Friday, 7 November 2014

Trial Balance and its Importance in Accounts

What is Trial Balance?
Trial balance is a list of your account book balances mentioned in two columns- debits and credits; the totals of which should tally.

Normally, trial balances are prepared each month to verify whether you entered your accounts correctly or not. It is a kind of preliminary exercise before preparation of your profit & loss statement or balance sheet.

How to prepare Trial Balance?
After each month is over, the accounts book known as the General Ledger or Main Ledger is to be got balanced accurately.

Thereafter, take a paper and make columns as below:

Particulars(Head of Account)        Ledger Folio                   DEBITS               CREDITS        

Now, enter all the balances of your accounts from the General Ledger into this statement accurately- mentioning all the debit balances in the debit column and credit balances in the credit column. Take the cash balance also from the cash book and then total both the columns.

The totals of both debit and credit columns should tally with each other. This is because for each debit, there will be a corresponding credit entry in your books of accounts. If the totals do not tally, then there is some mistake either in your account books or in the balancing of the Ledger accounts, or may be in copying the balances into the trial balance statement. So, you need to check all these things.

Importance of Trial Balance   
  • Trial balance confirms the accuracy of all your debits and credits.
  • It serves as a statement to have a quick picture of your accounts.
  • You can know how much amount was spent or incurred under each expenditure head or amount received under each income head by seeing this trial balance statement for any particular period.    
  • It is the preliminary stage for preparing your financial statements. You can prepare your Profit & Loss statement or Balance sheet statements with the help of this Trial Balance.  
  • Other important documents like Budget and Cost Sheets are also prepared with the help of this trial balance.
  • It serves as a managerial information statement for having a quick look at revenue expenses and income during any period.

What to do if Trial Balance does not tally 
If the Trial Balance does not tally, you should check the following factors.
  1. Check the totals of both columns in the trial balance.
  2. Check the amount of balances entered under each head whether correctly copied from the General Ledger or not.
  3. Check whether debit balance is entered in debit column and credit balance in credit column.
  4. Check the balancing of each head in your General Ledger- whether the balancing is correctly done or not.
  5. If, inspite of all these verifications, the trial balance does not tally, then there can be mistakes in your original postings of accounts. So you may have to check each and every entry of accounts in your Main Ledger  which can take days to locate the mistake.
A Smart Tip
One simple tip which may or may not work out is to take half of the amount of difference that is there in your trial balance and check for that half amount. Whether any entry is there for such amount in your books. If there is an entry equal to that half amount, whether it has been wrongly entered in debit instead of credit or viceversa. This method, sometimes, works out and can save a lot of time and energy in locating the mistake.                                              

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