What is a Trial Balance?
A trial balance is a statement of all the debits and credits in the double-entry accounting system. If the trial balance doesn’t balance, then there is an error in the bookkeeping.
The report lists all the ledger accounts from your chart of accounts on the left side. You can omit any accounts that you haven't used during the period. Then there’s a column with debit balances, and one with credit balances. The sum of debits and credits ought to be equal.
Producing an accurate TB balance is the first step in producing financial statements for any given reporting period. The expenses gains and losses for a period are reliant on these balances.
What is a trial balance in accounting?
Companies use trial balances to prepare balance sheets and other financial statements, making them an important document for auditors. A trial balance checks if the total amounts in the debit and credit columns match in the general ledger. It helps to find errors in accounting.
Should the totals not align, the reason could be a missing debit or credit transaction, or a mistake in transferring data from the general ledger account. But there could still be mistakes or errors in the accounting system even if the amounts do match. An accountant or bookkeeper utilizes a trial balance to verify the accuracy of things.
An unadjusted trial balance report is called an initial trial balance. Once errors are corrected, the adjusted trial balance is created to help prepare financial statements.
What Does a Trial Balance Include?
A trial balance encompasses a compilation of all total amounts from the general ledger accounts. Every account must contain an account number, a description of the account, and its ultimate debit/credit balance.
Additionally, it should specify the final date of the accounting period for which the report is created. The general ledger lists all transactions by account. The trial balance only shows the total for each account, not individual transactions.
Finally, if you entered some adjusting entries, you must reflect them on a trial balance. In this situation, you need to display the numbers before making changes, the adjustment made, and the new balances.
Undetectable Errors in a Trial Balance
A trial balance can trace the mathematical inaccuracy of the general ledger. However, there are a number of errors that cannot be detected by this report:
- Error of omission: The transaction was not entered into the system.
- Error of original entry: The double-entry transaction includes the wrong amounts on both sides.
- Error of reversal: When a double-entry operation was recorded with the right figures, but the account intended for debit was credited and the account meant for credit was debited.
- Principle error: The entered transaction violates the fundamental principles of accounting. For example, the correct amount was chosen and the right side was selected. However, the account type was wrong, such as using an expense account instead of a liability account.
- Commission error: The transaction amount is correct, but the account debited or credited is wrong. Commission error is akin to the aforementioned principle error, but it typically stems from negligence, whereas principle error is often due to an absence of understanding of accounting principles.
KEY POINTS
- A trial balance is a worksheet with two columns - one for debits and one for credit entries. It helps ensure a company's bookkeeping is accurate.
- Debits and credits show all the company's transactions over a period, including assets, expenses, liabilities, and revenues.
- The debits and credits in a trial balance must be equal to prevent math errors. However, there may still be errors in the accounting systems.
Special Considerations
List all ledger accounts and their balances on a trial balance worksheet. Add up debit balances and credit balances separately to ensure total debits equal total credits. Uniformity ensures that there are no mistakes in the double entry recording process, preventing unequal debits and credits from being entered.
However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes. Should identical debits and credits be posted to incorrect accounts, a transaction goes unrecorded, or simultaneous errors occur with a debit and a credit, a trial balance would still display an impeccable equilibrium between the total debits and credits.
Types of Trial Balance
There are three main types of trial balance:
- The unadjusted TB
- The adjusted TB
- The post-closing TB
All three of these types have exactly the same format but slightly different uses. Prepare the unadjusted trial balance on the fly before completing adjusting journal entries. It records day-to-day transactions and helps balance a ledger by adjusting entries.
Once you balance a book, you can complete an adjusted trial balance. The trial balance contains the final balances in all the accounts and is used to prepare the financial statements. The post-closing trial balance displays the balances once the closing entries have been completed. This is your starting trial balance for the next year.
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