have been extracted.
  • Balances
    relating to assets and expenses are presented in the left column (debit
    side) whereas those relating to liabilities, income and equity are
    shown on the right column (credit side).
  • The sum of all debit and credit balances is shown at the bottom of their respective columns.
The Advantages and Short Falls of the Trial Balance
Give the advantages and short falls of the Trial Balance
Advantages (Objectives of Trial Balance)
  • 1. It ensures that the transactions recorded in the books of accounts have identical debit and credit amount.
  • 2. Balance of each ledger account has been computed correctly.
  • 3. Balance of each and every ledger account has been transferred
    accurately and on the correct side of the sheet on which trial balance
    has been prepared.
  • 4. The debit and the credit columns of trial balance have been added up correctly.
  • 5. Preparation of final accounts is not possible without preparing trial balance first.
  • 6. Agreed trial balance is a prima facie evidence of the arithmetical accuracy of the accounting books maintained.
  • 7. Errors which are revealed by preparing trial balance (listed below)
    are rectified even before the preparation of final accounts.
Errors revealed by (the preparation of) trial balance
  • If trial balance does not agree, the disagreement may be due to :
  • (1) Omission to post an amount into ledger: If an item is not posted
    from journal or subsidiary book to ledger, two sides of trial balance
    shall not agree, e.g., if goods sold on credit to A are recorded
    properly in sales book but not debited to A’s account’ in ledger, the
    debit side of trial balance shall fall short.
  • (2) Omission to
    post an amount in trial balance: It is natural if balance ‘of an account
    is not recorded in trial balance the two sides of trial balance shall
    not agree which is an indication of error in accounts.
  • (3)
    Wrong totalling or balancing of ledger account: If any account in the
    ledger is wrongly totalled or balanced, then also the trial balance
    shall not agree.
  • (4) Wrong totalling of subsidiary books: If
    the total of any subsidiary book is wrongly cast, it would cause a
    disagreement in the trial balance, e.g., if purchase book totaled Rs.
    2,500 instead of 2,050, the debit side of the trial balance shall exceed
    the credit side by Rs. 450.
  • (5) Posting on the wrong side:
    When an item is by mistake posted on the wrong side of the ledger
    account it would cause disagreement in the trial balance, e.g., if Rs.
    200 have been allowed as discount and while posting into discount
    account the amount has been credited to discount account. It will result
    in a difference of Rs. 400 in two sides of trial balance.
  • (6)
    Posting of wrong amount: If wrong amount is posted in one of the two
    accounts while posting, it would immediately cause disagreement of trial
    balance e.g. goods worth Rs. 690 have been sold to ‘X’ but ‘X’s account
    has been debited with Rs. 960. It will increase the debit side of trial
    balance by Rs. 270.
Trial Balance Limitations – Shortcomings of trial balance
  • An agreed trial balance does not prove by itself that :
  • 1. All transactions have been correctly analyzed and recorded in proper
    accounts. For example wages paid for installation of fixed asset might
    have wrongly been debited to wages account.
  • 2. All the transactions have been recorded and nothing has been omitted.
  • 3. Certain types of .errors (listed below) remain undetected even after the preparation – of trial balance.



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