TRIAL BALANCE —MEANING, OBJECTIVES AND LIMITATIONS

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A trial balance is a two-column list of all the ledger account balances at any particular point in time.

it is a schedule that lists the debit and credit balances of all ledger accounts on a specific date in two columns.

Trial balance can also be defined as a list of ledger balances used to ascertain the arithmetic accuracy of the double-entry system.

Accounts with debit balances are placed in one column, while accounts with credit balances are grouped in another column in the trial balance.

Because every debit entry has a corresponding entry and vice versa, the total of the debit balance column of the trial balance must equal the total of the credit balance column.

However, the equality of the debit column and the credit column is not clear of the mathematical accuracy of the postings in the ledger.

This is because some errors are not disclosed through the trial balance.

Features Of The Trial Balance

1. It is part of the double-entry system

2. It is not an account.

3. Total of the debit column must equal the total of the credit column, otherwise, there is an error.

4. It is prepared on a specific date.

5. It shows the balances of every account in the ledger.

Objectives Of The Trial Balance

The objectives, purposes or reasons for preparing a trial balance are as follows:

1. To check the accuracy of the posting: This is the primary reason for preparing a trial balance.

Through trial balance, we can detect arithmetic errors made by an accountant or bookkeeper.

This is because an arithmetic error can be quickly detected by comparing debit and credit columns of the trial balance.

2. To prepare final accounts: Another objective of the trial balance is to provide a summary of all accounts' balances to aid in the preparation of financial statements.

Trial balance serves as the basis of the preparation of final accounts. It may be possible to completely ignore a transaction while creating financial statements if we do not first prepare a trial balance

3. Comparative study of individual accounts: The trial balance aids in the comparison of an account's current balance with its previous balance.

It can be used to predict whether an account's closing balance will increase or decrease throughout two accounting periods.

Limitations Of The Trial Balance 

Although the trial balance can be a useful tool for checking the arithmetic accuracy of the ledger posting, it has the following drawbacks:

1. Because there are some errors that the trial balance cannot detect, the trial balance cannot be considered a complete measurement of posting in the ledger 

2. Arising from point one, it does not guarantee that all transactions have been recorded in the ledger exactly the way there are documented in the source document

3. It only provides summarized information of an account. Hence, it may not be useful for making some economic decisions

4. It does not provide information on the profit and loss made by the business. 

Stated differently, the trial balance does not provide information about the financial performance of a business as a statement of profit and loss does.

5. It is not suitable for companies that make use of a single entry system as it is only prepared by companies that make use of a double-entry system.

6. If the trial balance is incorrectly created, the financial statement derived from it will be erroneous and unreliable.

Stated differently, a wrong trial balance automatically results in unreliable financial statements

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