What is Trial Balance?
In overall accounting process, trial balance sits right in the middle of book keeping and reporting as shown in the following figure. It works as bridge between input and output process of accounting.
- Trial balance works as bridge between bookkeeping and reporting.
- Trial balance is the list of the ledger.
- Trial balance is base for the preparation of the financial statement.
- Trial balance is a summary of all financial transactions.
- Trial balance is a tool for checking the arithmetic accuracy.
(Remember 5 things bridge, list, base, tool, summary)
Errors that Trial Balance Can Locate
Trial balance can only find out the arithmetic errors. Which is also called one-sided error. An arithmetic error may occur in the following conditions
- Different amount of entry in debit and credit side of the journal.
- Different amount posted in the ledger while transferring from the journal.
- Different amount in the debit and credit in the ledger.
- Different amount posted in the trial balance while transferring from the ledger.
- Due ot lack of dual and equal effect on journal voucher.
- Mistake in summation of trial balance.
These are the reason for the arithmetic error. These types of errors are corrected by checking the journal and ledger. Balanced trial balance assures only an arithmetic accuracy. But although we get equal amount in both sides of the credit and debit, it does not mean that there is no mathematical error. Basically, trial balance can not detect following 5 errors.
What are the errors that trial balance cannot detect?
There are 5 major errors that can not be detected by trial balance. They are –
- Error or principle
- Compensating error
- Error of duplication
- Error of commission or posting error
- Error of omission
1) Error or Principle
It occurs when there is a mismatch between capital nature transaction and revenue nature transaction. For eg. amount of marker posted in the furniture title.
2) Compensating Error
It occurs when one error overlapped by another error. For eg. when same amount is debited in on title in debit side and the same amount is credited in another title of credit side.
3) Error of Duplication
It occurs when the amount is posted two or more than two times in the same heading.
4) Error of Commission/Posting Error
It occurs when under posting and over posting of the particular transaction on the debit side as well as the credit side of the table.
5) Error of Omission
It occurs when no original posting is done in the table.
These errors can be corrected by the following methods
- Cross verification
- Internal audit
- External audit
- Customer complain
Methods of preparing trial balance
The format of the trial balance is two column schedule with all the debit balance listed on one column and all the credit balance listed in another.The trial balance is prepared after all the transaction for a certain period of time have been journalized and posted on the general ledger. There are three methods of preparing a trial balance
- Net balance method
- Total balance method
- Mixed method
- Net balance method : If the trial balance is prepared with the balancing figures of each and every ledger then such method is called the net balance method. In other words, if trial balance is prepared by using the only closing balance of the ledger, then such method is said to be a net balance method.
- Total balance method : If the trial balance is prepared with all the summation of a debit figure as well as credit figure of each and every ledger then such a method is called total balance method. Due to practical inconvenience, this method is not in practice.
- Mixed method : Mixed method is a combination of net balance method and total balance method.
Example of Trial Balance
The trial balance of ABC firm as on 31st Asar 2078
|S.N.||Particulars||L.F||Dr Balance||Cr Balance|
|1||All ledger balance of assets||4,00,000||–|
|2||All ledger balance of expenses||5,00,000||–|
|3||All ledger balance of losses||1,00,000||–|
|4||All ledger balance of capital||–||3,00,000|
|5||All ledger balance of liabilities||–||2,00,000|
|6||All ledger balance of gain||–||1,00,000|
|7||All ledger balance of income||–||4,00,000|
We use the fictitious amount to balance the trial balance
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