Trial balance is a type of report that lists closing balances of each ledger account. Trial balance is the first step towards the creation of a financial statement. It is created at the end of an accounting period.
Ledger balance are distributed into debit and credit balances. The purpose of creating a trial balance is to check the arithmetical accuracy between debit and credit sides. Ideally, the credit and debit balance will be tallying if proper entry is done.
Preparation of Trial Balance
It involves the following steps:
- All the Ledger Accounts are closed at the end of an accounting period.
- Ledger balances are posted into the trial balance.
- Trial Balance is cast, and the errors are identified.
- A suspense account is created for agreeing to the trial balance temporarily until corrections are accounted for.
- Errors identified are then rectified by posting of corrective entries.
- Any such adjustments that are required at the period end, which are not previously accounted for are immediately incorporated into the trial balance.
Uses of Trial Balance
Following are the uses of trial balance:
- The comfort of posting adjustment: Tallied trial balance is very helpful, and adjustments can also be made with rectification entry.
- Helpful for Auditing: Trial balance contains a list of all ledgers with the respective balances, so it is easier to audit for the discrepancies.
- Assessing Credibility: Trial balance is an important parameter used by lending agencies or investors to determine the credibility of the business.
Advantages of Trial Balance
- Trial balance is based on the double-entry system of debit and credit. Hence, an entry for a debit will have an opposite entry in credit which establishes the arithmetical accuracy of accounts.
- Trial balance provides a summary of all ledgers and hence is able to present details of transactions in the organisation.
- It acts as the first step towards the creation of financial statements.
Limitations of Trial Balance
Following are some of the limitations:
- It is unable to find the missing entry from the journal and ledger
- It is unable to protect recording errors.
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