What is a Trial Balance

The Trial Balance is a statement of ledger account balances as on a particular instance. Trial Balance of M/s Wearall Textlies as on 31st March 2006 Particulars Opening Stock Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery Total L/F Debit Amount Credit Amount (in Rs) (in Rs) 63,650 22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 2,50,000 1,19,000 2,10,000 1,80,000 36,86,000 6,52,950 2,08,000 5,69,000 47,68,950 47,68,950

Why is a Trial Balance prepared?

The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Though not a conclusive proof, the agreement of the trial balance is a prima facie evidence of the absence of mathematical errors. This is the most important purpose for which the trial balance is prepared.
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 Isn't Trial Balance made for enabling preparation of Final Accounts?

No, not at all. Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle. Since Final Accounting can be completed without the preparation of the Trial Balance, we can say that enabling the preparation of final accounts is not the purpose of the trial balance.

When is a Trial Balance prepared?

The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the end of the accounting period. Theoretically, the trial balance can be prepared as and when needed. The practical difficulty in preparing the trial balance as and when needed is the requirement of the balances of all the ledger accounts within the organisational accounting system. Different ledger accounts are balanced at different time intervals based on the information needs of the organisation. Say in a typical organisation Cash a/c is balanced daily, Expenses, Creditor and Debtor accounts are balanced on a monthly basis, Asset accounts are balanced annually etc. The ledger account balances relating to all ledger accounts would not be available ready hand at any given instance. Year ending is one such instance when the balances are derived.

Computerised Accounting
In mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as and when needed.

Accounting Cycle Absence of Preparation of Trial Balance

Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle. The Accounting Cycle (activities involved)


Begins with opening the books of accounts for an accounting period by recording the opening entry;

Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____ Debit Credit V/R Amount Date Particulars L/F Amount No. (in Rs) (in Rs) 1st Assets a/c Dr January To Liabilities a/c To Capital a/c [For bringing the balances in the various ledger accounts at the end of the previous accounting period into books.]
   

This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger accounts. Recording the various transactions all through out the accounting period; Balancing the ledgers as and when needed and finally at the end of the accounting period; Recording the transactions for making up the final accounts 1. Making the Trading a/c 2. Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c 3. Making the Profit and Loss a/c 4. Closing the Profit and Loss a/c by transferring the balance in it to Capital a/c (or Profit and Loss Appropriation a/c)

 

Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up and closing the Trading and Profit & Loss a/c.) The accounting cycle ends with recording the closing entry for closing the books of accounts.

Journal in the books of M/s Amonaya Metals for the period from 1st Jan to 31st Dec 2007 Debit Credit V/R Date Particulars L/F Amount Amount No. (in Rs) (in Rs) 31st Liabilities a/c Dr December Capital a/c To Assets a/c [For carrying the balances in the various ledger accounts at the end of the accounting period to the subsequent accounting period.]


This is the journal entry that supports the posting To Balance c/d and By Balance c/d in the various ledger accounts.

Final Accounting : Use of Journal/Ledger

Final Accounting deals with all the ledger account balances at the end of the accounting period in one way or the other.


All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the Trading a/c. For this at least two journal entries are recorded.

The Trading a/c is closed by transferring its balance to the Profit and Loss a/c. For this a journal entry is recorded. 10

All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by transfer to the Profit and Loss a/c. For this at least two journal entries are recorded.

The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss Appropriation a/c. For this a journal entry is recorded.

All the remaining accounts are listed out in the Balance Sheet.

Final Accounting : Use of Trial Balance : Avoiding Journal/Ledger

In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the information in the Trial Balance avoiding the act of journalising the transactions involved in final accounting. This is done by showing each item in the ledger accounts (Trading, P/L a/c) or the statement (Balance Sheet) where it would be ultimately appearing had the actual procedure been adopted. This would have the same affect as recording the journal and posting into the ledger.

Example
The balance in the Carriage Inwards a/c (direct expenditure) is transferred to the Trading a/c by recording a Journal entry. By this, the Carriage Inwards a/c would get closed (its balance becomes zero) and the Trading a/c would get debited with that balance. In preparing the Trading a/c the balance in the Carriage Inwards a/c can be ascertained from the Trial Balance and shown on the debit side of Trading a/c.

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 Reduction of Work involved in Manual Accounting

Since not recording the related journal entries makes no difference as far as final accounting is concerned, in almost all cases in manual accounting, the process of recording the journal entries required for final accounting and updating the ledger is bypassed to reduce the burden of the work involved.

Information in Trial Balance To be dealt with only once

In making up final accounts using the information in the Trial Balance, we should ensure that each item of information (representing a ledger account balance) should be dealt with only once. In final accounting each piece of information can appear either on the debit or credit sides of the Trading a/c or "Profit & Loss a/c" or on the assets or liabilities side of the "Balance Sheet". Each item from the Trial Balance should be dealt with only once in Final Accounting.

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y Interpreting the items in the Trial Balance

A statement for interpretation of the various ledger account balances in the above trial balance Trial Balance of M/s Wearall Textlies as on 31/03/06 Statement of Analysis Account Description Account Balance Where Which Amount Type Nature Side Opening Stock Direct Nominal Debit Trading Debit 63,650 Textile Expenses Nominal Debit a/c Debit 22,56,000 Purchases Direct Nominal Debit Trading Debit 3,25,000 Wages Expenses Nominal Debit a/c Debit 1,78,200 Octroi Direct Nominal Debit Trading Debit 1,04,000 Salaries Expenses Nominal Debit a/c Debit 1,26,000 Rent Direct Nominal Debit Trading Debit 74,650 Printing and Expenses Nominal Debit a/c Debit 86,000 Stationery Indirect Real Debit P/L a/c Assets 26,000 Advertisements Expenses Real Debit P/L a/c Assets 4,23,450 Cash Indirect Personal Credit P/L a/c Liabilities 2,50,000 Office Building Expenses Personal Debit P/L a/c Assets 1,19,000 Capital Indirect Real Debit B/S Assets 2,10,000 Bank Expenses Personal Credit B/S Liabilities 1,80,000 Motor Vehicles Indirect Nominal Credit B/S Credit 36,86,000 Sundry Expenses Spl. Credit B/S Liabilities 6,52,950 Creditors Asset Nominal Debit B/S Assets 2,08,000 Sales Asset Personal Debit B/S Assets 5,69,000 P/L Liability Real Trading Appropriation Liability/Asset a/c Sundry Debtors Asset B/S Machinery Liability B/S Direct Incomes B/S Accumulatd Profit Asset Asset

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y Making up the Final Accounts

Final Accounting using the information in a Trial Balance involves nothing more than putting the right items in the right places i.e. on the appropriate side of Trading a/c, Profit and Loss a/c or the Balance Sheet. Dr Trading and Profit & Loss a/c [For the year ending 31/03/06] Cr Particulars Amount Particulars Amount (in Rs) (in Rs) To Opening Stock 63,650 By Sales 36,86,000 To Textile Purchases 22,56,000 To Wages 3,25,000 To Octroi 1,78,200 To Gross Profit 8,63,150 36,86,000 36,86,000 To Salaries 1,04,000 By Gross Profit 8,63,150 To Rent 1,26,000 To Printing and Stationery 74,650 To Advertisements 86,000 To Net Profit 4,72,500 8,63,150 8,63,150 Balance Sheet of M/s Wearall Textlies as on 31st March 2006 Liabilities Amount Assets Amount Capital 2,50,000 Cash 26,000 Sundry Creditors 1,80,000 Bank 4,23,450 P/L Appropriation 11,25,450 Office Building 1,19,000 [6,52,950 + 4,72,500] Motor Vehicles 2,10,000 Sundry Debtors 2,08,000 Machinery 5,69,000 15,55,450 15,55,450

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Care in dealing with Profit and Loss Appropriation a/c (or Capital a/c)
The balance in the "Profit & Loss Appropriation a/c" as shown in the Trial Balance represents the balance carried forward from the previous accounting period (i.e. year ending 31st March 2005). The Profit and Loss a/c relating to the current period is closed by transfer its balance to the "Profit & Loss Appropriation a/c" Dr Profit and Loss Appropriation a/c Cr Date Particulars J/F Amount Date Particulars J/F Amount (in Rs) (in Rs) 31/03/06 To Bal c/d 11,25,450 31/03/06 By Bal b/d 6,52,950 31/03/06 By Net Profit 4,72,500 Total 11,25,450 Total 11,25,450 01/04/06 By Balance b/d 11,25,450 Therefore, while showing the information (balance) relating to the Profit & Loss Appropriation a/c in the Balance sheet, care should be taken to make appropriate adjustment to the balance on account of the transfer of balance from the Profit and Loss a/c. The balance that appears in the balance sheet is not the one that appears in the trial balance, but the one that takes into consideration the adjustment on account of current periods profit or loss also. If the balance in Profit and Loss a/c is transferred to the Capital a/c, then such a care should be taken with regard to the Capital a/c balance. A closing entry is recorded in relation to this, though it is not directly related to preparing the balance sheet.

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If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be recorded and all the ledger accounts that are affected by those transactions are to be posted to and updated. That would result in the making up of the Trading a/c and Profit and Loss a/c. The balance sheet is prepared by drawing up a statement of ledger account balances carried forward through the closing entry.

Edexcel & Cambridge Resources | Mystudytable http://www.mystudytable.com/ Revision Notes: Adjustments To Trial Balance http://www.mystudytable.com/accounting-f48/revision-notesadjustments-to-trial-balance-t3731.html Author: hixam [ Sat Mar 05, 2011 9:26 am ] Post subject: Revision Notes: Adjustments To Trial Balance Revision Notes: Adjustments To Trial Balance Salient Points: 1. Understand WHAT are adjusting entries: Are journal entries made at end of month or year in order to match all expenses in the current month/year against the revenue associated to them; Based on Matching concept Page 1 of 1

3. Understand HOW MANY GROUP of adjusting entries: Deferrals Accruals

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3a. Deferrals: Expenses deferrals/prepaid/prepayments like insurance, rental prepaid Depreciation Revenue Deferrals like unearned revenue

3b. Accruals: Income earned but not yet recorded ( sales recognition); Expenses incurred but not yet recorded( to match to revenue recorded) like utilities bills not received and includes doubtful debts.conservatism /prudence rule) 4. Remember that we have the unadjusted trial balance which is for checking the double entries and after completing all the above adjusting entries and posted into the ledger and all related accounts are adjusted, it then become the Adjusted Trial Balance which is the basis for the preparation of financial statements. OTHERS: A deferred revenue or income takes place when a payment is received before any service or good has taken place. Hence this payment received is credited as a liability in an account called unearned revenue until such service or good being provided.

A deferred expense takes place when a transaction involves COST but the related service has not been used up. A deferred expense is recorded as an assets Company often pays up rental and insurance in advance. When such related services are used up, the expenses will then be taken up by debiting expenses and credit such prepayment account.

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Accruals need not be only expenses but also for income. An Accrued revenue often arises from interest from an investment Author: Atif [ Sat Mar 05, 2011 9:53 am ] Post subject: Re: Revision Notes: Adjustments To Trial Balance thankyou for the post Author: hixam [ Sun Mar 06, 2011 3:54 am ] Post subject: Re: Revision Notes: Adjustments To Trial Balance your welcome Author: Elina [ Sun Mar 06, 2011 11:21 am ] Post subject: Re: Revision Notes: Adjustments To Trial Balance thank you hixam Author: hixam [ Mon Mar 07, 2011 7:34 am ] Post subject: Re: Revision Notes: Adjustments To Trial Balance your welcome

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