Trial Balance is an accounting report which summarises the balances of all company’s general ledger accounts. The balances are divided between the debit and credit columns. The totals of these columns should be identical if all the accounting records are entered correctly and the ledger balances are calculated without errors.
General ledger accounts are accounts used by a company in its bookkeeping system. In double-entry bookkeeping, records in ledger accounts are attributed either to debit or credit. Each entry in debit should have a corresponding entry in credit, and vice versa. In very general terms, debit entries show how money is spent: they include assets and expense accounts. Credit balances register the sources of the money: company’s liabilities, capital and income.
Who and Why Needs Trial Balance
The main purpose of compiling a trial balance is to check if there are any mathematical or factual errors in the company’s bookkeeping system. If the totals of debit and credit are not identical, an accountant should go back to the bookkeeping records and find the reason for that. The possible errors include a debit balance that is recorded as credit (or another way around) or a miscalculation in an account balance. Make things easier and avoid the errors mentioned above by turning to your online accounting services.
The trial balance is not a part of financial reporting. However, it is often used by accountants as a working paper for preparing financial statements, especially if accounting and reporting are done manually. The trial balance ensures that for each debit entry there is a corresponding credit entry in the double-entry accounting. Ensuring the balance of debit and credit in the trial balance helps to minimise further problems with compiling financial reports.
The trial balance can also be requested by an auditor at an early stage of the audit. An auditor can then use audit procedures to test the balance between debit and credit sides.
How to Prepare Trial Balance
A trial balance is prepared to a specific date, usually at the end of a reporting period. It often looks like a worksheet with the names and corresponding numbers of the accounts from the general ledger, and two columns for debit and credit balances. The debit and credit balances summarise all business transactions of a company over a certain period. The information about transactions is extracted from the company’s bookkeeping records.
Here is an example of a trial balance for a digital consulting company “IT Crowd”. It contains four columns: account number, name of the account, debit and credit.
|Trial balance as of 31.12.2019|
Account number is a number that is used in the “IT Crowd” bookkeeping system. Account name indicates what is included in this account. For example, account “Sales” contains all the revenues the company receives from sales of its services. Account “Accounts payable” include all the payments that the company is due to pay to its counterparts, while “Accounts receivable” are payments that the company’s counterparts owe to this company.
The totals for debit and credit balances are calculated at the bottom of the trial balance table. Here, they are identical, as expected when a company is keeping its records in order.
Limitations of Trial Balance
The trial balance is a helpful tool to check if the records in the bookkeeping are balanced. However, even identical totals of debit and credit do not guarantee that there are no errors in the bookkeeping. Here are some examples of the errors which will be missed by a trial balance:
- Omitting a transaction. For example, if a company does not include a sale in its records (neither as credit nor as debit), it will not distort the balance of the debit and credit totals, but instead will result in a total too low.
- Mixing the accounts. If debt from a counterparty is recorded on the “Cash” account instead of “Accounts receivable”, it will not change the total of the debit accounts, and the trial balance totals will still be identical. However, this mistake might mess up the company’s financial statements.
- Wrong original input. A transaction can be recorded on the right accounts but as a wrong amount. For example, if a sale for 1000 GBP is recorded as a sale for 1200 GBP on both debit and credit sides, the debit and credit totals will still be identical on the trial balance, but the value will be too high.
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