What is Trial Balance in Accounting?
Trial Balance is the third stage of an accounting cycle. various stages of the accounting cycle are as follows:
Stage 1
Identification of transactions and preparing journal entries for the same.
Stage 2
The posting of journal entries is posted into ledger accounts.
Stage 3
Preparation of trial balance.
Stage 4
As shown above, when the journal entries are posted into ledger accounts, the various balances of ledger accounts are then represented in a statement called Trial Balance. Generally, there are two columns i.e. debit and credit. The debit column shows the balances of all assets and expenses accounts whereas the credit column shows the balances of all liabilities and income/gain accounts. Both these debit and credit columns should be equal or balanced out. Sometimes, it might happen that after the trial balance is prepared, some adjustments might have to be performed. In this case, an adjusted trial balance is prepared and the same is then used to prepare the financial statements.
What are the major objectives of providing Trial Balance?
They are as follows:
1. Trial balance forms the basis for the preparation of financial accounts such as the Balance Sheet, Income Statement or Profit and Loss Account, and Cash Flow Statement.
2. Trial Balance helps to check the arithmetical accuracy of the various ledger accounts prepared. I.e. after posting ledger account balances in the trial balance, if the debit and credit side totals agree with each other, then it proves that the ledger accounts are accurate. This way the arithmetical inaccuracies (if any) are also traced and corrected.
Example:
Mr. X started a business with a Capital of $50000 on 1 January 2011. On 2 January 2011, he bought a Plant and Machinery for $25000 depreciable at 10% per annum. The remaining $25000 remained as the cash balance in the bank as of 31 January 2011. During this period there were no sales and expenses incurred, however, depreciation was charged on Plant and Machinery at 10% for a month i.e. an amount of $208 ($25000 *10% * 1/12) was charged as depreciation.
The journal entries for the same are as follows:
Journal entries in the books of X
Date |
Journal |
Amount $ (Debit) |
Amount $ (Credit) |
|
|
|
|
1 January 2018 |
Cash A/c Dr |
50000 |
|
|
To Capital A/c |
|
50000 |
|
(Cash invested in the firm as Capital) |
|
|
|
|
|
|
1 January 2018 |
Plant and Machinery A/c |
25000 |
|
|
To Cash A/c |
|
25000 |
|
(Plant and Machinery purchased from cash) |
|
|
|
|
|
|
31 January 2018 |
Depreciation A/c |
208 |
|
|
To Accumulated Depreciation |
|
208 |
|
(Depreciation transferred to accumulated depreciation) |
|
|
|
|
|
|
31 January 2018 |
Accumulated Depreciation A/c |
208 |
|
|
To Plant and Machinery |
|
208 |
|
(Plant and machinery reduced by accumulated depreciation) |
|
|
|
|
|
|
31 January 2018 |
Profit and Loss A/c |
208 |
|
|
To Depreciation |
|
208 |
|
(Depreciation charged to Profit and Loss A/c) |
|
|
|
|
|
|
Trial Balance In the books of As at 31 January 2018
Particulars |
Amount $ (Debit) |
Amount $ (Credit) |
|
|
|
Cash |
25000 |
0 |
Plant and Machinery |
24792 |
0 |
Accumulated Depreciation |
0 |
0 |
Profit and Loss |
208 |
0 |
Capital |
0 |
50000 |
|
|
|
Total |
50000 |
50000 |