What is trial balance in accounting? Types | Differences
What is Trial Balance in accounting, and what does it show?
The trial balance is a convenient accounting tool. The trial balance lists all of the account balances held by a company and provides a snapshot of the company's financial position. Preparing a trial balance is to ensure that the debits and credits from all transactions during an accounting period cancel each other out.
If there is a discrepancy between the ledger account totals, this indicates an error in the accounting system. To correct errors, journal entries can be made to bring the totals back into agreement. Once all errors have been corrected, the trial balance can be used to produce financial statements like a balance sheet.
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- Method to prepare a trial balance
- Three types of trial balance
- How does trial balance help in locating errors
Why is it called trial balance?
Many accounting students find the term "trial balance" confusing, but it's pretty simple. A trial balance is simply a list of all the accounts in your ledger with their balances. This information can be used to prepare financial statements and ensure that the debits and credits are balanced.
The term "trial balance" comes from the fact that it is used as a tool to test for errors. If the trial balance does not balance, there is an error in the ledger. This simple method is still used today because it is an effective way to check for errors.
What is the method to prepare trial balance?
Creating a trial balance is a simple three-step process:
- Gather and list all individual account balances – check to ensure that general ledger account balances have been calculated and posted. If balances have not been posted, then calculate the balances.
- Transfer account names and balances to the trial balance form – assets and expenses balances are listed on the left as debits. Liabilities, revenues, and equities balances are on the right as credits.
- Total the debits and the credits – the totals should match. For books to balance, debits should equal credits.
What are the three types of trial balances?
Unadjusted trial balance :
- Done before adjusting entries are made
- Calculated by totalling the balances of all ledger accounts
You start by preparing the unadjusted trial balance. You check the balance of debits against the balance of credits in the general ledger. If they're equal, your books are balanced. You usually work with this trial balance at the end of the accounting cycle, business quarter, or fiscal year.
Adjusted trial balance :
- Done after adjusting entries are made, just before financial reports are produced
- Calculated by totalling the balances of all ledger accounts
Some transactions are not recorded during an accounting period. Prepaid rent, prepaid insurance, interest, or depreciation, for example. You then have to adjust entries to account for these changes.
After you complete the adjustments, redo the trial balance to ensure there are no errors.
You can now go ahead and create your financial statements. And then prepare for the next accounting period. You start by closing your Income Statement accounts. Generally, these accounts – sometimes called temporary or nominal accounts –track expenses and revenue.
At the end of the accounting period, you transfer all balances to a permanent account –assets, liabilities, or equity accounts. Then return all balances to zero.
Balances in Permanent accounts like assets are simply carried over into the next accounting period. You make closing entries when you transfer the temporary account balances to permanent accounts.
Post-closing trial balance :
- Done after temporary accounts are closed
- Calculated by totalling the balances of all permanent ledger accounts
Lastly, You're now ready to prepare the post-closing trial balance. Other trial balances listed all your account balances. But the post-closing trial balance lists only permanent – or Balance Sheet – accounts.
Again, verify the balances to make sure they equal out. You're now set for the next accounting period.
Remember that all trial balances – regardless of the type – have the same purpose. Your total of debits should equal your total of credits. This tells you if your financial entries are correct or if you need to look for any errors.
How does trial balance help in locating errors? Explain?
Entries have been made in the journal and posted to the ledger. There's an error, and you can't find it. There's a handy tool called the trial balance that can help you.
[A sample Trial Balance is displayed. There are three columns: 'Account Title,' 'Debit,' and 'Credit.']
You can use it to check if your journal and ledger balances are accurate.
How does it work? The process is quite simple. You take each balance from the general ledger and enter it into the trial balance as either a debit or credit. If your total debits equal the total credits, your books are balanced.
The steps to tally a trial balance is:
- Start by listing the balances of all ledger accounts. Then add the balances to either the debit or credit column in the trial balance form.
- Total the debits and credits. If the amounts match, your postings were correct, and your books are balanced.
- It could be as simple as an error when totalling the amounts or transferring the wrong figure from the general ledger. You could've forgotten an account or added a figure to the wrong column.
- A general rule is to work backwards to find the error. So trace the amount from the trial balance to the general ledger and then further back – if needed – to the relevant journal.
Use a trial balance to double-check how accurate your books are.
Is a trial balance the same exact thing as a balance sheet?
A trial balance is an important part of the accounting process. It is a list of all the ledger accounts, with their balances as of a certain date. This list is used to ensure that the debit entries equal the credit entries and that all account balances are correct.
A balance sheet, on the other hand, is a snapshot of a company's financial position at a given point in time. It shows how much money the company has in assets, how much it owes in liabilities, and what its owner's equity is.
What is the difference between a journal and a trial balance?
There is a fundamental difference between a journal and a trial balance. A journal is a chronological record of transactions, while a trial balance lists all the debit and credit balances in the ledger.
A journal provides evidence of individual transactions, while a trial balance ensures that all the debit balances equal all the credit balances. This second point is crucial because it allows accountants to check that each account has been correctly debited or credited.
How does general ledger and trial balance differ?
The main differences between a general ledger and a trial balance are:
- A General ledger contains all financial transactions made by a business. In contrast, a trial balance only includes those transactions that impact the financial statements.
- A general ledger provides more detail and insights into the financial health of a business than a trial balance. Because it includes all transactions, regardless of whether or not they affect the financial statements,
- a general ledger can investigate unusual activity or discrepancies.
- Trial balances are typically prepared at the end of an accounting period, while general ledgers can be prepared at any time.
- General ledgers can create financial reports like income statements and balance sheets, while trial balances are typically used as a stepping stone in the Accounting cycle.
What is trial balance in hindi?
Trial balance ke naam se aapko lagbhag shayad hi pata hoga, lekin aisa bilkul bhi nahin hai. Trial balance simple Hindi me ek Thanka balance hota hai jo ki business houses apne hisse ke transactions ka record rakhne ke liye use karte hain.
Kisi bhi business house ya organization ka trial balance tab tak taiyar nahin hota jab tak uske pas sare transactions ka data available na ho. Iska main purpose yeh hai ki owners ko har varsh apni company ke safal hone ya asafal hone ke bare me detail information mil sake
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