Trial balance is the list of debit and credit balances, taken out from ledger.
It also includes the balances of cash and bank taken from the cash book.
In other words, a trial balance is a schedule or list of balances, both debit, and credit, extracted from the accounts in the ledger in order to test whether the transactions have been correctly posted from the original records into the ledger and the arithmetical accuracy of the ledger.
If the debit and the credit totals of the trial balance are equal, it may be presumed that the postings have been properly made and the books of accounts are arithmetically accurate.
If the trial balance disagrees, it reveals the presence of error or errors which must be located and rectified.
Features/ characteristics of a Trial balance:
The main features of trial balance are:
A) Merely a statement: The trial balance is merely a statement prepared on a separate sheet of paper.
It is neither prepared in the journal nor in the ledger.
B) Not a part of the double-entry system: The trial balance is not a part of the double-entry system.
Methods of recording or posting of transactions have nothing to do with the preparation of trial balance.
C) Periodicity of preparation: The trial balance is prepared at the end of a certain period, namely, a day, week, months, etc.
D) Arithmetical accuracy: The trial balance means through which the arithmetical accuracy of the books of accounts can be tested.
E) Not a conclusive proof of accuracy: Even if the trial balance agrees, it cannot be said with certainty that the books of accounts are correct in all respects.
Objectives of preparing a trial balance:
The following are the objectives of trial balance:
I) To check the Accuracy of ledger accounts: The preparation of trial balance provides an opportunity to check the arithmetical accuracy of ledger accounts.
II) Helpful in the detection of errors: Trial balance helps in locating errors of posting and casting in the subsidiary books and ledger.
III) Summary of each Account: Trial balance shows the summary of each account in the ledger.
It provides a condensed picture of each account in the ledger hence it is a source of information, in a condensed form, of the position of every ledger account.
IV) Identification of Adjustment: The preparation of trial balance facilitates the identification of the items for which adjustments are are required.
V) Helps in preparing the final account: Final accounts can be prepared easily after the preparation of trial balance.
The trial balance acts as a connecting link between the ledger and final accounts.
Types of Preparing Trial Balance:
There are three types of preparing a trial balance. These types are:
- Balance method
- Total method method
- Total and balance method
1) Balance method: Every account in the ledger have both a debit and credit side. At the end of a certain period, ledger accounts are balanced.
There may be some accounts that show debit balance, some accounts which show credit balance and account which do not show any balance.
Under the balance method, only those accounts which show balances are written in the trial balance along with the number of balances.
Accounts showing debit balances are written on the debit side and accounts showing credit balance are written on the credit side of the trial balance.
2) Total amount Method: Under this method, the total of the debit side and credit side of every account is separately written in the debit side and credit column of the trial balance.
Therefore, the names of all accounts which appear in the ledger is written in the trial balance.
3) Total and balance method: Under this method, both the balance and total balance of both sides of the accounts are shown in the same trial balance side by side.
The amount column is divided for writing the total and balance of the accounts.
The total of the debit and credit of balance columns must be equal. Again, the total of both sides of the total columns must be equal.
Limitations of a Trial balance:
The following are the limitations are:
A) Not a conclusive proof of accuracy: An agreed trial balance does not prove that all transactions have been recorded and nothing has been left.
B) Non-disclosure of errors: There are certain types of errors such as entry of the wrong amount, the error of principle, etc. which are not disclosed by a trial balance even if the trial balance agrees such errors relating to accounts may still be there.
C) Non-disclosure of operational results: The trial balance does not give any information regarding operational results and financial position.
D) Non-disclosure of compensating error: The trial balance does not disclose the compensating error.
Is trial balance indispensable:
Through the preparation of trial, balance is of great help to the accountant in the practical field of accounting, yet it is neither an account itself nor an essential part of the accounting system.
It is not a part of the ledger account also. It is only a statement in which the accountants prepare for their own conveniences and satisfaction.
If the accountant is sure about the accuracy of the entries in the books of account, he may not prepare the trial balance.
Therefore, it can be said that the preparation of the trial balance is not indispensable and the final accounts may be prepared without preparing the trial balance.