Trial Balance

A company’s trial balance is its beating heart. It is a summary of the company’s operations. It’s also a good measure of a company’s financial health. “If you want to invest in shares of a company, you must analyze its trial balance,” says a classic adage.

Trial Balance and Its Working Principle

A ledger is made up of multiple entries in separate accounts. Trial balance is the process of gathering all ledger balances and displaying them in a single worksheet as of a specific date. 

To grasp the concept of a trial balance, we must first comprehend the following:

1.Double Entry System -:Recording two entries for a single transaction that is equal and opposing in nature is known as a double entry system.

2.Journal-:All transactions are recorded in a journal using the double entry bookkeeping approach.

3 Ledger – A compilation of all similar journals.

Let’s pretend we’re buying a book on credit for Rs.1,000. Now we have the book and must pay for it. As a result, there are two activities in this transaction.

1.Purchasing the book

2.Taking the seller’s credit

The recording of this transaction by dividing it into two operations is referred to as a double entry system of bookkeeping in accounting. 

Concept Of Trial Balance 

Assume you keep a diary of your daily activities. You summarize your diary and categorize it at the end of each month. Create a sheet and divide the categories into productive and non-productive categories. That is precisely what corporations do.

1.A journal entry is a record of transactions.

2.Ledgers are used to summarize and categorize data.

3.A Trial Balance is the process of creating a worksheet and classifying the ledgers.

A trial balance is a sheet that lists all of the ledger balances and divides them into debit and credit categories. The name of the ledger and the balances are typically included in a trial balance. This is prepared as of a specific date, which could be the end of the fiscal year or the beginning of the calendar year.

Benefits of Trial Balance

1. Accuracy in arithmetic

As we know   the nature of the double entry method, each transaction will result in two equal and opposite entries. As a result, all debit ledger totals will equal credit ledger totals at any given time. Because a trial balance includes all of the accounts as of a specific date, the debit total must match the credit total. As a result, a Trial Balance is a measure of the accuracy of the books of accounts’ arithmetic. With accounting software, the above advantage of the trial balance is no longer relevant. Because data input systems do not allow entries to be posted if the debit and credit amounts disagree, there is no tolerance for error.

2.Bird’s Eye View

A trial balance is a sheet that summarizes all of the ledges and balances. As a result, it provides a bird’s eye view of an organization’s accounting transactions.

3. Financial statement preparation requires the following prerequisites:

An organization’s profit or loss and financial situation at the end of the year must be known. As a result, Trial Balance is required to prepare financial statements. This information is required by all parties. It’s the initial step toward closing the books for a given time.

Applications of Trial Balance

1.Adjustment of postings is simple.

A tabulated Trial Balance provides great accuracy assurance, allowing for post-trial balance modifications.

2.Auditing Aids

A list of all ledgers with balances is provided by Trial Balance. The trial balance is examined for auditing purposes. If, for example, an account is debit in nature but has a credit amount, the entire ledger will be scrutinized. As a result, the trial balance is an important tool for auditors.

3.Defines the term “credibility.”

Banks and credit agencies also utilize trial balance to determine a company’s borrowing capability and reliability.

Despite all of the advantages of a Trial Balance, it is critical to remember that a tabulated Trial Balance does not guarantee zero errors. Even if there are offsetting errors, the Trial Balance will balance. Also, if some transactions are not recorded, the ledgers will be unaffected, and the tallied Trial Balance will show an incorrect picture. With the advent of accounting software, the Trial Balance from an ERP system has automated a number of operations. It comprises ledger codes, ledger names, account type, current period balance, and prior period balance. The trial balance can be retrieved for any period in huge companies as well. With all of the benefits and drawbacks in mind, it’s evident that preparing a Trial Balance has a lot of advantages, and it’s become a need for closing books of accounts. Even today, the Trial Balance is a good foundation for financial statement preparation and business analysis.

Conclusion 

A trial balance is a sheet that summarizes all of the ledges and balances. As a result, it provides a bird’s eye view of an organization’s accounting transactions. An organization’s profit or loss and financial situation at the end of the year must be known. As a result, Trial Balance is required to prepare financial statements.