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Meaning and Objectives of Preparing Trial Balance
We all know that we do accounting for financial transactions on the
basis of dual aspect concept of accounting. It means that every debit
has a respective credit. Thus, we can say that the sum of all debits is
equal to the sum of all credits. For this purpose, we presume that all
the entries in the ledger accounts are correct and accurate. Here, we
will learn the meaning and objectives of trial balance along with the
Trial Balance Format.
Preparing Trial Balance
A Trial Balance is a statement that shows the total debit and total
credit balances of accounts. The total of debit amounts shall be equal
to the credit amounts. It thus verifies the arithmetical accuracy of the
postings in the ledger accounts. It is a significant statement as it shows
the final balances of all the accounts and also aids in the preparation of
the Final Accounts.
While preparing the final accounts the balances of accounts are
directly taken from the Trial Balance. A firm normally prepares the
trial balance at the end of the accounting year. However, it may also
prepare it monthly, quarterly or half-yearly also depending upon its
requirements.
Objectives of Preparing Trial Balance
1] Ascertainment of the Arithmetical Accuracy
We record the entire debit as well as the credit balances of the ledger
accounts in a Trial Balance. In other words, it is the summary of all
the ledger accounts. The total of debit side shall be equal to the credit
side, for the trial balance to get tallied. When it tallies, we assume that
the posting and the balancing of the ledger accounts are accurate.
Thus, it ensures the arithmetical accuracy of the ledgers. However,
this is not the conclusive evidence of the correctness and the accuracy
of the ledger accounts.
2] Locating the Errors
It helps in locating the errors in the posting or recording of the
transactions. When a Trial Balance does not tally, then we know that
the errors must have occurred at the time of
i. totaling the Subsidiary books
ii. posting in the ledgers
iii.balancing the accounts
iv.writing the account balances in the trial balance
v. totaling the trial balance. After finding the errors we need to
rectify them.
3] Preparation of Financial Statements
The Trial Balance is a summary of all the ledger account balances.
Thus, while preparing the final accounts, we do not need to refer the
individual accounts. We can take the final balances of the accounts
directly from the Trial Balance. We directly transfer the final balances
to the Trading and Profit and Loss A/c and Balance Sheet. Let us now
look at the trial balance format.
Source: shutterstock
Trial Balance Format
Trial Balance of……..
As on.……
Name of the Account L.
F. Debit Amount
(₹) Credit Amount
(₹)
Total
Solved Example for You
Q: Explain the steps in the preparation of the Trial Balance?
Ans. The steps in the preparation of the Trial Balance are:
1. Determine the balances of all the ledger accounts.
2. Prepare the trial balance format
3. Enlist each account and write their balances in the respective
columns. For example, the balance of Cash A/c is debit and
therefore we will write it in the debit column.
4. Calculate the balance of the debit column and the credit
column.
5. If the total of debit column is equal to the total of the credit
column, the trial balance is tallied and thus, verifies the
arithmetical accuracy. In case the trial balance does not tally,
we need to find out the reasons thereof and correct the errors if
any.
Preparation of Trial Balance
A Trial Balance is a statement that shows the total debit and total
credit balances of accounts. The total of debit amounts shall be equal
to the credit amounts. It thus verifies the arithmetical accuracy of the
postings in the ledger accounts. We will now study the methods of
Preparation of Trial Balance – totals method, balance method and
total-cum-balance method.
Preparation of Trial Balance
We can prepare the Trial Balance in the following three ways:
1] Totals Method
In this totals method, we ascertain the total of each side in the ledger
i.e. debit and credit, separately and show them in the respective
columns in the Trial Balance. Here also the total of the column with
debit totals should tally with the total of the column of the credit
totals. The dual aspect concept holds true in this case also.
However, totals method is not in use widely as it does not determines
the accurate balances of the accounts and thus, also does not help in
the preparation of the Financial statements or final accounts.
2] Balances Method
In this method, we total the debit side and the credit side of the
accounts and balance them. We then write these debit or credit
balances of the ledger accounts in the respective debit and credit
columns in the Trial Balance. A trial balance tallies when the total of
the debit column is equal to the total of the credit column.
This method is the most common method as it shows the net effect
and also helps in the preparation of the financial statements. Usually,
in the trial balance instead of showing the individual accounts of the
debtors and creditors, we show Sundry Debtors and Sundry Creditors
accounts, respectively.
Source: shutterstock
3] Totals-cum-Balances Method
In this method, we prepare four columns. In two columns we write
debit and credit totals of accounts and in the other two columns, we
write the debit and credit balances of accounts. This method consumes
a lot of time and is a duplicate of work. Hence, it is rarely in use.
Solved Example for You
Q: From the following information prepare trial balance using all the
three methods.
Capital A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To balance c/d 15000
0 Apr 1 By Cash A/c 14000
0
Sep 1 By Cash A/c 10000
15000
0 15000
0
Cash A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Apr 1 To Capital A/c 14000
0 Mar 31 By Salary A/c 40000
Sep
1 To Capital A/c 10000 Mar 31 By Bank A/c 50000
Mar 31 By Drawings A/c 10000
Mar 31 By balance c/d 50000
15000
0 15000
0
Salary A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To Cash A/c 40000 Mar 31 By balance c/d 40000
40000 40000
Drawings A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To Cash A/c 10000 Mar 31 By balance c/d 10000
10000 10000
Bank A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To Cash A/c 50000 Jan 1 By Furniture A/c 30000
Mar 31 By balance c/d 20000
50000 50000
Furniture A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Jan 1 To Bank A/c 30000 Mar 31 By balance c/d 30000
30000 30000
Purchases A/c
Date Particulars Amou
nt Date Particulars Amou
nt
May
1 To Ram’s A/c 50000 Mar 31 By balance c/d 10000
0
Nov
25 To Amit’s A/c 20000
Feb
15 To Shyam’s A/c 30000
10000
0 10000
0
Ram’s A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To balance c/d 50000 May 1 By Purchases A/c 50000
50000 50000
Amit’s A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To balance c/d 20000 Nov 25 By Purchases A/c 20000
20000 20000
Shyam’s A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To balance c/d 30000 Feb 15 By Purchases A/c 30000
30000 30000
Sales A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Mar
31 To balance c/d 70000 Jun 15 By Ajit’s A/c 40000
Nov 24 By Dipu’s A/c 30000
70000 70000
Ajit’s A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Jun
15 To Sales A/c 40000 Mar 31 By balance c/d 40000
40000 40000
Dipu’s A/c
Date Particulars Amou
nt Date Particulars Amou
nt
Nov
24 To Sales A/c 30000 Mar 31 By balance c/d 30000
30000 30000
Answer:
1] Totals Method
Trial Balance as at…..
Name of the account L.F
. Debit Total Credit Total
Capital 150000
Cash 150000 100000
Drawings 10000
Bank 50000 30000
Salary 40000
Furniture 30000
Purchases 100000
Ram 50000
Amit 20000
Shyam 30000
Sales 70000
Ajit 40000
Dipu 30000
Total 450000 450000
2] Balances Method
Trial Balance as at…..
Name of the account L.F. Debit Amount Credit Amount
Capital 150000
Cash 50000
Drawings 10000
Bank 20000
Salary 40000
Furniture 30000
Purchases 100000
Ram 50000
Amit 20000
Shyam 30000
Sales 70000
Ajit 40000
Dipu 30000
Total 320000 320000
3] Totals-cum- Balances Method
Trial Balance as at…..
Name of the
account L.F
. Debit
Total Credit Total Debit
Amount Credit Amount
Capital 150000 150000
Cash 150000 100000 50000
Drawings 10000 10000
Bank 50000 30000 20000
Salary 40000 40000
Furniture 30000 30000
Purchases 100000 100000
Ram 50000 50000
Amit 20000 20000
Shyam 30000 30000
Sales 70000 70000
Ajit 40000 40000
Dipu 30000 30000
Total 450000 450000 320000 320000
Rectification of Errors
When the trial balance tallies it provides us only with the proof of
the arithmetical accuracy of the ledger accounts. However, there
may still be some errors present. Some errors affect the trial
balance while some do not. When the trial balance does not tally,
it is a clear indication of the presence of errors. We need to
identify and locate these errors. Thus, after locating them
Rectification of Errors is also necessary.
Rectification of Errors
On the basis of rectification of errors, we can classify the errors
into the following two broad categories:
1. Errors not affecting the Trial Balance
2. Errors affecting the Trial Balance
The errors need to be categorized in these categories because we
can usually rectify the errors not affecting the trial balance by
passing a rectification journal entry. While the errors affecting
the trial balance affect only one account and for these, we cannot
pass a journal entry. However, we can pass a journal entry only
by opening a Suspense A/c.
Rectification of Errors not affecting the Trial Balance
These errors affect two or more accounts simultaneously. Thus,
these are two-sided errors. We can rectify these by passing a
journal entry giving the correct debit and credit to the accounts.
In order to rectify an error, we need to cancel the effect of wrong
debit or credit by reversing it and restore the effect of correct
debit or credit.
When there is short debit or excess credit in an account we need to
debit the concerned account. Whereas, when there is short credit
or excess debit in an account we need to credit the concerned
account.
Complete omission to record an entry in the journal or the
subsidiary books, incorrect recording of transactions in the books,
complete omission of posting and errors of principle are the
examples of these errors.
Rectification of Errors affecting the Trial Balance
These errors affect only one account. Thus, these are one-sided
errors. We can rectify these errors by giving an explanatory note
in the account or by passing a journal entry with the help of
Suspense A/c. When we detect an error before posting to the
ledger, we can correct it by simply crossing the wrong amount,
writing the correct amount above it and initializing it. Similarly,
we can also correct an error in the ledger account.
Errors of casting, errors of carrying forward the balances, errors
of balancing the accounts, errors of posting the wrong amount in
the correct account, error of posting in the correct account on the
wrong side, omitting to show an account in the trial balance,
posting in wrong side with wrong amount are the examples of
errors affecting the Trial Balance.
Suspense Account
When the trial balance does not tally due to the one-sided errors
in the books, an accountant puts the difference between the debit
and credit side of the trial balance on the shorter side as the
Suspense A/c. As and when we locate and rectify the errors, the
balance in the Suspense A/c reduces and consequently becomes
zero. Thus, we cannot categorize the Suspense A/c. It is a
temporary account and can have debit or credit balance
depending upon the situation.
While using the Suspense A/c to rectify the one-sided errors, the
accountant needs to follow the following steps:
1. Identification of the account with the error.
2. Ascertainment of the excess debit or credit or short debit or
credit in the above account.
3. In case of short debit or excess credit in an account, we
need to debit the concerned account. Whereas, in case of
short credit or excess debit in an account we need to credit
the concerned account.
4. Pass the necessary journal entry by debiting or crediting
the Suspense A/c
Source: shutterstock
Rectification of Errors in the Next Accounting Year
When we cannot locate and rectify the errors before the final
accounts, we need to carry forward the balance of the Suspense
A/c to the next financial year. When we rectify the errors of the
previous accounting year, we need to route them through the
Profit and Loss Adjustment A/c for the items of expenses, losses,
incomes and gains. This avoids their impact on the current income
statement.
Solved Example for You
Q: Trial Balance of M/s Shinde Enterprises did not agree. It puts
the difference to the Suspense A/c. Rectify the following errors
and prepare the Suspense A/c to ascertain the original difference
in the trial balance.
1. Amount paid for the installation of the machinery ₹10000
was posted to the Repairs and maintenance A/c.
2. Total of Purchases book ₹50000 was not posted to the
ledger.
3. Goods returned to John ₹3000 were recorded in Sales
Book.
4. Salary paid to Ram ₹6000 was debited to his personal
account.
5. Depreciation written-off on furniture ₹500 was not posted
to the furniture account.
Ans: In the books of M/s Shinde Enterprises
Da
te Particulars Amount (Dr.) Amount (Cr.)
1. Machinery A/c D
r. 10000
To Repairs and Maintenance A/c 10000
(Being rectification of the wrong journal entry
in the Repairs and maintenance A/c)
2. Purchases A/c D
r. 50000
To Suspense A/c 50000
(Being rectification of the omission to post the
total of purchases book in the ledger)
3. Sales A/c D
r. 3000
To Purchases Return A/c 3000
(Being rectification of wrong recording of the
purchases return in the sales book)
4. Salary A/c D
r. 6000
To Ram’s A/c 6000
(Being rectification of wrong debit to the
personal account of an employee)
5. Suspense A/c D
r. 500
To Furniture A/c 500
(Being rectification of omission of posting in
the furniture account)
Suspense A/c
Dat
e Particulars Amount Dat
e Particulars Amount
Difference as per
Trial balance 49500 2. By Purchases A/c 50000
5. To Furniture A/c 500
50000 50000
Trial Balance Accounting and Searching
of Errors
A Trial Balance is a statement that shows the total of debit and
credit balances of accounts. The total of debit amounts shall be
equal to the credit amounts for the trial balance to tally. Hence, it
verifies the arithmetical accuracy of the postings in the ledger
accounts. Trial Balance Accounting is thus an integral part of
financial accounting.
Trial Balance Accounting and Searching of Errors
Trial balance accounting is significant in the preparation of final
accounts. It involves summarizing of all the ledger accounts.
When the debit amounts are equal to the credit amounts in the
trial balance, we say that the trial balance has tallied. A tallied
Trial Balance in trial balance accounting is the proof of the
arithmetical accuracy of the ledger accounts though it is not an
absolute proof. However, it does not disclose some errors which
affect the debit amounts and credit amounts equally.
Some of the errors in the preparation of accounts are:
1. Wrong totaling of the debit amounts and the credit
amounts in the Trial Balance.
2. Error in the total of Subsidiary books.
3. Wrong posting of the total of Subsidiary books in the
ledger.
4. Omitting an account balance in the Trial Balance.
5. Showing the account balances in the wrong column or with
the wrong amount in the Trial Balance.
6. Wrong calculation of the account balance.
7. Error in posting a journal entry to the ledger
8. Recording a transaction incorrectly in the Journal.
9. Recording a transaction incorrectly in the Subsidiary
Books
Classification of Errors
We can classify the above errors in the following categories:
1. Errors of Commission: Errors due to the wrong posting of
transactions to the ledger, wrong totaling of accounts, wrong
balancing of accounts, the wrong casting of the day books, or
wrong recording of the amount in the journal or the day books
are errors of commission. These are of clerical nature and
mostly affect the trial balance.
2. Errors of Omission: The error of omission usually occurs at
the time of recording a transaction in the journal or
subsidiary books or at the time of posting to the ledger.
These are of two types, error of complete omission and
error of partial omission. When the accountant completely
omits to record a transaction, it is the error of complete
omission. On the other hand, suppose he records the
transaction in the subsidiary book but forgets to post it in
the ledger, this is the error of partial omission.
3. Compensating Errors: When the net effect of two or more
errors is nil, these are Compensating errors. These do not
affect the trial balance.
4. Errors of Principle: We record the journal entry of the
transactions as per the accounting conventions and
principles. The errors resulting due to the violation of these
are errors of principle. A wrong classification of
expenditure or income between capital and revenue is an
error of principle.
Source: shutterstock
Searching for Errors
When the trial balance does not tally, we need to search and find
out the errors and correct them to prepare the financial
statements. Following are the steps to locate the errors:
1. Recheck the totals of debit and credit columns of the trial
balance.
2. Equate the account head in the trial balance with the ledger
to check the difference in the amount or complete omission
of the account.
3. Compare the trial balance with that of the previous year to
see the additions and deletions of accounts. If there is a
major difference in any account balance, verify it for
correctness.
4. Balance the ledger accounts once more.
5. Check the postings to the ledger from the journal entries or
the subsidiary books.
6. A difference may indicate the complete or partial omission
of a posting. For example, a difference in the debit side may
indicate that an amount has been recorded in the books of
original entry but has been omitted to be posted on the
debit side of an account.
7. A difference of an amount divisible by two between the
debit and credit side of the trial balance indicates a
possibility of the wrong posting of an amount equal to half
of the difference on the wrong side of another ledger
account. For example, the total of the credit side of the trial
balance is more by ₹1000. In this case, we shall scan all the
credit entries with an amount of ₹500.
Solved Example for You
Q: Classify the following errors:
1. A pays ₹5000 to B for the purchase of goods. The entry in
the Cashbook is correct but posting in the ledger is only
with ₹500.
2. Credit purchases ₹10000 not recorded in the purchases
book.
3. Cash book is overcast by ₹1000 and Purchases Book is
undercast by ₹1000.
4. The purchase of machinery ₹50000 recorded in the
Purchases Book.
5. Sales Book is undercast by ₹250
6. The purchase of furniture ₹20000 is not posted in the
furniture account and an income of ₹20000 is also not
posted.
Ans.
1. Error of Commission
2. Error of Omission
3. Compensating Error
4. Error of Principle
5. Error of Commission
6. Compensating Error