A trial balance is a financial worksheet that lists all the balances of general ledger accounts in a company’s bookkeeping system. It’s essentially a summary of all the debits and credits in a company’s accounts at a specific point in time, typically at the end of a financial year.
What is a Trial Balance?
Multiple entries in various accounts will make a ledger. Taking all the ledger balances and presenting them in a single worksheet as on a particular date is Trial Balance. To understand a trial balance, we must first understand the following-
- Double entry system – Recording two entries for a single transaction that is equal and opposite in nature
- Journal – All transactions recorded in double entry system of bookkeeping
- Ledger – Summary of all journals of a similar nature.
Why is the Trial Balance Prepared?
After closing all general ledger accounts, the trial balance is prepared at the end of the financial year. It helps to record the income and expenditures of the business and easily complete the preparation of the balance sheet in the next step.
Moreover, the trial balance is also prepared to detect any error in the mathematical calculation. A key objective of preparing a trial balance is to summarise the financial transactions while continuing with the business activities. It helps the business management to make necessary decisions regarding changes in the finances and business activities.
Features of Trial Balance
- It comprises a list of different accounts of general ledger balances, both debit and credit amounts.
- Preparation of trial balance allows a firm to check for mathematical accuracy of the general ledger balances.
- This statement is prepared at the end of the financial year.
- It is not a part of the final financial statements.
Limitations of Trial Balance
- The trial balance may fail to detect errors when a journal entry contains an incorrect amount recorded in both accounts.
- Errors of omission may go unnoticed as some transactions may not be recorded in the journal, making it impossible for even a correctly balanced Trial Balance to reveal such omissions.
- Any missing journal entry in the ledger will not be reflected in the Trial Balance, making it challenging to spot such omissions.
- Correct amounts in journal entries might be misallocated under the wrong accounting category by the accountant, a mistake that the trial balance is incapable of identifying.
FAQs
How to Prepare a Trial Balance?
- Firstly, close all general ledger accounts to get their closing balance at the end of the financial year.
- Prepare the worksheet of trial balance as per format. It must comprise the columns of account names and debit and credit amounts.
- Fill in the trial balance worksheet as per the balances of the accounts. Any assets or expense amount of the business is considered in the debit column, and any revenue or business liabilities amount is recorded in the credit column.
- Add values accurately in each column.
- Lastly, close the trial balance worksheet. You must remember that if your total amount of debit balance matches the total credit balance, then recordings in the trial balance have been done accurately. Differences in totals suggest either mathematical error or input error of the balances.
Trial Balance Rules?
- Assets of the business must be put down in the debit column.
- All business expenses must be written down in the debit amount column.
- Every liability of the company must be recorded in the credit column.
- All revenue and business gains will be recorded in the credit column.