What is a Trial Balance

The Trial Balance is a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Wearall Textiles as on 31^st March 20_6

Particulars	L/F	Amount (Dr)	Amount (Cr)
Opening Stock Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery	– – – – – – – – – – – – – – – – – –	63,650 22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 1,19,000 2,10,000 2,08,000 5,69,000	2,50,000 1,80,000 36,86,000 6,52,950
Total		47,68,950	47,68,950

Why is a Trial Balance prepared?

The trial balance is prepared to check, verify or ensure the arithmetical accuracy of accounting. Though not a conclusive proof, the agreement of the trial balance is a prima facie evidence of the absence of mathematical errors.

This is the most important purpose for which the trial balance is prepared.

Isn't Trial Balance made for enabling preparation of Final Accounts?

No, not at all.

Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle. Since Final Accounting can be completed without the preparation of the Trial Balance, we can say that enabling the preparation of final accounts is not the purpose of the trial balance.

When is a Trial Balance prepared?

Theoretically, the trial balance can be prepared as and when needed.

The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the end of the accounting period.

Difficulty in preparing the Trial Balance

The practical difficulty in preparing the trial balance as and when needed is the requirement of the balances of all the ledger accounts within the organisational accounting system. Different ledger accounts are balanced at different time intervals based on the information needs of the organisation. Say in a typical organisation Cash a/c is balanced daily, Expenses, Creditor and Debtor accounts are balanced on a monthly basis, Asset accounts are balanced annually etc.

The ledger account balances relating to all ledger accounts would not be available ready hand at all given instance. Year ending is one such instance when the balances of all accounts are derived and readily available.

The difficulty in having the ledger account balances readily available as and when needed should be understood in the context of manual accounting.

Computerised Accounting

Computers are machines that can perform tasks entrusted to them by the programs in lightning speeds. In computerised accounting systems (programs) used for small to medium sized organisations, deriving all the ledger account balances is a task that can be accomplished in seconds. As such a trial balance can be derived as and when needed.

Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle.

The activities involved in an Accounting Cycle are

• Accounting begins (books of accounts are opened) in an accounting period by recording the opening entry;

  Opening Entry

  Opening entry is the first journal entry recorded in the books of accounts of an organisation which has been in existence during the prior accounting period and whose operations are being carried forward to the current accounting period.

  The opening entry is the journal entry that is the support for the postings To Balance b/d and By Balance b/d in the various ledger accounts.

  All the balances in the books of accounts during the prior accounting period are brought forward to the current accounting period through the use of this entry.

  Journal in the books of M/s Amonaya Metals for the period from 1^st January 20_7 to ____

  Date	V/R No.	Particulars		L/F	Amount (Dr)	Amount (Cr)
  01/01/_7	–	Assets a/c To Liabilities a/c To Capital a/c	Dr	– – –	–	– –
  		[For bringing the balances in the various ledger accounts at the end of the previous accounting period into books.]

  Information from the Balance Sheet

  The information relating to the various assets, liabilities and capital that are to be brought forward can be obtained from the closing Balance Sheet of the prior accounting period.

  This should not be understood as balances being brought down from the balance sheet. Balances are being brought down from the ledger accounts of the prior period. Balance sheet is just a statement that shows all the closing balances in the prior period.

• Recording the various transactions all through out the accounting period;
• Balancing the ledgers as and when needed and finally at the end of the accounting period;

• Making up the final accounts

  1. Recording the transactions for making the Trading a/c
  2. Closing the Trading a/c by transferring its balance (Gross profit/loss) to the Profit & Loss a/c either directly or through an intermediary account.
  3. Recording the transactions for making the Profit and Loss a/c
  4. Closing the Profit and Loss a/c by transferring its balance (Net Profit/Loss) to Capital a/c or Profit and Loss Appropriation a/c.
• Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up and closing the Trading a/c as well as the Profit & Loss a/c.)
• The accounting or accounting cycle ends (books of accounts are closed) for an accounting period by recording the closing entry.

  Closing Entry

  Closing entry is the last journal entry recorded in the books of accounts of an organisation which has been in existence during an accounting period and whose operations are being carried forward to the subsequent accounting period.

  The closing entry is the journal entry that is the support for the postings To Balance c/d and By Balance c/d in the various ledger accounts.

  All the balances in the books of accounts at the end of the accounting period are carried forward to the subsequent accounting period through the use of this entry.

  Journal in the books of M/s Amonaya Metals for the period from 1^st Jan to 31^st Dec 20_7

  Date	V/R No.	Particulars		L/F	Amount (Dr)	Amount (Cr)
  31/12/_7	–	Liabilities a/c Capital a/c To Assets a/c	Dr	– – –	– –	–
  		[For carrying the balances in the various ledger accounts at the end of the accounting period to the subsequent accounting period.]

  Information in the Balance Sheet

  The information relating to the various assets, liabilities and capital that are carried forward are shown in the closing Balance Sheet of the accounting period.

  This should not be understood as balances being carried forward to the balance sheet. Balances are being carried forward from the ledger accounts. Balance sheet is just a statement that shows all the closing balances in an accounting period.

Final Accounting deals with all the ledger account balances at the end of the accounting period in one way or the other.

• Making the trading a/c

  All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the Trading a/c.

  For this at least two journal entries are recorded.

• Closing the trading a/c

  The Trading a/c is closed by transferring its balance

  • directly to the Profit and Loss a/c

    For this a journal entry is recorded.

  • through an intermediary account Gross Profit when there is a profit or Gross Loss when there is a loss.

    For this two journal entries are recorded.

• Making the trading a/c

  All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by transfer to the Profit and Loss a/c.

  For this at least two journal entries are recorded.

• Closing the Profit & Loss a/c

  The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss Appropriation a/c

  • directly

    For this a journal entry is recorded.

  • through an intermediary account Net Profit when there is a profit or Net Loss when there is a loss.

    For this two journal entries are recorded.

• Closing Accounting

  A closing entry is recorded to carry over the balances in all the remaining ledger accounts to the subsequent accounting period.

  Balances carried over appear in the balance sheet

  The balances that are carried forward are the ones that appear in the closing balance sheet.

  Balances appearing in the balance sheet can be interpreted as the balances in all the ledger accounts after ascertainment and capitalisation of profits.

  We use To Balance c/d, By Balance c/d for carrying forward the closing balances. These postings are supported by the closing entry. Thus we may say that the closing entry is recorded and the balance sheet is prepared from that.

If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be recorded, all the ledger accounts that are affected by those transactions are to be posted to and rebalanced and then the balance sheet is to be prepared using the information in the closing entry.

Computerised Accounting

In computerised accounting, all the journal entries mentioned above are setup to be recorded automatically whenever final accounting is asked to be done i.e. whenever the profit statement (profit and loss a/c) or the position statement (balance sheet) is asked to be shown.

This possibility is to be viewed in the context of manual accounting and also in the context of examination problem solving.

In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the information in the Trial Balance, bypassing the tasks involved in journalising the transactions for final accounting.

How done

We classify the ledger account balances in the trial balance as

• Direct Expenses
• Direct Incomes
• Indirect Expenses
• Indirect Incomes
• Losses
• Gains
• Assets
• Liabilities

Make up the empty proforma Trading a/c, Profit and Loss a/c and Balance Sheet all at once or one after the other in the same order.

Consider each ledger account from the Trial Balance. Based on the above classification, decide where the ledger account balance ultimately appears had the journal entries for final accounting been recorded. Write it down in that account or statement.

This would have the same affect as going through the tasks of recording, posting and rebalancing in final accounting.

Illustration

• Salaries account shows a debit balance of 1,04,000

  Salaries a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To – To – To –	– – –	By Balance c/d	1,04,000
  	1,04,000		1,04,000
  To Balance b/d	1,04,000

• Since it is indirect expenditure, it is to be closed by transfer to the Profit and Loss a/c.

  Recording the transaction for transferring the indirect expenses to profit and loss a/c.

  Journal

  Particulars		Amount (Dr)	Amount (Cr)
  Profit and Loss a/c To – To Salaries a/c To –	Dr	–	– 1,04,000 –

  Relevant posting to the ledger

  Salaries a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To – To – To –	– – –	By Balance c/d	1,04,000
  	1,04,000		1,04,000
  To Balance b/d	1,04,000	By Profit and Loss a/c	1,04,000
  	1,04,000		1,04,000

• On account of the recording and posting, Salaries are posted to (appear on) the debit side of Profit and Loss a/c.

  Profit and Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To – To Salaries To –	– 1,04,000 –	By – By –

Directly from Trial Balance

• Trial balance has the information relating to the balance in the Salaries account and its nature.

  Trial Balance of M/s Wearall Textiles as on 31^st March 20_6

  Particulars	L/F	Amount (Dr)	Amount (Cr)
  – – Salaries – –	– – – – –	– – 1,04,000 – –

• Identify it and show (post) it in the proforma profit and loss account.

  Profit and Loss a/c

  DrCr
  Particulars	Amount	Particulars	Amount
  To – To Salaries To –	– 1,04,000 –	By – By –

  This bypasses the total accounting procedure that is involved in final accounting giving the same result.

Reduction of Work involved in Manual Accounting

Since not recording the related journal entries makes no difference as far as final accounting is concerned, in almost all cases in manual accounting, the process of recording the journal entries required for final accounting and updating the ledger is bypassed to reduce the burden of the work involved.

Classifying the items in the Trial Balance

Prepare a statement for classifying the various ledger account balances in the trial balance as follows, so that the subsequent process of making up the Trading a/c, Profit and Loss a/c and the Balance Sheet becomes easy.

In final accounting each ledger account balance will appear either on the debit or credit sides of the Trading a/c or Profit & Loss a/c or on the assets or liabilities side of the Balance Sheet.

Trial Balance Analysis

Account	Description	Account Type	Balance Nature	Where	Which Side	Amount
Opening Stock Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery	Direct Expenses Direct Expenses Direct Expenses Direct Expenses Indirect Expenses Indirect Expenses Indirect Expenses Indirect Expenses Asset Asset Liability Liability/Asset Asset Liability Direct Incomes Accumulated Profit Asset Asset	Nominal Nominal Nominal Nominal Nominal Nominal Nominal Nominal Real Real Personal Personal Real Personal Nominal Special Nominal Personal Real	Debit Debit Debit Debit Debit Debit Debit Debit Debit Debit Credit Debit Debit Credit Credit Credit Debit Debit	Trdg Trdg Trdg Trdg P/L P/L P/L P/L B/S B/S B/S B/S B/S B/S Trdg B/S B/S B/S	Debit Debit Debit Debit Debit Debit Debit Debit Assets Assets Liabilities Assets Assets Liabilities Credit Liabilities Assets Assets	63,650 22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 2,50,000 1,19,000 2,10,000 1,80,000 36,86,000 6,52,950 2,08,000 5,69,000

To be used only once

In making up final accounts using the information in the Trial Balance, we should ensure that each item of information (representing a ledger account balance) should be used only once. Using it once makes its balance zero, either on account of it being closed (nominal account) or having been carried forward to the subsequent accounting period.

Making up the Final Accounts

Final Accounting using the information in a Trial Balance requires us to place each ledger account balance from the trial balance in its right place i.e. on the appropriate side of Trading a/c, Profit and Loss a/c or the Balance Sheet.

The classification and analysis statement prepared should make the task very easy.

Trading and Profit & Loss a/c [For the year ending 31/03/_6]

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Textile Purchases To Wages To Octroi To Gross Profit	63,650 22,56,000 3,25,000 1,78,200 8,63,150	By Sales	36,86,000
	36,86,000		36,86,000
To Salaries To Rent To Printing and Stationery To Advertisements To Net Profit	1,04,000 1,26,000 74,650 86,000 4,72,500	By Gross Profit	8,63,150
	8,63,150		8,63,150

Balance Sheet of M/s Wearall Textiles as on 31^st March 20_6

Liabilities	Amount	Assets	Amount
Capital Sundry Creditors P/L Appropriation   [6,52,950 + 4,72,500]	2,50,000 1,80,000 11,25,450	Cash Bank Office Building Motor Vehicles Sundry Debtors Machinery	26,000 4,23,450 1,19,000 2,10,000 2,08,000 5,69,000
	15,55,450		15,55,450

The balance in the Profit & Loss Appropriation a/c as shown in the Trial Balance represents the balance carried forward from the previous accounting period (i.e. year ending 31^st March 20_5).

The Net profit of the current period is transferred to the Profit & Loss Appropriation a/c.

Profit and Loss Appropriation a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/03/06	To Balance c/d	11,25,450	31/03/06 31/03/06	By Balance b/d By Net Profit	6,52,950 4,72,500
	Total	11,25,450		Total	11,25,450
			01/04/06	By Balance b/d	11,25,450

While considering the balance relating to the Profit & Loss Appropriation a/c for being shown in the Balance sheet, care should be taken to make appropriate adjustments to the balance on account of the net profit or loss transferred to it.

The balance that should be shown in the balance sheet is not the one that appears in the trial balance, but the one that takes into consideration the adjustment on account of current period profit or loss also.

If the net profit is transferred to the Capital a/c, then such a caution should be taken with regard to the Capital a/c balance.