Rules to prepare the Trial balance.pdf

Trial Balance sheet

1. Subject: - Accounting For managers
Unit: - I
Topic: - Trial Balance

Trial balance

A trial balance is a conglomerate of or list of debit and credit balances extracted from various accounts in
the ledger including cash and bank balances from cash book. The rule to prepare trial balance is that the
total of the debit balances and credit balances extracted from the ledger must tally. Because every
transaction has a dual effect with each debit having a corresponding credit and vice versa.
Therefore, at the end of the accounting period or at the end of each month, the balances of the ledger
accounts are extracted, and trial balance is prepared to test as to if the total debits are equal to total credits
or not
Steps to prepare trial balance
Step-1 Debit and Credit Rule
The rules of debit and credit are as follows. One just needs to remember these rules to record all the
transactions in the books of accounts.
 Debit the account when the assets/expenses increase, and the liabilities/revenues decrease.
 Credit the account when the assets/expenses decrease, and the liabilities/revenues increase.
Step-2 Journal Entry
In the Journal entry system, one just needs to record the debit and credit accounts in proper order.
For example, cash is introduced into the business in form of cash. Going by the debit credit rule we will
arrive the following result:
The transaction or the dual
aspect involved
Type of
account
Effect Rule of Debit and Credit
Cash Asset
Account
Asset increases Debit the account ( when expense/ asset
increases )
Capital Liability
Account
Liability
Increases
Credit the account ( when
liability/revenue increases )

2. The journal entry will be as follows:
Cash A/c (Dr) xxx
To Capital A/c (Cr) xxx
Step-3 Ledger Entry
Ledger entry is something which is recorded in the “T” format. And it’s from here where the Trial
Balance gets its inputs. The net balance (Debit or Credit) of individual accounts forms part of Trial
Balance.
Considering the above example, we can record the ledger entry as below. There are two ledger accounts
affected in this transaction.
Capital Ledger Account
Debit Amount (Rs.) Credit Amount (Rs.)
Capital A/c xxx By Balance c/f xxx
Total xxx Total xxx
Cash Ledger Account
Debit Amount (Rs.) Credit Amount (Rs.)
To balance c/f xxx Cash A/c xxx
Total xxx Total xxx

Step-4 Constructing Trial Balance
So it can now be easily said that the end balances of Ledger account is what forms part of the trial balance
and taking forward the above example, the trial balance can be constructed in the manner as below:
Accounts Debit Credit
Cash Ledger Account xxx
Capital Ledger Account xxx
Total xxx xxx

3. Methods to Prepare Trial Balance
There are three methods in which a Trial Balance can be prepared. Which are as follows :
 Total Method or Gross Trial Balance
 Balance Method or Net Trial Balance
 Compound Method

 Total Method or Gross Trial Balance:
Under this method, two sides of the accounts are totaled. The total of the debit side is called the “debit
total” and the total of the credit side is called the “credit total”. All the debit totals are entered on the debit
side of the Trial Balance while the credit total is entered on the credit side of the Trial Balance
If any particular account has a total on one side, it will be entered either in the debit column or the credit
column as the case may be.
Advantage  It promotes the arithmetical accuracy of the accounts.
 Extraction of ledger balances is not required at the time of preparation of
Trial Balance.
Disadvantage  Preparation of final accounts is not possible.



 Net Trial Balance or Balance Method:
Under this method, all the ledger accounts are balanced. The balancing figure may be either a
“debit balance” or “credit balance”.
Advantage o It helps in the easy preparation of final accounts.
o Time and labour can be saved in constructing a Trial Balance following this
method.
Disadvantage o Errors may remain undisclosed irrespective of the agreement of Trial
Balance.

4. Compound Method:
Under this method, totals of both the sides of the accounts are written in the separate columns. Along
with this, the balances are also written in the separate columns. Debit balances are written in the debit
column and credit balances are written in the credit column of the Trial Balance.
Advantage o It offers the advantage of both methods.
Disadvantage o Lengthy process and more time consumed in the preparation of a Trial
Balance.
Utilities a Trial Balance can Offer and its Interpretation
The benefits of Trial balance could be found in the following:
 It assists in the preparation of financial statements i.e. - Profit and Loss Account and Balance
sheet.
 A self-balanced trial balance ensures the arithmetical accuracy of the entries made. If the balances
do not tally, then the errors can be found out, rectified and then financial statements can be
prepared.
 It acts as a quick reference. So that we can easily find out the balance in any ledger
account. Without actually referring to the ledger.
 If the classification of ledger accounts is systematically done in the trial balance, one can do
quick time analysis. Therefore the listing of ledger accounts is usually done in the sequence of
Asset accounts, Liability accounts, Capital accounts, Owner’s equity accounts, Income or gain
accounts and Expenses or losses accounts in that order.

 Rules to prepare the Trial balance
 The rule to prepare the Trial balance is an equation which is as follows:
Total Debit Entries = Total Credit Entries
Debit Credit
 All Assets (Cash in hand, Cash at
Bank, Inventory Land and Building,
Plant and Machinery etc.)
 Sundry Debtors
 Expenses (Carriage Inward, Freight,
Rents, rebates and rates, Salary,
Commission etc.)
 Purchases
 Losses (Depreciation, Return
inwards, Profit and Loss A/C (Dr.),
Bad debts etc.)
 All liabilities (Bank Overdraft, Secured and
unsecured loans, bills payable, Outstanding
Payables or expenses, Loan on mortgage etc.)
 Sundry Creditors
 Reserve fund, general reserve, provision for
depreciation, Accumulated depreciation etc.,
 Sales
Gains (Discount received, Return Outwards, Bad
dates recovered, Profit and loss A/c (Cr) etc.)

5. Steps to prepare Trial balance
The following are the steps to prepare Trial Balance.
Step 1 Cast/ Balance all the ledger accounts in the books.
Step 2 List all the Debit balances on the debit side and sum them up.
Step 3 List all the Credit balances on the credit side and sum them up.

Specimen of Trial balance
Trial Balance of XXX Ltd as at ______
SI No Particulars L.F Amount Rs. Dr. Amount Rs. Cr.


Example of Trial Balance
____ Ltd Trial Balance 31- Dec 2018 (in Dirham)
Accounts Debit Credit
Cash 1,02,280 -
Accounts Receivable 7,500 -
Office Expenses 2,500 -
Prepaid Rent 600 -
Prepaid Insurance 120 -
Office furniture and equipment 15,000 -
Bank loan - 15,000
Accounts Payable - 5,000
Unearned Revenues - 7,500
Capital - 1,00,000
Drawings 3,000 -
Commission Revenue - 12,500
Salary Expenses 9,000 -
Total 1,40,000 1,40,000