What is Trial Balance?

What is Trial Balance?

The Trial Balance is the summary of all the ledger accounts at one place to give the overall view of the business activities indicating the business health of the organization or the statement which takes all the ledger balances at one place to summarize the business activities to indicate the financial health of the business is called as the Trial Balance.

Explanation

In General, the accounts consists of the various ledgers indicating the different heads of accounts. When all the ledgers are placed at one place to give the summarized view of the business activities and its financial health, that statement is called as the Trial balance. For the preparation of the Trial Balance, basic concepts of the accounts needs to be understood like Double entry system of accounts where every accounting entry needs to be given a dual treatment which is opposite of each other, Journal where booking of transactions is taken place and the Ledger where all the journals are posted in the summarized form.

Objectives of Trial Balance

There are many objectives of the Trial balance which includes below:

  1. The Trial balance gives the accuracy check in a single view statement.
  2. The Trial balance helps in the process of audit in which it is analyzed as an overview and helps in highlighting of errors.
  3. The Trial balance also helps to understand the financial health of the organization and thus the credibility of the organization can be defined in an overview.

Example of Trial Balance

The format of the Trial balance is as below:

Debit Balance: 1) Assets

                             2) Expenses

Credit balance: 1) Liabilities

                                2) Equity

                                3) Revenue

Example is as follows:

Trial Balance

Account HeadingDebitCredit
Cash$5,000 
Loans Receivable$5,000 
Office Maintenance$2,000 
Bank Loans$7,000 
Payables $4,000
Revenue $5,000
Stock $13,000
Bank Loans $2,000
Rent Expenses$700 
Utilities$500 
Salaries$3,800 
Total$24,000$24,000

Treatment of closing stock in Trial Balance

As the general rule, the closing stock is not to be included in the Trial Balance. The reason for this is the trial balance already includes the purchases balances in it. The leftover balance of the purchases is shown in the Trial balance. If purchases and closing stock are both shown in the Trial balance, the effect will be doubled and the trial balance will not get tallied.

However, if closing stock is shown in the Trial balance (which is optional) , it should be first adjusted against the purchases by its deduction from purchases and by passing the below journal entry:

Closing Stock A/c…….Dr

     To Purchases A/c….Cr.

Advantages of Trial Balance

The following are the advantages of the trial balance:

  1. The Trial balance provides the arithmetic accuracy of the financial statements of the organization. It is the general concept that the debits should be equal to the credits, hence when that is achieved in the trial balance, there is expected to exist arithmetic accuracy.
  2. As discussed above, the trial balance is the summary of all the ledger balances and hence it provides the bird’s eye view.
  3. The trial balance is the basis on which the financial statements of the business are prepared.

Disadvantages of Trial Balance

The following are the Disadvantages of the Trial balance:

  1. The trial balance only provides the closing balance of the ledger, hence, the accuracy of the ledger is not ensured by the Trial balance.
  2. The errors of omission cannot be avoided by the Trial balance.
  3. Sometimes, there can be repeated postings which cannot be protected by the Trial balance.
  4. The repeated journal entries, postings, or any missing entry cannot be found out by the Trial balance.
  5. Other errors like errors of commission etc. cannot be found out by the Trial Balance.

Final Thought

The Trial balance is the basis of the accounting system of the organization. It is prepared in order to give an overview of the financial health of the organization. It is a very helpful tool for the purpose of audit and in short, can provide the basis of information regarding the correction of the given financial data. One needs to have a basic understanding of accounting like journal entries, ledger accounts, and double-entry system in order to understand the trial balance in a proper way.

Related Articles

  1. What is Journal?
  2. What is Ledger?
  3. What are Assets?
  4. What are Liabilities?
  5. What are Expenses?
  6. What is Income?
  7. What is Owner’s Equity?
  8. Trial Balance methods

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