A Trial Balance is prepared from the balances of the ledger accounts maintained under the double-entry bookkeeping system. The given accounting concept also refers to an adjusted Trial Balance and a post-closing Trial Balance, based on the stage at which ledger balances are considered.
An adjusted Trial Balance contains the adjusted closing balances of general ledger accounts as on a specific date. It reflects the balances after necessary accounting adjustments have been made. Whenever an adjustment is passed, the Trial Balance should be checked to ensure that the total debit balances remain equal to the total credit balances.
A post-closing Trial Balance relates to ledger balances after the books have been closed. At the end of an accounting period, revenue and expense accounts are reduced to zero and the resulting profit or loss is transferred to retained earnings through a closing entry. The remaining balances form the opening basis for the new accounting period.
Preparation of a Trial Balance
For preparing a Trial Balance, financial transactions are first recorded in the daybooks or journals. These transactions are then posted to the appropriate nominal ledger accounts and personal ledger accounts.
After posting the transactions, the balance of each ledger account is determined. Each nominal ledger account will normally have either a debit balance or a credit balance.
The name of each ledger account and its closing balance are then listed in the Trial Balance. Accounts having debit balances are entered in the debit column, while accounts having credit balances are entered in the credit column.
After all ledger balances have been entered, the debit column and credit column are totalled separately. According to the double-entry bookkeeping principle, the total debit balances must equal the total credit balances.
If both totals are equal, the Trial Balance is mathematically balanced. The ledger accounts listed in the Trial Balance can then be used for preparing the Trading Account, Profit and Loss Statement, Balance Sheet, and other financial reports.
However, the agreement of debit and credit totals is only a check of arithmetic equality. It does not provide a complete guarantee that all accounting transactions have been recorded correctly.