A trial balance is a bookkeeping worksheet that lists the balances of all ledgers in debit and credit columns. So it is used to ensure that all entries made into an organization’s general ledger are properly balanced.
The importance of a trial balance lies in its ability to help spot accounting errors and prepare financial statements, such as balance sheets.
Key Takeaway
- A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain point in time.
- The purpose of a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct.
- The trial balance helps identify any computational errors throughout the accounting cycle.
- The trial balance is often the first step in an audit procedure.
- The trial balance helps a professional accountant to balance or check both debit and credit items of income, expenses, assets, and liabilities.
- The trial balance does not guarantee that the totals will be correct, as errors and fraud can still lurk in either column.
Definitions
J.R Batliboi said that “A trial balance is a statement, prepared with the debit and credit balances of the ledger accounts to test the arithmetical accuracy of the books.”
Purpose of Trial Balance
- A trial balance is a bookkeeping report used to verify the accuracy of an organization’s general ledger.
- The report lists the balances of all accounts in separate credit and debit columns.
- The objective of a trial balance is to verify the accuracy of debits and credits, highlight errors, and provide a summary of transactions.
- The total debit and credit balances should be equal, and if they are not, errors should be identified and corrected.
- A trial balance is used as the first step in an audit procedure to ensure there are no mathematical errors in the bookkeeping system.
- The trial balance ensures a proper balance of entries in an organization’s general ledger
- Accounting software packages do not require a trial balance as they do not allow unbalanced entries
- The trial balance is valuable for manual record keeping and used to create financial statements
- Auditors use the trial balance to transfer ending account balances into their auditing software
- The trial balance is also used by auditors to test the ending account balances.
Types of Trial Balance
There are three types of trial balances:
- The unadjusted trial balance
- The adjusted trial balance
- Post-closing trial balance.
The unadjusted trial balance is created first and lists all accounts with their balances before any adjustments have been made. So the adjusted trial balance is created after adjusting entries have been made to correct errors or update accounts. Post-closing trial balance is created after closing entries have been made to reset temporary accounts to zero for the next accounting period.
Unadjusted trial balance
The unadjusted trial balance is the first trial balance that’s prepared at the end of an accounting period. It includes all the company’s financial transactions during that period, without any adjustments made.
The unadjusted trial balance is used as the basis for preparing the adjusted trial balance.
Adjusted trial balance
The adjusted trial balance, on the other hand, takes into account any adjustments made during the accounting period. Adjusting entries are posted to comply with the accrual method of accounting and to rectify any errors highlighted while reviewing the unadjusted trial balance.
The adjusted trial balance is then used for the preparation of financial statements, which is the next step of the accounting cycle.
Post-closing trial balance
The post-closing trial balance is prepared after closing the temporary accounts in the adjusted trial balance. This trial balance is used to check if the debits and credits in the permanent accounts match.
Unadjusted Trial Balance Example
| Account Name | Debit | Credit |
|---|---|---|
| Cash | 10,000 | |
| Accounts Receivable | 5,000 | |
| Supplies | 2,500 | |
| Equipment | 20,000 | |
| Accumulated Depreciation | 5,000 | |
| Accounts Payable | 8,000 | |
| Common Stock | 15,000 | |
| Retained Earnings | 6,500 | |
| Sales Revenue | 25,000 | |
| Rent Expense | 4,000 | |
| Utilities Expense | 2,500 |
Example of adjusted trial balance
| Account Name | Debit | Credit |
|---|---|---|
| Cash | 10,000 | |
| Accounts Receivable | 5,000 | |
| Supplies Expense | 2,500 | |
| Equipment | 20,000 | |
| Accumulated Depreciation | 5,000 | |
| Accounts Payable | 8,000 | |
| Common Stock | 15,000 | |
| Retained Earnings | 4,000 | |
| Sales Revenue | 25,000 | |
| Rent Expense | 4,000 | |
| Utilities Expense | 2,500 | |
| Depreciation Expense | 1,000 | |
| Interest Expense | 500 |
Steps of Creating Trial Balance
Step 1: Calculate the balances of each ledger account
The first step in preparing a trial balance is to calculate the balances of each ledger account. So the ledger contains all the financial transactions of your company and is divided into accounts
To get the balance of any account, you must add all the credits and remove all the debits. So if the result is positive (+) There is a credit on the account. If the result is negative (-), the account has a debit balance.
Step 2: Enter the debit or credit balances in the trial balance
When the balance of each ledger account is calculated. The next step is to add them to the trial balance. A trial balance is a list of all ledger accounts and their balances. Record the balances in the trial balance.
Now this time we need to create two columns, one for debits and one for credits Accounts with debit balances go into the debit column, then accounts with credit balances go into the credit column.
Step 3: Calculate the amount for the debt column
After posting the debit and credit balances in the trial balance, the next step is to total the debit column. You can do this by adding all the balances in the debit column.
Step 4: Calculate the total for the credit column
Similarly, you need to calculate the total amount of the credit column by adding all the amounts in the credit column.
Step 5: Verify that the debit equals the credit
The final step in preparing a trial balance is to verify that the debit column matches the credit column. If the amounts are equal, so it means your books are balance and your financial records are accurate.
If the totals do not match, there is a problem with your financial administration. You must review your accounts and transactions to determine and correct the error.
Limitations of Trail Balance
The limitations of a trial balance are that it may hide errors of omission, some transactions may not be journalised at all, and even a correctly balanced trial balance cannot reveal these mistakes.
If a journal entry with an incorrect amount gets recorded in both accounts, the trial balance will not detect that error.
The trial balance does not prove that all transactions have been recorded or that the ledger is correct. It also does not find out all kinds of errors.
There are a few classes of errors that the trial balance cannot detect such as compensating errors, errors of principle, and errors of commission.
One type of error that can be difficult to identify is an error of omission. This happens when a transaction is completely left out of the books of accounts or only partially recorded.
The trial balance will not detect this type of error, since there will be neither a debit nor credit entry in the ledger.
Another challenging type of error is an error of original entry, which occurs when the wrong amounts are enters on both sides of a double-entry transaction. This can be especially problematic since the trial balance will still balance even if the amounts are incorrect.
Additionally, errors of reversal, commission, principle and compensating errors can also be difficult to identify.
It’s essential to understand these types of errors and the potential impact they can have on your financial statements.
So to avoid accounting errors, it’s crucial to maintain a well-organized workspace, establish proper internal controls, and ensure your bookkeeper is not overworked.
By implementing these simple measures, you can reduce the likelihood of errors and ensure. That your financial statements are accurate.
Process of Preparing Trial Balance
Name of the Company
First things first, when preparing a trial balance, you’ll need to write down the name of the company, the date of preparation, and the trial balance in the format.
Then, in the accounts serial number column, you’ll write down the serial numbers of the ledger accounts.
Title of the account
In the account titles column, you’ll write down the full title of the account from the ledger that corresponds with the serial number in the first column.
For example, if the serial number is for the capital account, you’ll write “Capital account” in the account titles column.
Ledger folio column
Next up is the ledger folio column, where you’ll write down the page number in the ledger where the balances for each account were brought from.
And finally, in the debit balance and credit balance columns, you’ll write down all the debit and credit balances for each account.
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