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LALL POA LESSONS

Syllabus SESSION 9 8. Use the balances brought down to construct the trial
Objective balance.

9. Outline the uses and limitations of the trial balance.

The Trial Balance

A trial balance is a bookkeeping worksheet in which the balance of all ledgers are compiled into
debit and credit account column totals that are equal. A company prepares a trial balance
periodically, usually at the end of every reporting period. The general purpose of producing a
trial balance is to ensure the entries in a company's bookkeeping system are mathematically
correct.

How The Trial Balance Works

➢ If the total debits equal the total credits, the trial balance is considered to be balanced,
and there should be no mathematical errors in the ledgers.
➢ However, this does not mean there are no errors in a company's accounting system.

Uses of The Trial Balance

1. Checking Arithmetical Accuracy: The trial balance is used to verify the actual amount
entered on the right side of the current account while migrating the figures from various ledger
books like purchase books, sales books, cash books, etc. Trial Balance, aside from general ledger
accounts, is also useful to check the accuracy of special-purpose accounting books.
2. Assist in Preparing Financial Statements: Profit and Loss Account, Balance Sheet, and Cash
Flow Statement must be prepared at the end of each accounting year. The balances of all the
ledger accounts used to prepare financial statements are already available in the trial balance.
Hence, it makes the preparation and analysis of financial statements easier.
3. Assist in Rectifying errors: The debit total of the trial balance must equal to credit total of
the trial balance. This checks the arithmetical accuracy of ledger postings. If this does not
happen, it will make the accountant find and rectify the error. Accountants, therefore, feel
relieved when the trial balance debit totals and credit totals match.

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4. Assist in Adjustments: Adjustment accounts like prepaid expenses, outstanding liabilities,

closing stock, etc., need to be prepared during the preparation of the trial balance. This assists
in making adjustments only relevant to the current accounting year. Businesses prepare
adjustment accounts generally at the end of the accounting year. However, there is no
restriction to open these adjustment accounts as they occur.
5. Assist in preparation of Audit Reports
6. Assist in Decision Making regarding budget

Limitations of Trial Balance

1. It does not prove that all transactions have been recorded
2. It does not prove that the ledger is correct
3. Numerous errors may exist even though the trial balance columns agree
4. It cannot find the missing entry from the journal
5. It cannot find the missing entry from the ledger
6. It cannot protect the repeated postings
7. It cannot protect the offsetting errors
8. It cannot protect the errors of principles
9. It cannot protect the errors of commission
10. It cannot protect the errors of omission

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Trial Balance Format

<COMPANY NAME>
Trial Balance as at <insert date>
DR CR
$ $
Bank xx
Cash xx
Motor Vehicle xx
Capital xx
Purchases xx
Sales xx
Returns Inwards xx
Returns Outwards xx
T. Smith xx
L. Larry xx
xxx xxx

Double Entry Rules

Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Capital Credit Debit
Expenses Debit Credit
Revenues Credit Debit

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TYPES OF BALANCES ACCOUNTS USUALLY HAVE:

Account Classification Types of Balance

Assets Debit Balance

Liabilities Credit Balance

Capital Credit Balance

Expenses Debit Balance

Revenues Credit Balance

Steps for Balancing an Account

1. Adding up both sides of the account.
2. The smaller side is subtracted from the larger side.
3. The difference in #2 would be your balance c/d.
4. Insert balance c/d on the smaller side.
5. Total each side.
6. Double line under each total.
7. Insert balance b/d on opposite side to balance c/d

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Exercise 1

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Exercise 2

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