Trial Balance

Meaning and Concept of Trial Balance

A trial balance is a statement prepared using the debit and credit balances of all the ledger accounts, with a view to ascertaining the arithmetical accuracy of the recording of all the financial transactions of a business during a given period of time.

According to R.N. Carter:

"Trial balance is the list of debit and credit balances, taken out from the ledger; it also includes the balances of cash and bank taken from the cash book."

According to R. Pickles:

"The statement prepared with the help of ledger balances, at the end of the financial year or at any other date, to find out whether the debit total agrees with the credit total, is called the trial balance."

According to A.N. Annual (as stated in the source; author name unclear in OCR):

"The statement in which the debit and credit balances are noted down and finally totalled up to ascertain if they are equal is called the trial balance."

Objectives of Preparing Trial Balance

i) To check arithmetical accuracy: A trial balance is basically prepared to check the arithmetical accuracy of the recordings maintained by a business organization.

ii) To summarize the financial transactions: A trial balance always helps to summarize the different recordings of a number of financial transactions held during a given period of time.

iii) To provide the basis for preparing final accounts: A trial balance is assumed to be the most suitable basis for preparing the final accounts at the end of each accounting period.

iv) To help locate accounting errors: A trial balance also helps to locate certain types of accounting errors that affect only one side of a ledger account.

Importance / Advantages of Trial Balance

i) It helps to check the arithmetical accuracy of the recording of all the financial transactions of a business. ii) It is used to summarize all the financial transactions of the business. iii) It provides a suitable basis for the preparation of final accounts. iv) It helps to locate different accounting errors.

Limitations / Disadvantages of Trial Balance

i) There are certain errors that are not disclosed by a trial balance. ii) A trial balance gives only condensed information about each account. iii) It does not give information about the amount of profit earned or loss incurred, or the financial position of the business, at the end of a given period.

Methods of Preparing Trial Balance

a) Total method: Under this method, the trial balance is prepared by taking up the total of the debits and credits of all the ledger accounts.

b) Balance method: Under this method, only the balances of all the ledger accounts are taken up to prepare the trial balance.

c) Compound method: This is a combination of both the total method and the balance method. It is thus also known as the total-cum-balance method.