Trial Balance

Trial Balance is the report of accounting in which ending balances of a different general ledger of the company are and is presented into the debit/credit column as per their balances, where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.

At the end of the financial year, the balances of all the ledger accounts are extracted. They are written up in a trial balance (a type of financial report) and finally summed up to see if the total debit balances and the total credit balances should be tallied. It may also be stated as a statement of the total debit and credit balances extracted from the various accounts in the ledger to examine the mathematical exactness of the books.

Trial balance is a worksheet that leads to the final preparation of the financial statement and report, which is used by management and stakeholders to gain knowledge about the company’s financial health.

This sample trial balance report reflects the closing balance of different ledger accounts related to all transactions that took place within the business. At the end of every accounting period the accounting books are to be closed and preparing the trial balance is the first step towards it.

In this sheet, according to the double entry system, there is a debit and also a credit column where all ledger balances are posted. The two columns should have equal totals. This ensures that all calculations and posting are mathematically correct, and the accounting rules and regulation have been followed properly.

As the name suggests, it is actually a trial or a test of the accounting aspect and recording of transactions in the books. However, sample trial balance is just a partial view of the process. When the auditors check the authenticity of the books, they go through all levels of financial records to endure they are error free and present a true and fair view of the business.

Adjusted trial balance is the base of financial statement preparation, which should be done with skill and proper knowledge regarding accounting procedures. All the business transactions are a part of either the debit or the credit which must tally to ensure there are no mistakes.

There are various objectives for preparing Trial balance which is mentioned below:

• To have balances of all the accounts of the ledger to avoid the necessity of going through the pages of the ledger to find it out.
• To have material for the preparation of the financial statement of the organization.
• To have the arithmetic accuracy of the books of accounts because of the trial balance agreement.
• To prove that each transaction double-entry has been recorded because of its agreement.
• To guide in the identification of errors.

The following methods can be used to prepare Trial Balance -

• Total method. This method states that each account's total debit and credit amount are displayed in the two columns of amount against it, i.e., one for the debit balance and another for the credit balance.
• Balancing Method. In this method, the difference of each amount is taken out. If the debit balance is more significant than the credit balance, the difference is put in the debit columns.

Of the two methods of preparation of trial balance in accounting mentioned above, the balance method that is the second one is usually used in practice because it facilitates the preparation of financial statements.

The following are steps necessary to take for the preparation of the trial balance.

• At the end of the accounting year, all the accounts and ledgers are to be closed.
• Closing balances of the ledger are to be posted.
• Errors are to be identified.
• A suspense account is to be generated temporarily to tally the total trial balance until the correction entries are made.
• Adjustment entries are required at the end of the year, which are not previously accounted for in the incorporation of trial balance.

The correspondence of trial balance is not stated as definite evidence for the absolute accuracy of the books. It only indicates the mathematical precision of the books of accounts. The Trial balance may agree, and yet there may be some errors of the following types remaining undisclosed.

• An error of omission - If the entry has not been recorded in a subsidiary book, the debit and credit would be omitted. And the trial balance agreement will not be affected in any way.
• Compensating errors – These are the errors that compensate themselves in the net result.I.e., Over debit or under the credit of various accounts being neutralized by over credits or under the credit to the same extent as other accounts. For example, the posting of $ 500 on the debit side of a certain account would be compensated by under posting of $ 100 on the credit side of another account and omission of credit posting of $ 400 to a third account. This error may also be neutralized by over-posting $ 500 on the debit side in some other account or accounts.
• Errors of principle – These errors will not affect the trial balance agreement as they arise from the debiting or crediting of wrong heads of accounts, as would be inconsistent with the fundamental principles of double-entry accounting. For example, $ 1,500 spent on the extension of the building wrongly debited to the repairs account instead of the building account will not affect the agreement of the Trial Balance. Thus, such errors arise whenever an asset is treated as an expense, liability as income, or vice versa.
• A wrong entry in a subsidiary book – If a credit purchase of $ 450 from James is wrongly written as $ 540 in the purchase book, such an error will not be disclosed. The posting on both the debit side of the purchase account and the credit side of the account of James will be with the wrong amount of $ 540, so the trial balance will agree.
• Posting an item to the right side but in the wrong account – If a purchase of $ 100 from Carl James has been credited to Mathew Woods instead of Carl James, it will not detect such an error.

There are the following errors that are disclosed due to the disagreement.

• A particular from a subsidiary book into ledger omitted to post – For example, a purchase of $ 500 from Anthony omitted to be credited to his account. As a result of this error, the figure of the sundry creditors to be shown in the trial balance will reduce by $ 500, and the credit balance will be $ 500 less as compared to the debit balance, respectively.
• Entry of incorrect amount in ledger statement – For Example, a credit sale of $ 1000 to Anya wrongly posted her account at $ 100. The effect of this error will be that the figure of sundry debtors will be reduced by $ 900, and the total of the debit side of the trial balance will be $ 900 less than the credit balance.
• Entering an amount to the wrong side of the ledger statement – For example, that $ 10 discount allowed to a customer wrongly posted to the credit instead of the debit side of the discount allowed. Due to this outcome of an error, in the trial balance, the credit side will exceed $ 20. That is, the error amount is doubled.
• Incorrect inclusion towards ledger accounts – For example that is, at the end of the financial year, while tallying the capital account, the credit amount of $ 9,900 wrongly taken as $ 8,900; As a result of this error, the credit side total of the trial balance will be $ 1,000 short.
• Wrong totaling of subsidiary books – For example, a Sales book is overcast by $ 50. Due to the outcome of this type of error, the credit side in the trial balance will be $ 50 to become higher because the sales account will appear at a higher figure on the credit side in the trial balance.
• Double posting of an item in the subsidiary book to a ledger account – That is a payment of $ 500 to a creditor entered twice to his account.
• Amount omission of an account in the trial balance – The bank and cash balances may have been omitted.
• Balance of various accounts incorrectly posted – For example, a balance of $ 52 in a stationary account was wrongly posted as $ 25.
• Some account balances entered to the incorrect side – The balance of commission earned account was wrongly mentioned to the debit account instead of the credit account.
• The wrong summed up of the trial balance will bring disagreement.

Whenever there is disagreement in trial balance in accounting, significant steps must be taken to locate the reason for differences:

• Rechecking the totals and discovering the actual amount of difference.
• The difference in the total amount will be divided into two, and find out if there is any balance of the same amount in the trial balance. It may be that such a balance might have been recorded on the wrong side, thus causing the difference of double the amount.
• If the steps mentioned above do not locate the mistake, then the difference in the trial balance should be divided by 9. If the difference is even divisible by 9, the error may occur due to transposition or transplacement of figures. Transposition occurs when 54 is written like 45 or 98 as 89. A transplacement occurs when the numbers' digits are moved to the left or right. That is when $ 5 450 is written as $ 54. 50. If there is a transplacement or transposition of figures, the search can be narrowed down to numbers where these errors might have been made.
• Verify that each balance of all accounts, including cash and bank balances, has been involved.
• Verifying the opening balances has been brought forward in the current year's account.
• If the dissimilarity is a huge amount, collate the trial balance of the current year with that of the previous year and look out if the numbers under similar account heads are very near the same as those of the previous year and whether their balances fall on the same side. If the difference between the years is huge, establish the cause of the difference.
• If the steps mentioned above fail to detect the error following steps are taken to check:
  • Check the totals of the subsidiary books.
  • Check the posting made from the journal or subsidiary books in the ledger.
  • Verify the balances pulled out from the ledger.
  • The balance list will be re-casted.

If all these efforts fail to locate the errors, all the books of prime entry must be cast, and posting to the ledger should be rechecked.

Let us understand the concept of adjusted trial balance with the help of a suitable example, as given below:

We assume that ABC Ltd is a company which is into buying and selling cosmetics as a wholeseller. Therefore, it has lots of transaction which are typically of very high value and also includes collection of payments for clients, payment to the producers, follow up with supply chain, and various other cost, income and expenses. This results in many types of ledger accounts that are prepared, and their closing balance is transferred to the trial balance during account closing.

The ledgers during trial balance preparation will typically include purchase, sale, purchase return, sales return, accounts receivable and payable, salaries, payment to transporters, various utility bills, rent of office and warehouse, bad or doubtful debt, furniture, fixtures, cash, capital, and so on. All the balances will be transferred to this sheet and any error that will be detected resulting in mismatch of both the sides need to be verified and settled.

If it is impossible to locate the errors despite the above steps, the difference in the trial balance is transferred to the suspense account, and it is thus tallied. The suspense account will be eliminated when all errors are located. Later, when errors occur, they can be rectified through the suspense account.

Example: The following trial balance has been prepared.

• It can be prepared only in those concerns where the double-entry system accounting system is adopted, which is not helpful in the single entry system. This double-entry system basis is costly and cannot be adopted by small concerns.
• Though the trial balance provides arithmetic accuracy of the books of accounts, certain errors are not disclosed. Due to this reason, it is said that trial balance is not conclusive proof of the books of account accuracy.
• If the accurate trial balance is not prepared, then the final accounts will not review the statement of affairs of the organization free from material misstatement. Whatever the various groups of persons make, conclusions and decisions will not be correct and accurate and will mislead such persons.

Both the above refer to documents that are prepared and reflect the financial status of the business. However, there are some important points of differences between them. They are as follows:

• The former is the step taken to close the general ledger accounts whereas the latter is the step taken to close the asset and liability position of the company.
• The trial balance preparation includes all ledger account balances like purchase, sale, purchase return, sales return, accounts receivable and payable, salaries, payment to transporters, various utility bills, rent, etc, but the latter will include all assets, liabilities, capital structure, final cash balance, etc.
• Through the former, it is possible to check whether all recrding of transactions are done in proper manner and without any errors. But the latter checks or reveals what the company owns and what it owes to outsiders.
• The balances of the former comes from ledger accounts but the balances of the latter comes partly from the former and partyly from other accounting statements like income statement, cash flow statement and statement of equity.
• The former helps in preparing the financial statements but the latter is an important component of the financial statement.
• The former is typically not revealed to outsiders, but the latter is particularly for all stakeholders apart from the management of the company.
• The former may be made at the end of every quarter, half-yearly or annually. But the latter is always made as on a particular date at the end of every financial year.
• The former is verified by the auditor but does not need their signature after preparation. But the latter needs the auditor’s signature as a proof of verification.  

Thus, the above are some noteworthy differences between the two statements.

Guide to Trial Balance and its meaning. We explain it with example, how to prepare, its objectives, vs balance sheet & errors.

• Format of Trial Balance
• Trial Balance Examples
• Adjusted Trial Balance
• General Ledger vs Trial Balance