What is Trial Balance? Objectives, Preparation, Example, Limitations

What is Trial Balance?

A trial balance is prepared at the end of the year after all accounting entries for the year are done and completed. All journal entries are posted in their respective ledger accounts. The totalling of the accounts is done and all the accounts are balanced.

The trial balance is in a T-Format having a debit side and a credit side. All debit balance accounts are recorded on the debit side and all the credit balance accounts are recorded on the credit side of the trial balance.

The debit side and credit side amounts should be equal, as for every debit entry, there is a corresponding credit entry and for every credit entry, there is a corresponding debit entry.

When the two sides of the trial balance are equal which is also called tally, then it is considered to be as preliminary proof of the arithmetical accuracy of accounting entries. It is proof all the journal entries are correct, posting is correct, totalling is correct and the balances obtained are correct.

The problem arises when the two totals do not balance, this means there is an error in the books of accounts and the financial statements cannot be prepared now. Thus, it can be said that trial balance is a schedule list of all debit and credit balances that ensures that all the entries of the books of accounts are done following the rules of double-entry and arithmetical accuracy. It is a check done before preparing financial statements.

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Objectives of Preparing a Trial Balance

A balanced trial balance forms the basis of preparing final accounts. This is the most important objective of preparing a trial balance.

Some of the major objectives of preparing a trial balance are explained as follows:

• To Ensure Arithmetical Accuracy
• To Identify Accounting Entry Errors
• To Facilitate the Preparation of Final Accounts
• To Facilitate Comparison and Analysis
• To Prepare Budget

To Ensure Arithmetical Accuracy

The trial balance is prepared with the objective to eliminate all kinds of accounting errors. One of them is arithmetical errors, which can happen due to erroneously eliminating any amount from the total or taking an amount twice in the total or taking a wrong amount.

For example, taking 1200 instead of 2100. These kinds of errors are identified while preparing the trial balance and all these kinds of errors could be rectified.

To Identify Accounting Entry Errors

Trial balances help in locating errors in the posting or recording of transactions. If the debit side total of the trial balance is not equal to the credit side total of the trial balance, it means that the trial balance does not tally.

When a trial balance does not tally, it means that the errors must have occurred at the time of recording of journal entries with wrong account or wrong amount or wrong debit and credit effect. It may also happen while posting in the ledger.

Some of the errors can be:

• Totalling the subsidiary books
• Posting in ledgers
• Balancing accounts
• Writing the account balances in the trial balance
• Totalling the trial balance

After finding the errors, they could be rectified and error free record of accounts can be maintained.

To Facilitate the Preparation of Final Accounts

If we prepare final accounts without preparing the trial balance, then all errors in accounting and arithmetical errors will get into the final accounts and the business will not get the correct picture of the business.

It may even get into legal implications as disclosing false figures is a criminal offence. Therefore, businesses should be absolutely sure of their financial statements and its accuracy.

To Facilitate Comparison and Analysis

The trial balance is a list of all the accounts and so it is easy to compare the trial balance of the current year with that of previous year. By doing so, a business entity can have a fair idea of how every account has performed and what decisions could be taken to improve the performance level.

For example, a business entity can decide on whether the depreciation rate should be decreased to show improved profit or increased to decrease the profits and create reserves for new purchases

To Prepare Budget

With the current trial balance, the future predictions of expenses and revenues could be made and budgets for the coming year could be made to estimate, monitor or control the performance.

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Trial Balance Preparation

If we recall the accounting process, we will see that

• first all financial transactions are recorded in the subsidiary books and journal.
• Second, all these transactions are posted into the respective ledgers.
• Third, the ledgers are totalled at the end of the year and balanced.
• Fourth, the balances of the ledgers are then transferred or taken into the trial balance.

While transferring in the trial balance, care is taken in which column it is taken – debit or credit. The debit balances are taken on debit side and the credit balances are taken on the credit side. Thus, after making journal entries and ledger posting, totalling and balancing, the trial balance is the next step in the accounting cycle.

Trial balance is not an account nor is it mandatory to disclose along with financial statements, but it is a statement that shows all balances of accounts in the ledger, cash book and bank book, which enable businesses to prepare error-free financial statements. It acts like a filter to eliminate all errors.

There are two methods of preparing a trial balance, namely total method and balance method. These two methods are explained as follows

Total Method

In this method, ledger accounts are not balanced individually rather they are only totalled. Then these totals are entered in the debit and credit columns of the trial balance.

Thus, for each account, the debit total is entered in the debit column and credit total is entered in the credit column. The grand total of the debit column should then equal to the grand total of the credit column.

The format of the trial balance under this method will be depicted as given below:

Trial Balance as on (Date of Closing of Accounts)

Name of Account	L.F.	Debit Total of Account Amount	Credit Total of Account Amount
Total

Balance Method

In this method, each ledger account is balanced and the closing balances are then listed in a separate statement. These balances are then recorded in the trial balance. All debit balances are recorded in the debit column and all credit balances are recorded in the credit column.

This is the most popular method used in almost all businesses. The trial balance is prepared at the yearend on a particular date.

The format of the trial balance is as mentioned below:

Name of Account	L.F.	Debit Balance Amount	Credit Balance Amount
Total

The trial balance is prepared on a worksheet with two columns debit balance column and credit balance column. All the accounts having debit balances are entered in the debit balance column and all the accounts having credit balances are entered in the credit column balance. Both the columns total must be equal.

Example of Trial Balance Preparation

Example: Record journal entries, post them in the ledgers and prepare a trial balance for Pushpa Travels.

Date	Particulars	Amount (in ₹)
July 1	Commission received	10,000
July 2	Rent paid	5,000
July 5	Interest received	6,000
July 7	Brokerage paid	2,000

Solution:

Journal Entries in the books of Pushpa Travels 2019

Date	Particulars	Journal L.F.	Debit Amount (in ₹)	Credit Amount (in ₹)
July 1	Cash A/c Dr. To Commission received A/c (Being cash received)		10,000	. 10,000
July 2	Rent Paid A/c Dr. To Cash A/c (Being rent paid)		5,000	. 5,000
July 5	Cash A/c Dr. To Interest received A/c (Being interest received		6,000	. 6,000
July 7	Brokerage A/c Dr. To Cash A/c (Being brokerage paid)		2,000	. 2,000

Ledger Accounts in the books of Pushpa Travels As on 2019
Cash Account

Date	Particulars	J. F.	Amount (in ₹)	Date	Particulars	J. F.	Amount (in ₹)
July 1	To Commission		10,000
				July 2	By Rent paid		5,000
July 5	To Interest received		6,000
				July 7	By Brokerage		2,000
				July 31	By Bal c/d		9,000
	Total		16,000		Total		16,000

Trial Balances of Pushpa Travels
Prepared as on 31 July 2019

Name of Account	Debit Balance Amount (in ₹)	Credit Balance Amount (in ₹)
Brokerage Account	2,000
Rent Paid	5,000
Commission Received		10,000
Interest Received		6,000
Cash at hand	9,000
Total	16,000	16,000

Limitations of Trial Balance

There are some limitations of a trial balance, as follows:

• Some errors cannot be tracked by the trial balance
  
  
  
• Even if the balances of debit side and credit side of a trial balance agree, it cannot be said that the accounting is completely accurate.
  
  
  
• Trial balance provides a balance in each account and does not tell anything about the performance of the business
  
  
  
• If the trial balance has errors, the final accounts will also be affected, so trial balance cannot be taken as a reliable basis to prepare financial statements
  
  
  
• Trial balance is a tool only to those businesses that follow the doubleentry system of accounting and not for those that follow the singleentry system of accounting.

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Errors Disclosed by Trial Balance

If the Trial Balance does not tally, it will indicate that certain errors have been committed which have affected the agreement of the Trial Balance. The accountant will then proceed to locate such errors. On location such errors are rectified.

Errors disclosed by trial balance have been explained below:

• Wrong Casting
• Posting to the Wrong Side of an Account
• Posting of Wrong Amount
• Omission of Posting of One aspect of a Transaction
• Posting an amount twice in an Account
• Errors of Totaling and Balancing of Accounts in the Ledger

Wrong Casting

If the total of the Cash Book or some other Subsidiary Book is casted wrong, the Trial Balance will not tally.

For example, the total of the Purchase book has been casted ₹2000 more. When this total will be posted to the debit side of the purchase account, it will also show an excess debit of ₹2000 and hence, the Trial Balance will not agree.

Posting to the Wrong Side of an Account

If instead of posting an amount on the debit side of an account, it is posted on the credit side, or vice versa, the Trial balance will not tally.

For example, goods for ₹2,000 purchased from Sohan. If instead of posting the amount on the credit side of Sohan’s account it is posted to his debit, the debit side of the Trial Balance will exceed the credit side by ₹4,000.

Posting of Wrong Amount

The Trial Balance will not tally if the posting in an account is made with an incorrect amount.

For example, goods for ₹600 have been purchased from Anil. If, it has been correctly entered in the Purchase Book or purchase account, but while posting to Anil’s account, in credit side (correct side) the amount posted is ₹60 instead of ₹600, the Trial Balance will not tally.

Omission of Posting of One aspect of a Transaction

For example, if ₹500 has been received from Shyam and correctly entered in the Cash Book but if it is omitted to be posted on the credit side of Shyam’s Account, the Trial Balance will not tally.

Posting an amount twice in an Account

For example ₹500 has received from Vinod and correctly entered in the Cash Book, but if it is posted twice on the credit side of Vinod’s account, the Trial Balance will not tally.

Errors of Totaling and Balancing of Accounts in the Ledger

Errors may occur in the totaling of debit or credit sides of accounts in the Ledger or in the balancing of accounts in the Ledger. Because the balances of accounts are transferred to the Trial Balance, resulting in transferring wrong balances in the Trial Balance. This will result into the disagreement of the trial balance.