Trial Balance may be defined as a statement that contains balances of all ledger accounts on a particular date. Trial balance consists of a debit column with all debit balances of accounts and credit column with all credit balances of accounts. The totals of these columns if tally it is presumed that ledger has been maintained correctly. Trial balance proves only the arithmetical accuracy of posting in the ledger. Trial balance is prepared for the following mentioned reasons.
Why is Trial Balance Prepared
- Ensuring arithmetical accuracy: Arithmetical accuracy in ledger posting means writing correct amount, in the correct account and on its correct side while posting transactions from various original books of accounts, such as Cash Book, Purchases Book, Sales Book.
- Assisting in preparing Financial Statements: The ultimate objective of the accounting is to prepare financial statements i.e. statements of comprehensive income, statement of cash flows and statement of financial position of a business enterprise at the end of an accounting year. These statements contain balances of various ledger accounts.
- Finding out locating possible errors: If total balances of two columns of the trial balance agree, it is a proof of arithmetical accuracy in the ledger posting. However, if the two columns do not same it indicates that there is some mistake in the ledger accounts. This prompts the accountant to find out the errors.
- Making comparison: Comparison of ledger account balances of one year with the corresponding balances with the previous year helps the management taking some important decisions. This is possible by using the trial balances of the consecutive two years.
- Making year ending adjustments: While making financial statements adjustments regarding closing stock, prepaid expenses, outstanding expenses are to be made. Trial balance helps in identifying the items requiring adjustments in preparing the financial statements. Trial Balance is generally prepared at the end of the year. However it can be prepared at any time during the accounting year to check the accuracy of the posting.