A trial balance is defined as the accounting report or the bookkeeping that contains the list of all general ledgers of the organization in the form of debits and the credits in the way that all the debit balances are listed under the heading “Debit balances” and all the credit balances are listed under the heading “Credit balances” and the total of all debits equals to the total of all the credits.
Purpose of Trial balance
There are basically two purposes of preparation of trial balance:
- To check the arithmetic test i.e. to check the equality of debits and the credits.
- To provide the information of all the accounts in one place which ultimately helps in the preparation of financial statements and accounts.
Methods of preparing Trial Balance
There are basically three methods of preparation of the Trial Balance, each one of which is explained below
In the totals method of preparation of trial balance, the total of each side of the ledger i.e. the debit side and the credit side are shown separately on two different sides and in two respective columns of the Trial balance. In this, the total of the debit side should tally with the total of the credit side and both the column’s totals should match with each other. This method holds the dual aspect concept. This method is not widely used because we cannot determine the accurate balances of the accounts and hence this method is not preferable in the preparation of financial statements or preparation of final accounts.
In this method of preparation of trial balance, the total of debit side and the credit side of the account is taken and we need to balance them both. The Debit balance and the credit balances of the ledger accounts are then written in the respective debit and the credit columns in the trial balance. When the totals of the debits side of the account match with the total of the credit side of the account, a trial balance is said to be tallied.
This is the most common method of preparation of trial balance. This method shows the net effect of transactions and also helps in the preparation of financial statements. Generally, while preparing the trial balance, Sundry Debtors and Sundry Creditors accounts are shown instead of separately showing the individual accounts of debtors and the creditors. With the help of this method, we can determine the accurate balances of the accounts unlike the totals methods of preparation of trial balance in which we cannot determine the accurate balances of the accounts.
Under this method of preparation of trial balance, there need to be prepared four columns. There are debit and credit totals of accounts in two columns and debit and credit balances of accounts in the other two columns. This is a very time-consuming method and involves duplication of work also. Hence, it is not widely used in the industry for the preparation of trial balance.
Trial balance is a very important report that is prepared in finance and accounting. The fundamental principle of the double-entry system is that the total of debits should be equal to the total of credits. Hence, the trial balance is used to check the arithmetic accuracy of the ledger accounts i.e. the equality of debit accounts and the credit accounts. It also gives the summary of all the ledger balances at one place i.e. the closing balances of all the ledgers at one place. Hence, it provides an overview of the books of accounts in summary form and also helps in the preparation of financial accounts and financial statements.
If the trial balance gets tallied, we generally assume that the books of accounts are prepared correctly. If there is a deviation in any account, i.e. suppose debits accounts are higher than that of the credits accounts, we can find out the entry which is not recorded on the credit side and it is not given the double-entry effect. However, the trial balance cannot identify certain types of errors that exist inside the ledgers like wrong accounting treatment and other minor errors too. Hence, one needs to go inside the ledgers to identify certain types of errors inside the ledgers.