Trial Balance Double-checking Your Small Business Books

Enron defrauded thousands by
intentionally inflating revenues that did not exist. Arthur Andersen was the auditing
firm in charge of independently verifying the accuracy of
Enron’s financial statements and
disclosures. This meant they would review statements to make sure
they aligned with GAAP principles, assumptions, and concepts, among
other things. This table is an example of a compound entry with expenses recorded against petty cash. Since most companies have computerized accounting systems, they rarely manually create a TB or have to check for out-of-balance errors. The reason for not tallying was that there was an error in classification by the accountant.

The trial balance is strictly a report that is compiled from the accounting records. The Trial Balance Worksheet contained in the attached file is designed to save you time and money in preparing the trial balance yourself. The spreadsheet contains over 80 common account titles in a trial balance format. Simply plug in your balance for each account and the spreadsheet will automatically add up the debits and credits, and tell you if your books are out of balance (and by how much).

What is a trial balance?

Each month, you prepare a
trial balance showing your company’s position. After preparing your
trial balance this month, you discover that it does not balance. Note that for this step, we are considering our trial balance to
be unadjusted. The unadjusted trial balance in
this section includes accounts before they have been adjusted. As
you see in step 6 of the accounting cycle, we create another trial
balance that is adjusted (see
The Adjustment Process).

In order to prevent errors and to make sure that all transactions are properly recorded as debits and credits in the correct T-accounts, a checking procedure takes place at the end of each accounting period. A trial balance is thus a list of all the debit and credit balances in the general ledger accounts. If all the individual double entries have been correctly carried out, the total of the debit balances should always equal the total of the credit balances in the trial balance.

Activity 2 Preparing a correct trial balance

In addition, it should state the final date of the accounting period for which the report is created. The main difference from the general ledger is that the general ledger shows all of the transactions by account, whereas the trial balance only shows the account totals, not each separate transaction. This balance is transferred to the Cash account in the debit column on the unadjusted trial balance.

• Since it is a spreadsheet template, you can add or delete accounts or otherwise modify it to suit your needs and preferences.
• Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account.
• A more complete picture of company position
  develops after adjustments occur, and an adjusted trial balance has
  been prepared.
• A trial balance is simply a listing of the ledger accounts along with their respective debit or credit balances.
• ABC and XYZ have decided to merge their business, and they are keen to know how their combined financial statements would look like.

Capital, and each type of asset and liability, has its own T-account. These T-accounts are recorded in the general ledger (also known as the nominal ledger). Figure 1 below shows the general ledger and the three categories of T-accounts therein that we have discussed so far. Another way to find an error is to take the difference between
the two totals and divide by nine.

Trial Balance vs. Balance Sheet

A further important purpose of the trial balance is that it forms the basis for the preparation of the balance sheet. 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 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.

The trial balance shows the double-entry rule that ‘for every debit there is a credit’. Once all balances are transferred to the unadjusted trial balance, we will sum each of the debit and credit columns. The debit and credit columns both total $34,000, which means they are equal and in balance. However, just because the column totals are equal and in balance, we are still not guaranteed that a mistake is not present.

Example of Journal Entry and Trial Balance

If the outcome of the difference
is a whole number, then you may have transposed a figure. For
example, let’s assume the following is the trial balance for
Printing Plus. One way to find the error is to take the difference between the
two totals and divide the difference https://www.bookstime.com/articles/what-is-a-trial-balance by two. For example, let’s
assume the following is the trial balance for Printing Plus. For example, if rent is $900 per month, then for one period there would be a record of the rental expense of $900 as a debit and then a credit to prepaid rent for the same amount.

• One of the most important factors to why a trial balance is run is that it offers a sort of check and balance system in that the debit side on the left should equal the credit side on the right.
• 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.
• Finally, after the period has been closed, the report is called the post-closing trial balance.
• A Trial Balance is a list of accounts’ Debit and Credit balances in a double-entry ledger at a given date prepared primarily to test their equality.
• It is used in preparing Financial Statements like Income Statement, Balance Sheet, and Cash Flow Statement of the business.

A trial balance
is an important step in the accounting process, because it helps
identify any computational errors throughout the first three steps
in the cycle. The importance of the journal entry is that this is the first place where transactions are recorded. Any transaction that occurs will result in a change in financial information and must be reflected in order to maintain accurate records.

There are also net changes for the period trial balance report that provides a good view of all changes made during an accounting period. Edgar Edwards’ bank account in the general ledger has now been balanced off. The debit side was greater than the credit side, therefore leaving a debit balance of £9,150.

From the trial balance it can be seen that the total of debit balances equals the total of credit balances. This demonstrates that for every transaction the basic principle of double-entry accounting has been followed – ‘for every debit there is a credit’. In order to prepare a trial balance at any time, it is necessary to determine the balance on each account. This process is known as ‘balancing off’ the general ledger accounts. The trial balance can then be prepared by listing each closing balance from the general ledger accounts as either a debit or a credit balance. Transferring information from T-accounts to the trial balance requires consideration of the final balance in each account.

Completing a Trial Balance

With modern accounting tools, credit and debit balances are checked against each other automatically, making trial balances somewhat obsolete. However, some businesses prepare trial balances as an internal check before issuing https://www.bookstime.com/ official financial statements. The journal entries are posted to the general journal which is the book of original record that reflects and tracks accounts such as assets, liabilities, owner’s capital, revenues, and expenses.