Trial balance
Trial balance is a tabular statement of debit and credit balance of ledger account, which is prepared in order to prove arithmetic accuracy of books of account.
A business firm prepares trial balance usually at the end of accounting period which facilitate for the preparation of financial statements.
When the sum of debit and credit columns of trial balance are equal, it is regarded as balanced i.e. the accounts are mathematically accurate.
Objectives of preparing trial balance
To ascertain arithmetic accuracy of book of accounts.
To provide summary information of all the ledger account in one place.
To locate and rectify accounting errors at an early stage.
To minimize different types of accounting errors and frauds.
To form a basis for preparation of financial statement.
To make comparison of various heading of financial statements between two different period
Importance of trial balance
For verifying arithmetic accuracy of ledger account.
For helping in preparation of financial statements at the end of each accounting period.
For detecting, rectifying, and minimize accounting errors and frauds.
For facilitating in comparative analysis by comparing past balance with current year balance to make appropriate decision.
For assisting auditor to prepare audit report by providing relevant information.
For helping in making decision regarding a financial budget to improve a business firm’s performance.
For making necessary adjustment if accounting errors are found.
For helping to view a complete financial picture of a business firm by proving summary information of all the ledger account.
Methods to prepare Trial balance
Total method:
Under this method; total (not balanced) of each side of ledger account i.e. Debit & Credit, shown in the respective column of Trial balance.
The debit balance and credit balance should be equal as the accounts are based on the double entry system.
However, this method is not used widely as it does not verify arithmetical accuracy of balance of various accounts and preparation of financial account.
Balanced method
Under this method, trial balance is prepared by showing all the balance of ledger accounts in the respective columns of trail balance to assure their correctness.
This method is the most common method to prepare trial balance as it show the net effect and also helps in preparation of the financial statements.
Instead of showing individual accounts of debtors and creditors, it shows sundry debtors and creditors’ accounts.
Total cum balance method or compound method
This method is a combination of total method and balance method. It is also not used in practice as it time consuming and hardly serve any special purpose.
Under this method; four columns for amount is prepared. Two columns for writing debit and credit of total various accounts and two columns for writing debit and credit balance.
Trial balance plays crucial role in preparing financial statements of a business firm. On the basis of such financial statements, management takes necessary decisions regarding to improve financial health of a firm. For this course of action, a firm prepares trial balance by using balance method to assure correctness and financial statements.
What types of errors are disclosed by Trial balance and what types of errors are not disclosed by Trial balance? Also mention the steps to be taken to find fault with the Trial balance.
Trial balance is a tabular statement of debit and credit balance of ledger account, which is prepared in order to prove arithmetic accuracy of books of account. It is helpful in disclosing errors and to adjust such errors but some errors cannot disclose by Trial balance which are mentioned below with the steps to find out such errors.
Errors that are disclosed by Trial balance or errors that affect Trial balance
Enter in journal account but posted to one account and omitted to be posted to other account.
Posting amount on the wrong side of a ledger account.
Posting amount twice in a ledger account
Over-casting and under-casting in a subsidiary book.
Posting wrong amount to the correct side of an account.
Omission to post an entry from subsidiary book.
Errors made in preparing the list of debtors and creditors.
Errors made in carrying forward the from one page to another page.
Errors of partial omission.
Errors arising in the balancing of an account.
Errors that is not disclosed by Trial balance or errors that doesn’t affect Trial balance
Treating revenue nature expenditure as capital expenditure
Omitting transaction completely
Entering a transaction in a wrong subsidiary book
Entering a transaction twice in a subsidiary book or journal
Entering the amount of a transaction wrongly in the journal
Entering the amount of a transaction wrongly in a subsidiary book
Under and over posting of the transactions on debit and credit side of an account
Posting amount twice in ledger account
One error overlapped by another same amount of error or one error compensate another error
Steps to identify errors
Recast the total of the debit and credit columns of the Trial balance.
Compare each accounting heads and its amount appeared in the ledger account to detect any differences in amount or omission of any account.
Compare trial balance of current year with that of previous year to check the additions or deletion to any accounts and to verify if there is any unexplained difference in amount.
Recheck the correctness of balance of individual accounts in their respective ledger.
Recheck the accuracy of the posting in individual accounts from the transactions entered in the books of original entry.
If the differences between the debit and credit columns is of ‘1’, ‘10’, ‘100’, or ‘1000’ the casting of the subsidiary book should be rechecked.
If the difference between debit and credit columns is divisible by 2, then there is a possibility that an amount equals to half the differences may have been posted to the wrong side of another ledger account.
The above points may also indicate a complete omission of posting.
If the differences are divisible by 9, the mistake could be because of transposition of figure.
If it is not possible to locate errors, the difference in the trial balance for that moment is transferred to the suspend account. The entire one sided errors detected are rectified through this account.
Trial balance is prepared by a business firm to check the accuracy of the books of account by adjusting accounting errors but sometimes it does not disclosed any errors which does not affect Trial balance. If the above mentioned steps are taken, such errors can be found and adjusted.