A trial balance is a list of balances of all the ledger accounts within a ledger. Usually, the trial balance is prepared every month. This is only done after all the transactions are recorded in the ledger.
Purpose of Trial Balance:
The main purpose of creating a trial balance is to check the correctness of all transactions recorded in accounts. But the preparation of the trial balance also helps to easily consolidate the final account statements.
How is Trial Balance prepared?
The trial balance lists the debit, credit accounts for a given ledger for a month. The trial balance is created in two columns one with all the debit balances and the other with all the credit balances. If the total of the debit column does not equal the total of the credit column then there is an error in the ledger accounts. The assets, expenses will be recorded under the debit balances. Liabilities, equity, and revenue will be recorded under the credit balances.
Limitations
But there is no guarantee that if the trial balance is fine, the ledger accounts are correct. There might be some omissions in the ledger accounts, or even a duplicate entry is also a possibility. Some times there will be ledger entries that are wrong when looked into individually. But while doing a trial balancing there might have been other wrong entries that have compensated for these errors.
Trial balancing can easily trace the wrong posting of amounts in a different account. So trial balancing is also time consuming, but this will ensure that the debit and credit balances are corrected every month.