What is a Trial Balance

Ever heard of trial balance or a trial balance? A trial balance is not a financial statement. This is an internal report that is useful in manual accounting systems.

If the trial balance is not “balanced”, it indicates an error somewhere between the journal and trial balance. Often the cause of the discrepancy is the miscalculation of account balances, posting debit amounts as credits (or vice versa), changing numbers in amounts when posting or setting up trial balances, etc.

Want to know more about the trial balance? Read on for this article to the end:

Contents:

1 What is a Trial Balance?
2 Purpose of a Trial Balance
3 How to Prepare a Trial Balance Statement?
3.1 General rules that you should pay attention to when creating a trial balance:
4 What Does a Trial Balance Do for Your Business?

What is a Trial Balance?

A trial balance is an internal report that is always present in the accounting department. The trial balance lists all the accounts in the general ledger and their balances (or all accounts that have balances).

However, the debit balance amounts are entered in one column and the credit balance amounts are entered in another column. Each column is then added up to prove that the total debit balance equals the total credit balance.

In manual accounting systems, trial balances are useful for ensuring that there are no errors when transactions are journalized, posted, account balances are calculated, etc. However, if you use accounting software, this administrative error is unlikely to occur.

Purpose of a Trial Balance

Used in a double-entry bookkeeping system, a trial balance lists all debit and credit balance amounts for a given time period. This is often the first step in interpreting financial statements for your business.

After posting the transactions to the accounting journals and summarizing them in the general ledger, a trial balance statement is prepared using the closing balance (with debits and credits respectively). The total debits and credits in each accounting entry must match. Otherwise, it indicates that the general ledger transactions are not balanced.

The report tests the arithmetical accuracy of the books and finds errors. It helps in the preparation of final accounts at the end of each year to understand the operating results and financial position of the business organization.

How to Prepare a Trial Balance Statement?

There are four basic steps to setting up a trial balance manually.

1. Prepare a three-column or four-column worksheet containing: the account number, account name, debit, and credit.
2. List your debit and credit totals for each general ledger account. Assets, expenses, and losses are recorded as debits, while liabilities, capital, and income are recorded as credits
3. After all account balances are entered, each column is summed
4. The debit column must be the same as the credit column

General rules that you should pay attention to when creating a trial balance:

1. All assets must be put on the debit side
2. All obligations must be put on the credit side
3. All income or profits must be recorded on the credit side
4. All expenses must be recorded on the debit side

If the debits and credits don’t match, you may have an error in the general ledger account. This could be due to a missing debit or credit entry or a miscalculation or an incorrectly copied amount from a general ledger account.

Some common reasons for mismatched trial balances are:

1. Not posting amounts to the general ledger or trial balance
2. Incorrect post count
3. Post in the wrong column
4. Incorrectly recorded account balance in the trial balance.
5. Remove the account from the trial balance.
6. Transposition or slide errors in accounts or journals

What Does a Trial Balance Do for Your Business?

A trial balance will help you detect:

1. Calculation error: Taking an incorrect balance from one or more general ledger accounts will result in a miscalculation.
2. Transcription error: Entering a debit balance in the credit column or vice versa will result in a transcription error.
3. Transposition error: A data entry error resulting from two digits that are individuals or parts of a larger number sequence are reversed.
4. Posting errors: Errors made in general ledger postings are posting errors

There are certain mistakes that a trial balance cannot detect such as posting on both sides to the wrong ledger account, changing debit and credit entries in the general ledger and making two mistakes that cancel each other out.

Once an error is detected, a suspension account is created. This is a temporary account, created on the short side, to make the debit side agree on the credit side. It is removed by detecting the error committed.