When you want to collate all your ledger accounting in one place, we recommend the best practice to you. Yes, you must know what it is, how to prepare the same and the benefits offered by the same in keeping your business accounting intact.
What Is Trial Balance?
- It is a method for determining the accuracy of debit and credit entries in various ledger accounts.
- It is therefore prepared to verify the accuracy of different transactions
- It is undoubtedly a vital accounting tool because it confirms the final position of all transactions.
- It is also used in the preparation of the company’s final accounting statements.
- It aims to streamline the process of preparing crucial financial statements.
As a result, a business owner can use this to get the balances of all accounts. He is not required to search for such balances in individual ledger accounts.
Purpose of Trial Balance Preparation:
A trial balance in general makes sure that every entry made in a business ledger account gets tallied. Further, it summarizes the closing balance of each of the general ledger accounts.
Therefore, if the debit and credit totals on a trial balance do not match, one or more unbalanced transactions were mentioned in the general ledger.
1. Ledger balance arithmetic correctness verification:-
At the time of computing the trial balance, if the total debit balance value and the total credit balances value becomes the same, then there is clear evidence that the ledger accounts are mathematically correct.
2. Easily finalizing accounts:-
All ledger balances are assembled in the Trial Balance according to their nature. This ensures that all debit and credit balances are appropriately classified and organized. As a result, while finalizing accounts, the accountant can move on to the Trial Balance without having to refer to voluminous ledger accounts repeatedly.
3. Balance sheet tally assurance:-
The balance sheet contains 2 panels namely lower and upper. The lower panel represents ‘Equity and Liabilities,’ while the upper panel represents ‘Assets.’ As a result, both sides of the Balance Sheet are always equal. Trial Balance serves as a first assessment, ensuring that the Balance Sheet is balanced.
When Is Trial Balance Prepared?
Precise trial balance meaning is, it is a statement of the ledger balances at a specific point in time. All debit balances should be equal to the sum of all credit balances at all times. If a business continues to maintain records manually, the trial balance is more valuable, as unbalanced entries can be created in such a system.
When a manual record-keeping system is used, the financial statements are also created using the trial balance format. This indicates that the balances in the trial balance are aggregated manually in the line items in the financial statements.
The preparation of this document follows ledger postings and account balances as the next step in the accounting cycle. This phase assists in determining whether the sum of the debit and credit balances are equal. This is a crucial phase just before final accounts are prepared at the end of the accounting period. However, in practice, Trial Balances are prepared quarterly to check the account accuracy.
Also, auditors use the trial balance. They require it early in the audit process and import the report’s ending account balances into their internal audit software. They put these balances to the test using auditing procedures.
How to Prepare Trial Balance:
1. Determine the balances of all ledger accounts.
Business transactions are initially recorded using journal entries under fundamental accounting principles. These journal entries are then transferred to the ledger accounts that correspond to the various business transactions.
2. Record the debit and credit balances.
The Trial Balance is then used to record the remainder debit or credit balances in multiple ledger accounts as determined earlier. The balance of each ledger’s accounts is entered in the debit or credit columns depending on the case.
3. Determine the total in the Debit Column.
Determine the debit column’s total. This is accomplished by recording the debit balances of all the ledger accounts in the debit column of the Trial Balance.
4. Determine the total in the Credit Column.
Determine the credit column’s total. This is accomplished by recording the credit balances of all the ledger accounts in the Trial Balance’s credit column.
5. Verify that the debit balance is equal to the credit balance.
Finally, you must verify that the debit column’s total equals the credit column’s total. As previously stated, the purpose of a trial balance is to check the correctness of the debits and credits of various ledger accounts. The Trial Balance’s debit and credit columns must balance, as each debit equals each credit. However, in cases where the transactions are not equal, some errors were made while recording them in the ledger or trial.
It’s essential to keep in mind that, according to accounting principles; All liabilities, revenues, and payables must have credit balances, while all assets, expenditure, and receivables must have debit balances.
Advantages of Preparing Trial Balance:
1. The results of all transactions over a period are summarized.
2. The arithmetic accuracy of account balances in the ledger is proved.
3. It provides ready reference to all account balances of all ledger accounts in one place.
4. If an error is detected, it can easily be corrected.
5. It is a basis for the preparation of the final accounts of a company.
Difference between Trial Balance and Balance Sheet:
- A balance sheet is a financial statement that summarizes a business’s liabilities, assets, and stockholders’ equity as of a specified date. A trial balance and the financial statement are not one and the same. It summarizes all transactions recorded on the company’s ledgers.
- Additionally, a trial balance is not included in the final accounts, whereas a balance sheet is required for final accounts.
- The types of accounts that are displayed by the two are also different. The trial balance format includes both real and nominal accounts, whereas the balance sheet only includes real and personal accounts.
- The trial balance records the final balance of each account, whereas the balance sheet may accumulate the final balances of different accounts into each line item.
- The balance sheet is framed to specific accounting standards, whereas a trial balance is not mandated to follow any particular format.
- The balance sheet and trial balance are used for external and internal purposes respectively.
- The balance sheet is a concluding report, whereas the trial balance is used to generate additional reports.
- Another significant distinction between trial balance and balance sheets is the format of the financial statements. The trial balance is recorded in debit and credit sections, while the balance sheet shows total assets, liabilities, and equities.
FAQs about Trial Balance Concept:
Q1. What types of errors in the trial balance unable to detect?
Ans: The following types of errors are not detected by trial balance:
- Errors of omission
- Writing Errors
- Compensating Errors
- Errors of miss-posting
- Principle Errors.
Q2. When is the trial balance going to be prepared?
Ans: Every accounting period ends with a trial balance preparation.
Q3. In the trial balance, what does the suspense account represent?
Ans: The suspense account is used to express the difference between the debit and credit columns.
Q4. What accounts are excluded from the trial balance?
Ans: Closing inventory, opening cash, and opening bank deposits.