Asok Nadhani-Accountancy-Trial Balance

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