HOW TO PREPARE TRIAL BALANCE?

What is a Trial balance?

After ledger posting, the next step of the accounting process is to prepare Trial Balance. Well to put it in simple, “A Trial balance is a statement containing balances of all ledger accounts as at any given date, arranged in a form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of ledger postings”.

The fundamental principle of the double-entry system of book-keeping is that “every debit has a corresponding credit and vice-versa of equal amount”.
DEBIT BALANCE = CREDIT BALANCE

Features of trial balance

The following are the features of trial balance:
1. It is not an account; it is only a statement which is prepared to verify the arithmetical accuracy of ledger accounts.
2. It contains debit and credit balances of ledger account.
3. It is prepared on a particular date generally at the end of the business year.
4. Trial balance helps in preparing final accounts.
5. As it is prepared by taking up the ledger account balances, both debit and credit side of a trial balance is always equal.

Advantages of trial balance

1. It helps in finding out the arithmetic accuracy of the accounts in the ledger.
2. Trading, profit and loss account and balance sheet are prepared based on trial balance.
3. It will help in detecting the errors in the books of accounts and in their rectification.
4. Trial balance enables us to know the balances of all accounts in one place.

Disadvantages of trial balance

1. Trial balance tallies even though errors exist in the books of accounts.
2. It is only possible to prepare a trial balance of an organization, if the double-entry system is followed, which is costly and time-consuming.
3. Even if some transactions are omitted the trial balance tallies.
4. If the trial balance is not prepared in a systematic method the final account prepared based on trial balance do not depict the actual financial position of the concern.

Method for preparing trial balance

A trial balance can be prepared in the following two methods:
1. Total balance method: Under this method, debit total and credit total of each account of ledger are recorded in trial balance. In this method, all accounts of ledger without balancing them will be totalled and recorded in trial balance in their respective rows. (I.e. Dr and Cr). This method is not in practice.
2. Net Balance method: Under this method, the difference of each account is extracted. If the 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 bigger, the difference is written on the credit column of Trial Balance. So, While preparing the trial balance all accounts with debit balances are shown on the debit side of the trial balance, whereas all the accounts with credit balances are shown on the credit side of the trial balance.

Points to be noted for the preparation of Trial Balance

1. Accounts dealing with assets, expenses and losses will show debit balance.
2. Accounts dealing with liabilities, incomes and gain will show credit balance.
3. Sundry Debtors is the total amount due to various debtors and sundry creditors is the total amount due to various creditors.
4. Opening stock will show debit balance, but closing stock will not appear in Trial Balance.
5. Reserves and Provisions such as General Reserve, Provision for doubtful debts, and Reserve for discount on debtors will show a credit balance. However, Reserve for Discount on Creditors will show debit balance.

For your better understanding, a table of the accounts appearing in trial balance on debit and credit side is given below:

EXAMPLE PROBLEM:

Following balances are taken from the books of Raj & Co. as at 31-12-2016. Prepare the Trial Balance.
Capital Rs. 25,000, Drawings Rs. 6,500, Cash in hand Rs. 200, Bank balance Rs.
7,000, Opening stock Rs. 10,000, Purchases Rs. 8,000, Sales Rs. 12,000,
Sales Return Rs. 500, Purchases Return Rs. 800, Bill Receivable Rs. 4,000,
Bills payable Rs. 3,000, Sundry Debtors Rs. 5,000, Sundry creditors Rs. 3,500,
Discount paid Rs. 600, Carriage inwards Rs. 400, Advertisement Rs. 500,
Salary Rs. 1,200 Rent paid Rs. 400.

Before we dig in for solution 🤗let me first explain you little one by one ok! You must have remembered (Dr) Means Debit and (Cr) means Credit so, here I’m using Dr and Cr for debit balance and credit balance, from the above table of accounts for trial balance. Let’s start!😄

Capital is a liability to the firm– Cr
Drawings is an expenses and losses– Dr
Cash in hand is an asset– Dr 
Bank balance is an asset– Dr
Opening stock is an expense – Dr
Purchases is an expense – Dr
Sales is an income– Cr
Sales return is loss– Dr
Purchase return is gain– Cr
Bill receivable is an asset– Dr
Bills payable is a liability– Cr
Sundry debtors is an asset – Dr
Sundry creditors is a liability– Cr
Discount paid is expenses and loss– Dr
Carriage inwards is an expense – Dr
Advertisement is an expense– Dr
Salary is an expense– Dr
Rent paid is an expense– Dr

SOLUTION:

Now let me give you one ☝️(DIY) for your practice ✍let’s see how you will do! Well, I have shared my knowledge with you let’s see did you gained that knowledge?🤔

DO IT YOURSELF (DIY):
1. Prepare trial balance from the following balances.
Kumar’s Capital Rs. 35,000,
Kumar’s Drawings Rs. 3,000,
Opening Stock Rs. 40,000,
Machines Rs. 4,000,
Furniture Rs. 2,000,
Sundry debtors Rs. 15,000,
Sundry creditors Rs. 18,000,
Cash                       Rs. 1, 2000,
Bank balance Rs. 4,000,
Purchases Rs. 12,000,
Sales                       Rs. 20,500,
Sales Return Rs. 1,000,
Insurance Rs. 400,
Rent                       Rs. 450,
Closing stock Rs. 15,000
Advertisement Rs. 250,
Bills Receivable Rs. 4,000,
Bills payable Rs. 14,600,
Stationery Rs. 800.

(Ans: Rs. 98,900 Dr and Cr balance)

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