Balances Method

The Balances Method

The Balances Method is the most widely used approach for preparing a trial balance in practice. Instead of listing every individual transaction, this method works directly with the closing balances of each ledger account.

Why balances? Because the balance of an account summarises the net effect of all transactions recorded in that account over the period. For example, instead of listing every sale and every payment received from a customer, you simply take the net amount owed by that customer at the end of the period. This makes the trial balance concise and directly useful for preparing financial statements.

How It Works

Under this method, you follow these steps:

1. Determine the balance of every ledger account. For an asset or expense account, the balance is usually a debit. For a liability, income, or capital account, the balance is usually a credit.
2. List each account's balance in the trial balance — debit balances in the debit column, credit balances in the credit column.
3. Total both columns of the trial balance. If the totals agree, the ledger is arithmetically correct.

A Practical Convention

In practice, the trial balance does not show the balance of every single debtor and creditor individually. Instead, a single combined figure is used:

• Sundry Debtors — the total of all individual debtors' debit balances (i.e., the total amount owed to the business by customers).
• Sundry Creditors — the total of all individual creditors' credit balances (i.e., the total amount the business owes to suppliers).

This is a standard simplification. The detailed list of individual debtors and creditors is maintained separately in the subsidiary ledgers (the sales ledger and purchases ledger), but the trial balance only needs the summary figure.

Proforma of a Trial Balance (Balances Method)

The trial balance itself is a simple two-column statement. The format is: