How to prepare a trial balance & it’s Format

Trial balance is a list of ledger accounts balances, showing debit balances and credit balances, separately on a certain date. Trial balance is only a statement not an account. As we learned, every transaction has equal debit and credit aspects so that the trial balance possesses equal debit and credit balances. Preparing trial balances monthly will help you to fix errors as soon as it happens.

In Today’s computerized accounting environment the possibilities of trial balance error are very few.  The clerical and math errors became zero. The computer software list all the ledgers with balances without any human effort. Hence the significance of trial balance in computer software are very law comparing with old manual accounting.  However trail balance preparation is important for students and accounting learners for better understanding the concept.

Trial balance preparation

You need to arrange all ledger balance accordance with its balances. All debit balance ledger should be on debit column and credit balance should be on credit column and finally total both the sides. The total of both sides must equal. If it doesn’t match; something went wrong in ledger posting or ledger balancing.

A trial balance tests the arithmetical accuracy of ledger posting before using it to the balance sheet, by ensuring both sides are equal. If both sides are equal we say trial balance is tallied or agreed. However tallying trial balance cannot ensure the 100% accuracy. There may be errors like compensating error which can be find out only after scrutinizing ledger posting .We will discuss trial balance and errors on next chapter.

Trial balance preparation step by step

Before a detailed illustration, here is a summary or step by step trial balance preparation guide for those who are expert in journalising & ledger posting.

  1. Total the debit and credit side of each and every ledger opened in your ledger book including sales and purchase ledgers if maintained separately, and balance the accounts .
  2. Draw the trial balance columns  with Heading,  Account, Folio Number, Debit column & Credit column as shown at the end of this article.
  3. List every accounts with balances in the appropriate columns of trial balance like  ledger name, ledger folio number, debit balance of ledger should be on debit column and credit balance of ledger on the credit  column.
  4. Total the debit column and credit column and record the amount at the end.
  5. If the debit column and credit column are not equal,indicate that there is an error in the general ledger accounting.That error has to be checked and rectified with the process of vouching.
  6. If the total of debit and credit columns are found equal, the accounting process  like journalising, ledger posting and mathematical accuracy are said to be correct except some cases like compensating errors.

Examples of Trial Balance

Let’s begin from the scratch, consider the following example of M/s Ideal Stores a whole sale merchant. On 1st April 2016 had the following assets and liabilities:

Liabilities Asset
Sundry Creditors Cash In Hand 12000
Thomas Trading 42000 Standard Chartered Bank 500000
Micheal food products 208000 Stock of Goods 246000
Key Foods International 300000 Furniture & Fittings 150000
 Capital  994600 Sundry Debtors
Sweet World 154600
Krishna Store 82000
Amandum Traders 400000
 Total 1544600  Total 1544600

Transactions of Ideal Traders on April 2016

Date Transactions details Amount
2/4/2016 Sold to Keys Foods International on credit 52400
3/4/2016 Received from Krishna Store on account 50000
3/4/2016 Allowed A Discount to Krishna store 2000
6/4/2016 Withdraw cash from bank for office purpose 50000
7/4/2016 Paid wages 42500
10/4/2016 stationery purchase for cash 1600
12/4/2016 Brought Goods from  city traders 342800
13-04-2016 Goods returned to city traders due to damage 24500
15-04-2016 Cash received from Keys foods  deposited into bank 30000
16-04-2016 Sold goods to sweet world 72400
18-04-2016 Sweet world  returned goods for 12800
20-4-2016 Sent cheque to city traders   on account 200000
21-04-2016 Sent cheque to Micheal food products in full settlement of their account 200000
24-04-2016 Paid rent 10000
24-04-2016 Bought office safe by cheque 50000
26-4-2016 Advertising charges paid to Business standard 5000
28-4-2016 Bought computer 24500

Now we have the opening balance or last year balance sheet and current month ( April 2016 ) transactions to start with. Let’s bring the opening balances and ongoing transactions into journal book.

Learn: How to journalise transactions

Here is the journal entry for above opening balance and transactions.

M/S Ideal stores
Journal Book
Date Particulars……………………….……..Dr LF Debit Credit
1/4/2016 Cash in Hand…………………………..Dr 12000
Standard Chartered Bank……….Dr 500000
Stock of Goods……………………….Dr 246000
Furniture & Fittings ………………Dr 150000
Sweet World…………………..……..Dr 154600
Krishna Store………………….……..Dr 82000
Amandum Traders…………….…..Dr 400000
Thomas Trading 42000
Micheal food products 208000
Key Foods International 300000
Capital 994600
1544600 1544600
( Asset, Liabilities & capital as on this date)
2/4/2016  Keys Foods International—— Dr 52400
To;  Sales A/c 52400
( Being goods sold to Key international on credit)
3/4/2016 Cash —————Dr 50000
To; Krishna Store 50000
( cash recived from Krishna store)
3/4/2016 Discount —————Dr 2000
To; Krishna Store 2000
( cash recived from Krishna store)
6/4/2016 Cash —————Dr 50000
To; Standard chartered Bank 50000
(Cash withdrawn for office purpose)
7/4/2016 Wages ………………….Dr 42500
To; Cash 42500
( wages paid for the week)
10/4/2016 Printing & Stationery 1600
To; Cash 1600
( being stationery purchase)
12/4/2016 Purchase A/c ………….Dr 342800
To; City Traders 342800
(Being goods purchased from city traders)
13/4/2016 City Traders…………….Dr 24500
To; Purchase Retrun 24500
( Goods returned due to damage)
15/04/2016 Standard chartered Bank….. Dr 50000
To; Key foods International 50000
(Cash received from keyfoods deposited in to bank)
16/04/2016 Sweet World……………Dr 72400
To; Sales 72400
( Sales to sweet world)
18/04/2016 Sales return ……………Dr 12800
To; sweet world 12800
( being goods return by sweet world)
20/04/2016 City Traders…………….Dr 200000
To; Standard chartered Bank 200000
(being payment made to city traders through cheque)
21/04/2016 Micheal food products………Dr 208000
To; Standard chartered Bank 200000
” Discount Received 8000
( being cheque issued for full settlement  rs 8000 adjusted as discount received )
24/04/2016 Rent………………Dr 10000
To; Cash 10000
( rent paid for the month)
24/04/2015 Furniture & Fitting 50000
To; Standard chartered Bank 50000
(bought office safe by cheque)
26/04/2016 Advertising ………………Dr 5000
To; Cash 5000
(Advertising charges to Business standard)
28/04/2016 Computer ……………Dr 24500
To;  cash 24500
( computer purchased for office)

Now various books and ledger account of Ideal Traders April 2016 are written up as follows. If you don’t know ledger posting click here.

Cash in Hand A/c

Ledger account -cash in hand

Standard Chartered Bank A/c

Standard Chartered Bank ledger

Furniture & Fitting A/c

Furniture and fittings ledger

Sweet World A/c

Sweet World Account

City Traders A/c

City Traders Account

Krishna Stores A/c

Krishna Store Account

Amandum Traders A/c

Amandum traders

Thomas Trading A/c

Thomas trading account

Micheal Food Products A/c

Micheal food product ledger

Key Foods International

Key food international

Sales A/c

Sales Account

Sales Return A/c

Sales return account

Purchase A/c

Purchase ledger

Purchase Return A/c

Purchase return account

Discount Received A/c

Discount received account

Discount Allowed A/c

Discount allowed account

Wages A/c

Wages Account

Printing & Stationery

Printing and stationery ledger

Rent A/c

Rent Account

Advertising A/c

Advertising Account

Computer A/c

Computer ledger

Now,Since the posting has been completed we are in a position to prepare the Trial Balance.

How to prepare Trial balance

The trial balance preparation process is simple, You just need to extract all balances from the ledgers on a particular date and place the name of the ledger and balances in a sheet called trial balance. Ledger with debit balance should be written on the debit side of the trial balance and ledger with credit balance should placed on the credit side of  the trial balance. The Total of the both the sides should be tallied.

The Format of Trial Balance

The trial balance is usually headed with “Trial Balance as at….. ( DATE) as the balance shown are relating to a particular date.In the Following Trial  balance of M/s Ideal as at 30 April 2016, a folio column is given showing the name and page of the ledger from which the balance was extracted.

Note: Only the stock at the beginning of a period appears in the trial balance.The stock at close should not ordinarily appear in the trial balance. In this example we did not prepared a ledger for the stock , So extract the stock amount from the opening balance given.

Format of trial balance
Trial balance format

Let’s explain items in the table

Ledger: Organisations are using different Ledger books, for different types of transactions, like a ledger book for sales, ledger book for debtors, purchases etc. If you are using different ledger the name should be entered here

Account: Each and every account balance in a ledger book

Folio No: The Page number of Ledger book in which the account balance exists.

Important tips to construct a trial balance for students.

In examination point of view, students are often given set of ledger account balances. In this attempt he/she must be guided by the following consideration.Knowing these tips are  useful for professionals also especially in auditing.

  • A debit balance is either an asset or expense.
  • A credit balance is either a liability or a profit or an income.
  • Purchase is debit balance, Purchase return is credit balance.
  • Sale is a credit balance while sale return is debit balance.
  • Items such as Commission ,Discount, Interest and rent must be treated as expenses and rent must be treated as expenses and debit balances. But Commission Received, Interest earned, Rent received etc are Income and therefore credit balances.
  • Only stock at the beginning of a period appears in the trial balance. The stock at close ,should not ordinarily appear in the trial balance.
  • Capital being liability of the business is a credit balance,Drawings which reduce this liability must be debit.
  • Sometimes capital is not given among the balances, in which case it should be ascertained by finding the difference between the total debits and the total credits.

Uses of trial balance

  • The trial balance provides proof that the ledger is in balance.
  • The Agreement of the debit and credit totals of the trial balance gives assurance that

1.Equal debits and credits have been recorded for all transactions

2.The debit or credit balance of each account has been correctly computed

3.The addition of the account balances of each account has been correctly computed.

Errors in Trial balance

Suppose that the debit and credit totals of the trial balance do not match indicates that errors in Trial balance. some of such errors are

  • The entering of debit as credit or credit as debit
  • Totalling mistake in balancing
  • Account balance copied wrongly into trial balance
  • Entering debit balance into credit side of trial balance and vice versa.

Limitations of trial balance

Trial balance does not prove that all transactions have been posted and analysed into proper ledger accounts. For example cash payment transaction wrongly debiting cash and crediting expense account, still trial balance tally. or if we are omitting some transactions for recording into ledger, still trial balance tally. Trial balance only proves only the equality of debit & credit.

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