Preparation of Trial Balance
April 14, 2022
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Preparation of Trial Balance
Following Steps are involved in the preparation of a Trial Balance:
All Ledger Accounts are closed at the end of an accounting period.
Ledger balances are posted into the trial balance.
Trial Balance is cast and errors are identified.
Suspense account is created to agree the trial balance totals
temporarily until corrections are accounted for.
Errors identified earlier are rectified by posting corrective entries.
Any adjustments required at the period end not previously
accounted for are incorporated into the trial balance.
Closing Ledger Accounts
Ledger accounts are closed at the end of each accounting period by
calculating the totals of debit and credit sides of a ledger. The difference
between the sum of debits and credits is known as the closing balance. This
is the amount which is posted in the trial balance.
How closing balances are presented in the ledger depends on whether the
account is related to income statement (income and expenses) or balance
sheet (assets, liabilities and equity). Balance sheet ledger accounts are
closed by writing ‘Balance c/d’ next to the balancing figure since these are to
be rolled forward in the next accounting period. Income statement ledger
accounts on the other hand are closed by writing ‘Income Statement’ next to
the residual amount because it is being transferred to the income statement
as revenue or expense incurred for the period.
The steps involved in closing a ledger account may be summarized as below:
Add the totals of both sides of a ledger
The higher of the totals among the debit side and credit side must
be inserted at the end of BOTH sides. Closing balance is the
balancing figure on the side with the lower balance.
In case of ledger accounts of assets, liabilities and equity, ‘balance
c/d’ is written next to the closing balance whereas in case of income
and expenses ledger accounts, ‘Income Statement’ is written next to
the closing balance.
The closing balances of all ledger accounts are posted into the trial
balance.
Trial balance
A trial balance is a bookkeeping worksheet-like account that reflects all the
credit and debit balances of all the ledger accounts. Once we prepare this
statement, we can prepare the final accounts of the company on the basis of
this trial balance.
One other important use of the trial balance is that it can determine to the
arithmetic accuracy of the accounts. So if both columns of the trial balance
tally, we can be reasonably assured of the accuracy of the accounts. It does
not ensure that the accounts are free of all errors but it can at least establish
mathematical accuracy.
Preparation of trial balance
Trial Balance
XYZ Trading
As at DD/MM/YYYY
General Ledger Accounts Dr. Cr.
Cash at Bank 10,000
Inventory 40,000
Vehicles 30,000
Fixtures & Fittings 32,000
Accounts Receivable 15,000
Credit card Payable 12,000
Accounts Payable 15,000
Bank Loan 50,000
Sales 175,000
Purchases 60,000
Advertising 5,000
Wages 65,000
Rent 15,000
Electricity 5,000
Owners Capital 25,000
Total 277,000 2,77,000
Preparation of Trial Balance
Preparation of trial balance is the third step in the accounting process. First,
we record the transactions in the journal. And then we post them in the
general ledger. Then we prepare a trial balance to verify that the debit totals
equal to the credit totals. Let us take a look at the steps in the preparation of
trial balance.
1. To prepare a trial balance we need the closing balances of all the
ledger accounts and the cash book as well as the bank book. So
firstly every ledger account must be balanced. Balancing is the
difference between the sum of all the debit entries and the sum of
all the credit entries.
2. Then prepare a three column worksheet. One column for the
account name and the corresponding columns for debit and credit
balances.
3. Fill out the account name and the balance of such account in the
appropriate debit or credit column
4. Then we total both the debit column and the credit column. Ideally,
in a balanced error-free Trial balance these totals should be the
same
5. Once you compare the totals and the totals are same you close the
trial balance. If there is a difference we try and find and rectify
errors. Here are some cases that cause errors in the trial balance
A mistake in transferring the balances to the trial balance
Error in balancing an account
The wrong amount posted in the ledger
Made the entry in the wrong column, debit instead of credit or vice
versa
Mistake made in the casting of the journal or subsidiary book
Rules for Preparation of Trial Balance
While preparation of trial balances we must take care of the following
rules/points
1) The balances of the following accounts are always found on the debit
column of the trial balance
Assets
Expense Accounts
Drawings Account
Cash Balance
Bank Balance
Any losses
2) And the following balances are placed on the credit column of the trial
balance
Liabilities
Income Accounts
Capital Account
Profits
