Trial Balance | Importance | Features | Methods | Limitations | Bank Exam Preparation

Trial Balance

Introduction of Trial Balance

Trial balance is the bridge between book keeping and reporting. In accounting, the trial balance is a worksheet listing the balance of each ledger in two columns, namely debit and credit. The trial balance is prepared in each financial period as a summary of the closing of the previous ledgers. Total of debit side should always be equal to the total of credit side. The trial balance thus servers as a tool to detect errors which may have occurred during the double entry system of the ledger. Often credit will be representative as negative, in which case the total of the trial balance should be zero.

Method of Making Trial Balance

The format of trial balance is a two column schedule with all the debit balances listed in one column and all the credit balances listed in another. The trial balance is prepared after all the transactions for the periods have been journalized and posted on the general ledger.

Key to preparing a trial balance is making sure that all the account balances are listed under the correct column. Following methods are available for the preparation of trial balance.

• Net balance method
• Total balance method
• Mixed method

Net Balance Method

• If trial balance is prepared with the balancing figures of each and every ledger than such method is called net balance method.
• Debit side of trial balance holds for ledger balance of assets, expenses and losses but credit side is applicable to present ledger balance of income, gain, capital and liabilities.
• Both side of trial balance must be equal. If it is not happened than we have to create suspense account for equalizing of trial balance.

Total Balance Method

If organization prepare trial balance with all summation of debit figure as well as credit figure of each and every ledger than such method is defined as total balance method. Due to the practical inconvenience this method is not on practice.

Mixed Method

Combination of net balance and total balance method is called mixed method of making trial balance.

Features of Trial Balance

• It is a list of balancing of all ledger accounts and cash book.
• It is not a part of double entry system of book keeping: it is just a working paper.
• It can be prepared at any time during the accounting periods.
• It serves as an instrument for carrying out the jobs of checking and testing.
• Arithmetical accuracy of posting of entries from journal to ledger can be ensued.
• Some errors are not revealed by the trial balance, for example, error of principles.

Purpose of Trial Balance

• To check the arithmetical accuracy
• To provide the basis for preparing final accounts
• To summarize the financial transactions
• To help locate accounting errors
• In order to bridging book keeping and reporting
• To support for auditing activities
• To maintain transparence and accountability
• To maintain financial discipline
• For the strengthens of internal control system
• To present capital and revenue nature transaction at once

Errors not Disclosed by Trial Balance

Equalizing of debit and credit side of trial balance is the indication of lack of arithmetic error. Following errors can’t locate by trial balance so we can’t confirm lack of error if trial balance becomes equal.

  Errors in omission: if some transaction has not original entry as well as posting on ledger than such error is called error of omission
  Error in principles: lack of application of accounting norms as well as mismatch between capital and revenue nature transaction is principle error. This error is out of the reach of trial balance.
  Compensating errors: It is such state of affair where one error is overlapped by another error.
  Errors in commission: Under posting and over posting of particular financial transaction on debit as well as credit side is error of commission.
   Errors of duplication: Posting of transaction on respective headings two or more than two times is error of duplication.

Error Detected by Trial Balance

Trial balance can locate only one error i.e. arithmetic error. Arithmetic error may exist on the following steps;

• Due to the lack of dual and equal effects on journal voucher
• Because of error on the posting of amount from journal to ledger
• Due to the error on addition of debit and credit side of ledger
• If error exist on transferring amount into trial balance from ledger
• If summation of trial balance becomes mistakes.

Limitation of Trial Balance

• Lack of independency because trial balance is prepared from ledger
• Not a major elements of accounting cycle
• Can’t find out principle error, omission error, commission error, as well as error of duplication.
• Lack of marshaling
• Difficult to prepare and tedious
• Time consuming and expensive method
• Can’t prepare under single entry system
• Lack of qualitative system