What is Trial Balance?
It is a statement to test arithmetical accuracy of the books of accounts. Moreover, it also tests the ledger equilibrium. Companies prepares trial balance every month.
The double entry book keeping system requires that sum of the credits in each entry must be equal. In simple words, if you record all debits and credits correctly from original entry book to ledger, it follows that ledger should be balance. It also states that sum of debit totals of all the accounts should be equal to credit totals of all the accounts.
Definition of Trial Balance
“A trial balance is a list of accounts on a ledger at a given date with the debit and credit totals of each account”.
“It is the list of accounts of a ledger at a given date with debit or credit balance of each account”.
There are two reasons for the preparation of trial balance –
- It proves as well as disproves the equality of debits and credits in the ledger.
- Provides convenient summary of ledger accounts and is therefore the basis for preparation of the balance sheet and profit and loss account.
Limitation of Trial Balance
The trial balance does not reveal following errors –
- Omission of an entire entry.
- Recording the wrong amount although the entry is otherwise correct.
- A debit or credit to the wrong account.
- Compensating or offsetting errors.
What to do if Trial Balance does not Balance
- Determine the difference between the trial balance totals. It frequently happens that if only one item is omitted or duplicated the figure is familiar or easily traceable.
- Examine the trial balance to see whether balances are written at the right place or not.
- Add the trial balance columns again.
- Check with the ledger to see if all balances are taken correctly.
- Check postings from the original entry books to the ledger whether are recorded accurately or not.