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What is Trial Balance

What is Trial Balance

What is the definition of trial balance, its meaning, and how is it prepared? Its objectives and what are its limitations. Read to learn more.

A trial balance is a statement to record the ledger balances of all the accounts corresponding to a particular business. It comprises two columns, namely credit and debit. Generally prepared at the end of the financial year, it is used to prepare monetary statements like profit or loss accounts or a balance sheet. The primary target of any trial balance periodically is to ensure statistical and mathematical accuracy in the business transactions recorded in the company or organisation’s ledgers. 

How is a trial balance prepared? 

Some methods for how a trial balance statement can be created are listed below –

  • The total method – records each ledger’s total credit and debit columns that pertain to the trial balance in the account. In this method, both the columns must be equal because it follows the dual entry or the double-entry bookkeeping worksheet method.
  • The balance method – records the final debit or credit of the ledger’s account in the trial balance. Once all the figures are listed, the trial balance checks the accuracy of the entire transaction. This method is much more popular than other methods.
  • The total cum balance method – is the amalgamation of both the total and balance methods. In this, the trial balance has four columns, namely two for credit and debit and two other for the account’s credit or debit balances. 

Rules 

There are some rules to preparing a trial balance, as follows –

The debit column of the trial balance should incorporate the account balances, such as –

  • Assets.
  • Drawing account.
  • Expense account.
  • Bank balance.
  • Cash balance.
  • Any losses.

The credit column of the trial balance should incorporate the account balances, such as —

  • Liabilities.
  • Capital account.
  • Income account.
  • Profits.

Objectives 

The prime objectives of trial balance are listed below –

  • It aids in ascertaining arithmetic errors occurring in account creation. Accountants sometimes make mistakes while recording monetary transactions under the dual entry bookkeeping worksheet. If the credit and the debit sides fail to match, there might be an accounting mistake while recording the transaction in the ledger. 
  • Apart from recording transactions via bookkeeping worksheets, it helps prepare the company’s monetary statements at the financial end of the year. The financial balance is taken from the trial balance. After that, both statements are used to make a profit or loss account or a balance worksheet.
  • While running a business, a trial balance statement helps summarise all transactions done. It provides a consolidated summary of all transactions conducted at the financial year-end. Trial balance periodically also helps management make business decisions. 

Limitations 

Although trial balances are helpful, they have a few limitations, as follows — 

  • There can be a possibility of hiding errors of omission. Sometimes, an accurate trial balance also fails to reveal or disclose this fallacy.
  • If there is an incorrect entry in the journal in both accounts, the trial balance will not disclose this error.
  • Even if the journal entry is correct, an accountant might record it incorrectly to any accounting heads. Even if the trial balance is accurate, it will fail to detect and reveal the error.
  • If there is a missing journal entry in the ledger, it will not reflect in the trial balance. 

Conclusion

A trial balance is a statement to record the final ledger balance of all the accounts corresponding to a particular business. It is generally prepared at the financial year-end. It helps prepare monetary statements like profit or loss accounts or a balance sheet. The trial balance statement comprises two columns, namely credit and debit. 

The total method records each ledger’s total credit and debit account columns on the account’s trial balance. The balance method records the final debit or credit of the ledger’s account in the trial balance. The total cum balance method amalgamates both the total and balance methods. The primary target of any trial balance is to ensure statistical and mathematical accuracy in the business transactions that are recorded in the company or organisation’s ledgers. There are also specific rules to preparing a trial balance. As previously mentioned, although trial balances are helpful, they do have some limitations.