What is the Trial balance? 

In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally. 

Trial balance records debit and credit balance of all the ledger accounts. All the debit balances are recorded on one side and credit balances are recorded on the other side. Only when both sides are equal, it is considered as an accurate trial balance. The general purpose of preparing this is to ensure that all the transactions recorded in ledger are accurate.  

Format of trial balance   

Before knowing how final accounts are prepared from trial balance let us know briefly about the final account and components of the final account. 

 Final account: One of the main purposes of businessmen to enter into a business is to earn profit and accounting is the way to know the profit and loss of the business concern. As to know the profitability and the position of the business, these accounts are prepared at the end of the accounting cycle that is why it is known as the final account.  

Components of final accounts:  

• Trading account: It is a part of final accounting that shows the gross profit or loss earned by the business during a particular period of time. It gives details about the total sale and purchase and all direct expenses and incomes.  
• Profit and loss Account: trading accounts show the gross profit at the end while the profit and loss accounts shows net profit and loss at a particular period of time. It is also called an income statement.   
• Balance sheet: It shows the financial position of the business. It records all the assets on one side and liabilities on the other side. A balance sheet is a part of financial statements.

How Trial Balance assists in Final Accounting? 

Every company prepares a final account at the year-end or at each accounting period. Final accounts show both financial position and profitability of the company. Final account includes a trading account, profit and loss account and balance sheet and it cannot be prepared easily without the help of trial balance.  

While preparing the final account, accountant starts with reading and analyzing the trial balance and all the adjustments. In the final account, an accountant starts with preparing a trading account. All the direct expenses are recorded on the debit side and all the direct incomes are recorded on the credit side. Gross profit is arrived at after balancing both the sides.  

To compute the net profit, all the indirect expenses are recorded on the debit side and indirect incomes on the credit side. In other words, we can say that all the debit items of the trial balance are recorded either on the debit side of the trading and PL account or on the asset side of the balance sheet. All the credit items of the trial balance are recorded either in the credit side of trading and PL account or in the liability side of the balance sheet. All the items of trial balance are posted once. The adjustment items have a double effect, one debit effect, and one credit effect.  

Importance of Trial Balance 

Checking accuracy: It helps in checking whether all the amount entered in the ledgers is accurate or not. If the trial balance does not tally, it means there is some mistake in recording amount in ledgers.  

Helps in final accounting: It is necessary to prepare a final account at the end of the accounting cycle. All the balances of ledger accounts are recorded in the trial balance hence it makes it easier to prepare a final account for accountants.  

 Helps in comparing: Balances of various items of trial balance helps in comparing balances of the current period and any other period. This helps businesses in any decision making and knowing the current trend of business.   

Trial Balance vs Balance Sheet 

Balance sheet is the part of the financial statement which shows the financial position of the business. It has two sides, one is the liability side and the other is the asset side. Liability side includes all the liabilities, noncurrent liabilities and capital of the business and asset side is categorized in two parts that is current asset and non-current asset. Current assets are those assets which can be converted into cash within a short period of time and non-current assets are those assets which help business in its operation. 

Whereas trial balance is a statement in which all the ledger balances are transferred and it helps to know the accuracy of debit and credit transactions recorded in ledgers. It helps to prepare the financial statements which include the balance sheet. 

Balance sheet is a component of a financial statement but a trial balance is not a component of a financial statement. Trial balance is used by the internal users whereas the balance sheet is used by external users. Trial balance is prepared from ledgers whereas balance sheet is prepared from trial balance. 

Context and Applications: 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for       

• BBA 
• B.COM 
• M.COM