Concept of Trial Balance

Before learning about trial balance, we have to recall the concept of Journal and Ledger. Journal is the book of primary entry recording the debit and credit aspects of a transaction identifying the respective impacted account. Ledger is the next step after the preparation of the journal. Ledger is the classified record of different accounts along with their debit and credit impact as recorded in a journal. The scope of trial balance comes only after the ledger posting and balancing is completed.

Trial balance is a statement prepared to check the arithmetical accuracy of the books maintained.  It is prepared after the posting and balancing work of the ledger is completed. It is prepared based onthe total or balances of the ledger accounts. It checks the equality of total debit and total credit balances. If they are equal, there is no arithmetical error resulting from mistakes while preparing journals and ledger. It examines whether or not the double-entry system has been correctly followed. It supports in preparation of financial statements such as Trading/Manufacturing Account, Profit and Loss Account, Income Statement and Balance Sheet.

Specimen of Trial Balance:

Under Total Approach

Trial Balance of ………….

AS on ………………..

S.No.	Name of the Account	LF	Dr. Total	Cr.Total

Under Balance Approach

Trial Balance of ………….

AS on ………………..

S.No.	Particulars	LF	Dr. Balance	Cr.Balance

Benefits/Advantages of Trial Balance

Trial balance is a statement with different benefits or advantages in accounting. Some major advantages/benefits of trial balance are as follows:

• It checks the correctness of ledger posting identify posting error (if any)
• It checks the arithmetical accuracy of a journal, ledger, subsidiary books, cash book etc. prepared before the preparation of trial balance
• It ensures duality of accounting correctly exists or not by equality of total debit balance and total credit balance
• It facilitates in preparation of financial statements such as Trading/Manufacturing Account, Profit and Loss Account, Income Statement and Balance Sheet
• Trial balance acts as a link between the ledger and financial statements
• It summarizes large details of different accounts precisely in one place
• Management of companies can take useful decisions on different items based on the summary provided by the trial balance

Errors Disclosed By Trial Balance

The preparation of trial balance checks the arithmetical accuracy of accounts. It can find out whether or not the books of accounts are correct or not. Apart from this, there are other key errors disclosed by the trial balance. These are mentioned as under:

• An error of recording the wrong amount or in the wrong side of journal while recording from journal supporting documents like bills, receipts, memos and payment vouchers
• An error of posting on the wrong side, wrong balance posting and wrong balancing at the time of preparing ledger
• Any additional error in journal, ledger, cashbook subsidiary books
• Errors at the time of extracting ledger balances at the time of preparing a trial balance
• An error of recording balance in wrong side and addition at the time of preparing trial balance itself

Errors Not Disclosed By Trial Balance

The agreement (Debit = Credit) of the trial balance does not mean everything is correct and accurate about the books. There could still be some errors that cannot be disclosed by a trial balance. The errors not disclosed by trial balance are of the following types:

• Error of Principle:

This error is related to accounting principles. This type of error is conducted at the time of recording in a journal which cannot be disclosed by a trial balance. For instance, the purchase of furniture of Rs.10000 is debited to purchase A/C instead of Furniture A/C. This is incorrect as per the accounting principle. But it cannot be disclosed by trial balance as it is arithmetically correct.

• Error of Omission:

This is a type of error in which a transaction is fully not recorded in the journal. Since it is not recorded in a journal, it does not influence its concerned accounts. For instance, cash sales of Rs. 12000 is omitted from recording in a journal. In such a case, the trial balance agrees despite this error. Hence, such an error of omission cannot be disclosed by a trial balance.

• Error of Duplication:

This is a type of error in which a transaction is entered correctly in a journal, but recorded more than once. Such duplication does not affect the agreement of the trial balance. For instance, wages paid of Rs.3000 are recordedcorrectly twice in the journal. Such duplication cannot be disclosed by trial balance which is regarded as an error of duplication.

• Error of Original Entry:

This type of error is conducted while making the entry of a transaction. In such an error, the wrong amount is recorded in both debit and credit of a transaction in its original books of record. For example, the electricity bill paid of Rs.400 is recorded as Rs. 40 in both Electricity A/C and Cash A/C. Both debit and credit side is recorded equal and trial balance cannot disclose such error.

• Error of Commission:

This is a type of error in which the wrong account is debited or credited. In this type of error, the nature of the correct and incorrect accounts is the same. For example, salary paid Rs.1200 is debited to Wages A/C, or Commission Received Rs.1500 is credited to Interest Received A/C. In these cases, the trial balance will match and cannot disclose such error of commission.

• Error of Compensation:

This is a type of error in which two or more sets of mistakes cancel out the effect of the error. In such a case, the trial balance agrees. For example, Carriage A/C of Rs.1000 was recorded as Rs.100 and Custom Duty A/C of Rs.100 was recorded as Rs.1000. Here, the effect of the earlier error is nullified by the effect of the later error. Such error is not disclosed by a trial balance.