Every business transaction has a dual effect. Thus, each transaction is recorded in two separate accounts as per the Double Entry System of accounting. The double entry accounting principle means that for every debit, there is an equal credit. Thus, as per this principle, the sum of all debits is equal to the sum of all credits. As a result, it is assumed that the transactions posted in ledger accounts in terms of debit and credit amounts are correct.

So, the accountant or the business owner first records transactions in the Journal following the basics of accounting. Then, entries from the Journal are recorded into the ledger accounts. Further, the closing debit or credit balances in various ledger accounts go into the Trial Balance of the business for a particular year.

Therefore, Trial Balance is prepared basically to check if debit or credit amounts recorded in the ledger accounts are accurate. So, let’s understand

• what is trial balance?
• how is a trial balance prepared?
• how is it useful for your business?

What is Trial Balance?

Trial Balance is a technique for checking the accuracy of the debit and credit amounts recorded in the various ledger accounts. It is basically a statement that exhibits the total of the debit and credit balances recorded in various accounts of ledger. Accordingly, Trial Balance is prepared to check the accuracy of the various transactions that are posted into the ledger accounts. It is certainly one of the important accounting tools as it reveals the final position of all accounts. Further, it is used in preparing the final accounting statements of the business.

Now, the whole idea of preparing Trial Balance is to simplify the task of preparing the basic financial statements. Thus, a business owner or the accountant can simply draw balances of all accounts from the Trial Balance. He does not have to look for such balances in each ledger account.

Typically, Trial Balance is prepared at the end of an accounting year. However, a business may choose to prepare the Trial Balance at the end of any specific period. This could be at the end of each month, quarter, half a year or a year as per the need.

Trial Balance Example

Kapoor Pvt Ltd entered into the following transactions for the month April 30, 2018.

1. April 1, 2018 – Kapoor Pvt Ltd started business with a capital of Rs 8,00,000
2. April 4, 2018 – Bought goods from Singhania Pvt Ltd on credit for Rs 2,00,000
3. April 5, 2018 – Sold goods to M/s Khanna for Rs 2,50,000
4. April 6, 2018 – Cash purchases Rs 2,50,000
5. April 8, 2018 – Cash sales Rs 1,50,000
6. April 10, 2018 – Goods returned to Singhania Pvt Ltd Rs 20,000
7. April 11, 2018 – Purchased furniture for Rs 1,50,000
8. April 12, 2018 – Cash paid to Singhania Pvt Ltd Rs 1,20,000
9. April 13, 2018 – Goods returned by M/s Khanna Rs 30,000
10. April 15, 2018 – Goods taken by Kapoor Pvt Ltd for private use Rs 30,000
11. April 16, 2018 – Cash received from M/s Khanna Rs Rs 1,20,000
12. April 17, 2018 – Kapoor Pvt Ltd took loan from M/s Sahani Rs 3,00,000
13. April 18, 2018 – Salary paid Rs 50,000
14. April 19, 2018 – Purchased stationery for Rs 10,000
15. April 20, 2018 – Money paid to M/s Sahani for loan Rs 1,80,000
16. April 21, 2018 – Interest received Rs 40,000

Steps in Preparation of Trial Balance

Let’s understand how to prepare a trial balance keeping into consideration the above example. Following are the steps:

1. Calculate the Balances of Each of the Ledger Accounts

Business transactions are first recorded in the form of journal entries following the basic accounting principles. These journal entries then go into the ledger accounts involved in the various business transactions.

For instance, consider the cash account of Kapoor Pvt Ltd in the above example. The cash transactions are recorded and the cash account is closed with the remaining debit balance of Rs 6,50,000 as on May 1, 2018. Likewise, balances of other ledger accounts are ascertained and accordingly the accounts are closed with the remaining debit or credit balances.

2. Record Debit or Credit Balances in Trial Balance

The remaining debit or credit balances in various accounts of ledger as ascertained above are then recorded in the Trial Balance. The balances of each of the accounts of ledger are recorded in the debit or the credit columns as the case may be.

For example, the remaining debit cash balance as on May 1, 2018 is recorded in the debit column of the trial balance. Further, the remaining credit balance of capital account of Rs 8,00,000 is recorded in the credit column of the trial balance. Similarly, the remaining debit or credit balances of all the accounts of ledger are recorded in the debit or credit columns of trial balance respectively.

3. Calculate Total of The Debit Column

Ascertain the total of the debit column. This is done after recording all the debit balances of the various accounts of ledger put into debit column of Trial Balance.

For instance, consider the total of the debit column of the Trial Balance of Rs 10,20,000. This is calculated after recording all the closing debit balances of various accounts of ledger. These accounts include cash, stock, furniture, drawings etc.

4. Calculate Total of The Credit Column

Ascertain the total of the credit column. This is done after recording all the credit balances of the various accounts of ledger put into credit column of Trial Balance.

For instance, consider the total of the credit column of the Trial Balance of Rs 10,20,000. This is calculated after recording all the closing credit balances of various accounts of ledger. These accounts include capital, interest etc.

5. Check if Debit is Equal To Credit

Finally, you need to check if the total of the debit column matches the total of the credit column. As specified earlier, trial balance is prepared to check the accuracy of the debit and credit balances of various accounts of ledger. Both the debit and credit columns of the Trial Balance must tally since every debit has every credit. However, it is an indication that there were some errors made while recording transactions in ledger or trial in cases where they are not equal.

You must note that as per the accounting principle:

• All assets, expenses and receivables must have debit balances and all
• Liabilities, incomes and payables must have credit balances

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