Business

Understanding trial balance

Introduction

Has the term trial balance often seemed confusing and left you wondering what is trial balance? well, don’t worry we’ll clarify it for you. The trial balance is a statement of all transactions for the period. It includes both cash and non-cash transactions. The trial balance summarizes the financial position of a company at a specific point in time. It is used to analyze financial transactions for a specific period.

The trial balance can be prepared from several different sources, including:

  • a bank reconciliation report
  • a credit card statement
  • an invoice register

Why do you need to prepare a trial balance and what are its objectives?

1. Accuracy

Trial balance is a very useful tool for the management of your business and financial statements. It helps you to know the business’s true financial position at any given time. Trial balance is also helpful in detecting errors and frauds in transactions, which can be very risky for a business if not detected early.

2. Compilation of data in one place

The trial balance gives you an overall picture of all your accounts, which is useful when you want to check if there are any discrepancies between them or if they have been accounted for properly.

3. Helps in preparing financial statements

Trial balances also help prepare financial statements such as Balance Sheets and Income statements. These statements are prepared after all the transactions have been recorded in the books of account and they give an accurate picture of your business at a specific point in time.

4. Summary

The trial balance provides a summarised view of all assets, liabilities and equity accounts at a given time. This is the most important advantage of drawing up a trial balance. It helps to understand the financial position of the business. Additionally, it also gives an accurate snapshot. A trial balance is a list of all your accounts, which gives you an overview of your financial position at any given point in time.  This helps you to see whether there are any discrepancies between the amounts shown on your books and those shown on your tax form

5. Easy reference

It supplies a ready reference to all the accounts, which are consolidated in one place. This will help in making quick decisions regarding any transaction or adjustment or audit, etc., under different headings in different accounts.

6. Easy rectification

If any error is found during an audit or when preparing final accounts, it can easily be rectified by referring back to this trial balance for details and for verifying its correctness or otherwise.

Now before you jump on learning about types of trial balance in Tally and creating them it is crucial that you learn about the common mistakes that you can make while preparing a trial balance. Check out this page for more info.

7. one-sided entries

The common mistake is to write the total of all transactions in the debit side of the balance sheet. In some cases, this is a good thing because it shows how much money was spent on goods or services but it can also be misleading if you don’t understand how your business operates. Sometimes businesses will sell more than they believe they are going to need, or they may buy things that they don’t really need but want to appear as if they do. These are examples of businesses operating on a one-sided basis.

8. Incorrect additions

Another common mistake is to add up all the debits and then subtract all the credits without taking into account any cash flow from income or expenses. If you have an incorrect balance at the end of each month, it could lead you to believe that your business is growing when in fact your balance sheet is just being manipulated by sales and expenses being reported twice (once on each side). This can also lead to an under capitalisation in your company because you’re not recording all income and expenses correctly.

Related Articles

Leave a Reply

Check Also
Close
Back to top button