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Trial Balance
KULDEEP MATHUR
B.B.A. JIWAJI UINVERSITY GWALIOR
Trial BalanceMeaning of Trial Balance
Trial balance is a statement,
prepared with the debit and credit balances of ledger
accounts to test the arithmetical accuracy of the books.
It may also be prepared with debit and credit totals of
ledger accounts and
also with the balances and totals of ledger accounts.
If the total of debit and credit amount column is
equal, we assume our books of accounts to be
arithmetically correct,
but do not take it as the conclusive proof of
arithmetical accuracy
Special features of trial balance
Trial balance has the following special features:
1. The trial balance is prepared on a specific date. This
is why; we use the word 'as on ..... .' with its heading.
2. Trial balance contains the list of all ledger accounts
including cash account.
3. Trial balance may be prepared with the balances or
totals or balances and totals of ledger accounts.
Special features of trial balance
4. The total of the debit and credit column of the amount must be equal.
5. In case the debit and credit side of the trial balance are equal, we assume that the
principles of 'Double Entry System' and the assumptions of accounting equation
have been observed.
6. The difference between the debit and credit side of the trial balance points out that
certain mistakes have been committed somewhere.
7. If both the debit and credit sides have the same total, it does not mean that there is
no mistake in accounting.
OBJECTS AND FUNCTIONS OF TRIAL BALANCE
The trial balance is prepared with the following
objects:
1. Test of arithmetical accuracy. Trial balance is the
test of accuracy of arithmetical calculation. If correct
posting has been made from subsidiary books and
ledger accounts and correct figures have been
recorded and copied, the debit and credit total of the
trial balance must tally.
OBJECTS AND FUNCTIONS OF TRIAL BALANCE
2. Summarized information of ledger accounts.
Trial balance contains a list of all ledger accounts. It
presents the names of ledger accounts and the amount
of their debit and credit balance. The summarized
position of ledger accounts can be obtained at a glance
from the trial balance. It would have been very
difficult to assess the position of different ledger
accounts from subsidiary books and ledger accounts.
OBJECTS AND FUNCTIONS OF TRIAL BALANCE
3. Basis for preparing final accounts. The ultimate
end of maintaining books of accounts is to ascertain
the result of the business in term of profit and the
value of different assets and liabilities. For this
purpose, we prepare a profit and loss account and
balance sheet on the basis of information supplied by
the trial balance. It is, in this way, a source statement
for preparing final accounts.
OBJECTS AND FUNCTIONS OF TRIAL BALANCE
4. Useful for making adjustments. While making
final accounts certain adjustments regarding closing
stock, outstanding and prepaid expenses, accrued and
unearned income are to be made. While identifying
items for adjustments we will have to study the
information furnished by the trial balance.
METHODS OF PREPARING TRIAL BALANCE There are three methods of preparing trial
balance. The total of both the debit and credit
column of the trial balance must be equal in all
the methods. The following methods can be
used for preparing trial balance:
Balance method
Total method
Total and balance method.
Capital
Drawings
Opening Stock
Closing Stock
Carriage Inward ,Freight Inward
Purchases
Sales
Royalty on Production
Gas and Fuel
Discount Received
Provision for Bad Debts
Commission Received
Repairs
Rent
Salaries
Loan Secured
Interest Received
Interest Paid
Insurance
Carriage Outward carriage on
sales
Advertisement
Sundry Expenses
Trade Charges
Miscellaneous Receipts
Income-tax
Office Expenses
Import Duty
Allowances
Sales-tax
Provision for Discount on
Debtors
Provision for Discount on
Creditors
Sundry Creditors
Sundry Debtors
Goodwill
Plant and Machinery
Discount Allowed
Bad debts
Purchases Return/Return
outwards
Purchases Return/Return
outwards
Sales Return/return inwards
Outstanding Expenses
Prepaid Expenses
Earned Income/Accrued income
Unearned income/ Unaccrued
income
Loan from X
Loan to X
Interest on loan from X
Interest on loan to X
Interest on Capital
Interest on Drawings
Bank overdraft
Cash in hand
Cash at bank
Bills receivable
Bills payable
Bad debts recovered
Tax refund
All expenses
All Incomes
All Assets
All Liabilities
The following is the Trial Balance prepared by an Inexperienced accountant. Redraft it in a correct form
Dr. Cr.
Sundry Debtors 24,400
Sundry Creditors 18,400
Opening Stock 31,200
Purchases 1,07,000
Purchases Return 4,200
Cash in hand 22,000
Machinery 80,400
Goodwill 20,000
Sales 1,72,400
Discount Received 3,000
Investment 16,000
Interest on Investment 1,600
Interest on Ram’s Loan 6,000
Sales Returns 15,600
Loan from Ram 40,000
Bills Receivable 12,800
Capital 1,14,000
Life Insurance Premium 10,000
Carriage 1,200
Advertisement 5,000
Outstanding Expenses
Trial balance Adjustment
1) Shown in balance Sheet liabilities 1) Shown in balance sheet side. liabilities side.
2) Added with relevant head Trading and loss a/c debit side or profit
Meaning:- Expenses which have been incurred during the year and
whose benefit has been derived during the year, but not paid yet are
called outstanding expenses.
Prior to the preparation of the financial statements, it must be ensured
that all expenses which have fallen due to be paid but which have not
been paid during the accounting period are also brought into the books
to help in the proper matching of revenues and expenses
Journal Entry:- Relevant Expenses a/c ------------Dr.To Outstanding Expanses
Prepaid or unexpired Expenses
Trial balance Adjustment
1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side.
2) Deduct from relevant head Trading or profit and loss a/c debit side
Meaning:- In some cases, the benefit of the amount already spent will be
available in the next accounting year also. Such a part of the expense
is called a ‘prepaid expense’.
Journal Entry:- Prepaid Expenses a/c ------------Dr.
To Relevant Expanses
Un accrued or Unearned Income
Trial balance Adjustment
1) Shown in balance 1) Shown in balance sheet Sheet liabilities side. liabilities side.
2) Deduct from relevant head in profit and loss a/c Credit side
Meaning:- The income which has been received during the current
accounting year but relates to the next accounting year is called
‘Unearned income’.
Journal Entry:- Relevant Income a/c ------------Dr.
To Unearned Income
Closing stock
Trial balance Adjustment
1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side.
2) Shown in Trading a/c credit side
Meaning:- The Value of closing inventory will be brought into the
books of accounts through the following journal entry:
Journal Entry:- Closing Stock a/c ------------Dr.
To Trading a/c
Depreciation
Trial balance Adjustment
1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account Debit side
2) Deduct from relevant assets in balance sheet assets side
Meaning:- The value of fixed assets reduce year after because of usage
and passage of time . It is well Known that fixed assets are used for
earning revenue .It is treated like any other expenses and is debited to
the profit and loss a/c.
Journal Entry:- Depreciation a/c ------------Dr.
To Relevant Assets
Interest on capital
Trial balance Adjustment
1) Shown in Profit and loss account 1) Shown in Profit and Loss account Debit side Debit side
2) Added with Capital in balance sheet liabilities side.
Meaning:- Fund invested by a proprietor to the business constitute the
capital. Like other borrowings/loans , interest can be paid on the
proprietor’s capital also. It is treated like any other expenses and is
debited to the profit and loss a/c.
Journal Entry:- Interest on capital a/c ------------Dr.
To Capital a/c
Interest on Drawings
Trial balance Adjustment
1) Shown in Profit and 1) Shown in Profit and Loss account credit side loss account credit side
2) Deduct from Capital in balance sheet liabilities side
Meaning:- The proprietor may also realise that when he draws money for
his own use, the firm loss interest. therefore , the proprietor may be
debited with the interest on the money drawn by him.
Journal Entry:- Capital/Drawings a/c ------------Dr.
To Interest on Drawings a/c
Interest on Loan from------
Trial balance Adjustment
1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account debit side
2) Added with loan in balance sheet liabilities side
Meaning:- Interest must be paid on loans whether there is profit or loss.
It is calculated by referring to the rate of interest agreed to be paid by
the firm and the amount and period of the loan.
Journal Entry:- Interest on loan from a/c ---------Dr.
To Loan from------- a/c
Particulars
Capital 1,64,000 P B/S 1,64,000
Drawings 5,600 P B/S 5,600
Machinery 10,000 R B/S 10,000
Opening Stock 30,000 R T 30,000
Purchases 1,74,400 R T 1,74,400
Sales Returns 12,000 R T 12,000
Debtors 42,000 P B/S 42,000
Furniture 18,200 R B/S 18,200
Motor Car 80,000 R B/S 80,000
Freight Inwards 4,000 N T 4,000
Wages 1,600 N T 1,600
Freight outwards 600 N P/L 600
Advertisement 30,800 N P/L 30,800
Creditors 18,000 P B/S 18,000
Sales 2,48,000 R T 2,48,000
Purchases Returns 2,000 R T 2,000
Discount Allowed 1,600 N P/L 1,600
Discount Received 2,400 N P/L 2,400
Rent Received 2,000 N P/L 2,000
Lighting 800 N P/L 800
Motor Car Expenses 12,600 N P/L 12,600
Loan from Ashok 20,000 P B/S 20,000
Interest on Loan 1,800 N P/L 1,800
Bank Balance 30,400 P B/S 30,400
THANK YOU