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What is Trial Balance? Meaning, Objectives, Format, Example
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The main objective of a trial balance is to ensure that a company's bookkeeping system is mathematically correct. A trial balance is a test of a company's books, but it's not a full audit.
A trial balance is a bookkeeping tool that lists the debit and credit balances of journal entries. Debit (DR) is recorded in the debit column, and credit (CR) is recorded in the credit column.
When the total debits and credits in a trial balance do not match, it is called an "unbalanced trial balance." This indicates an error in the accounting records.
Net profit is the total revenue minus total expenses or gross income minus total expenses. It can also be expressed as net income, which is the total revenue a company earns during a period minus all expenses.
A trial balance should always sum to zero, which means the total debits must equal the total credits. Accountants prepare a trial balance after posting all transactions from an accounting period.
These are the following errors in the trial balance:
Error of omissions
Error of commissions
Error of principals
Error of compensation
Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Every business aims to be profitable. A trial balance is a basic accounting tool that verifies the correctness of financial information. It combines all ledger accounts and reports their balances as debits or credits, adhering to the fundamental concept that the total of debits must equal the total of credits. This article will help you understand trial balance, its objectives, and more.
What is a Trial Balance?
A trial balance is a bookkeeping tool that lists all the balances in a business's general ledger accounts at a given time. It's a part of a financial statement prepared at the end of an accounting year to ensure the accuracy of bookkeeping system entries.
A trial balance has two columns: debit and credit. The total of each column should be equal to keep the books balanced. A trial balance shows each general ledger account's account number, account name description, debit amount in the debit column, and credit amount in the credit column.
How Does a Trial Balance Work?
After understanding the meaning of trial balance in accounting, you may wonder how it works. A trial balance is a financial report that depicts the debits and credits in a company's accounts at a given moment. It confirms that the total of the debits equals the total of the credits and identifies any entries recorded in the wrong account. A trial balance also serves as the basis for the balance sheet, profit and loss account, and other financial statements.
The purpose is to ensure that the sum of all debits matches the amount of all credits and to detect any entries entered in the incorrect account.
How to Prepare a Trial Balance?
Understanding the trial balance meaning is not enough, as one must also understand how to prepare one. To prepare a trial balance, you can follow these steps:
A trial balance is created after all financial transactions are posted to the journals and summarised on the ledger statements. It helps to locate errors in the journal or ledger and detect mathematical mistakes in the double-entry accounting system. A trial balance is considered balanced if the total debits equal the total credits.
Why is the Trial Balance Prepared?
A trial balance is a financial statement that records the final balances of ledger accounts at the end of a financial year. It is prepared to ensure all bookkeeping system entries are accurate and to help identify accounting errors. If the totals do not match, it indicates a problem that must be recognised and rectified.
Some purposes of preparing a trial balance include:
Some errors that can occur in a trial balance include duplicate entries, reversed entries, one-sided entries, errors in previous trial balancing, and balancing accuracy errors.
What are the Objectives of Trial Balance?
The main objective of a trial balance is to ensure the accuracy of accounting records by verifying that the total debits equal the total credits.
What are the Features of Trial Balance?
As the trial balance definition suggests, it is a statement that lists the final balances of a company's ledger accounts, and it has the following features:
What are the Limitations of a Trial Balance?
A trial balance has several limitations, including:
What are the Format and Examples of a Trial Balance?
Here is the trial balance format:
Here's a list of accounts having debit and credit balances:
Example of a trial balance
XYZ PRIVATE LIMITED
Trial Balance as of 31st March, 2024
Read Also: What is a Letter of Credit – Definition, Types and Process
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