Trial Balance
By Asok Nadhani
7.1
Trial Balance
After close of books,
balances in various accounts are recorded in a statement form, called Trial
Balance.
Trial Balance is a
statement in which Dr. and Cr.balance of all the accounts of ledger including
cash and bank balances (taken from cash book) are shown to test arithmetical
accuracy (that is why the name is ‘Trial’ Balance) of the books of accounts. As
every debit has a corresponding credit, total of debit balances always tally
with total of its credit balances.
7.1.1
Objectives of Preparing a Trial Balance
i)
To ensure the arithmetical accuracy of the books.
ii)
To check the correctness of Trial Balance by
rechecking with ledger balances.
iii)
To get the summary of all the Ledger accounts are
one place.
iv)
To prepare the Final Accounts, i.e. Trading, Profit
and Loss Account, Balance Sheet by providing the balances of all the accounts
at one place.
7.2
Method of preparing a Trial Balance
There are four methods for
preparing a trial balance which are as follows:-
i)
Total Method: Under this
method debit total and credit total of each account of ledger are entered in
trial balance in the respective debit and credit columns.
ii)
Balance Method: Under this
method, only balance of each account of ledger is recorded in trial balance
either in debit or credit column, as this case may be.
iii)
Total and
Balance Method: This is the combination of above two methods. The debit and credit
total of each account and also balances of each account are recorded.
iv)
Elimination of
Equal Totals Method: The accounts whose debit totals are equal to
credit totals i.e. the accounts which have no balances are eliminated. Such
accounts are not recorded in trial balance.
7.3 Locating error in Trial Balance
Steps of locating error in trial balance:
Step 1: Totals of the debit and credit columns
should be checked again adding the account balances.
Step 2: Cash and bank balance should be
included.
Step 3: If there is
difference by minor amount by Re.1, Rs.10, Rs.100, etc. the castings of the
subsidiary books of accounts should be carefully checked.
Step 4: If there is
difference is big too big, the balances of various accounts should be compared
with the previous year’s balances of related accounts, to quickly locate gross mistake.
Step 5: An entry equal to
the difference of the trial balance should (to locate omission) or its half
amount, to locate mistake in debit and credit should be checked.
Step 6: The opening
balances of all the accounts from the previous year’s Balance sheet should be
checked again.
Step 7: Check that all the
balances have been recorded in the appropriate column of the Trial Balance and if
the errors still remain undetected, a suspense account will be opened and the
amount of difference posted in Suspense Account.
7.3.1 Errors disclosed by
Trial Balance
The following error can be identified in Trial
balance:
i)
Omission of posting an amount in the
ledger: When a transaction
is entered correctly in the Journal, but not entered in the Ledger, or, when
there is omission in carrying forward of a total balance from one page to the
other, the balance will be wrong and the trial balance will not tally.
ii)
Omission of balance of an account: If the balance of an account is ignored
totally in the trial balance, the trial balance will not tally.
iii)
Wrong sum up of subsidiary books: The subdivisions of journal into various
books are called subsidiary books. If the total of a subsidiary book is wrongly
carried forward, the trial balance will disagree.
iv)
Incorrect summation in trial balance: If the columns of trial balance are summed
up incorrectly, the trial balance will not agree.
v)
One side entry or entered doubly: If only one side of an transaction, either Dr. side or Cr. Side, is entered or any
one account is or entered doubly, trial balance will not tally.
vi)
Wrong Side entry of Dr. or
Cr. Balance: If either debit side or credit side of an transaction is
wrongly entered, the trial balance will not agree.
7.3.2 Errors not disclosed by
Trial Balance
1.
Errors of Omission: Even If a
transaction is not recorded at all or omitted wholly or partly in the books of
original entry, the trial balance will still agree. Such error of omission does
not affect the trial balance.
2. Errors of Commission: If a transaction is
recorded incorrectly either wholly or partly, errors of commission arises. (e.g.
a credit sale of Rs.2,132 was recorded as Rs.2,312). Such error does not affect
the agreement of trial balance.
3.
Errors of
Principle: Errors
committed due to wrong application of the principles of Accounting, (e.g. asset
purchased is recorded in purchase account).
4.
Compensating Errors: When one error is
compensated by another error of opposite nature. (Purchase books and sales books
both are under cast by Rs.500).
5.
Errors of Mis-posting: Amount posted to
a wrong ledger will not
disturb the agreement of the Trial Balance.
6.
Errors of entering both aspects of
transaction twice in the books of account: If both aspects of transaction are entered more than
once in the books of original entry, the trial balance will still agree.
7.4
Suspense Account
If the two sides
of trial balance do not agree even after scrutinizing, it implies that there
are certain one-sided errors in the books of account. If it is not possible to
locate the errors immediately, the amount of difference in the trial balance is
put in an account temporarily known as “Suspense Account" until that error
is located. If the debit side of trial balance exceeds the credit side, the
difference in the trial balance is transferred to the credit side of the
Suspense Account and vice-versa.
This is a
temporary account. When all the errors affecting the trial balance are located
and rectified, the suspense account will be automatically balanced and closed, and will be removed
from Trial Balance.
7.5 Format of a Trial
Balance
Trial Balance of Ram
As on 31.3.2008
|
Sl. No.
|
Heads of Account
|
L.F.
|
Debit Balance
(Rs.)
|
Credit Balance
(Rs.)
|
|
1.
|
Cash in hand
|
|
20,000
|
|
|
2.
|
Cash at bank
|
|
60,000
|
|
|
3.
|
Purchases
|
|
2,00,000
|
|
|
4.
|
Wages
|
|
30,000
|
|
|
5.
|
Rent
|
|
10,000
|
|
|
6.
|
Sales
|
|
|
2,40,000
|
|
7.
|
Capital
|
|
|
60,000
|
|
8.
|
Loan from Bank
|
|
|
20,000
|
|
|
TOTAL
|
|
3,20,000
|
3,20,000
|
7.6 Preparation of Trial Balance from Given Ledger
Balances
The
following rules should be followed to prepare the Trial Balance from a given
list of Ledger Balances,
i)
The balances of all
accounts relating to: (a) Assets; (b) Expenses; (c) Losses; (d) Drawings; and
(e) Debtors, should be placed in the debit column of the Trial Balance.
ii) The balances of all accounts relating to: (a) Liabilities; (b) Income and
Revenue; (c) Gain; and (d) Creditors, should be placed in the Credit column of
the Trial Balance.
Generally,
closing stock does not appear in the Trial Balance because a separate account
for this is not opened in the general ledger.
7.7 Distinction between
Trial Balance and Balance Sheet
|
|
Trial Balance
|
Balance Sheet
|
|
1.
|
Trial Balance is prepared After preparation of
ledger and before preparation of final account.
|
After
preparing Trial Balance,
Balance Sheet is prepared from balances of Trial Balances.
|
|
2.
|
Trial balance is normally prepared on a particular date
(periodically, monthly, quarterly, half-yearly or yearly) as decided by the
management.
|
Balance
Sheet is normally prepared at the end of an accounting year, though in some organization
it is prepared quarterly.
|
|
3.
|
There is no statutory or
legal requirement of preparation of Trial Balance. It is optional.
|
Preparation
of Balance Sheet is mandatory.
|
|
4.
|
Trial balance helps us to know the arithmetical
accuracy of the posted entries from journal to ledgers.
|
Balance
Sheet shows financial position of the business.
|
|
5.
|
A Trial Balance is a summary of all General Ledger
Balances as on a particular date.
|
Balance
Sheet is a summary of only assets and liabilities as on a particular date.
|
|
6.
|
Difference in Trial Balance indicates errors in
account books.
|
Balance
Sheet is prepared after correction of errors.
|
Example 1: [Self made
Questions]
State whether the balances of the following accounts should be placed in
debit column or credit column of the trial balance.
|
a. Cash-in-hand.
|
b. Creditors.
|
|
c. Sundry Debtors.
|
d. Bank Overdraft.
|
|
e. Plant and Machinery.
|
f. Furniture.
|
|
g. Salary.
|
h. Discount Received.
|
|
i. Discount Received.
|
j. Interest Paid.
|
|
k. Suspense Account.
|
l. Sales Account.
|
|
m. Purchase Account.
|
n. Carriage Inward.
|
|
o. Carriage Outwards.
|
p. Drawings.
|
|
q. Advance Income.
|
|
Solution:
|
Serial
Number
|
Heads of Accounts
|
Logic
|
Debit Balance
(Rs.)
|
Credit Balance
(Rs.)
|
|
a.
|
Cash-in-hand
|
Asset
|
√
|
|
|
b.
|
Creditors
|
Liability
|
|
√
|
|
c.
|
Sundry Debtors
|
Asset
|
√
|
|
|
d.
|
Bank Overdraft
|
Liability
|
|
√
|
|
e.
|
Plant and Machinery
|
Asset
|
√
|
|
|
f.
|
Furniture
|
Asset
|
√
|
|
|
g.
|
Salary
|
Expense
|
√
|
|
|
h.
|
Discount allowed
|
Expense
|
√
|
|
|
i.
|
Discount Received
|
Income
|
|
√
|
|
j.
|
Interest Paid
|
Expense
|
√
|
|
|
k.
|
Suspense Account *(Note)
|
|
|
|
|
l.
|
Sales Account
|
Income
|
|
√
|
|
m.
|
Purchase Account
|
Expense
|
√
|
|
|
n.
|
Carriage Inward
|
Expense
|
√
|
|
|
o.
|
Carriage outwards
|
Expense
|
√
|
|
|
p.
|
Drawings
|
Expense
|
√
|
|
|
q.
|
Advance Income.
|
Liability
|
|
√
|
The balances of all accounts related to: (a) Assets; (b) Expenses; (c)
Drawings; (d) Losses and (e) Debtors, should be placed in the ‘Debit’ column in
Trial Balance.
(a) Liabilities, (b) Income and Revenue, (c) gain and (d) Creditors
should be placed in the ‘Credit’ column in Trial balance.
*Note: Suspense Account
may contain balance either in debit or credit column depending upon error.
Example 2: Following Trial
Balance is prepared from the books of a trader. Although it has been tallied,
but it has certain errors. Prepare a corrected Trial Balance.
|
Trial Balance as on….
|
|||
|
Heads of Account
|
(Dr.)Rs.
|
Heads of Account
|
(Cr.)Rs.
|
|
Building
|
50,000
|
Capital
|
72,500
|
|
Machinery
|
27,000
|
Sales
|
1,05,000
|
|
Furniture
|
10,600
|
Debtors
|
60,000
|
|
Creditors
|
45,000
|
Interest received
|
2,700
|
|
Bank Loan
|
15,000
|
Discount received
|
3,000
|
|
Bad debts
|
1,200
|
Return outwards
|
2,600
|
|
Cash
|
2,000
|
Interest paid
|
200
|
|
Purchase
|
95,000
|
|
|
|
Advance Income
|
200
|
|
|
|
|
2,46,000
|
|
2,46,000
|
Solution:
|
|
Incorrect (as given in the Q.)
|
Correct
|
|
||
|
Heads of Account
|
Dr.(Rs.)
|
Cr.(Rs.)
|
Dr.(Rs.)
|
Cr.(Rs.)
|
Notes
|
|
Building
|
|
|
50,000
|
|
|
|
Machinery
|
|
|
27,000
|
|
|
|
Furniture
|
|
|
10,600
|
|
|
|
Debtors
|
|
60,000
|
60,000
|
|
Debtor is an asset. It should be in Dr. side in Trial
Balance.
|
|
Bad debts
|
|
|
1,200
|
|
|
|
Cash
|
|
|
2,000
|
|
|
|
Purchase
|
|
|
95,000
|
|
|
|
Interest paid
|
|
200
|
200
|
|
Interest paid is an
expense. It should be in Dr. side
in Trial Balance.
|
|
Capital
|
|
|
|
72,500
|
|
|
Sales
|
|
|
|
1,05,000
|
|
|
Interest received
|
|
|
|
2,700
|
|
|
Discount received
|
|
|
|
3,000
|
|
|
Return outwards
|
|
|
|
2,600
|
|
|
Advance Income
|
200
|
|
|
200
|
Advance Income, Creditors,
Bank Loan are a type of liability and have credit balance. So they will be Cr. side of Trial Balance.
|
|
Creditors
|
45,000
|
|
|
45,000
|
|
|
Bank Loan
|
15,000
|
|
|
15,000
|
|
|
Total
|
|
|
2,46,000
|
2,46,000
|
|
