What is Trial Balance? Meaning, Objectives, Format, Example

Ever thought about what will happen if we do not segregate our financial transactions into debit and credit amounts? Well, first and foremost, you will not be able to prepare your financial statement, leading to no understanding of your business finances and others.

So why take the risk of not preparing your financial statements accurately when you just need to follow a few simple steps using the trial balance method? Take a look at this article to get a comprehensive guide on trial balance, its importance, method of preparation and examples.

What is Trial Balance?

Trial balance refers to a part of a financial statement that records the final balances of the ledger accounts of a company. This statement comprises two columns: debit and credit. An organisation prepares a trial balance at the end of the accounting year to ensure all entries in the bookkeeping system are accurate.

The term 'Trial Balance' is derived from the perspective that it acts as a test for fundamental entries in the bookkeeping but does not perform a full audit. It is the first step in checking or auditing business finances as it helps accountants to be sure that no mathematical error happens before proceeding with other complex financial statements.

Why is the Trial Balance Prepared?

After closing all general ledger accounts, the trial balance is prepared at the end of the financial year. It helps to record the income and expenditures of the business and easily complete the preparation of the balance sheet in the next step.

Moreover, the trial balance is also prepared to detect any error in the mathematical calculation. A key objective of preparing a trial balance is to summarise the financial transactions while continuing with the business activities. It helps the business management to make necessary decisions regarding changes in the finances and business activities.

Features of Trial Balance

Below is a list of features that trial balance has, helping businesses to analyse and proceed with financial recordings accurately:

• It comprises a list of different accounts of general ledger balances, both debit and credit amounts.
• Preparation of trial balance allows a firm to check for mathematical accuracy of the general ledger balances.
• This statement is prepared at the end of the financial year.
• It is not a part of the final financial statements.

Limitations of Trial Balance

Even though the trial balance is an important part of the financial statement providing significant financial details, it has certain limitations. Here they are:

• The trial balance may fail to detect errors when a journal entry contains an incorrect amount recorded in both accounts.
• Errors of omission may go unnoticed as some transactions may not be recorded in the journal, making it impossible for even a correctly balanced Trial Balance to reveal such omissions.
• Any missing journal entry in the ledger will not be reflected in the Trial Balance, making it challenging to spot such omissions.
• Correct amounts in journal entries might be misallocated under the wrong accounting category by the accountant, a mistake that the trial balance is incapable of identifying.

How to Prepare a Trial Balance?

Here is the process to prepare trial balances in your business:

• Firstly, close all general ledger accounts to get their closing balance at the end of the financial year.
• Prepare the worksheet of trial balance as per format. It must comprise the columns of account names and debit and credit amounts.
• Fill in the trial balance worksheet as per the balances of the accounts. Any assets or expense amount of the business is considered in the debit column, and any revenue or business liabilities amount is recorded in the credit column.
• Add values accurately in each column.
• Lastly, close the trial balance worksheet. You must remember that if your total amount of debit balance matches the total credit balance, then recordings in the trial balance have been done accurately. Differences in totals suggest either mathematical error or input error of the balances.

Trial Balance Rules

While preparing a trial balance, there is a set of rules you need to follow. They are as follows:

• Assets of the business must be put down in the debit column.
• All business expenses must be written down in the debit amount column.
• Every liability of the company must be recorded in the credit column.
• All revenue and business gains will be recorded in the credit column.

Trial Balance Format

Follow this structure to understand the format of trial balance:

Name of Company

Trial Balance as on ………….. (date on which it is recorded)