Trial Balance

A Trial Balance is a two-column schedule listing the titles and balances of all
the accounts in the order in which they appear in the ledger. The debit balances are
listed in the left-hand column and the credit balances in the right-hand column. In the
case of the General Ledger, the totals of the two columns should agree. We, now,
know the fundamental principle of double entry system of accounting where for every
debit, there must be a corresponding credit. Therefore, for every debit or a series of
debits given to one or several accounts, there is a corresponding credit or a series of
credits of an equal amount given to some other account or accounts and vice-versa.
Hence, according to this principle, the sum total of debit amounts must equal the
credit amounts of the ledger at any date. If the various accounts in the ledger are
balanced, then the total of all debit balances must be equal to the total of all credit
balances. If the same is not true then the books of accounts are arithmetically
inaccurate. It is, therefore, at the end of the financial year or at any other time, the
balances of all the ledger accounts are extracted and are recorded in a statement
known as Trial Balance and finally totalled up to see whether the total of debit
balances is equal to the total of credit balances.

A Trial Balance may thus be defined as a statement of debit and credit totals
or balances extracted from the various accounts in the ledger books with a view to test
the arithmetical accuracy of the books. The agreement of the Trial Balance reveals
that both the aspects of each transaction have been recorded and that the books are
arithmetically accurate. If both the sides of Trial Balance do not agree to each other, it
shows that there are some errors, which must be detected and rectified if the correct
final accounts are to be prepared. Thus, Trial Balance forms a connecting link
between the ledger accounts and the final accounts.

3.6. OBJECTIVES OF PREPARING TRIAL BALANCE

The following are the main objectives of preparing the trial balance:
(i) To check the arithmetical accuracy of books of accounts: According to the
principle of double entry system of book-keeping, every business transaction has two
aspects, debit and credit. So, the agreement of the trial balance is a proof of the
arithmetical accuracy of the books of accounts. However, it is not a conclusive
evidence of their accuracy as there may be certain errors, which the Trial Balance
may not be able to disclose.

(ii) Helpful in preparing final accounts: The trial balance records 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 the trial
balance agrees, the final accounts cannot be prepared. So, if the trial balance does not
agree, errors are located and necessary corrections are made at the earliest, so that
there may not be unnecessary delay in the preparation of the final accounts.

(iii) 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. are ascertained and their analysis is made for taking managerial decisions.
So, it serves as an aid to the management.

3.7. LIMITATIONS OF TRIAL BALANCE

The following are the main limitations of the Trial Balance:
(i) Trial Balance can be prepared only in those concerns where double entry
system of accounting is adopted.
(ii) Though trial balance gives arithmetic accuracy of the books of accounts
but there are certain errors, which are not disclosed by the trial balance. That is why it
is said that trial balance is not a conclusive proof of the accuracy of the books of
accounts.

(iii) If trial balance is not prepared correctly then the final accounts prepared
will not reflect the true and fair view of the state of affairs of the business. Whatever
conclusions and decisions are made by the various groups of persons will not be
correct and will mislead such persons.
 3.8. METHODS OF PREPARATION OF TRIAL BALANCE
A trial balance can be prepared by the following two 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).

2. Balance Method: In this method, the difference of each amount is

extracted. If debit side of an account is bigger in amount than the credit side, the
difference is put in the debit column of the Trial Balance and if the credit side is
bigger, the difference is written in the credit column of the Trial Balance.

A specimen of the Trial Balance is given as follows:

Trial Balance of ABC Ltd. as on 31st March 2018

Serial No. Name of the Account Debit Credit
Rs. Rs.
1. Capital A/C - XXX

2. Drawings A/C XXX -

3. Interest on Capital A/C XXX -

4. Interest on Drawings A/C - XXX

5. Salaries, Rent and all types of office and Admin.Exp XXX -

6. All type of Provisions and reserves A/C - XXX

7. All type of Current and fixed Assets A/c XXX -

8. All type of fixed liabilities and current liabilities A/c - XXX

9. Bad debts XXX

10. Provision for Bad debts - XXX

11. Opening and closing stocks XXX

12. Purchases XXX

13. Sales - XXX

14. Purchase Returns/Return outwards - XXX

15. Sales Returns /Return inwards XXX -

Of the two methods of the trial balance preparation, the second is usually used
in practice because it facilitates the preparation of the final accounts.
 Illustration 1: The following Trial Balance has been prepared wrongly. You
are asked to prepare the Trial Balance correctly.

Name of Accounts Debit Balances Credit Balances

Rs. Rs.
Cash in hand - 7,000
Purchase returns 8,000 -
Wages 8,000 -
Establishment Expenses 12,000 -
Sales Returns - 7,000
Capital 12,000 -
Carriage outwards - 2,000
Discount received 1,200 -
Commission earned 800 -
Machinery - 20,000
Stock - 10,000
Debtors 8,000 -
Creditors - 12,000
Sales - 44,000
Purchases 1,28,000 -
Bank Overdraft - 1,14,000
Manufacturing expenses 14,000 -
Loan from Mr.Arun 14,000 -
Carriage inward 1,000 -
Interest on Investment - 1,000
Total 2,17,000 2,17,000
 Solution: 01
Correct Trial Balance of ABC Ltd as on 31st March 2018
Name of Accounts Debit Balances Credit Balances
Rs. Rs.
Cash in hand 7,000 -
Purchase returns - 8,000
Wages 8,000 -
Establishment Expenses 12,000 -
Sales Returns 7,000 -
Capital - 12,000
Carriage outwards 2,000 -
Discount received - 1,200
Commission earned - 800
Machinery 20,000 -
Stock 10,000 -
Debtors 8,000 -
Creditors - 12,000
Sales - 44,000
Purchases 1,28,000 -
Bank Overdraft - 1,14,000
Manufacturing expenses 14,000 -
Loan from Mr.Arun - 14,000
Carriage inward 1,000 -
Interest on Investment - 1,000
Total 2,17,000 2,17,000
Illustration 2:

Prepare Trial Balance as on 31-12-2018 from the books of Shri.Rao Ltd.,

Name of the Accounts
Rs.
Opening stock 10,000
Salaries 5,000
Bills payable 5,000
Cash in hand 12,000
Bank overdraft 4,000
Debtors 15,000
Cash at Bank 18,000
Sales 80,000
Wages 1,000
Prepaid Insurance 2,500
Depreciation on Plant 8,000
Capital 60,000
Creditors 10,000
Loan from Krishana 25,000
Discount allowed 700
Accrued interest payable 5,000
Purchases 30,000
Reserve for Bad debts 1,200
Trade Expenses 500
Outstanding salaries 2,000
Plant and Machineries 90,000
Outstanding interest on overdraft 500
Solution: 02
Trial Balance of Sri Rao as on 31-12-2018

Name of the Accounts Debit Credit

Rs. Rs.
Opening stock 10,000 -
Salaries 5,000 -
Bills payable - 5,000
Cash in hand 12,000 -
Bank overdraft - 4,000
Debtors 15,000 -
Cash at Bank 18,000 -
Sales 80,000
Wages 1,000 -
Prepaid Insurance 2,500 -
Depreciation on Plant 8,000 -
Capital - 60,000
Creditors - 10,000
Loan from Krishana - 25,000
Discount allowed 700 -
Accrued interest payable - 5,000
Purchases 30,000 --
Reserve for Bad debts - 1,200
Trade Expenses 500 -
Outstanding salaries - 2,000
Plant and Machineries 90,000 -
Outstanding interest on overdraft - 500
Total 1,92,700 1,92,700
Exercise: 01
Prepare Trial Balance as on 31-3-2018 from the books of Mr. Vasu

Particulars Rs. Particulars Rs.

Capital 2,49,000 Drawings 24,000

General Expenses 98,210 Building 78,000

Machinery 1,18,680 Stock ( 1-4-2017) 1,32,400

Wages 14,400 Insurance 2,610

Bad debts 1,100 Creditors 5,000

Sales 3,30,720 Loan (Cr) 75,000

Exercise: 02
Commission 5,500 Purchases 2,10,800

Bills payable 7,700 Reserve Fund 15,000

Bank O/D 28,600 Cash in hand 25,320

Journalize the following transactions in the books of Nithish and Co., prepared ledger
and Trial balance
Rs.

2016,
June 1 Started business with a capital of 60,000
2 Paid into bank 30,000
4 Purchased goods from Srinath on credit 10,000
6 Paid to Arun 4,920
8 Cash Sales 20,000
12 Sold to Ravi 5,000
15 Purchased goods from Bharat on credit 7,500
18 Paid salaries 4,000
20 Received from Prem allowed him discount 20
25 Withdrew from bank for office use 5,000
28 Withdrew for personal use 1,000
30 Paid Anil by cheque 3,000

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