What is Trial Balance?
A trial balance is a financial report that lists a company's general ledger accounts closing balances at a certain period. A trial balance contains accounts that are the main accounting items, such as assets, liabilities, revenues, expenses, equity, gains, and losses.
It is used primarily to establish the debits and credit balances entered from the recorded transactions in the general ledger.
As well as for error detection, the trial balance allows for the necessary adjusting entries to the general ledger. Once the adjusting entries have been posted, the trial balance is again prepared to make sure that the totals of the debits and credits still match. The trial balance is not an official statement of the company but for internal use only. People outside the company should not be given copies of this report.
Example of Trial Balance
Here's a sample of a trial balance. The heading includes the company's name, the report's name, and the date the report was created. On the left column are the account names, with the debit and credit columns on the right, where balances are posted.
Name of Company
December 31, XXXX
|Long Term Liabilities
|Cost of Goods Sold
How Trial Balance Works
A company's business transactions are initially recorded in bookkeeping accounts in the general ledger. These accounts may be debited or credited based on the kind of business transactions that were made.
The ending balance of each account in the ledger posted in the trial balance worksheet is the sum total of all debits and credits entered into that account.
The preparation of a trial balance worksheet is aimed at detecting any errors that have been committed in the double entry accounting system. If the total debits are the same as the total credits, then the trial balance is considered accurate, and no mathematical errors can be found in the ledgers. However, some transactions may be improperly classified, which results in errors that the trial balance procedure can't identify.
Types of Trial Balance
There are 3 trial balance reports prepared at various stages of the accounting cycle.
Unadjusted Trial Balance
Unadjusted Trial Balance is a listing of all the accounts in the general ledger, which is prepared at the end of a period (e.g., month, quarter, year).
Usually, it is the starting point for analysing account balances, which is done before adjusting entries.
Adjusted Trial Balance
Adjusted Trial Balance is a listing of all the account balances after adjusting entries that may include accrued and prepaid expenses.
Post Closure Trial Balance
Post Closure Trial Balance lists all balance sheet accounts at the end of the reporting period. It verifies that all debit balances have the same amount as the total of all the credit balances. Which net result should be zero.
Common Errors in Trial Balance
While trial balance can point out the mathematical mistakes in the general ledger, there are still errors that this procedure cannot discover. See the list of errors below:
- The error of omission - failure to enter the transaction into the system.
- The error of original entry - wrong amounts entered into the double entry transactions.
- The error of reversal - the account to be debited was credited, and vice versa despite the correct amount entered.
- Principle error - the transaction that was entered violated the accounting principles due to a lack of knowledge of it,
- Commission error - the transaction amount is correct, but the account debited/credited is incorrect (due to oversight).
Steps to Prepare Trial Balance
The closing balances of the general ledger accounts are required to prepare a trial balance. Here are the five steps to do it:
- Determine the balances of each account in the ledger. Make sure that every ledger account is balanced.
- In the trial balance worksheet, record debit or credit balances. These balances are posted in the debit or credit columns according to the circumstances.
- Calculate the total debit column after recording the debit balances of the ledger accounts.
- Calculate the credit column's total after recording the ledger accounts' credit balances.
- Check if the total of the debit column is equal to the total of the credit column
The Debit and Credit amounts should tally, as a debit has a credit.
If they are not equal, then there must be error/s made in recording the transactions in the ledger or trial balance.
If you prefer to take care of your accounts independently, you tend to lose valuable time and effort and face compliance issues; the latter might ultimately cost your business.
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