Question

What is the trial balance used for?

• A. It is financial statement
• B. It records the balance of balance sheet
• C. It does not contribute to the accounting cycle
• D. It records balance of accounts

Hint:

The trial balance is a tool for error detection, not a final financial report.

Answer 1

The Correct Option is D

The trial balance is a fundamental component in the accounting cycle, used for various purposes:

1. Definition and Purpose: A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns. It is primarily used to ensure that the sum of debit and credit balances is equal, which helps in verifying the mathematical accuracy of the company's accounts.
2. Recording Balances of Accounts: The correct purpose of a trial balance is to record the balance of all accounts as part of the end-of-period procedures. It consolidates all the balances from individual ledger accounts.
3. Financial Statement Preparation: While the trial balance itself is not a financial statement, it serves as a preliminary step in preparing financial statements like the balance sheet and income statement.
4. Accounting Cycle Contribution: Contrary to the option suggesting that it does not contribute to the accounting cycle, a trial balance is essential for preparing accurate financial reports and is therefore a critical component of the accounting cycle.

Evaluating the options given in the question:

• Option 1: "It is a financial statement" - This is incorrect as a trial balance is not a financial statement, but a preparatory step towards creating one.
• Option 2: "It records the balance of balance sheet" - This is incorrect because the trial balance includes balances from all accounts, not just those on the balance sheet.
• Option 3: "It does not contribute to the accounting cycle" - This is incorrect since the trial balance is a key part of the accounting cycle.
• Option 4: "It records balance of accounts" - This is the correct answer as the trial balance aggregates the balances of all ledger accounts.

Conclusion: The main purpose of the trial balance is to record and consolidate the balances of all accounts. This ensures that all entries are correctly balanced (debits equal credits) and helps in the preparation of financial statements.