Contents:
Trial
balance may be defined as an informal accounting
schedule or statement that lists the ledger account balances
at a point in time compares the total of debit balance with
the total of credit balance.
The
fundamental principle of double entry system is that
at any stage, the total of debits must be equal to
the total of credits. If entries are recorded and
posted correctly, the ledger will reflect equal
debits and credits, and the total credit balance
will then be equal to the total debit balances.
Every business
concern prepares final accounts at the end of the year to
ascertain the result of the activities of the whole year. To
ensure correct result, the concern must be free from doubt
that the books of accounts have been correctly recorded
throughout the year. Trial balance is prepared to test the
arithmetical accuracy of the books of accounts. As we know
that under double entry system for each and every
transaction one account is debited and other account is
credited with an equal amount. If all the transactions are
correctly recorded strictly according to this rule, the
total amount of debit side of all the ledger accounts must
be equal to that of credit side of all the ledger accounts.
This verification is done through trial balance.
If the trial
balance agrees we may reasonably assume that the books are
correct. On the other hand, if it does not agree, it
indicates that the books are not correct - there are
mistakes somewhere. The mistakes are to be detected and
corrected otherwise correct result cannot be ascertained.
There are however, a few types of errors which the trial
balance cannot detect. In other words, the trial balance
will agree in spite of the existence of those errors.
The trial
balance is not an absolute or solid proof of the accuracy of
books of accounts. Thus if trial balance agrees, there may
be errors or may not be errors. But if it does not agree,
certainly there are errors.
The trial
balance serves two main purposes. These are as under:
-
To check
the equality of debits and credits - an arithmetical or
mathematical test of accuracy.
-
To provide
information for use in preparing final accounts.
There are three
methods for the preparation of trial balance. These
methods are:
- Total or gross trial
balance
- Balance or net trial
balance
- Total - cum - balance
trial balance
The method 1 and 2 are
described below:
Total or Gross Trial Balance:
Under this method the two sides
of all the ledger accounts are totaled up. Thereafter, a list of
all the accounts is prepared in a separate sheet of paper with
two "amount" columns on the right hand side. The first one for
debit amounts and the second one for credit amounts. The total
of debit side and credit side of each account is then placed on
"debit amount" column and "credit amount" column respectively of
the list. Finally the two columns are added separately to see
whether they agree of not. This method is generally not followed
in practice.
Balance or Net Trial Balance:
Under this method, first of all
the balances of all ledger accounts are drawn. Thereafter, the
debit balances and credit balances are recorded in "debit
amount" and "credit amount" column respectively and the two
columns are added separately to see whether they agree or not.
This is the most popular method and generally followed.
The various Steps involved in
the preparation of Trial Balance under this method are given
below:
- Find out the balance of
each account in the ledger.
- Write up the name of
account in the first column.
- Record the account number
in second column.
- Record the debit balance
of each account in debit column and credit balance in credit
column.
- Add up the debit and
credit column and record the totals.
Enter the following
transactions in journal and post them into the ledger and also
prepare a trial balance.
2005 |
|
Jan. 1 |
Mr. X started
business with cash $80,000 and furniture $20,000. |
Jan. 2 |
Purchased goods on
credit worth $30,000 from Y. |
Jan. 3 |
Sold goods for cash
$16,000. |
Jan. 4 |
Sold goods on credit
to S for $10,000 |
Jan. 8 |
Cash received from
S $9,800 in full settlement of his account. |
Solution:
Journal
Date
2005 |
Particulars |
L.F |
DR.
Amount ($) |
Cr.
Amount ($) |
Jan. 1 |
Cash A/C |
5 |
80,000 |
|
|
Furniture
A/C |
7 |
20,000 |
|
|
Capital A/C |
9 |
|
1,00,000 |
|
(Owner
invested cash and furniture) |
|
|
|
|
|
|
|
|
Jan. 2 |
Purchases
Account |
11 |
30,000 |
|
|
Y |
13 |
|
30,000 |
|
(Bought
goods on credit) |
|
|
|
|
|
|
|
|
Jan. 3 |
Cash A/C |
5 |
16,000 |
|
|
Sales A/C |
15 |
|
16,000 |
|
(Sold
goods for cash) |
|
|
|
|
|
|
|
|
Jan. 4 |
S
A/C |
17 |
10,000 |
|
|
Sales A/C |
15 |
|
10,000 |
|
(Sold
goods on credit) |
|
|
|
|
|
|
|
|
Jan. 8 |
Cash A/C |
5 |
9,800 |
|
|
Discount
A/C |
19 |
200 |
|
|
S A/C |
17 |
|
10,000 |
|
(Cash
received and discount allowed) |
|
|
|
Ledger
Cash Account
(No.5)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Capital
A/C |
5 |
80,000 |
|
80,000 |
|
Jan. 3 |
Sales A/C |
5 |
16,000 |
|
96,000 |
|
Jan. 8 |
S
A/C |
5 |
9,800 |
|
105,800 |
|
Furniture
Account (No.7)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Capital
A/C |
5 |
20,000 |
|
20,000 |
|
Capital
Account (No.9)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Cash
A/C |
5 |
|
80,000 |
|
80,000 |
Jan. 1 |
Furniture
A/C |
5 |
|
20,000 |
|
1,00,000 |
Purchases
Account (No.11)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 2 |
Y A/C |
5 |
30,000 |
|
30,000 |
|
Y Account
(No.13)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 2 |
Purchases
A/C |
5 |
|
30,000 |
|
30,000 |
Sales Account (No.15)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 3 |
Cash
A/C |
5 |
|
16,000 |
|
16,000 |
Jan. 4 |
S A/C |
5 |
|
10,000 |
|
26,000 |
S
Account (No.17)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 4 |
Sales A/C |
5 |
10,000 |
|
10,000 |
|
Jan. 8 |
Cash
A/C |
5 |
|
9,800 |
|
|
Jan. 8 |
Discount
A/C |
5 |
|
200 |
Nil |
|
Discount
Account (No.19)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 8 |
S A/C |
5 |
200 |
|
200 |
|
Trial Balance
S. No. |
Account Name |
A/C No. |
Debit |
Credit |
1 |
Cash Account |
5 |
105,800 |
|
2 |
Furniture
Account |
7 |
20,000 |
|
3 |
Capital
Account |
9 |
-- |
100,000 |
4 |
Purchases
Account |
11 |
30,000 |
|
5 |
Y Account |
13 |
-- |
30,000 |
6 |
Sales Account |
15 |
-- |
26,000 |
7 |
S
Account |
17 |
-- |
-- |
8 |
Discount
Account |
19 |
200 |
-- |
|
Total |
|
156,000 |
1,56,000 |
Note:
If an account shows zero balance, it is not
necessary to record it in trial balance. |