A Trial Balance Is A List Of All The Accounts And Their Balances At A Specific Point In Time. It Is Used To Check If Total Debits & Total Credits are equal, Which Helps Ensure That The Accounting Records Are Accurate.
Trial Balance Format
| NAME OF ACCOUNTS | LF | DEBIT | CREDIT |
| ASSETS | ****** | ||
| EXPERNSES | ****** | ||
| CAPITAL | ****** | ||
| LIABILITIES | ****** | ||
| INCOME | ****** | ||
| TOTAL | ****** | ****** |
Assets
Definition: Anything that provides cash or benefits in the future is termed an asset. Assets are owned or controlled by an individual, business, or organization. They provide a probable future economic benefit, such as generating income, improving operations, or supporting business activities.
Types of Assets in a Trial Balance
1. Current Assets
Current assets are short-term assets that gives cash or benefit in one year. They play a critical role in maintaining liquidity and supporting day-to-day operations.
Common Types of Current Assets:
- Cash and Cash Equivalents
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Short-term Investments
Non-Current Assets
Non-current assets are long-term assets used in operations that are not expected to be quickly converted into cash. They provide benefits for more than one year and are classified into tangible and intangible assets.
Common Types of Non-current Assets:
Tangible Assets: Physical items that can be touched or seen.
Examples: Property, Plant, and Equipment (PP&E)
Intangible Assets: Non-physical but valuable items.
Examples: Patents, Trademarks, Goodwill
Expenses
An expense is the cost of operations that a company incurs to generate revenue from , which no further benefit is expected.
In a trial balance, expenses are costs incurred by a business during its operations. Expenses are recorded on the debit side of the trial balance because they decrease the company’s equity and are part of the income statement.
Common Examples of Expenses in a Trial Balance
- Operating Expenses: Costs related to the core business operations.
- Rent Expense
- Salaries and Wages
- Utilities (electricity, water, internet)
- Office Supplies
- Advertising and Marketing
- Cost of Goods Sold (COGS): Direct costs of producing goods or services sold by the company.
- Raw Materials
- Direct Labor
- Administrative Expenses: General expenses for running the business.
- Professional Fees (e.g., accountants, consultants)
- Depreciation on Office Equipment
- Financial Expenses: Costs associated with borrowing money or managing finances.
- Interest Expense
- Bank Charges
- Non-Operating Expenses: Costs not related to core operations.
- Loss on Asset Disposal
- Legal Settlements
Capital
The owner invests the money into the business is called capital and is recorded on the credit side. If the owner takes the money for personal use it is termed as drawings. This will happen In partnership business as well as single owner business.
In the case of companies, the capital is divided into small units called shares. Those owners are called shareholders. Shareholders contribute the capital of the company so they get something in return called the dividend. Whatever profit the company made a portion that distributed among the owners of the company.
Types of Capital in a Trial Balance
- Owner’s Capital (for Sole Proprietorships/Partnerships):
Initial and additional contributions made by the owner(s). - Share Capital (for Corporations):
Funds raised from issuing shares (e.g., common stock, preferred stock). - Retained Earnings:
Profits from previous years retained in the business rather than distributed as dividends. - Reserves:
Funds set aside for specific purposes, such as future expansion or contingencies.
Liabilities
Definition: Liabilities are the amounts a business owes to external parties. They are recorded on the credit side because they represent obligations against the company’s assets.
Types of Liabilities in a Trial Balance:
1. Current Liabilities
Short-term obligations are due within a year.
Examples:
- Creditors
- Bills Payable
- Outstanding Expenses
- Bank Overdraft
- Income Received in Advance
- Short-term Loans
2. Non-Current Liabilities
Long-term obligations are due after a year.
Examples:
- Long-term Loans
- Debentures
- Long-term Debt
- Long-term Provisions
- Bonds Payable
- Lease Obligations
Income
Definition: In a trial balance, incomes (or revenues) represent the all source of money a company earns or receive , both from operating & non-operating activities. Incomes are recorded on the credit side because they increase the owner’s equity by contributing to the company’s profitability.
Types of Income in a Trial Balance:
1. Operating Income
Income earned from a company’s core business operations.
Examples:
- Sales Revenue
- Service Revenue
2. Non-Operating Income
Earnings from activities not directly related to core operations.
Examples:
- Interest Income
- Dividend Income
- Rental Income
- Gains on Asset Sales
How to Prepare a Trial Balance?
| NAME OF ACCOUNT | LF | DR | CR |
| Capital | **** | ||
| Land & Building | **** | ||
| Plant & Machinery | **** | ||
| Equipment | **** | ||
| Furniture & Fixture | **** | ||
| Cash In Hand | **** | ||
| Cash @ Bank | **** | ||
| Debtors | **** | ||
| Bills Receivable | **** | ||
| Stock Of Raw Materials | **** | ||
| Stock Of Finished Goods | **** | ||
| Purchase | **** | ||
| Carriage Inward | **** | ||
| Carriage Outward | **** | ||
| Sales | **** | ||
| Sales Return | **** | ||
| Purchase Return | **** | ||
| Interest Paid | **** | ||
| Commission Received | **** | ||
| Salaries | **** | ||
| Long Term Loan | **** | ||
| Bills Payable | **** | ||
| Creditors | **** | ||
| Advances From Customers | **** | ||
| Drawings | **** | ||
| TOTAL | **** | **** |
