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Explain the concept of trial balance
Trial balance records and categorizes all the ledger balances into debit and credit in a particular period. A trial balance includes items like assets, revenues, liabilities, gains, expenses, losses and equity.
Usually, trial balance is prepared at the end of the reporting period. Each business transaction is recorded in credit and debit.
Quality trial balance shows the sum of transactions recorded in debit is equal to sum of transactions recorded in credits. If there is any error in balancing the credit and debit column, then there must be an error in recording the transaction in trial balance.
The errors are rectified by correcting the transactions and are balanced again. If balances are equal, then it is okay otherwise, repeat the process till the balances are equal.
Undetectable errors
Some of the undetectable errors are as follows −
- Transactions Omission or transactions not entered.
- Wrongly entered entries.
- Entering debit and credit column reversely, which means money debited is entered in credit column and vice versa. Also, called a reversal entry.
- Violating accounting fundamental principles (entered account is wrong, entering entries of expense in liability account etc.)
- Oversight or lack of basic accounting principles knowledge.
Uses
The uses of trial balance are given below −
- Adjustments in postings are easy.
- Helpful for auditors at the time of audits.
- Credibility is defined.
Advantages
The advantages of trial balance are given below −
- Indicates accuracy of books of accounts.
- All ledger balances are listed.
- Prerequisite for financial statements.
Limitations
The limitations of trial balance are given below −
- Some transactions are omitted.
- In spite of errors, sometimes credit and debit balances are equal.
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