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Preparation of trial balance is the third phase in the accounting process. After posting
the accounts in the ledger, a statement is prepared to show separately the debit and credit
balances. Such a statement is known as the trial balance. It may also be prepared by
listing each and every account and entering in separate columns the totals of the
debit and credit sides. Whichever way it is prepared, the totals of the two columns
should agree. An agreement indicates reasonable accuracy of the accounting work; if
the two sides do not agree, then there is simply an arithmetic error(s).
Illustration 1
Given below is a ledger extract relating to the business of X and Co. as on March, 31, 2010.
You are required to prepare the Trial Balance by the Total Amount Method.
Cash Account
Dr. Cr.
Particulars Rs. Particulars Rs .
To Capital A/c 10,000 By Furniture A/c 3,000
To Ram's A/c 25,000 By Salaries A/c 2,500
To Cash Sales 500 By Shyam's A/c 21,000
By Cash Purchases 1,000
By Capital A/c 500
By Balance c/d 7,500
35,500 35,500
Furniture Account
Dr. Cr.
Particulars Rs. Particulars Rs .
To Cash A/c 3,000 By Balance c/d 3,000
3,000 3,000
Salaries Account
Dr. Cr.
Particulars Rs. Particulars Rs .
To Cash A/c 2,500 By Balance c/d 2,500
2,500 2,500
Shyam's Account
Dr. Cr.
Particulars Rs. Particulars Rs .
To Cash A/c 21,000 By Purchases A/c 25,000
To Purchase Returns A/c 500 (Credit Purchases)
To Balance c/d 3,500 –
25,000 25,000
Purchases Account
Dr. Cr.
Particulars Rs . Particulars Rs.
To Cash A/c (Cash Purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases Book
(Credit Purchases) 25,000 –
26,000 26,000
Purchases Returns Account
Dr. Cr.
Particulars Rs . Particulars Rs.
To Balance c/d 500 By Sundries as per Purchases
Return Book 500
500 500
Ram's Account
Dr . Cr.
Particulars Rs . Particulars Rs .
To Sales A/c (Credit Sales) 30,000 By Sales Returns A/c 100
By Cash A/c 25,000
By Balance c/d 4,900
30,000 30,000
Sales Account
Dr . Cr.
Particulars Rs. Particulars Rs.
To Balance c/d 30,500 By Cash A/c (Cash Sales) 500
By Sundries as per Sales Book
(Credit sales) 30,000
30,500 30,500
Sales Returns Account
Dr . Cr.
Particulars Rs. Particulars Rs .
To Sundries as per Sales
Returns Book 100 By Balance c/d 100
100 100
Capital Account
2.4
Dr. 1 Cr.
Particulars Rs. Particulars Rs.
To Cash A/c 500 By Cash A/c 10,000
To Balance c/d 9,500 –
10,000 10,000
1. TOTAL METHOD
Under this method, every ledger account is totaled and that total amount (both of
debit side and credit side) is transferred to trial balance. In this method, trial balance can
be prepared a soon as ledger account is totaled. Time taken to balance the ledger accounts
is saved under this method as balance can be found out in the trial balance itself. The
difference of totals of each ledger account is the balance of that particular account. This
method is not commonly used as it cannot help in the preparation of the financial
statements.
2. BALANCE METHOD
Under this method, every ledger account is balanced and those balances only are carry
forward to the trial balance. This method is used commonly by the accountants and
helps in the preparation of the financial statements. Financial statements are prepared on
the basis of the balances of the ledger accounts.
The following are the main points of difference between the trial balance by balance method and
the trail balance by total amount method:
Category Explanation
Revenue The revenues (sales) during the period are recorded here. Sometimes referred
to as the “top line” – revenue shows the total value of sales made to
customers
Cost of sales The direct costs of generating the recorded revenues go into “cost of sales”.
This would include the cost of raw materials, components, goods bought for
resale and the direct labour costs of production.
Gross profit The difference between revenue and cost of sales. A simple but very useful
measure of how much profit is generated from every Rs.1 of revenue before
overheads and other expenses are taken into account. Is used to calculate the
gross profit margin (%)
Distribution & Operating costs and expenses that are not directly related to producing the
administration goods or services are recorded here. These would include distribution costs
expenses (e.g. marketing, transport) and the wide range of administrative expenses or
overheads that a business incurs.
Operating profit A key measure of profit. Operating profit records how much profit has been
made in total from the trading activities of the business before any
account is taken of how the business is financed.
Finance expenses Interest paid on bank and other borrowings, less interest income received on
cash balances, is shown here. A useful figure for shareholders to assess how
much profit is being used up by the funding structure of the business.
Profit attributable The amount of profit that is left after the tax has been accounted for. The
to shareholders shareholders then decide how much of this is paid out to them in dividends
and how much is left in the business (“retained earnings” in the equity section
of the balance sheet)
Trading and Profit & Loss Account (Horizontal Format)
for the year ended ---
Schedule VI (Part II)
The prescribed form of the Balance Sheet is given in Part I of Schedule VI of The
Companies Act, 1956.
The Companies Act has laid down two forms of the Balance Sheet known as:
SCHEDULE VI PART I
Balance Sheet of ….CO.LTD.
As at …
Note: A footnote to the Balance Sheet may be added to show the contingent liabilities.
FORMAT OF THE DETAILED BALANCE SHEET IN A HORIZONTAL FORM
Horizontal Form of Balance Sheet
Balance Sheet of..... (Name of the company) as on.....
I. Source of Funds:
1. Shareholder’s Funds:
(a) Share capital
(b) Reserves and Surplus
2. Loan Funds:
(a) Secured loans
(b) Unsecured loans
Total (Capital Employed)
II. Application of Funds
1. Fixed Assets:
(a) Gross block
(b) Less: depreciation
(c) Net block
(d) Capital work-in-Progress
2. Investments:
3. Current Assets, Loans and Advances:
(a) Inventories
(b) Sundry Debtors
(c) Cash and Bank Balances
(d) Other Current Assets
(e) Loans and Advances
Less: Current Liabilities and Provisions:
(a) Current liabilities
(b) Provisions
Net Current Assets
4. (a) Miscellaneous expenditure to the extent not
written-off or adjusted.
(b) Profit and Loss account
(debit balance, if any)
TOTAL
Note: A footnote to the Balance Sheet may be added to show the contingent liabilities.