Objectives of trial balance

However, this is not conclusive evidence of the correctness and the accuracy of the ledger accounts. Locating the Errors It helps in locating the errors in the posting or recording of the transactions. When a Trial Balance does not tally, then we know that the errors must have occurred at the time of.

Preparation of Financial Statements The Trial Balance is a summary of all the ledger account balances. Thus, while preparing the final accounts, we do not need to refer to the individual accounts. We can take the final balances of the accounts directly from the Trial Balance. Let us now look at the trial balance format. Question: Explain the steps in the preparation of the Trial Balance? Answer: The steps in the preparation of the Trial Balance are:.

Meaning and Objectives of Preparing Trial Balance We all know that we do accounting for financial transactions on the basis of the dual aspect concept of accounting.

Preparing Trial Balance A Trial Balance is a statement that shows the total debit and total credit balances of accounts. Objectives of Preparing Trial Balance 1. When a Trial Balance does not tally, then we know that the errors must have occurred at the time of totaling the Subsidiary books posting in the ledgers balancing the accounts writing the account balances in the trial balance totaling the trial balance.

These statements contain balances of various ledger accounts. As Trial Balance contains balances of all ledger accounts, in financial statements the balances of ledger accounts are carried from the Trial balance for proper analysis. If the total of two columns of the trial balance agree it is proof of arithmetical accuracy in the ledger posting. However, if the totals of the two columns do not tally it indicates that there are some mistakes in the ledger accounts.

This prompts the accountant to find out the errors. Comparison of ledger account balances of one year with the corresponding balances with the previous year helps the management take some important decisions.

This is possible by using the Trial Balances of the two years. While making financial statements adjustments regarding closing stock, prepaid expenses, outstanding expenses etc are to be made. Trial balance helps in identifying the items requiring adjustments in preparing the financial statements.

Followings are the methods of preparing trial balance :. Under this method, the total of each side in the ledger debit and credit is ascertained separately and shown in the trial balance in the respective columns.

The total of a debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on the double-entry system. However, this method is not widely used in practice, as it does not help in assuming the accuracy of balances of various accounts and preparation of the financial statements. This is the most widely used method in practice.

Under this method, a trial balance is prepared by showing the balances of all ledger accounts and then totalling up the debit and credit columns of the trial balance to assure their correctness. The account balances are used because the balance summarises the net effect of all transactions relating to an account and helps in preparing the financial statements.

It may be noted that in the trial balance, normally in place of balances in individual accounts of the debtors, a figure of sundry debtors is shown, and in place of individual accounts of creditors, a figure of sundry creditors is shown.

This method is a combination of the totals method and balances method. Under this method, four columns for amount are prepared. Two columns for writing the debit and credit totals of various accounts and two columns for writing the debit and credit balances of these accounts. However, this method is also not used in practice because it is time-consuming and hardly serves any additional or special purpose. Followings are the classification of errors in the trial balance :.

Keeping in view the nature of errors, all the errors can be classified into the following four categories:. These are the errors that are committed due to wrong posting of transactions, wrong totalling or wrong balancing of the accounts, the wrong casting of the subsidiary books, or wrong recording of the amount in the books of original entry, etc. This transaction was correctly recorded in the cashbook. This constitutes an error of commission.

As a result, the debit and credit columns of trial balance must always be equal. If they do, it is assumed that the recordings of financial transactions are accurate. Conversely, if they do not, it is assumed that they are not arithmetically accurate. Therefore, one important purpose of preparing trial balance is to provide a check on the arithmetical accuracy of the recordings of the financial transactions.

To Help Locate Accounting Errors Since the trial balance indicates if there is any error committed in the journal and the ledger, it helps the accountant to locate the error because the starting point of locating errors is trial balance itself. To Summarize The Financial Transactions A business performs several numbers of financial transactions during a certain period of time.

The transactions themselves can not portray any picture of the financial affairs of the business.