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Trial balance: What is it, advantages and applications

[] In this article, we will explain the meaning of Trial balance, its applications and importance for businesses.

What is a trial balance?

A trial balance has all the general ledger accounts contained in the ledger of a business. This listing will include the name and value of nominal ledger balances in each account.

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The first description of double-entry bookkeeping is in Lucca Pacioli’s Summa de arithmetica, in the section Particularis de Computis et Scripturis, published in 1494. He prescribed a technique similar to a post-closing trial balance that accountants perform during an audit.

Trial balance is the report of accounting in which ending balances of different general ledger accounts are available. The trial balance is prepared on the last day of the accounting period. 

For example, utility expenses during a period include the payments of four different bills amounting to Rs 2,000, Rs 4,000, Rs 3,500 and Rs 5,500. In this case, a single utility expense account would be shown with the total of all expenses amounting to Rs 15,000.

Concept of trial balance 

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Imagine you keep a diary of your daily activities. You review your diary and categorise it at the end of each month. You also create a spreadsheet and split the groups into productive and non-productive categories. This is precisely what corporations do. There are two accounting books needed to create a trial balance:

  1. Journal, where the accounting transactions are recorded.
  2. Ledgers, which are used for summaries and categories of data.
  3. Trial balance, creation of a spreadsheet and classification of the ledgers.

A balance sheet is a sheet that lists all of the ledger balances and divides them into debit and credit categories. The name of the ledger and the balance are typically included in a trial balance. This is produced as a specific date, which could be the end of the fiscal year or the beginning of the calendar year.

Advantages of trial balance

Mathematical precision 

The double entry system is an accounting method wherein every transaction will have two entries of equal and opposite nature. As a result, all debt ledger totals will equal credit ledger totals at any moment in time, thereby eliminating the problem of simultaneous occurrence and detection of errors. In a trial balance, all accounts are listed on a particular date. It is used to test the accuracy and completeness of financial records by reconciling them against the actual balances in each account at that date.

It is an indicator of the arithmetical accuracy of the books of accounts and is used to check the totals from the sub-ledgers before closing the books. 

Overview of accounts

Trial balance is an essential financial statement. You can easily see your organisation’s assets and liabilities and its shareholders’ equity. This trial balance template helps you create this report quickly and easily. Once you have entered your numbers in the top fields, it will automatically subtract the double-entry journal entries previously added to generate its trial balance report with values in place. It also generates a cash flow statement based on your organisation’s non-cash transactions not included in its balance sheet. So this template is money saving.

Requirement for preparing financial statements

At the end of any accounting period, a trial balance is prepared to determine the financial position from which transactions were made. It is a snapshot of the balance sheet at a given point in time. It helps the organisation track its business activities and provides information about its financial health. A trial balance is a record of all the transactions that occurred during the year, including all debits and credits. It is a prerequisite for preparing financial statements, including Profit and Loss Accounts, Trial Balance and Balance Sheet.

Trial Balance’s Applications

Adjustments are made easy

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A trial balance is a listing of all debits and credits, showing the financial position of your business at any specific moment in time. Having an accurate trial balance can help you understand your company’s financial health and predict how it will perform in the future, and identify potential issues before they get out of hand. The accuracy of a tallied trial balance can be assured, so adjustments can be made post-trial balance.

Helps in audit 

A trial balance is a list of all your ledgers and the balances in their accounts. For example, if an account has a credit balance but a debit amount, the whole ledger will be checked. A trial balance is also used by auditors to find errors in books or to see if there are any unusual transactions.

Installs credibility

Banks and credit agencies also utilise trial balances to determine a company’s borrowing capability and reliability.

Despite all of the advantages of a Trial Balance, it is critical to remember that a tabulated Trial Balance does not guarantee zero errors. Even if there are balancing mistakes, the Trial Balance will balance.

Also, if some transactions are not recorded, the ledgers will be unaffected, and the tabulated Trial Balance will show an incorrect picture.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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