Financial Accounting Concepts

Methods of Preparing a Trial Balance

A trial balance lists all debits and credits in your accounting system. The total of debits must equal the total of credits.

It’s an excellent tool for understanding your financial position because it gives you an easy-to-digest snapshot of what’s going on in your entire company. A trial balance is a financial statement that shows a company’s financial position at the end of each accounting period. It includes items such as cash, receivables, and inventories.

After all monthly transactions have been reviewed, journalized, and updated continuously throughout the accounting period (a month in our example), we may begin creating a trial balance (unadjusted). Preparing a trial balance without adjustments is the fourth phase in the accounting cycle.

Types of Trial Balance

In accounting, there are three kinds of Trial balances. They are:

Unadjusted Trial Balance

It only denotes the preparation of a trial balance prior to entering the correcting entries into the books of accounts. It is formulated before any modifications are made and before the ledger account balances are retrieved. Because this is not the final version of the data, it cannot be utilised to generate the financial statements because there may be revisions that need to be made.

Adjusted Trial Balance

It indicates that a trial balance is generated after correcting entries have been made in the books of accounts. Adjustments are made to ledger accounts, resulting in the entry of adjusting entries to correct mistakes, and any omitted transactions are recorded. It contains the final corrected balances. Consequently, it may be utilised to create financial statements.

Post Closing Trial Balance

It indicates that a statement is created after the closing entries have been finished in their entirety. After closing entries have been made in the books of accounts, it is produced by taking the ledger account balances and preparing them separately. This statement serves as the beginning trial balance that may be applied to the following fiscal year.

Methods of Preparation of Trial Balance

There are three methods of preparation of trial balance: Total method; Balance method, Total and balance method

Now we shall understand each method in detail with logic and illustration as follows:

Total Method

Under this method, every ledger account is totalled, and that total amount (both on the debit and credit sides) is transferred to the trial balance. This method can prepare the trial balance as soon as the ledger account is totalled.

Time taken to balance the ledger accounts is saved under this method as the balance can be found out in the trial balance itself. The difference of totals of each ledger account is the balance of that particular account. This method is not commonly used as it cannot help in the preparation of the financial statements

Suppose the following ledger balances are provided to us, and we have to prepare a trial balance:

cash account

Bank A/c

Dr.Cr.
DateParticularJ.F.$DateParticularJ.F.$
 Jan 1To balance b/d 20000Jan 31By Balance c/d20000
2000020000
Feb 1To balance c/d20000

Stock A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 1To balance b/d 20000 Jan 31By balance c/d20000
2000020000
 Feb 1To Balance b/d20000

Building A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 1To balance b/d10000 Jan 31By Balance c/d 10000
10000 10000
 Feb 1To Balance b/d 10000

Rita A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 1To balance b/d 2000 Jan 31By Balance c/d2000
20002000
Feb 1To Balance b/d2000

Albert’s A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 31To balance c/d 5000 Jan 1By Balance b/d5000
50005000
 Feb 1By Balance b/d5000

Capital A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 31To balance c/d55000 Jan 1By Balance b/d 55000
 55000 55000
 Feb 1By Balance b/d55000

Purchase A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 1To cash A/c 3800 Jan 31By balance c/d 4000
To Discount A/c200
 4000 4000
Feb 1To balance b/d4000

Discount A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 1By Purchases A/c200
Jan 31To balance c/d200
 200200
Feb 1By Balance b/d200

Plant A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 8To Michael A/c5000Jan 31By Balance c/d5300
 Jan 8To Cash A/c300
5300 5300
Feb 1To Balance b/d5300

Michael’s A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 31To balance c/d5000 Jan 8By plant A/c5000
 50005000
 Feb 1By balance b/d5000

Sales A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 31To balance c/d1600 Jan 12By Robert600
 Jan 18By Cash1000
 16001600
Feb 1By Balance b/d1600

Robert’s A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 12To Sales A/c600 Jan 15By Cash A/c300
Jan 15By Bad Debts A/c300
 600600

Bad Debts A/c

DateParticularJ.F.$DateParticularJ.F.$
 Jan 15To Robert300Jan 31By Balance c/d300
 300 300
 Feb 1To balance b/d300

Solution

Trial Balance

Sr. No.Name of AccountTotal DebitTotal Credit
1Cash93004100
2Bank20000
3stock20000
4Building10000
5Rita2000
6Albert5000
7Capital55000
8Purchase4000
9Discount200
10Plant5300
11Michael5000
12Sales1600
13Bad Debts300
7090070900

Balance Method

Under this method, every ledger account is balanced, and those balances only are carried forward to the trial balance. This method is commonly used by accountants and helps in the preparation of financial statements. Financial statements are prepared on the basis of the balances of the ledger accounts.

Trial Balance

Sr. No.Name of Account Debit Balance Credit Balance
1Cash5200
2Bank20000
3stock20000
4Building10000
5Rita2000
6Albert5000
7Capital55000
8Purchase4000
9Discount200
10Plant5300
11Michael5000
12Sales1600
13Bad Debts300
6680066800

The Total and Balance Method

Under this method, the above two explained methods are combined. Under this method statement of trial, balance contains seven columns instead of five columns.

Trial Balance

Sr. No.Name of AccountTotal

Debit

Total

Credit

Debit

Balance

Credit

Balance

1Cash930041005200
2Bank2000020000
3stock2000020000
4Building1000010000
5Rita20002000
6Albert50005000
7Capital5500055000
8Purchase40004000
9Discount200200
10Plant53005300
11Michael50005000
12Sales16001600
13Bad Debts300300
70900709006680066800

Conclusion

A trial balance is a method of checking to make sure that all the transactions in a financial period are balanced. It ensures that there are no overdrafts, under or overpayments in the transaction and thus provides a good picture of the account. In this post, you have learnt about three preparation methods for the trial balance.

Show More