A trial balance is a summary of balances of all accounts recorded in the ledger. The trial balance is prepared at the end of a chosen period which may either be monthly, quarterly, half-yearly or annually or as and when required. Since, every debit should have a corresponding credit as per the rules of the double entry system, the total of the debit and credit balances should tally. In case there is a difference, one has to check the correctness of the balances brought forward from the respective accounts. This type of checking of accounts leads to ascertainment of arithmetical accuracy of the balances of various accounts in a summarized form. Besides checking the arithmetical accuracy, trial balance also aims at ascertaining the correctness of the nature of balances in relation to the type of account. All assets, expenses, receivables shall have debit balances. Similarly, all liabilities, revenues, payables will have credit balances.
Objectives of Preparing a Trial Balance
In order to provide a summary statement view of the balances of various accounts, we need to prepare the trial balance. This also indicates the correct nature of the balances of various accounts. A trial balance is prepared to fulfill the following objectives:
- check the arithmetical accuracy of the ledger accounts;
- help in locating errors; and
- provide a basis for preparing the financial statements.
To Check the Arithmetical Accuracy of Accounts
A trial balance is prepared to check whether all debits and the corresponding credits are properly recorded in the ledger or not. When the totals of all the debits and credits in the trial balance are equal, it is assumed that the posting and balancing of ledger accounts is arithmetically accurate.
Help in Locating Errors
Whenever the trial balance does not tally, the accountants know that errors have crept in at the stage of recording, posting, balancing, or transfer of balances. The accountant, at this stage, is faced with the problem of errors. It is immaterial whether the amount of difference is small or large. Even a small amount of difference requires careful attention to be paid to achieve accuracy in accounts. Once the errors are detected and located, these are rectified and then the corrected trial balance is prepared.
Provide a Basis for the Preparation of Financial Statements
Since the balances of all accounts appear in the trial balance, it provides a basis for the preparation of the financial statements. A tallied trial balance therefore becomes the first step in the preparation of financial statements.
All revenues and expenses accounts from trial balance are transferred to the trading and profit and loss account. All assets, liabilities and capital accounts along with the balance of the profit and loss account are shown in the balance sheet.
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Steps taken to identify errors of the trial balance, Identifying the errors of the trial balance, Overcoming with the errors of the Trial Balance...