How to Prepare a Trial Balance

The main purpose of preparing a trial balance is to assist in the preparation of the year-end balance sheet. Thus, the trial balance is prepared towards the end of the accounting cycle. This article explains, 

     1. What is an Accounting Cycle

     2. How to Prepare a Trial Balance
           – Errors Reflected in the Trial Balance
           – Errors that are Not Reflected in the Trial Balance

What is an Accounting Cycle

Recording of financial information in accounts is a lengthy process with several steps. When the technology was not as advanced as at present, all these steps were conducted manually. Now, most companies use advanced accounting software to prepare financial accounting records; therefore, this process is less time consuming and convenient. The steps for preparing the financial statements are as follows.

The main objective of preparing a trial balance is to detect the mathematical accuracy of the ledger balances. According to the basic accounting principle, all debit (DR) entries should be equal to credit (CR) entries. For every debit entry, there is a corresponding credit entry.

Assets + Expenses = Liabilities + Income + Capital

As per the above accounting equation,

An increase in an asset or expense is recorded as a debit entry while a decrease is recorded as a credit entry.

Similarly,

An increase in liability/ income/ capital is recorded as s credit entry while a decrease is recorded as a debit entry.

How to Prepare a Trial Balance - 2

How to Prepare a Trial Balance

A trial balance has a simple structure where all the ending debit balances will be recorded in one column with all the ending credit balances in another. These ending balances are obtained from individual ledger accounts such as sales, purchases, inventory, receivables, creditors etc. A trial balance provides all the ending balances in a single document at a glance; thus, it is easy to compare the balances. If all the transactions for an accounting period are accurately recorded, the sum of the debit balances of the trial balance should be equal to the sum of the credit balances. If this is achieved it can be concluded that the recording of transitions is mathematically accurate.  It also assists in disclosing a number of possible errors in case of occurrence and helps to identify which journal entries should be posted in order to correct the identified errors. Thus there are errors that can be identified by preparing a trial balance while others are not reflected through the trial balance.

How to Prepare a Trial Balance

Errors Reflected in the Trial Balance

The following errors are single sided errors and are reflected in the trial balance. In such situations, the trial balance will not balance.

Error

Example

Errors of partial omission

Only the debit entry or the credit entry is posted in accounts

In cash payment for inventory of $ 1500 the cash A/C entry is not recorded

Errors of casting

The total of an account is more or less recorded

The total of the purchases ledger is overcasted by $450

Errors of carrying forward

The ending balance is carried forward incorrectly

The closing balance $550 of sales ledger is carried forward as $500

Errors that are Not Reflected in the Trial Balance

Error

Example

Error of Principle in Accounting

The entries are posted to the incorrect type of account

A sale of $2200 is credited to the salaries expenses account instead of the sales account

Errors of Omission in Accounting

The entries are completely omitted from the accounts

A payment of $ 3500 to creditors is not recorded in accounts

Error of Commission

An entry is posted in the correct type of account, but the wrong account

Cash paid $ 1150to AB Ltd. is recorded as a cash payment to ABC Ltd.

Error of compensation

Incorrect entries in two or more accounts cancel out each other

Fixed assets account is incorrectly totaled and understated for $500, and the rent account is also incorrectly totaled and overstated for $500.

Error of Original Entry

The incorrect amount is posted to the correct accounts

Cash receipt from receivables for $ 300 is recorded as $3000

Complete Reversal of Entries

The correct amount is posted to the correct accounts but the debits and credits have been reversed

A cash sale of $ 750 is recorded with sales account debited and cash account credited

Reference:

“What is depreciation? | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 25 Jan. 2017.
“Types of accounting errors Archives.” Finance and Accounting simplified. N.p., n.d. Web. 25 Jan. 2017.

Image Courtesy:

“y2cary3n6mng-daet13-example-of-a-trial-balance” by   via

About the Author: Dilini

Dilini is a Management and Financial Accounting professional with MBA. She is very about sharing knowledge and her areas of interests include Research Methods, Marketing, Management Accounting and Financial Accounting.

Leave a Comment


Related pages


tuff meansformalin vs formaldehydeesthetician vs aestheticiancold blooded warm blooded differencedifference between cytosol and cytoplasmshakespeare comedies and tragediesmeaning of allomorphc3 and c4 plants definitionanalogy and metaphor differenceabraham lincoln courageous actsshakespeare tragedy comedystructure of a recountwhen do you use sincerely and faithfully in a letterelectro magnet definitiontemporary magnetismlabradors and golden retrieverswhat is the structural difference between starch and cellulosebrass and bronze compositionvalencieswhat is the difference between male and female cannabis plantsjupiter inner or outer planetdifference between end point and equivalent pointarmagnac cognac differencewhat is difference between bipap and cpappure bicarbonate powderaddition polymerization and condensation polymerizationbelief synonymdifference between msc and msdifference between practise and practicetheft larceny differencevernier caliper least count formulawhat is achiral moleculegymnosperms and angiosperms differencesdefine adverbialaerated ice creamwhat is the difference between hyperglycemia and hypoglycemiathe definition of duskopen vowel wordsdifference between lime lemondefine nucleoplasmwhat is the function of radiclevascular and non vascularlysosomes and peroxisomeseubacteria kingdom examplesde jure legal definitionwhat is the difference between isopropyl and denatured alcoholwhat is the difference between a puma and a pantherdifference of transverse and longitudinal wavesdefine polysemycapitalist free marketdefinition of anode and cathodecarpe diem poem examplesproverbs and adagescultural assimilation definitionwhat is the difference between gerund and participlehomophones and homonyms exampleshallucination vs delusion examplesdefine aristocracieshyper vs hypoglycemiamicrofilament functioncumulative adjectives definitionwhat are deuterostomescompare and contrast inner and outer planetswhat is the past tense of forgodifference between stomach bug and food poisoningwhat is difference between alpaca and llamaaffectionate defdifference between straightening and smoothingtransitive and intransitive verbs in englishexample of c4 plantscatabolic hormones definitioncanker sore vs cold soreiubmb enzyme nomenclaturedifference between cyclone hurricane and tornadodifferentiate between metal and nonmetalmonocot seeds and dicot seeds examples