What is a Trial Balance?
A trial balance is a statement of the balances of all the ledger accounts in a business at a particular time. It is used to check that the total of all the debit balances in the ledger equals the sum of all the credit balances in the ledger. If the trial balance does not balance, there is an error in the ledger accounts.
How do you prepare a Trial Balance?
The general ledger accounts’ closing balances are necessary to produce a trial balance. After recording each financial transaction in the journals and compiling it on the ledger statements, the trial balance is created.
The purpose of the trial balance is to confirm that the debits and credits in the chart of accounts are equal.
Here are a few things you should remember:
- Make sure every ledger account is balanced before beginning the trial balance. The balance is determined by the difference between the total of all debit entries and the total of all credit entries.
- Construct a worksheet with eight columns. Account name, account number, and the associated debit and credit amounts columns should all have column headings.
- Transfer the account name, account number, and account amount for each ledger account to the corresponding debit or credit column on the trial balance worksheet.
- The totals in the credit and debit columns should be added. In an error-free trial balance, the sums should be equal. You can close the trial balance after the totals are equal.
- Accountants must identify and correct any inaccuracies if there is a discrepancy.
Here are some examples of trial balance mistakes:
- Error in account balancing
- Entered the information in the incorrect column, using debit instead of credit or vice versa
- There are two entries of a transaction.
- Mistaken accounts have been used to make entries.
- Mistake in translation
- Absence of entries
- A misstep during the balances’ transfer to the trial balance
- The ledger has the incorrect amount recorded.
What are the methods of preparing Trial Balance?
The trial balance can be created using either of two techniques:
- Total Approach
Ledger accounts’ debit and credit sides are combined. The calculations in the credit and debit columns need to add up to the same amount. In the trial balance, the total of the debit side is put in the debit column, and the sum of the credit side is set in the credit column.
- Balanced Approach
According to the balanced approach, the trial balance only displays the balances of all the ledger accounts.
How are accounts listed in Trial Balance?
The trial balance accounts are listed in a particular order to ease the creation of financial statements.
A trial balance lists the accounts in the following order:
- Assets
- Assets
- Equity
- Revenue
- Expenses
The assets and liabilities must also be listed in order of liquidity, determined by how quickly a purchase may be turned into cash to settle liabilities. First listed are the assets that are the most liquid. Money, as well as current receivables, are included here.
How do you match a Trial Balance?
A trial balance serves to verify that each entry is correctly matched. If the trial balance totals do not match, there may be an accounting issue.
An interim suspense account is set up to temporarily match the trial balance totals until the errors are found and fixed.
Adjusting entries are added to the trial balance after finding errors. The trial balance is therefore treated as an adjusted trial balance.
A periodic trial balance helps a business identify bookkeeping issues. Business owners don’t have to wait until the end of the year to create it and evaluate their financial data.
FAQs on 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.
What is a trial balance example?
The trial balance is a financial report that includes the closing credits of the company's various general ledgers;
For instance, energy expenses for a period include paying four bills totalling Rs 1,000, RS 3,000, Rs 2,500, and Rs 1,500; therefore, in the trial balance, a single utility expenses account will be displayed with the sum of all charges totalling Rs 8,000.
What is the purpose of trial balance?
A trial balance is a statement that lists all of the ledgers accounts for a business and their balances. The purpose of a trial balance is to check the accuracy of the ledger account balances. This is done by taking the sum of all the debit balances and comparing it to the sum of all the credit balances.
Why is it called trial balance?
Your trial balance's debit and credit sides will always include equal amounts, which is why it is called a "trial balance."
Who uses trial balance?
The trial balance spreadsheet is the foundation for accountants when creating financial statements.
What are the rules of trial balance?
- Gains and revenue must be shown on the trial balance's credit side.
- The credit side must include all liabilities, and the debit side must consist of all assets.
- The debit side of the trial balance must represent expenses. Below are the trial balance's guidelines:
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