Why Trial Balance is Prepared?

Trial balance can be defined as a tabular statement which is prepared at the end of the financial year. Most of the businesses make trial balance at the end of the fiscal year, which forms a base for developing the final financial statement of the company.

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In the debit section of trial balance all the expenses, losses, drawings, assets, bank and cash accounts are recorded, whereas, all the income, liabilities capital, and gains are mentioned on the credit column.

Here, the sum of both the debit and credit section should be equal, then only the trial balance is considered as balanced and mathematically correct. However, if errors occur or the total does not match, then it means there is an issue in journal or ledger entries.

Objectives of Preparing Trial Balance

  • To have a correct and precise book of accounts. Trial balance helps in preparing the account book free of mathematical errors, and both journal and ledger entry are done correctly.
  • It forms a base while composing a financial statement at the end of the fiscal year.
  • It can be taken as a ledger summary, as it has all the accounts balance.
  • Trial balance helps management to verify whether the debit and credit columns are equal or not.

Methods of Preparation of Trial Balance

  • Total Method – In this process, the ledger accounts are added, and the debit and credit sections are moved to the trial balance. It is also known as gross trial balance method. This method saves the time consumed while balancing the account, so whenever the account is totalled, the trial balance can be prepared. However, in general, this method is not applicable because one cannot rely on it while making the final accounts.
  • Balance Method: Most of the companies use this method, as the trial balance is arranged according to the ledger account balances. In this method, first, the ledger accounts are added and balanced. These balances are then transferred to the trial balance. Balance method is also known as net trial balance method.

Trial Balance List.

Mentioned below are the trial balance item list

  • Cash
  • Accounts Receivable
  • Inventory
  • Equity
  • Revenue
  • Taxes
  • Other Expenses

 

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