Trial Balance

KULDEEP MATHUR

B.B.A. JIWAJI UINVERSITY GWALIOR

Trial BalanceMeaning of Trial Balance

Trial balance is a statement,

prepared with the debit and credit balances of ledger

accounts to test the arithmetical accuracy of the books.

It may also be prepared with debit and credit totals of

ledger accounts and

also with the balances and totals of ledger accounts.

If the total of debit and credit amount column is

equal, we assume our books of accounts to be

arithmetically correct,

but do not take it as the conclusive proof of

arithmetical accuracy

Special features of trial balance

Trial balance has the following special features:

1. The trial balance is prepared on a specific date. This

is why; we use the word 'as on ..... .' with its heading.

2. Trial balance contains the list of all ledger accounts

including cash account.

3. Trial balance may be prepared with the balances or

totals or balances and totals of ledger accounts.

Special features of trial balance

4. The total of the debit and credit column of the amount must be equal.

5. In case the debit and credit side of the trial balance are equal, we assume that the

principles of 'Double Entry System' and the assumptions of accounting equation

have been observed.

6. The difference between the debit and credit side of the trial balance points out that

certain mistakes have been committed somewhere.

7. If both the debit and credit sides have the same total, it does not mean that there is

no mistake in accounting.

OBJECTS AND FUNCTIONS OF TRIAL BALANCE

The trial balance is prepared with the following

objects:

1. Test of arithmetical accuracy. Trial balance is the

test of accuracy of arithmetical calculation. If correct

posting has been made from subsidiary books and

ledger accounts and correct figures have been

recorded and copied, the debit and credit total of the

trial balance must tally.

OBJECTS AND FUNCTIONS OF TRIAL BALANCE

2. Summarized information of ledger accounts.

Trial balance contains a list of all ledger accounts. It

presents the names of ledger accounts and the amount

of their debit and credit balance. The summarized

position of ledger accounts can be obtained at a glance

from the trial balance. It would have been very

difficult to assess the position of different ledger

accounts from subsidiary books and ledger accounts.

OBJECTS AND FUNCTIONS OF TRIAL BALANCE

3. Basis for preparing final accounts. The ultimate

end of maintaining books of accounts is to ascertain

the result of the business in term of profit and the

value of different assets and liabilities. For this

purpose, we prepare a profit and loss account and

balance sheet on the basis of information supplied by

the trial balance. It is, in this way, a source statement

for preparing final accounts.

OBJECTS AND FUNCTIONS OF TRIAL BALANCE

4. Useful for making adjustments. While making

final accounts certain adjustments regarding closing

stock, outstanding and prepaid expenses, accrued and

unearned income are to be made. While identifying

items for adjustments we will have to study the

information furnished by the trial balance.

METHODS OF PREPARING TRIAL BALANCE There are three methods of preparing trial

balance. The total of both the debit and credit

column of the trial balance must be equal in all

the methods. The following methods can be

used for preparing trial balance:

Balance method

Total method

Total and balance method.

Capital

Drawings

Opening Stock

Closing Stock

Carriage Inward ,Freight Inward

Purchases

Sales

Royalty on Production

Gas and Fuel

Discount Received

Provision for Bad Debts

Commission Received

Repairs

Rent

Salaries

Loan Secured

Interest Received

Interest Paid

Insurance

Carriage Outward carriage on

sales

Advertisement

Sundry Expenses

Trade Charges

Miscellaneous Receipts

Income-tax

Office Expenses

Import Duty

Allowances

Sales-tax

Provision for Discount on

Debtors

Provision for Discount on

Creditors

Sundry Creditors

Sundry Debtors

Goodwill

Plant and Machinery

Discount Allowed

Bad debts

Purchases Return/Return

outwards

Purchases Return/Return

outwards

Sales Return/return inwards

Outstanding Expenses

Prepaid Expenses

Earned Income/Accrued income

Unearned income/ Unaccrued

income

Loan from X

Loan to X

Interest on loan from X

Interest on loan to X

Interest on Capital

Interest on Drawings

Bank overdraft

Cash in hand

Cash at bank

Bills receivable

Bills payable

Bad debts recovered

Tax refund

All expenses

All Incomes

All Assets

All Liabilities

The following is the Trial Balance prepared by an Inexperienced accountant. Redraft it in a correct form

Dr. Cr.

Sundry Debtors 24,400

Sundry Creditors 18,400

Opening Stock 31,200

Purchases 1,07,000

Purchases Return 4,200

Cash in hand 22,000

Machinery 80,400

Goodwill 20,000

Sales 1,72,400

Discount Received 3,000

Investment 16,000

Interest on Investment 1,600

Interest on Ram’s Loan 6,000

Sales Returns 15,600

Loan from Ram 40,000

Bills Receivable 12,800

Capital 1,14,000

Life Insurance Premium 10,000

Carriage 1,200

Advertisement 5,000

Outstanding Expenses

Trial balance Adjustment

1) Shown in balance Sheet liabilities 1) Shown in balance sheet side. liabilities side.

2) Added with relevant head Trading and loss a/c debit side or profit

Meaning:- Expenses which have been incurred during the year and

whose benefit has been derived during the year, but not paid yet are

called outstanding expenses.

Prior to the preparation of the financial statements, it must be ensured

that all expenses which have fallen due to be paid but which have not

been paid during the accounting period are also brought into the books

to help in the proper matching of revenues and expenses

Journal Entry:- Relevant Expenses a/c ------------Dr.To Outstanding Expanses

Prepaid or unexpired Expenses

Trial balance Adjustment

1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side.

2) Deduct from relevant head Trading or profit and loss a/c debit side

Meaning:- In some cases, the benefit of the amount already spent will be

available in the next accounting year also. Such a part of the expense

is called a ‘prepaid expense’.

Journal Entry:- Prepaid Expenses a/c ------------Dr.

To Relevant Expanses

Un accrued or Unearned Income

Trial balance Adjustment

1) Shown in balance 1) Shown in balance sheet Sheet liabilities side. liabilities side.

2) Deduct from relevant head in profit and loss a/c Credit side

Meaning:- The income which has been received during the current

accounting year but relates to the next accounting year is called

‘Unearned income’.

Journal Entry:- Relevant Income a/c ------------Dr.

To Unearned Income

Closing stock

Trial balance Adjustment

1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side.

2) Shown in Trading a/c credit side

Meaning:- The Value of closing inventory will be brought into the

books of accounts through the following journal entry:

Journal Entry:- Closing Stock a/c ------------Dr.

To Trading a/c

Depreciation

Trial balance Adjustment

1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account Debit side

2) Deduct from relevant assets in balance sheet assets side

Meaning:- The value of fixed assets reduce year after because of usage

and passage of time . It is well Known that fixed assets are used for

earning revenue .It is treated like any other expenses and is debited to

the profit and loss a/c.

Journal Entry:- Depreciation a/c ------------Dr.

To Relevant Assets

Interest on capital

Trial balance Adjustment

1) Shown in Profit and loss account 1) Shown in Profit and Loss account Debit side Debit side

2) Added with Capital in balance sheet liabilities side.

Meaning:- Fund invested by a proprietor to the business constitute the

capital. Like other borrowings/loans , interest can be paid on the

proprietor’s capital also. It is treated like any other expenses and is

debited to the profit and loss a/c.

Journal Entry:- Interest on capital a/c ------------Dr.

To Capital a/c

Interest on Drawings

Trial balance Adjustment

1) Shown in Profit and 1) Shown in Profit and Loss account credit side loss account credit side

2) Deduct from Capital in balance sheet liabilities side

Meaning:- The proprietor may also realise that when he draws money for

his own use, the firm loss interest. therefore , the proprietor may be

debited with the interest on the money drawn by him.

Journal Entry:- Capital/Drawings a/c ------------Dr.

To Interest on Drawings a/c

Interest on Loan from------

Trial balance Adjustment

1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account debit side

2) Added with loan in balance sheet liabilities side

Meaning:- Interest must be paid on loans whether there is profit or loss.

It is calculated by referring to the rate of interest agreed to be paid by

the firm and the amount and period of the loan.

Journal Entry:- Interest on loan from a/c ---------Dr.

To Loan from------- a/c

Particulars

Capital 1,64,000 P B/S 1,64,000

Drawings 5,600 P B/S 5,600

Machinery 10,000 R B/S 10,000

Opening Stock 30,000 R T 30,000

Purchases 1,74,400 R T 1,74,400

Sales Returns 12,000 R T 12,000

Debtors 42,000 P B/S 42,000

Furniture 18,200 R B/S 18,200

Motor Car 80,000 R B/S 80,000

Freight Inwards 4,000 N T 4,000

Wages 1,600 N T 1,600

Freight outwards 600 N P/L 600

Advertisement 30,800 N P/L 30,800

Creditors 18,000 P B/S 18,000

Sales 2,48,000 R T 2,48,000

Purchases Returns 2,000 R T 2,000

Discount Allowed 1,600 N P/L 1,600

Discount Received 2,400 N P/L 2,400

Rent Received 2,000 N P/L 2,000

Lighting 800 N P/L 800

Motor Car Expenses 12,600 N P/L 12,600

Loan from Ashok 20,000 P B/S 20,000

Interest on Loan 1,800 N P/L 1,800

Bank Balance 30,400 P B/S 30,400

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