What is a Trial Balance?
A Trial Balance is a statement that keeps a record of the final ledger balance of all accounts in a business. It has two columns – debit and credit. Trial Balance is prepared at the end of a year and is used to prepare financial statements like Profit and Loss Account or Balance Sheet. The main objective of a Trial Balance is to ensure the mathematical accuracy of the business transactions recorded in a company’s ledgers.
Preparing a Trial Balance:
There are three methods by which you can prepare a Trial Balance. They are as follows:
- Total Method – Total Method records each ledger account’s debit and credit columns to the Trial Balance. Both the columns should be equal as this method follows the double-entry bookkeeping method.
- Balance Method – This method uses each ledger account’s final debit/credit balance in the Trial Balance. Once the balance figures of all accounts are listed, the Trial Balance (both on the debit and credit side) helps check the accuracy of all transactions. The Balance Method of preparing Trial Balance is more popular compared to its alternatives.
- Total cum Balance Method – This method is a combination of both the Total Method and Balance Method. The Trial Balance has four columns – two for the credit and debit totals of a ledger account and two for that account’s credit/debit balances.
Objectives of Trial Balance:
The main objectives of a Trial Balance are as follows:
- It helps in ascertaining arithmetic errors that occur while preparing accounts. Accountants can make mistakes while recording financial transactions under the double-entry bookkeeping system. When the debit and credit sides of a Trial Balance do not match, it means one of two things. One, there was an error in either recording the account balance. Or two, there is an accounting mistake made while recording the transaction in the ledgers.
- It helps in preparing the financial statements of a company at the end of a financial year. The final balance of expenses and revenue accounts is taken from the Trial Balance and used in the Profit and Loss Account. Similarly, the accounts related to Assets, Liabilities and Capital gets recorded in the Balance Sheet.
- A Trial Balance helps in summarising the financial transactions done while running a business. It is a consolidated summary of the financial transactions that have taken place within a financial year. It can help the management in making business decisions as well.
Limitations of a Trial Balance
The main limitations of a Trial Balance are as follows:
- It may hide errors of omission. Some transactions are not journalised at all. Even a correctly balanced Trial Balance cannot reveal this mistake.
- If a journal entry with an incorrect amount gets recorded in both accounts, the Trial Balance will not detect that error.
- A journal entry may have the right amount, but the accountant may have entered it under the wrong accounting heads. The Trial Balance cannot identify such mistakes.
- If a journal entry is missing in the ledger, it will not reflect in the Trial Balance.
Trial Balance is an essential part of the accounting process. It is beneficial in providing a summary of the financial activities of a company, and it also helps in preparing financial statements.