# Trial Balance

Article byDheeraj Vaidya, CFA, FRM

## What is Trial Balance in Accounting?

Trial Balance is the report of accounting in which ending balances of a different general ledger of the company are and is presented into the debit/credit column as per their balances, where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.

At the end of the financial year, the balances of all the ledger accounts are extracted. They are written up in a trial balance (a type of financial report) and finally summed up to see if the total debit balances and the total credit balances should be tallied. It may also be stated as a statement of the total debit and credit balances extracted from the various accounts in the ledger to examine the mathematical exactness of the books.

For eg:
Source: Trial Balance (wallstreetmojo.com)

### Objectives of the Trial Balance

There are various objectives for preparing Trial balance which is mentioned below:

• To have balances of all the accounts of the ledger to avoid the necessity of going through the pages of the ledger to find it out.
• To have material for of the organization.
• To have the arithmetic accuracy of the books of accounts because of the trial balance agreement.
• To prove that each transaction double-entry has been recorded because of its agreement.
• To guide in the identification of errors.

### How to Prepare a Trial Balance?

The following methods can be used to prepare Trial Balance –

• Total method. This method states that each account’s total debit and credit amount are displayed in the two columns of amount against it, i.e., one for and another for the credit balance.
• Balancing Method. In this method, the difference of each amount is taken out. If the debit balance is more significant than the credit balance, the difference is put in the debit columns.

Of the two methods of preparation mentioned above, the balance method that is the second one is usually used in practice because it facilitates the preparation of financial statements.

The following are steps necessary to take for the preparation of the trial balance.

• At the end of the accounting year, all the accounts and ledgers are to be closed.
• Closing balances of the ledger are to be posted.
• Errors are to be identified.
• A is to be generated temporarily to tally the total trial balance until the correction entries are made.
• Adjustment entries are required at the end of the year, which are not previously accounted for in the incorporation of trial balance.

### Errors in Trial Balance

The correspondence of trial balance is not stated as definite evidence for the absolute accuracy of the books. It only indicates the mathematical precision of the books of accounts. The Trial balance may agree, and yet there may be some errors of the following types remaining undisclosed.

• An error of omission – If the entry has not been recorded in a subsidiary book, the debit and credit would be omitted. And the trial balance agreement will not be affected in any way.
• Compensating errors – These are the errors that compensate themselves in the net result.I.e., Over debit or under the credit of various accounts being neutralized by over credits or under the credit to the same extent as other accounts. For example, the posting of \$ 500 on the debit side of a certain account would be compensated by under posting of \$ 100 on the credit side of another account and omission of credit posting of \$ 400 to a third account. This error may also be neutralized by over-posting \$ 500 on the debit side in some other account or accounts.
• Errors of principle – These errors will not affect the trial balance agreement as they arise from the debiting or crediting of wrong heads of accounts, as would be inconsistent with the fundamental principles of double-entry accounting. For example, \$ 1,500 spent on the extension of the building wrongly debited to the repairs account instead of the building account will not affect the agreement of the Trial Balance. Thus, such errors arise whenever an asset is treated as an expense, liability as income, or vice versa.
• A wrong entry in a subsidiary book – If a credit purchase of \$ 450 from James is wrongly written as \$ 540 in the purchase book, such an error will not be disclosed. The posting on both the debit side of the purchase account and the credit side of the account of James will be with the wrong amount of \$ 540, so the trial balance will agree.
• Posting an item to the right side but in the wrong account – If a purchase of \$ 100 from Carl James has been credited to Mathew Woods instead of Carl James, it will not detect such an error.

There are the following errors that are disclosed due to the disagreement.

• A particular from a subsidiary book into ledger omitted to postFor example, a purchase of \$ 500 from Anthony omitted to be credited to his account. As a result of this error, the figure of the sundry creditors to be shown in the trial balance will reduce by \$ 500, and the credit balance will be \$ 500 less as compared to the debit balance, respectively.
• Entry of incorrect amount in ledger statementFor Example, a credit sale of \$ 1000 to Anya wrongly posted her account at \$ 100. The effect of this error will be that the figure of sundry debtors will be reduced by \$ 900, and the total of the debit side of the trial balance will be \$ 900 less than the credit balance.
• Entering an amount to the wrong side of the ledger statementFor example, that \$ 10 discount allowed to a customer wrongly posted to the credit instead of the debit side of the discount allowed. Due to this outcome of an error, in the trial balance, the credit side will exceed \$ 20. That is, the error amount is doubled.
• Incorrect inclusion towards ledger accountsFor example that is, at the end of the financial year, while tallying the capital account, the credit amount of \$ 9,900 wrongly taken as \$ 8,900; As a result of this error, the credit side total of the trial balance will be \$ 1,000 short.
• Wrong totaling of subsidiary books – For example, a Sales book is overcast by \$ 50. Due to the outcome of this type of error, the credit side in the trial balance will be \$ 50 to become higher because the sales account will appear at a higher figure on the credit side in the trial balance.
• Double posting of an item in the subsidiary book to aThat is a payment of \$ 500 to a creditor entered twice to his account.
• Amount omission of an account in the trial balance – The bank and cash balances may have been omitted.
• Balance of various accounts incorrectly postedFor example, a balance of \$ 52 in a stationary account was wrongly posted as \$ 25.
• Some account balances entered to the incorrect sideThe balance of commission earned account was wrongly mentioned to the debit account instead of the credit account.
• The wrong summed up of the trial balance will bring disagreement.

### Location of Errors

Whenever there is disagreement, significant steps must be taken to locate the reason for differences:

• Rechecking the totals and discovering the actual amount of difference.
• The difference in the total amount will be divided into two, and find out if there is any balance of the same amount in the trial balance. It may be that such a balance might have been recorded on the wrong side, thus causing the difference of double the amount.
• If the steps mentioned above do not locate the mistake, then the difference in the trial balance should be divided by 9. If the difference is even divisible by 9, the error may occur due to transposition or transplacement of figures. Transposition occurs when 54 is written like 45 or 98 as 89. A transplacement occurs when the numbers’ digits are moved to the left or right. That is when \$ 5 450 is written as \$ 54. 50. If there is a transplacement or transposition of figures, the search can be narrowed down to numbers where these errors might have been made.
• Verify that each balance of all accounts, including cash and bank balances, has been involved.
• Verifying the opening balances has been brought forward in the current year’s account.
• If the dissimilarity is a huge amount, collate the trial balance of the current year with that of the previous year and look out if the numbers under similar account heads are very near the same as those of the previous year and whether their balances fall on the same side. If the difference between the years is huge, establish the cause of the difference.
• If the steps mentioned above fail to detect the error following steps are taken to check:
• Check the totals of the subsidiary books.
• Check the posting made from the journal or subsidiary books in the ledger.
• Verify the balances pulled out from the ledger.
• The balance list will be re-casted.

If all these efforts fail to locate the errors, all the books of prime entry must be cast, and posting to the ledger should be rechecked.

### Suspense Account and Trial Balance

If it is impossible to locate the errors despite the above steps, the difference in the trial balance is transferred to the suspense account, and it is thus tallied. The suspense account will be eliminated when all errors are located. Later, when errors occur, they can be rectified through the suspense account.

Example: The following trial balance has been prepared.

### Limitations

• It can be prepared only in those concerns where the accounting system is adopted, which is not helpful in the single entry system. This double-entry system basis is costly and cannot be adopted by small concerns.
• Though the trial balance provides arithmetic accuracy of the books of accounts, certain errors are not disclosed. Due to this reason, it is said that trial balance is not conclusive proof of the books of account accuracy.
• If the accurate trial balance is not prepared, then the will not review the statement of affairs of the organization free from material misstatement. Whatever the various groups of persons make, conclusions and decisions will not be correct and accurate and will mislead such persons.