People with limited knowledge of accounting always ask the question that what is a Trial Balance. In this article, we are answering this question. We also explain how to prepare the Trial Balance with different methods.
I hope you enjoy this article.
Trial Balance, as its name indicates, is a statement of the trial to check the arithmetical accuracy of all the account balances on a specified date.
This statement divided into three columns. One for particulars and the other two columns are for recording the debit and credit balances of the ledger accounts.
This statement is not a part of the books of accounts of the business.
If the debit and credit side of the Trial Balance equal, it may be tallied arithmetically. It does not mean that all the accounting entries tallied as per the double-entry system.
This statement prepared at the end of a particular accounting period. This period is decided by the management or Accountant of the business organization.
Table of Contents
Why Trial Balcne is Prepared
It makes easy the process of preparation of Profit and Loss Account and Balance sheet of the business.
As the business is following the double-entry system, equality of the debit and credit will increase the confidence of the accounts department
Is Trial Balance is part of Final Accounts?
No, Trial Balance is prepared by accounts for their convenience to check the accuracy of the records.
Is it compulsory to prepare this Statement ?.
No. At present, all the business houses are using Accounting Software and Applications like Tally ERP, Quickbooks etc. So manual preparation is not required at all. All the Accounting Softwares are giving the option to generate this statement at any time during the accounting period.
As we are using Accounting Software, the mistake of arithmetical accuracy is very limited.
How to Prepare the Trial Balance
The basic rule of preparing the Trial Balance is to enter all the Debit balance of ledgers to the Debit column and Credit Balances to the Credit column of this statement.
The Debit Balance ledger accounts include Assets, Drawings, Debtors, Expenses and losses.
Credit Balance ledger accounts include Liabilities, Capital, Creditors, Gains and Incomes.
A. We need to select a format first.
There are two types of format for the preparation of Trial Balance.
This format is the same as of a Journal. It id having five columns. They are Name of Account, Ledger Folio No, Debit balance amount and Credit balance amount
This format is the same as a ledger. It has two sides. Each side consists of 3 columns like Name of Account, Ledger folio number, and Amount.
B. Decide the method of Preparation
There are three methods usually used to prepare Trial Balance.
- Gross Balance
- Net Balance
- Compound Method
i. Gross Balance
This method also knows as Toat method. In this method, first, the Debit side and Credit side of ledger Accounts are totalled separately. Then, this totals enters on the corresponding sides of the Trial Balance, depends on the Debit balance or credit balance.
If a particular ledger account has only one side balance, it may either Debit or Credit, the same transfers to the respective column only.
ii. Net Balance
This method is also known as the Balance Method. Under this method, first to find out the net balance of the ledger accounts. This balance records the respective debit or credit column of the Trial Balance
iii. Compound Method
It is the combination of Gross Trial Balance method and Net Trail Balance method.
First, we need to prepare the Trial Balance as per the Gross Trial Balance method. It enters in a column. Then find the balance as per the Net Trial balance method, and add a separate column and record this balance
C. Start the Preparation
Lat step is to prepare the Trial Balance. The data entered in the Trial balance is normally keeping a sequence as given below.
- Asset Accounts
- Liability Accounts
- Capital Accounts
- Owners Equity accounts
- Income and & Gains Accounts
- Expenses & Losses Accounts
Explain with the Example
Ledger balances of XYZ Company for the current year are given below. Prepare the Trial Balance
Adjusted Purchases 1,389,000.00
Petty Cash 15,000.00
Sales Ledger 30,000.00
Carriage inward 6,000.00
Discount Allowed 15,000.00
Prepaid Insurance 3,000.00
Cash at Bank 270,000.00
Stock (Closing ) 180,000.00
Accrued Interest 6,000.00
Carriage Outwards 9,000.00
Current A/c 15,000.00
Purchase Ledger 90,000.00
Outstanding expenses 15,000.00
P&L A/c 30,000.00
Bad Debt Recovered 3,000.00
Interest Received 15,000.00
Provision for Bad Debt 9,000.00
General Reserve 66,000.00
Trial Balance of XYZ Co. as on 31 December 2019
|Name of Account||Debit||Name of Account||Credit|
Cash at Bank
Stock (Closing )
Bad Debt Recovered
Provision for B/D