Importance of Trial Balance

importance of Trial Balance

The importance of trial balance cannot be over-emphasized in any business. This is so because, a businesses success depends on the ability to properly balance the checkbooks and eradicate all forms of accounting errors that could bring about poor financial habits, and this is where the trial balance comes in.

The trial balance, which is mostly referred to as the heart of a business, is a tool that not only summarizes the activities of a business but also points out the “financial health” of the business, ensuring that the bookkeeping systems are double-checked to maintain accuracy.

However, Investopedia described trial balance as a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. In other words, presenting all ledger balances on a single worksheet for a specific date is said to be a “Trial Balance.”

 

Uses of Trial Balance include:

  • The trial balance makes sure that all account balances are accurately extracted from accounting ledgers.
  • The trial balance is used as a basis for the preparation of financial statements.
  • The trial balance permits the double entry concept of accounting. That is, when there is a debit entry, there has to be a credit entry, which makes it easy to investigate and rectify differences before the preparation of financial statements.

 

Top 8 Importance of Trial Balance to Businesses

  1. For Decision-Making: The trial balance makes it possible for businesses to have a proper budget plan ahead of upcoming accounting periods by comparing the ledger balances with the past balances. This type of comparison showcases the performance of the business over time.

  2. For Detecting and Correcting Errors: A trial balance allows an accountant to identify and correct errors in ledger postings as soon as possible. Noting that the debit total of the trial balance must correspond to the credit total of the trial balance.

  3. For Comparative Analysis: To understand the level of a business is at, a trial balance allows you to compare balances from different years and analyze performance in terms of income, expenses, production costs, and so on. This makes it easy to take necessary actions where needed.

  4. For Arithmetical Accuracy: The trial balance exposes all types of flaws in a business’s finances, and this makes it useful for verifying the actual amount recorded on the right side of the current account during the migration of figures from multiple ledger books, such as cash books, sales books, purchase books, and so on. Aside from this, the trial balance is also used to ensure the accuracy of special-purpose accounting books.

  5. For Audit Reports: Trial balance provides the audit trail which auditors require to audit, and then gives them the liberty to locate entries in the original book of accounts and comment on the preparation of financial statements in their audit report.

  6. For Financial Statements: The preparation and analysis of financial statements is made easy with the trial balance because it contains the balances of all the ledger accounts that are required to prepare the financial statements. This means that the trial balance already has the Cash Flow Statement, Balance Sheet, and Profit and Loss Account that needs to be prepared at the end of each accounting year.

  7. For Adjustments: Most businesses prepare their adjustment account at the end of the fiscal year. However, preparing adjustment accounts like outstanding liabilities, prepaid expenses, and closing stock while preparing the trial balance makes it easy to carry out adjustments relevant to the current accounting year.

  8. For Summary and Credibility: The trial balance summarizes all ledgers and balances, hence, it enables businesses to see through all the accounting transactions of specific dates. The trial balance is also important in understanding the capacity and credibility of an organization, especially for lending firms.


Conclusion

I have just walked you through what a trial balance is and its importance. I hope you found value in this post.

 

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