Definition: Trial Balance refers to a schedule, in which the balances of all ledger books are assembled into debit and credit columns, to check the arithmetical accuracy of the entries posted in the ledger accounts.
Trial Balance is a tabular statement, containing a specified date on which it is prepared, indicated at the top of the statement. The balances of all the assets, expenses, losses, drawings, cash and bank account are taken to the debit column whereas the balances of all the liabilities, incomes, gains, capital are transferred to the credit column.
Companies prepare trial balance periodically, usually at the end of the financial year which forms a basis for preparing final accounts. However, it can be prepared otherwise also, subject to the accounts are balanced.
When the total of debit and credit columns are equal, then the trial balance is regarded as balanced, i.e. the accounts are mathematically accurate, however, certain errors are still there, that might have occurred during journalizing and posting the entries into a ledger.
Objectives of Preparing Trial Balance
- To ensure arithmetical accuracy of the books of accounts, which indicates that the books are free from any mathematical errors and both the aspects of the account are recorded, in journal and ledger.
- To prepare financial statements, as trial balance forms a base for preparing final accounts at the end of the financial year.
- To act as a summary of the ledger, as it compiles the balances of all accounts.
Trial Balance prepared to verify as to whether the totals of the debit column equals the total of credit columns.
Methods of Preparation of Trial Balance
- Total Method: Otherwise called gross trial balance method, under this method all the ledger accounts are totalled and the total of both debit and credit side is carried forward to the trial balance.
This method saves time, as the time taken to balance the account is saved and the trial balance can be prepared as and when the accounts are totalled. However, this method is not used in general, because it does not help in the preparation of the final accounts.
- Balance Method: This method is used by the companies, as the trial balance is prepared on the basis of ledger account balances. As per this method, first of all, the ledger accounts are totalled and balanced and those balances are transferred to the trial balance. This method is also known as net trial balance method.
Here, balance refers to the difference of totals of debit and credit side of a ledger account. Balancing of ledger account implies tallying both the debit and credit sides of the particular account by placing the balance on the side where the amount falls short.
- Total and Balance Method: Also known as a compound method, as its name suggests it is a combination of the two methods discussed above. In this method, the statement contains columns for both totals as well as balances.
Trial Balance is the third step of the accounting process, wherein once the accounts are posted in the ledger, a statement is prepared to show the debit and credit balances. It is prepared by listing all the accounts and then entering them in their respective columns.
The totals of the debit and credit columns must agree irrespective of the method is used for preparing Trial Balance. This is because of the dual effect, i.e. every debit has an equivalent credit, and it indicates that the trial balance does not contain any clerical errors. However, this is not absolute proof of accuracy, as an error of principle, an error of omission and compensating errors may still be there.
Adjusted Trial Balance
Suspense account is a temporary account is created when there is a disagreement in the debit and credit column of the trial balance after carrying forward all ledger account balances and errors are not detected at the right time, then the trial balance is equalized by transferring the difference of the two sides in this account, so as to proceed further and prepare final accounts.