Trial BalanceDefined with Formula, Examples, Format & Sample Sheet
Lets jump into one of the more popular subjects that we’ve been asked to cover by our readers, Trial Balance.
What is the Trial Balance?
The trial balance is a report used in bookkeeping in which the balances from the general ledger are recorded.
The trial balance lists the closing balances of the accounts from the general ledger as of a specific date.
This report is usually completed before preparing a business’s financial statements.
- A trial balance will list all of the accounts from the general ledger and their balances. It has three columns with all of the account titles in the first column. The second column has all of the accounts with debit balances, and the accounts with credit balances are in the third column. This worksheet is used to check the mathematical accuracy of a business’s bookkeeping.
- The debits and credits in the trial balance should include all business transactions for the time period the trial balance covers.
- The total of the debits and the credits on the trial balance should be equal. This will show that there are no mathematical errors, but other errors may exist in your accounting system.
Requirements of this Report
To complete a trial balance, it is necessary to access the transactions in the general ledger.
This information will then be used to complete the trial balance.
The trial balance will then ensure that every transaction has both a debit and a credit entry.
Any asset or expense accounts should show a debit balance.
Whereas the liabilities, revenue, and equity accounts should have a credit balance.
How to Prepare
The business’s name is listed at the top of the trial balance, as well as the title, (Unadjusted) Trial Balance, and the date.
The three columns from left to right are: Accounts, Debits, and Credits.
The accounts with debit balances will be listed in the debit column, and the accounts with credit balances will be listed in the credit column.
When listing the accounts, assets will be listed first, followed by liabilities, equity, then revenue, and last the expenses.
After the accounts are listed, the balances should be placed in the appropriate column.
Then, the totals should be found for the debit and credit columns.
These totals should be equal.
Here is a sample of what a trial balance report should look like:
(Unadjusted) Trial Balance
Month Day, Year
Use of a Trial Balance
A trial balance is the first step toward preparing a company’s financial statements.
This is a valuable worksheet for accountants, which will act as a basis for ensuring the accuracy of account balances while crafting financial statements.
A trial balance ensures that for every debit entry, there is a corresponding credit entry recorded in the books, which is the basis of double-entry accounting.
By checking this, if an accountant finds that the trial balance does not agree, any differences can be investigated and straightened out prior to crafting the financial statements.
This can avoid the difficult and often costly task of fixing a mistake after the financial statements have been completed.
Suppose a company has a cash account with a balance of $1,750, accounts receivable of $250, accounts payable of $1,500, and stockholder equity of $500.
When forming a trial balance, all accounts with a debit balance will be added together in the left column, and all accounts with a credit balance will be added together in the right column.
Here is how this would look with our example company.
(Unadjusted) Trial Balance
January 31st, 2021
As you can see, the debit and credit accounts balance each other, which is a strong sign that our accounts have been recorded correctly.
Limitations and Constraints
A trial balance is an extremely useful accounting tool, but it does have several limitations to keep in mind.
First of all, a trial balance will only confirm that the total of all credit balances matches the total of debit balances.
There are actually several errors that can result in the sums of credits and debits agreeing despite still being incorrect.
Similarly, a correct trial balance does not prove that all transactions have been recorded.
After all, if a transaction is not recorded on either the credit or debit side, a trial balance will remain equivalent and therefore appear correct.
However, the balance will be incorrect regardless, and other measurements will have to be applied to detect the errors.
Additionally, a trial balance does serve to show that debit and credit balances are equal, and this helps to ensure that corresponding debit and credit entries are made for every transaction.
However, it cannot confirm that these entries were made in the correct accounts, only that they were made into both a credit and a debit account.
If an equal credit and debit balance are entered in error, whether it is to wrong accounts or if incorrectly entered transactions offset each other, a trial balance will still show a perfect balance between debits and credits and require other methods to reveal errors.
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UMass Lowell "Verifying Data in the General Ledger: Trial Balance" Page 1 . November 16, 2021
OpenLearn.edu "2.6 Balancing off accounts and preparing a trial balance" Page 1 . November 16, 2021
Western Washington University "Trial Balance" Page 1 . November 16, 2021