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CHAPTER 10 TRIAL BALANCE

In the earlier chapters, we have learnt about the basic principles of accounting that for every debit there will be an equal credit. It implies that the total of debits will be equal to total of credits. if the sum of all debits equals the sum of all credits, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate. The trial balance is a tool for verifying the correctness of debit and credit amounts. It is an arithmetical check under the double entry system which verifies that both aspects of every transaction have been recorded accurately.

Preparation of Trial balance is the third phase in Accounting Process. After posting the accounts in the ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known as Trial Balance. In other words, A trial balance is a statement showing the balances of all the accounts in the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts. Trial balance is an important statement in the accounting process as it shows the final position of all accounts and helps in preparing the final statements (i.e., Profit & Loss account and Balance sheet).

It is normally prepared at the end of an accounting year. However, an organisation may prepare a trial balance at the end of any chosen period, which may be monthly, quarterly, half yearly or annually depending upon its requirements.

In order to prepare a trial balance following steps are taken:

• Ascertain the balances of each account in the ledger.

• List each account and place its balance in the debit or credit column, as the case may be. (If an account has a zero balance, it may be included in the trial balance with zero in the column for its normal balance).

• Compute the total of debit balances column.

• Compute the total of the credit balances column.

• Verify that the sum of the debit balances equals the sum of credit balances. If they do not tally, it indicates that there are some errors. So, one must check the correctness of the balances of all accounts.

It may be noted that all assets expenses and receivables account shall have debit balances whereas all liabilities, revenues and payables accounts shall have credit balances.

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Objectives of Preparing a Trial Balance

The trial balance is prepared to fulfil the following objectives:

To ascertain the arithmetical accuracy of the ledger accounts.
To help in locating errors.
To help in the preparation of the financial statements. (Profit & Loss account and Balance Sheet).

(i) Checking of the arithmetical accuracy of the accounting entries

As indicated above, Trial Balance helps in knowing the arithmetical accuracy of the accounting entries. This is because according to the dual aspect concept for every debit, there must be an equivalent credit. Trial Balance represents a summary of all ledger balances and, therefore, if the two sides of the Trial Balance tally, it is an indication of this fact that the books of accounts are arithmetically accurate.

Of course, there may be certain errors in the books of accounts in spite of an agreed Trial Balance. For example, if a transaction has been completely omitted, from the books of accounts, the two sides of the Trial Balance will tally, in spite of the books of accounts being wrong.

(ii) Basis for financial statements

Trial Balance forms the basis for preparing financial statements such as the Income Statement and the Balance Sheet. The Trial Balance represents all transactions relating to different accounts in a summarized form for a particular period. In case, the Trial Balance is not prepared, it will be almost impossible to prepare the financial statements as stated above to know the profit or loss made by the business during a particular period or its financial position on a particular date.

(iii) Summarized ledger

It has already been stated that a Trial Balance contains the ledger balances on a particular date. Thus, the entire ledger is summarized in the form of Trial Balance. The position of a particular account can be judged simply by looking at the Trial Balance. The Ledger may be seen only when details regarding the accounts are required.

Preparation of Trial Balance

Theoretically speaking, a trial balance can be prepared in the following three ways:

(i) Totals Method

(ii) Balances Method

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(iii) Totals-cum-balances Method

Totals method

Under this method, total of each side in the ledger (debit and credit) is ascertained separately and shown in the trial balance in the respective columns. The total of debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on double entry system. However, this method is not widely used in practice, as it does not help in assuming accuracy of balances of various accounts and preparation of the financial statements.

Balances Method

This is the most widely used method in practice. Under this method trial balance is prepared by showing the balances of all ledger accounts and then totalling up the debit and credit columns of the trial balance to assure their correctness. The account balances are used because the balance summarises the net effect of all transactions relating to an account and helps in preparing the financial statements.

It may be noted that in trial balance, normally in place of balances in individual accounts of the debtors, a figure of sundry debtors is shown, and in place of individual accounts of creditors, a figure of sundry creditors is shown.

Totals-cum-balances Method

This method is a combination of totals method and balances method. Under this method four columns for amount are prepared. Two columns for writing the debit and credit totals of various accounts and two columns for writing the debit and credit balances of these accounts.

However, this method is also not used in practice because it is time consuming and hardly serves any additional or special purpose.

Trial Balance of X and Co. as at 31.03.2016

Sl. No.	Name of Account	Debit Balance ₹	Credit Balance ₹
1.	Cash A/c	7,500
2.	Furniture A/c	3,000
3.	Salaries A/c	2,500
4.	Shyam’s A/c		3,500
5.	Purchases A/c	26,000
6.	Purchases Returns A/c		500
7.	Ram’s A/c	4,900
8.	Sales A/c		30,500
9.	Sales Returns A/c	100
10.	Capital A/c		9,500
	Total	44,000	44,000

The table visually presented in the PDF is headed “Trial Balance of X and Co. as at 31.03.2016”, with separate Debit Balance ₹ and Credit Balance ₹ columns, and totals of ₹44,000 on both sides.

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YouTube Link for Lecture:

Channel Name:

Lateef’s Commerce Academy

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Visual/table content in the PDF

The main visual element is the Trial Balance table on page 41. It contains 10 accounts:

Cash A/c — Debit ₹7,500
Furniture A/c — Debit ₹3,000
Salaries A/c — Debit ₹2,500
Shyam’s A/c — Credit ₹3,500
Purchases A/c — Debit ₹26,000
Purchases Returns A/c — Credit ₹500
Ram’s A/c — Debit ₹4,900
Sales A/c — Credit ₹30,500
Sales Returns A/c — Debit ₹100
Capital A/c — Credit ₹9,500

Total Debit = ₹44,000
Total Credit = ₹44,000