Trial Balance and its Importance in Accounts

A trial balance is a list of your account book balances mentioned in two columns- as debits and credits; the totals of which should tally.

The Trial Balance is named so because it is a trial to test whether you have entered your account books correctly. If the sheet tallies, you can confidently prepare your Profit & Loss and Balance Sheet Accounts.

Normally, trial balances are prepared each month to verify whether you entered your accounts correctly during that month. It is a kind of preliminary exercise. Though at times, your entries could be wrong, such as when you might have made a credit or debit entry correctly, but the corresponding entry might have been posted to the wrong account heads.

How to Prepare A Trial Balance

At the end of each month, you will draw the closing balances for each and every account in the primary accounting book known as the General Ledger or Main Ledger. When you do this, each account will show either a debit balance or a credit balance at the end of each month. Now, you can prepare a Trial Balance by writing down those balances on a sheet of paper, debits in one column and credits in the other.

You should depict the columns as below:

Particulars(Head of Account)        Ledger Folio                   DEBITS               CREDITS        

Now, enter all the balances of your accounts from the General Ledger into this sheet accurately, mentioning all the debit balances in the debit column and credit balances in the credit column. Enter the cash balance also on this sheet (taking it from the cash book) and then total both columns.

The totals of both debit and credit columns should tally. This is because, for each debit entry, there will be a corresponding credit entry in your books of accounts. 

If the totals do not tally, then you should know that there is some mistake either in your account books or in the balancing of the Ledger accounts, or maybe you have made a mistake while copying the balances from each page into the trial balance statement. So, you need to check all these points.

Importance of Trial Balance   

• Trial balance confirms the accuracy of all your debit and credit entries.
• It serves as a quick picture of your accounts.
• You can know the amount spent or incurred under each expenditure head or the amount received under each income head by looking into this trial balance statement for any particular period.    
• It is the preliminary stage for preparing your financial statements. You can prepare your Profit & Loss statement or Balance sheet statements with the help of this Trial Balance.  
• Other important documents, like Budget and Cost Sheets, are also prepared with the help of this trial balance.
• It serves as a managerial information statement for having a quick look at revenue, expenses, and income during any period.

What to Do if Trial Balances Do Not Tally 

If the Trial Balance does not tally, you should check the following factors.

1. Check/recheck the totals of both columns in the trial balance.
2. Compare the amounts of balances entered in the trial balance with your ledger and ascertain whether they were entered accurately.
3. Check whether the debit balance is entered correctly in the debit column and credit balance in the credit column of the sheet.
4. Check the balancing of each head in your General Ledger- whether it is correctly done or not.
5. If, in spite of all these verifications, the trial balance does not tally, then there can be mistakes in your original postings of accounts while entering them from your original bills and vouchers. 
6. So you need to check each and every entry done in your Main Ledger with their corresponding vouchers, which can take many days to locate the mistake.

Here is "A Smart Tip"

One simple trick, which may or may not work, is to take half of the amount (half of the difference between Debit and Credit side totals in the Trial Balance) and check for that half amount in your accounts. Whether any entry was done for such amount in your books. If there is an entry equal to that half amount, whether it has been wrongly entered on the debit side instead of the credit or vice versa. 

This method sometimes works and can save a lot of time and energy in locating the mistake. But it only works if you made one simple mistake of that kind. If you made many mistakes, it will not help much.