What is Trial balance?

What is Trial balance?


Trial balance is a list of debits and credits items (assets/liabilities/income/expenses) extracted from closing balance in each account of general ledger. This type of report is generated in a double entry account format before the finalization of balance sheet on a certain date, usually at the end of an accounting period.

The trial balance taken first time is called unadjusted trial balance. Whenever totals of debits and credits side mismatches in unadjusted trial balance, concerned persons on the job will search and correct the irregularity. Such corrected statement is known as ‘adjusted trial balance’. Once the adjusted trial balance is saved/ printed, the closing balances of revenue related accounts (like interest received, commission received, discount received, salary paid, premises rent paid, telephone bill paid, electric bill paid, traveling expenses, stationery expenses ,postage expenses etc.) of the reporting financial year will be journalized and transferred to the ‘Profit and loss account’  (also known as ‘Retain earning account’)  . Once the balance of above types of accounts are closed and moved to profit and loss account, only permanent accounts that have balance in them will continue in the books of accounts and same will be balanced again under double entry system. This balanced list of permanent accounts is called post-closing trial balance. As mentioned above, the post-closing trial balance does not show balance in any of the income account or expenses account, since these temporary accounts have already been closed and their balances moved into the profit and loss account as part of the closing process.

The trial balance report is primarily generated to find out whether total of debit balances equal to total of credit balances to generate accurate financial statement. If there is any disagreement between total of debits and total of credits, then it means existence of error. When total of debits and credits matches with each other it means there are no unbalanced journal entries.   However, we have to remember that trial balance may not always give you perfect ground for finalization of balance sheet. Even when total of debit entries of trial balance agrees with total credit entries, it does not mean that books of accounts are perfectly tallied. The trial balance may still show a perfect match between total debits and credits even when certain entries are wrongly classified and posted in wrong heads of account or certain transaction/s might have been omitted to record during the period or off setting errors of debits and credits are simultaneously made. In such events, errors would not be easily identified by the trial balance procedure.

No Comments

Leave a Reply

Your email address will not be published. Required fields are marked *


Comments

Latest Tweets

error: Content is protected !!