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Trial Balance

What Is Trial Balance?

A trial balance is a worksheet that lists the balances of all the general ledger accounts during a certain period. A trial balance statement includes all major accounts such as assets, liabilities, revenues, expenses, profits, and losses. 

A trial balance is not a formal document. It is essentially a self-checking statement that allows an accountant to check whether the debit side entries equal the credit side entries. It is periodically produced to ensure that the entries in a company’s accounts are correct.

How Does a Trial Balance Work

Every transaction of a company is recorded using the double-entry method of bookkeeping. The double-entry method involves entering every financial transaction into two equal and opposite columns to balance the account. However, a trial balance does not use the double-entry system of accounting.

If the debit column is equal to the credit column, the trial balance is considered to be correct. This means that there are no errors in the accounting ledgers. However, this is not a foolproof method to ensure there are no errors. Sometimes, transactions might be recorded incorrectly, recorded twice, or missed altogether. Therefore, even if a trial balance is correct, it is mandatory to check every ledger.

A trial balance ensures that the transactions are tallied on both sides of a ledger. It is prepared just before the final account statements and provides the foundation for them.

Why is a Trial Balance Used?

A trial balance is used to provide a quick overview of all the ledgers. As the trial balance displays the total amount in a particular ledger, you can save some time by not having to check the ledger. 

A trial balance is also useful to quickly recognise and remedy errors in the ledgers. It is also used to check whether there are any arithmetical mistakes in the ledgers.

Limitations of a Trial Balance

Though a trial balance is extremely beneficial while preparing financial statements, it has some limitations too. 

Even if the trial balance is correct, some transactional entry issues in the ledgers may exist, such as missing entries or double entries. Hence, it is necessary to check the ledgers thoroughly even if the trial balance matches.

Types of Trial Balance

There are three types of trial balance according to the different stages of accounting. They are:

  1. Adjusted trial balance
  2. Unadjusted trial balance
  3. Post closure trial balance

What Entries are Included in a Trial Balance?

A trial balance includes the total of all general ledger accounts. It includes an account number, the name and description of the account, and the amount under each type of balance. It also has the final date of the accounting period of the report. 

A trial balance is different from the general ledger. The general ledger shows all the transactions by account, while a trial balance shows only the net amount, not every separate transaction.

If any adjusting entries are made, they are shown on the trial balance. It shows the figures before adjustment, adjusting entry, and balances after adjustment.

Rules to Follow While Drawing Trial Balance

You must follow these rules while drawing a trial balance:

  1. List the liabilities on the credit side and the assets on the debit side.
  2. List the incomes and profits on the credit side of the trial balance.
  3. List the expenses and losses on the debit side of the trial balance.

Requirements for a Trial Balance

All business transactions are recorded in the general ledger. Depending on the transactions, the entries in the ledger are made in the credit or debit columns during a certain financial period. 

Some accounts may list multiple transactions. The ending balance of each ledger is the net amount of all the debits and credits that have been recorded in that account. The accounts of assets, expenses, and losses are recorded in the debit balance and liabilities, gains, and incomes are recorded on the credit side.

When the financial statements have to be prepared, the trial balance contains the debit amounts on the left side and credit amounts on the right side, with the account titles and account numbers on the far-left columns.

How to Prepare a Trial Balance

You can prepare a trial balance using two methods:

  1. Balance method

In this method, the net balance of a ledger is entered in the trial balance. It may be a debit balance or credit balance. This trial balance can be made only if the account ledgers are balanced. So, this is a more accurate method of preparing the final trial balance.

  1. Totals method

In this method, the net amount on the credit and debit sides of the account is recorded in the trial balance. This method is used to reduce arithmetical errors. However, there is the problem of duplication or missed transactions in this method, thus leading to more errors.

Here are the steps to prepare a trial balance:

Step 1: Understanding the Golden Rules of Accounting

The Golden Rules of Accounting are an extremely vital part of preparing a trial balance. These rules help you understand which transactions need to be debited and which need to be credited and under what rule. Understanding the Golden Rules of Accounting is the basis for a correct trial balance and financial statement.

Step 2: Passing the journal entries

When a transaction is entered in the debit or credit section, it needs to be passed as a journal entry. The collection of journal entries gives the total balance of the transactions. If you are using software such as Tally ERP 9, the journal entries are automatically passed when you input the amounts.

Step 3: Posting the entries

When the journal entries are passed, you must post them in the ledgers. Each account has a different ledger and thus, each transaction should enter the particular ledger. If you are using the Tally ERP 9 software, the journal entries automatically enter the respective ledgers. Otherwise, you have to enter them manually.

Step 4: Recording the trial balance

The ledger entries then get recorded in the trial balance. If there are no errors in the entries, the trial balance will show equal amounts. If there is any difference between the accounts, you must record the error amount in the suspense account.

Errors in Trial Balance

Every transaction must be debited and credited using the three Golden Rules of Accounting. This is necessary for the accounts to tally. However, the accounts may not balance even if the trial balance is the same.

  • Omission errors

When a transaction is not entered in the ledger at all, it will not be recorded in the trial balance and a trial balance only checks the net amounts.

  • Commission errors

When a transaction is recorded with incorrect values, the error is called a commission error. For example, a transaction conducted for INR 1,000 is recorded as INR 10,000.

  • Principle errors

This error happens when a transaction is recorded in a different set of accounts than it usually should. For example, if a rent transaction is recorded in the Expenses account rather than in the Nominal account.

  • Compensating errors

This error occurs when one error compensates for another. For example, if you have a transaction of INR 1,000 in one account but you entered it in another account.

  • Entry reversal

This error happens when the transactions are recorded on the wrong side of the ledger. For example, the company borrows INR 5,000 from A, but INR 5,000 is written on the credit side in the cash account.

  • Transposition errors

This is a very common mistake that happens when the numbers in an entry are transposed. For example, a transaction of the amount INR 2,345 is entered as INR 2,435.

Incorrect Trial Balance

For a trial balance to be correct, both sides need to be balanced. If both sides of a trial balance are not the same, it might be due to the following reasons:

  • When only one part of a transaction is recorded

Every transaction has to be recorded in two opposite columns using the Golden Rules of Accounting. If a transaction has been recorded only on one side without its corresponding entry on the other side, the trial balance shows an error.

  • Inaccurate tallying

If the closing balances of the previous financial period have not been tallied correctly, the trial balance will show an error.

  • Mismatched values

If the values in the trial balance are different than that in the ledger, it leads to an incorrect trial balance. For example, if the ledger entry is INR 5,000, but the trial balance entry is INR 500, it will lead to an error.

  • Incorrect entries

If the values of a transaction are entered in a different ledger than the one they should be entered in, the trial balance shows an inaccuracy. For example, while buying an asset, the value is entered in the debit side of a revenue ledger than in the asset account.

Other Important Aspects to Remember While Preparing Trial Balance

  1. All the accounts – personal, nominal, and real – are considered in a trial balance.
  2. If there is no entry in a ledger, it is not considered in a trial balance.
  3. The purchase ledger has a debit balance and is written on the debit side of the trial balance.
  4. The incomes ledger has a credit balance and is written on the credit side of the trial balance.
  5. Returned items from purchase and sales are entered separately in the trial balance and are reduced from the purchase or sales ledgers respectively.
  6. The opening stock figure is obtained from the profit and loss account statement. 
  7. All expenses appear on the debit side of the trial balance.
  8. All revenues appear on the credit side of the trial balance.
  9. The debits and credits must be equal to each other after all the entries are made.

How to Make Entries in a Trial Balance

The trial balance is the foundation for preparing the final financial statements that show the company’s performance. Here is how you can make entries in the trial balance:

  1. Prepare the ledger accounts with all the accounts in each ledger. 
  2. Enter the closing balances of each account in the trial balance in the debit and credit columns accordingly.
  3. Calculate the total debit and credit balances.
  4. If all the entries are correct, the trial balance should have the same values under the debit and credit sides.
  5. If both sides are unequal, you must check the accounts thoroughly to locate the error.

Example of a Trial Balance

A trial balance can be in two formats:

  1. Journal format

This is similar to a journal entry. In this format, the amounts are displayed with the serial number, account name, ledger folio, and whether the amount is under credit or debit.

  1. Ledger format

This format is similar to a ledger entry and balances the two sides of debit and credit. The format displays the name of the ledger and the net amount of the account.

Trial Balance for Company ________ Ltd. as of DD/MM/YY
Accounting ParticularsDebitCredit
Bank Balance5.000
Loan from Bank10,000
Profit and Loss20,000
Capital Account2,00,000
Office Property1,40,000
Advance Salary5,000

The debit side of the trial balance has:

  1. Assets – Tangible and intangible assets including building, capital, inventory, machinery, etc.
  2. Receivables – Debts and bills to be received
  3. Expenses – Salaries
  4. Losses – Losses in sales, other losses including depreciation
  5. Purchase account

The credit side of the trial balance has:

  1. Liabilities – Loans, bank credits, and other payable expenses
  2. Payables – Credits and bills to be paid
  3. Revenue – Capital, investments, sales revenue, etc.
  4. Profit – Profit on sales of assets such as machinery, land, building, etc.
  5. Reserves – These include all the backup reserves and insurance

FAQs about Trial Balance:

When is the trial balance going to be prepared?

Every accounting period ends with a trial balance preparation.

What is the double-entry method of bookkeeping?

A double-entry method of accounting is one in which a single entry is made in two different and opposite columns using the Golden Rules of Accounting.

Where can I get the opening stock amount for preparing a trial balance?

You can get the amount from the profit and loss statement.

Do we need to carry the assets and liabilities balance in the trial balance?

Yes, the assets and liabilities balances are carried forward to the next year. So, they need to be included in the trial balance.

Which account balances are not carried forward?

Expense and income accounts are closed at the end of a financial period and are not carried forward.

Is a balance sheet the same as a trial balance?

No, both are different. While both are used to check accounts for a particular period, the trial balance contains the balances from the balance sheet and profit and loss statement. On the other hand, a balance sheet is one of the main financial statements of a company.

Why do the debit and credit sides of a trial balance differ?

The debit and credit sides of a trial balance should be the same. If they differ, it could be due to:
- Incorrect entries
- Mismatched values
- Only one side of a transaction is entered
- Inaccurate tallying

What is a suspense account?

If the debit and credit sides of a trial balance do not match, the difference between the two sides is calculated and is placed in the suspense account. It is a temporary account to place the difference until the ledgers are checked and tallied.

In the trial balance, what does the suspense account represent?

The suspense account is used to express the difference between the debit and credit columns.

What accounts are excluded from the trial balance?

Closing inventory, opening cash, and opening bank deposits.