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Use of Trial Balance for Final Accounting

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... From Page 7

Trial Balance » What? Why? When?

 
 

• What is a Trial Balance

The Trial Balance is a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Wearall Textlies as on 31st March 2006
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Opening Stock
Textile Purchases
Wages
Octroi
Salaries
Rent
Printing and Stationery
Advertisements
Cash
Office Building
Capital
Bank
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery


















63,650
22,56,000
3,25,000
1,78,200
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450

1,19,000
2,10,000



2,08,000
5,69,000










2,50,000


1,80,000
36,86,000
6,52,950

Total   47,68,950 47,68,950

• Why is a Trial Balance prepared?

The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Though not a conclusive proof, the agreement of the trial balance is a prima facie evidence of the absence of mathematical errors.

This is the most important purpose for which the trial balance is prepared.

» Isn't Trial Balance made for enabling preparation of Final Accounts?

No, not at all.

Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle. Since Final Accounting can be completed without the preparation of the Trial Balance, we can say that enabling the preparation of final accounts is not the purpose of the trial balance.

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• When is a Trial Balance prepared?

The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the end of the accounting period.

Theoretically, the trial balance can be prepared as and when needed.

The practical difficulty in preparing the trial balance as and when needed is the requirement of the balances of all the ledger accounts within the organisational accounting system. Different ledger accounts are balanced at different time intervals based on the information needs of the organisation. Say in a typical organisation Cash a/c is balanced daily, Expenses, Creditor and Debtor accounts are balanced on a monthly basis, Asset accounts are balanced annually etc.

The ledger account balances relating to all ledger accounts would not be available ready hand at any given instance. Year ending is one such instance when the balances are derived.

» Computerised Accounting

In mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as and when needed.

Accounting Cycle » Absence of Preparation of Trial Balance

 
 
Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle.

The Accounting Cycle (activities involved)

  • Begins with opening the books of accounts for an accounting period by recording the opening entry;

    Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____
    Date V/R
    No.
    L/F Debit Amount
    (in Rs)
    Credit Amount
    (in Rs)
    1st January Dr



    [For bringing the balances in the various ledger accounts at the end of the previous accounting period into books.]

    This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger accounts.

  • Recording the various transactions all through out the accounting period;
  • Balancing the ledgers as and when needed and finally at the end of the accounting period;
  • Recording the transactions for making up the final accounts
    1. Making the Trading a/c
    2. Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c
    3. Making the Profit and Loss a/c
    4. Closing the Profit and Loss a/c by transferring the balance in it to Capital a/c (or Profit and Loss Appropriation a/c)
  • Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up and closing the Trading and Profit & Loss a/c.)
  • The accounting cycle ends with recording the closing entry for closing the books of accounts.

    Journal in the books of M/s Amonaya Metals for the period from 1st Jan to 31st Dec 2007
    Date V/R
    No.
    L/F Debit Amount
    (in Rs)
    Credit Amount
    (in Rs)
    31st December Dr



    [For carrying the balances in the various ledger accounts at the end of the accounting period to the subsequent accounting period.]

    This is the journal entry that supports the posting To Balance c/d and By Balance c/d in the various ledger accounts.

Final Accounting : Use of Journal/Ledger

 
 
Final Accounting deals with all the ledger account balances at the end of the accounting period in one way or the other.
  • All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the Trading a/c.

    For this at least two journal entries are recorded.

  • The Trading a/c is closed by transferring its balance to the Profit and Loss a/c.

    For this a journal entry is recorded.

  • All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by transfer to the Profit and Loss a/c.

    For this at least two journal entries are recorded.

  • The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss Appropriation a/c.

    For this a journal entry is recorded.

  • All the remaining accounts are listed out in the Balance Sheet.

    A closing entry is recorded in relation to this, though it is not directly related to preparing the balance sheet.

If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be recorded and all the ledger accounts that are affected by those transactions are to be posted to and updated. That would result in the making up of the Trading a/c and Profit and Loss a/c. The balance sheet is prepared by drawing up a statement of ledger account balances carried forward through the closing entry.

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Final Accounting : Use of Trial Balance : Avoiding Journal/Ledger

 
 
In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the information in the Trial Balance avoiding the act of journalising the transactions involved in final accounting.

This is done by showing each item in the ledger accounts (Trading, P/L a/c) or the statement (Balance Sheet) where it would be ultimately appearing had the actual procedure been adopted. This would have the same affect as recording the journal and posting into the ledger.

» Example

The balance in the Carriage Inwards a/c (direct expenditure) is transferred to the Trading a/c by recording a Journal entry. By this, the Carriage Inwards a/c would get closed (its balance becomes zero) and the Trading a/c would get debited with that balance. In preparing the Trading a/c the balance in the Carriage Inwards a/c can be ascertained from the Trial Balance and shown on the debit side of Trading a/c.

» Reduction of Work involved in Manual Accounting

Since not recording the related journal entries makes no difference as far as final accounting is concerned, in almost all cases in manual accounting, the process of recording the journal entries required for final accounting and updating the ledger is bypassed to reduce the burden of the work involved.

Information in Trial Balance » To be dealt with only once

 
 
In making up final accounts using the information in the Trial Balance, we should ensure that each item of information (representing a ledger account balance) should be dealt with only once.

In final accounting each piece of information can appear either on the debit or credit sides of the Trading a/c or "Profit & Loss a/c" or on the assets or liabilities side of the "Balance Sheet".

Each item from the Trial Balance should be dealt with only once in Final Accounting.

• Interpreting the items in the Trial Balance

A statement for interpretation of the various ledger account balances in the above trial balance

Trial Balance of M/s Wearall Textlies as on 31/03/06 » Statement of Analysis
Account Description Account
Type
Balance
Nature
Where Which
Side
Amount
Opening Stock
Textile Purchases
Wages
Octroi
Salaries
Rent
Printing and Stationery
Advertisements
Cash
Office Building
Capital
Bank
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery
Direct Expenses
Direct Expenses
Direct Expenses
Direct Expenses
Indirect Expenses
Indirect Expenses
Indirect Expenses
Indirect Expenses
Asset
Asset
Liability
Liability/Asset
Asset
Liability
Direct Incomes
Accumulatd Profit
Asset
Asset
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Real
Real
Personal
Personal
Real
Personal
Nominal
Spl. Nominal
Personal
Real
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Debit
Debit
Credit
Credit
Credit
Debit
Debit
Trading a/c
Trading a/c
Trading a/c
Trading a/c
P/L a/c
P/L a/c
P/L a/c
P/L a/c
B/S
B/S
B/S
B/S
B/S
B/S
Trading a/c
B/S
B/S
B/S
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Assets
Assets
Liabilities
Assets
Assets
Liabilities
Credit
Liabilities
Assets
Assets
63,650
22,56,000
3,25,000
1,78,200
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450
2,50,000
1,19,000
2,10,000
1,80,000
36,86,000
6,52,950
2,08,000
5,69,000

• Making up the Final Accounts

Final Accounting using the information in a Trial Balance involves nothing more than putting the right items in the right places i.e. on the appropriate side of Trading a/c, Profit and Loss a/c or the Balance Sheet.

DrTrading and Profit & Loss a/c [For the year ending 31/03/06]Cr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Textile Purchases
To Wages
To Octroi
To Gross Profit
63,650
22,56,000
3,25,000
1,78,200
8,63,150
By Sales 36,86,000
  36,86,000   36,86,000
To Salaries
To Rent
To Printing and Stationery
To Advertisements
To Net Profit
1,04,000
1,26,000
74,650
86,000
4,72,500
By Gross Profit 8,63,150
  8,63,150   8,63,150

Balance Sheet of M/s Wearall Textlies as on 31st March 2006
Liabilities Amount Assets Amount
Capital
Sundry Creditors
P/L Appropriation
  [6,52,950 + 4,72,500]
2,50,000
1,80,000
11,25,450
Cash
Bank
Office Building
Motor Vehicles
Sundry Debtors
Machinery
26,000
4,23,450
1,19,000
2,10,000
2,08,000
5,69,000
  15,55,450   15,55,450

Care in dealing with Profit and Loss Appropriation a/c (or Capital a/c)

 
 
The balance in the "Profit & Loss Appropriation a/c" as shown in the Trial Balance represents the balance carried forward from the previous accounting period (i.e. year ending 31st March 2005).

The Profit and Loss a/c relating to the current period is closed by transfer its balance to the "Profit & Loss Appropriation a/c"

DrProfit and Loss Appropriation a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
31/03/06 To Bal c/d 11,25,450 31/03/06
31/03/06
By Bal b/d
By Net Profit

6,52,950
4,72,500
  Total   11,25,450   Total   11,25,450
        01/04/06 By Balance b/d 11,25,450

Therefore, while showing the information (balance) relating to the Profit & Loss Appropriation a/c in the Balance sheet, care should be taken to make appropriate adjustment to the balance on account of the transfer of balance from the Profit and Loss a/c.

The balance that appears in the balance sheet is not the one that appears in the trial balance, but the one that takes into consideration the adjustment on account of current periods profit or loss also.

If the balance in Profit and Loss a/c is transferred to the Capital a/c, then such a care should be taken with regard to the Capital a/c balance.

Author Credit : The Edifier ... Continued Page 9

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