TRIAL BALANCE

Definition
“Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to
test the arithmetical accuracy of the books” – J.R. Batliboi.
Trial balance is a statement which shows debit balances and credit balances of all accounts in the
ledger. Since, every debit should have a corresponding credit as per the rules of double entry
system, the total of the debit balances and credit balances should tally (agree). In case, there is a
difference, one has to check the correctness of the balances brought forward from the respective
accounts. Trial balance can be prepared in any date provided accounts are balanced.

Objectives
The objectives of preparing a trial balance are:
i. To check the arithmetical accuracy of the ledger accounts.
ii. To identification and rectification of errors.
iii. To facilitate the preparation of final accounts.
iv. To ensure that the account balances are accurately extracted from accounting ledgers

Advantages
The advantages of the trial balance are:
i. It helps to ascertain the arithmetical accuracy of the book-keeping work done during the period.
ii. It supplies in one place ready reference of all the balances of the ledger accounts.
iii. If any error is found out by preparing a trial balance, the same can be rectified before preparing
final accounts.
iv. It is the basis on which final accounts are prepared.

Methods
A trial balance can be prepared in the following methods.
i. The Total Method: According to this method, the total amount of the debit side of the ledger
accounts and the total amount of the credit side of the ledger accounts are recorded.

ii. The Balance Method: In this method, only the balances of an account either debit or credit, as
the case may be, are recorded against their respective accounts.
The balance method is more widely used, as it supplies ready figures for preparing the final
accounts.

Format (Balance Method)

 Trial Balance of ABC Ltd.
as on ..................
Sl. No. Particulars L.F. Amt. Dr. Amt. Cr.
1
2
3

Points to be noted:
i. Date on which trial balance is prepared should be mentioned at the top.
ii. Name of Account column contains the list of all ledger accounts.
iii. Ledger folio of the respective account is entered in the next column.
iv. In the debit column, debit balance of the respective account is entered.
v. Credit balance of the respective account is written in the credit column.
vi. The last two columns are totalled at the end.

Sundry Debtors and Sundry Creditors

In the ledger there are many personal accounts, some of them may show debit balances, some
others may show credit balances. If all the names are to be written in the trial balance it will be
unduly long. Therefore, a list of names with the debit balances is prepared. This list is known as
‘Sundry Debtors’ (Sundry means ‘many’). Similarly, a list of names with the credit balances is
prepared. This list is known as ‘Sundry Creditors’.

Question:
The following balances were extracted from the ledger of Rahul on 31st March, 2003. You are
requested to prepare a trial balance as on that date in the proper form.
Particulars Amount Particulars Amount
Salaries 36,320 Sales 1,73,500
Purchases 1,44,670 Commission Paid 1,880
Sundry Debtors 1,430 Capital, 1.4.2002 62,500
Plant & Machinery 34,300 Returns Inward 1,000
Travelling Expenses 2,630 Discount Allowed 1,150
Carriage Inward 240 Returns Outward 400
Stock on 1.4.2002 11,100 Rent and Rates 3,220
Sundry Creditors 14,260 Investments 6,000
Repairs 1670 Cash at Bank 1,090
Sundry Expenses 460 Drawings 3,500

Limitations
Though the trial balance helps to ensure the arithmetical accuracy of the books of accounts, it is
possible only when the accountant has not committed any error. As all the errors made are not
disclosed by the trial balance, it would not be regarded as a conclusive proof of correctness of the
books of accounts maintained.

TRADING AND PROFIT & LOSS ACCOUNT

Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end.
The businessman is interested in knowing whether the business has resulted in profit or loss and
what the financial position of the business is at a given period. In short, he wants to know the
profitability and the financial soundness of the business. The trader can ascertain these by
preparing the final accounts. The final accounts are prepared at the end of the year from the trial
balance. Hence the trial balance is said to be the connecting link between the ledger accounts and
the final accounts.

Final Accounts includes:

1. Trading and Balance Sheet; &
2. Profit and Loss Account

Parts of Final Accounts

The final accounts of business concern generally includes two parts. The first part is Trading and
Profit and Loss Account. This is prepared to find out the net result of the business. The second
part is Balance Sheet which is prepared to know the financial position of the business. However
manufacturing concerns, will prepare a Manufacturing Account prior to the preparation of trading
account, to find out cost of production.

1. Trading Account
Trading means buying and selling. The trading account shows the result of buying and selling of
goods.

Need
At the end of each year, it is necessary to ascertain the net profit or net loss. For this purpose, it is
first necessary to know the gross profit or gross loss. The trading account is prepared to ascertain
this. The difference between the selling price and the cost price of the goods is the gross earning
of the business concern. Such gross earning is called as gross profit. However, when the selling
price is less than the cost of goods purchased, the result is gross loss.

Format
Trading Account
for the year ending………..
Dr. Cr.
Particulars Amt (in Rs.) Particulars Amt (in Rs.)
To Opening Stock xxxx By Sales xxxx
To Purchases xxx Less: Returns Inward xxx xxxx
Less : Returns outward xxx xxx By Closing stock xxxx
To Wages xxx By Gross Loss c/d (transferred
To Freight xxx to P&L A/c) xxx
To Carriage Inwards xxx
To Clearing charges xxx
To Packing charges xxx
To Dock dues xxx
To Power (factory) xxx
To Octroi Duty xxx
To Gross Profit c/d (transferred to
P&L A/c) xxx
xxxxx xxxxx

Items appearing in the debit side

1. Opening stock: Stock on hand at the beginning of the year is termed as opening stock.
The closing stock of the previous accounting year is brought forward as opening stcok of
the current accounting year. In the case of new business, there will not be any opening
stock.
2. Purchases: Purchases made during the year, includes both cash and credit purchases of goods.
Purchase returns must be deducted from the total purchases to get net purchases.
3. Direct Expenses: Expenses which are incurred from the stage of purchase to the stage of
making the goods in saleable condition are termed as direct expenses. Some of the direct
expenses are:
i. Wages: It means remuneration paid to workers.
ii. Carriage or carriage inwards: It means the transportation charges paid to bring the goods
from the place of purchase to the place of business.
iii. Octroi Duty: Amount paid to bring the goods within the municipal limits.
iv. Customs duty, dock dues, clearing charges, import duty etc.: These expenses are paid to
the Government on the goods imported.
v. Other expenses : Fuel, power, lighting charges, oil, grease, waste related to production and
packing expenses.

Items appearing in the credit side

i. Sales: This includes both cash and credit sale made during the year. Net sales is derived by
deducting sales return from the total sales.
ii. Closing stock: Closing stock is the value of goods which remain in the hands of the trader at
the end of the year. It does not appear in the trial balance. It appears outside the trial balance.
(As it appears outside the trial balance, first it will be recorded in the credit side of the trading
account and then shown in the assets side of the balance sheet).

Balancing
The difference between the two sides of the Trading Account, indicates either Gross Profit or
Gross Loss. If the credit side total is more, the difference represents Gross Profit. On the other
hand, if the total of the debit side is more, the difference represents Gross Loss.
The Gross Profit or Gross Loss is transferred to Profit & Loss Account.
 2. Profit and Loss Account
After calculating the gross profit or gross loss the next step is to prepare the profit and loss
account. To earn net profit a trader has to incur many expenses apart from those spent for
purchases and manufacturing of goods. If such expenses are less than gross profit, the result will
be net profit. When total of all these expenses are more than gross profit the result will be net loss.

Need:
The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a
particular period.

Format
Profit & Loss Account
for the year ending………..
Dr. Cr.
Particulars Amt (in Rs.) Particulars Amt (in Rs.)
To Trading A/c (Gross Loss) xxxx By Trading A/c (Gross profit) xxxx
To Salaries xxx By Commission earned xxxx
To Rent & rates xxx By Rent received xxx
To Stationeries xxx By Interest received xxx
xxx xxx
To Postage expenses By Discount received
xxx xxx
To Insurance xxx
By Net Loss (Transferred to
To Repairs xxx Capital A/c) xxx
To Trading expenses xxx
To Office expenses xxx
To Interest paid xxx
To Bank charges xxx
To Sundry expenses xxx
To Commission paid xxx
To Discount allowed xxx
To Advertisement xxx
xxx
To Carriage outwards
xxx
To Travelling expenses xxx
To Distribution expenses xxx
To Repacking charges xxx
To Bad debts xxx
To Depreciation xxx
To Net Profit (transferred to
Capital A/c) xxx
xxxxx xxxxx

Items appearing in the debit side

Those expenses which are chargeable to the normal activities of the business are recorded in the debit side
of profit and loss account. They are termed as indirect expenses.
i. Office and Administrative Expenses: Expenses incurred for the functioning of an office are office and
administrative expenses – office salaries, office rent, office lighting, printing and stationery, postages,
telephone charges etc.
ii. Repairs and Maintenance Expenses: These expenses relates to the maintenance of assets - repairs and
renewals, depreciation etc.
iii. Financial Expenses: Expenses incurred on borrowings – Interest paid on loan.
iv. Selling and Distribution Expenses: All expenses relating to sales and distribution of goods -
advertising, travelling expenses, salesmen salary, commission paid to salesmen, discount allowed,
repacking charges etc.

Items appearing in the credit side

Besides the gross profit, other gains and incomes of the business are shown on the credit side. The
following are some of the incomes and gains.
i. Interest received on investment
ii. Interest received on fixed deposits.
iii. Discount earned.
iv. Commission earned.
v. Rent Received

BALANCE SHEET
This forms the second part of the final accounts. It is a statement showing the financial position of
a business. Balance sheet is prepared by taking up all personal accounts and real accounts (assets
and properties) together with the net result obtained from profit and loss account. On the left hand
side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are
shown. Balance sheet is not an account but it is a statement prepared from the ledger balances. So
we should not prefix the accounts with the words ‘To’ and ‘By’.
Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm
and which serves to ascertain the financial position of the same on any particular date’.

Need:
The need for preparing a Balance sheet is as follows:
i. To know the nature and value of assets of the business
ii. To ascertain the total liabilities of the business.
iii. To know the position of owner’s equity.

Format
The Balance sheet of a business concern can be presented in the following two forms:
i. Horizontal form or the Account form
ii. Vertical form or Report form

i) Horizontal form of Balance Sheet:

The right hand side of the balance sheet is asset side and the left hand side is liabilities side. All
accounts having debit balance will appear in the asset side and all those having credit balance will
appear in the liability side.
It can be prepared on the basis of:
 a. Liquidity; and
b. Permanence

Balance Sheet of ................

as on ..................
Liabilities Amt. Assets Amt.
Sundry creditors x x x Cash in hand xxx
Bills payable x x x Cash at bank xxx
Bank overdraft x x x Sundry debtors xxx
Outstanding expenses x x x Bills receivable xxx
Mortgage loans x x x Investments xxx
Reserve fund x x x Closing stock xxx
Capital xxxx Prepaid expenses xxx
Add: Net profit (or) xxx Furniture & fittings xxx
Less: Net loss xxx Plant & machinery xxx
xxx Land & buildings xxx
Less: Drawings xxx Business premises xxx
Less: Income tax xxx x x x Patents & trade marks xxx
Goodwill xxx
TOTAL XXXX TOTAL XXXX

Vertical form of Balance Sheet

In this, Balance Sheet is presented in a statement form.
Balance Sheet as on ..............................
Particulars Rs. Rs.

Current Assets:
Stock-in-Trade xxx
Sundry Debtors xxx
Prepaid Expenses xxx
Accrued Income xxx
Bills Receivable xxx
Cash at Bank xxx
Cash in Hand xxx xxx
Total Current Assets
Less: Current Liabilities:
Sundry Creditors xxx
Bills Payable xxx
Bank Overdraft xxx
Outstanding Expenses xxx xxx
Total Current Liabilities xxx
Net Working Capital:
Add: Fixed Assets:
Goodwill xxx
Land and Building xxx
Plant and Machinery xxx
Furniture xxx
Investment xxx xxx
Total Fixed Assets xxx
Capital Employed (Both owner’s and outsiders)
Less: Long Term Liabilities
Debentures xxx
Loans xxx xxx
Total Long Term Liabilities xxx
Net Assets
Represented by:
xxx
Owner’s Capital
xxx xxx
Reserves and surplus
Shareholder’s Funds

Difference between Trial Balance and Balance Sheet

Sl. Basis of Trial Balance Balance Sheet
No. Difference
1 Objective To know the arithmetical To know the true and fair financial
accuracy of the accounting work. position of a business.
2 Format The columns are debit balances The two sides are assets and
and credit balances. liabilities.
3 Content It is a summary of all the ledger It is a statement showing closing
balances – personal, real and balances of personal & real
nominal accounts. accounts.
4 Stage It is the middle stage in the It is the last stage in the
preparation of accounts. preparation of accounts.
5 Period It can be prepared periodically, It is generally prepared at the end
say at the end of the month, of the accounting period.
quarterly or half yearly, etc.
6 Preparation It is prepared before the It is prepared after the preparation
preparation of trading, profit and of trading, profit and loss account.
loss account.
7 Stock It shows opening stock only. It shows closing stock only.
8 Order Balances shown in the trial Balances shown in the balance
balance are not in order. sheet must be in order.
9 Evidence It cannot be produced as It can be produced as documentary
documentary evidence in the evidence.
court.
10 Compulsion Preparation of trial balance is not Preparation of the balance sheet is
compulsory. a must.

PRACTICE QUESTIONS:
Ill. 7; Q. 12; Q. 13; Q. 14; Q. 15
 BANK RECONCILIATION STATEMENT
The balance of the bank column in the double or triple column cash book represents the customers
cash balance at bank. It should be the same as shown by his bank pass book on any particular day.
For every entry made in the cash book if there is a corresponding entry in the pass
book(maintained by the banker) or vice versa, the bank balance will be the same in both the
books.
However, it must be noted that the cash book and the pass book are maintained by two different
parties and hence it is not certain that entry in one book will always have a corresponding entry in
the other. Normally entries in the cash book should tally (agree) with those in the pass book and
the balances shown by both the books should be the same. But in practice, the balances generally
differ. In case of disagreement in the balance of the cash book and the pass book, the need for
preparing Bank Reconciliation Statement arises.
‘Bank reconciliation statement is a list in which the various items that cause a difference
between bank balance as per cash book and pass book on any given date are indicated’.

Need and Importance

After tracing the various items of difference, a bank reconciliation statement is prepared. The
following are its advantages in which lies its importance.
i. The errors that might have taken place in the cash book in connection with bank transactions
can be easily found.
ii. Regular preparation of bank reconciliation statement prevents frauds.
iii. It indirectly imposes moral check on the accounting staff.
iv. By the preparation of bank reconciliation statement, cheque not credited can be detected and
steps can be taken for their collection.

Causes of disagreement between the balance shown by the cash book and the balance shown
by the pass book

1. Cheques paid into bank but not yet collected

The cheques paid into bank for collection but not credited into the account of the customer,
because the cheque is
i. not collected and credited till that date.
ii. collected but the bank staff has forgotten to make entry.
iii. collected but credited to wrong account.
iv. dishonoured.
v. collected for No. I account but credited to No. II account of the same customer.
As soon as the cheques are sent to the bank, entries are made in the debit side of the cash book
(bank column). But, usually bank credit the customers account only when they have received
payment from the bank concerned, in other words, when the cheques have been collected. Hence,
there will be a time gap between the depositing of the cheques and the collection by the bank.
For example, Bharat Company Limited deposited a cheque on March 28, 2003 for a sum of
Rs.3,000. The cheque was collected on April 4, 2003. In case the bank sends a statement of
account upto March 31, 2003, there will be a difference of Rs 3,000 between the balance shown
by the cash book and the pass book.

2. Cheques issued but not yet presented for payment

The cheques issued but not debited customers account may be because the cheque is
i. not cashed till date.
ii. not presented till date.
iii. presented but dishonoured for some reasons or other.
iv. lost by the party to whom the cheque was issued.
v. cashed out of No. I account but wrongly debited to No. II account of the same customer.
In all of the above cases, the entry in the cash book is made immediately on the issue of cheque
but naturally the entry will be made by bank only when the cheque is presented for payment. Thus
there will be a gap of some days between the entry for issue of cheque in the cash book and the
entry for payment made in the pass book.
For example, Bharat Company Limited issued a cheque in favour of Mr.Krishna on March 28,
2003 for a sum of Rs.5,000. The cheque is presented for payment at the bank on April 4, 2003. In
case, bank sends a statement of account upto March 31, 2003, there will be a difference of
Rs.5,000 between the balance as shown by the cash book and the balance as shown by the pass
book.

3. Amount credited by the banker in the pass book without the immediate knowledge of the
customer
The following are some of the examples for the above statement
i. The bank might have collected rent, dividend, bills of exchange, interest etc., due for the
customer as per standing instructions .
ii. Some debtors might have directly paid into bank.
iii. Bank credits interest on the credit balance of the customer’s account.
iv. The banker has wrongly credited this account instead of some other account.
In all the above cases, the entry will be first entered in the pass book. The customer will know this
only after he verifies the entries in the pass book. So there may be a time gap of some days before
the customer includes entries made in the pass book.
For example, the bank has credited Bharat Company Limited’s account for interest amounting to
Rs.500 on March 31, 2003. The bank prepares and sends a statement of account on March 31,
2003.
If the customer receives the statement of account on April 4, 2003, there will be a difference of Rs
500 between the balance shown by the cash book and the balance shown by the pass book.
4. Amounts debited by the banker in the pass book without the immediate knowledge of the
customer
The following are some of the examples for this.
i. The banker has recorded bank charges, interest on overdraft etc.
ii. The banker has paid insurance premium, subscription for periodicals, etc. on behalf of the
customer as per the standing instructions.
iii. The banker has wrongly debited this account instead of some other account.
iv. The banker has paid the bills payable of the customer as per standing instructions.
v. Dishonour of a cheque deposited and discounted bills receivable
In all the above cases, the entry will be first entered in the pass book of the customer. And the
customer will know only after he verifies the entries in the pass book or statement of account. So
there may be a time gap of some days before the customer includes the entries made in the pass
book.
For example, the bank has debited Bharat Company Limited’s account for its charges amounting
to Rs. 250 on March 31,2003. In case, the bank sends a statement of account upto March 31,2003,
there will be a difference of Rs.250 between the balance as per the cash book and the balance as
per the pass book.
For example, A cheque for Rs.5,000 dishonoured on March 28, 2003. In case, the bank sends a
statement of account upto March 31, 2003 there will be a difference of Rs.5,000 between the
balance as shown by the cash book and the balance as shown by the pass book.
After tracing the various items of differences, a Bank reconciliation statement is prepared by
starting with the balance shown by any of the two books. But in actual practice, a Bank
reconciliation statement is prepared by the customer starting with the balance as per cash book
and will ensure that the balance as per pass book is arrived at.

Bank Overdraft
Bank overdraft is an amount drawn over and above the actual balance kept in the bank account.
This facility is available only to the current account holders. Interest will be charged for the
amount overdrawn i.e., overdraft. The Cash book will show a credit balance i.e., unfavourable
balance. The pass book will show a debit balance.

Practice Question:
Prepare a Bank Reconciliation Statement of Mr. Srinivasan. (Ques. 11)
Prepare Bank Reconciliation Statement: From Cash Book and Pass Book:

Taking Pass Book Balance as Starting Point:

Taking Cash Book Balance as Starting Point: