Unit-2 The Accounting Process
This unit discusses how various transactions are recorded in the Journal and how they will be posted into the concemed ledger accounts.
What is Trial Balance? Explain how it is prepared?
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- After posting the journal entries into the ledger and balancing all accounts, we prepare a statement called Trial Balance. This statement shows the balances of all the accounts which appear in the ledger. The debit balances are shown in one column and the credit balances in the other. It is usually prepared just before preparing the final accounts. me purpose is to check the arithmetical accuracy of the books of account.
- You know that under the Double Entry System for every debit there is an equal and corresponding credit. So, the total of debits given to different accounts must be equal to the total of credits given to different accounts. Similarly, the total of debit balances in different accounts must be equal to the total of credit balances in different accounts. Now if the Trial Balance tallies i.e., the total of its debit balances column is equal to the total of its credit balances column, it would mean that both the aspects of each transaction have been correctly recorded in the ledger. If, however, the two totals do not tally it implies that some errors have been committed while posting the transactions into ledger.
- There are two methods of preparing the Trial Balance: (i) Totals Method, and (ii) Balances Method. Under the first method we show the totals of each side of an account in the Trial Balance. The debit side total of an account is shown h the debit column of the Trial Balance and the credit side total of the account in the credit column. Under the second method we show only the balances of each account in the Trial Balance. The second method is more convenient and commonly used because it eliminates all those accounts which have nil balance.
- Now, let us prepare the Trial Balance from the ledger accounts prepared. Under Illustration 3 you will notice that all the accounts which appear in the ledger have been included and their balances entered in the appropriate column. The total of debit balances column in the Trial Balance is equal to the credit balances column. This means that all postings have been correctly made in different ledger accounts.