Trial Balance in business

1. Meaning of trial balance

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements. Ledger balances are segregated into debit balances and credit balances. Asset and expense accounts appear on the debit side of the trial balance whereas liabilities, capital and income accounts appear on the credit side. If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the total of all debit balances appearing in the trial balance must equal to the sum of all credit balances.

Trial balance can be defined as the schedule or list that shows the debit and credit balances extracted from the ledgers,to show the arithmetical accuracy of the ledgers. The technique ensure that debit and credit balances as displayed in the ledgers are complied.the objective is to prove the accuracy of the book-keeping.

1. Uses of trial balance

• Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.
• Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. If the totals of the trial balance do not agree, the differences may be investigated and resolved before financial statements are prepared. Rectifying basic accounting errors can be a much lengthy task after the financial statements have been prepared because of the changes that would be required to correct the financial statements.
• Trial balance ensures that the account balances are accurately extracted from accounting ledgers.

• Trail balance assists in the identification and rectification of errors

1. Balances that form the trial balance

The following is an example of what a simple Trial Balance looks like-

• Title provided at the top shows the name of the entity and accounting period end for which the trial balance has been prepared.
• Account Title shows the name of the accounting ledgers from which the balances have been extracted.
• Balances relating to assets and expenses are presented in the left column (debit side) whereas those relating to liabilities, income and equity are shown on the right column (credit side).
• The sum of all debit and credit balances are shown at the bottom of their respective columns.

1. Formation of trial balance from ledger

Trial balance is prepared with two different techniques: Total Method and Balance Method.

According to the Total Method, total of debits and credits of every account is shown in the trial balance, i.e. both debit and credit totals are recorded in the trial balance. On the other hand, according to the Balance Method, only the Net balance which is the difference between credit and debit total is transferred and recorded.

Prepare a trial balance as on 31st Dec 2013 by filling in the debit and credit columns accordingly for each ledger balance mentioned below.

Ans.

Trial Balance From the Above Ledger (31st Dec 2013)

The way a balance is transferred to either debit or credit side of a trial balance depends on the nature of that account, below is the table showing the relationship between types of accounts and their usual balances.

Identification of balance sheet items on the trial balance

Assets

The assets accounts show how the company has used the money it has obtained from lenders, investors, and company earnings. Technically, according to GAAP, assets are resources with “probable future economi benefits obtaine or controlled by an entity resulting from past transactoins or events.” This leads to some non-intuitive results. Important resources like intellectual property or longstanding business relationships, though valuable to a business, are generally not reflected on the balance sheet.

Assets are grouped as monetary (cash and accounts receivables), liquid (whether they can easily be converted to cash), tangible or intangible.

Current assets: cash and those items, such as accounts receivable, that are normally expected to be converted into cash within one year.

Non-current assets:

Fixed assets: the company’s more or less permanent physical assets, such as its land, buildings, machinery and equipment

Intangible assets: goodwill, trademarks, copyrights, patents (reader beware!)

Depreciation

these are all terms that refer to allocating the cost of along-lived asset to consecutive accounting periods as expenses until the full cost is fully accounted for.

Intangible Assets

This item has become more important as intellectual property (patents, trademarks, copyrights) has become the darlings of the information age. Typically, IP is carried at its acquisition or development cost.

Liabilities

The second portion of the balance sheet consists of the company’s liabilities — usually separated into current liabilities and long-term liabilities. Liabilities can be understood as the opposite of assets — they represent obligations of the business. Not all obligations to make a payment in the future are reflected on the balance sheet. For example, an obligation to pay employees’ rising health care costs may be a significant commitment , it might not be represented on the balance sheet if sufficiently uncertain. Or the prospect of paying clean-up fees for a toxic site owned by the business may not make it to the balance sheet, though it may be described in a note.

Owners’ Equity

The third and final portion of a balance sheet represents the owners’ equity. In a sole proprietorship (a business with one owner), the ownership account is known as “proprietor’s equity”; in a partnership, the ownership account is “partners’ capital.”