A trial balance is a two-column schedule in which the total of accounts with debit balances is equal to the total of accounts with credit balances, obtained from ledger accounts.
It consists of all the names and balances of all the accounts and the names appear in such order as they appear in the ledger accounts. The debit balances appear on the right-hand side of the column and the credit balances appear on the left-hand side of the column. Both sides of the column must be equal, in order to get the correct answer.
What is Trial Balance used for?
Trial balance set a proof that the ledger accounts are balanced. It provides the basis for Income statement and Balance Sheet.
When the debit side of the trial balance equals credit side, it means that
- For all the given transactions, debits and credits are recorded in equal proportion.
- Correct additions of the debit and credit side accounts has taken place.
Can you answer the question what are audit assertions?
Reasons of Errors occurring in the Trial Balance:
Sometimes, the debit and credit side of the trial balance does not agree. The reasons for such disagreements may be as follow:
- The posting of a debit balance as a credit balance, or vice versa.
- Mathematical errors in determining account balances
- Errors made while copying balances from ledger accounts into the trial balance
- Errors made while adding the entries of the trial balance
What is Trial Balance in accounting with Example?
Suppose a corporation XYZ, A basic format of its trial balance will look like as follow:
November 30th, 2019
|Notes payable||$ 40,000|
|Totals||$ 163,000||$ 163,000|
Limitations of the Trial Balance
Although, we believe that the trial balance may not result in agreement of the debit and credit side totals due to certain errors, however, a trial balance may still not be balanced even if the above given errors are omitted.
For Example: If a receipt of cash were negligently recorded by debiting the Machinery account instead of the cash account, the trial balance would still balance.
In addition, the omission of a transaction from the ledger, cannot be disclosed by the trial balance, which is a main shortcoming of the trial balance.
In conclusion, the trial balance only highlights the equality of debit and credit side of the schedule.