After posting the accounts in the ledger, a statement is prepared to show the separately the debit and credit balances. Such a statement is known as Trial Balance.
Meaning:
A trial balance is a list of all the accounts which have an outstanding balance. It checks the arithmetic to see if the total of the debits is equal to the total of the credits.
Objectives of Preparing Trial Balance
1. Trial balance helps to check the arithmetical accuracy of the accounts.
2. The financial statements as prepared based on the trial balance.
3. The trial balance serves as a summary of what is contained in the ledger.
Methods
1. Total Method: Under this method, every ledger account is totaled and that total amount (both credit and debit side) is transferred to trial balance. The difference of totals of each ledger account is the balance of that particular account. This method is not commonly used as it cannot help in the preparation of financial statements.
2. Balance Method: Under this method, every ledger account is balanced and those balances only are carried forward to the trial balance. Financial statements are commonly prepared on the basis of this method.
3. Total and Balance Method: As name shows it is combination of above two methods. Under this method, statement of trial balance shows to balance contains the balance in both ways as explained in the above two methods.
Rules:
Following are the rules to prepare trial balance from Ledger balances:
1. The following balances must be placed in the debit side of the trial balance:
• Asset Accounts
• Expenses Accounts
• Losses
• Drawings
• Cash and Bank Balances
2. The following balances must be placed in the credit side of the trial balance:
• Liabilities Accounts
• Income Accounts
• Profits
• Capital Account
Format of Trial Balance:
Example:
