Trial Balance - Definition, examples and explanation

Trial balance is basically prepared at the end of an accounting period, which acts as the first step towards the preparation of financial statements. Trial balance is a list of closing balances of all the ledger accounts at a specific time that is on a particular date and in trial balance, all the ledger balances are sorted and segregated as debit balance and credit balance. In other words, Trial balance is just a consolidated statement showing the balances of accounts that are to be transferred to Balance sheet.

If all the accounting transactions are properly recorded, journalized and posted, the totaling is also automatically done without any mistake. Then, the total balance of credit will be equal to that of debit. All the ledgers can be classified into Assets, Liabilities, Income, Expenses, and Capital generally. Capital can be also called as Owner’s fund. In all these accounts, expenses and assets normally have debit balances. And in case of incomes, capital and liabilities, it will have credit balances. Generally, trial balance acts as working papers, but they are documents which give a basis to the accountants for the purpose of preparing financial statements.

Trial balance helps out to verify whether our journalizing, posting and totaling work are being done in the process of accounting. If the total balance of debit is equal to that of sum total of credit, it points out that all the processes in the accounting and is trustworthy and is without any bias or errors (except to some errors which are discussed in subsequent articles) to an extent.

Trial balance ensures that for all the transactions both debit and credit entry made for the corresponding entry at the same time. Trial balance also to an extent assures arithmetical accuracy of accounting entries.

If the totals of both the sides in trial balance do not match with each other or doesn’t agree, the difference is to be enquired and cleared off before stepping forward for the preparation of financial statements. Trial balance supports to find errors and clarify those errors.

Trial balance also has some limitations. Trial balances will fail to identify compensating errors, full omission, and errors of principal. A trial balance cannot be considered as evidence because of these limitations.