What is Trial Balance?
A trial balance is regarded as a bookkeeping worksheet where the balance of all ledgers is grouped together into debit and credit account column total equally. Preparation of trial balance for the company is done periodically, generally at the end of every reporting period, when the managers are required to report the company’s data to the top executives. The prior purpose of producing the trial balance is to be sure that the entries in a company's bookkeeping system are valid mathematically.
In our further section, we will talk more about the concept of Trial Balance.
Trial Balance Format
The Trial Balance has a simple format that is to be designed. Below is the design of the simple format.
Trial Balance Accounting
Trial balance for a company serves to detect any types of mathematical errors which might have occurred in the double-entry system of accounting. If the debit column is equal to the total of the credit column, the trial balance is then considered to be balanced, and there should be 0 mathematical errors in the ledgers. This of course does not mean that there are no errors in a company's accounting system as transactions which are classified improperly or those which are simply missing from the system is still an accounting error. This type of error cannot be detected by the trial balance procedure.
How to Prepare a Trial Balance
To prepare a trial balance, we require the closing balances of all the respective general ledger accounts. The trial balance is drafted after posting all the financial transactions which are required to be posted to the journals and summarizing them on the ledger statements. The trial balance is formatted to ensure that the debit’s balance is equal to the credit’s balance.
To start off with preparing the trial balance, this is to be made sure that we need every ledger account to be balanced, the balance amount is to be chalked out to include in the trial balance.
After this, prepare an eight-column worksheet, in which column headers should assign the account number, account name and the aligned columns for debit and credit balances.
For every ledger account, the balance is to be transferred to the trial balance worksheet, the account number and the account name along with the account balance in the appropriate debit or to the credit column.
Then add up the amounts of the debit column and the credit column. Generally, the totals should be the same in an error-free trial balance.
If there is a difference in balance, accountants need to locate and rectify the errors made.
Objectives of Trial Balance
The purpose of a trial balance is made to ensure that the journal entries made into the organization's ledger are tallied properly. A trial balance lists the ending amount of the balance in each general ledger account. The total amount of all the debits and credits in an accounting entry are required to be matched by the balances. If it does not then it means one or more transactions were recorded in the general ledger, that was left unbalanced.
In the manual record-keeping system, the trial balance is used to create the financial statements, which means that the account balances in the trial balance are manually averaged out and are found in the financial statements.
FAQs on Trial Balance
1. What are Ledgers?
An accounting ledger is a type of account or the record which is used to store the bookkeeping entries for the balance-sheet and for income-statement transactions. The ledgers in the balance sheet include the asset ledgers like the cash or accounts receivable. The Income statement ledgers here include the ledgers like the revenue and the expenses.
A ledger is a book which contains the accounts where the classified and summarized information from the journals is posted as the debits and credits. The ledger here contains the information which is required to prepare the financial statements. This includes the accounts for the assets, liabilities, owners' equity, revenues and expenses.
2. What is the Double-Entry System of Accounting?
The double-entry system of accounting is a fundamental concept which is used in the accounting process. This is the underlying present-day bookkeeping and accounting, which states that every financial transaction has an equal and an opposite effect in at least two different accounts. This is to satisfy the equation:
Asset = Equity + Liability
In the double-entry system, the transactions are recorded in terms of debits and credits. Since a debit in one account offsets the credit in another, the sum of all the debits is required to be in sync with the sum of all credits.
3. Give examples of errors in the Trial Balance.
The errors which are found in a Trial Balance are as follows:
Entries which are made twice.
The omission of a few entries.
Entries posted to the wrong account.
Transposition error occurred.
A mistake while transferring the balances to the trial balance.
Error in balancing the account.
The wrong amount being posted in the ledger.
Making the entry in the wrong column, debit instead of credit or the vice versa.
