6 Tial Balance 24.10.08

What is a Trial Balance?

A trial balance is a statement of ledger account balances within a Ledger, at a particular instance. If we balance all the ledger accounts at a particular instance and then prepare a statement of balances we get the "Trial Balance". » Trial Meaning = The act of testing something/Trying something to find out about it. • Trial Balance is a statement, not an account A trial balance is a statement and it has got a conventional format of its own. It is not a Ledger Account. Purpose

A trial balance is prepared to check the mathematical/arithmetic accuracy of accounting. This is the only (main) purpose of the "Trial Balance". Since it is anyhow prepared for a purpose, it is put to some other uses like for the preparation of final accounts etc., Format of a Trial Balance

The most common format in which we find a trial balance is as below.

Trial Balance of M/s _____ as on _____ Particulars

L/F

Debit Amount Credit Amount (in Rs) (in Rs)

Account Head 1

— — Account Head 2 — — Account Head 3

– – –

– – –

Total

xxxx

xxxx

• Header Row The heading row contains the heading for the trial balance. It consists of the details relating to name of the organisation and the instance to which the ledger account balances pertain. • Particulars Each row in the trial balance pertains to the information relating to an account. The name of the Account head is written in the particulars column. • L/F » Ledger Folio Ledger Folio gives the information relating to the page number in the ledger from which the information relating to the ledger is being extracted. • Debit amount This is the amount whose information is extracted from the ledger account. What the debit amount actually means is dependent on the method used for constructing the trial balance. • Credit amount

This is the amount whose information is extracted from the ledger account. What the credit amount actually means is dependent on the method used for constructing the trial balance.

Illustration »

The following is the General Ledger of Mr. ABC, containing all the Ledger accounts within the accounting system. General Ledger [Books of Mr. ABC] Dr

Date 15/06/05 19/06/05 24/06/05 24/06/05

Cash a/c

Particulars

J/F

Amount Date (in Rs)

Cr

Particulars

J/ Amount F (in Rs)

17/06/05 To To To To

Capital a/c Goods/Stock a/c Mr. XYZ a/c Commission Received a/c

– – – –

By Furniture a/c 2,00,000 17/06/05 By Rent Paid a/c 12,000 By Bank a/c 2,000 18/06/05 By Goods/Stock a/c 500 18/06/05 By Wages Paid a/c

– – – – –

20,000 5,000 1,50,000 10,000 5,000

21/06/05 sub-total

2,14,500

sub-total 25/06/05 By Balance c/d

Total 25/06/05

Dr

To Balance b/d

2,14,500 –

Total

1,90,000 –

24,500 2,14,500

24,500

Capital a/c

Cr

Date

25/06/05

Particulars

J/F

Amount (in Rs)

sub-total

0

To Balance c/d –

2,00,000

Total

2,00,000

Date

Particulars

J/F

Amount (in Rs)

15/06/05

By Cash a/c

–

2,00,000

25/06/05

Dr

2,00,000

Total

2,00,000

By Balance b/d –

2,00,000

Furniture a/c

Date

Particulars

J/F

Amount (in Rs)

17/06/05

To Cash a/c

–

20,000

sub-total

Date

20,000 25/06/05

25/06/05

sub-total

Total

20,000

To Balance b/d –

20,000

Dr

Cr

Particulars

J/F

sub-total

0

By Balance c/d –

20,000

Total

20,000

Rent Paid a/c

Date

Particulars

J/F

Amount (in Rs)

17/06/05

To Cash a/c

–

5,000

sub-total

Date

5,000 25/06/05

Amount (in Rs)

Cr

Particulars

J/F

Amount (in Rs)

sub-total

0

By Balance c/d –

5,000

25/06/05

Total

5,000

To Balance b/d –

5,000

Dr

Total

Bank a/c

Date

Particulars

J/F

Amount (in Rs)

18/06/05

To Cash a/c

–

1,50,000

sub-total

1,50,000

To Balance b/d –

1,20,000

Dr

J/F

20/06/05 24/06/05

By Machinery – a/c By M/s Ramdas – & Bros. a/c

25,000

sub-total

30,000

By Balance c/d –

1,20,000

Total

1,50,000

Goods/Stock a/c

Date

Particulars

J/F

18/06/05 18/06/05

To Cash a/c – To M/s Ramdas – & Bros. a/c

Amount (in Rs)

Particulars

1,50,000

Total

Cr

Date

25/06/05

25/06/05

5,000

5,000

Cr

Amount (in Rs)

Date

Particulars

10,000

19/06/05 21/06/05

By Cash a/c – By Mr. XYZ a/c –

12,000 8,000

J/F

Amount (in Rs)

10,000

sub-total

20,000

sub-total

20,000

Total

20,000

Total

20,000

Dr

M/s Ramdas & Bros. a/c

Cr

Date

Particulars

J/F

Amount (in Rs)

Date

Particulars

24/06/05

To Bank a/c

–

5,000

18/06/05

By Goods/Stock – a/c

10,000

sub-total

10,000

Total

10,000

By Balance b/d –

5,000

25/06/05

sub-total

5,000

To Balance c/d –

5,000

Total

10,000 25/06/05

Dr

Amount (in Rs)

Machinery a/c

Date

Particulars

J/F

Amount (in Rs)

20/06/05

To Bank a/c

–

25,000

sub-total

Date

25,000 25/06/05

25/06/05

J/F

Total

25,000

To Balance b/d –

25,000

Dr

Cr

Particulars

J/F

sub-total

0

By Balance c/d –

25,000

Total

25,000

Mr. XYZ a/c

Date

Particulars

J/F

21/06/05

To Goods/Stock –

Amount (in Rs)

Cr

Amount (in Rs)

Date

Particulars

J/F

Amount (in Rs)

8,000

24/06/05

By Cash a/c

–

2,000

a/c sub-total

8,000 25/06/05

25/06/05

Total

8,000

To Balance b/d –

6,000

Dr

Particulars

J/F

Amount (in Rs)

21/06/05

To Cash a/c

–

5,000

sub-total

Date

5,000

6,000

Total

8,000

Particulars

J/F

Amount (in Rs)

By Balance c/d –

5,000

Total

5,000

Commission Received a/c

Cr

5,000

To Balance b/d –

5,000

Particulars

Cr

0

Total

Dr

25/06/05

By Balance c/d –

sub-total 25/06/05

Date

2,000

Wages Paid a/c

Date

25/06/05

sub-total

J/F

Amount (in Rs)

sub-total

0

To Balance c/d –

500

Total

500

Date

Particulars

J/F

Amount (in Rs)

24/06/05

By Cash a/c

–

500

25/06/05

sub-total

500

Total

500

By Balance b/d –

500

Preparation of Trial Balance » Steps to Prepare the Trial Balance Here are the steps you will undertake to prepare the trial balance: •

For each ledger account -- Cash, Accounts Payable, etc. -total your credits and debits. ○

If the credit total is larger, subtract the debit total

There are two methods for preparing a trial balance (1) Traditional Method and (2) Modern Method. Both serve the same purpose. The modern method is a derivative of the traditional method. • Traditional Method The traditional method considers the sub-totals of each ledger

account. It is prepared by presenting the sub-totals relating to each ledger account in the relevant columns in the trial balance. "Trial Balance" [Traditional Method] Trial Balance of M/s _____ as on _____ Particulars

L/F

Debit Amount Credit Amount (in Rs) (in Rs)

Cash a/c Capital a/c Furniture a/c Rent Paid a/c Bank a/c Goods/Stock a/c M/s Ramdas & Bros. a/c Machinery a/c Mr. XYZ a/c Wages Paid a/c Commission Received a/c

— — — — — — — — — — —

214,500 0 20,000 5,000 1,50,000 20,000 5,000 25,000 8,000 5,000 0

1,90,000 2,00,000 0 0 30,000 20,000 10,000 0 2,000 0 500

4,52,500

4,52,500

Total • Debit amount

Debit amount is the sub-total of the debit column in the Ledger Account. • Credit amount Credit amount is the sub-total of the credit column in the Ledger Account. • Modern Method

The modern method considers only the balances of the ledger accounts. It is prepared by presenting the balance relating to each ledger account in the relevant column in the trial balance. "Trial Balance" [Modern Method] Trial Balance of M/s _____ as on _____ Particulars

L/F

Cash a/c Capital a/c Furniture a/c Rent Paid a/c Bank a/c Goods/Stock a/c M/s Ramdas & Bros. a/c Machinery a/c Mr. XYZ a/c Wages Paid a/c Commission Received a/c

— — — — — — — — — — —

Total

Debit Amount Credit Amount (in Rs) (in Rs)

24,500

2,00,000

20,000 5,000 1,20,000 5,000 25,000 6,000 5,000

2,05,500

500 2,05,500

Modern method » A modification of the Traditional method Modern method is a derivative of the traditional method. Instead of writing down two amounts (sub-totals), they are set off and only the net balance is written. This balance is nothing but the balance shown by the ledger account. That is the reason we say "the trial balance is a statement of

ledger account balances". • Debit amount This column has data to be filled only in case of accounts with a debit balance. The data to be filled being the balance of the ledger account with a debit balance. • Credit amount This column has data to be filled only in case of accounts with a credit balance. The data to be filled being the balance of the ledger account with a credit balance. Unbalanced Trial Balance If you have an unbalanced trial balance, then you have an error somewhere in the accounting process. Examples of problems that can unbalance a trial balance include: • Adding the debits and credits for the trial balance incorrectly; • Forgetting to include a ledger account balance on the trial balance; • Putting the ledger account balances in the wrong debit/credit column in the trial balance; • Writing the wrong ledger account balances in the trial balance columns; • Miscalculating the ledger account totals; • Posting a journal entry incorrectly to the general ledger, whether using the wrong number or getting your debits/credits mixed up; • Making an error in your journal entry, whether using the wrong number or forgetting part of a compound journal entry. In order to proceed, you'll need to figure out why the trial balance is unbalanced and fix it. (Read more about balancing an

unbalanced trial balance.) Balanced Trial Balance If all of your journal entries were posted properly (and error-free) in the general ledger, your debit grand total and credit grand total should balance, and you can move on in the accounting cycle. If the debit and credit grand totals do not balance, then you have an error to find somewhere in your transaction posting process (journal to general ledger to trial balance). It's possible to have a posting error even if the debits and credits do balance, but that will get found and solved later in the accounting cycle. Examples of problems that would not show up in the trial balance include: • Putting the credit amount in the debit column and the debit amount in the credit column for a particular transaction; • Recording a transaction in an incorrect account; • Forgetting to record a journal entry as a general ledger transaction; • Neglecting to make a journal entry at all. Preparing a trial balance more frequently means that you have fewer transactions to go through, so if there is an error you can (usually) find it more easily. Once you have a balanced trial balance, you can proceed to adjusting entries, the next step in the accounting cycle. Remember, though, you don't have to wait until the end of the accounting period to prepare a trial balance!