Trial Balance – Purpose & Preparation
Trial Balance is the accounting checkpoint - if it doesn't balance, something's wrong!
What is Trial Balance?
Definition: A statement showing all ledger account balances on a particular date to verify that total debits equal total credits.
Purpose: Mathematical verification of ledger posting
Format: Two-column list
- Left column: All debit balances
- Right column: All credit balances
Why "Trial"?
It's a TRIAL (test/check) to see if books are balanced. If it balances → Accounts may be correct. If it doesn't → Definitely errors exist!
Format of Trial Balance
Trial Balance of Ram's Business as on 30th April 2024
| Account Name | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash A/c | 45,000 | |
| Capital A/c | 1,00,000 | |
| Purchases A/c | 30,000 | |
| Sales A/c | 50,000 | |
| Rent A/c | 5,000 | |
| Furniture A/c | 25,000 | |
| Salary A/c | 15,000 | |
| Mohan (Creditor) | 10,000 | |
| Ramesh (Debtor) | 40,000 | |
| Total | 1,60,000 | 1,60,000 |
✅ Balanced! Both sides equal.
3 Methods of Preparing Trial Balance
Method 1: Total Method (Totals of Ledger Accounts)
Take the TOTAL of debit & credit sides of each ledger account.
Example: Cash Account
- Dr. total = ₹80,000
- Cr. total = ₹35,000
In Trial Balance:
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | 80,000 | 35,000 |
(Not commonly used - too cluttered!)
Method 2: Balance Method (Most Common)
Take only the BALANCE of each ledger account.
Example: Cash Account
- Dr. total = ₹80,000
- Cr. total = ₹35,000
- Balance = ₹45,000 Dr.
In Trial Balance:
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | 45,000 |
This is what we saw in the first example above!
Method 3: Total-cum-Balance Method
Shows both totals AND balances - 4 columns.
| Account | Dr. Total | Cr. Total | Dr. Balance | Cr. Balance |
|---|---|---|---|---|
| Cash A/c | 80,000 | 35,000 | 45,000 |
(Used for detailed verification, not in exams usually)
Step-by-Step: Preparing Trial Balance
Let's prepare trial balance from Ram's ledger accounts:
Step 1: List all ledger accounts
Cash, Capital, Purchases, Sales, Rent, Furniture, etc.
Step 2: Find balance of each account
- Cash A/c → ₹45,000 Dr.
- Capital A/c → ₹1,00,000 Cr.
- Purchases A/c → ₹30,000 Dr.
- And so on...
Step 3: Write in Trial Balance format
Debit balances in debit column, credit balances in credit column.
Step 4: Total both columns
Should be EQUAL!
Complete Example
Ram's Transactions for April 2024:
- Started with cash ₹1,00,000
- Purchased goods ₹30,000 cash
- Sold goods ₹50,000 cash
- Paid rent ₹5,000
- Bought furniture ₹25,000 cash
- Paid salary ₹15,000
- Purchased goods from Mohan ₹10,000 on credit
- Sold goods to Ramesh ₹40,000 on credit
Ledger Balances:
- Cash: (1,00,000 + 50,000) - (30,000 + 5,000 + 25,000 + 15,000) = ₹75,000 Dr.
- Capital: ₹1,00,000 Cr.
- Purchases: 30,000 + 10,000 = ₹40,000 Dr.
- Sales: 50,000 + 40,000 = ₹90,000 Cr.
- Rent: ₹5,000 Dr.
- Furniture: ₹25,000 Dr.
- Salary: ₹15,000 Dr.
- Mohan (Creditor): ₹10,000 Cr.
- Ramesh (Debtor): ₹40,000 Dr.
Trial Balance as on 30th April 2024:
| Account Name | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash A/c | 75,000 | |
| Ramesh A/c | 40,000 | |
| Purchases A/c | 40,000 | |
| Rent A/c | 5,000 | |
| Furniture A/c | 25,000 | |
| Salary A/c | 15,000 | |
| Capital A/c | 1,00,000 | |
| Sales A/c | 90,000 | |
| Mohan A/c | 10,000 | |
| Total | 2,00,000 | 2,00,000 |
✅ Perfect Balance!
Objectives of Trial Balance
| Objective | Explanation |
|---|---|
| Arithmetical Accuracy | Check if total debits = total credits |
| Basis for Final Accounts | Used to prepare P&L and Balance Sheet |
| Locate Errors | If doesn't balance, errors exist |
| Summary of Accounts | One-page view of all accounts |
Limitations of Trial Balance
⚠️ IMPORTANT: Trial Balance balancing does NOT guarantee 100% accuracy!
Errors NOT Detected by Trial Balance:
| Error Type | Example | Why Not Detected? |
|---|---|---|
| Error of Omission | Forgot to record ₹5,000 sale | Both sides reduced equally |
| Error of Commission | Posted to wrong account (same type) | Debit-credit still balanced |
| Compensating Errors | ₹100 excess debit + ₹100 excess credit | Errors cancel out |
| Error of Principle | Furniture treated as expense | Both debited, balance maintained |
| Error of Complete Reversal | Debited credit side, credited debit side | Amounts equal, wrong sides |
Example of Hidden Error:
Sold goods ₹10,000 to Ram but posted to Ramesh's account.
Entry Made:
- Dr. Ramesh ₹10,000
- Cr. Sales ₹10,000
Correct Entry:
- Dr. Ram ₹10,000
- Cr. Sales ₹10,000
Trial Balance will still balance! But Ramesh shows wrong balance.
When Trial Balance Doesn't Tally
What to Do?:
- Re-check trial balance - Addition mistakes?
- Verify ledger balances - Calculated correctly?
- Check posting - All journal entries posted?
- Review journal - Debit-credit equal for each entry?
- Use difference amount - Divide by 2, divide by 9 techniques
- Suspense Account - Temporarily balance (advanced topic)
Tips for Exam
- ✅ Capital always goes to credit side
- ✅ All assets (Cash, Furniture, Debtors) → Debit
- ✅ All liabilities & capital → Credit
- ✅ All expenses → Debit
- ✅ All incomes → Credit
- ✅ Drawings → Debit (reduces capital)
Quiz
Test Your Knowledge
Question 1 of 6
1. Trial Balance is prepared to check:
💡 Final Wisdom: "Trial Balance is your safety net - it catches most (but not all) errors. Always prepare it before final accounts. If it doesn't balance, don't ignore it - find and fix the error!"