Trial Balance
Trial Balance
Trial Balance is a list of closing balances of
ledger accounts on a certain date and is the first step towards the preparation
of financial statements. It is usually prepared at the end of an accounting
period to assist in the drafting of financial statements. Ledger balances are
segregated into debit balances and credit balances. Asset and expense accounts
appear on the debit side of the trial balance whereas liabilities, capital and
income accounts appear on the credit side. If all accounting entries are
recorded correctly and all the ledger balances are accurately extracted, the
total of all debit balances appearing in the trial balance must equal to the
sum of all credit balances.
- Trial Balance acts as the first step in the preparation
of financial statements. It is a working paper that accountants use as a
basis while preparing financial statements.
- Trial balance ensures that for every debit entry
recorded, a corresponding credit entry has been recorded in the books in
accordance with the double entry concept of accounting. If the totals of
the trial balance do not agree, the differences may be investigated and
resolved before financial statements are prepared. Rectifying basic
accounting errors can be a much lengthy task after the financial
statements have been prepared because of the changes that would be
required to correct the financial statements.
- Trial balance ensures that the account balances are
accurately extracted from accounting ledgers.
- Trail balance assists in the identification and
rectification of errors.
Following is an example of what a simple Trial
Balance looks like:
|
ABC LTD
Trial Balance as at 31 December 2011 |
||
|
Account
Title
|
Debit
|
Credit
|
|
$
|
$
|
|
|
Share
Capital
|
20,000
|
|
|
Furniture
& Fixture
|
10,000
|
|
|
Building
|
10,000
|
|
|
Creditor
|
10,000
|
|
|
Debtors
|
8,000
|
|
|
Cash
|
2,000
|
|
|
Sales
|
10,000
|
|
|
Cost
of sales
|
8,000
|
|
|
General
and Administration Expense
|
2,000
|
|
|
Total
|
40,000
|
40,000
|
1.
Title provided at the
top shows the name of the entity and accounting period end for which the trial
balance has been prepared.
2.
Account Title shows the
name of the accounting ledgers from which the balances have been extracted.
3.
Balances relating to
assets and expenses are presented in the left column (debit side) whereas those
relating to liabilities, income and equity are shown on the right column
(credit side).
4.
The sum of all debit and
credit balances are shown at the bottom of their respective columns.
Trial Balance only confirms that the total of
all debit balances match the total of all credit balances. Trial balance totals
may agree in spite of errors. An example would be an incorrect debit entry
being offset by an equal credit entry. Likewise, a trial balance gives no proof
that certain transactions have not been recorded at all because in such case,
both debit and credit sides of a transaction would be omitted causing the trial
balance totals to still agree. Types of accounting errors and their effect on
trial balance are more fully discussed in the section on Suspense Accounts
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