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    Trial Balance


    Trial Balance
    After posting the accounts in the Ledger, a statement is prepared to show separately the debit and credit balances and to check the arithmetic accuracy of the accounts of a certain periods such a statement is known as the Trial Balance.
    The agreement of a trail balance ensures arithmetical accuracy only.  A concern can prepare trail balance at any time, but its preparation as on the closing date of an accounting year is compulsory.
    According to M.S. Gosav “Trail balance is a statement containing the balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of ledger postings”.
    Objectives and Features of trial balance
    a)      To Ascertain the Arithmetical Accuracy of Ledger Accounts: The agreement of a trail balance ensures arithmetical accuracy of books of books of accounts.
    b)      To help in preparing Final Accounts: Financial statements are normally prepared on the basis of the Trial Balances. Otherwise, the work may be difficult, if not impossible. Preparation of financial statements, therefore, is the second objective of preparing a Trial Balance.
    c)       Summary of Each Account: The trial balance offers a summary of the Ledger. The ledger may have to be referred to only when more detail is required in respect of an account.
    d)      To Help in Locating Errors: The Trial Balance helps in locating errors in books-keeping work. It should, however, be noted that it does not disclose all the errors in book-keeping work but only the arithmetical inaccuracies.

    Features of trial balance
    The following are the important features of a trail balances:
    a)      A trail balance is prepared as on a specified date.
    b)      It contains a list of all ledger account including cash account.
    c)       It may be prepared with the balances or totals of Ledger accounts.
    d)      Total of the debit and credit amount columns of the trail balance must tally.
    e)      It the debit and credit amounts are equal, we assume that ledger accounts are arithmetically accurate.
    f)       Tallying of trail balance is not a conclusive profit of accuracy of accounts.

    The uses of the trial balance as follows:
    a)      It provides a check on the accuracy of the ledger account balances - ensuring that entries have been made correctly.
    b)      It proves the arithmetical accuracy of accounts.
    c)       It makes preparation of the final accounts easier - we can simply use the balances from the trial balance, rather than having to refer to all the individual accounts.
    d)      It is the connecting link between the ledger accounts and the financial statements.
    e)      It summarises the data. Trial balance reduces the large number of personal accounts into sundry debtors and sundry creditors.
    f)       Useful data for management. The various balances of accounts provide useful information to the management for comparing the balances inter-se and arriving at conclusion.

    Limitations of trial balance
    a)      The trail balance can be prepared only in those concerns where double entry system of book- keeping is adopted. This system is too costly.
    b)      A trail balance is not a conclusive proof of the arithmetical accuracy of the books of account. It the trail balance agrees, it does not mean that now there are absolutely no errors in books. On the other hand, some errors are not disclosed by the trail balance.
    c)       It the trail balance is wrong, the subsequent preparation of Trading, P&L Account and Balance Sheet will not reflect the true picture of the concern.

    METHODS OF PREPARING TRAIL BALANCE:
    A trail balance refers to a list of the ledger balances as on a particular date. It can be prepared in the following manner:
    1.       Total Method: According to this method, debit total and credit total of each account of ledger are recorded in the trail balance.
    2.       Balance Method: According to this method, only balance of each account of ledger is recorded in trail balance. Some accounts may have debit balance and the other may have credit balance. All these debit and credit balances are recorded in it. This method is widely used.
    3.       Compound Method: This method presents both the balance and total method in the same trial balance. There are four columns for balances and totals.
    Difference between Balance Method and Total method of preparing trial Balance:
    Trial Balance By Balance Method
    Trial Balance by Total Method
    1) It can be prepared after all the Ledger accounts have been balanced.
    1) It can be prepared immediately after the completion of posting from books of original entry to the Ledger.
    2) It shows the balances of all the accounts in the Ledger.
    2) It shows the total amounts of the debit and credit sides in each Ledger Accounts.
    3) It considers only those accounts which show a balance. If an account shows no balance it will not be considered.
    3) It considers all accounts of the Ledger.

    Rules of Preparing Trial Balance and Its Format:
    While preparing the trial balance from the given list of ledger balances, following rules should be taken into care:
    1.       The balances of all assets account, expenses and losses account, drawings, cash and bank balances are placed in the debit column of the trial balance.
    2.       The balances of all liabilities account, incomes and gains account and Capital balances are placed in the credit column of the trial balance.
    Specimen of Trial balances
    Debit Account Items.
    Amount
    Credit Account Items.
    Amount
    Land and Building
    Plant and Machinery
    Equipment
    Furniture and Fixtures
    Cash in Hand
    Cash at Bank
    Debtors
    Bills Receivable
    Stock of Raw Materials
    Work in Progress
    Stock of Finished Goods
    Prepaid Insurance
    Purchases
    Carriage Inwards
    Carriage Outwards
    Sales Return
    Interest Paid
    Salaries
    Outstanding Interest Earned
    Drawings

    Capital
    Sales
    Purchase Return
    Commission / Discount Received
    Long Term Loan
    Bills Payable
    Creditors
    Outstanding Salaries
    Advances from Customers
    Reserve Fund
    Provision For Doubtful Debts

    Total

    Total

                                                                                   
    Trial balance disclosed some of the errors and does not disclosed some other errors. This is given below.
    A) Errors disclosed by the Trial Balance
    i)     Wrong totaling of subsidiary books
    ii)    Posting of an amount on the wrong side
    iii)  Omission to post an amount into ledger
    iv)  Double posting or omission of posting
    v)   Posting wrong amount
    vi)  Error in balancing
    B) Errors not disclosed by the Trial Balance
    i)        Error of principle
    ii)       Error of omission
    iii)     Errors of Commission
    iv)     Recording wrong amount in the books of original entry
    v)      Compensating errors

    Steps to be taken to discover errors when trial Balance do not agree
    Whenever a trial balance disagrees the following steps can be taken to discover the errors:
    1.       Divide the difference by two and find out if some figure equal to that (half the difference) appears in the trial balance. It is possible that such item might have been recorded on the wrong side of mal balance, causing double the difference.
    2.       If the mistake is not located, the difference should be divided by 9 and if difference is evenly divisible by 9 the error be due to transportation of figures, e.g. Rs. 590 wrongly recorded as 950, the difference is (950-590) 360 and it is evenly divisible by 9.
    3.       The next step is to recheck the debit and credit totals of trial balance to satisfy that trial balance has been cast correctly.
    4.       If mistake remains undetected, make sure that balances or totals of all the ledger accounts have been correctly shown in the trial balance. Special care should be taken to ensure that cash or bank balances have been duly incorporated in the mal balance.
    5.       The next step should be to recheck that all the closing balances from preceding year's balance sheet were correctly carried forward and recorded in respective accounts in the ledger.
    6.       Further the totaling and balancing of the ledger accounts should be redone so as to be sure that there is no mistake on that account.
    7.       Check the totals of schedule of debtors and creditors and find out that the balances have been included in the list.
    8.       If difference is round sum, it is advisable to check casting and carry forwards. But if the difference is odd sum the balancing should be checked minutely.
    9.       Even then if error is not located, all the accounts should be checked thoroughly.