The statement which is prepared at a particular date with the ledger account balances to test the arithmetical accuracy of the ledger accounts and also to facilitate preparation of financial statements is called a trial balance.
It is to be noted that trial balance is not an account; it is a mere a statement.
A trial balance contains the columns – serial number of ledger accounts,
Account titles, Ledger folio, debit balance, and credit balance.
If a trial balance agrees i.e. a total of debit money column and a total of credit money column are equal, it proves that the ledger accounts are arithmetically accurate.
The famous writer R.N. Carter says;
A trial balance is a schedule or a list of balances both debit and credit extracted from the accounts in the ledger and including the cash and bank balances from the cash book.
According to J.R. Batliboi,
A trial balance may be defined as a statement of debit and credit balances extracted from the ledger with a view to testing the arithmetical accuracy of the books.
Characteristics of Trial Balance
It appears from the definitions of trial balance that the trial balance contains the following features;
- The trial balance is neither an account nor a part of it. It is a statement containing all balances of ledger accounts.
- It is not recorded in any book of account. The trial balance is prepared in a separate sheet or paper.
- The trial balance is prepared with the balances of accounts at the end of a particular accounting period. A trial balance is prepared before the preparation of financial statements at the end of the accounting period.
- The statement contains all kinds of accounts, irrespective of their classifications, such as assets liabilities, income-expenses etc. It helps to test the arithmetical accuracy of accounts.
Objects of Trial Balance
Although trial balance is not an account, it is prepared to fulfill the following objects;
- The main object of the trial balance is to proof the arithmetical accuracy of accounts.
- It is prepared to check whether the debit and credit accounts of each transaction have been recorded properly.
- For the convenient preparation of financial statements, the trial balance is prepared to bring debit and credit ledger balances together.
- To proof accurate balancing of a ledger account.
- To detect mistakes in the process of accounts, if any.
- To provide information to the proper authority in time.
- To compare the balances of various ledger accounts of the current year with those of previous year.
Why do both Sides of Trial Balance Agree
According to double entry system every transaction is recorded in journal debiting one account and crediting the other for the same amount of money with an explanation.
At the time of posting of the transaction from journal to ledger debit account of the journal is debited in the same account and credit account of the journal is credited in the same account in the ledger.
As a result, a total of debit balance of ledger accounts becomes equal to the total credit balance of ledger accounts.
Therefore, According to double entry principle;
If all correctly drawn ledger accord balance is recorded in trial balance in debit and credit money columns properly, the totals of both columns of trial balance become equal.
Preparing Trial Balance From Journal and Ledger (How To)
To prepare a trial balance, first, we need to know to make sure the transactions are journalized and have been posted to ledgers.
The final balance from the ledger needs to be properly placed on the debit and credit column while preparing the trial balance, to make sure the accounting process is correct.
How to Prepare a Trial Balance
Business transactions are first recorded in the journal and thereafter these are posted in the ledger under different heads of accounts.
It may be mentioned that transactions may directly be posted in the ledger accounts without recording them in the journal.
At the end of a particular accounting period, a trial balance is prepared in a separate sheet of prescribed form recording debit ledger balance, in debit column and credit ledger balances in credit money column.
Besides ledger balances, cash balance and bank balance of cash book of that particular date are also included in the trial balance.
Thereafter total of debit and credit money columns of a trial balance is calculated. Agreement of trial balance is the conclusive evidence of the accuracy of the ledger and trial balance.
The format for Preparing Trial Balance
A short description of the format of the trial balance is given below:
- Titles: In the middle of the format name of the company, the trial balance and date of preparation are written.
- Accounts serial number: In this column, the serial numbers of ledger accounts are written.
- Account Titles: The serial number of that account of the ledger which has been written in the first column, the full title of that account is written in this column. For example, Capital account, Furniture account, Cash account etc.
- Ledger Folio: The number of the ledger page from where ledger balances are brought is written in this column.
- Debit balance: All debit balances of ledger accounts are written in this column.
- Credit balance: All credit balances of ledger accounts are written in this column.
Ledger Account Balance and Trial Balance
Rules for recording debit ledger account balances and credit ledger account balances in debit money column and credit money column of trial balance in absence of ledger account:
| Ledger account balances to be recorded in debit money column | Ledger account balances to be recorded in credit money column |
| All assets Land, building, leasehold property, machinery, furniture, investment, notes receivable, accounts receivable, cash, stock, goodwill, patents, trademarks, etc.. | External liabilities The loan, mortgage loan, accounts payable, notes payable, debenture, bank overdraft, etc.. |
| All expenses Wages expense, salary expense, supplies expense, advertisement expense, rent expense, repair expense, interest expense, commission expense, depreciation expense, bad debt expense, discount expense, Items for which payment is made: Owner’s goods withdrawal, merchandise purchase. | All Incomes Rent revenue, discount income, interest income, apprenticeship premium income etc.. |
| Prepaid expense Prepaid insurance, prepaid rent, prepaid advertisement, salary advance etc.. | Expense payable Salaries payable, rent payable. |
| Accrued income Interest on investment accrued, interest on bank balance accrued, interest accrued on notes receivable and accounts receivable. | Losses Cash lost, goods lost etc. |
| Unearned income Unearned rent, unearned premium, etc.. | All types of reserves and provisions General reserve, provision for doubtful debts. Provision for discount on accounts receivable, etc.. |
| Other items Sales return, reserve for, discount on accounts payable. | Other items Purchase return, capital, bad debt recovered. |
Important to remember:
- Opening cash and bank balance is not shown in the trial balance as these are included in closing cash and bank balances.
- Closing stock is not shown in the trial balance because this remains included with opening stock and purchase of the accounting year. But if opening stock and purchase remain absent in trial balance and adjusted purchase is shown in the trial balance, in that case, the closing stock is shown in the debit money column of the trial balance.
