What is a trial balance? It is an accounting report that lists all the nominal accounts in two columns showing debit or credit balances.
With double entry bookkeeping, you make two entries one credit and the other debit. When all the debits and credits are added up, they will be equal. As you can see in the example.
A Trial Balance includes the figures from both the Profit and Loss report and the Balance Sheet. Examples of some of the accounts included are bank, stock, debtors, creditors, wages, expense codes and sales.
Prepare a Trial Balance Report
Most software accounting packages include a trial balance as part of their reports section, and due to the software always posting a double entry, the report will balance. To run the trial balance, you will need to select the period end date that is required; this may be month, quarter or year-end.
If you are using a manual system, it is possible to make a mistake, and the report is not equal on both sides. The difference between the credit and debit will have to be found and ensure that it balances.
The report will only show the totals of the postings to the accounts if a user error has occurred or a transaction posted to the wrong account; it will not be visible. A transaction might also be completely missing from the report. It is therefore essential that checks are put in place to check some individual ledgers.
What is a Trial Balance – Uses
The report is useful to accountants and auditors at the end of the year to see a complete picture of the company in one place. At the year-end, there are usually adjusting journals, which may include correction of errors, depreciation, writing off debt. Create a new trial balance after posting the journals; this will show the updated picture of the business.
The other primary use is if you are switching accounting packages; the figures from the report can be used to enter the opening balances in the new accounting software. When switching to accounting software, take out a free trial to confirm that the package is suitable for the business.
The best time to start a new accounting software is at the end of the financial year. If you are starting a new business, you will not need a trial balance to open the accounts, but instead, use the bank opening balance and any transactions to commence the business.
What is a Trial Balance Format
The Trial Balance format includes the following information:
- Report header: Company Name and date
- Columns: Ledger account codes if used and account names, credits and debits amount
- Total of Debit and Credit
All the accounts that make up the balance sheet (assets, liabilities and Equity) are first followed by the profit and loss accounts (sales and expenses).
Trial Balance Example
Below is an example downloaded from Quickbooks into Excel. The figures include all the balances from both the balance sheet and Profit and Loss account. The totals of debits and credits are the same and, therefore, it balances.
This trial balance example includes all the balance sheet items first followed by the profit and loss account.
If you review the trial balance and notice that an adjustment is required, a journal entry will be required. The journal entry will require a debit and credit. Accounting systems will not accept a journal unless it balances. looking at the trial balance makes it easier to decide what the journal entries are.
Return from what is a trial balance to Accounting basics page.
Further reading on what is a trial balance is available in Wikipedia.