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