- Steps to prepare trial balance
- Difference between trial balance and balance sheet
- Relevance of trial balance in modern-day accounting
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 ) |
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 |
Difference Between Trial Balance and Balance Sheet
Basically, the trial balance is an internal document. And the balance sheet is prepared to disclose the financial affairs of the company to external stakeholders. To break it up, a balance sheet is an extension of the accounts recorded in the trial balance.
Relevance of trial balance in modern-day accounting
Although modern accounting software may have seemed to make the traditional use of the Trial Balance redundant, the reality is that it has enhanced the report.
Initially, the trial balance was used as an accountant’s report to verify if debits and credits were of equal value. In totality, it helped to verify the proper recording of business transactions.
Today, the trial balance has gone beyond that purpose and is used to identify obvious account discrepancies, ensure proper grouping of accounts for formatting purposes and finally the trial balance is used to generate auxiliary sets of books for other selective purposes.
Read More on Trial Balance
What is Trial Balance, How to Prepare Trial Balance, Methods to Prepare Trial Balance, Rules & Examples of Trial Balance, Errors in Trial Balance
