Trial Balance: Meaning, Objectives and Defects

Let us make in-depth study of the meaning, objectives and defects of trial balance in accounting.

Meaning of Trial Balance:

Trial Balance is a statement of debit and credit balances taken out from all ledger accounts including cash book. The golden rules that “Accounting equation remains balanced all the time” and “For every business transaction there is an equal debit and credit” shall always prevail in the whole accounting theory. Therefore, total of all debits balances must be equal to total of all credit balances.

ADVERTISEMENTS:

To verify this, a schedule known as Trial Balance is prepared. Balances of debits and credits are to be extracted from all ledger accounts, including cash book and shown in this schedule. This schedule is prepared to assure the management about arithmetical accuracy of books of accounts.

Basically, this schedule facilitates preparation of final accounts. Generally, it is prepared at the end of each accounting year; however, it can be prepared at the end of each month, quarter or at the end of any chosen period.

Objectives of Preparing the Trial Balance:

The trial balance is prepared to achieve the following objectives:

(i) To ascertain arithmetical accuracy:

Trial balance helps to check accuracy in the ledger posting. It ensures that both aspects of every transaction have been posted into ledger i.e., debit aspect of transaction on debit side and credit aspect of transaction on credit.

(ii) To facilitate detection of errors:

ADVERTISEMENTS:

Trial balance helps in locating errors committed during ledger posting. Hence, due importance should be given to even a small difference in a trial balance as it may be possible that there may be a large number of errors which have offset the affect of one another, resulting in small difference in agreement of Trial Balance.

(iii) To facilitate preparation of financial statements:

Financial statements are prepared from Trial Balance. Trial Balance contains all ledger accounts, and provides a basis for further processing of accounting data i.e. preparation of financial statements.

(iv) To facilitate auditors:

ADVERTISEMENTS:

Total of all debit balances must be equal to total of all credit balances. Agreement of trial balances assures Auditors that all transactions have been recorded in books of accounts. However, facts remain that trial balance may agree in-spite of same errors being present.

Defects of Trial Balance:

The defects of Trial Balance are as under:

(i) The Trial Balance fails to tell whether all the transactions have been recorded in the books of accounts or not.

(ii) The Trial Balance fails to assure that an agreed Trial Balance is free from all accounting errors. At times it may agree in-spite of some errors being present.

ADVERTISEMENTS:

For example:

(a) Treating revenue expenditure as capital expenditure or vice versa

(b) Recording wrong name

(c) Compensating errors etc.

(iii) Trial Balance does not depict the assets and liabilities separately.

(iv) Trial Balance does not show the gross profit and net profit.

(v) Trial Balance does not facilitate an analyst to analyse the books of accounts and arrive at some meaningful conclusions.


Related pages


asb standardsaverage variable costs formularectification of errorassets liabilities equity examplesapplications of marginal costingwhat does amalgamated meandisadvantages of weighted average methodadvantages and disadvantages of sale and leasebackaudit techniquesbank reconciliation made easyworking capital forecasting methodsdepreciation accounting principlestandard cost variance analysisarithmetical accuracywhat is marketable securityhow to calculate contribution margin per unitwhat is meant by fictitious assetscalculate gearing ratio from balance sheetrelevance theory of dividendequity shareholders and preference shareholdersschedule of debtorsscope of erpabsorption costing profitthe proper journal entry to purchase a computerwhat is the difference between debentures and sharescapm notesdisadvantages of budgetinghow to calculate contribution to sales ratiogross profit computationadvantages and disadvantages of accounting standardsredeemable debenturesimportance of petty cashconcept of marginal costingirr accountingmerits of marginal costingsteps for activity based costingtax on negative externalityeconomic disequilibriumcauses of labour turnovermarginal costing vs absorption costingpareto optimalityinventory bin cardnormative accounting theory definitionnon profit organisation accounting procedureswhat are marketable securities in accountingbep chartfactors that influence the elasticity of supplyprocess of securitizationstock velocity ratio formularaw materials turnoverpromissory note payeewhat is window dressing in accountingregressive tax graphaccountants trial balancesignificance of cash managementmarginal weighted average cost of capitalpurchase ledger control account exampleconventional costingwhat is objectivity in accountingproduction overheadhorizontal equity in taxationmerits of marginal costingadvantages of profit maximisationprinciples of accounting conceptsflexible budget advantages and disadvantagesvariable overhead cost variancewhat is wip accountingsinking fund calculationscope of managerial accountingtypes of accounting conceptsqualities of a auditordifference between shares and debenturesclosing inventory in trial balancedebenture meaning with exampleobjectives of accountancypromissory definitionfund flow and cash flowbonus schemes examples