1. What is a Trial Balance?
A Trial balance is a report which lists out all the Closing balances of all the accounting ledgers of a company at a certain period of time i.e. Normally 31st March of every year. The ledger accounts include both Revenue & Capital ledgers.
In Trial balance, all the ledger account’s Debit and Credit balances must be Equal.
The main purpose of preparing a Trial balance is to ensure that all the accounting entries in a company’s bookkeeping systems are mathematically correct before preparing the financial statement of the organization.
As you know, Each Ledger account will have either a Debit balance or a Credit balance. Such a Debit balance will be shown in the “Debit column of the Trial balance” and the Credit value will be shown in the “Credit column of the Trial balance”.
2. Types of Trial Balances
There are 3 types of Trial balances:
1. Unadjusted Trial balance
It denotes the Trial balance is prepared before adjustment entries are made. It can be calculated by totaling all the ledger account balances.
2. Adjusted Trial balance
It denotes the Trial balance is to be prepared after making necessary adjustment entries but it can be done before the preparation of Financial Statements. Then also, the Trial balance can be calculated by totaling all the ledger account balances.
3. Post-closing Trial balance
The trial balance will be done after Temporary accounts are closed and will be calculated by totaling all permanent ledger account balances.
3. Uses of Trial Balance
The Uses of the Trial balance is
1. To Check the Arithmetical accuracy of all the Ledger accounts
2. Trial balance helps in the preparation of Financial statements like Profit and Loss accounts, Balance sheets, and Cash flow statements.
4. Trial balance Rules
The Trial balance Rules are as follows
1. All Expenses/ Losses / Drawings must be recorded on the Debit side
2. All Incomes / Profits must be recorded on the Credit side
3. All Assets / Cash and Bank balances must be recorded on the Debit side
4. All Liabilities, Equity & Capital must be recorded on the Credit side
5. When a Trial balance is prepared?
Trial balance preparation is 3rd step in the process of accounting. After the Ledger posting, a statement will be prepared to show the Debit and Credit balances. i.e. Trial balance.
If the two ledger balances are agreed upon, the accounting is reasonably accurate.
If the two ledger balances are not agreed upon, the accounting is not reasonably accurate and there may be some error that the accounts department needs to be rectified.
6. Trial Balance Format
A Trial balance is a sheet that contains 5 columns
1. Serial number of ledger
2. Name of the Ledger account
3. Ledger folio
4. Debit column
5.. Credit column
Trial balance
As at …………
| S.No. (1) | Name of the Ledger account (2) | L.F (3) | Debit (Closing balance) (4) | Credit (Closing balance) (5) |
Note:
1. A Trial balance to be prepared at a particular date is to be mentioned on Top of the statement.
2. In the First column, you need to mention the Serial Number of the Ledger
3. In the Second column, the Name of the Ledger account will be mentioned i.e. Machinery a/c, Purchases a/c, Sales a/c, etc.,
4. In the Third column, Ledger Folio number or any Unique Serial number to identify the ledger.
5. In the Fourth column, the Closing Debit balance of Ledger accounts like Asset accounts or Expenses accounts.
6. In the Fifth & Last column, the Closing Credit balance of Ledger accounts like Liability accounts or Income accounts.
7. Example of a Trial Balance
Illustration
One of our clients, Ms. Sabitha Nayar asked you to finalize her books of accounts for the year ended 31st Mar 2022. The transactions are given as follows. For audit purposes, Mr. Sabitha Nayar furnished the following statement.
| Dr Balance (Rs. in 000’s) | Cr Balance (Rs. in 000’s) | |
| Sabitha Nayar’s Capital | 5,250 | |
| Sabitha Nayar’s Drawings | 625 | |
| Bills payables | 1,256 | |
| Sales | 6,255 | |
| Leasehold property | 7,553 | |
| Trade receivables | 25 | |
| Bills receivables | 5 | |
| Sales returns | 1 | |
| Land | 4,403 | |
| Inventory (1.4.2021) | 19 | |
| Cash at Bank | 76 | |
| Purchase returns | 6 | |
| Cars | 23 | |
| Trade payables | 37 |
Closing inventory on 31st Mar 2022 is valued at Rs.84,000. Prepare Trial balance by making corrections.
Solution:
The Corrected Trial balance of Ms.Sbitha Nayar as at 31st March 2022
| Particulars | Dr Balance (Rs. in 000’s) | Cr Balance (Rs. in 000’s) |
| Sabitha Nayar’s Capital | 5,250 | |
| Sabitha Nayar’s Drawings | 625 | |
| Bills payables | 1,256 | |
| Sales | 6,255 | |
| Leasehold property | 7,553 | |
| Trade receivables | 25 | |
| Bills receivables | 5 | |
| Sales returns | 1 | |
| Land | 4,403 | |
| Inventory (1.4.2021) | 19 | |
| Cash at Bank | 76 | |
| Purchase returns | 6 | |
| Cars | 23 | |
| Trade payables | 37 | |
| Total | 12,767 | 12,767 |
Note:
Closing inventory on 31st Mar 2022 is valued at Rs.84,000 and will not be shown in the Trial balance.
I hope you understood the “Trial Balance: 7 Things you Need to Know” concept.
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