Meaning of Trial Balance Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

Hi guys!
So far we have completed the second stage
that is recording and transferring stage of
our accounting cycle.
In our previous session we compared and reconciled
our bank book with the passbook and posted
the required corrections in our books.
Now It seems our ledger is complete in all
respect..we are ready to move on to the third
and final stage of accounting cycle-
Imagine we are a chef who has prepared a variety
of dishes for our guests but they are all
kept in different corners of the kitchen.scattered.
Our final motive here is to present our plate
beautifully to serve our guests .So firstly,
for our convenience we need to put all the
prepared dishes on one table to serve it.
Bringing them together makes things so much
easier .
In the same way whatever we have done until
journal or subsidiary books was like the ingredients
of preparing different dishes .ledger accounts
is the food prepared . These ledger accounts
have to be communicated to all the parties
interested in our business.
The final statements to be prepared for stakeholders
is like serving the guests..
This will give them chance to pick what they
would love to eat.
Which also relates to different stakeholders
being interested in a particular segment of
the final statements.
Being interested from a different perspective
like government would be interested in seeing
that you have paid the taxes Banks would want
to know the overall health of the business
through the statement so that they can make
a decision about lending you a loan.
Or shareholders would like to know where their
invested amount is being used or how much
return on investments/dividends are going
to be distributed, and so on
.So overall they are concerned with the profit
and loss in business and statement of our
assets and liabilities- to know financial
health of our business.
.. Hence to meet this need of our guests or
stakeholders or all these interested parties
it is important to first arrange all the different
ledger balances) on one sheet (like arranging
food on the table)so that is why we prepare
the trial balance which is a summarized statement
of all ledger balances.
Lets make a trial balance for the ledgers
we already have of Daniel with us. in this
case we are making a monthly trial balance
on 30thst of April
Now here in this ledger that we made for Daniel.This
is the cash A/c we can see the left side or
debit side total is 12925 and the credit side
total is 8845...
So if debit is greater than credit side we
have a net debit or debit balance.
Here we have a net debit of 4080.
Although the format of our recording is such,
that we write the closing balance on the credit
side.
Just to make total equal on both the sides,and
this ensures that there is no calculation
error.
Lets check our next Account,Capital Account
.It has has a net credit or credit balance
of 8000(as credit side total is greater)
Now can you tell, what does this purchase
account show??
Does it show a net debit or net credit?
A net debit because the debit side total is
greater and by how much 6330.
This is very easy.
So now we are all set should we proceed to
transfer them in our trial balance?
We are going to list all our balances in here.
Debit balances and credit balances.
Cash debit balance ______as the net debit
is 4080 the debit side is greater.
Capital credit balance ________8000
Purchases debit balance ________6330
Sales Credit balance _______5050
And similarly, we have posted each accounts
balance.
This method that we just used is called as
a balance method of preparing trial balance
.Just to provide a complete picture from academics
point of view there is another way we can
prepare trial balance ..Which is called the
gross method wherein directly the totals of
debit and credit sides are taken from ledgers
to prepare a gross trial balance and then
the amounts on the two sides of each account
is subtracted to find its net balance making
a net trial balance..
So this is how we got all our ledger A/c balances
on one sheet like we got all scattered dishes
on one table .. It was quite simple right
?
Once the trial balance is made...the final
balance of debit must be equal to the credit
as we know every debit has equal and corresponding
credit effect in our records .If the debits
are equal to credits we say our trial balance
has been tallied.
We can say this acts as a proof stating that
double entry has been followed in each entry.
But if at all, the totals are not equal we
would know that somewhere we may have not
given the correct two equal effects in our
records.
So this trial balance proves the arithmetic
accuracy of the ledger entries prior to preparing
final statements.
It also brings all the ledger balances in
one place making it easier for a businessman
to go through all of his accounts just by
looking at the trial balance and if he compares
it to another month or years trial balance
he can see if the balances in a particular
amount have increased or decreased .
It facilates preparation of final statements.
It is the starting point in the finalizing
stage.
Trial Balance also provides a starting point
to locate any errors committed
So these are the reasons why a business prepares
trial balance internally to check for accuracy.
Can you observe this trial balance we just
made and find anything in common for the different
types of accounts??
(chart will be formed on screen)
1.
All of the real accounts are showing debit
balance...
Real accounts always show a debit balance
2.
Nominal Accounts: - All expenses are showing
a debit balance and all of the incomes or
gains are showing a credit balance
3.
Personal: - Personal A/c either has a debit
balance or credit balance.
The persons which have a debit balance are
our debtors and if you look all our creditors
are having a credit balance.
Once you understand this� with a little
practice this should be on the tip of our
tongue.
So with this we have completed preparing a
trial balance which is like a self checking
system but like we would check everything
well before serving our guests ..We would
have to check that our trial balance is cent
percent true in all aspects..there still may
be certain errors that we may notice..you
may say silly errors or human errors..
Like if we give two wrong effects our trial
balance may tally but not show a true picture
or maybe Some expenses might show credit balance
instead of debit
There can be several such mistakes..
(All mistakes will appear on screen)
� Some expenses might show credit balance
instead of debit
� Two wrong but equal effects may wrongly
tally the trial balance
� we may debit one account instead of credit
it
� Cash A/c shows credit balance which is
never possible we cannot spend more cash than
what we have ..
� We need to check for such mistakes by
doing a scrutiny of TB to find such errors
and rectify them �
To know more about errors and how we rectify
them..
Don�t miss our next session on errors and
rectification.
That�s it for today.
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