What is Trial Balance? It's features, objectives, types/methods

Let us know as to What is Trial Balance in Accounting? It's features, objectives, types, methods and format with example

A Trial Balance is a statement of all ledger accounts having debit balances and credit balances prepared to ensure the arithmetical accuracy of books of accounts. It is a statement, not an account that is prepared on a particular date for preparing and presenting financial statements.

What is Trial Balance in Accounting? Its meaning, definition & scope

Trial Balance is a statement that is prepared to ensure the arithmetical accuracy of books of accounts. It is a statement, not an account. It is prepared on a particular date to ensure the arithmetical accuracy of books of accounts i.e., to check that all accounts adhere to the Generally Acceptable Accounting Principles and there are no clerical errors exist in books of accounts.

Trial balance has all the ledger accounts having debit and credit balances. It has a debit balance and credit balance columns which are equal in amount and tallies. If both the credit and debit columns are equal in amount and tallies, then it ensures the arithmetical accuracy of books of accounts. The difference amount in the Trial Balance will be transferred to the suspense account. When these errors were rectified, the suspense account will be closed by passing an adjustment entry.

It facilitates the preparation of Financial Statements. Financial statements include Trading and profit&loss account, Balance sheet, notes to accounts and cash flow statement

What are the characteristic features of Trial Balance?

Here, we have the following features as listed below.

1. Debit & Credit Balances

It gives the summary of all ledger account balances. All the debit & credit balances extracted from relevant ledger accounts are listed in a particular format. It gives the details of the ledger account balances. For example, the debtor's account has a debit balance, shown on the debit balances column. Similarly, the creditor's account has a credit balance, shown on the credit balance column.

2. It is a Statement, not an account

It is only a statement or report, not an account. An account has a T shape. The left side of an account is referred to as Debit and denoted as Dr. Similarly, the right side of an account is Credit, denoted as Cr. It is the statement prepared after extracting the ledger account balances.

3. Arithmetical Accuracy of books of accounts

It gives the arithmetical accuracy of the transactions recorded in the books of accounts. But this arithmetical accuracy of accounts can only be determined by conducting an audit. As we know, the audit is an independent examination of books of accounts to ensure that the accounts are prepared as per the accounting standards, and accounting policies.

4. Basis for Financial Statements

Trial balance forms the basis for the preparation of financial statements. Financial statements include profit & loss account, balance sheet, notes to accounts, and cash flow statement. This helps in the finalization of accounts. These financial statements are prepared after the preparation of the Trial Balance.

5. Prepared at a particular point of time

This statement is prepared at a particular point of time such as weekly, monthly, half-yearly. Generally, it is prepared after extracting the ledger account balances, prior to the finalisation of accounts. Thus, it is just a statement but not an account, prepared at a particular point of time. Mostly, this statement is prepared at the end of the accounting period.

6. Forms/methods of Trial Balance

It can be prepared using two methods. One is the Total method and the other one is the Balance method. We can also use the compound or hybrid method, a combination of both Total method and Balance method. Under the Total method, the debit side of an account is totalled and the credit side of an account is totalled. The debit total of an account is taken on debit column of Trial balance. The credit total of an account is taken on credit column of Trial Balance. Under Balance method, ledger accounts are balanced. The debit balance of an account is taken on debit side of trial balance. The credit balance is taken on credit side of trial balance.

7 Format/specimen of Trial balance

It is prepared in a particular format. Here, we have columns such as serial no, name of the account, debit balance, and credit balance. We mention the name of the account and put the balance of an account in the balance column. The balance column is totalled. The total of Debit balance column must be equal to the total of the Credit balance column

8. Types of Trial Balance

Generally, we have adjusted and unadjusted Trial balance. Unadjusted trial balance is prepared prior to recording the adjustment entries. Adjusted trial balance is prepared after passing adjustment entries. We also have post closure trial balance which is prepared after closing entries were completed.

9. Rules to prepare Trial Balance

It has an equation where the total of debit balance column must be equal to the total of credit balance column. If both the debit balance column and the credit balance column have same amount, then it will imply that there are no errors or omissions. If there exist any difference or total of debit & credit balance column does not tally, then the difference is taken to Suspense Account

What is the objective or Purpose of preparing Trial Balance?

The primary purpose of preparation of Trial balance is to ensure that all ledger accounts having debit balances are equal to those with credit balances. It is a statement prepared to ensure the arithmetical accuracy of books of accounts. It is the statement that helps in the preparation of financial statements

The following were the objectives of the trial balance.

1. To ascertain the arithmetical accuracy of books of accounts

2. It helps in preparing the financial statements, to finalise the accounts.

3. It aids in summarising the financial transactions & consolidating ledger account balances

4. It helps to identify & rectify the errors, omission of transactions

5. To ensure that ledger posting is done correctly, extracting ledger account balances

6. It helps the auditors to conduct the audit in a smooth & fair manner

7. It helps to make the decisions by accountants & bookkeepers

How to prepare Trial Balance, explained with example or format?

Trial Balance has two columns such as Debit balances and Credit balances. These two columns are ledgers account balances which must be equal. All the assets and expenses are placed in the debit balances column and all the liabilities, capital and incomes are placed in the credit balances column.

Let us take an example and format of Trial Balance of Alpha limited as follows:

In the above example, all the assets and expenses are placed in the debit balances column. Liabilities, capital, incomes are placed in the credit balances column. The trial balance has debit and credit balances that are equal and this ensures that there are no errors and omissions. Trail balance gives arithmetical accuracy of books of accounts.

All the debit balance amounts are taken to the Assets side of the Balance sheet or the Debit side of the Profit and loss statement. All the credit balance amounts are transferred to Liabilities in the Balance sheet or on the credit side in the Profit and loss statement.

What are the 3 types of Trial Balance?

There are 3 types of Trial balance in accounting. They are

1. Unadjusted Trial Balance

It simply means a trial balance is prepared before passing the adjusting entries in the books of accounts. It is prepared before making any adjustments and extracting the ledger account balances. It may not be used to prepare the financial statements because this is not final, there may be adjustments required to be made.

2. Adjusted Trial Balance

It simply means a trial balance is prepared after passing the adjusting entries in the books of accounts. It is prepared by making any adjustments in ledger accounts, thereby passing adjusting entries to rectify the errors and by recording any transactions, if omitted. It has the adjusted final balances. Thereby it can be used to prepare the financial statements.

3. Post Closing Trial Balance

It means a statement is prepared after closing entries have been completed. It is prepared by extracting the ledger account balances after passing closing entries in the books of accounts. This statement is the starting trial balance that can be used for the next year.

What are the 3 methods of Trial Balance?

The 3 methods are Total method, Balance method, and Combined Method

1. Total Method

Under the Total method, the debit side of an account is totalled and the credit side of an account is totalled. The debit total of an account is taken on debit column of the Trial balance. The credit total of an account is taken on credit column of Trial Balance. Finally, a statement is prepared using this Total method.

2. Balance Method

Under Balance method, ledger accounts are balanced. The debit balance of an account is taken on debit side of trial balance. The credit balance is taken on credit side of trial balance. This is the most common, widely used method across the world.

3. Combined/Hybrid Method

This is simply a combination of both the Total method and the Balance method. This method uses both the Total method and Balance method to prepare the Trial Balance by adding additional columns.

What are the advantages (uses) or benefits of Trial Balance?

The following were the advantages, uses (benefits) of the trial balance.

1. It helps to ascertain the arithmetical accuracy of books of accounts

2. To facilitate the preparing the financial statements, to finalise the accounts.

3. It aids in summarising the financial transactions & consolidating ledger account balances

4. It helps to identify & rectify the errors, omission of transactions

5. To ensure that ledger posting is done correctly, extracting ledger account balances

6. It helps the auditors to conduct the audit in a smooth & fair manner

7. It helps to make the decisions by comparison of ledger account balances with the prior period.

8. To assist in passing adjustment entries, closing entries at the year-end

9. To assist the management in the preparation of a financial budget for the upcoming accounting periods

10. It ensures that the total of debit balance are equal to total of credit balances.

What are the disadvantages (limitations) of Trial Balance?

The following are the demerits or disadvantages or limitations listed below.

1. It does not prove that all the transactions have been recorded in the books of accounts. There may be transactions omitted to be recorded in the Journal.

2. It cannot assure that the Ledger is correct and reliable. There may be errors committed in Ledger while posting or balancing the ledger accounts.

3. It cannot find the missing journal entries in the Journal because there may be transactions omitted while recording the transactions.

4. It cannot locate the duplicate entries booked in the journal. There may be entries recorded twice in Journal that cannot be detected.

5. It cannot identify the errors committed while recording the transactions in the books of accounts. These errors may be error of omission, error of commission, principle errors, or compensating errors.

Conclusion:

We can conclude as to What is Trial Balance in Accounting? Its features, objectives, types/methods with example. Thus, it is a statement prepared to ensure the arithmetical accuracy of books of accounts. All the debit and credit balances in it are transferred to the profit and loss statement and balance sheet. Thus it facilitates the preparation of financial statements.