Preparation of Trial Balance: Steps in the Preparation of Trial Balance

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Trial balance is used to simply finish the next phase of preparing the balance sheet by aiding in the recording of the company’s income and expenses. While recording carriage outwards in a trial balance, the amount must be written down in the debit column. Carriage outwards is considered as an expense of the seller that occurs while transferring goods to customers. Hence, it is considered a selling or indirect expense of the business and, thus, recorded in the debit column of the trial balance. However, totals method is not in use widely as it does not determines the accurate balances of the accounts and thus, also does not help in the preparation of the Financial statements or final accounts.

A more complete picture of company position develops after adjustments occur, and an adjusted trial balance has been prepared. These next steps in the accounting cycle are covered in The Adjustment Process. After closing all general ledger accounts, the trial balance is prepared at the end of the financial year. It helps to record the income and expenditures of the business and easily complete the preparation of the balance sheet in the next step. A trial balance is a bookkeeping worksheet-like account that reflects all the credit and debit balances of all the ledger accounts. Once we prepare this statement, we can prepare the final accounts of the company on the basis of this trial balance.

Trial balance example

These are accounting errors that would not show up in the trial balance. In a double-entry account book, the trial balance is a statement of all debits and credits. The trial balance is the first step toward recording and interesting your financial results.

  • This statement records the closing balances derived from general ledger accounts.
  • This shows the importance of producing a trial balance in the first place – it tells the user that the accounting equation is out of balance and it needs to be fixed before going any further.
  • Bookkeepers typically scan the year-end trial balance for posting errors to ensure that the proper accounts were debited and credited while posting journal entries.
  • Next sections contain examples illustrating how the various types of ledger accounts are closed at the period end 31 December 2011.
  • Therefore at the trial balance stage accountants and bookkeepers are often forced to go back and review vouchers, journals, and ledgers to locate the errors and bring the accounts back to balance.

A Trial Balance is a statement that shows the total debit and total credit balances of accounts. It thus verifies the arithmetical accuracy of the postings in the ledger accounts. We will now study the methods of Preparation of Trial Balance – totals method, balance method and total-cum-balance method. For example, the remaining debit cash balance as on May 1, 2018 is recorded in the debit column of the trial balance. Further, the remaining credit balance of capital account of Rs 8,00,000 is recorded in the credit column of the trial balance.

Working Trial Balance in Accounting

If the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean that there are no errors in a company’s accounting system. For example, transactions classified improperly or those simply missing wave integrations from the system still could be material accounting errors that would not be detected by the trial balance procedure. Rerun the trial balance after making adjusting entries and again after making closing entries. Keep in mind, this does not ensure that all journal entries were recorded accurately.

What is Trial Balance?

You should try to create a trial balance at least once every reporting period. This ensures that your books are correct and that you can withstand a financial audit. A trial balance is so called because it provides a test of a fundamental aspect of a set of books, but is not a full audit of them. One way to find the error is to take the difference between the two totals and divide the difference by two.

What is a post-closing trial balance?

For example, let’s assume the following is the trial balance for Printing Plus. Let’s now take a look at the T-accounts and unadjusted trial balance for Printing Plus to see how the information is transferred from the T-accounts to the unadjusted trial balance. Furthermore, the assets and liabilities have to be listed in order of liquidity, which refers to how quickly an asset can be converted to cash to pay off liabilities.

The closing stock would be tallied twice in the Trial Balance if it were included. So why take the risk of not preparing your financial statements accurately when you just need to follow a few simple steps using the trial balance method? Take a look at this article to get a comprehensive guide on trial balance, its importance, method of preparation and examples. This method is the most common method as it shows the net effect and also helps in the preparation of the financial statements. Usually, in the trial balance instead of showing the individual accounts of the debtors and creditors, we show Sundry Debtors and Sundry Creditors accounts, respectively. Bookkeepers and accountants or small business owners use different types of trial balance, depending on the stage of the accounting cycle close.

Does a Business Have to Use a Trial Balance?

At the bottom of the trial balance report document, the Debit and Credit column totals are presented. According to the rules of double-entry accounting, total debits should equal total credits. Trial Balance entails the accuracy of the financial record and comparing the debit and credit balances in the general ledger accounts to find any possible errors or discrepancies. If it’s out of balance, something is wrong and the bookkeeper must go through each account to see what got posted or recorded incorrectly. This balance is transferred to the Cash account in the debit
column on the unadjusted trial balance. Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock
($20,000) and Service Revenue ($9,500) all have credit final
balances in their T-accounts.

Arnout van Kempen