Trial Balance Definition, Explanation, Method, Preparation, Example

An entry into one account results in an equal and opposite entry into another. Any time an organization purchases equipment, makes a sale, or even spends petty cash, the transaction is recorded in a journal entry. Finally, as previously stated, a trial balance provides account summaries that are critical for putting together a balance sheet and an income statement. It’s good to reference a current trial balance with previous reports, as this helps a company identify transactions or entries that have been overlooked. Fortunately, there are tools and systems built to handle this financial complexity.

Under this method, first of all
the balances of all ledger accounts are drawn. Thereafter, the
debit balances and credit balances are recorded in “debit
amount” and “credit amount” column respectively and the two
columns are added separately to see whether they agree or not. As with all financial accounting, the debits must equal the credits. If it’s out of balance, something is wrong and the bookkeeper must go through each account to see what got posted or recorded incorrectly. A trial balance can be used to detect any mathematical errors that have occurred in a double entry accounting system.

Whenever any adjustment is performed run trial balance and confirm if all the debit amount is equal to credit amount. A trial balance is prepared at the end of the year after all accounting entries for the year are done and completed. All journal entries are posted in their respective ledger accounts.

Errors Disclosed by Trial Balance

The final total in the debit column must be the same dollar amount that is determined in the final credit column. For example, if you determine that the final debit balance is $24,000 then the final credit balance in the trial balance must also be $24,000. If the two balances are not equal, there is a mistake in at least one of the columns. A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in the ledger of a business.

  • Trial balance is a significant part of a company’s accounting procedure.
  • The adaptation of accounting software has made the processes even smoother.
  • The Trial Balance is designed to show any differences between debits and credits for each account in the ledger.

A company’s transactions are recorded in a general ledger and later summed to be included in a trial balance. Thus, for each account, the debit total is entered in the debit column and credit total is entered in the credit column. The grand total of the debit column should then equal to the grand total of the credit column. A balanced trial balance forms the basis of preparing final accounts. Of course, there may be certain errors in the books of account in spite of an agreed trial balance. Trial Balance is an important statement in the accounting process, which shows final position of all accounts and helps to prepare the final statements.

Trial Balance:

A debit could have been entered in the wrong account, which means that the debit total is correct, though one underlying account balance is too low and another balance is too high. For example, an accounts payable clerk records a $100 supplier invoice with a debit to supplies expense and a $100 credit to the accounts payable liability account. The debit should have been to the utilities expense account, but the trial balance will still show that the total amount of debits equals the total number of credits.

Problems with the Trial Balance

Once a book is balanced, an adjusted trial balance can be completed. This trial balance has the final balances in all the accounts, and it is used to prepare the financial statements. The post-closing trial balance shows the balances after the closing entries have been completed. After closing all general ledger accounts, the trial balance is prepared at the end of the financial year. It helps to record the income and expenditures of the business and easily complete the preparation of the balance sheet in the next step.

What is a general ledger?

A bookkeeper or accountant uses a trial balance to double-check things are correct. When the two sides of the trial balance are equal which is also called tally, then it is considered to be as preliminary proof of the arithmetical accuracy of accounting entries. It is proof all the journal entries are correct, posting is correct, totalling is correct and the balances obtained are correct. Today, credit balances and debit balances are checked automatically, mostly eliminating the need to create trial balance documents.

What is the purpose of Trial Balance

It’s a fundamental part of the accounting process, and completing a trial balance is one of the final steps for closing the books at the end of an accounting period. Even when the debit and credit totals stated on the trial balance equal each other, it does not mean that there are no errors in the accounts listed in the trial balance. We note below several ways in which errors could occur and yet not be spotted by reviewing the trial balance. The trial balance is strictly a report that is compiled from the accounting records.

Financial reporting

However, trial balances are still useful for accountants who need to check their work and for auditors who may need to understand which accounts to audit. Transferring information from T-accounts to the trial balance requires consideration of the final balance in each account. If the final balance in the ledger account (T-account) is a debit balance, you will record the total in the left column of the trial balance. If the final balance in the ledger account (T-account) is a credit balance, you will record the total in the right column. The adjusted amounts make up the adjusted trial balance, and the adjusted amounts will be used in the organization’s financial statements.

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