6.1 Meaning of Trial Balance

A Trial Balance is a statement that lists the balances of all ledger accounts to verify the mathematical accuracy of the accounting records. It ensures that the sum of debit balances equals the sum of credit balances, which is a fundamental principle of the double-entry accounting system.

6.2 Objectives of Preparing a Trial Balance

The trial balance serves the following purposes:

1. Verification of Arithmetic Accuracy – It helps in confirming that total debits match total credits.
2. Detection of Errors – It assists in locating errors in the ledger accounts.
3. Preparation of Financial Statements – It simplifies the preparation of financial statements by providing a ready reference to ledger balances.

6.3 Steps to Prepare a Trial Balance

1. List all ledger account balances.
2. Separate debit and credit balances.
3. Compute the total of both columns.
4. If the totals do not match, check for errors.

6.4 Nature of Accounts and Debit/Credit Rules

Different accounts follow specific rules regarding debits and credits. These rules are based on the type of account:

Type of Account	Nature	Debit Effect	Credit Effect
Assets	Real Account	Increase	Decrease
Liabilities	Personal A/c	Decrease	Increase
Capital	Personal A/c	Decrease	Increase
Revenue	Nominal A/c	Decrease	Increase
Expenses	Nominal A/c	Increase	Decrease

6.5 Common Accounts and Their Classification

The following table provides an extensive list of accounts commonly found in a balance sheet and their classification, organized by category:

Assets

Account Name	Type of Account	Normal Balance	Debit Effect	Credit Effect
Cash	Asset	Debit	Increase	Decrease
Bank Balance	Asset	Debit	Increase	Decrease
Accounts Receivable	Asset	Debit	Increase	Decrease
Inventory	Asset	Debit	Increase	Decrease
Prepaid Expenses	Asset	Debit	Increase	Decrease
Notes Receivable	Asset	Debit	Increase	Decrease
Machinery	Asset	Debit	Increase	Decrease
Land & Buildings	Asset	Debit	Increase	Decrease

Liabilities

Account Name	Type of Account	Normal Balance	Debit Effect	Credit Effect
Accounts Payable	Liability	Credit	Decrease	Increase
Bank Overdraft	Liability	Credit	Decrease	Increase
Salaries Payable	Liability	Credit	Decrease	Increase
Interest Payable	Liability	Credit	Decrease	Increase
Notes Payable	Liability	Credit	Decrease	Increase
Accrued Expenses	Liability	Credit	Decrease	Increase
Unearned Revenue	Liability	Credit	Decrease	Increase
Dividend Payable	Liability	Credit	Decrease	Increase
Rent Payable	Liability	Credit	Decrease	Increase

Equity

Account Name	Type of Account	Normal Balance	Debit Effect	Credit Effect
Owner’s Drawings	Equity	Debit	Increase	Decrease
Owner’s Capital	Equity	Credit	Decrease	Increase

Revenue

Account Name	Type of Account	Normal Balance	Debit Effect	Credit Effect
Sales Revenue	Revenue	Credit	Decrease	Increase
Interest Income	Revenue	Credit	Decrease	Increase
Rent Revenue	Revenue	Credit	Decrease	Increase

Expenses

Account Name	Type of Account	Normal Balance	Debit Effect	Credit Effect
Cost of Goods Sold	Expense	Debit	Increase	Decrease
Depreciation Expense	Expense	Debit	Increase	Decrease
Utilities Expense	Expense	Debit	Increase	Decrease
Insurance Expense	Expense	Debit	Increase	Decrease
Advertising Expense	Expense	Debit	Increase	Decrease
Commission Payable	Expense	Debit	Increase	Decrease
Bad Debts	Expense	Debit	Increase	Decrease

6.6 Errors in Accounting

Errors in accounting can be classified into different types:

6.6.1 Errors that Affect the Trial Balance

1. Errors of Omission – When a transaction is completely omitted from the books.
2. Errors of Commission – When an incorrect amount is entered or an entry is made in the wrong account.
3. Errors of Principle – When an expense is treated as an asset or vice versa.
4. Compensating Errors – Two or more errors that cancel each other out.

6.6.2 Errors that Do Not Affect the Trial Balance

1. Errors of Original Entry – Recording an incorrect amount in both debit and credit entries.
2. Reversal of Entries – When a debit entry is mistakenly recorded as a credit and vice versa.
3. Errors of Duplication – When a transaction is recorded twice.

6.7 Rectification of Errors

Errors should be corrected as soon as they are detected. This can be done in two ways:

6.7.1 Rectification Without a Suspense Account

• If the error is identified before preparing the trial balance, it can be corrected by making an additional journal entry.

6.7.2 Rectification Using a Suspense Account

• If the trial balance does not tally, a suspense account is created to temporarily record the difference. Once errors are identified and corrected, the suspense account is closed.

6.8 Suspense Account

A Suspense Account is used when there is a discrepancy in the trial balance. It helps in:

1. Temporarily balancing the trial balance.
2. Identifying and rectifying errors.
3. Ensuring that financial statements can still be prepared while errors are being resolved.

Conclusion

The trial balance is a crucial step in the accounting process that ensures accuracy before financial statements are prepared. Identifying and rectifying errors promptly enhances the reliability of financial reports.