After passing the journal entries and posting them to the ledger, the next process of accounting is the preparation of Trial Balance. A Trial Balance is a statement or list of all debit and credit balance of each account separately. Whenever Trial Balance is prepared, its total of the debit side should tally with the total of credit side.
An agreement of both sides indicates a reasonable (but not conclusive) accuracy of accounting work. If however, two sides do not tally, there is undoubtedly some error.
It emerges from the principle of Double Entry System that the amounts written on the debit side are always equal to the credit side. Once there is an agreement is established it is an indication that accounting work is free from clerical errors.
However, this accuracy is only reasonable accuracy. It cannot be said absolute accuracy because some errors in nature of errors of principle and compensating errors do not result in disagreement of trial balance and a layman will think that accounts have been accurately prepared.
Generally, the T.B. is prepared at monthly or quarterly depending on the size of the organisation.
(i) It enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors. In other words, the trial balance helps to establish the arithmetical accuracy of the books.
(ii) Financial statements are typically prepared by the agreed trial balance. Otherwise, the work may be cumbersome. Hence, the preparation of financial statements is the second objective.
(iii) It serves as a summary of what is contained in the ledger; the ledger should be seen only when details are required in respect of an account.
One should note that the agreement of Trial Balance is not conclusive proof of accuracy. In other words, despite the agreement of the trial balance some errors may be undetected. These may be of the following types:
(i) The transaction has not challenged at all in the journal.
(ii) The wrong amount has been written in both columns of the journal.
(iii) A wrong account has been recorded in the journal.
(iv) An entry has not at all been posted to the ledger.
(v) Entry is posted twice in the ledger.
Still, the preparation of the trial balance is advantageous. Without it, the preparation of the financial statement, the profit and loss account and the balance sheet, would be very difficult.
Trial Balance Format
Rules of Preparation of TB
While preparing the T. B. from the given list of ledger balances, the following rules should be taken into care:
- The balances of all assets, expenses accounts, losses, drawings, cash and bank balances are entered in the debit column of the Trial Balance.
- The balances of all liabilities accounts, income, profits and capital, are entered in the credit column of the Trial Balance.
- If due to some reasons both sides to not tally, the difference should be transferred to suspense account temporarily but suspense account should be reconciled for the reasons of difference before the preparation of final accounts. Having a suspense account is not a good practice.