Trial Balance: Rules Explained with Examples

Trial Balance: Rules Explained with Examples

A trial balance is a bookkeeping worksheet aggregating all ledger balances into equal debit and credit account column totals. 

Preparing a trial balance is usually at the end of each reporting period. 

Creating a trial balance to check whether the entries in a company's system are correct or not.

A trial balance is so named because it tests a key component of a set of books. But does not provide a thorough audit of them. 

A trial balance is the first step in an audit method. It helps auditors to ensure that the bookkeeping system is free of errors. 

We can move on to a more complex and thorough investigation after that.

Why is trial balance explained so important?

1. CHECKING ARITHMETICAL ACCURACY: 

Using it to verify the amount put in the side of the current account while shifting data from other ledgers. Such as the sale day book, sales day book, cash book, etc. 

Using the trial balance is to assess the correctness of special-purpose accounting books.

2. ASSIST IN THE PREPARATION OF FINANCIAL STATEMENTS:

 At the end of the fiscal year, financial statements like the Profit and Loss Account should exist.

It contains the balances of all the accounts used to generate statements. Making it easier to prepare and analyze financial statements.

3. ASSIST IN CORRECTING ERRORS:

Because the debit total of the trial balance explained must equal the credit total of the trial balance. This verifies the arithmetic accuracy of ledger posts. 

The accountant must locate and correct the error if it is not balanced. 

Relieving accountants when the trial debit and credit totals match after preparing it.

4. ASSIST IN ADJUSTMENTS:

 Change accounts such as prepaid expenses, outstanding liabilities, closing stock, and so on. Preparing it must be done during the trial balance e-preparation process. 

This aids in making adjustments that apply to the current fiscal year. 

Generally, businesses create change accounts after the fiscal year. 

There is no restriction on opening these change accounts as they arise.

5. ASSIST IN COMPARATIVE ANALYSIS: 

It assists in comparing current year balances with the previous year and analysis. 

This will assist the company in making key decisions about income, expenses, and so on.

It aids in recognizing business trends and taking appropriate action.

6. ASSIST IN AUDIT REPORT PREPARATION: 

Trial Balance assists auditors in locating entries in the original books of accounts. 

, an audit trail is what auditors need to audit, and the trial balance offers this. 

Auditors can then comment on financial statement preparation in their audit reports.

7. ASSIST IN BUDGET DECISION-MAKING:

The trial balance explained aids in the comparison of ledger balances with previous balances. This type of comparison assists management in developing a pattern for performance. 

A financial budget for the forthcoming accounting periods should develop to aid management.

What Is the Purpose of a Trial Balance?

Understanding that the trial balance is not a financial statement is critical. 

It is, for the most part, an internal report. But why does a business need a trial balance? 

What are the goals of a trial balance? Let us try to figure out what it's all about.

While not a financial statement, a trial balance is the first step in compiling one. Accountants use the trial balance spreadsheet to prepare financial statements.

Creating a trial balance using the double-entry accounting principle. This means that for every item in the debit column, recording a credit entry will be in the credit column as well. 

It entails entering all of the organization's ledgers in this manner. It even aids in identifying and correcting problems.

For example, if the debit and credit account totals differ at any point, it indicates a mistake. 

Most businesses use software that their system won't allow adding entries if they do not match. This contributes to mathematical precision.

Using the trial balance to confirm that account balances derive from accounting ledgers.

As a summary, it aids in providing an overview of the company's accounting transactions. 

It can be a useful tool for auditors since it allows them to assess the trial balance before inspecting the ledgers.

It gives accountants tallied columns, which can even make adjustments after its creation.

Types of Trial Balance

As stated below, three stages or sorts of trial balances are explained.

The trial balance without adjustments:

A trial balance report generates from ledger entries. At the same time, an unadjusted one is generated before modifying journal entries.

In other words, it represents the daily debits and credits.

This trial balance comes in handy when creating the adjusted trial balance.

Trial balance change:

This one type of trial balance is ready once all the completion of modifying entries are completed.

It displays the balances at the end of each of the company's accounts. 

It guarantees that the inaccuracies visible in the unadjusted trial balance are correct.

This is the primary purpose of trial balancing in a firm or business:

  • It demonstrates the company's balancing of debit and credit accounts. 
  • It serves as a guide while preparing financial statements. This includes the balance sheet and income statement.

Trial balance after closure:

One of the types of trial balances was posting all balances on the balance sheets with a net balance of zero in this trial balance. It handles ensuring that the credit and debit balances are equal. 

It also serves as the beginning trial balance for the following fiscal year.

Uses of Trial Balance 

A trial balance can be used for various purposes, including the ones listed below.

  • Employing it in the preparation of financial statements.
  • A trial balance's double-entry recording technique makes it simple to identify errors.
  • It is a summary of a company's financial transactions.
  • It aids in the proper extraction of ledger account balances. It is one of the major uses of Trial balance.
  • It aids auditors in better understanding ledgers.
  • Its tabulated columns make it simple to change a trial balance even after preparing it.

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Example of trial balance

According to the definition of the trial balance, it is the first phase in compiling a firm's financial statements. 

Preparing the final accounts are prepared at the end of an accounting period. Here, we will understand a few of the uses of trial balance.

Particular



Amount (INR)

Particular

Amount (INR)

Particular

Amount (INR)

Bill Payable

5000

Rent

15000

Drawings 

2000

Insurance Charges

5000

Outstanding Salaries

5000

Equipment

20000

Owner investments

80000

Machinery

30000

Maintenance Expenses

3000

Unearned revenue

4000

Prepaid rent

4000

Accrued Expenses

1000

Bank Loan

25000

Sundry debtors

15000

Mics Expenses

2000

Marketable Security

10000

Accrued revenue

20000

Sales

42250

Accrued Depreciation

Equipment

14000

Unexpired Insurance

10000

Purchases

30000

Depreciation Expenses Equipment

3000

Vendor payable

4000

Taxes

11250

As per the transactions shown above, now the Trial Balance will be represented as:

Sr. No.

Particulars

Amount (Inr)

   

Dr.

Cr.

1

Bill Payable

 

5000

2

Insurance Charges

5000

 

3

Owner investments

 

80000

4

Unearned revenue

 

4000

5

Bank Loan

 

25000

6

Marketable Security

10000

 

7

Accumulated Depreciation -Equipment

 

14000

8

Depreciation Expenses -Equipment

3000

 

9

Rent

15000

 

10

Outstanding Salaries

 

5000

11

Machinery

30000

 

12

Prepaid Rent

4000

 

13

Sundry Debtors

15000

 

14

Accrued Revenue

20000

 

15

Unexpired Insurance

10000

 

16

Vendor Payable

 

4000

17

Drawings

2000

 

18

Equipment

20000

 

19

Maintenance Expenses

3000

 

20

Accrued Expenses

 

1000

21

Mics Expenses

2000

 

22

Sales

 

42250

23

Purchase

30000

 

24

Taxes

11250

 
 

Total

180250

180250

According to the trial balance created, the total of the Debit side is the same as the total of the Credit side. 

We then use trial balances to prepare other financial statements, such as profit and loss accounts, balance sheets, etc.

The trial balance is the first step in creating a company's financial statements. 

If the sum of the debit and credit sides does not match, we must recheck the journal entries to determine what was incorrectly accounted for with the transaction.

FAQs

  • When should a company produce a trial balance?

At any time, a trial balance can be prepared. On the other hand, trial balances are often prepared at the end of an accounting period.

  • Where should a debit balance in an account be placed in the trial balance

All debit balances are recorded in the trial balance's debit column.

  • What can we learn from an agreed trial balance?

A trial balance indicates that the books of accounts are arithmetic correct. It does not imply that every transaction in the journal and ledger has been correctly documented and that there are no errors in the books.

Even if a trial balance agrees, there may be one or more inaccuracies in the books of accounts. A trial balance, for example, will not notice the omission of a transaction since the omitted transactions do not affect the trial balance's agreement.

  • Which accounts do not need to be transferred to the trial balance?

Accounts with zero balances do not affect the trial balance; therefore, they do not need to be transferred to the trial balance.

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