Trial balance in accounting overview:
A trial balance in accounting is a list of accounts and their balances at a given time, particularly at the end of the accounting period. A trial balance is the next step after the general ledger in the accounting cycle. It is extracted from the general ledger simply by listing all the balances on every account. Debit balances appear in the left column and credit balances in the right column.
Steps in Trial balance preparation
There are just three steps for preparing a trial balance.
- Listing every account title with its balance in the appropriate debit or credit column.
- Totaling the debit and credit of both columns
- Checking and proving the equality of both columns
Let’s see an example of trial balance.
It might be classified as opening trial balance and adjusted trial balance. An opening trial balance requires year-end adjustments, for instance, adjustment of opening and closing inventory, depreciation charges, accruals, and prepayments, writing off bad debts, and adjusting the allowance for irrecoverable debts. While an adjusted trial balance is one that is used as a source document for the preparation of financial statements.
The objectives of trial balance
Trial balance is neither a final report nor an official financial statement. It is actually the list of totals of ledger accounts that has two objectives.
- It is a starting point for producing financial statements. In other words, all the financial statements are prepared based on the adjusted trial balance.
- A trial balance is a necessary checkpoint for discovering certain types of errors in the accounting system. The task of the bookkeeper is to find the causes of errors and rectify them when both sides of the trial balance are not equal.
Limitations of trial balance
The trial balance is mathematical equality of debits and credits after posting. When both the debit and credit columns of trial balance are equal to each other, we assume that there is no mistake in the posting of journal and subsidiary books to ledger accounts, there is no mistake in the balancing of ledger accounts, or even in carrying forward balances of ledger accounts to trial balance. This assumption might be correct even then it should never be taken as conclusive proof of accuracy. It means that there are many errors that still remain undetected by a trial balance.
Let’s see the examples of errors that occur even if both sides of the trial balance are equal.
- A transaction was not recorded anywhere in the journal
- A journal entry was posted twice.
- A correct journal entry was not posted
- An entry was posted to the wrong account
- When recording the transaction, offsetting errors were made.