Why is it Important to Maintain Trial Balance?
Table of Contents
What is a trial balance?
A trial balance is a report where in the balance is taken from all the different ledgers of a company and combined into one under debit and credit. The purpose of the trial balance is to prove the equality of the debit and credit totals. This report is usually run at the end of an accounting period, and it can also be used to prepare financial statements such as the balance sheet and income statement.
Advantages of trial balance preparation:
1. Sorting Out human mistakes:
With the help of a trial balance, you can detect all sorts of mathematical errors along with errors committed while transferring the figures from one book to another. Trial Balance helps you find posting mistakes, omissions in ledger accounts, and also helps in spotting errors while making suspense accounts entries. You can easily solve the problems with quick action before they become too big. Similarly, it can also be used to test the arithmetical accuracy of ledger accounts. It helps to prevent arithmetical errors in recording business transactions.
2. Checking Balance Accuracy:
The trial balance is quite useful in verifying actual balances taken from different ledgers and balancing them with their respective balances as per other ledger accounts. It helps to discover any error that might have occurred in carrying forward the balances or posting the same in the ledger account or extracting the same. The trial balance helps to identify errors that cannot be located with the help of self-balancing ledger accounts. This can be explained by taking an example of two errors: one of omission and the other of commission. In the former, some transactions may not have been recorded at all whereas in the latter, one or more amounts may have been recorded twice or they may have been wrongly entered in the ledger.
3. Discovery of Errors:
Errors are those mistakes that are not discovered earlier and which affect both sides of a transaction an equal amount. Such errors are called compensating errors and these can be detected by preparing trial balance as it will not tally if such errors exist. It helps to prevent fraud as it highlights all errors and shows their effect on total debit and total credit balances. Hence it also ensures that your submissions in things like oltas challan are error-free.
4. Preparation of Financial Statements:
All essential information to prepare financial statements like profit and loss account and balance sheet can be gathered from the trial balance itself. Hence it saves lots of time in preparing financial statements after preparing a trial balance.
5 For making comparisons:
It is extremely useful for making a comparative analysis. This comparative analysis could be done with yourself where you are matching your company’s previous performance with its current performance. Or you can use it for making comparisons with your competitors. You can also use it to understand a company’s progress and understand its growth structure by co-relating it with the strategies that the company adopted for this growth. Additionally, it also shows the trends in the industry by doing a peer analysis based on which you and your team can strategize
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