Term paper

Subject – financial accountancy

Program – BBA
Enrolment no. - A25606422035
Name -sanyum kapila
Topic
Trail balance

Introduction

A trial balance is a bookkeeping worksheet in which the balances 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 that the entries in a company’s bookkeeping system are
mathematically correct.
A trial balance is so called because it provides a test of a fundamental
aspect of a set of books, but is not a full audit of them. A trial balance is
often the first step in an audit procedure, because it allows auditors to
make sure there are no mathematical errors in the bookkeeping system
before moving on to more complex and detailed analyses.
A trial balance is a worksheet with two columns, one for debits and one for credits,
that ensures a company’s bookkeeping is mathematically correct.
The debits and credits include all business transactions for a company over a
certain period, including the sum of such accounts as assets, expenses, liabilities,
and revenues.
Debits and credits of a trial balance must tally to ensure that there are no
mathematical errors, but there could still be mistakes or errors in the accounting
systems.
Trial balance for a company serves to detect any types of
mathematical errors which might have occurred in the double-
entry system of accounting. If the debit column is equal to the
total of the credit column, the trial balance is then considered to
be balanced, and there should be 0 mathematical errors in the
ledgers
This of course does not mean that there are no errors in a
company's accounting system as transactions which are classified
improperly or those which are simply missing from the system is
still an accounting error. This type of error cannot be detected by
the trial balance procedure.

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 summarising 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.

How a Trial Balance Works

Preparing a trial balance for a company serves to detect any mathematical
errors that have occurred in the double entry accounting system. If the

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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 that there are no errors in a company’s
accounting system. For example, transactions classified improperly or
those simply missing from the system still could be material accounting
errors that would not be detected by the trial balance procedure.
Requirements for a Trial Balance
Companies initially record their business transactions in bookkeeping
accounts within the general ledger. Depending on the kinds of business
transactions that have occurred, accounts in the ledgers could have been
debited or credited during a given accounting period before they are used
in a trial balance worksheet. Furthermore, some accounts may have been
used to record multiple business transactions. As a result, the ending
balance of each ledger account as shown in the trial balance worksheet is
the sum of all debits and credits that have been entered to that account
based on all related business transactions.
At the end of an accounting period, the accounts of asset, expense, or loss
should each have a debit balance, and the accounts of liability, equity,
revenue, or gain should each have a credit balance. However, certain
accounts of the former type also may have been credited and certain
accounts of the latter type also may have been debited during the
accounting period when related business transactions reduce their
respective accounts’ debit and credit balances, an opposite effect on those
accounts’ ending debit or credit balances. On a trial balance worksheet, all
of the debit balances form the left column, and all of the credit balances
form the right column, with the account titles placed to the far left of the
two columns.

Objectives of Trial Balance

The purpose of a trial balance is made to ensure that the journal
entries made into the organisation’s ledger are tallied properly. A
trial balance lists the ending amount of the balance in each
general ledger account. The total amount of all the debits and
credits in an accounting entry are required to be matched by the
balances. If it does not then it means one or more transactions
were recorded in the general ledger, that was left unbalanced.
In the manual record-keeping system, the trial balance is used to
create the financial statements, which means that the account

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balances in the trial balance are manually averaged out and are
found in the financial statements.

Steps in Preparation of Trial Balance

Let’s understand how to prepare a trial balance keeping into consideration the
above example. Following are the steps:
1. Calculate the Balances of Each of the Ledger Accounts
Business transactions are first recorded in the form of journal entries following
the basic accounting principles. These journal entries then go into the ledger
accounts involved in the various business transactions.
For instance, consider the cash account of Kapoor Pvt Ltd in the above example.
The cash transactions are recorded and the cash account is closed with the
remaining debit balance of Rs 6,50,000 as on May 1, 2018. Likewise, balances of
other ledger accounts are ascertained and accordingly the accounts are closed with
the remaining debit or credit balances.
2. Record Debit or Credit Balances in Trial Balance
The remaining debit or credit balances in various accounts of ledger as ascertained
above are then recorded in the Trial Balance. The balances of each of the accounts
of ledger are recorded in the debit or the credit columns as the case may be.
For example, the remaining debit cash balance as on May 1, 2018 is recorded in
the debit column of the trial balance. Further, the remaining credit balance of
capital account of Rs 8,00,000 is recorded in the credit column of the trial balance.
Similarly, the remaining debit or credit balances of all the accounts of ledger are
recorded in the debit or credit columns of trial balance respectively.
3. Calculate Total of The Debit Column
Ascertain the total of the debit column. This is done after recording all the debit
balances of the various accounts of ledger put into debit column of Trial Balance.
For instance, consider the total of the debit column of the Trial Balance of Rs
10,20,000. This is calculated after recording all the closing debit balances of
various accounts of ledger. These accounts include cash, stock, furniture, drawings
etc.
4. Calculate Total of The Credit Column
Ascertain the total of the credit column. This is done after recording all the credit
balances of the various accounts of ledger put into credit column of Trial Balance.
For instance, consider the total of the credit column of the Trial Balance of Rs
10,20,000. This is calculated after recording all the closing credit balances of
various accounts of ledger. These accounts include capital, interest etc.
5. Check if Debit is Equal To Credit

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Finally, you need to check if the total of the debit column matches the total of the
credit column. As specified earlier, trial balance is prepared to check the accuracy
of the debit and credit balances of various accounts of ledger. Both the debit and
credit columns of the Trial Balance must tally since every debit has every credit.
However, it is an indication that there were some errors made while recording
transactions in ledger or trial in cases where they are not equal.
You must note that as per the accounting principle:
 All assets, expenses and receivables must have debit balances and all
 Liabilities, incomes and payables must have credit balances

What are the Uses of a Trial Balance?

It is important to note that the trial balance is not a financial
statement. For the most part, it is only an internal report. But why
does a company need a trial balance? What are the objectives of a
trial balance? Let us try to understand its purpose.
 While it is not a financial statement, a trial balance acts as the
first step in preparing one. Accountants use the trial balance
spreadsheet as the basis while preparing a financial statement.
 A trial balance is made in accordance with the double-entry
concept of bookkeeping. This means that for every entry
recorded in the debit column, a corresponding credit entry will
also be recorded in the credit column. Since it involves
recording all the entries from the ledgers of the organisation in
this manner, it also helps to identify and rectify errors.
For example, if there is a mismatch between the debit and
credit account totals at any point, it indicates an error. However,
since most companies use software tools, their system may not
allow new entries to be added if there is a mismatch between the
values, leaving no room for error. This helps to achieve
mathematical accuracy.
 With the help of the trial balance, one can also ensure that the
account balances are accurately extracted from accounting
ledgers.

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  Being a summary sheet, it helps to give a bird’s eye view of the
accounting transactions of the company.
 A trial balance can be an important tool for auditors as they can
analyse the trial balance prior to scrutinising the ledgers.
 Adjustments can be made easily even after a trial balance has
already been prepared because it provides the accountants
with tallied columns.

Trial Balance Format -The Trial Balance has a simple format that is
to be designed. Below is the design of the simple format.

Foli Credi
Debit
o t

Land 1,00,00 48000

0
Furniture 80,00
600 0
Machinery
560 5676
Inventory
6000 4817
Debtors
0
Bank
4600
Capital
Loan
Creditors
Sales
Sales Returns 590

Cost of Goods Sold 13067

Advertising 6576

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 Membership Fees
340
Water and
Electricity 1200
Telephone 900
Salaries and 2800
Wages
1260
Interest Paid

13849
138493
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What are the three types of trial balances?

Unadjusted trial balance :

 Done before adjusting entries are made

 Calculated by totalling the balances of all ledger
accounts
You start by preparing the unadjusted trial balance. You
check the balance of debits against the balance of credits in
the general ledger. If they're equal, your books are balanced.
You usually work with this trial balance at the end of the
accounting cycle, business quarter, or fiscal year.

Adjusted trial balance :

 Done after adjusting entries are made, just before

financial reports are produced
 Calculated by totalling the balances of all ledger
accounts

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 Some transactions are not recorded during an accounting
period. Prepaid rent, prepaid insurance, interest, or
depreciation, for example. You then have to adjust entries to
account for these changes.
After you complete the adjustments, redo the trial balance to
ensure there are no errors.
You can now go ahead and create your financial statements.
And then prepare for the next accounting period. You start by
closing your Income Statement accounts. Generally, these
accounts – sometimes called temporary or nominal accounts –
track expenses and revenue.
At the end of the accounting period, you transfer all balances
to a permanent account –assets, liabilities, or equity accounts.
Then return all balances to zero.
Balances in Permanent accounts like assets are simply carried
over into the next accounting period. You make closing entries
when you transfer the temporary account balances to
permanent accounts.

Post-closing trial balance :

 Done after temporary accounts are closed

 Calculated by totalling the balances of all permanent
ledger accounts
Lastly, You're now ready to prepare the post-closing trial
balance. Other trial balances listed all your account balances.
But the post-closing trial balance lists only permanent – or
Balance Sheet – accounts.
Again, verify the balances to make sure they equal out. You're
now set for the next accounting period.
Remember that all trial balances – regardless of the type –
have the same purpose. Your total of debits should equal your
total of credits. This tells you if your financial entries are
correct or if you need to look for any errors.

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Limitations of Trial Balance
Trial Balance is an essential Account, especially for the
bookkeepers. However, there are certain limitations of the Trial
Balance too. The main limitation of the Trial Balance is that it
does not find out all kinds of errors. This means that even if there
is a fully Balanced Trial Balance, it would not assure that there is
100% accuracy in all the Accounts. There are several kinds of
errors that the Trial Balance does not draw attention to. These
errors are as follows:
1. A transaction which is entirely missing is not journalised.
2. If wrong amounts are written in both the Accounts.
3. If the posting is carried out in the wrong Account but the
amount is right.
4. The entry which is not posted in the ledger at all.
5. Double posting of the entry mistakenly.
6. One of the main and important limitations of Trial Balance is
that it does not point out every type of error. This basically
means that even if you have fully Balanced Trial Balance,
there will not be 100 percent accuracy of all the Accounts.
7. Any transaction which is missing completely and wasn't even
journalised, then Trial Balance will not detect any error.
8. When there are wrong amounts written on both the sides of
Trial Balance, it will be unable to detect the error.
9. If any posting was done on the wrong Account of the ledger
but in the right amount, then Trial Balance will not draw
attention to this error.
10. Any double posting of entry in the ledger Account by
mistake will not be able to be identified by the Trial Balance.

A Trial Balance is a report or it is like a bookkeeping worksheet

that collects the Balances of all the general ledger Accounts which
is prepared by a company at the end of the financial year.
Basically, it is an Account which lists the closing Balances of every

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Account on the Debit and Credit sides. One of the important
functions of objective is that it has to ensure that all the Debit
sides and Credit sides must be equal to each other. The Accounts
mentioned in the Trial Balance are related to Accounting items
like assets, liabilities, revenues, gains and losses, equity etc. It is
being prepared by companies to make the adjusting entries to the
general ledger which are necessary.

Preparation of Trial Balance is the third step or process of the

Accounting process. After journalising and posting each and every
entry in the ledger Accounts, Trial Balance is prepared. Accuracy
of the Accounts is being judged by analysing the Trial Balance
whether it is Balanced or not. Trial Balance also provides
reasonable and proper assurance about the books of Accounts
that they are free of any errors. The main function of Trial Balance
is to check the accuracy of all the Accounts of the entity.

Trial Balance vs Balance Sheet

May be due to the similarity in nomenclature a lot of people get
confused between the Trial balance and the balance sheet, but by
now you surely know that both these are completely different. The
information from the trial balance is used to prepare the balance
sheet.
Some important distinctions here must be made between a trial
balance vs balance sheet.
 The most important difference is that a balance sheet is a
financial statement that is used to report a company's
liabilities, assets, and stockholders' equity at a particular date.
The trial balance, as stated earlier, is not a financial statement.
It simply summarises all the transactions on the company's
ledgers.
 A trial balance also does not form part of the final accounts,
while a balance sheet is an essential part of those.
 Another important difference in trial balance vs balance sheet
is their formats. The trial balance is recorded under debit and
credit columns, while a balance sheet ideally displays total
assets, liabilities, and stockholders' equity. Moreover, while the
trial balance uses the company's ledgers as a source, a balance
sheet uses the trial balance as a basis.

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 The two also differ in the types of accounts that they display.
The trial balance shows real, nominal, and personal accounts,
while a balance sheet shows only real and personal accounts.
 Unlike a trial balance, a balance sheet requires the
authorisation of an auditor.
Conclusion
While the preparation of a trial balance is not a one-solution for
detecting all accounting errors, it is undoubtedly an essential step in
the accounting process since the remaining accounting exercises
hinge on this process. It finds excellent use in real-life scenarios. For
example, banks and lending agencies may use it to understand the
borrowing capacity of a company and also its credibility. It is an
essential procedure for the closure of books of accounts, but it is not
error free

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