Trial Balance: Rules Explained With Examples - Khatabook

For example, if goods worth Rs 1000/- were sold to Mr B and completely omitted from the books of accounts, the trial balance will still show the ... Home(current) AboutUs Blog Category GoldRate Khata Payments BusinessTips AccountingandInventory GST IncomeTax Tally Salary MoneyManagement News We'reHiring Newsroom ContactUs QRPage Login All GoldRate Payments BusinessTips GST Salary News ViewMore Khata AccountingandInventory IncomeTax Tally MoneyManagement English Malayalam Bengali Gujarati Odia Marathi Telugu Kannada Tamil Assamese Hindi Punjabi English Malayalam Bengali Gujarati Odia Marathi Telugu Kannada Tamil Assamese Hindi Punjabi Blog /AccountingandInventory Copytoclipboard CopyLink Copytoclipboard writtenbyKhatabook|September1,2021 TrialBalance:RulesExplainedWithExamples Whatisatrialbalance?T hetrialbalanceisasummationoforlistofcreditanddebitbalancesdrawnfromthemanyledgeraccountslikethebankbalance,cashbooketc.Thecardinalruleofthetrialbalanceisthatthetotalofthetrialbalancedebitandcreditaccounts andba lancestakenfromtheledgersshouldbethesameortallied.Thisisbecauseeverytransactionhasacreditanddebitentryoraneffectwithdualconsequences.Whenanaccountingperiodendsorattheendofeachmonthwhentheledgersaretalliedanddulyextracted,itisthetrialbalancethattestswhetherthetotalcreditsandtotaldebitsareinasystematicpatternornot.Ifnot,thereisanerrororinaccuracyintheledgerentries.ItistheprimaryaccountstatementfromwhichseveralfinancialstatementsliketheBalancesheetorP&LorTradingandProfit&Lossaccountandmoreareprepared. TheObjectivesofaTrialBalance:  Thetrialbalanceisusedtopreparefinancialstatementsfromtheledgerandjournalentries.Itisthebasisforpreparingthefinancialstatementslikebalancesheetetc.,andthefinalP&Laccounts.Thetrialbalanceformat anditsobjectivesinclude: Assessingtheledgeraccounts'arithmeticalaccuracywhenthetotalcreditisequaltothetotaldebt. Locatingledgerandjournalerrorsorinefficienciesinthemanystagesoftheaccountingsystem.Sucherrorsmayarisewhenpostingtheledgerorjournalaccountswiththemanyentries,calculationormanualerrorsinenteringvalues,totallingthesubsidiaryledgers/journals,trialbalancepostingerrors,etc. PreparingthevariousfinancialstatementsliketheP&Laccount,balancesheet,otherfinancialstatements,accountingrecords,etc.  ExpensesandincomeentriesaretakenfromledgeraccountsfortheP&Laccount, Journalentriesarerequiredforthebalancesheet.  Thus,thetrialbalanceisthefoundationalbridgebetweenthefinancialstatementsandthevariousaccountingrecords. TrialBalanceFeatures: Thetrialbalanceisastatementofaccountsandnotanaccountbyitself.Itisalsoneverapartofthefinalfinancialstatements. Itcontainsthesummationofcreditanddebitbalancesdrawnfromthemanyledgeraccountsinatrialbalanceformat. Itsobjectiveistoprovethearithmeticaccuracyofitsentriessince,inaTrialbalance,thecreditanddebitbalancesareequal.Itdoesnotverifytheinaccuracies,however,whichrequiresanaudittoproveinaccuraciesinthecredit/debitbalances. EveryaccountingyearhasaTrialbalancedrawnatitsend.Ifneeded,suchtrialbalancesheetscanalsobedrawnmonthly,half-yearly,quarterly,orevenweekly. ItisthefoundationstoneofallaccountstatementsandtheconnectingbridgebetweentheProfitandLossAccount,Booksofaccounts,andtheBalancesheet. Trialbalancetypes: Therearethreedifferenttypesoftrialbalancesdrawnatvariousaccountingcyclestages. The3trialbalancesare- AdjustedTrialBalance. UnadjustedTrialBalance. PostclosureTrialBalance. RulesindrawingtheTrialBalance: Herearetherulesofatrialbalance. Allliabilitiesmustbereflectedonthecreditsideandassetsreflectedonthedebitside. Gainsandincomemustbereflectedonthecreditsideofatrialbalance. Expensesmustbereflectedonthedebitsideofthetrialbalance. AlsoRead:ProfitandLoss,AccountandStatement  ErrorsinaTrialBalance: TheTrialBalanceensuresthedebitandcreditentriesmatchwitharithmeticalaccuracybuttheydonotportraytheaccuracyoftheledgeraccount.Let’sexploresomeoftheerrorsthatcanoccurinatrialbalance.  ErrorsofCommission: Theseerrorsoccurwhenthecorrectamountisintherightclassofaccountsbutthewrongaccount.Forexample,MrCsoldgoodsworthRs1000/-toMrXandenteredthemasGoodsSoldintheaccountofMrY.  ErrorsofOmission: Theseerrorsareerrorswhereatransactionisnotreflectedorcompletelyomitted.Forexample,ifgoodsworthRs1000/-weresoldtoMrBandcompletelyomittedfromthebooksofaccounts,thetrialbalancewillstillshowthedebitsandcreditsasmatchedsinceboththedebitandcreditforRs1000/-areunderstatedintheTrialBalance. ErrorsofPrinciple: Thesetransactionsreflectthecorrectamountbutonthewrongsideandclassofaccounts. Forexample,thepurchaseofafixedassetcariswronglyreflectedintheExpensesAccountformotorvehicles,arevenueexpenseaccount. CompensatingErrors: Theseerrorsoccurwhentwoormoresamevalueaccountsoccuronboththecreditanddebitsides.Forexample,insteadofdebitingtheFixedAssetaccountbyRs50,000/-,theSales(creditaccount)isprovidedRs50,000/-. Reversalofentries: Theerrorsoccurduetothecorrectaccountsbeingrecordedbutonthewrongside.Thetrialbalancewillstillbalanceinthiscase.Forexample,Rs20,000/-incashfromMrAwaswronglydebitedtotheiraccount,andacreditentrypassedforCashBook.  Errorsoftransposition: Theseentriesoccurwhenthenumericalvaluesoftherightentryarewronglywrittenwithtransposedvalues.Forexample,Rs4235/-waswronglywritteninsteadof4,523/-. Stepstopreparethetrialbalancesheet: Thetrialbalanceisthefirststepofpreparingthefinalfinancialaccounts,wherethestatementsoftheclosingbalancefromgeneralledgersaccountsareconsidered.Thestepstopreparethetrialbalanceare: Firstlypreparetheledgeraccountsandtheclosingbalancesofeveryaccountinit.Forexample,thebankoverdraftintrialbalance, the commissionreceivedintrialbalance and generalexpensesinfinalaccounts, amongtheothers. Nowpostthesebalancesintothetrialbalance’screditanddebitcolumns.  Expensesandassetsareaccountedforasdebitbalances,whileincomeandliabilitiesareconsideredcreditbalances. Next,calculatethetotaldebitandcreditbalances. Ifthetrialbalanceisaccurate,thesumofcreditanddebitbalancesshouldbeequal. Incaseofanydifferencesinthebalances,youmustundertaketrialbalanceerrorrectificationthroughanauditoftheaccounts. Trialbalanceformatandexample: Takealookatthebelowformatofatrialbalanceofafirm. Asshownabove,theledgeraccountsarementionedinthefirstcolumn,andtheirvariousentriesareshownascreditordebitentriesintherespectivecolumns. Formatoftrialbalance: TrialBalanceofABCLtdasondd/mm//yy. SINo Particulars L.F Amount(Rs)Dr Amount(Rs)Cr           TrialBalanceExample: ABCLtdTrialBalanceon31-March2020(inDollars) Accounts Debit(Dr) Credit(Cr) Cash 1,20,280 - AccountsReceivable 9,500 - OfficeExpenses 2,500 - PrepaidRent 800 - PrepaidInsurance 220 - Officefurnitureandequipment 15,000 - Bankloan - 15,000 AccountsPayable - 5,000 UnearnedRevenues - 9,500 Capital - 1,21,200 Drawings 5,000 - CommissionRevenue - 12,500 SalaryExpenses 9,900 - Total 163,200 163,200 TrialBalanceForms: Thetrialbalancecanbedrawninthebelowtwoforms.Namely,  LedgerForm wherethetrialbalanceiscastintheformofanaccountwithcreditanddebitsides.Bothsideshavethefirstcolumnhavingtheaccountname,amountcolumn,foliocolumn,etc. JournalForm wherethetrialbalancetakesthejournalformwithacolumnforserialnumbering,accountname,debit/creditamounts,ledgerfoliodetails,etc.,includingthepagenumberonwhichtheaccountisenteredintheledgers. However,duetothedualnatureofentrieswitheachofthedebtorsintrialbalance havingacorrespondingcreditentryandviceversa,thetrialbalance,whenright,mustalwaystally. Trialbalanceitemslist: AsseenintheformatoftheTrialBalance,thereareseveralcreditanddebitaccountsaccountedfortherein.Hereisaquicktabletohelpclassifythem.       DebitSide CreditSide TotalAssets(Cashinbank/hand,BuildingsandLand,Inventory,PlantandMachinery,andmore.) Expenses(Freight,inwardcarriageexpenses,rents,salary,rebates,Commission,etc.) Sundrydebtorsinthetrialbalance    Losses(Inwardreturns,baddebts,depreciation,debitstoP&LA/c,etc.)   Purchases Totalliabilities(Unsecured/Securedloans,Bankoverdrafts,mortgageloans,outstandingbillsandexpensespayable,andmore.) Reservesinfunds,depreciationprovisions,generalreserves,accumulateddepreciationonplantandmachinery,etc. SundryCreditors Gains(Outwardreturns,recoveredbaddebts,discountreceived,creditstoP&L,etc.) Sales Modern-dayadvancesinaccountingandTrialBalances: Thetrialbalancehelpsdetectanyerrorsaccurately.But,withbusinessneedsbecomingmorediverse,financialstatementsareneededtobeinalignmentwithbusinesshealthandfundingsothateffectivedecisionscanbemade.MostbusinessesuseadvancedaccountingsoftwarelikeTallyPrime,TallyERP9,etc.,tomaintaintheirbooks,drawfinancialreportsandstatements,andusefinancialdataforanalyticalreports.Hence,youneednoteverhavetobalancecreditsanddebitsanymoretodrawTrialbalancesheets,asTallyPrime,anaccountingsoftware,ensuresthematchingofcreditsanddebitswhenrecordingtransactionsautomatically.Thisisalsoamoreefficient,reliable,accuratewayofrecordingtransactionsdigitallywhilesavingeffort,time,resources,andmore.  AlsoRead: DoubleEntrySystemofAccounting Conclusion: Inthisarticle,wehaveseenhowthetrialbalanceisprepared,whatistrialbalanceinTallywithtrialbalanceexamples.AreyouawareofanaccountingsolutionBizAnalystwhereyoucaneffectivelymanageyouraccountingneeds?ForTallyusers,thisapplicationcanbeusedforvariousfunctionssuchasdoingdataentry,sendingpaymentremindersandmaintainingpropercashflow.Italsoaidsintheanalysisofsalesthroughwhichsignificantdata-drivendecisionscanbetakenforbusinessgrowth. FAQs: 1.Whatismeantbyageneralledger? GeneralLedgersumsupthefinancialaccounttransactionsandentriesinanygivenperiodintheprescribedledgerformattoquicklyascertaintheperiod’sclosingbalance.Theledgerorjournalistheprimarybookofaccounts.Itcontainsreal,personal,andnominalaccountsandtheentriespassedunderthemreflectingtheamountsascredits/debitsintheamountcolumn. Ithastwosides,namelythecreditontherightanddebitontheleftofeachaccount,thedate,thefolioorpagenumberonwhichtheaccountappears,andparticularsoftheaccount.Here’showitlooks. Date Particulars JournalFolio Amount(Rs.) Date Particulars JournalFolio Amount(Rs.)                                                   2.HowtopreparetrialbalanceinInventory? Inventoryistheavailablestockofphysicalidlegoodswiththemonetaryvalueheldbytheorganisationintheformofrawmaterials,packedstock,stockinpackaging,processingetc.Inventorycanbeinincompleteorcompletestatesandisusedinthenearfuture.Itispreparedbyevaluatinginventoriesofsales,repairedgoods,defectivegoods,goodsinthemanyprocessesetc. 3.WhatismeantbytheProfit&LossA/C? AProfitandLossAccountisafinancialstatementmeasuringthelossandprofitoftheaccountingperiodbasedonitsbusinessactivitiesandreflectingtheenterprise'sfinancialhealth.ItisalsoknownastheExpenseandIncomeStatement.ItusestheTrialBalancesheetasitsbasis. 4.WhatisthemeaningofBadDebtsintheTrialBalance? Baddebtsaretheorganisation’sdebtsthatareeitherirrecoverableoruncollectable.Inbusinessterms,baddebtsarealosstothecompanyandhenceshouldbelimited.ItistransferredtothelosssideoftheP&LaccountandisalsoreflectedintheTrialBalancesheetasanentryrecoverablefromitsprofits. 5.Whoarecreditors/debtorsinaTrialBalance? Businessesrunonmoneyandtheoutflow/inflowofcash.Creditorsanddebtorsarealwaysinvolvedinshapingthebusiness’cashflowandefficientworkinguse.Anindividualwhosuppliesservicesorgoodstothefirmoncreditisasundrycreditor.Similarly,asundrydebtorisanindividualtowhomthefirmsuppliesservicesorgoodsoncredit.TheseentriescanbefoundintheTrialBalanceandP&LAccount. 6.WhatismeantbyAccumulatedDepreciation? Allassetshavealimitedlifeandareducedvalueduetowearandtearanduse.Thisiscalleddepreciation.Accumulateddepreciationmeansthetotaldepreciationamountsofacompanyonitsassetsforthespecifiedperiod. PreviousPost ProfitandLossAccount&Statement NextPost AllYouNeedToKnowAboutCashDepositSlip CashBook-Free&EasySalesandExpenseApp DownloadTheApp 3GoldenRulesofAccounting,ExplainedwithBestExamples 1minread 3GoldenRulesofA… 1minread RelatedPosts WhatisCompositeandMixedSupplyUndertheGST? WhatistheDifferenceBetweenSingleEntryandDoubleEntryBookkeeping? 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