Trial balance
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The document discusses trial balance, which is a statement that lists the debit and credit balances of ledger accounts to test the arithmetical accuracy of accounting books. A trial balance has certain features, such as being prepared on a specific date and including all ledger accounts. It also discusses the purpose of a trial balance, which is to test accuracy, provide a summary of ledger account balances, and serve as the basis for preparing final financial statements. The document outlines different methods for preparing a trial balance and provides examples of common account adjustments that are made, such as for closing stock, depreciation, outstanding expenses, and prepaid expenses.
Trial balance
- 1. Trial Balance KULDEEP MATHUR B.B.A. JIWAJI UINVERSITY GWALIOR
- 2. Trial Balance Meaning of Trial Balance Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books. It may also be prepared with debit and credit totals of ledger accounts and also with the balances and totals of ledger accounts. If the total of debit and credit amount column is equal, we assume our books of accounts to be arithmetically correct, but do not take it as the conclusive proof of arithmetical accuracy
- 3. Special features of trial balance Trial balance has the following special features: 1. The trial balance is prepared on a specific date. This is why; we use the word 'as on ..... .' with its heading. 2. Trial balance contains the list of all ledger accounts including cash account. 3. Trial balance may be prepared with the balances or totals or balances and totals of ledger accounts.
- 4. Special features of trial balance 4. The total of the debit and credit column of the amount must be equal. 5. In case the debit and credit side of the trial balance are equal, we assume that the principles of 'Double Entry System' and the assumptions of accounting equation have been observed. 6. The difference between the debit and credit side of the trial balance points out that certain mistakes have been committed somewhere. 7. If both the debit and credit sides have the same total, it does not mean that there is no mistake in accounting.
- 5. OBJECTS AND FUNCTIONS OF TRIAL BALANCE The trial balance is prepared with the following objects: 1. Test of arithmetical accuracy. Trial balance is the test of accuracy of arithmetical calculation. If correct posting has been made from subsidiary books and ledger accounts and correct figures have been recorded and copied, the debit and credit total of the trial balance must tally.
- 6. OBJECTS AND FUNCTIONS OF TRIAL BALANCE 2. Summarized information of ledger accounts. Trial balance contains a list of all ledger accounts. It presents the names of ledger accounts and the amount of their debit and credit balance. The summarized position of ledger accounts can be obtained at a glance from the trial balance. It would have been very difficult to assess the position of different ledger accounts from subsidiary books and ledger accounts.
- 7. OBJECTS AND FUNCTIONS OF TRIAL BALANCE 3. Basis for preparing final accounts. The ultimate end of maintaining books of accounts is to ascertain the result of the business in term of profit and the value of different assets and liabilities. For this purpose, we prepare a profit and loss account and balance sheet on the basis of information supplied by the trial balance. It is, in this way, a source statement for preparing final accounts.
- 8. OBJECTS AND FUNCTIONS OF TRIAL BALANCE 4. Useful for making adjustments. While making final accounts certain adjustments regarding closing stock, outstanding and prepaid expenses, accrued and unearned income are to be made. While identifying items for adjustments we will have to study the information furnished by the trial balance.
- 9. METHODS OF PREPARING TRIAL BALANCE There are three methods of preparing trial balance. The total of both the debit and credit column of the trial balance must be equal in all the methods. The following methods can be used for preparing trial balance: Balance method Total method Total and balance method.
- 10. Capital Drawings Opening Stock Closing Stock Carriage Inward ,Freight Inward Purchases Sales Royalty on Production Gas and Fuel Discount Received
- 11. Provision for Bad Debts Commission Received Repairs Rent Salaries Loan Secured Interest Received Interest Paid Insurance Carriage Outward carriage on
- 12. Advertisement Sundry Expenses Trade Charges Miscellaneous Receipts Income-tax Office Expenses Import Duty Allowances Sales-tax Provision for Discount on Debtors
- 13. Provision for Discount on Creditors Sundry Creditors Sundry Debtors Goodwill Plant and Machinery Discount Allowed Bad debts Purchases Return/Return outwards
- 14. Purchases Return/Return outwards Sales Return/return inwards Outstanding Expenses Prepaid Expenses Earned Income/Accrued income Unearned income/ Unaccrued income Loan from X Loan to X
- 15. Interest on loan from X Interest on loan to X Interest on Capital Interest on Drawings Bank overdraft Cash in hand Cash at bank Bills receivable Bills payable
- 16. Bad debts recovered Tax refund All expenses All Incomes All Assets All Liabilities
- 17. The following is the Trial Balance prepared by an Inexperienced accountant. Redraft it in a correct form Dr. Cr. Sundry Debtors 24,400 Sundry Creditors 18,400 Opening Stock 31,200 Purchases 1,07,000 Purchases Return 4,200 Cash in hand 22,000 Machinery 80,400 Goodwill 20,000 Sales 1,72,400 Discount Received 3,000 Investment 16,000 Interest on Investment 1,600 Interest on Ram’s Loan 6,000 Sales Returns 15,600 Loan from Ram 40,000 Bills Receivable 12,800 Capital 1,14,000 Life Insurance Premium 10,000 Carriage 1,200
- 18. Outstanding Expenses Trial balance Adjustment 1) Shown in balance Sheet liabilities 1) Shown in balance sheet side. liabilities side. 2) Added with relevant head Trading and loss a/c debit side or profit Meaning:- Expenses which have been incurred during the year and whose benefit has been derived during the year, but not paid yet are called outstanding expenses. Prior to the preparation of the financial statements, it must be ensured that all expenses which have fallen due to be paid but which have not been paid during the accounting period are also brought into the books to help in the proper matching of revenues and expenses Journal Entry:- Relevant Expenses a/c ------------Dr. To Outstanding Expanses
- 19. Prepaid or unexpired Expenses Trial balance Adjustment 1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side. 2) Deduct from relevant head Trading or profit and loss a/c debit side Meaning:- In some cases, the benefit of the amount already spent will be available in the next accounting year also. Such a part of the expense is called a ‘prepaid expense’. Journal Entry:- Prepaid Expenses a/c ------------Dr. To Relevant Expanses
- 20. Un accrued or Unearned Income Trial balance Adjustment 1) Shown in balance 1) Shown in balance sheet Sheet liabilities side. liabilities side. 2) Deduct from relevant head in profit and loss a/c Credit side Meaning:- The income which has been received during the current accounting year but relates to the next accounting year is called ‘Unearned income’. Journal Entry:- Relevant Income a/c ------------Dr. To Unearned Income
- 21. Closing stock Trial balance Adjustment 1) Shown in balance 1) Shown in balance sheet Sheet Assets side. Assets side. 2) Shown in Trading a/c credit side Meaning:- The Value of closing inventory will be brought into the books of accounts through the following journal entry: Journal Entry:- Closing Stock a/c ------------Dr. To Trading a/c
- 22. Depreciation Trial balance Adjustment 1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account Debit side 2) Deduct from relevant assets in balance sheet assets side Meaning:- The value of fixed assets reduce year after because of usage and passage of time . It is well Known that fixed assets are used for earning revenue .It is treated like any other expenses and is debited to the profit and loss a/c. Journal Entry:- Depreciation a/c ------------Dr. To Relevant Assets
- 23. Interest on capital Trial balance Adjustment 1) Shown in Profit and loss account 1) Shown in Profit and Loss account Debit side Debit side 2) Added with Capital in balance sheet liabilities side. Meaning:- Fund invested by a proprietor to the business constitute the capital. Like other borrowings/loans , interest can be paid on the proprietor’s capital also. It is treated like any other expenses and is debited to the profit and loss a/c. Journal Entry:- Interest on capital a/c ------------Dr. To Capital a/c
- 24. Interest on Drawings Trial balance Adjustment 1) Shown in Profit and 1) Shown in Profit and Loss account credit side loss account credit side 2) Deduct from Capital in balance sheet liabilities side Meaning:- The proprietor may also realise that when he draws money for his own use, the firm loss interest. therefore , the proprietor may be debited with the interest on the money drawn by him. Journal Entry:- Capital/Drawings a/c ------------Dr. To Interest on Drawings a/c
- 25. Interest on Loan from------ Trial balance Adjustment 1) Shown in Profit and 1) Shown in Profit and Loss account Debit side loss account debit side 2) Added with loan in balance sheet liabilities side Meaning:- Interest must be paid on loans whether there is profit or loss. It is calculated by referring to the rate of interest agreed to be paid by the firm and the amount and period of the loan. Journal Entry:- Interest on loan from a/c ---------Dr. To Loan from------- a/c
- 26. Particulars Capital 1,64,000 P B/S 1,64,000 Drawings 5,600 P B/S 5,600 Machinery 10,000 R B/S 10,000 Opening Stock 30,000 R T 30,000 Purchases 1,74,400 R T 1,74,400 Sales Returns 12,000 R T 12,000 Debtors 42,000 P B/S 42,000 Furniture 18,200 R B/S 18,200 Motor Car 80,000 R B/S 80,000 Freight Inwards 4,000 N T 4,000 Wages 1,600 N T 1,600 Freight outwards 600 N P/L 600 Advertisement 30,800 N P/L 30,800 Creditors 18,000 P B/S 18,000 Sales 2,48,000 R T 2,48,000 Purchases Returns 2,000 R T 2,000 Discount Allowed 1,600 N P/L 1,600 Discount Received 2,400 N P/L 2,400 Rent Received 2,000 N P/L 2,000 Lighting 800 N P/L 800 Motor Car Expenses 12,600 N P/L 12,600 Loan from Ashok 20,000 P B/S 20,000 Interest on Loan 1,800 N P/L 1,800 Bank Balance 30,400 P B/S 30,400
- 27. THANK YOU