All three of these types have exactly the same format but slightly different uses. The unadjusted trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record of day-to-day transactions and can be used to balance a ledger by adjusting entries. It is made as an attempt to prove that the total of ledger accounts with a debit balance is equal to the total of ledger accounts with a credit balance. As the name suggests, it is an actual “trial” of the debit and credit balances, they should be equal. The errors have been identified and corrected, but the closing entries still need to be made before this TB can used to create the financial statements.
The accounts are listed on the left with the balances under the debit and credit columns. For example, an entry in which the debit and credit should both have been $100 is instead entered as $1,000 to both the debit and credit accounts. This means that the entry is balanced, and so would not be spotted via a trial balance review – and yet is still incorrect. The trial balance can also be used to manually compile financial statements, though with the predominant use of computerized accounting systems that create the statements automatically, the report is rarely used for this purpose. Not all accounts in the chart of accounts are included on the TB, however. Usually only active accounts with year-end balance are included in the TB because accounts with zero balances don’t make it on the financial statements.
Internal accountants, on the other hand, tend to look at global trends of each account. For instance, they might notice that accounts receivable increased drastically over the year and look into the details to see why. 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.
Correct
This is because if the debit and credit side of the trial balance agrees, then it is assumed that the journal, subsidiary books, and ledgers are correctly and properly maintained. The main reason for the trial balance to match is the ‘Double Entry System’ of accounting. According to the double entry system, every transaction is recorded twice, once on the debit side and the other on the credit side. Though it is not conclusive proof of the correctness of all books of accounts because there can be some errors despite the fact that the total of both sides of the trial balance is matching.
After the closing entries have been made to close the temporary accounts, the report is called the post-closing trial balance. 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. As a learner/instructor, you need to consider those accounts whose DR and CR totals are equal. In such a scenario, the account is closed down and it is excluded in the trial balance.
Trial Balance Format
The debits would still equal the credits, but the individual accounts are incorrect. This type of error can only be found by going through the trial balance sheet account by account. Bookkeepers typically scan the year-end trial balance for posting errors to ensure that the proper accounts were debited and credited while posting journal entries.
When the trial balance is first printed, it is called the unadjusted trial balance. Then, when the accounting team corrects any errors found and makes adjustments to bring the financial statements into compliance with an accounting framework (such as GAAP or IFRS), the report is called the adjusted trial balance. The adjusted trial balance is typically printed and stored in the year-end book, which is then archived. Finally, after the period has been closed, the report is called the post-closing trial balance. This post-closing trial balance contains the beginning balances for the next year’s accounting activities.
Steps in preparing a trial balance
After these errors are corrected, the TB is considered an adjusted trial balance. A trial balance sheet is a report that lists the ending balances of each account in the chart of accounts in balance sheet order. Bookkeepers and accountants use this report to consolidate all of the T-accounts into one document and double check that all transactions were recorded in proper journal entry format. Debits and credits of a trial balance must tally to ensure that there are no mathematical errors.
The following trial balance example combines the debit and credit totals into the second column, so that the summary balance for the total is (and should be) zero. Adjusting entries are added in the next column, yielding an adjusted trial balance in the far right column. 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.
- An entry could have been made in reverse, where the amount to be debited was actually credited, while the account to be credited was debited.
- So, as a learner/ entrepreneur, never use the balance c/d to prepare the trial balance for this is against the accounting principles and conventions.
- A Trial balance is a summary of balances of all accounts recorded in the ledger.
- It is not distributed elsewhere within an organization, and it is not read by outside parties, other than the auditors.
- After these errors are corrected, the TB is considered an adjusted trial balance.
- A trial balance is simply a financial statement which depicts the summary of debit and credit balances for all accounts.
Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double entry accounting system. If the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean that there are no errors in a company’s accounting system. For example, transactions classified improperly or those simply missing from the system still could be material accounting errors that would not be detected by the trial balance procedure. The learner needs to understand that a trial balance is prepared for twofold reasons.
Definition of Trial Balance in Accounting
Companies can use a trial balance to keep track of their financial position, and so they may prepare several different types of trial balance throughout the financial year. A trial balance may contain all the major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them. A trial balance is often used as a tool to keep track of a company’s finances throughout the year, whereas a balance sheet is a legal statement of the financial position of a company at the end of a financial year. A Trial balance is a summary of balances of all accounts recorded in the ledger. It is prepared at the end of a particular period to indicate the correct nature of the balances of various accounts.
The entrepreneur/learner should recall that in the accounting cycle, once the ledger accounts have been established and balances extracted, the next step is to prepare a trial balance. A trial balance is a summary of all the transactions which took place within a specified financial period. A trial balance is simply a financial statement which depicts the summary of debit and credit balances for all accounts. To prepare a trial balance, all the accounts with debit balances or totals are posted on the debit side of the trial balance and all accounts with credit balances or totals are posted on the credit side of the trial balance.
The trial balance is strictly for use within the accounting department. It is not distributed elsewhere within an organization, and it is not read by outside parties, other than the auditors. Tax accountants and auditors also use this report to prepare tax returns and begin the audit process. The above account has a total DR balance of 6,800 made up of cash, bank and discount received while the CR side has a similar total of 6,800 made up of b/f of 2,300 and purchases of 4,500. About the Author – Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya.
The Difference Between a Trial Balance and a General Ledger
This can be assessed using the balances of both the debit and credit side of the trial balance. Because if the total on both sides agrees or equates, then it means that ledger postings are posted in an accurate manner. It also confirms the rules of the double entry system that all the entries have a double effect. 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 all the ledger accounts and their balances are listed on a trial balance worksheet in their standard format, add up all debit balances and credit balances separately to prove the equality between total debits and total credits. Such uniformity guarantees that there are no unequal debits and credits that have been incorrectly entered during the double entry recording process. However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes. These postings are recorded in the trial balance to verify and check for the correctness of the journal entries and ledger postings.
This is because the trial balance is a financial statement where we post only ledger accounts with DR Or CR balances which are more than zero (0) value. The main user of the trial balance is the general ledger accountant (or the bookkeeper in a smaller business). This person uses it as part of the month-end and year-end closing process, to ensure that the debit and credit totals match. Since the debit and credit columns equal each other totaling a zero balance, we can move in the year-end financial statement preparation process and finish the accounting cycle for the period. As the bookkeepers and accountants examine the report and find errors in the accounts, they record adjusting journal entries to correct them.
Depending on the kinds of business transactions that have occurred, accounts in the ledgers could have been debited or credited during a given accounting period before they are used in a trial balance worksheet. Furthermore, some accounts may have been used to record multiple business transactions. As a result, the ending balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered to that account based on all related business transactions.
At the end of an accounting period, the accounts of asset, expense, or loss should each have a debit balance, and the accounts of liability, equity, revenue, or gain should each have a credit balance. On a trial balance worksheet, all of the debit balances form the left column, and all of the credit balances form the right column, with the account titles placed to the far left of the two columns. As the name suggests, it is a method related to the balances, so the balances are available in the ledger account at the end after all the adjustments are carried forward to the trial balance. Also, if any of the ledger accounts do not show any balance i.e. the total on both the debit and the credit side is the same, then there is no need to carry it to the trial balance. So, in the end, if the debit and credit side of the trial balance matches, it can be said that the trial balance has been well prepared. Companies initially record their business transactions in bookkeeping accounts within the general ledger.
Balance Method:
For every businessman, it is important to know the financial health of their business. This can be ascertained by preparing financial accounts like Trading Account, Profit and Loss Account, and Balance Sheet. The aim of the trial balance is to check if all the ledger postings are done in a correct and accurate manner.
