The initial step while preparing the final accounts is the preparation of trial balance. So therefore it is absolutely necessary that we prepare the trial balance correctly, so that our final accounts don’t contain any errors or mistakes.
A trial balance can be prepared in the following ways:
1. Totals Method: Under this method, the total of each side in the ledger (debit and credit) is determined independently and is shown in the trial balance in separate sections. The total of the debit section of the trial balance ought to agree with the total of the credit section in the trial balance as the accounts are based on a double entry system.
Although, this method isn’t generally used in practice, as it doesn’t help in assuming accuracy of balances of different records/accounts and in preparing of the financial statements.
2. Balance Methods: This is the most commonly used method which is in practice. Under this method the trial balance is prepared by showing the balances of all ledger accounts/records and afterwards the totalling up ofthe debit and credit sections of the trial balance to guarantee their correctness. The account balances are utilized because the balance sums up the net impact/effect of all the exchanges and transactions identifying or relating to an account or a record which helps in preparing the financial statements. It might be noticed that in trial balance, ordinarily instead of the balances in specific accounts or records of the debtors, a figure of sundry debtors is then shown and instead of individual accounts/records of the creditors, a figure of sundry creditors is Shown.
3. Totals-cum-balances Method: This method is the combination of totals method and the balances method. Under this method four rows for sum are prepared. Two rows are for writing the debit and credit aggregates of different accounts/records and two rows for writing the debit and credit balances of these accounts/records. Although, this method is not utilized practically as it is tedious, very time consuming and barely serves any extra or special purpose.
Thus, to make the financial statements at the year end, the trial balance serves as the starting point. This trial balance can be prepared following any of the three methods available. These are Totals Method, Balances Method and Totals-cum-balances Method.