A trial Balance is a statement in which the balances of all the ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. Here, you will know the objectives of trial balance. The general purpose of preparing a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct. Asset and Expense accounts appear on the debit side of a Trial Balance, whereas on its credit side, Liabilities, Capital, and ‘Income’ accounts appear. In this article, we will discuss the functions and objectives of trial balance. All the debit balances and credit balances appearing in the “Trial Balance” must be equal, provided:
1) All accounting entries are recorded accurately
2) All the ledger balances are correctly extracted
Functions and Objectives of Trial Balance
Here we will be going to mention the functions and objectives of trial balance:
1. To Check the Arithmetical Accuracy
The ‘Double Entry Theory’ that the ‘Debits’ and ‘Credits’ in any accounting need to be equal is the foundation of ‘Trial Balance.’ As such, the ‘Debit and Credit’ columns of Trial Balance’ must always be equal, and they do if the financial transactions are recorded accurately. If the ‘Debit’ and ‘Credit’ columns are not equal, it is presumed that certain arithmetical inaccuracy has been found at some stage.
2. To Help Detecting Accounting Errors
As the preparation of “Trial balance” is based on the principle that the ‘Debits’ and ‘Credits’ in any accounting need to be equal, any mistake made inadvertently in ‘Journal Entries’ or ‘Ledger Posting’ is disclosed. “Trial Balance,” thus, facilitates the detection of accounting errors.
3. To Summarize the Financial Transactions
A business entity undertakes several financial transactions during a given timeframe. Such transactions cannot depict the financial affairs of the business entity. Considering the above objective, a summary of all the financial transactions of the business entity must be prepared in a trial balance.
4. To Provide the Basis for Preparing Final Accounts
The final Accounts of a company are prepared at the end of an accounting period to reveal its profit and loss and the financial position in the form of a “Profit and Loss Account’ and ‘Balance Sheet.’ These accounts are prepared based on balances in the ‘Debits’ and ‘Credits’ of all the ledger accounts.
Limitations of Trial Balance
Generally, the statement Trial Balance’ indicates accurate entries of various financial transactions. However, such a statement does not always prove that everything is error-free. Despite the equal totaling of all the “Debits” with all the Credits,” certain errors may remain undetected. Such errors may be found due to the following reasons:
- A business transaction has altogether been omitted to be entered in the Journal.
- An erroneous amount has been entered in the debit as well as credit columns of the Journal.
- An appropriate account has not been indicated in the Journal.
- While undertaking ledger posting, an entry has not been posted.
- An entry has been posted in the ledger twice.
In the above segments, we have explained the functions and objectives of trial balance. A trial balance is a crucial tool in accounting. It acts as a manipulation mechanism ensuring mathematical accuracy, aids in the practice of monetary statements, allows error detection, provides a top-level view of business transactions, confirms the validity of double-entry bookkeeping, and assists in the audit manner. It’s crucial to remember that even as a trial balance is a beneficial device, it isn’t always foolproof. Therefore, comprehensive tests and internal controls are essential in any accounting device.