How to Prepare Trial Balance

Just before final accounts, a trial balance is generated, which comprises a balance sheet, profit and loss statement, cash flow, and notes to accounts. We might presume that it is the core structure behind preparing the final accounting in layman’s terms. After the entries are passed in the journal-register, categorization and grouping of transactions to their appropriate ledgers, it is the third phase in the road map to generate final accounts. These ledgers, i.e. the main book comprising all sets of accounts, are then gathered in one location to form a Trial balance.

Purpose of Trial Balance

The trial balance is useful in the development of financial statements. The balance sheet is where the assets and liabilities are recorded. In the profit and loss statement, income and costs are recorded. The preparation of final accounts is based on all of these accounts.

Features of Trial Balance

• In accounting, a trial balance lists all of the ledgers, including the cash book.
• It is not a part of the Double-entry Accounting System. It is just intended to be used as a guide.
• A trial balance can be created at any period of the year: weekly, monthly, quarterly, and at the end of the year.
• It is an important instrument for ensuring the books’ arithmetical accuracy.
• It also serves as a link between the Profit and Loss Account and the Balance Sheet.
• It does not prove the absence of error conclusively. Errors such as primary errors may still exist.

Objectives of Trial Balance 

Bird Eye View

The trial balance summarises all of the ledgers. You can save time by not having to look at the ledger again because the net amount is presented.

Pointing Out Error

The trial balance assists in the detection of errors. It’s also used to double-check the accuracy of accounting books.

Limitation of Trial Balance

• Even if the trial balance matches, the fundamental error and compensatory error may still remain.
• Even if transactions are completely removed from recording in the books if they are not accounted for, the trial balance matches.

Methods of Preparation of Trial Balance

There are two methods of preparation of the trial – balance are:

Balance Method

The net amount of a ledger is displayed in a trial balance using this procedure. It might be a credit or debit balance. The trial balance can only be created using this method after all of the accounts have been balanced. This is one of the most accurate ways to prepare final accounting.

Totals Method

The total of either side of the account (debit and credit) is displayed in the trial balance using this manner. This strategy ensures more mathematical precision. However, because of the potential for duplication and inaccuracies, this procedure is rarely used in the production of final accounts.

Steps to prepare Trial Balance

Step 1. Understanding the Golden Rule of Accounting

It’s critical to know the accounting golden rules. It aids in determining which accounts should be debited and which should be credited. Debit goes under Expenses and Assets, and credit goes under Incomes, Gains, and Liabilities, according to the golden rule. As a result, credit refers to payables, whereas debit refers to receivables.

Step.2. Pass the journal Entries 

A mandatory journal entry is passed after confirming which account is debited or credited. When you use Tally ERP 9, the entries are automatically transferred when the amount is entered.

Step 3. Post the journal entries into their relevant ledgers once they’ve been approved. This posting is done automatically at the back end of Tally ERP 9. If you’re using manual accounts, manually enter them into the appropriate accounts.

Step 4. All ledgers are routed to the trial balance in this stage. The debit and credit sides will line up if there is no arithmetic error. If there is a discrepancy, note it in the suspense account.

Errors that cause a mismatch in Trial Balance

A trial balance must balance on both sides. However, if this does not occur, it could be due to one of the following factors.

When only one leg of the transaction is posted

Assume you’re buying something on credit. The Creditor’s account was not credited, but the Purchase account was debited.

Lack of accurate Balancing

The previous year’s closing balances have not been appropriately balanced in the current year.

Amounts Mismatched

Let’s say the sales ledger has a credit balance of Rs 10,000, but when it’s put in the trial balance, it’s only entered as Rs 1000. As a result, the trial balance will have an Rs 9000 mismatch.

Mismatch issue

Assume that the prepaid rent has been paid. The Vendor’s account is debited rather than the prepaid rent account. A mismatch in the trial balance will result as a result of this.

Important Principle used in the Preparation of Trial Balance

• When preparing the trial balance, all nominal, personal, and real accounts must be taken into account.
• A ledger with a NIL balance is not taken into account when preparing the trial balance.
• The purchase or consumption ledger has a debit balance and appears on the trial balance’s debit side.
• The revenue account is always in the credit side of the balance sheet and has a credit balance.
• The trial balance can show sales returns and purchase returns as independent line items or as lowered from the main purchase and sales ledgers, respectively.

Format of Trial Balance

Generally Trial Balance has two formats:

Journal Format

This follows the Folio format of a journal. There is a column for the serial number, account name, ledger folio, and the amount of debit and credit in this format.

Ledger Format

This type of trial balance has two debit and credit sides. The amount column on each side will show the ledger’s name and the ledger’s net amount.

Conclusion

The trial balance is useful in the development of financial statements. The balance sheet is where the assets and liabilities are recorded. In the profit and loss statement, income and costs are recorded. The preparation of final accounts is based on all of these accounts. The net amount of a ledger is displayed in a trial balance using this procedure. It might be a credit or debit balance. The trial balance can only be created using this method after all of the accounts have been balanced. In accounting, a trial balance lists all of the ledgers, including the cash book. It is not a part of the Double-entry Accounting System. It is just intended to be used as a guide.