What is Trial Balance ? | Examples | Steps | Prepare | Errors

What is Trial Balance ? |Examples | Steps | Prepare | Errors – As we know that the basic principle of double entry system of accounting is that for every debit, there must be a corresponding credit. Thus, for every debit or a series of debts given to single or several accounts, there is a corresponding credit or series of debits given to some other account or accounts and vice versa. It follows, therefore, that the sum total of debit amount and credit amount of ledger should be tally for the particular period. But whereas if the various accounts in the ledger are balanced, then the sum total of all debit balances must be tally with the total of all credit balances if the books of accounts are arithmetically accurate and authenticated.

Thus, at the end of the financial year the balances of all the ledger accounts are extracted and 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. A trial balance may also be stated as statement of sum total of debit and credit balances extracted from the various accounts in the ledger with a view to examine the mathematical exactness of the books. The accordance of the trial balance disclose that both the feature of each and every transaction have been recorded and that the books are arithmetically accurate. If the trial balance does not agree, it shows that there are some errors which must be detected and retrieve if the accurate financial report are to be made. Thus, Trial balance provides a bridge relationship to the ledger accounts and the final statement.

In this article, we discuss the details of Trail Balance –

• Objectives of the Trial Balance
• Limitations of the Trial Balance
• Preparing Trial balance
• Steps for Preparing a Trial Balance
• Errors in Trial Balance
• Location of Errors
• Suspense account

Objectives of the Trial Balance

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

• To have balances of all the accounts of the ledger in order to avoid the necessity of going through the pages of the ledger to find it out.
• To have material for preparation of the financial statement of the organization.
• To have the arithmetic accuracy of the books of accounts because of the agreement of the trial balance.
• To have a proof that the double entry of each transaction has been recorded because of its agreement.
• To provide guidance in an identification of errors.

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Limitations of the Trial Balance

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There are various limitations of trial balance which mention below:

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

Preparing Trial balance

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Through the following two methods a trial balance will be prepared:

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

Steps taken for Preparation of trial balance

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

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

Errors in Trial Balance

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The correspondence of trial balance is not stated as a definite evidence as for the absolute accuracy of the books. It only provides an indication of the mathematical accuracy 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 of that transaction would be omitted and the agreement of the trial balance will not be affected in any way.
• Compensating errors – These are the errors which compensate themselves in the net result, i.e. over debit or under credit of various accounts being neutralized by the over credits or under credit to the same extent of some 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 an omission of credit posting of $ 400 to a third account. It is quite possible that 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 vice versa or a liability is treated as an 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 by the Trial Balance. As the posting on both the debit side of purchase account and credit side of account of James will be with the wrong amount $ 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 of trial balance:

• A particular from a subsidiary book into ledger omitted to post – For example, that is 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 of trial balance respectively.
• Entry of incorrect amount in ledger statement – Example, that a credit sale of $ 1000 to Anya wrongly posted her account as $ 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 credit balance of trial 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 error, in 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, that a Sales book is overcast by $ 50. Due to the outcome of this type of error, credit side in trial balance will be $ 50 become higher because sales account will appear at the higher figure on the credit side in trial balance.
• Double posting of an item in the subsidiary book to a ledger account – That 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 in trial balance.
• Balance of various account incorrectly posted in the trial Balance – For example, that a balance of $ 52 in stationary account wrongly posted as $ 25.
• Some account’s balance entered to the incorrect side of the trial balance – 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 of the trial balance.

Location of Errors 

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

• Rechecking the trial balance totals and discover the actual amount of difference in trial balance.
• The difference of the total amount of trial balance will be divided by two and find out if there is any balance of the same amount in trial balance. It may be that such a balance might have been recorded on the wrong side of the trial balance, thus causing the difference of the 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. A transposition occurs when 54 is written as 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 the each balance of all accounts in trial balance including cash and bank balances have 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 alike account heads are very near the same as those of the previous year and whether their balances fall on the same side of the trial balance. If the difference figure of both the years is huge, established the cause of the difference.
• If the above-mentioned steps 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 ledger.
  • Verify the balances pull out from the ledger.
  • The balances list will be re-casted.

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

Suspense account 

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If it is not possible to locate the errors in spite of the above steps, the difference of the trial balance is transferred to the suspense account and the trial balance 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.

Particulars	Debit Balance ( $ )	Credit Balance ( $ )
Cash Account	12,220	0
Capital account	0	45000
Bank Account	14,000	0
Purchase Account	22,000	0
Sales Account	0	12,500
Furniture Account	5,000	0
Returns outwards account	0	1,000
Discount Account	0	20
Drawings Account	1,000	0
Telephone Rent Account	400	0
Stationary account	200	0
Rent account	1,000	0
Salaries Account	2,500	0
Returns inwards Account	200	0
TOTAL	58,520	58,520