Concept And Meaning Of Trial Balance

Trial balance is an important statement prepared under the double-entry system. The
fundamental principle of the double-entry system is that for every amount of debit there is an
equal amount of credit and vice verse. This principle provides a check on arithmetical
accuracy of the recording of financial transactions in different books such as journal and the
ledger. Such a check can be performed by preparing a statement called trial balance. Trial
balance is a statement prepared taking up the debit and credit totals or balances of all ledger
accounts on a particular date.
Trial balance is a statement which is prepared by using the debit and credit totals or balances
of all ledger accounts with a view to ascertain the arithmetical accuracy of the recordings of
the financial transactions of the business. Trial balance is prepared after closing all the ledger
accounts and drawing balances therefrom a certain date. All the debit and credit totals or
balances are arranged in debit and credit column together with the heads of account in a
separate sheet of paper so as to ascertain whether the totals of debit and credit columns agree.
If the two totals of trial balance agree, it is assumed that recordings of financial transactions
in the journal and the ledger are arithmetically accurate. The trial balance can also be used to
prepare the final accounts of the business.

Trial balance

A Trial Balance is a list of all the General ledger accounts (both revenue and capital)
contained in the ledger of a business. This list will contain the name of the nominal ledger
account and the value of that nominal ledger account. The value of the nominal ledger will
hold either a debit balance value or a credit balance value. The debit balance values will be
listed in the debit column of the trial balance and the credit value balance will be listed in the
credit column. The profit and loss statement and balance sheet and other financial reports can
then be produced using the ledger accounts listed on the trial balance.

The name comes from the purpose of a trial balance which is to prove that the value of all the
debit value balances equal the total of all the credit value balances. Trialing, by listing every
nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial
reporting of a business's performance. If the total of the debit column does not equal the total
value of the credit column then this would show that there is an error in the nominal ledger
accounts. This error must be found before a profit and loss statement and balance sheet can
be produced.

The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks
to record financial transactions and then post them to the nominal ledgers and personal ledger
accounts. The trial balance is a part of the double-entry bookkeeping system and uses the
classic 'T' account format for presenting values.
Trial balance limitations

A trial balance only checks the sum of debits against the sum of credits. That is why it does
not guarantee that there are no errors. The following are the main classes of error that are not
detected by the trial balance.

 An error of original entry is when both sides of a transaction include the wrong amount.[1]
For example, if a purchase invoice for £21 is entered as £12, this will result in an incorrect
debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account),
both for £9 less, so the total of both columns will be £9 less, and will thus balance.
 An error of omission is when a transaction is completely omitted from the accounting
records.[1] As the debits and credits for the transaction would balance, omitting it would still
leave the totals balanced. A variation of this error is omitting one of the ledger account
totals from the trial balance.[2]
 An error of reversal is when entries are made to the correct amount, but with debits instead
of credits, and vice versa.[1] For example, if a cash sale for £100 is debited to the Sales
account, and credited to the Cash account. Such an error will not affect the totals.
 An error of commission is when the entries are made at the correct amount, and the
appropriate side (debit or credit), but one or more entries are made to the wrong account of
the correct type.[1] For example, if fuel costs are incorrectly debited to the postage account
(both expense accounts). This will not affect the totals.
 An error of principle is when the entries are made to the correct amount, and the
appropriate side (debit or credit), as with an error of commission, but the wrong type of
account is used.[1] For example, if fuel costs (an expense account), are debited to stock (an
asset account). This will not affect the totals.
 Compensating errors are multiple unrelated errors that would individually lead to an
imbalance, but together cancel each other out.[1]
 A Transposition Error is an error caused by switching the position of two adjacent digits.
Since the resulting error is always divisible by 9, accountants use this fact to locate the
misplaced number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates
that one of the switched digits is either more, or less, by 8 than the other digit. Hence the
error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the
totals.

The Importance Of A Trial Balance

 The Trial Balance is prepared in each financial period as a summary of the closing of
the previous ledger which proves the arithmetic accuracy of the ledger entry.
 In bookkeeping, this is a useful tool for checking the accounting entries prior to doing
the period-end processing.
 Trial Balance reflects all the activity for an account or accounts within a selected date
range. It shows the balance of the account at the beginning of the date range, the
activity within the date range, and the balance at the end of the date range.

While a financial report like the balance sheet does have its limitations, when it comes to selling
your business, finding investors and having an accounting professional prepare your annual tax
return, the trial balance is key in finding out if you are in a sense, “cooking the books,” or just making
mistakes in your journal entries. The importance of a trial balance in financial statements ensures
that the accounting cycle is followed correctly and that every transaction in your business is
recorded accurately.