What is Trial Balance and its Purpose|Limitation|Format

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What is Trial Balance:

if you  are look for what is trial balance then you are at the right place, here we will discuss what trial balance is in accounting..!

         When Ledger accounts have been prepared the next to prepare the trial balance by posting the balances of ledger accounts.

        It is a list of the balances of ledger accounts of a business at a specific point of time usually at the end of a period such as month, quarter or year.

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what is Purpose of Trial balance:

Trial Balance is used for the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.

  • Trial balance confirms that for every debit entry recorded, a matching credit entry has been recorded in the books according to double entry system of accounting.
  •  If the totals of the trial balance do not agree, the differences may be examined and resolved before financial statements are prepared.
  • Trial balance confirms that the account balances are correctly extracted from ledgers.
  • Trail balance helps in the identification and rectification of errors

Limitations of a Trial Balance:

             It only confirms that the total of all debit balances match the total of all credit balances.
Trial balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been recorded at all because in such case, both debit and credit sides of a transaction would be omitted causing the trial balance totals to still agree. Types of accounting errors and their effect on trial balance are more fully discussed in the section on Suspense Accounts.

The preparation  is very simple. All we have to do is to list the balances of the ledger accounts of a business.

Trial Balance Format:

The format of Trial balance is simple it contains the following columns.

  1. Chart of Account No#
  2. Account Name
  3. debit balance Ending  (if any)
  4. credit balance Ending  (if any)

below i have make an unadjusted trial balance for you, have a look please.!

Example of Trial Balance:

Following is the unadjusted trial balance prepared from the ledger accounts of a Haseeb & Co .

                        Haseeb & CO

                           Trial Balance

                       31 January, 2014

 
 DebitCredit
CashRs.20,430 
Accounts Receivable5,900 
Office Supplies22,800 
Prepaid Rent36,000 
Equipment80,000 
Accounts Payable 5,200
Notes Payable 20,000
Utilities Payable 3,964
Unearned Revenue 4,000
Common Stock 100,000
Service Revenue 82,600
Wages Expense38,200 
Miscellaneous Expense3,470 
Electricity Expense2,470 
Telephone Expense1,494 
Dividend5,000 
TotalRs.215,764Rs.215,764

 

         Since, in double entry accounting we record each transaction with two aspects, therefore the total of debit and credit balances of the trial balance are always equal. Any difference shall indicate some mistake in the recording process or in the calculations. Although each unbalanced trial balance indicates mistake, but this does not mean that all errors cause the trial balance to unbalance. There are few types of mistakes which will not unbalance the trial balance and they may escape un-noticed if we do not review our work carefully. For example, to omit an entry, to record a transaction twice, etc.

 When Trial balance have been prepared the next step to prepare Final Accounts of business.

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