Definition and Explanation:
Having posted all the transactions into the ledger, it is necessary to check the correctness of the work done before proceeding further. In order to test the arithmetical accuracy of our ledger we should prepare a statement called trial balance.
A trial balance is a statement prepared by taking out the debit and credit balances of all accounts appearing in the ledger.
Objectives and Advantages of Preparing a Trial Balance:
The following are the main objectives of preparing a trial balance.
- Trial balance helps in knowing the arithmetical accuracy of the accounting entries. Trial balance represents a summary of all ledger balances and, therefore, if the two sides of the trial balance tally, it is an indication of this fact that the books of accounts are arithmetically accurate.
- Trial balance forms the basis for preparing financial statements such as income statement / Trading and profit and loss account and balance sheet. In case, the trial balance is not prepared, it will be almost impossible to prepare the financial statements.
- The entire ledger is summarized in the form of a trial balance. Thus the position of a particular account can be judged simply by looking at the trial balance.
Proof of Accuracy:
If the debit and credit totals of the trial balance are equal and also correspond with the total of journal, we may be satisfied that the posting have been properly made and are arithmetically accurate.
How to Prepare a Trial Balance - An Example:
The trial balance is usually prepared on a loose sheet of paper. The ruling of trial balance is similar to that of a journal. We may prepare a trial balance in one of the following forms:
- Total Trial Balance Method
- Balance Trial Balance Method
Total Trial Balance Method:
According to total trial balance method two sides of each ledger account i.e., debit and credit side are added up and debit and credit totals so obtained are placed in the debit and credit columns of the trial balance respectively. Thus we may draw the following trial balance by taking out the debit side total and credit side total of each account in the ledger (see example of ledger page).
Trial Balance
Ledger Account
| J.F | Total Debits | Total Credits |
Cash Account Sundry Debtors Account Sundry Creditors Account Discount Account Purchases Account Sales Account Machinery Account Building Account Capital Account Rent Account Wages Account Salaries Account | $ 12,453 43,675 23,654 430 26,670 -- 10,000 20,000 -- 3,400 600 1,000 | $ 8,436 34,453 31,298 550 -- 32,145 -- -- 35,000 -- -- -- | |
| 1,141,882 | 1,141,882 |
One clear defect of this method is that mistakes may be committed more often while preparing the trial balance, because large number of figures would be required to be enlisted. Thus, the process becomes unwieldy and cumbrous.
Balance Trial Balance Method:
The task of preparing a trial balance under balance - trial balance method is much simplified. There is well known axiom that if equals are subtracted from equals the remainders are equal. On this assumption, in place of writing against each account the debit as well as the credit total the balance alone is written. The difference between the two sides of an account is called the balance. If the debit side of an account is greater than the credit side, the balance falls on the debit side and is known as "debit balance." If the credit side of an account is greater than the debit, the the balance is on the credit side and is called "credit balance."
Rules of Balancing Accounts: Rules of balancing each account is as follows:
- Add up both sides of the account
- Find out the difference in a separate slip.
- Put the difference on the lighter side.
- Add up both sides again.
- Rule off.
The trial balance prepared above, if prepared with the balance of accounts will appear as under (see example of ledger page):
Trial Balance
Ledger Account
| J.F | Dr. Balance | Cr. balance |
Cash Account Sundry Debtors Account Sundry Creditors Account Discount Account Purchases Account Sales Account Machinery Account Building Account Capital Account Rent Account Wages Account Salaries Account | $ 4,017 9,222 -- -- 26,670 -- 10,000 20,000 -- 3,400 600 1,000 | $ -- -- 7,644 120 -- 32,145 -- -- 35,000 -- -- -- | |
| 74,909 | 74,909 |
The second method has the added advantages and is the one that is generally used. There are comparatively less chances of committing errors. As the magnitude of figures is smaller the process is not cumbrous. It does not appear to be unwieldy. Moreover, in a trial balance, the exact position of any account on the date of trial balance can be determined at a glance.