What is Trial balance and how it’s prepared

Total debit and total credit of every accounting transaction must tally while posting it to the accounting system. In an organisation, accountants across the world post transactions by debiting and crediting respective accounts. To check, the equality of all the transactions of an organisation, trial balance is prepared.

This means, in a trial balance, total of all debit entries in the ledger should equal with the total of all credit entries.

To compare debt and credit entries, trial balance is prepared with two column schedule. On the left side, you will find debit balances of each account and on the right column, credit balances of each account. After listing debit and credit balances, you must add it and record the totals, they must be the same.

If debit and credit balance tally, then arithmetically you are right. Theoretically, you need to check transaction entries and know whether correct accounts are debited or credited for the transactions.

Now a days, every transactions are posted automatically in ERP or accounting softwares. These products will not allow transactions to be posted if total of debit and credit does not tally. However, it’s not created to detect whether accountant is selecting or posting the transaction to the correct account.

For instance, if you have purchased a machinery and debited the expenses account instead of to the asset account, then debit and credit side will tally. As a result, your trial balance will also tally. But, the transaction entry will not be seen in the machinery account, instead you will see the expense account has increased substantially with the high cost of machinery. In this case, you need to post a rectification entry to correct the earlier wrong entry. To get these type of wrong entries, you need to do periodic internal audit and have a better internal control system.

After finalizing the trial balance, you need to prepare your financial statements from it. In case of accounting softwares, ERP or cloud based bookkeeping, you will get all these processed simultaneously based on it’s back end configuration to get you the financial statements of the company. If you are planning to buy an accounting software or ERP package or any other product to manage your accounting system, we suggest you to go for the one which  can be customized according to your country’s rules and regulations and gives you report based on that.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.