A ‘Trial Balance’ is a list of all the General ledger accounts (both revenue and capital) contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit balance value. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.
The following are the important objectives of trial balance: 1. To Check The Arithmetical Accuracy Trial balance is based on the double-entry principle of debit equals credit or credit equals debit. As a result, the debit and credit columns of trial balance must always be equal. If they do, it is assumed that the recordings of financial transactions are accurate. Conversely, if they do not, it is assumed that they are not arithmetically accurate. Therefore, one important purpose of preparing trial balance is to provide a check on the arithmetical accuracy of the recordings of the financial transactions. 2. To Help Locate Accounting Errors
Trial balance Essay Example
Since the trial balance indicates if there is any error committed in the journal and the ledger, it helps the accountant to locate the error because the starting point of locating errors is trial balance itself. 3. To Summarize the Financial Transactions A business performs several numbers of financial transactions during a certain period of time. The transactions themselves cannot portray any picture of the financial affairs of the business. For that purpose, a summary of the transactions has to be drawn. The trial balance is prepared with a view to summarize all the financial transactions of the business. 4.
To Provide the Basis for Preparing Final Accounts Final accounts are prepared to show profit and loss and the financial position of the business at the end of an accounting period. These accounts are prepared by using the debit and credit of all ledger accounts. Therefore, since the trial balance is a statement of the debit and credit balances of the ledger accounts, it provides the basis for the preparation of the final accounts. Characteristics of Trial Balance. It is a list of balances of all Ledger accounts and Cash Book It is not a part of the double entry system of book-keeping. It is only a working paper.
It can be prepared on any date. It verifies the arithmetical accuracy of posting of entries from the Journal to the Ledger. It is not a conclusive proof of the accuracy of the books of account since some errors are not disclosed by Trial Balance. Disagreements of Trial Balance: The debit total of trial balance should be equal to credit total. Sometimes, they are not equal and it is assumed that there are some errors in books of account. Some of the reasons of errors may be as follows. Trial balance will disagree if a transaction is posted in one side of an account and omitted to post it in the another side of another account.
If wrong amount is posted in ledger accounts, the trial balance will not agree. When an amount is posted wring side say in debit side instead of credit side, the trial balance will not agree. Sometime, a transaction may be posted twice in the ledger accounts. As a result, the total of a trial balance will not be equal. Disagreement of a trial balance may be caused by the wrong totaling or balancing of ledger accounts. While totaling the figure of subsidiary books there may arise some errors that will cause disagreement of trial balance. Omission to post a ledger balance also causes the disagreement of a trial balance.
If there is wrong in totaling of trial balance, a trial balance will disagree. Another cause of disagreement of a trial balance may be the error made in carrying forward the total from one page to another. An error of original entry is when both sides of a transaction include the wrong amount. For example, if a purchase invoice for Rs. 21 is entered as Rs. this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for Rs. 9less, so the total of both columns will be Rs. 9 less, and will thus balance.
An error of omission is when a transaction is completely omitted from the accounting records. As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance. An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa. For example, if a cash sale for Rs. 100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals.
An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type. For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals. An error of principle is when the entries are made to the correct amount, and the appropriate side (debit or credit), as with an error of commission, but the wrong type of account is used. For example, if fuel costs (an expense account), are debited to stock (an asset account).
This will not affect the totals. Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out. A Transposition Error is an error caused by switching the position of two adjacent digits. Since the resulting error is always divisible by 9, accountants use this fact to locate the mis-entered number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates that one of the switched digits is either more, or less, by 8 than the other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the totals.