In the double entry system of accounting, debit is always equal to credit. This means every individual account is perfectly matched. It also means that all accounts of the entity must match perfectly. One way to check this accuracy is through the Trial Balance of the company. Let us learn more about the concept and the objectives of trial balance.
A trial balance is like a bookkeeping worksheet the company prepares at the end of the financial year. Basically, it is an account that lists the closing balance of each account on the respective debit or credit side. One of the main objectives of the trial balance is to ensure that the total of all debits equals the total of all the credits.
Preparing the trial balance is the third step of the accounting process. After journalizing and posting all entries in the ledgers, the bookkeepers prepare the trial balance. A fully balanced trial balance will assure the arithmetic accuracy of the accounts. Also, a balanced trial balance will provide reasonable assurance that the books of accounts are free of any clerical errors as well.
Let us take an example. Say the bookkeeper was recording entry for credit sales. And he successfully recorded the entry in the sales book/journal. But he by mistake did not make the corresponding entry in the account of the creditor. Then while preparing the trial balance, this difference will show up between the amounts of debit and credit. Bookkeeper then will be able to rectify his error by looking at the trial balance
(Trial Balance Format)
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Objectives of Trial Balance
Now let us take a look at the main objectives of trial balance and the reasons for its preparation.
- It ensures that the posting from the ledgers is done correctly. If there are any arithmetic errors in the accounting then this will get reflected in the trial balance. And we can determine this when the total of the debit column and the credit column do not match.
- Similarly, it will also detect clerical errors, like a fault in posting, mixing up of figures, etc.
- Trial balance will also help in the preparation of the final accounts. The balances for the financial statements are taken from the trial balance.
- And the trial balance will also serve as a useful summary of all accounting records. It is a summary of all the ledger accounts of a firm. We will only refer to the individual ledger accounts if any details are needed. Otherwise, we rely on the trial balance.
Limitations of Trial Balance
As we saw the trial balance is an important account for bookkeepers. But there are some limitations of a trial balance as well. One main limitation is that it does not point out all types of errors. This means that even if we have a fully balanced trial balance it will not assure 100% accuracy of the accounts. There are many types of errors a trial balance does not draw attention too. Some such errors are
- A transaction that is completely missing, was not even journalized
- When the wrong amount was written in both the accounts
- If a posting was done in the wrong account but in the right amount
- An entry that was never posted in the ledger altogether
- Double posting of entry by mistake
Solved Question for You
Q: A bookkeeper while recording a credit purchase, mistakenly recorded it as a cash purchase. Will this error show up in the trial balance?
Ans: No, unfortunately, such an error will not show up in the trial balance. Only arithmetic errors are reflected in the trial balance. Here the amount recorded was correct, only it was posted in the wrong ledger. Such errors do not show up in the trial balance.