A trial balance is a statement of ledger accounts prepared after the books of the concern have been posted, but before the closing entries are made, showing in two parallel money columns either the total debit and total credit side of each ledger account, or the difference between the debit side and the credit side of each ledger account.
Some writers distinguish between the trial balance before closing and the trial balance after closing the ledger accounts, but this differentiation is rather strained. The statement showing the balances after the closing of the ledger accounts exhibits definite balances, and absolute results, such as assets, liabilities and proprietorship. If the double-entry system is followed, such a statement should be spoken of as a balance sheet. The trial balance gives totals or balances of all ledger accounts containing items of a nominal nature. Hence what is properly a balance sheet should not be misnamed as a trial balance.
The only thing in favor of the first method of showing total debits and total credits of ledger accounts is that it helps to localize errors. As a rule, provided every debit has an equal credit and vice versa, the trial balance will be in equilibrium, as is correct, because it is supposed to give a bird’s-eye view of the contents of a ledger. Where the first method is used it is easier to discover the error if the trial balance is out of balance, as is sometimes the case.
The second method has more advantages than the first, namely: (a) It facilitates the preparation of statements, business or financial; (b) it can be arranged to subdivide the various ledger accounts into nominal and real; (c) it can further subdivide debit from credit balances.
By a systematic ordering of ledger accounts in the trial balance, the business man is enabled—leaving the inventory out of consideration—to tell approximately his financial position at any time. No definite rule can be laid down for the order in which the accounts should appear on the trial balance. It is, however, a good policy to place real accounts first, followed by nominal accounts, and finally proprietorship accounts, e.g., drawing and capital accounts. This order has been adopted in the working of the various sets given in the text-book. It facilitates the preparation of statements, as each section can be taken up separately. The trial balance given on page 96 is a good illustration of the arrangement of ledger accounts.
Explanation of the trial balance book.—Trial balances are prepared monthly, and it is always advisable to enter them in what is known as a trial balance book. The ruling for such a book is illustrated on page 101a. It consists of twelve double columns, debit and credit for the entire year. Each double column contains debit and credit balances of a month’s transactions. Accounts which have already appeared in one month need not be repeated. Only new accounts should be added.
This trial balance book affords also statistical advantages. A merchant can readily compare his sales of one month with those of another. Similarly he can compare and contrast his floating or quick assets, as well as his floating or quick liabilities of different months.
It must be always borne in mind that the trial balance is not positive proof of the accuracy of the entries. There may be errors even though the trial balance is in equilibrium. The following errors will be revealed by a trial balance: (1) Omission of posting an entry; (2) posting an entry twice; (3) posting to the wrong side of an account.
The following errors will not be revealed by a trial balance: (1) An entry which, although posted to the right side of the ledger, is posted to the wrong account; (2) errors in mathematical operations which occurred on the books of original entry and have been carried so to the ledger; (3) posting of transposed figures to both sides of the ledger account; (4) the omission of entire business transactions; (5) over-debiting one account and under-debiting another (provided the amount of the over-debit equals the amount of the under-debit); (6) over-crediting one account and under-crediting another (provided the amount of the over-credit is equal to the amount of the under-credit).
19. Relation of the trial balance to the business statements.—The relation of the trial balance to the business or financial statements is such that one does not need to refer to the ledger in order to be able to tell the results of operations or the condition of finances, provided, of course, that the inventories are furnished. Indeed, it would be very difficult to begin to prepare statements directly from the ledger. Leaving out of the question the time needed to do this, it would be an impossibility to avoid errors were this method adopted. The trial balance thus gives the material for the prepa’ration of the various statements required. It is a feeder for the statements, and if it is without errors, even if the books of account are destroyed, can furnish the necessary information for carrying on the business.
Having completed the trial balance we usually have to make certain adjustment entries, and also to take into account, the value—generally at cost—of the stock on hand. Only then can we proceed to prepare statements showing the result of operations and the financial condition of the affairs at a given time.
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