Trial Balances are financial statements which provide the balance of all accounts in a proper accounting chart at a particular point of time. Advantages of trial balance are it ensures that all debit in the accounting tables are equal to all the credits. It helps in verifying the accuracy of balances of individual accounts and getting ensured that all the double entry accounting systems are balanced.
Trial Balance is generally prepared at the end of accounting periods, such as the month or year. It is used as an initiation point to prepare the financial statements. The accountant first gathers the account balances from the general ledger and gets it listed in the trial balance and accounting statements for preparing the trial balance. All these accounts are typically coupled in assets , liabilities, equity, revenue and the expenses.
The sum of all debit balance is compared to total of credit balance. If the total are equal it shows that the double entry accounting system is in balance and that all account balance are proper and accurate. As, if the sum is unequal, it can indicate an error in the records of accounting records or problem with underlying transactions. So, in here the accountant shall identify and correct the problem before the preparation of the financial statements.
In addition for verifying accuracy of account balances, this trial balance is useful to identify any account which could need further review or analysis. Such as an expense account has a significant increase in balances than the previous records, it could be worth in determining the reason for the increase.
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Concept of Trial Balance
Trial balance is based on the double entry accounting system, it records the financial transaction in which all transaction influence two accounts. In this all transaction are recorded in debit and a credit account. Total of these debit balance in all accounts are to be equal to the total of credit balances.
A trial balance is a financial statement which provides the balance of all account in a businesses’s accounts at a particular point of time. By ensuring that all the debits in the accounting statement are equal of total of all the credits. It helps in verifying the accuracy of balances of individual account and making sure that the double entry accounting system is balanced.
If the trial balance shows the debits and credit are not balanced, it indicates that there is an error in accounting records or problem with underlying transactions. As per this the accountant shall identify and correct the problem before preparing financial statements. It is generally prepared at end of accounting period for e.g. a month or year. Its used as a initiation point for the preparation of financial statements which provide the financial statements. Its an essential step in financial statement process which helps in ensuring that the financial statement are accurately reflecting the financial position and the performance of business.
Preparation
For preparing Trial Balance, the accountant will gather all the balances of accounts from general ledger and mention them in a worksheet. These accounts are generally grouped in assets, liabilities, equity, revenue and expenses.
All these totals of the debit balance are summed and compared to the total of credit balance. If the total are equal, it shows that the double entry accounting system gets balanced and that the balance are accurate. If the sum is unequal, it can show a mistake in the records or a problem with underlying transaction. So, the individual shall identify and correct the problems before preparation of financial statements.
While in calculating the total of debit and credit balance, the accountant has to perform another task of preparing a Trial balance. Such as they could be required to:-
- Review the Balances accounts for ensuring its accurate and complete.
- Perform any adjusting entry for reflecting any change or discrepancy in accounts.
- Making any supporting accounts or worksheet which could be required for any specific account.
- Checking any unrecorded transaction or any error which could have been made in the accounting records.
Once this trial balance is prepared, the accountant can also use it for identifying the accounts which could need further review or analysis. It can also be used for initiating preparation of financial statements such as balance sheet and the income statement.
Advantages of Trial Balance
Some advantages of preparing a trial balance are:-
- Verification of accuracy: It helps in ensuring the accuracy of account balance and the overall double entry accounting system. It also allows the accountant to find any sort of discrepancy or mistake in the accounting record and correcting them before preparing all the financial statements.
- Identification of problems: Its useful in identifying any account which needs further review for analysis.
- Preparing Financial Statement: Its generally prepared at the end of accounting period and it is used for initiating financial statements. It gives the accountant with all the balances in an account in a list which can be used in a financial statement.
- Internal control: Having a trial balance can ensure the integrity of accounting records and the business’s internal control. It also allows the accountant to detect any unauthorised transaction or mistake which can happen.
- Making the accounting records and the business’s internal control. It provides the accountant in detecting any unauthorised transaction or error that could have occurred.
- Efficient financial reporting: It streamlines the financial statement preparation process by providing a complete and systematic list of all the account balances. It makes it easier in preparing the financial statement and managing to review and analyse the business’s financial performance.
Purpose of a Trial Balance
Advantages of Trial Balance is it provides significant comfort in regard with accuracy. So, the after balance adjustments could be affected. It helps in providing a list of all ledgers with the balances. For auditing if the nature of the account is debit it holds a credit balance, then complete ledger should be scrutinised. So, the trial balance acts as a vital tool for auditing.
It is used by banks and the lending agencies for knowing and understanding the borrowing capacity of business and its credibility. Inspite of number of benefits of Trial Balance, its imperative for understanding that trial balance do not guarantee zero errors. As, if there are offsetting mistakes, the trial balance will still match despite an error.
As, some transactions are not in records there could be no impact on ledgers and so cross checked trial balance poses a wrong picture. After seeing all the pros and cons its clear that preparing trial balance has many benefits and the preparation is mandatory for closing Accounting Books. As of today the trial balance gives an excellent base for preparing the financial statement and analysing the business.
