Trial balance is a work sheet that is prepared for accountancy purposes. It is a statement that lists all the ledgers the company has in terms of debit and credit columns. A ledger is a collection of all the transactions of a business entity being recorded in a book according to debits and credits. Trial balance can only be prepared if the business entity is following a double entry book keeping system of accounting i.e. it is maintaining accounts in terms of debits and credits.
Importance of Trial Balance
1. To check the accuracy of accountancy systems
Trial balance is an important component with respect to the preparation of financial statements. Trial balance reflects the mathematical accuracy of the ledgers that are being prepared around the year for day-to-day transactions of the business. The debit and credit side of the trial balance must equal to each other in the end. If they do not balance, it implies that something is wrong with the accounting system and transactions have to be rechecked and recorded properly.
Financial statements are being prepared from the ledgers. An unbalanced trial balance will result in the preparation of inaccurate financial statements, which are, income statement, balance sheet and cash flow statement. The profits or losses, assets or liabilities could be overstated or understated, thus, making the financial statements highly unreliable. A trial balance serves as a significant reminder that checks the arithmetical accuracy of the ledgers and paves way to the preparation of accurate financial statements.
2. Summary of business transactions
Trial balance serves as a source of succinct summary of all the business transactions that have taken over a specified period. The accountants can find the pattern of change in all the transactions, which are related either to expenditure or to revenue. The accountants can pin point any outliers, and remedial action can be taken in a timely manner. Without trial balance, it will be very cumbersome for the accountants to keep the record of accomplishment of each of the transactions of a business entity.
3. Simplifies preparation of financial statements
Trial balance greatly facilitates the preparation of financial statements. All business organizations prepare their annual financial statements in order to assess their performance over the year. Trial balance serves as a very important tool in this regard. By enlisting all the ledgers in debit and credit entry, the preparation of financial statements becomes a very convenient task.