Accounting 101: Understanding a Trial Balance

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There are many kinds of records, files, and data that an accountant needs to be able to prepare an accurate report of a company’s financial standing. 

Although a trial balance is not a formal statement, it is one of those records that can help confirm the accuracy of all the data at hand.


What is a Trial Balance?

As mentioned previously, a trial balance is not a formal financial statement. Some professional accountants or companies may opt not to have a trial balance especially when they are using an automated accounting system.

A trial balance is a form of ledger accounts that lists their respective closing debit or credit balances on a certain date. Usually, other financial statements are prepared after the trial balance is ready.


Why Does Your Company Need a Trial Balance?

You should know that bookkeeping and recording every single financial transaction your company has is an essential step to making sure that your business is on the right track.

Great bookkeeping demands accuracy and consistency. However, automated systems and humans alike can make errors. Some ways to avoid errors or at least to identify them as early as possible includes:

  • Separating your personal funds from your business funds
  • Assigning different account function amongst a number of accounting staff
  • Preparing bank reconciliation statement
  • Routinely checking cash balances against cash held
  • Preparing a trial balance

Your company accountant or your chosen third-party accounting professional needs to prepare a trial balance to determine whether your debits equal credits at any particular point in time. 

However, you must keep in mind that this is not the same as determining your total assets or total revenues or total expenses. A trial balance computes all the company debits and all the credits in a summarized form.

Errors may occur due to manipulation of records, carelessness, or simply a human error. Regardless of the reason, you need to find the error to ensure that it does not cause any more problems down the line,

The Trial Balance can help discover errors in:

  • postings from the Book of Original Entry
    • postings of an incorrect amount
    • debiting the correct amount instead of crediting and vice versa
  • the ledger accounts balancing
  • extracting the Trial Balance

However, keep in mind that the trial balance is limited. It cannot help your find all the errors in your records. For instance, here are some errors that a trial balance cannot help you identify:

  • Errors of principle like making a record that is not following accounting principles
  • Omission or duplication – a trial balance cannot identify whether an entry is a duplicate or if a transaction is not recorded at all
  • Mistakes of original entry- a trial balance cannot identify if the amount a transaction is originally entered incorrectly
  • Errors of commission- a trial balance cannot identify if an entry is made to the wrong account
  • Compensating errors- a trial balance cannot identify an accounting error that offsets another accounting error

How to Prepare a Trial Balance?

Here is how to prepare a trial balance.


Step 1: Make sure that every ledger account is balanced.

Before you can prepare your trial balance, you must first make sure that all your ledger account is balanced. You can do this by determining the difference between the sum of all the debit entries and the sum of all the credit entries.

Step 2: Prepare an eight-column worksheet.

You will use these columns to note and record the account number, account name, and the corresponding columns for debit and credit balances.

Step 3: Transfer the details from the ledger account to the trial balance.

You need to transfer details like account number and account name along with the account balance in the relevant debit or credit column.

Step 4: Add up all the amounts under the debit column, then do the same for the credit column.

The totals for these two separate columns would be the same in an error-free trial balance.

Step 6: Close the trial balance.

If there is no issue with your records and the totals for the debit and credit is the same, then you may:

  1. Add up the amounts of the debit column and the credit column. Ideally, the totals should be the same in an error-free trial balance. When the totals are the same, you may close the trial balance.
  2. If there is a difference, accountants have to locate and rectify the errors.

Bottomline

A trial balance is a great way to identify mistakes and errors in your financial records. If your trial balance fails to– well… balance, then something has certainly gone wrong in your bookkeeping records.

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