Whenever you do the assignment given to you, it is essential to check and verify the task’s level correctly. The same is the case of trial balance. The accountant posts ledger account through a journal during the accounting period, and it needs to be finalized and verified.
Trial balance plays an essential tool in checking the arithmetical accuracy of posting ledger accounts, assisting the accountant in preparing the financial statements, proceeding with audit adjustments, etc. Trial balance helps a professional accountant to balance or check both debit and credit items of income, expenses, assets, and liabilities are correctly recorded or posted.
If all of the accounts are correctly recorded in the balance sheet, then assets should be equal to liabilities plus equity. Same as trial balance, if total debit and credit are the same, that means the debit or credit rule probably correctly applies.
Hence, for checking the accuracy of ledger postings, a statement of the trial balance is prepared. Trial Balance is important because of the following points:
- Checking Arithmetical Accuracy: The trial balance is used to verify the actual amount entered on the right side of the current account while migrating the figures from various ledger books like purchase books, sales books, cash books, etc. Trial Balance, aside from general ledger accounts, is also useful to check the accuracy of special-purpose accounting books.
- Assist in Preparing Financial Statements: Profit and Loss Account, Balance Sheet, and Cash Flow Statement must be prepared at the end of each accounting year. The balances of all the ledger accounts used to prepare financial statements are already available in the trial balance. Hence, it makes the preparation and analysis of financial statements easier.
- Assist in Rectifying errors: The debit total of the trial balance must equal to credit total of the trial balance. This checks the arithmetical accuracy of ledger postings. If this does not happen, it will make the accountant find and rectify the error. Accountants, therefore, feel relieved when the trial balance debit totals and credit totals match.
- Assist in Adjustments: Adjustment accounts like prepaid expenses, outstanding liabilities, closing stock, etc., need to be prepared during the preparation of the trial balance. This assists in making adjustments only relevant to the current accounting year. Businesses prepare adjustment accounts generally at the end of the accounting year. However, there is no restriction to open these adjustment accounts as they occur.
- Assist in Comparative Analysis: Preparation of Trial Balance helps to compare balances of the current year with past year balances and peer analysis. This helps the business to make important decisions regarding income, expenses, production costs, etc. It helps to recognize the trend in the business and take action wherever necessary.
- Assist in preparation of Audit Reports: Trial Balance helps the auditors to locate the entries in the original books of accounts. Basically, the audit trail is what auditors need to audit, and this is what trial balance provides. Auditors are then able to comment on the preparation of financial statements in their audit report.
- Assist in Decision Making regarding budget: As we have seen above, trial balance helps compare ledger balances with the past balances. Such comparison helps the management to create a trend regarding the performance of the business. After analyzing the comparisons, the financial budget can be prepared for the upcoming accounting periods to assist the management.
Is trial balance the financial statements?
No, the trial balance is not the financial statement. But it is used to records all of the amount balance and transactions including balance sheet’s account and income statements accounts. It is also used as a tool to ensure that the financial statements are correctly and easily prepared.
What is the purpose of trial balance?
The main purpose of the trial balance is the ensure that the financial statements are correctly prepared by ensuring that all of the accounting entries that are recorded during the period are correctly recorded in accordance with the rule of debit and credit.
Written by Sinra