Trial Balance: Meaning, Importance and Advantages

Concept of the Trial Balance

A trial balance is a statement that lists all debit ledger balances on one side, and all credit ledger balances on the other side to check their arithmetical accuracy at the end of a particular date.

It is a statement prepared with taking up the balances of ledger accounts, listing all debit balances on one side and all credit balances on the other side to check the arithmetical accuracy of their recording. Both sides of the trial balance should be equal; otherwise, it indicates that the book of accounts contains arithmetical errors.

Generally, the Trial balance is prepared at the end of the financial year of the business entity. However, an accountant can prepare it on half-yearly, quarterly, and monthly as per the organization's need.

Objectives and Importance of Trial Balance

Trial balance is prepared to check the arithmetical accuracy of the recording of financial transactions. As it checks arithmetical accuracy, it also helps locate any error, if any. Similarly, it also provides a basis for preparing final accounts. The objectives of preparing trial balance thus can be described follows:

• Checking arithmetical accuracy: It is prepared by an accountant listing debit account balance and credit account balance on each of its sides. Just as weight balance, if the total amount of debit sides is equal to the total amount of credit side, then it is assumed that the recordings of financial transactions are arithmetically accurate. If they are not equal, then it is assumed that there is something error in recordings of the transactions.
•  Locating Errors: A trial balance shows both debit and credit balances of ledger accounts on each side of the statement. If these sides are not equal, it indicates an error in recording the transactions in the books or ledgers. Thus, one of the purposes of preparing a trial balance is to locate errors:
• Helps in Preparing Final Accounts: One other purpose of the trial balance is to help in preparing final accounts. Before preparing final accounts, accountants prepare the trial balance to ensure that all the ledger balance balances are used to prepare the final account arithmetically correct. These balances are then used to prepare final accounts.

Preparation of Trial Balance 

There are two methods of preparing Trial Balance.

• Total method: Under this method, the total balances of the ledger accounts are taken up to prepare the trial balance.
• Balance Method: Under this method, the different balances of ledger accounts are taken up for preparing the trial balance. The difference balance is the balance between the total debit and total credit of an account. For example, the total debit and the total credit of the Cash Account are Rs 10,000 and Rs. 8,000. The difference balance is then Rs. 2,000, which is a debit balance because the total balance of the debit side of the cash account exceeds over the total of its credit side. This debit balance of the cash account is then shown on the debit side of the trial balance.

Specimen / Format of the Trial Balance

A trial balance is prepared on different methods, so the specimens of trial balance are different. However, the general format of the trial balance is as follows: