Trial Balance

A trial balance is a list of all the general ledger accounts (both revenue and capital) contained
in the ledger of a business. This list will contain the name of each nominal ledger account and
the value of that nominal ledger balance. Each nominal ledger account will hold either a debit
balance or a credit balance. The debit balance values will be listed in the debit column of the
trial balance and the credit value balance will be listed in the credit column.
The purpose of a trial balance is to prove that the value of all the debit value balances equals
the total of all the credit value balances. If the total of the debit column does not equal the total
value of the credit column then this would show that there is an error in the nominal ledger
accounts.

Objectives of Trial Balance:

1. To check the arithmetical accuracy of books of accounts:
According to the principle of the double-entry system of book-keeping, every business
transaction has two aspects, debit and credit. They base on the double-entry principle of debit
equals credit or credit equals debt. As a result, the debit and credit columns of they must always
be equal. If they do, it assumes that the recordings of financial transactions are accurate.

2. Helpful in preparing final accounts:

They record the balances of all the ledger accounts at one place which helps in the preparation
of final accounts, i.e. Trading and Profit and Loss Account and Balance Sheet . But, unless they
agree, the final accounts cannot prepare. Final accounts prepare to show profit and loss and
the financial position of the business at the end of an accounting period.

3. To serve as an aid to the management:

By comparing the trial balances of different years changes in figures of certain important items
such as purchases, sales, debtors, etc. ascertain and their analysis make for taking managerial
decisions. So, it serves as an aid to the management.

4. To Summarize the financial transactions:

A business performs several numbers of financial transactions during a certain period. The
transactions themselves cannot portray any picture of the financial affairs of the business. For
that purpose, a summary of the transactions has to draw. They prepare to intend to summarize
all the financial transactions of the business.

Ashish Sharma /Sem.2/ Accountancy 1

5. To Help to detect accounting errors:
Since the trial balance indicates if there is any error committed in the journal and the ledger; It
helps the accountant to locate the error because the starting point of locating errors is trial
balance itself. It has been pointed out in an earlier paragraph that if they not agree, the
accountant must locate such errors.

Methods of Trial Balance:

A trial balance can prepare by the following three methods;

1. Total method:
In this method, the debit and credit totals of each account are shown in the two amount columns
(one for the debit total and the other for the credit total). Under these methods, the trial balance
prepares by taking up the total of debits and credit of all ledger accounts.

2. Balance Method:
In this method, the difference of each amount extracts. If the debit side of an account is bigger
in amount than the credit side; Also, the difference is put in the debit column of the Trial
Balance and if the credit side is bigger; The difference writes in the credit column of the Trial
Balance. Under these methods, only the balances of all the ledger accounts take up to prepare
the trial balance.

3. Compound Method:
The compound method is the combination of both the methods, total method, and balance
method. Thus, the compound method also knows as a total cum balance method.

Ashish Sharma /Sem.2/ Accountancy 2

Advantages of Trial Balance:
 To help of summarizes all the financial transactions of the business. Also, presents to
the businessman a consolidated list of all ledger balances.
 It is the shortest method of verifying the arithmetical accuracy of entries made in the
ledger.
 If the total of the debit side/column is equal to the total of the credit side/column, the
trial balance says to agree. Otherwise, it implies that some errors have been committed
in the preparation of accounts.
 It helps in the preparation of the final accounts i.e., Trading a/c. Profit and loss a/c and
Balance Sheet.
 To help in locating or detecting errors in accounting balances. As well as, helps the
accountant to locate the error; Because, the starting point of locating errors is trial
balance itself.
 They serve as a summary of all the ledger accounts and provides a complete summary
report of each account in the ledger.

Limitations
A trial balance only checks the sum of debits against the sum of credits. That is why it does not
guarantee that there are no errors. The following are the main classes of errors that are not
detected by the trial balance.
 An error of original entry is when both sides of a transaction include the wrong
amount. For example, if a purchase invoice for Rs.21 is entered as Rs.12, this will result
in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant
creditor account), both for Rs.9 less, so the total of both columns will be Rs.9 less, and
will thus balance.
 An error of omission is when a transaction is completely omitted from the accounting
records. As the debits and credits for the transaction would balance, omitting it would
still leave the totals balanced. A variation of this error is omitting one of the ledger
account totals from the trial balance (but in this case the trial balance will not balance).
 An error of reversal is when entries are made to the correct amount, but with debits
instead of credits, and vice versa. For example, if a cash sale for Rs.100 is debited to
the Sales account, and credited to the Cash account. Such an error will not affect the
totals.

Ashish Sharma /Sem.2/ Accountancy 3

  An error of commission is when the entries are made at the correct amount, and the
appropriate side (debit or credit), but one or more entries are made to the wrong account
of the correct type. For example, if fuel costs are incorrectly debited to the postage
account (both expense accounts). This will not affect the totals. This can also occur due
to confusion in revenue and capital expenditure.
 An error of principle is when the entries are made to the correct amount, and the
appropriate side (debit or credit), as with an error of commission, but the wrong type of
account is used. For example, if fuel costs (an expense account), are debited to stock
(an asset account). This will not affect the totals.
 Compensating errors are multiple unrelated errors that would individually lead to an
imbalance, but together cancel each other out.

Example

Prepare a Trial Balance with the following information:

Balance Balance
Sr. No Name of Account Sr. No Name of Account
(₹) (₹)
(i) Capital 2,00,000 (ii) Stock 70,000
(iii) Cash 1,80,000 (iv) Debtors 3,00,000
(v) Creditors 1,00,000 (vi) Bank Loan 1,50,000
(vii) Sales 3,00,000 (viii) Purchases 2,00,000

Solution
Trial Balance
Debit Credit
S. No. Account Title Balance Balance
(Rs) (Rs)
(i) Capital 2,00,000
(ii) Stock 70,000
(iii) Cash 1,80,000
(iv) Debtors 3,00,000
(v) Creditors 1,00,000
(vi) Bank Loan 1,50,000
(vii) Sales 3,00,000
(viii) Purchases 2,00,000
7,50,000 7,50,000

Ashish Sharma /Sem.2/ Accountancy 4