Trial Balance

What is Trial Balance in Accounting?

Trial Balance is the report of accounting in which ending balances of 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 and 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 trial balance (a type of financial report) and finally summed up to see if the total of debit balances and the total credit balances respectively should be tallied. It may also be stated as a statement of the total of debit and credit balances extracted from the various accounts in the ledger to examine the mathematical exactness of the books.

Trial-Balance

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Source: Trial Balance (wallstreetmojo.com)

Objectives of the Trial Balance

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

How to Prepare a Trial Balance?

The following methods can be used to prepare Trial Balance –

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 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.

  • Error of omission – If the entry has not been recorded in a subsidiary book, both the debit and credit would be omitted. And the agreement of the trial balance 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 credit of various accounts being neutralized by over credits or under credit to the same extent of other accounts. For example, under 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 of $ 500 on the debit side in some other account or accounts.
  • Errors of principle – These errors will not affect the agreement of the trial balance as they arise from the debiting or crediting of wrong heads of accounts, as would be inconsistent with the fundamentals principles of double-entry accounting. For example, $ 1,500 spent on the extension of building wrongly debited to repairs account instead of building account will not affect the agreement of the Trial Balance. Thus, such errors arise whenever an asset is treated as an expense or 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. As the posting on both the debit side of the purchase account and 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 correct 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 following errors that are disclosed due to the disagreement.

  • A particular from a subsidiary book into ledger omitted to post – For 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 statement – 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 incorrect side of ledger statement – For 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 by $ 20. That is, the error amount is doubled.
  • Incorrect inclusion towards ledger accounts – Example that is, at the end of the financial year while tallying the capital account, 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 the higher figure on the credit side in the trial balance.
  • Double posting of an item in the subsidiary book to a ledger accountLedger AccountLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read moreThat is a payment of $ 500 to a creditor entered twice to his account.
  • Amount omission of an account in the trial balance –The balances of bank and cash may have been omitted.
  • Balance of various accounts incorrectly posted – For example, that a balance of $ 52 in stationary account wrongly posted as $ 25.
  • Some account’s balance entered to the incorrect side – That is the balance of commission earned account wrongly mentioned to the debit account instead of the credit account.
  • Wrong summed up of the trial balance will bring the disagreement.

Location of Errors 

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

  • Rechecking the totals and discover 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 and so on. A transplacement takes place when the digits of the numbers 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 narrow 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 have been precisely brought forward in the present 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 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 figure of both the years is huge, established 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 pull out from the ledger.
    • The balances 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 not possible to locate the errors despite the above steps, the difference of the trial balance is transferred to the suspense account, and it is thus tallied. Later, when errors occur will be located, they can be rectified through the suspense account. The suspense account will be eliminated when all errors will be located.

Example: The following trial balance has been prepared.

ParticularsDebit Balance ( $ )Credit Balance ( $ )
Cash Account12,2200
Capital account045000
Bank Account14,0000
Purchase Account22,0000
Sales Account012,500
Furniture Account5,0000
Returns outwards account01,000
Discount Account020
Drawings Account1,0000
Telephone Rent Account4000
Stationary account2000
Rent account1,0000
Salaries Account2,5000
Returns inwardsReturns InwardsReturn Inward, also known as sales return, refers to the goods returned to the business entity when the customers find that the goods delivered did not meet their expectations and, therefore, unsatisfactory.read more Account2000
TOTAL58,52058,520

Limitations

Reader Interactions

Comments

  1. AvatarVictor Freeman says

    Briefly explained. Thank you. I have a small query. Is trial balance same as a balance sheet?

    • Dheeraj VaidyaDheeraj Vaidya says

      Thanks. NO! Trial balance and balance sheet are not the same thing. Trial balance includes the closing balances of all the general ledger accounts. Whereas balance sheet includes the upper portion of trial balance, and gives a good deal of information. Trial balance is prepared before the preparation of Balance sheet.

  2. AvatarBlake Nelson says

    Thanks for such a mind-blowing explanation of Trial balance accounting. I want to learn more on Finance and Accounting. Any contact? So that I can connect you directly.

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