A trial balance is an accounting or bookkeeping report that lists balances from a company’s general ledger accounts. The debit balances ‘and the credit balances are listed under their respective fields. The sum of these columns should be the same.
The preparation of trial balance occurs periodically, mostly at the end of every accounting period. The primary purpose of producing this statement is to confirm that there are no unequal journal entries in the books which can hamper the process of preparing any financial report.
Trial balance helps a company to detect if there are any mathematical mistakes in their double-entry accounting system. In a trial balance statement, where the debit and credit side of it is equal, it is considered balanced. Additionally, it ensures that there are no errors in the ledger. However, this does not qualify that it is free of mistakes. For instance, improper entries and missing entries from ledgers are still considered accounting errors that are not detected by a trial balance.
Auditors often ask for the annual trial balance before commencing their audit. It helps them to transfer the account balances to their software. Furthermore, they may even ask for an electronic version to make this copying process easy and time-saving.
A trial balance example is –
How to Prepare a Trial Balance
The preparation of trial balance initially requires closing balances of general ledger accounts. A trial balance is prepared after entering every financial transaction into the journals and then concisely mentioning them on ledger statements. After this follow the below-mentioned steps to make a trial balance –
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Before commencing, you need to ensure that all ledger accounts are balanced. It requires adding up debit entries and credit entries and finding the difference between them.
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Prepare a worksheet with headers like account name, number, debit and credit balances.
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Fill up this worksheet by transferring the data from ledger accounts. Enter the data in their respective columns accurately.
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After finishing the entries, add up the amounts of debit and credit columns. In case, the total on both sides are the same; it creates an error-free balance.
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In case of a difference in debit and credit balance, you have to find out the mistake and then rectify it.
While preparing a trial balance, you need to ensure that you have all of the material that is required to prepare the same. It is also a must for you to make sure that all the ledgers are balanced out. This enables you to get only the final amount in the Trial Balance and match the credit and debit side.
Various mistakes might be made while preparing a trial balance. Some may even be made before the trial balance preparation. Whatever might be the case, you must ensure that all the errors are rectified in time. This way, all the amounts will be ready to be used further in the various financial statements shortly.
Convenience of Auditors
Trial balances are prepared not only to check the assets and liabilities. These are also prepared for the auditors to check and copy-paste the content into their system. This helps them analyze the details before they check out and audit the books of a business.
Mistakes to Avoid
Here are some common mistakes that everyone makes while preparing a trial balance –
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Double entries
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Omitting entries
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Entering details in wrong accounts or columns like entering details of the debit account in credit and vice-versa.
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Making transposition errors
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Mistakes made while transferring the data from ledger to trial balance statements
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Making miscalculations while balancing an account
A trial balance format is given below for a better understanding
Rule of Trial Balance
The trial balance rules that you have to follow while preparing one is –
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All assets must be on the debit side
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All expenses and losses must be on the debit side
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All liabilities must be on the credit side
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All income and gain must be on the credit side
Trial Balance Items List
The list of debit and credit items in the trial balance is as follows –
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The debit side of it will feature entries from accounts like assets, drawings accounts, expense accounts, cash balance, bank balance, losses, purchases, and sundry debtors, among others.
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The credit side of it will feature entries from liabilities, capital accounts, income accounts, sales, sundry creditors, gains and reserves.
Methods of preparing a Trial Balance
There are two chief methods of preparing trial balance, these are –
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Total method: Here, entries from each debit and credit side are summed up and then placed at the bottom of each side. The total of each column should be the same.
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Balance method: Here, the balances of every ledger accounts are presented in the trial balance.
Advantages of Trial Balance
The benefits of trial balance are –
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Arithmetical Accuracy: Trial balance indicates the arithmetical accuracy of the accounts of a company. Due to the double-entry system, every transaction has two equal yet opposite entries at every step. Hence, at every point, the debit side must match the credit side. Moreover, the trial balance lists accounts as per date.
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Comprehensive: Trails balance is technically a summary of all ledgers. Hence, it offers a more holistic view of a company’s accounts and transactions within a specific period.
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Prerequisite for Preparing Financial Statements: Every company needs to know its financial status at the end of a fiscal year, and trial balance is quintessential in that respect. It streamlines the process of preparing other financial statements. Shareholders of a company often ask for it as it offers a comprehensive study of the accounts of a company.
Preparing trial balance is essential for every company whether it is small or big, and for commerce students, it is a vital chapter. Apart from knowing the preparation of trial balance and other aspects of it, students can visit the official website of to learn more on different subjects of commerce.