Chapter 5

Trial Balance

5.1 Concept of Trial Balance

Trial Balance is basically a statement having a debit side and a credit side where all the debit
balances of journal entries and ledger postings are recorded on the debit side of the trial
balance, and all the credit balances of journal entries and ledger postings are recorded on the
credit side of the trial balance. These postings are recorded in the trial balance to verify and
check for the correctness of the journal entries and ledger postings. This is because if the debit
and credit side of the trial balance agrees, then it is assumed that the journal, subsidiary books,
and ledgers are correctly and properly maintained.
The main reason for the trial balance to match is the ‘Double Entry System’ of accounting.
According to the double entry system, every transaction is recorded twice, once on the debit
side and the other on the credit side. So, for every debit entry, there is a corresponding credit
entry. Though it is not conclusive proof of the correctness of all books of accounts because
there can be some errors despite the fact that the total of both sides of the trial balance is
matching.
According to Carter – “Trial Balance is the list of debit and credit balances, taken out from
ledger. It also includes the balances of cash and bank taken from cash book.”

5.2 Objectives of Trial Balance

The objectives or the significance of trial balance is as follows:
1. It Summarizes the Ledger Accounts:
Ledger accounts are made to record all the transactions related to the assets, liabilities,
expenses, and income of the business with the help of a journal. So, all the debit and credit side
balances of ledgers are transferred to the debit and credit side of the trial balance, respectively.
So, now from the trial balance, it becomes easy to get concrete information of what is the
actual status of the assets, liabilities, expenses or income rather than having abstract access to
information. So, trial balance provides the summary for the ledger accounts.
2. It Helps in Determining the Arithmetical Accuracy of the Ledger Accounts:
The aim of the trial balance is to check if all the ledger postings are done in a correct and
accurate manner. This can be assessed using the balances of both the debit and credit side of
the trial balance. Because if the total on both sides agrees or equates, then it means that ledger
postings are posted in an accurate manner. It also confirms the rules of the double entry system
that all the entries have a double effect.
3. It Guides in Preparing Final Accounts:
For every businessman, it is important to know the financial health of their business. This can
be ascertained by preparing financial accounts like Trading Account, Profit and Loss Account,
and Balance Sheet. So, there comes the role of Trial Balance. Once, all the journal entries have
been passed, ledger postings have been recorded, and the trial balance matches, then all the
financial accounts are prepared, thereby that the balances in the trial balance become the base
for recording all the accounting data further in the final accounts.
4. It Helps in Allocating the Errors:
It is important for the trial balance to tally, but if it does not tally, it implies that certainly there
are some errors in the books of accounts. So, it would help to first make the businessman
aware that maybe a few postings have not been well posted or posted with the wrong amount
or in the wrong account, and many other possible errors could be there. So, once the errors are
allocated, and then corrections could be done to remove the errors.

5.3 How to Prepare Trial Balance?

The statement for trial balance can be prepared at any time in the business like at the end of a
financial year, for half yearly, at the end of a quarter, or at the end of every month. But most
often trial balance is prepared at the end of the financial year so that it can be ensured that
books of accounts are maintained with complete accuracy. The statement for trial balance is
not prepared as such for a particular period rather it is prepared on a set date. Following are the
three methods for preparing the statement for trial balance:
1. Balance Method
While preparing the statement of trial balance under this method, all the ledger accounts with
the debit balances are carried forward to the debit side of the trial balance and all the ledger
accounts with the credit balances are carried forward to the credit side of the trial balance. As
the name suggests, it is a method related to the balances, so the balances are available in the
ledger account at the end after all the adjustments are carried forward to the trial balance. Also,
if any of the ledger accounts do not show any balance i.e. the total on both the debit and the
credit side is the same, and then there is no need to carry it to the trial balance. So, in the end,
if the debit and credit side of the trial balance matches, it can be said that the trial balance has
been well prepared.
2. Total Amount Method
While preparing the statement of trial balance under this method, unlike the balance method,
not only balances rather the total amount on the debit side of the ledger account is transferred
to the debit side of the trial balance and the total amount on the credit side of the ledger
account is transferred to the credit side of the trial balance. Under this method, the statement
for trial balance can be prepared promptly after posting all the entries to ledger accounts before
any adjustments are made to them.
3. Total-cum-Balances method
Under this method, two methods – ‘Balance Method’ and ‘Total Amount Method’ are
combined to prepare the statement of trial balance. It implies that in total, four columns are
prepared, two columns are for recording the debit and credit balances of ledger accounts and
two columns are for recording the debit and credit totals of various ledger accounts. This
method is rarely used and not so frequently used while making the statement for the trial
balance.

5.4 Limitations of Trial Balance

As we saw the trial balance is an important account for bookkeepers. But there are some limitations
of a trial balance as well. One main limitation is that it does not point out all types of errors. This
means that even if we have a fully balanced trial balance it will not assure 100% accuracy of the
accounts. There are many types of errors a trial balance does not draw attention too. Some such
errors are

 A transaction that is completely missing, was not even journalized

 When the wrong amount was written in both the accounts
 If a posting was done in the wrong account but in the right amount
 An entry that was never posted in the ledger altogether
 Double posting of entry by mistake

5.5 Features of a Trial Balance

The following are the features of a Trial Balance:

1. It is a list of the various ledger account balances whether debit or credit.

2. It is prepared in the form of a statement.
3. A firm prepares a trial balance in order to check the arithmetical accuracy of the ledger
accounts.
4. The arithmetical accuracy established by a trial balance is not proof that there are no mistakes
in the books of accounts.
5. A trial balance is usually prepared at the end of the accounting year. However, a firm may
prepare it weekly, monthly, quarterly or half-yearly also.
6. It does not form a part of the final accounts.
7. It provides a summary of the ledger accounts. Thus, it serves as a link between the books of
accounts and Trading & Profit and Loss A/c and Balance Sheet.

5.6 Undetectable Errors in a Trial Balance

A trial balance can trace the mathematical inaccuracy of the general ledger. However, there are a
number of errors that cannot be detected by this report:

 Error of omission: The transaction was not entered into the system.
 Error of original entry: The double-entry transaction includes the wrong amounts on
both sides.
 Error of reversal: When a double-entry transaction was entered with the correct
amounts, but the account to be debited is credited and the account to be credited is
debited.
 Principle error: The entered transaction violates the fundamental principles of
accounting. For example, the amount entered was correct and the appropriate side was
 chosen, but the type of an account was wrong (e.g., expense account instead of liability
account).
 Commission error: The transaction amount is correct, but the account debited or
credited is wrong. It is similar to the principle error described above, but commission
error is usually a result of oversight, while principle error is a consequence of a lack of
knowledge of accounting principles.

5.7 How to Prepare a Trial Balance

To prepare a trial balance, we require the closing balances of all the respective general ledger
accounts. The trial balance is drafted after posting all the financial transactions which are
required to be posted to the journals and summarizing them on the ledger statements. The trial
balance is formatted to ensure that the debit’s balance is equal to the credit’s balance.
1. To start off with preparing the trial balance, this is to be made sure that we need every
ledger account to be balanced, the balance amount is to be chalked out to include in the
trial balance.
2. After this, prepare an eight-column worksheet, in which column headers should assign
the account number, account name and the aligned columns for debit and credit balances.
3. For every ledger account, the balance is to be transferred to the trial balance worksheet,
the account number and the account name along with the account balance in the
appropriate debit or to the credit column.
4. Then add up the amounts of the debit column and the credit column. Generally, the totals
should be the same in an error-free trial balance.
5. If there is a difference in balance, accountants need to locate and rectify the errors made.
Exercise 1

Prepare e trial balance for Ahmed brother’s private limited

Item’s Description Amount of Taka

Bank Loan 14,000
Bill Payable 1,000
Marketable Securities 6,500
Unearned Revenue 3,500
Debtors 12,000
Outstanding Salaries 2,500
Prepaid Rent 2,000
Insurance Expenses 7,300
Owner’s Investment 95,000
Rent 400
Accumulated Depreciation Equipment 14,000
Accrued Revenue 15,000
Machinery 25,000
Drawings 3,500
Equipment 40,000
Maintenance Expenses 5,000
Misc. Expenses 4,800
Accrued Expenses 1,500
Depreciation Expenses Equipment 2,000
Unexpired Insurance 8,500
Vendor’s Payable 500