Following Steps are involved in the preparation of a Trial Balance:
- All Ledger Accounts are closed at the end of an accounting period.
- Ledger balances are posted into the trial balance.
- Trial Balance is cast and errors are identified.
- Suspense account is created to agree the trial balance totals temporarily until corrections are accounted for.
- Errors identified earlier are rectified by posting corrective entries.
- Any adjustments required at the period end not previously accounted for are incorporated into the trial balance.
Closing Ledger Accounts
Ledger accounts are closed at the end of each accounting period by calculating the totals of debit and credit sides of a ledger. The difference between the sum of debits and credits is known as the closing balance. This is the amount which is posted in the trial balance.
How closing balances are presented in the ledger depends on whether the account is related to income statement (income and expenses) or balance sheet (assets, liabilities and equity). Balance sheet ledger accounts are closed by writing ‘Balance c/d’ next to the balancing figure since these are to be rolled forward in the next accounting period. Income statement ledger accounts on the other hand are closed by writing ‘Income Statement’ next to the residual amount because it is being transferred to the income statement as revenue or expense incurred for the period.
The steps involved in closing a ledger account may be summarized as below:
- Add the totals of both sides of a ledger.
- The higher of the totals among the debit side and credit side must be inserted at the end of BOTH sides.Closing balance is the balancing figure on the side with the lower balance.
- In case of ledger accounts of assets, liabilities and equity, ‘balance c/d’ is written next to the closing balance whereas in case of income and expenses ledger accounts, ‘Income Statement’ is written next to the closing balance.
- The closing balances of all ledger accounts are posted into the trial balance.
Next sections contain examples illustrating how the various types of ledger accounts are closed at the period end 31 December 2011.