A trial balance is a bookkeeping or accounting report that lists the balances in each of an organization’s general ledger accounts.
Whenever a trial balance is prepared, its total on the debit side should tally with the total on the credit side. An agreement of both sides indicates a reasonable (but not conclusive) accuracy of accounting work. If two sides do not tally, there is undoubtedly some error.
It emerges from the principle of the Double Entry System that the amounts written on the debit side are always equal to the credit side. Once an agreement is established, it is an indication that the accounting work is free from clerical errors.
However, this accuracy is only reasonable accuracy. It cannot be said absolute accuracy because some errors of principle and compensating errors do not result in disagreement of trial balance, and a layman will think that accounts have been accurately prepared.
Generally, the T.B. is prepared monthly or quarterly, depending on the organisation’s size.
Objectives of Preparing Trial Balance
(i) It enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors. In other words, the trial balance helps to establish the arithmetic accuracy of the books.
(ii) Financial statements are typically prepared by the agreed trial balance. Otherwise, the work may be cumbersome. Hence, the preparation of financial statements is the second objective.
(iii) It serves as a summary of what is contained in the ledger; the ledger should be seen only when details are required in respect of an account.
Limitations of Trial Balance
One should note that the agreement of Trial Balance is not conclusive proof of accuracy. In other words, despite the agreement on the trial balance, some errors may be undetected. These may be of the following types:
(i) The transaction has not been challenged at all in the journal.
(ii) The wrong amount has been written in both journal columns.
(iii) A wrong account has been recorded in the journal.
(iv) An entry has not at all been posted to the ledger.
(v) Entry is posted twice in the ledger.
Still, the preparation of the trial balance is advantageous. Without it, preparing the financial statement, the profit and loss account and the balance sheet would be very difficult.
Trial Balance Format
Rules for the Preparation of Trial Balance
While preparing the T. B. from the given list of ledger balances, the following rules should be taken into care:
- The balances of all assets, expense accounts, losses, drawings, cash and bank balances are entered in the debit column of the trial balance.
- The balances of all liability accounts, income, profits, and capital are entered in the credit column of the Trial Balance.
- If for some reason, both sides do not tally, the difference should be transferred to the suspense account temporarily. Still, the suspense account should be reconciled for reasons of difference before preparing the final accounts. Having a suspense account is not a good practice.