Which one of the following statements about Trial Balance is correct ?

Correct — D, (d) It is a statement containing the various ledger balances of an entity on a particular date. Every word of that option is load-bearing, and the other three options each break one of them. It is a statement, not a book: nothing is posted to a trial balance and it forms no part of the double-entry records, which is why an accountant can redraw it as often as needed without touching the books. It carries balances, not accounts: each ledger account is balanced off first, and only the single net figure travels across, into a debit column or a credit column according to which side the balance falls. And it carries the various ledger balances — all of them, every asset, liability, capital, income and expense account the ledger holds, not a chosen family of them. Finally it is drawn as on a particular date, a snapshot rather than a record covering a period. Its purpose follows from that description: because every transaction was posted with a debit equal to its credit, the two columns of a correctly posted ledger must add to the same figure, so the trial balance is the arithmetical check on the posting and the working summary from which the Trading and Profit and Loss Account and the Balance Sheet are then prepared.

Why the others are wrong

• (a)It is a book containing different accounts of an entity. — That describes the LEDGER, which is the book of final entry and the principal book of account — the bound record in which a separate account is opened for every person, asset, liability, income and expense, and to which every entry from the journal and the subsidiary books is posted. The trial balance is drawn FROM the ledger and is not the ledger. The distinction matters beyond the vocabulary: entries are made in a book of account and it forms part of the entity's statutory records, whereas a trial balance is a working schedule that can be prepared at any date, discarded and prepared again without any consequence for the books. If a question offers 'book' and 'statement' as alternatives, that is usually the whole of the test.
• (b)It is a statement containing balances of debtors of an entity. — This gets the form right and the scope badly wrong. A statement listing the balances owed by customers is a schedule of debtors — a list extracted from the debtors ledger and totalled so that it can be agreed against the Sundry Debtors balance in the general ledger. It covers one class of account. A trial balance covers every account in the ledger, and debtors appear in it as a single line among dozens. The two are also prepared for different reasons: the schedule proves that the individual customer accounts add up to the control account, while the trial balance proves that total debits equal total credits across the whole ledger.
• (c)It is a statement containing balances of debtors and creditors of an entity. — The same error as (b) with one more class of account added, and adding classes one at a time never reaches a trial balance. Schedules of debtors and of creditors are real documents, extracted from the subsidiary ledgers and agreed against their control accounts, but between them they cover only two lines of the trial balance. Left out are cash and bank, stock, fixed assets, capital, drawings, loans, and the whole of the income and expense accounts — purchases, sales, wages, rent, depreciation and the rest. This option is worth a moment because it is the plausible near-miss of the set: it uses the right noun, names real accounting documents, and fails only on completeness.

The accounting cycle runs journal, then ledger, then trial balance, then final accounts, and the trial balance is the hinge between the bookkeeping and the reporting halves of it. Under double entry every transaction is recorded with equal debits and credits, so if every entry has been posted correctly the sum of all debit balances in the ledger must equal the sum of all credit balances. Listing those balances in two columns and totalling them tests that proposition. It can be prepared three ways — the totals method, listing each account's debit and credit totals; the balances method, listing only the net balance of each account, which is the usual practice and the one this option describes; and the totals-cum-balances method, which shows both. What the trial balance is not is a proof of correctness. It is an arithmetical check only, and a whole family of errors leaves it in perfect agreement: a transaction omitted from the books entirely, an entry posted to the wrong account of the right type, an error of principle such as capital expenditure charged to revenue, two errors that happen to cancel, and an entry recorded at the wrong amount in the book of original entry so that both sides carry the same wrong figure.

Key facts

• A trial balance is a statement of all the ledger balances of an entity as on a particular date, set out in a debit column and a credit column.
• It is prepared after the ledger accounts have been balanced, and it precedes the Trading and Profit and Loss Account and the Balance Sheet.
• Its purpose is to test the arithmetical accuracy of posting and to provide the working summary from which final accounts are drawn.
• It is not a book of account and no entry is ever posted to it; the book containing the accounts themselves is the ledger.
• The three methods of preparing it are the totals method, the balances method and the totals-cum-balances method.
• A schedule of debtors and a schedule of creditors are separate statements, extracted from the subsidiary ledgers and agreed against their control accounts.
• Agreement of the two columns does not prove the books are correct: omission of a whole transaction, errors of principle, compensating errors and errors of original entry all leave it in balance.

Common traps

• Calling the trial balance a book. It is a statement, and nothing is posted to it.
• Confusing it with the ledger, from which it is extracted.
• Confusing it with a schedule of debtors or creditors, which covers only one class of account.
• Treating agreement of the two columns as proof that the accounts are correct.
• Treating it as a financial statement. The Balance Sheet is the statement of position; the trial balance is a working list.

• practice — not a real PYQ

  Which one of the following is prepared primarily to test the arithmetical accuracy of the ledger postings ?

  • (a)Journal
  • (b)Trial Balance
  • (c)Balance Sheet
  • (d)Cash Flow Statement

  Answer(b) Trial Balance

• practice — not a real PYQ

  Which one of the following errors will NOT be disclosed by a Trial Balance ?

  • (a)Posting a wrong amount to one side of an account
  • (b)Omitting a transaction from the books altogether
  • (c)Posting a debit item to the credit side of an account
  • (d)Omitting a ledger balance from the Trial Balance

  Answer(b) Omitting a transaction from the books altogether