Trial Balance - Concept, Preparation, Advantages & Purpose

A trial balance is a sheet recording all the ledger balances categorized into debit and credit. A typical trial balance will have the name of ... Products IT IncomeTaxFiling FileIncometaxreturnsforfreein7minutes EX ExpertAssistedServices Getexperthelpfortaxfilingorstartingyourbusiness 80c TaxSavingNew CuratedMutualFunds&plansfortaxsavings MF MutualfundInvestmentsNew InvestinbestGrowthmutualfunds EINV e-InvoicingSoftware Completesolutionforallyoure-invoicingneeds GST GSTSoftware CompleteGSTfiling&billingsolution TC TaxCloud(DirectTaxSoftware) I-T,e-TDS&AuditSoftwareforCAs&TaxProfessionals Aboutus HelpCenter IncomeTax GST e-Invoicing MutualFunds Business MyAccount MyTaxReturns Myinvestments Logout ThispageisbestviewedinChrome,FirefoxorIE11 LogIn SignUp x MyAccount MyTaxReturns MyInvestments Logout IncomeTax GST e-Invoicing MutualFunds Business DownloadBlackApp NeedHelp? LogIn SignUp     RecentArticles StatementofChangesinEquity AnalysisofFinancialStatements CreditMonitoringArrangement(CMA)–Overview&DocumentsRequired Form61A–StatementofSpecifiedFinancialTransactions(SFT) GeneralLedger–Meaning,Process,Examples&ControlAccounts POPULARARTICLES Budget2021Highlights HowtofileITR WhichITRtoFile MutualFunds IncomeTaxCalculator RentReceiptsGenerator HRACalculator TaxRefundStatus ITR Youmightbeinterestedin TaxCalculator Section206AB RentReceiptsGenerator HRACalculator TaxRefundStatus Home AccountsandAudit FinancialReports TrialBalance–Concept,Preparation,Advantages&Purpose TrialBalance–Concept,Preparation,Advantages&Purpose Updatedon: Jul28,2021-06:42:02PM 08minread. TrialBalanceistheheartofabusiness.Itisasummaryofthebusinessactivities.Itisalsoanindicatorofthefinancialhealthofthebusiness.Thereisacommonlyheardadvicethat“Ifyouwanttoinvestinsharesofacompany,youmuststudyitstrialbalance”. WhatisaTrialBalance? Multipleentriesinvariousaccountswillmakealedger. TakingalltheledgerbalancesandpresentingtheminasingleworksheetasonaparticulardateisTrialBalance.Tounderstandatrialbalance,wemustfirstunderstandthefollowing- Doubleentrysystem–RecordingtwoentriesforasingletransactionthatisequalandoppositeinnatureJournal–AlltransactionsrecordedindoubleentrysystemofbookkeepingLedger–Summaryofalljournalsofasimilarnature. Illustration:Let’ssaywebuyabookforsayRs.1,000oncredit.Nowwereceivethebookandhavetopaymoney.Sothistransactionhastwoactivities. BuyingthebookTakingcreditfromseller Inaccountinglanguage,recordingofthistransactionbysegregatingintotwoactivitiesisadoubleentrysystemofbookkeeping.Intheaboveexample,let’sassumeanorganisationistradinginbooks,thentheJournalentrywillbe- PurchaseA/cDr1000ToCreditorA/c1000 Intheaboveexample, theTrialBalanceasondatewilllooklikethefollowingTrialBalanceason.….           Debit(Rs)Credit(Rs)PurchaseA/c.1000–CreditorA/C.–1000 ConceptofTrialBalance Let’ssayyourecordallyouractivitiesinadiary.Atmonthendyousummariseyourdiaryandclassifyitintovariouscategories.Now,youmakeasheetanddividethecategoriesintoproductive/non-productive.That’sexactlywhatbusinessesdo. Recordingoftransactionsisajournalentry.Summarisingthemandcategorisingthemareledgers.CreatingaworksheetandclassifyingtheledgersisaTrialBalance. Atrialbalanceisasheetrecordingalltheledgerbalancescategorizedintodebitandcredit.Atypicaltrialbalancewillhavethenameofledgerandthebalances.Thisispreparedasataparticulardatewhichcanbefinancialyearendorcalendaryear. AdvantagesofTrialBalance Arithmeticalaccuracy- Giventhenatureofthedoubleentrysystem,everytransactionwillresultintwoentriesofequalandoppositenature.Henceatanypointintimealldebitledgertotalswillmatchtocreditledgertotals.SinceTrialBalancelistsalltheaccountsasonaparticulardate,thedebittotalofatrialbalancemustmatchtothecredittotal. Therefore,aTrialBalanceisanindicatorofthearithmeticalaccuracyofthebooksofaccounts. Withsoftwaresbeingusedforaccounting,theaboveadvantageofthetrialbalanceisnotveryrelevant.Asdataentrysystemsdonotallowentriestobepostedifthereisadifferenceinthedebitandcreditamounthenceleavingnoroomforerror. Bird’s-eyeview- Atrialbalanceisasummarysheetlistingallledgesandbalances.Henceitprovidesabirdeyeviewoftheaccountingtransactionsofanorganisation. PrerequisiteforpreparationofFinancialstatements- Anorganisationneedstoknowprofitorlossandfinancialpositionatyearend.Andthustopreparefinancialstatements,TrialBalanceisprerequisite.Allstakeholdersalsoneedthisinformation.Itisthefirststeptowardsclosureofaccountsforaparticularperiod. UsesofTrialBalance Easeofpostingadjustments AtalliedTrialBalanceofferssignificantcomfortregardingaccuracyandhenceposttrialbalanceadjustmentscanbeaffected. AidsinAudit TrialBalancegivesalistofallledgerswithbalances.Forthepurposeofauditthetrialbalanceisanalysed.Forexampleifthenatureofanaccountisdebit,butitholdsacreditbalance,thentheentireledgerwillbescrutinised.Sotrialbalanceisalsoanimportanttoolforauditors. Definescredibility TrialBalanceisalsousedbybanksandlendingagenciestounderstandtheborrowingcapacityofthebusinessandcredibility. DespitethenumerousbenefitsofaTrialbalance,itisimperativetounderstandthatatalliedTrialBalancedoesnotensurezeroerrors.Ifthereareoffsettingerrors,theTrialBalancewilltallydespitetheerror. Alsoifsometransactionshavenotbeenrecorded,therewillbenoimpactontheledgersandhencethetalliedTrialBalancewillposeawrongpicture. Withsoftwaresbeingusedforpreparationofaccounts,todaytheTrialBalancefromERPsystemhasautomatedalotofprocesses.Itincludesledgercodes,ledgernames,typeofaccount,balanceforthecurrentperiod,balanceforthepreviousperiod.Alsoforlargeorganizationsthetrialbalancecanbeextractedforanyparticularperiod. Lookingatalltheprosandcons,itisveryclearthatpreparationofTrialBalancehasalotofbenefitsandhenceitspreparationhasbecomemandatoryforclosureofbooksofaccounts.EventodaytheTrialBalanceprovidesanexcellentbaseforpreparationoffinancialstatementsandanalysisofbusiness. FileyourincometaxforFREEin7minutes Free,simpleandaccurate.Designedbytaxexperts UploadyourForm-16 RecentArticles StatementofChangesinEquity AnalysisofFinancialStatements CreditMonitoringArrangement(CMA)–Overview&DocumentsRequired Form61A–StatementofSpecifiedFinancialTransactions(SFT) GeneralLedger–Meaning,Process,Examples&ControlAccounts POPULARARTICLES Budget2021Highlights HowtofileITR WhichITRtoFile MutualFunds IncomeTaxCalculator RentReceiptsGenerator HRACalculator TaxRefundStatus ITR Youmightbeinterestedin TaxCalculator Section206AB RentReceiptsGenerator HRACalculator TaxRefundStatus Top Hide→ CONTENTS Wasthisarticlehelpful? Thankyouforyourfeedback Submit Haveaquery? 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