Meaning of Trial balance
A Trial balance is an accounting or bookkeeping statement. It records the balances in all of an organization’s general ledger accounts. It is a worksheet presenting all of the credits and debits balances amounts in an account book. The list in Trial balance contains two columns. One is debt balance and the credit balance. While matching all the transactions the debit and credit balance should seem to identical. Trial Balance serves as the first level in the formation of financial statements.
The trial balance resumes being beneficial for accountants or auditors and who prefer to display:
- The general ledger account balances preceding to their recommended modification.
- The recommended modifications and all of the account balances after the recommended changes the balanced amounts proceed up the correct trial balance. The balance amounts utilize in the firm or the organization are financial statements.
The concept of trial balance
When you keep writing every activity taking place in your firm in a journal. At the month-end, you compile your records and sort it into different categories which debit and the credits made in a company. For making a general record of all the transactions you will separate the sections into a particular field in which the transaction suits. Important keywords one should know before preparing a trial balance.
- Record-keeping of a transaction is a Journal entry.
- Compiling the records and classifying the records are Ledgers.
- Framing a worksheet and analyzing the ledgers is a Trial Balance.
A trial balance is a worksheet that records all the balances in a section of debit and credit balances. Proper formatting of trial balance will contain the title of the ledger and the balances. The trial balance frames on an appropriate date in a calendar year or the financial year.
A procedure making a Trial balance
For the preparation of trial, balance at the beginning we enter the transactions in the journal. After that, we record them in the general ledger. Then we make a trial balance as it is the third level in accounting to prove that the debit entries match the credit entries.
Let us take a look at the measures in the formation of trial balance:
- Step 1
To make a trial balance we require the closing balances of all the cash book, ledger accounts, and the bank book. It’s important for making a trial balance that all ledger account need stay equal. Balancing is the contrast between the amount of all the credit and the debit entries. Prepare a worksheet with three columns. The first column for the account name and the identical columns for debit and credit balances.
- Step 2
Fill in all the account title and post their balances in the relevant credit or debit columns.
- Step 3
Then we calculate both the credit line and the debit line. It’s mandatory that the total of both lines would be the same.
- Step 4
When you compare both the debit and credit columns. They will match and you can close your trial balance.
Mistakes one can make while preparing a trial balance
While preparing a trial balance many times it doesn’t match. The reason could be the mistake in the journal book or accounting the ledgers. If there is a contrast in the trial balance. We seek, locate, and improve errors. Here are some facts that generate mistakes in the trial balance.
So let us explore the mistakes one can make during the preparation of trial balance :
- Even there can be a mistake in balancing an account.
- The incorrect amount or transaction mentioned in the ledger
- An error in transporting the balances of journal and ledgers to the trial balance.
- Errors are made in the part of the subsidiary book or journal.
- Executed the entry in the faulty column. For example: instead of credit the account debit the account or vice versa.
- Fault in the sum of Subsidiary books.
- Dropping an account balance in the Trial Balance.
Uses of Trial balance in accounting
- The balance of total accounts displays in one place. Thus it is the summary of all accounts and there is an efficiency of posting corrections.
- The trial balance Support in Providing financial Statements as the Balance Sheet, Cash Flow Statement, and profit and loss Account requires to be made at the closing accounting year. The balances of total ledger accounts use to serve financial statements. They are now open in the trial balance and so, it affects the formation and review of financial statements natural.
- The trial balance supports audits. Trial Balance provides a record of each ledger including balances for the objective of the audit the trial balance that is examined.
- The main use of trial balance is it helps in Judgment the budget. We can compare the trial balance with the help of the past balances with ledger balances.
- The trial balance helps in controlling Arithmetical efficiency. That means trial balance is used to check the actual amount entered the incorrect side of the current account while transferring the illustrations from various ledger books like sales book, purchase the book, cash book, and many more. Trial Balance apart from general ledger accounts is also helpful to examine the sharpness of specific purpose accounting books.
Points in preparation of trial balance
While building trial balances we need to take care of the following points :
- The following balances are stored on the credit column of the trial balance.
- capital account
- income account
- The following balances are stored on the debit column of the trial balance.
- bank balance
- drawing account
- cash balance
- expenses account
Trial Balance is a record of closing balances of ledger accounts on an appropriate date and is the prime level towards the formation of financial statements. It is ordinarily provided at the end of an accounting period to support the financial statement. Ledger balances are separated into credit balances and debit balances.
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