1.0 INTRODUCTION
We know that the fundamental principle of Double Entry System
of Accounting is that for every debit, there must be a corresponding credit.
Thus, for every debit or a series of debits given to one or several accounts,
there is a corresponding credit or a series of credits of an equal amount given
to some other account or accounts and vice versa.
It follows, therefore, that the sum total of debit amounts
should equal the credit amounts of the ledger at any date. But if the various
accounts in the ledger are balanced, then the total of all debit balances must
be equal to the total of all credit balances if the books of accounts are
arithmetically accurate.
2.0 OBJECTIVES
At the end of this note, you should be able to:
• define a Trial Balance
• explain the main purpose of a Trial Balance in Book-keeping
• explain the Methods of preparing a Trial Balance.
3.0 MAIN TEXT
3.1 Trial Balance
3.2 Definition
A Trial Balance is the summary of all ledger balances existing
at the balancing date. Or A Trial Balance is a list of balances extracted from
the ledger accounts at the end of an accounting period or at stated interval
{Monthly, quarterly e.t.c} in order to test the arithmetical accuracy of the
book.
Note that at the end of the financial year or at any stated
interval the balances of all the ledger accounts are extracted and are written
up in a statement known as Trial Balance and finally totalled up to see if the
total of debit balances is equal to the total of credit balances.
A Trial Balance can also be defined as a statement of debit
and credit totals or balances extracted from the various accounts in the ledger
in order to ascertain the corrections of all the entries in the ledger book.
3.3 Main Purpose of a Trial Balance
The main purpose of a trial balance in book-keeping is to
ascertain the arithmetical accuracy of the postings in the ledger i.e. to test
the corrections of all entries in the ledger.
The fact that the double-entry principles lead to a debit and
credit entry for each transaction and that this permits the accuracy of the
entries to be checked does not mean that the account is error free. A debit
entry has a corresponding credit entry somewhere in the accounts for the
trading period. A complete list of all the debits in the accounts should
therefore, equal in total to a similar list of all the credits. Again, for the
same reason, if the debits on each account are added and a list made of their
totals, this should equal in amount a similar list of credit totals.
Sometimes, the totals do not agree; the debit column may be
greater than
the credit, or perhaps, the other way round. In either case
there must be an error or errors in the ledger. The only way to detect this is
through the preparation of a Trial Balance. Also, the only way to ascertain the
correctness of the entries in the ledger is through the preparation of a Trial
Balance.
The Trial Balance, as its name implies, is however, a trial of
the balances of the accounts to check the accuracy of the entries.
3.4 Methods of Preparing Trial Balance
A trial balance can be prepared by the following two methods:
1. Total Method
In this method, the debit and credit totals of each account
are shown in the two amount column {one for the debit total and the other for
the credit total} against it.
2. Balance Method
In this method, the difference of each amount is extracted. If
debit side of an account is bigger in amount than the credit side, the
difference is put in the debit column of the Trial Balance and if the credit
side is greater, then the balance of the amount being a credit balance is
entered in the credit column of the Trial Balance. When all the balances are
entered, the columns are added and the totals should agree.
Trial Balance can be prepared on a loose sheet having four
columns. A specimen is given as follows:
TRIAL BALANCE OF………………AS AT………………….
You should note that, sometimes the totals do not agree; the
debit total may be greater than the credit, or perhaps, the other way round. In
either case there must be an error or errors in the ledger, or in extracting
balances from the ledger.
You should note that,
sometimes the totals do not agree; the debit total may be greater than the
credit, or perhaps, the other way round. In either case there must be an error
or errors in the ledger, or in extracting balances from the ledger.The errors,
of course, must be found, and you would be well advised to locate the cause or
causes of the disagreement in the two columns of the trial balance.
Of the two methods of preparation of trial balance, the second
method i.e. balance method is usually used in practice because it facilitates
the preparation of the final accounts.
4.0 CONCLUSION
If the double entries principle have been completed and
correctly applied, it is obvious that the total of all debit entries will be
equal to the total of all credit entry. By extension, the total of the debit
balances should be equal to the total of the credit balances. The list drawn up
showing the balances extracted from all accounts is known as a trial balance.
The trial balance serves two purposes:
1. It serves as a check on the arithmetical accuracy of the
entries and
2. It is the basis upon which the Trading and profit and loss
Account and the balance sheet are drawn up.
5.0 SUMMARY
You have now learnt the importance of Trial Balance in
Accounting. How to ascertain the correctness of all entries in the ledger
accounts should not be a problem to you. You should now be able to construct a
trial balance or extract balances from the ledger.
If there is an account whose debit side gives the same total
as the credit side, such an account should be left out of the summary or trial
balance.
Examinations questions are sometimes set asking for the
preparation of a trial balances from a given list of balances.
The balance method
will apply here and the balances must first be clarified into debits and
credits and the totals of
1 Assets, losses, and Expenses Accounts end in debit balances.
2 Liabilities, gains and profits accounts end up in credit
balances. Thus equipment, rents, stationary and salary will be entered in the
debit column of the trial balance while share capital {being liabilities},
interest on loan and fine will be entered on the credit side.
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