Trial Balance Definition:
In Accounting, Trial balance is a consolidated list of all the general ledger accounts of the business. Debit balances of ledger accounts will be listed across debit column of trial balance. Whereas Credit balances of ledger accounts will be listed across credit column of trial balance. Information listed on this statement report is used to prepare profit and loss statements and balance sheet of the business. Credit and debit trial balance should match. In-case of mismatch one has to rectify errors in nominal ledger accounts.
In today’s computerized accounting systems, any clerical errors or omissions are eliminated by accounting software’s. In other words, preparation of trial balance is less important now a days. It is assumed that debit and credit columns would be equal and any errors would be rectified automatically by accounting software. However in today’s world, trial balances are used by many companies for accounting and auditing purposes. Organizations who wish to disclose ledger balances prior to adjustments or ledger balances after proposed adjustments either publicly or for internally purposes maintain such statements.
Limitations of Trial Balance Accounting:
Primary objective of trial balance accounting is to match debit and credit balances. This does not mean trial balance statement is error free. Below errors may still appear in it.
1. Error in recording transaction: Error will not be detected; In-case incorrect amount is entered on debit as well as credit side of journal entry. For example: Machinery purchased for Rs.40,000/- was incorrectly mentioned as Rs.4,000/-.
2. Error of omission: It will not be able to find error in-case if any of the transaction is missing. Excluding any transaction will still leave credit and debit balance as in-balanced.
3. Error of Principle: Suppose, correct amount added to accurate side (debit / credit) of the account but posted to account with different type. In such scenario, there won’t be any affect on totals of trial balance. For example: Travelling expenses (account type: expenses) are wrongly debited to stock account (account type: assets).
4. Error of Commission: Debit and credit balance will remain unaffected in-case if transaction is posted to wrong account but of same types. For example: Account Payable A/c was incorrectly credited to Machinery A/c instead of Buildings and Assets A/c.
5. Error of Reversal: If any of the golden rules of posting entries are applied incorrectly. Under such circumstances balances will still be in-balance. For example: If the correct entry is Machinery A/c debit to Account Payable A/c credit instead of Account Payable A/c debit to Machinery A/c credit still balances of both the sides will remain same.
Example of Trial Balance Accounting:
|Xyz India Pvt. Ltd.|
|Trial Balances as of current assessment year.|
|List of Ledger Accounts||Debit||Credit|
|Share Equity Capital A/c||25,000|
|Furniture & Fixture A/c||10,000|
|Land and Buildings A/c||75,000|
|Cost of good sales A/c||7,000|
|General & Administration Expense A/c||3,000|
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» e-Learning Chapter 3: Types of Accounts
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» e-Learning Chapter 6: What is Assets and Current Assets?
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» e-Learning Chapter 9: What is a Single Entry System?
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» e-Learning Chapter 11: What are Journal Entries? Format and Examples.
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