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Trial Balance:

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Definition and Explanation:

Trial balance may be defined as an informal accounting schedule or statement that lists the ledger account balances at a point in time compares the total of debit balance with the total of credit balance.

The fundamental principle of double entry system is that at any stage, the total of debits must be equal to the total of credits. If entries are recorded and posted correctly, the ledger will reflect equal debits and credits, and the total credit balance will then be equal to the total debit balances.

Every business concern prepares final accounts at the end of the year to ascertain the result of the activities of the whole year. To ensure correct result, the concern must be free from doubt that the books of accounts have been correctly recorded throughout the year. Trial balance is prepared to test the arithmetical accuracy of the books of accounts. As we know that under double entry system for each and every transaction one account is debited and other account is credited with an equal amount. If all the transactions are correctly recorded strictly according to this rule, the total amount of debit side of all the ledger accounts must be equal to that of credit side of all the ledger accounts. This verification is done through trial balance.

If the trial balance agrees we may reasonably assume that the books are correct. On the other hand, if it does not agree, it indicates that the books are not correct - there are mistakes somewhere. The mistakes are to be detected and corrected otherwise correct result cannot be ascertained. There are however, a few types of errors which the trial balance cannot detect. In other words, the trial balance will agree in spite of the existence of those errors.

The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if trial balance agrees, there may be errors or may not be errors. But if it does not agree, certainly there are errors.

Purposes of Trial Balance:

The trial balance serves two main purposes. These are as under:

  1. To check the equality of debits and credits - an arithmetical or mathematical test of accuracy.

  2. To provide information for use in preparing final accounts.

Methods of Preparing Trial Balance:

There are three methods for the preparation of trial balance. These methods are:

  1. Total or gross trial balance
  2. Balance or net trial balance
  3. Total - cum - balance trial balance

The method 1 and 2 are described below:

Total or Gross Trial Balance:

Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The first one for debit amounts and the second one for credit amounts. The total of debit side and credit side of each account is then placed on "debit amount" column and "credit amount" column respectively of the list. Finally the two columns are added separately to see whether they agree of not. This method is generally not followed in practice.

Balance or Net Trial Balance:

Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances and credit balances are recorded in "debit amount" and "credit amount" column respectively and the two columns are added separately to see whether they agree or not. This is the most popular method and generally followed.

The various Steps involved in the preparation of Trial Balance under this method are given below:

  1. Find out the balance of each account in the ledger.
  2. Write up the name of account in the first column.
  3. Record the account number in second column.
  4. Record the debit balance of each account in debit column and credit balance in credit column.
  5. Add up the debit and credit column and record the totals.

Example:

Enter the following transactions in journal and post them into the ledger and also prepare a trial balance.

2005  
Jan. 1 Mr. X started business with cash $80,000 and furniture $20,000.
Jan. 2 Purchased goods on credit worth $30,000 from Y.
Jan. 3 Sold goods for cash $16,000.
Jan. 4 Sold goods on credit to S for $10,000
Jan. 8 Cash received from S $9,800 in full settlement of his account.

Solution:

Journal

Date
2005

Particulars

L.F DR.
Amount ($)
Cr.
Amount ($)
Jan. 1 Cash A/C 5 80,000  
  Furniture A/C 7 20,000  
       Capital A/C 9   1,00,000
  (Owner invested cash and furniture)      
 
     
Jan. 2 Purchases Account 11 30,000  
       Y 13   30,000
  (Bought goods on credit)      
 
     
Jan. 3 Cash A/C 5 16,000  
       Sales A/C 15   16,000
  (Sold goods for cash)      
 
     
Jan. 4 S A/C 17 10,000  
       Sales A/C 15   10,000
  (Sold goods on credit)      
 
     
Jan. 8 Cash A/C 5 9,800  
  Discount A/C 19 200  
       S A/C 17   10,000
  (Cash received and discount allowed)      

Ledger

Cash Account (No.5)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 1 Capital A/C 5 80,000   80,000  
Jan. 3 Sales A/C 5 16,000   96,000  
Jan. 8 S A/C 5 9,800   105,800  

Furniture Account (No.7)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 1 Capital A/C 5 20,000   20,000  

Capital Account (No.9)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 1 Cash A/C 5   80,000   80,000
Jan. 1 Furniture A/C 5   20,000   1,00,000

Purchases Account (No.11)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 2 Y A/C 5 30,000   30,000  

Y Account (No.13)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 2 Purchases A/C 5   30,000   30,000

Sales Account (No.15)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 3 Cash A/C 5   16,000   16,000
Jan. 4 S A/C 5   10,000   26,000

S Account (No.17)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 4 Sales A/C 5 10,000   10,000  
Jan. 8 Cash A/C 5   9,800    
Jan. 8 Discount A/C 5   200 Nil  

Discount Account (No.19)

Date references J.R Debit Credit Balance
2005 Dr. Cr.
Jan. 8 S A/C 5 200   200  

Trial Balance

S. No. Account Name A/C No. Debit Credit
1 Cash Account 5 105,800  
2 Furniture Account 7 20,000  
3 Capital Account 9 -- 100,000
4 Purchases Account 11 30,000  
5 Y Account 13 -- 30,000
6 Sales Account 15 -- 26,000
7 S Account 17 -- --
8 Discount Account 19 200 --
  Total   156,000 1,56,000

Note: If an account shows zero balance, it is not necessary to record it in trial balance.

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More study material from this topic:

Classification of accounts
Rules of debits and credits
Journal
Ledger
Trial balance
Questions and answers

 

 
 

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Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
----------------------------------------------------------------------------
  Journal, Ledger and Trial Balance
----------------------------------------------------------------------------
  Accounting for Bills of Exchange
----------------------------------------------------------------------------
  Special Journals
----------------------------------------------------------------------------
  Cash Book
----------------------------------------------------------------------------
Bank Reconciliation Statement
----------------------------------------------------------------------------
  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
----------------------------------------------------------------------------
  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
----------------------------------------------------------------------------
  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 
 

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