What is a Trial Balance

What is a trial balance?

What is a trial balance? An accounting report that lists all the nominal accounts in two columns showing debit or credit balances. It is the last step in the accounting cycle.

With double entry bookkeeping, you make two entries, one credit and the other debit. As you can see in the example, they will be equal when all the debits and credits are added up.

A Trial Balance includes the figures from the Profit and Loss (Income Statement) and the Balance Sheet financial statements. The accounts included are the bank, stock, debtors, creditors, wages, expense codes and sales.

Although a trial balance may equal the debits and credits, it does not mean the figures are correct. Errors can still occur in data entry of wrong amounts or posted to the incorrect account code.

Preparing 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 prepare the trial balance, you will need to select the period end date required; this may be month, quarter or year-end.

Here are a couple of accounting packages, which we recommend looking at and taking out a trial to see if they are suitable for your business.

If you are using a manual system, you can 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

Year-end

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.

What adjustments do accountants make?

An accountant will use the trial balance to see if any adjustments are required. It might be correcting errors to the accounts or year-end adjustments.

There are a few year-end adjustments include:

Once the adjustments are complete, the trial balance will be reviewed again.

Trial Balance for New Software

The other primary use is if you are switching accounting packages or using one for the first time.

Use our comparison tool to find the best accounting software.

It is worth choosing a suitable time to switch software; year-end is a good time.

To complete the switch run the trial balance from the old software and enter the figures as the opening balances in the new software. It is always good practice to run the report in the new software to ensure everything is posted to the correct account.

When switching to accounting software, take out a free trial to confirm that the package is suitable for the business.

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 BalanceWhat is a Trial Balance

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 the Debit column and Credit column

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).

You do not need to include any zero balance accounts.

What is a Trial Balance? – Debits and Credits

Accounting is a double entry system, so there will be a credit balance for each debit balance. Debits and credits make up the general ledger.

An example of debit entry is a sales invoice issued for 1000.00; the transaction will post in sales and the debtor’s account. By posting these two entries, the trial balance will always be equal.

Below is a simple table for debit and credit for double entry.

Debits and Credits cheat sheet

Trial Balance Example

Below is an example downloaded from Quickbooks into Excel. The figures include all the balances from both the balance sheet and the 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.

What is a trial balance?

You will require a journal entry if you review the trial balance and notice that an adjustment is 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.

Trial Balance Conclusion

A trial balance includes all the general ledger accounts of the business in one report.

It has two columns a debit and credit. The two columns should balance.

The uses include correcting errors and making any adjustments for year-end or for starting a new software package.

Return from what is a trial balance to Accounting basics page.

Further reading on what is a trial balance is available in Wikipedia.