What is Trial Balance?
Each and every business transaction has a dual effect. Thus, each transaction is recorded in two accounts separately as per the Double Entry System of accounting. The principle of double-entry accounting means that for every debit, there is an equal credit. Therefore, according to this principle, the sum of all the debits is equal to the sum of all the credits. And it is also assumed that the transactions posted in ledger accounts in terms of credit and debit amounts are correct.
So, the business owner or the accountant first records the transactions in the journal following on the basis of accounting. The entries from the journal are recorded into ledger accounts, Also, the closing credit or debit balances in different ledger accounts go into the Trial Balance of the business for a specific year.
A trial balance is basically prepared to check if the debit or the credit amounts recorded in the accounts are accurate.
In simple words, a trial balance is a technique for checking the accuracy of credit and debit amounts recorded in the various ledger accounts. It is mainly a statement that exhibits a total of the credit and debit balances being recorded in different accounts of the ledger. It is also prepared to check the accuracy of different transactions that are posted into the accounts. It is one of the most important tools of accounting as it reveals the final position of all the accounts.
Steps In Preparation of Trial Balance
The following are the steps as to how one can prepare a trial balance while considering important things:
- Calculate balances of each of the ledger accounts: The business transactions are first recorded in the form of journal entries as per the basic accounting principles. These entries then go into the accounts of the ledger that are involved in the business transactions. For instance, the cash transactions are recorded and the cash account is closed with a debt of Rs. 6,50,000/- on 1st May 2018. Similarly, the balances of other ledger accounts are ascertained.
- Record the credit and debit balances in trial balance: The remaining credit and debit balances in accounts of the ledger as ascertained are recorded in the trial balance. The balances of the accounts are recorded in the credit and debit columns. For instance, the remaining credit balance is Rs. 8,00,000 is recorded in the credit column and the remaining credit or debit balances of all the accounts are recorded in their respective columns.
- Calculate the total of the debit column: After that, ascertain the total of the debit column. It is done after recording all the debit balances of different accounts of the ledger and are then, put into the debit column. It is calculated after recording all the debit balances which are closing of the accounts of the ledger. These accounts include stock, cash, drawings, furniture, etc.
- Calculate the total of the credit column: Similarly, ascertain the total of the credit column. It is done after recording the credit balances of the different accounts of the ledger.
- Check if a debit is equal to credit: After performing all these steps, you finally need to check if the total of the debit column is equal to the total of the credit column. As mentioned earlier, a trial balance is prepared to check the accuracy of the credit balances and debit balances of various accounts. Both the credit and the debit column must tally as every debit has every credit. If they are not equal, it is an indication that there are some errors made while the transactions were getting recorded.
Also, according to the accounting principle:
- All expenses, assets and receivables must have debit balances.
- Incomes, liabilities and payables must have credit balances.
✅ What is a trial balance used for?
It is used to list all the balances in the business general ledger accounts.
✅ What is included in it?
It includes a list of all the general ledger account totals. Each account should be including a description of the account, account number, and the final balance.
✅ Why is it called a trial balance?
It is called a trial balance because there will be equal sums on the credit and debit sides of the balance.