2 – Trial Balance

Introduction:

According to the dual aspect principle, the total debit balance must equal the total credit balance. The correctness of posting to ledger accounts and their balances must be confirmed. This is accomplished by creating a trial balance.

A trial balance is a statement that reflects the balances of all accounts on a specific date. A trial balance is a schedule or list of balances, either debit or credit, retrieved from the ledger accounts, including cash and bank balances from the Cash Book. It is prepared to check the ledger balances, as the name implies. If the total of the trail balance’s debit and credit amount columns is equal, the posting to the ledger in terms of debit and credit amounts is assumed to be correct. The agreement of a trial balance ensures just arithmetic accuracy. A company can compile a trial balance at any time, but it must do so on the last day of the fiscal year.

2.1 Goals of Trial Balance Preparation

The following are the primary goals of trial balance preparation:

1. To compile a disclosure statement of the final accounting balances of various ledger accounts on a specific date.
2. To make a statement about a cross-checking device in accounting while posting entries, primarily based on the principle of double-entry accounting. It allows the accountant to post entries methodically.
3. It aids the firm in compiling the Trading and Profit and Loss Accounts for the fiscal year ended…………….. and the Balance Sheet as of the date………………..
4. It gives a bird’s-eye view of the accounting balances of several ledger accounts over the selected period.

2.2 Trial Balance Preparation

The preparation of the trial balance is divided into three distinct accounts, namely:

1. Real Account (R)
2. Nominal Account (N)
3. Personal Account (P)

The transactions are classified not only based on accounts but also based on payments and receipts. These payments and receipts are further categorised as follows:

Debit Balance – Payments Category

Debit Balance is the source of the three different accounts’ golden rules:

Personal Account: Deduct all expenses and losses from the Receiver Nominal Account.

Debit what comes in and debit all assets in the real account.

1. Category of Trading Expenses (TE)
2. Category of Profit and Loss (PE)
3. Balance Sheet – Assets (BA)

Credit Balance in the Receipts Category

Credit Balance is the primary source of the second half of the golden accounting principles.

Personal Account: Make a credit into the Giver’s

Nominal Account: All income and gains should be credited.

Real Account: Credit what goes out and credit all liabilities

1. Category of Trading Income (TI)
2. Category of Profit and Loss (PI)
3. Balance Sheet – Liabilities (BL)

The trial balance proforma is as follows:

Trial Balance as on ……………………

2.3 Trial Balance Preparation Methods

There is only one way to prepare a Trial Balance: the balance method. Accountants, on the other hand, recommend the following approaches for preparing a trial balance:

1. Using the Balance Method
2. Using the Total Method
3. Using the Combined Method (Balance and Total Methods) The following is an explanation of methods:
   1. Balance Approach: As the name implies, this method calculates the balance of each account. It is straightforward, easy to compute, and saves time and labour, which is why it is popular.
   2. Sum Approach: Instead of calculating the balance of each account, this method takes the total of both sides of each account.
   3. Combined Approach: As the name implies, this method employs balance and total methods. This procedure is no longer used because it wastes time and labour.

Preparation of a Trial Balance Using Balances

The ledger accounts are not mentioned in the examination problems, but a list of account balances is included. Students are expected to prepare the Trial Balance using these balances. When preparing a Trial Balance, students should keep the following rules in mind:

1. The balances of all assets and drawing accounts are entered on the Trial Balance’s debit side.
2. The credit side of the Trial Balance records the balances of all liabilities and capital accounts.
3. The balances of all company expenses and losses are shown on the Trial Balance’s debit side.
4. The credit side of the Trial Balance shows the balances of all incomes and gains.
5. The sales and return balances are shown on the credit and debit sides of the Trial Balance, respectively.
6. The purchases and purchase returns balances are shown on the Trial Balance’s debit and credit sides.

Illustration 1: Mr. Akshey Kumar provides the following balances as of March 31, 2008. You must prepare a Trial Balance with the following information:

Solution:

Trial Balance

(As of 31st March, 2008)

Dr.                                   Cr.

From the foregoing trial balances, it is evident that the total of the debit side will correspond with the total of the credit side if the Ledger accounts are arithmetically valid. If these totals do not add up, there will be an error in the ledger accounts.

2.4 Errors

Specific errors can occur when documenting accounting transactions in primary and secondary books of accounts. When there are problems in the accounting, the balance on both sides of the trial balance does not tally. Some faults are easy to spot, but the trial balance does not discover some. In other words, despite these flaws, a trial balance would agree. These faults are complicated to spot because you would be unaware of them. Errors of principle, omission, commission, compensating errors, and so on are such errors.

Errors are classified into two types:

2.4.1 Errors that cannot be found with Trial Balance

The following inaccuracies are not detectable by the trial balance, which implies that even after agreeing on the totals of the debit and credit sides, these errors occur in the accounts.

1. Error of Omission: These errors occur when a business transaction is totally or partially omitted from the original record books. Example: Goods sold for $10,000 to Mr. Ram are not recorded anywhere in the original books, so the effect is not reflected in the ledger or trial balance. As a result, trial balance cannot detect such inaccuracies.

2. Commission Error: This error occurs when one account is debited or credited instead of another. For instance, cash received from Shyam ‘1,000 has been credited to Ram’s name. Such inaccuracies do not influence the agreement of the totals on the debit and credit sides of the trial balance, but they do alter the business’s outcome.

3. Error of Principle: These errors occur when the capital and revenue nature of revenues or expenditures are misclassified. For example, a 20,000 furniture purchase is recorded in the book of purchases when it should be in the furniture account. Trial balance cannot detect such inaccuracies.

4. Compensating Error: A compensating error occurs when two errors in the same account occur, and the impact of the other compensates the effect of one error. For example, a purchase of ‘10,000 from Ajay is credited just by ‘1,000, whereas a purchase of ‘1,000 from Vijay is credited by ‘10,000. As a result, such inaccuracies do not affect the Trial Balance’s agreement.

2.4.2 Errors Detected Using Trial Balance

The inaccuracies that impact the agreement of the Trial balance totals can be easily identified. These mistakes could be related to:

1. Subsidiary book or ledger account totals. For example, the Purchases Book total is recorded as ‘44800 while the actual number is ‘44300, and the Sales Day Book total is written as ‘52500 whereas it is ‘52900.

2. The balancing of a ledger account. For example, the total of Mohan’s A/debit c’s column is ‘8600, ‘ and the total of his credit column is ‘6800. ‘ The estimated balance is ‘1600,’ whereas the actual balance is’ 1800. ‘

3. Incorrect posting of any amount in any account. For example, goods purchased from Rajesh Mohanti for ‘5400 were posted to his debit, twice to his account, or to Rakesh Mohanti’s credit.

4. Any account posting may be on the incorrect side of the account. Example: Sales made to Krishna ‘5000 are transferred to the credit side of Krishna’s account in the ledger.

5. Any account’s balance may be excluded from the Trial Balance in writing. For example, an advertisement account with a debit balance is excluded from the trial balance.

6. Incorrect Trial Balance total