Meaning and Objectives of Preparing

Trial Balance

We all know that we do accounting for financial transactions on the

basis​ of dual aspect concept of accounting. It means that every debit
has a respective credit. Thus, we can say that the sum of all debits is
equal to the sum of all credits. For this purpose, we presume that all
the entries in the ledger accounts are correct and accurate. Here, we
will learn the meaning and objectives of trial balance along with the
Trial Balance Format.

Preparing Trial Balance

A Trial Balance is a statement that shows the total debit and total
credit balances of accounts. The total of debit amounts shall be equal
to the credit amounts. It thus verifies the arithmetical accuracy of the
postings in the ledger accounts. It is a significant statement as it shows
the final balances of all the accounts and also aids in the preparation of
the Final Accounts.
While preparing the final accounts the balances of accounts are
directly taken from the Trial Balance. A firm normally prepares the
trial balance at the end of the ​accounting​ year. However, it may also
prepare it monthly, quarterly or half-yearly also depending upon its
requirements.

Objectives of Preparing Trial Balance

1] Ascertainment of the Arithmetical Accuracy
We record the entire debit as well as the credit balances of the ledger
accounts in a Trial Balance. In other words, it is the summary of all
the ledger accounts. The total of debit side shall be equal to the credit
side, for the trial balance to get tallied. When it tallies, we assume that
the posting and the balancing of the ledger accounts are accurate.
Thus, it ensures the ​arithmetical​ accuracy of the ledgers. However,
this is not the conclusive evidence of the correctness and the ​accuracy
of the ledger accounts.

2] Locating the Errors

It helps in locating the errors in the posting or recording of the

transactions​. When a Trial Balance does not tally, then we know that
the errors must have occurred at the time of

i. totaling the ​Subsidiary books

ii. posting in the ledgers
iii.balancing the accounts
iv.writing the account balances in the trial balance
v. totaling the ​trial balance​. After finding the errors we need to
rectify them.

3] Preparation of Financial Statements

The Trial Balance is a summary of all the ​ledger account​ balances.
Thus, while preparing the final accounts, we do not need to refer the
individual accounts. We can take the final balances of the accounts
directly from the Trial Balance. We directly transfer the final balances
to the Trading and Profit and Loss A/c and Balance Sheet. Let us now
look at the trial balance format.

Source: shutterstock

Trial Balance Format

Trial Balance of……..

As on.……
 L. Debit Amount Credit Amount
Name of the Account
F. (₹) (₹)

Total

Solved Example for You

Q: Explain the steps in the preparation of the Trial Balance?

Ans. The steps in the preparation of the Trial Balance are:

1. Determine the balances of all the ledger accounts.

2. Prepare the trial balance format
 3. Enlist each account and write their balances in the respective
columns. For example, the balance of Cash A/c is debit and
therefore we will write it in the debit column.
4. Calculate the balance of the debit column and the credit
column.
5. If the total of debit column is equal to the total of the ​credit
column, the trial balance is tallied and thus, verifies the
arithmetical accuracy. In case the trial balance does not tally,
we need to find out the reasons thereof and correct the errors if
any.

Preparation of Trial Balance

A Trial Balance is a statement that shows the total debit and total
credit balances of accounts. The total of debit amounts shall be equal
to the credit amounts. 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.
Preparation of Trial Balance

We can prepare the Trial Balance in the following three ways:

1] Totals Method

In this totals method, we ascertain the total of each side in the ​ledger
i.e. ​debit and credit​, separately and show them in the respective
columns in the Trial Balance. Here also the total of the column with
debit totals should tally with the total of the column of the credit
totals. The dual aspect concept holds true in this case also.
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.

2] Balances Method

In this method, we total the debit side and the credit side of the
accounts and balance them. We then write these debit or credit
balances of the ​ledger accounts​ in the respective debit and credit
columns in the Trial Balance. A trial balance tallies when the total of
the debit column is equal to the total of the credit column.

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.

Source: shutterstock

3] Totals-cum-Balances Method
In this method, we prepare four columns. In two columns we write
debit and credit totals of accounts and in the other two columns, we
write the debit and credit balances of accounts. This method consumes
a lot of ​time​ and is a duplicate of work. Hence, it is rarely in use.

Solved Example for You

Q: From the following information prepare trial balance using all the
three methods.

Capital A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Mar 15000 14000

To balance c/d Apr 1 By ​Cash​ A/c
31 0 0
 Sep 1 By Cash A/c 10000

15000 15000
0 0

Cash A/c

Amou Amou
Date Particulars Date Particulars
nt nt

14000
Apr 1 To Capital A/c Mar 31 By Salary A/c 40000
0

Sep
To Capital A/c 10000 Mar 31 By Bank A/c 50000
1

Mar 31 By Drawings A/c 10000

 Mar 31 By balance c/d 50000

15000 15000
0 0

Salary A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To Cash A/c 40000 Mar 31 By balance c/d 40000
31

40000 40000

Drawings A/c
 Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To Cash A/c 10000 Mar 31 By balance c/d 10000
31

10000 10000

Bank A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To Cash A/c 50000 Jan 1 By Furniture A/c 30000
31
 Mar 31 By balance c/d 20000

50000 50000

Furniture A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Jan 1 To Bank A/c 30000 Mar 31 By balance c/d 30000

30000 30000

Purchases A/c
 Amou Amou
Date Particulars Date Particulars
nt nt

May 10000
To Ram’s A/c 50000 Mar 31 By balance c/d
1 0

Nov
To Amit’s A/c 20000
25

Feb
To Shyam’s A/c 30000
15

10000 10000
0 0

Ram’s A/c
 Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To balance c/d 50000 May 1 By Purchases A/c 50000
31

50000 50000

Amit’s A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To balance c/d 20000 Nov 25 By Purchases A/c 20000
31
 20000 20000

Shyam’s A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To balance c/d 30000 Feb 15 By Purchases A/c 30000
31

30000 30000

Sales A/c
 Amou Amou
Date Particulars Date Particulars
nt nt

Mar
To balance c/d 70000 Jun 15 By Ajit’s A/c 40000
31

Nov 24 By Dipu’s A/c 30000

70000 70000

Ajit’s A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Jun
To Sales A/c 40000 Mar 31 By balance c/d 40000
15
 40000 40000

Dipu’s A/c

Amou Amou
Date Particulars Date Particulars
nt nt

Nov
To Sales A/c 30000 Mar 31 By balance c/d 30000
24

30000 30000
Answer:

1] Totals Method

Trial Balance as at…..

L.F
Name of the ​account Debit Total Credit Total
.

Capital 150000

Cash 150000 100000

Drawings 10000
Bank 50000 30000

Salary 40000

Furniture 30000

Purchases 100000

Ram 50000

Amit 20000

Shyam 30000
 Sales 70000

Ajit 40000

Dipu 30000

Total 450000 450000

2] Balances Method

Trial Balance as at…..

Name of the account L.F. Debit Amount Credit Amount

Capital 150000

Cash 50000

Drawings 10000

Bank 20000

Salary 40000

Furniture 30000
Purchases 100000

Ram 50000

Amit 20000

Shyam 30000

Sales 70000

Ajit 40000

Dipu 30000
 Total 320000 320000

3] Totals-cum- Balances Method

Trial Balance as at…..

Name of the L.F Debit Debit

Credit Total Credit Amount
account . Total Amount

Capital 150000 150000

Cash 150000 100000 50000

Drawings 10000 10000

Bank 50000 30000 20000

Salary 40000 40000

Furniture 30000 30000

Purchases 100000 100000

Ram 50000 50000

Amit 20000 20000

 Shyam 30000 30000

Sales 70000 70000

Ajit 40000 40000

Dipu 30000 30000

Total 450000 450000 320000 320000

Rectification of Errors
When the trial balance tallies it provides us only with the proof of
the ​arithmetical​ ​accuracy​ of the ledger accounts. However, there
may still be some errors present. Some errors affect the trial
balance while some do not. When the trial balance does not tally,
it is a clear indication of the presence of errors. We need to
identify and locate these errors. Thus, after locating them
Rectification of Errors is also necessary.

Rectification of Errors

On the basis of rectification of errors, we can classify the errors

into the following two broad categories:

1. Errors not affecting the ​Trial Balance

2. Errors affecting the Trial Balance

The errors need to be categorized in these categories because we

can usually rectify the errors not affecting the trial balance by
passing a rectification journal entry. While the errors affecting
the trial balance affect only one account and for these, we cannot
pass a journal entry. However, we can pass a journal entry only
by opening a Suspense A/c.
Rectification of Errors not affecting the Trial
Balance

These errors affect two or more accounts simultaneously. Thus,

these are two-sided errors. We can rectify these by passing a
journal entry giving the correct debit and credit to the accounts.
In order to rectify an error, we need to cancel the effect of wrong
debit or credit by reversing it and restore the effect of correct
debit or credit​.

When there is short debit or excess credit in an account we need to

debit the concerned account. Whereas, when there is short credit
or excess debit in an account we need to credit the concerned
account.

Complete omission to record an entry in the journal or the

subsidiary books, incorrect recording of transactions in the books,
complete omission of posting and errors of principle are the
examples of these errors.

Rectification of Errors affecting the Trial Balance

These errors affect only one account. Thus, these are one-sided
errors. We can rectify these errors by giving an explanatory note
in the account or by passing a journal entry with the help of
Suspense A/c. When we detect an error before posting to the
ledger​, we can correct it by simply crossing the wrong amount,
writing the correct amount above it and initializing it. Similarly,
we can also correct an error in the ledger account.
Errors of casting, errors of carrying forward the balances, errors
of balancing the accounts, errors of posting the wrong amount in
the correct account, error of posting in the correct account on the
wrong side, omitting to show an account in the trial balance,
posting in wrong side with wrong amount are the examples of
errors affecting the Trial Balance.

Suspense Account

When the trial balance does not tally due to the one-sided errors
in the books, an accountant puts the difference between the debit
and credit side of the trial balance on the shorter side as the
Suspense A/c. As and when we locate and rectify the errors, the
balance in the Suspense A/c reduces and consequently becomes
zero. Thus, we cannot categorize the Suspense A/c. It is a
temporary account and can have debit or credit balance
depending upon the situation.

While using the Suspense A/c to rectify the one-sided errors, the
accountant needs to follow the following steps:

1. Identification of the account with the error.

 2. Ascertainment of the excess debit or credit or short debit or
credit in the above account.
3. In case of short debit or excess credit in an ​account​, we
need to debit the concerned account. Whereas, in case of
short credit or excess debit in an account we need to credit
the concerned account.
4. Pass the necessary journal entry by debiting or crediting
the Suspense A/c

Source: shutterstock

Rectification of Errors in the Next Accounting

Year

When we cannot locate and rectify the errors before the final
accounts, we need to carry forward the balance of the Suspense
A/c to the next financial year. When we rectify the errors of the
previous ​accounting​ year, we need to route them through the
Profit and Loss Adjustment A/c for the items of expenses, losses,
incomes and gains. This avoids their impact on the current income
statement.

Solved Example for You

Q: Trial Balance of M/s Shinde Enterprises did not agree. It puts

the difference to the Suspense A/c. Rectify the following ​errors
and prepare the Suspense A/c to ascertain the original difference
in the trial balance.

1. Amount paid for the installation of the machinery ₹10000

was posted to the Repairs and maintenance A/c.
2. Total of Purchases book ₹50000 was not posted to the
ledger.
3. Goods returned to John ₹3000 were recorded in Sales
Book.
4. Salary paid to Ram ₹6000 was debited to his personal
account.
5. Depreciation written-off on furniture ₹500 was not posted
to the furniture account.
Ans: In the books of M/s Shinde Enterprises

Da
Particulars Amount (Dr.) Amount (Cr.)
te

D
1. Machinery A/c 10000
r.

To Repairs and Maintenance A/c 10000

(Being rectification of the wrong journal entry

in the Repairs and maintenance A/c)

D
2. Purchases A/c 50000
r.

To Suspense A/c 50000

(Being ​rectification​ of the omission to post the

total of purchases book in the ledger)
 D
3. Sales A/c 3000
r.

To Purchases Return A/c 3000

(Being rectification of wrong recording of the

purchases return in the sales book)

D
4. Salary A/c 6000
r.

To Ram’s A/c 6000

(Being rectification of wrong debit to the

personal account of an employee)

D
5. Suspense A/c 500
r.

To Furniture A/c 500

 (Being rectification of omission of posting in
the furniture account)

Suspense A/c

Dat Dat
Particulars Amount Particulars Amount
e e

Difference as per
49500 2. By Purchases A/c 50000
Trial balance

5. To Furniture A/c 500

50000 50000

​Trial Balance Accounting and Searching

of Errors
A Trial Balance is a statement that shows the total of debit and
credit balances of accounts. The total of debit amounts shall be
equal to the credit amounts for the trial balance to tally. Hence, it
verifies the arithmetical ​accuracy​ of the postings in the ledger
accounts. Trial Balance Accounting is thus an integral part of
financial accounting.
Trial Balance Accounting and Searching of Errors

Trial balance accounting is significant in the preparation of final

accounts. It involves summarizing of all the ledger accounts.
When the debit amounts are equal to the credit amounts in the
trial balance, we say that the trial balance has tallied. A tallied
Trial Balance in trial balance accounting is the proof of the
arithmetical​ accuracy of the ledger accounts though it is not an
absolute proof. However, it does not disclose some errors which
affect the debit amounts and credit amounts equally.

Some of the errors in the preparation of accounts are:

1. Wrong totaling of the debit amounts and the credit

amounts in the Trial Balance.
2. Error in the total of Subsidiary books.
3. Wrong posting of the total of Subsidiary books in the
ledger​.
4. Omitting an account balance in the Trial Balance.
5. Showing the account balances in the wrong column or with
the wrong amount in the Trial Balance.
6. Wrong calculation of the account balance.
 7. Error in posting a ​journal entry​ to the ledger
8. Recording a transaction incorrectly in the Journal.
9. Recording a transaction incorrectly in the ​Subsidiary
Books

Classification of Errors

We can classify the above errors in the following categories:

1. Errors of Commission: Errors due to the wrong posting of

transactions to the ledger, wrong totaling of accounts, wrong
balancing of accounts, the wrong casting of the day books, or
wrong recording of the amount in the journal or the day books
are errors of commission. These are of clerical nature and
mostly affect the ​trial balance​.
2. Errors of Omission: The error of omission usually occurs at
the time of recording a transaction in the journal or
subsidiary books or at the time of posting to the ledger.
These are of two types, error of complete omission and
error of partial omission. When the accountant completely
omits to record a transaction, it is the error of complete
omission. On the other hand, suppose he records the
 transaction in the subsidiary book but forgets to post it in
the ledger, this is the error of partial omission.
3. Compensating Errors: When the net effect of two or more
errors is nil, these are Compensating errors. These do not
affect the trial balance.
4. Errors of Principle: We record the journal entry of the
transactions as per the ​accounting​ conventions and
principles. The errors resulting due to the violation of these
are errors of principle. A wrong classification of
expenditure or income between capital and revenue is an
error of principle.

Source: shutterstock

Searching for Errors

When the trial balance does not tally, we need to search and find
out the errors and correct them to prepare the financial
statements. Following are the steps to locate the errors:

1. Recheck the totals of debit and credit columns of the trial

balance.
2. Equate the ​account​ head in the trial balance with the ledger
to check the difference in the amount or complete omission
of the account.
3. Compare the trial balance with that of the previous year to
see the additions and deletions of accounts. If there is a
major difference in any account balance, verify it for
correctness.
4. Balance the ledger accounts once more.
5. Check the postings to the ledger from the journal entries or
the subsidiary books.
6. A difference may indicate the complete or partial omission
of a posting. For example, a difference in the debit side may
indicate that an amount has been recorded in the books of
original entry but has been omitted to be posted on the
debit side of an account.
 7. A difference of an amount divisible by two between the
debit and credit​ side of the trial balance indicates a
possibility of the wrong posting of an amount equal to half
of the difference on the wrong side of another ledger
account. For example, the total of the credit side of the trial
balance is more by ₹1000. In this case, we shall scan all the
credit entries with an amount of ₹500.

Solved Example for You

Q: Classify the following errors:

1. A pays ₹5000 to B for the purchase of goods. The entry in

the Cashbook is correct but posting in the ledger is only
with ₹500.
2. Credit purchases ₹10000 not recorded in the purchases
book.
3. Cash book is overcast by ₹1000 and Purchases Book is
undercast by ₹1000.
4. The purchase of machinery ₹50000 recorded in the
Purchases Book.
5. Sales Book is undercast by ₹250
 6. The purchase of furniture ₹20000 is not posted in the
furniture account and an income of ₹20000 is also not
posted.

Ans.

1. Error of Commission
2. Error of Omission
3. Compensating Error
4. Error of Principle
5. Error of Commission
6. Compensating Error