In this article, we are going to build a Trial Balance. we discuss the Trial Balance definition, Trial Balance format, The debit and credit list, Uses, examples, Limitations of Trial Balance and it’s all about the Trial Balance. I am going to explain what it means, and why it exists, and so you how to make one for yourself…
Are you ready? let’s do this!
What is a Trial Balance?
A Trial Balance, or “TB” when abbreviated, is an Accounting Report showing the closing balances of all General Ledger accounts at a point time.
Back in the days of Accounting on paper, it was used to check that the Debit and Credit column totals match each Other.
Since the introduction of Accounting Software, it’s done automatically. Nowadays it is an inside document that is typically used by Accountants to check for errors, and assist in the making of Financial Statements. It is also used by Auditors in deciding which accounts to review.
Trial Balance Format & list of Dr.and Cr items
Format & list of Debit and Credit items.
Objectives of Preparing of Trial Balance
The following are the Objectives of preparing of Trial Balance:
- To Ascertain the Arithmetical Accuracy: When the Trial Balance tallies, it show the ledgers a/c are accurate.
- To help in locating errors: It helps in (detecting) errors in casting, posting & balancing. If any errors detected they can be rectified.
- To Provide a Basis for Preparation of Final Accounts: Trial Balance provides the Basis for Preparing Trading Account, Profit and Loss Account and the Balance Sheet.
- To find Out the Balance of specific Amount: Trial Balance Provides a full view of each account in the Ledger. As such, the balance of any Particular Ledger can not be found out easily from the Trial Balance without going through the ledger.
- It tests the accuracy of the books.
- If the trial balance tallies, we assume that the books are in order to prepare.
- It provides input for the preparation of financial statements, final accounts. In other words, final accounts prepared on the basis of balances given on the trial balance.
Ok, So now we know what a Trial Balance means, but what does it look like?
Ok, its look like this…
We have a complete listing of all General Ledger accounts, with two columns for the Debit and Credit totals. In the title, we need to mention the period end date since we’re looking at a snapshot at a point in time.
The account names are grouped by their type, typically we start off with Assets, Liabilities, Equity and Dividends since this is the typical layout of a Balance Sheet. Then we all have the Revenues and Expense accounts which makes up the Income Statement or Profit and Loss. To reduce the size of a Trial Balance, accounts with zero balances are normally left out completely. The columns that the account balances go in usually line up with the “Normal Balances” of the accounts types. Which we can remember using Dealer Dividends, Expenses and Assets are normally Debit accounts, so these go on the Left.
whereas the owner’s Equity, Liabilities and Revenue are Credit accounts, which go on the Right. The totals of the Debit and Credit columns should always match each other. If they don’t, then you’ll need to check over your working for errors.
We’re Double Entry Bookkeeping at all times so the total Debits and Credits are always equal. However, Debit and Credit totals being equal doesn’t mean our Trial Balance is error-free. We posted the Debits and Credits in a journal and got them the wrong way. Or we posted the same journal twice. Or not even posted it at all, Or we could have posted a wrong balanced journal to the correct accounts, but the numbers were wrong because we messed up our workings. So by no means does a balanced Trial Balance means that it’s a correct, but is certainly a good start.
How To Prepare a Trial Balance [Example]
We are going to build the Trial Balance for a Window Cleaning business. So we are going to need to include all of these transactions.
To create this we are going to use something called a Working Trial Balance.
We are not going to split Debit and Credit into two separate Columns.
Instead, we are going to identify Debits as positive number and credits as negative numbers.
To help us distinguish between them. To start things off, we need a listing of all of the accounts our window cleaning business has. We add 7 columns to right-hand side . 6 for each of the journal entries and 7th to calculate the total balances in each of the accounts. Below the list of accounts, we are going to add one final row for the totals of the columns so that we can check each of the journals balances as we enter them.
Now it’s time for us to enter the journals.
I’m going to move through the next section quite quickly.
- The business owner invests $100 and in return, the business issues $100 in stock.
Ans-We is going to Debit cash by $100 and Credit Owner’s equity by $100.
2. Then, the business takes out a further $200 loan to fund its activities. Ans-we needs to Debit cash again by $200 and Credit loans payable by $200 as well.
3. The business spends $30 in cash on Window cleaning equipment.
Ans-We Credit cash by $30 and we Debit equipment by $30.
4. It spends further $50 on cleaning supplies and the payment is made on the account.
Ans-So we Debit supplies by $50 and Credit accounts payable by $50.
5. The business makes $150 cleaning windows, using half of its supplies in the process.
Ans- We debit cash by hundred and Fifty dollars and credit revenue by $150 to recognise the revenue. We also credit supplies by $25 and Debit cost of sales by $25 as well to account for half of the supplies being used up. Finally, in the journal entries, We spend $20 at the laundry to clean our equipment. We Debit laundry costs $20 & Credit cash by $20.
Now that we have all of our journals written out, we can take the totals of each account. you will notice that some of these totals are zero. That’s a good sign because of its shows that our Trial Balance is balanced.
Now one last thing to finish this off…
Let’s reformat our Working Trial Balance to show our Debits and Credits in separate columns,
And let’s rename this to for the period ended 30th of September. The total of our accounts with a Debit Balance is $500 and the total our accounts with a Credit balance is also $500.
So here we have our final Trial Balance for the September accounting period.
Let’s recap what’s we just learnt there…
- It is an accounting report that shows the closing balances of all GL accounts at a point in time.
- It is an inside report, and it is also used by accountants to check for errors and help produce Financial Statements.
- The totals of Debit and Credit columns must always match each other exactly for it to balance.
- However, a balanced column doesn’t mean that this is error-free.
Limitations of Trial Balance
- The agreement of the Trial Balance does not guarantee that the books are correct.
- It is not a part of Books.its is prepared on a sheet of paper.
Thank you for reading, if you enjoyed this article then share with your friends and needy ones.
What are the three types of Trail Balance?
There are three types of trial balance:
3.Totals cum Balance method.
What is Trail Balance in Simple words?
Trial balance is a statement of debit and credit balances of ledger accounts on a particular date.
Whats included in a Trial Balance?
Here are the list of items that included in a trial balance.
Is Bank Overdarft Debit or a Credit?
In overdraft facility show cr.balance.
Understand what is Bank overdraft? Its basically an amount which is drawn over and above the balance kept in the bank account.This facility is only avilable for current a/c holders.
Overdrawn amount will be charged intrest by bank which is called overdraft.
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