How to prepare trial Balance? its benefits, feature, and methods

 Definition of Trial Balance 

Trial balance may be defined as a statement or a list of all ledger account balances taken from various ledgers on a particular date to check the arithmetical accuracy.

 According to the Dictionary for Accountants by Eric. L. Kohler, Trial Balance is defined as 

“a list or abstract of the balances or of total debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establish a basic summary for financial statements”.

 Trial Balance is merely a listing of balances on a particular date. it is supposed to be prepared at the end of accounting period.

Features of a Trial Balance

 Following are the features of Trial Balance: 

a) It is a list of debit and credit balances which are extracted from various ledger accounts. 

b) It is not an account. It is only a statement of debit and credit balances of account. 

c) The purpose is to establish arithmetical accuracy of the transactions recorded in the Books of Accounts. 

d) It does not prove accounting accuracy which can be determined by audit. 

e) It is not a part of the final statements. 

f) It is usually prepared at the end of the accounting year, but it can also be prepared anytime as and when required.

 g) It is a link between books of accounts and the Profit and Loss Account and Balance Sheet.

Purpose of a Trial Balance 

Trial Balance serves the following purposes:

 a) Bird’s Eye View:

 The trial balance gives the summary of all the ledgers. Since the net amount gets displayed, one can save time by not viewing the concerned ledger again.

 b) Pointing out Error: 

The trial balance aids in pointing out errors. It is also used to check the arithmetical accuracy of books of accounts. If the trial balance does not tally, the errors can be found out, rectified and then financial statements can be prepared. 

c) Basis for Preparation of Financial Statements:

 It forms the basis for preparation of financial statements i.e., Profit and Loss Account and Balance Sheet. 

d) Quick Reference: 

It acts as a quick reference. One can easily find out the balance in any ledger account without actually referring to the ledger. 

e) Helps in Analyses:

 If the listing of ledger accounts is systematically done in the trial balance, one can do a quick trend analysis. Hence, listing is usually done in the sequence of Asset accounts, Liability accounts, Capital accounts, Owner’s equity accounts, Income or gain accounts and Expenses or losses accounts in that order. One can draw some quick inferences from trial balance by interpreting the same. If one plots monthly trial balances side by side, one can analyse the movement of balances in various accounts e.g., one can see how expenses are increasing or decreasing or showing a trend of movements. By comparing the owner’s equity balances as on two dates, one can interpret the business result e.g., if the equity has gone up, one can interpret that business has earned net profit and vice versa. 

Preparation of Trial Balance is not indispensable as it is not a part of financial statements. It is a mere statement prepared by the accountants for his own convenience and if it agrees, it is assumed that at least arithmetical accuracy has been confirmed although there may be a lot of errors undetected. 

Pro-forma of Trial Balance

 Generally, the following pro-forma is used in preparation of a Trial Balance.  

Rules for Preparation of Trial Balance

While preparation of trial balances we must take care of the following rules/points 

1) The balances of the following accounts are always found on the debit column of the trial balance

 Assets 

 Expense Accounts 

 Drawings Account 

 Cash Balance

 Bank Balance 

 Any losses 

2) And the following balances are placed on the credit column of the trial balance 

 Liabilities 

 Income Accounts 

 Capital Account 

 Profits