What is The Trial Balance ?

What is a trial balance?

          Trial balance is a statement used to check the arithmetical accuracy of the books of prime entry and the ledger accounts.

What is the purpose of a trial balance?

·       It checks the arithmetical accuracy of the ledger.

·       It checks whether the debit side tallies with the credit side. (The reason why the trial balance tallies is because, in the double entry system each transaction is posted twice, one on the debit side and the other one the credit side).

·       It helps to summarise the ledger accounts which helps in the preparations of the final accounts.

 

How is a trial balance prepared?

        Before understanding how a trial balance is prepared, we need to understand when a trial balance is prepared.

A trial balance is prepared at the end of an accounting period. (i.e. every month, quarter, half yearly or every year), (it depends on the management to decide when it has to be prepared).

It must be noted that it is prepared on a particular date and not for a particular period.

So how is a trial balance prepared?

Step one: - balance and close all the ledger accounts.

Step two: - write the account’s name and its balance (debit or credit) in to the trial balance.

Step three: - when you finish writing all the account balances in the trial balance, total the debit and credit side.

*If the trial balance tallies it means that:-

o   The ledger accounts are free from arithmetical errors

o   The ledger accounts are free from some kinds of errors like: - error of transposition, error of omission (one sided), error of commission (one sided).

 But there can be errors like: - complete omission of a transaction, errors of principle, compensating errors etc.

*If the trial balance does not tally it means that: -

o   There are errors in the ledger account and the books of prime entry.

o   There may be errors like compensating errors, errors of principle, errors of transposition, errors of omission, errors of commission.

But this does not mean that the ledger and the books of prime entry contain all the above errors.

Step four:-

ü If the trial balance tallies, you can continue to prepare the final statements of the organisation.

ü If the trial balance does not tally, then find out the errors and correct it by passing a journal entry*.

Correction of errors is a topic for another day (check out my blog list).

Now let’s see what the pro forma of a trial balance look like.

 Pro forma

Name of the account	Ledger folio	Balance Dr	Balance Cr

 

Interesting fact about trial balance: - trial balance is not a part of the double entry system and it does not appear in the actual books of accounts. It is just a working paper.

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